KEY911F - BUSINESS 802 MANAGERIAL ECONOMICS FIRST EXAM KEY...

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BUSINESS 802 FIRST EXAM KEY FALL 1991 MANAGERIAL ECONOMICS SHORT QUESTIONS (30 pts, 10ts each) 1. Marginal Analysis . Characterize each of the following statements as true or false , and explain your answer. A. If marginal revenue is less than average revenue, the demand curve will be downward sloping. B. Profits will be maximized when total revenue equals total cost. C. Given a downward-sloping demand curve and positive marginal costs, profit-maximizing firms will always sell less output at higher prices than will revenue-maximizing firms. D. Marginal cost must be falling for average cost to decline as output expands. E. Marginal profit is the difference between marginal revenue and marginal cost and will always equal zero at the profit-maximizing activity level. 1. SOLUTION A. True . The demand curve is the average revenue curve. Since average revenue is falling along a downward sloping demand curve, marginal revenue is less than average revenue. B. False . Profits are maximized when marginal revenue equals marginal cost. Profits equal zero at the breakeven point where total revenue equals total cost. C. True . Profit maximization involves setting marginal revenue equal to marginal cost. Revenue maximization involves setting marginal revenue equal to zero. Given a downward sloping demand curve and positive marginal costs, revenue maximizing firms will charge lower prices and offer greater quantities of output than will profit maximizers. D. False . Average cost will fall as output expands so long as marginal cost is simply less than average cost. If this condition is met, average cost will decline whether marginal costs are falling, rising or constant. E. True . Marginal profit equals marginal revenue minus marginal cost, and will equal zero at the profit maximizing activity level. 2. Demand and Supply Curves. Demand and supply conditions in the market for unskilled labor are important concerns to business and government decision makers. Consider the case of a federally mandated minimum wage set above the equilibrium or market-clearing wage level. Some of the following factors have the
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2 potential to influence the demand or quantity demanded of unskilled labor. Influences on the supply or quantity supplied may also result. Holding all else equal, describe these influences as increasing or decreasing , and indicate the direction of the resulting movement along or shift in the relevant curve(s). A. An increase in the quality of secondary education; B. A rise in welfare benefits; C. An increase in the popularity of self-service gas stations, car washes, and so on; D. A fall in interest rates; E. An increase in the minimum wage. 2. SOLUTION A. An increase in the quality of secondary education has the effect of increasing worker productivity and will cause an increase or rightward shift in the demand for unskilled labor. To the extent that the benefits of an increase in the quality of education are recognized by students, more will stay in school and a secondary effect of a decrease or leftward shift in the
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KEY911F - BUSINESS 802 MANAGERIAL ECONOMICS FIRST EXAM KEY...

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