KEY922F - BUSINESS 802 MANAGERIAL ECONOMICS FINAL EXAM KEY...

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BUSINESS 802 FINAL EXAM KEY FALL 1992 MANAGERIAL ECONOMICS SHORT ANSWER (10 pts each) 1. Cost Estimation Concepts. Indicate whether each of the following statements is true or false . Defend your answer. A. The short-run covers the time period over which the manager is constrained with respect to input choice. B. The long-run is the time frame within which the manager enjoys complete flexibility regarding input usage. C. Cost estimates based on historical costs reflect economic replacement costs due to inflation. D. Average total costs are often constant or even rising when the transportation costs associated with serving distant customers are considered. E. If output of Q = 0 is an extrapolation well beyond the range of sample observations, the intercept term can be interpreted as an estimate of fixed cost. 1. SOLUTION A. True. The short-run covers the time period over which the manager is constrained with respect to input choice. B. True. The long-run is the time frame within which the manager enjoys complete flexibility regarding input usage. C. False. Cost estimates based on historical costs seldom represent economic replacement costs due to inflation. D. True. Average total costs are constant or even rising when the transportation costs associated with serving distant customers are considered. As a result, regional production at small plants close to major markets are favored over large centralized production facilities. False. If output of Q = 0 is an extrapolation well beyond the range of sample observations, the intercept term has no economic meaning. 2. Cost Estimation Techniques. Indicate whether each of the following statements is true or . Explain your answer. A. Unlike time-series analysis, cross-sectional regression analysis of cost-output relations is not influenced by the problem of changing technology. B. A linear model is inappropriate for estimating the point of minimum efficient scale in an industry. C. A cubic total cost function implies quadratic marginal cost and average total cost functions. D. The survivor technique for estimating long-run cost/output relations overcomes the problem of changing technology. The engineering technique of cost-estimation is a useful means for estimating dynamic influences on real-world markets.
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2 2. SOLUTION A. False. There is often a strong correlation between plant size and the age of firms being analyzed. As a result, there is often a strong possibility of a correlation between size and the vintage, or age, of the technology employed. If technology has changed between the times when plants of different sizes were built, the empirically estimated long- run cost function will bear little resemblance to the long-run cost function for current technology. B. True. The point of minimum efficient scale occurs at the minimum of a U-shaped average cost curve, or at the "corner" of L-shaped average cost curve. To estimate such points accurately, a nonlinear cost model must be estimated. Quadratic and cubic models, among others, are often used for such purposes.
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KEY922F - BUSINESS 802 MANAGERIAL ECONOMICS FINAL EXAM KEY...

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