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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 shortrun covers the time period over which the manager is constrained with respect to input choice.
B.
The longrun 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 shortrun covers the time period over which the manager is constrained with respect to input choice.
B.
True.
The longrun 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 timeseries analysis, crosssectional regression analysis of costoutput 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 longrun cost/output relations overcomes the problem of changing
technology.
The engineering technique of costestimation is a useful means for estimating dynamic influences on realworld
markets.
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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 longrun cost function for current technology.
B.
True.
The point of minimum efficient scale occurs at the minimum of a Ushaped average cost curve, or at the
"corner" of Lshaped 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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 Spring '11
 smith
 Economics

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