KEY981f - BUSINESS 702 MANAGERIAL ECONOMICS FIRST EXAM KEY...

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BUSINESS 702 FIRST EXAM KEY FALL 1998 MANAGERIAL ECONOMICS PLEDGE : "On my honor, I have neither given nor received any unauthorized aid on this exam, nor am I aware of anyone giving or receiving any unauthorized aid on this exam." ________________________________________ Signature Name (Print) SHORT PROBLEMS (40 pts, 10pts each) 1. Marginal Analysis (P2.1) . Characterize each of the following statements as true or false, and explain your answer. A. If marginal revenue is greater than average revenue, the demand curve is downward sloping. B. Profit is minimized when total revenue equals total cost. C. Given a downward-sloping demand curve and positive marginal costs, profit-maximizing firms always sell more output at lower prices than revenue-maximizing firms. D. Marginal cost must be less than average cost for average cost to decline as output expands. E. Marginal profit is the difference between marginal revenue and marginal cost, and always exceeds zero at the profit-maximizing activity level. SOLUTION A. False. Since average revenue is falling along a downward sloping demand curve, marginal revenue must be less than average revenue for the demand curve to slope downward.
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2 B. False. Profits are maximized when marginal revenue equals marginal cost. Profits equal zero at the breakeven point where total revenue equals total cost. Profits are minimized when the difference between total revenue and total cost is at a maximum. C. False. 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 charge lower prices and offer greater quantities of output than profit maximizers. D. True. Average cost falls as output expands so long as marginal cost is less than average cost. If this condition is met, average costs decline whether marginal costs are falling, rising or constant. E. False. Marginal profit equals marginal revenue minus marginal cost, and equals zero at the profit maximizing activity level. 2. Demand and Supply Concepts (SG4.1) . The market for oil is highly price sensitive. Indicate the effects of each of the following influences on demand and/or supply conditions: A. A major oil discovery. B. A $5 per barrel tax on oil. C. An improvement in oil recovery technology. D. An unusually hot summer causing an increase in the demand for air conditioning. E. An increase in energy conservation. SOLUTION A. Increase supply/rightward shift in supply curve. A major oil discovery will increase the quantity supplied at every price level. Decrease supply/leftward shift in supply curve. A $5 per barrel tax on oil will reduce the share of total oil-related expenditures going to producers, and thus reduce the quantity supplied at every price level.
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This note was uploaded on 07/31/2011 for the course ECON 1201 taught by Professor Smith during the Spring '11 term at Waseda University.

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KEY981f - BUSINESS 702 MANAGERIAL ECONOMICS FIRST EXAM KEY...

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