KEY991f - BUSINESS 702 MANAGERIAL ECONOMICS FIRST EXAM KEY...

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BUSINESS 702 FIRST EXAM KEY FALL 1999 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 (P2.3) . 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. 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.
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2 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 Concepts (SG4.2) . Describe the effects of each of the following influences on demand and/or supply conditions in the market for MBAs. A. An economic recession (fall in national income). B. An increase in MBA graduate salaries. C. An increase in the availability of low-cost student loans. D. A rise in tuition costs. E. A rise in relative productivity of MBA versus BA/BS job candidates. SOLUTION A. Decrease demand/leftward shift in demand curve and increase supply/rightward shift in supply curve. With a fall in national income, the profitability of added employment will fall, thereby causing a decline in the demand for labor. A recession can also reduce job opportunities for BAs and BSs, thereby reducing the income loss incurred while in graduate school, and thus can actually increase the supply of MBAs. Despite this often observed counter-cyclical relation between enrollment and economic activity, recessions can also limit the return to an MBA and
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KEY991f - BUSINESS 702 MANAGERIAL ECONOMICS FIRST EXAM KEY...

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