Key20031s - BUSINESS 702 MANAGERIAL ECONOMICS FIRST EXAM...

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BUSINESS 702 FIRST EXAM KEY SPRING 2003 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 ANSWER QUESTIONS (30 pts, 15pts each) 1. (SG P2.1 Marginal Analysis) . 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. P2.1 SOLUTION A. False. Because average revenue is falling along a downward sloping demand curve, marginal revenue must be less than average revenue for the demand curve to slope
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2 downward. 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 firms that maximize profits. 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. (P3.3 Demand Analysis.) The demand for housing is often described as being highly cyclical and very sensitive to housing prices and interest rates. Given these characteristics, describe the effect of each of the following in terms of whether it would increase or decrease the quantity demanded or the demand for housing. Moreover, when price is expressed as a function of quantity, indicate whether the effect of each of the following is an upward or downward movement along a given demand curve or involves an outward or inward shift in the relevant demand curve for housing. Explain your answers. A.
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Key20031s - BUSINESS 702 MANAGERIAL ECONOMICS FIRST EXAM...

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