Economics True/False Quiz

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Questions and Answers

Which statement is true about fixed costs?

Fixed costs only apply to manufacturing firms.

Fixed costs are part of variable costs.

Fixed costs remain constant regardless of output. (correct)

Fixed costs change with the quantity of output.

What does it indicate if a firm's output doubles and its total costs also double?

The firm is experiencing constant returns to scale. (correct)

The firm is losing profit.

The firm is experiencing economies of scale.

The firm is facing increasing variable costs.

When is average total cost increasing in relation to marginal cost?

When marginal cost is above average total cost. (correct)

When marginal cost is below average total cost.

When marginal cost is equal to average total cost.

When average total cost is at its minimum.

What does profit maximization occur at in a firm?

Where marginal revenue equals marginal cost. Signup and view all the answers

What does the Lerner Index represent in relation to elasticity?

It reflects the inverse of the absolute value of elasticity. Signup and view all the answers

Which of the following best describes backward induction?

A technique for finding equilibrium in sequential decision-making. Signup and view all the answers

What is a dominant strategy in game theory?

A strategy that is the best choice for a player most of the time. Signup and view all the answers

What is price discrimination?

Offering different prices to different customer segments. Signup and view all the answers

If a firm faces a constant marginal cost (MC) of $1 and own-price elasticity of demand of -1.1, what would their profit-maximizing price be?

$1.91 Signup and view all the answers

What does the Inverse Elasticity Pricing Rule suggest about the relationship between price and elasticity for a profit-maximizing firm with market power?

Price should be set higher when demand is less elastic. Signup and view all the answers

According to the Inverse Elasticity Pricing Rule, if the price elasticity of demand for a product is -2 and marginal cost is $10, what price should the firm set to maximize profit?

20 Signup and view all the answers

Suppose that Firm A faces elasticity of demand at -2, a marginal cost (MC) of $5 per unit, and they are currently pricing the product at $15. Which following statement is true?

Firm A needs to lower their price Signup and view all the answers

What is the primary motivation for both airlines when choosing a route?

Preference for different routes Signup and view all the answers

Is there a first-mover advantage in the sequential game between the airlines?

Yes, Delta has a first-mover advantage Signup and view all the answers

What is the total fixed cost for Lance’s Lumber if the average total cost is $2.00 and the average variable cost is $1.25?

$750 Signup and view all the answers

What is the total cost when producing 4 units given the total cost function 𝑇𝑇𝑇𝑇 = 200 + 2𝑄𝑄 + 4𝑄𝑄^2?

$224 Signup and view all the answers

What is the average total cost when producing 4 units using the total cost function 𝑇𝑇𝑇𝑇 = 200 + 2𝑄𝑄 + 4𝑄𝑄^2?

$68 Signup and view all the answers

What are Alan’s total costs for detailing 60 cars, with fixed costs of $300 and variable costs of $25 per car?

$1,800 Signup and view all the answers

What is the marginal cost per student when enrollment increases from 10,000 to 12,000 and total costs rise from $500,000 to $550,000?

$45.83 Signup and view all the answers

What is the efficient scale of output for a firm with total cost function 𝑇𝑇𝑇𝑇 = 8 + 2𝑄𝑄^2 and marginal cost function 𝑀𝑀𝑀𝑀 = 4𝑄𝑄?

4 Signup and view all the answers

What is the lowest average total cost per unit that a firm can achieve if its total cost function is 𝑇𝑇𝑇𝑇 = 8 + 2𝑄𝑄^2?

$4 Signup and view all the answers

What can be inferred about variable cost within the range of output between 15 and 20 units for the equation 𝑇𝑇𝑇𝑇 = 2𝑄𝑄^2 − 4𝑄𝑄 + 12?

Variable cost is increasing. Signup and view all the answers

How many popsicles does Adrian sell when maximizing profits?

250 Signup and view all the answers

What is the profit-maximizing price of each popsicle for Adrian?

$9.5 Signup and view all the answers

If Adrian charges $3 per popsicle, what will his variable profit be?

$3105 Signup and view all the answers

What is the deadweight loss when Adrian charges $3 for his popsicles?

$20 Signup and view all the answers

Which statement is true about the elasticity of demand for Amazon's student memberships?

Students must be more price elastic than the typical Amazon customer. Signup and view all the answers

What type of price discrimination is used by Amazon in this membership pricing?

Market segmentation Signup and view all the answers

For which group are the per-membership variable profits expected to be greater?

Regular memberships Signup and view all the answers

Which of the following represents an example of price discrimination?

Utility companies using time-of-use pricing. Signup and view all the answers

Study Notes

True/False

Fixed costs do not change when output changes.
Rent is a fixed cost for a t-shirt manufacturing company.
Economies of scale occur when output doubles and total cost doubles.
Average total cost is increasing when marginal cost is above average total cost.
Profit is maximized where marginal revenue equals marginal cost.
A firm should produce at the level where MR=MC.
A markup of 0.5 means the elasticity of demand is -2 for a profit-maximizing firm.
The Lerner Index (markup) is equal to the inverse of elasticity.
Backward Induction is used to find the equilibrium outcome in a sequential game.
A dominant strategy is the best strategy for a player regardless of what the other player does.
In a Coordination game, both players lose if they choose the same strategy.
Price discrimination refers to businesses offering different prices to different groups of people.
Combo meals at fast-food restaurants are an example of bundling, a type of price discrimination.
Market power refers to a firm's ability to control or manipulate the price of a good or service.
Fixed costs are not included in the calculation of variable profit.

Multiple Choice

Total fixed cost is calculated by subtracting total variable cost from total cost: 2.00∗1000−2.00 * 1000 - 2.00∗1000−1.25 * 1000 = $750.
Total cost is calculated by plugging the quantity into the cost function: 200 + 24 + 442 = 272.
Average total cost is calculated by dividing total cost by the quantity: 272/4 = 68.
Total cost is calculated by adding up fixed cost and variable cost: 300+(300 + (300+(5 + 20)∗60=20) * 60 = 20)∗60=1800.
Marginal cost is calculated by dividing the change in total cost by the change in quantity: (550,000−550,000 - 550,000−500,000) / (12,000 - 10,000) = $25.
Efficient scale is where marginal cost equals average total cost. Average total cost is 8/Q+2Q. Setting 4Q = 8/Q + 2Q, we get Q = 2.
The lowest average total cost is achieved where it is minimized. Average total cost is 8/Q + 2Q, and its derivative is -8/Q2 + 2. Setting it to zero and solving for Q gets us Q = 2. Plugging Q=2 into the average total cost function, we get 8/2 + 2*2 = 8.
The total cost function suggests that variable cost (2Q2-4Q) is decreasing as output increases from 15 to 20 units.
Revenue is maximized where marginal revenue is zero. Marginal revenue is positive at P=3 and P=2, which means revenue is still increasing.
Marginal revenue at P=3 is calculated by the change in total revenue divided by change in quantity: (9-5)/(4-2) = 2.
Marginal cost at P=1 is calculated by change in total cost divided by change in quantity: (21-17)/(10-8) = 2.
The firm's profit-maximizing quantity is the one where marginal revenue equals marginal cost. This occurs at a quantity of 4, where the marginal revenue and marginal cost are both 1.
The profit-maximizing price is found by setting marginal revenue, MR = 25-0.1*Q, equal to marginal cost, MC = 1, and solving for Q. Substitute this value of Q into the demand function to find the profit-maximizing price.
The inverse elasticity pricing rule states that the markup is equal to the inverse of elasticity. This implies that a firm with a more inelastic demand can charge a higher price.
If the price elasticity of demand is -2, and marginal cost is 10,thefirmshouldsetapriceof10, the firm should set a price of 10,thefirmshouldsetapriceof20. The equation is: Price = MC / (1 + 1 / Elasticity). Plugging in the values, we get: Price = 10/(1−(1/2))=10 / (1 - (1/2)) = 10/(1−(1/2))=20.
At a price of $15, the firm's markup is 10 / (1 - (-2)) = 3.33. This is because the elasticity of demand is -2. Since the firm's markup is higher than the inverse elasticity, the firm can raise their price to maximize their profit.
Alex does not have a dominant strategy since the best choice varies depending on Bob's strategy.
Bob does not have a dominant strategy because the best choice varies depending on Alex's strategy.
The externality is the difference in payoffs for Bob when playing Left against Bottom, compared to Right against Bottom: 12-6 = 6.
The Nash Equilibrium is (Bottom, Left) because, given that Alex is playing Bottom, Bob's best move is Left, and given that Bob is playing Left, Alex's best move is Bottom.
Using backward induction, we find that if Delta chooses Detroit, United's best response is to choose Atlanta. Knowing this, Delta will choose Atlanta to get a higher payoff. Therefore, the equilibrium is (Atlanta, Detroit), as both players will ultimately choose this strategy.
There is a second-mover advantage in this game. The second player (United) can always choose the route that gives them the highest payoff, knowing what the first player (Delta) has chosen.
The profit-maximizing quantity is found where marginal revenue equals marginal cost (MR=MC). Setting the marginal revenue equation, MR = 25-0.1*Q, equal to the marginal cost equation, MC = 2, and solving for Q, we get Q = 230.
To find the profit-maximizing price, plug the profit-maximizing quantity (230) into the demand function: Q = 500 - 20*P, and solve for P.
Variable profit is calculated by: Total revenue - Total variable cost. Total revenue is calculated by multiplying the quantity sold by the price. Total variable cost is calculated by multiplying the quantity sold by the marginal cost.
Deadweight loss is the loss of consumer and producer surplus due to market inefficiency. It is the area between the demand curve and the supply curve, to the right of the quantity produced.
Amazon is offering student discounts, which means they are charging a lower price to students. Since they are maximizing profit, the student group must have a higher price elasticity of demand than the regular customer group. In other words, students are more sensitive to price changes.
This is an example of market segmentation price discrimination. This is because Amazon is charging different prices to different groups with different price elasticities.
The per-membership variable profit is higher for the group with the lower price elasticity of demand. Since students have a higher price elasticity of demand, this means that regular memberships will have higher per-membership variable profits.
Utility companies using time-of-use pricing is an example of price discrimination. This is because they are charging different prices at different times of the day, based on the level of demand.

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Description

Test your understanding of key economic concepts with this True/False quiz. Questions cover fixed costs, economies of scale, profit maximization, and various market strategies. Perfect for students looking to reinforce their knowledge in economic theory.