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IE401-Econ401 MidTerm Managerial Economics

NAME:
Each of the 20 multiple choice questions is worth 3 points. Mar !our answers on the "#$%E& 'E( on
page ). "lso pro*ide +&IE, answers to each of the 4 -essa! t!pe.logical/ questions.
Multiple-Choice Questions
1. " manufacturer produces 10000 1aset1alls each da!0 which it sells to customers for 230 each. "ll
costs associated with production and sales total 21000003 howe*er0 if the manufacturer were to
produce one additional 1aset1all per da!0 total costs would increase to 2100100. ,rom these
amounts0 we can tell that
a. the firm has negati*e profit.
b. marginal cost equals $100.
c. marginal cost equals 21)0.
d. marginal cost equals marginal re*enue.

2. " retailer has to pa! 24 per hour to hire 13 worers. If the retailer onl! needs to hire twel*e
worers0 a wage rate of 25 per hour is sufficient. %hat is the marginal cost of the 13th worer6
a. 2115.
1. 24.
c. $33.
d. 274.
3. " computer manufacturer can produce ) computers for 2)0000 and 10 computers for 250)00.
+ased on this information0 what is the marginal cost per computer of the 8
th
through 10
th

computers6
a. $500
1. 25)0
c. 210000
d. 220)00
4. To ma9imi:e profits0 !ou should produce at the point where
a. !ou ma9imi:e the amount 1! which marginal re*enue e9ceeds marginal costs.
1. !ou minimi:e total costs.
c. !ou ma9imi:e total 1enefit.
d. marginal benefits and marginal costs are just equal.
). " 1aset1all compan! is considering purchasing a new machine that dou1les capacit! from 100
to 200 1alls per da!. The machine will occup! 10000 square feet of unused space on the factor!
floor. %hich costs are irrele*ant in this decision to purchase a machine6
a. Rental expense associated with the 20000 square foot factor!.
1. "dditional personnel required to operate the machine.
c. "dditional electricit! required to operate the machine.
d. Maintenance cost for routine cleaning of the machine.
8. If !ou are tr!ing to determine the *alue of a 1usiness0 which of the following factors would 1e
irrele*ant6
a. Interest rate ;discount rate<.
1. =osts incurred 1! the 1usiness.
c. &e*enues generated 1! the 1usiness.
d. >ow long the 1usiness is e9pected to sur*i*e.
e. "one of the factors are irrele#ant.

5. " 1aset1all manufacturer is considering a num1er of options for its new factor!. ?i*en the
following costs and 1enefits of the four different factor! configurations0 what are the marginal
costs and 1enefits of the E9tra @arge configuration relati*e to the @arge configuration6
Total =ost Total +enefit
=onfiguration ";$mall< 24)0000 2500000
=onfiguration +;Medium< 1200000 1500000
=onfiguration = ;@arge< 2400000 3000000
=onfiguration A ;E9tra @arge< 4000000 4200000
a. $arginal cost of $1%0000 and marginal benefit of $120000.
1. Marginal cost of 24000000 and marginal 1enefit of 24200000.
c. Marginal cost of 21200000 and marginal 1enefit of 21200000.
d. Marginal cost of 21800000 and marginal 1enefit of 22200000.
7. " 1aset1all manufacturer is considering a num1er of options for its new factor!. ?i*en the
following costs and 1enefits of the four different factor! configurations0 which =onfiguration
should the! select6
Total =ost Total +enefit
=onfiguration ";$mall< 24)0000 2400000
=onfiguration +;Medium< 1200000 1700000
=onfiguration = ;@arge< 2400000 2400000
=onfiguration A ;E9tra @arge< 4000000 4200000
a. =onfiguration ".
b. &onfiguration '.
c. =onfiguration =.
d. #one of the =onfigurations.
4. %hich of the following would 1e considered an e9tent decision6
a. " 1usiness is considering di*ersif!ing into a new line of 1usiness.
1. " 1usiness is considering shutting down operations.
c. " 1usiness is considering the sale of an underperforming line of 1usiness.
d. ( business manager is tr!ing to decide how man! wor)ers to hire for a new line of
business.

10. " computer manufacturer shares its production capacit! across two separate products0 computers
and printers. If the profita1ilit! of selling printers decreases0 then the compan! will find that the
a. cost of producing computers decreases.
1. cost of producing computers increases.
c. cost of producing computers is not affected.
d. profita1ilit! of producing computers increases.

11. %hich of the following statements is trueB
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a. " firmCs accounting costs are the same as its economic costs if the firm is earning a
normal rate of return.
1. " firmCs accounting costs are larger than its economic costs.
c. " firmDs accounting costs tae account of implicit costs of capital.
d. ( firm*s accounting costs are smaller than its economic costs.
12. %hich of the following is #ET true if a firm shuts down and produces :ero output in the short
run6
a. Faria1le costs will 1e :ero.
1. @osses will 1e incurred.
c. ,i9ed costs will 1e greater than :ero.
d. +ixed costs will be less than ,ero.
13. Ef the following t!pes of costs0 which is most liel! a fi9ed cost for a shoe manufacturer6
a. In*entor! costs.
1. =ost of the leather used to produce shoes.
c. Electricit! costs to run manufacturing equipment.
d. (n "'( pla!er-s lump.sum ro!alt! pa!ment to endorse the shoe.
14. " compan! that produces lu9ur! automo1iles has the following simplified costs. %hat is the
marginal cost of the second automo1ile6
G of "utomo1iles ,i9ed =ost Total Faria1le =osts
0 2)00000 20
1 2)00000 2100000
2 2)00000 2200000
3 2)00000 2400000
a. 2200000.
b. $10000.
c. 2500000.
d. 2300000.
1). " securit! s!stem compan!Ds total production costs depend on the num1er of s!stems produced
according to the following equationB Total =osts H 21000000000 I 22000Jquantit! produced.
%hat is the a*erage total cost of production when 200000 units are produced6
a. 40)00.
1. 30)00.
c. 2500.
d. 10)00.
18. "s a manufacturer increases output0 which of the following costs should decrease6
a. "*erage total cost.
b. (#erage fixed cost.
c. Marginal cost.
d. "*erage *aria1le cost.
15. " spirits manufacturer is considering two potential production in*estmentsB
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Eption " costs an initial 22 1illion and will in*ol*e *aria1le costs ;la1or and material< of 2) per
1ottle of spirits. Eption + costs an initial 24 1illion and will in*ol*e *aria1le costs ;la1or and
material< of 23 per 1ottle of spirits. "ssuming an annual capital charge equal to 10 percent of the
initial costs0 what is the a*erage fi9ed cost at production le*el of 3000000000 1ottles per !ear for
the Eption " facilit!6
a. 210.00.
1. 2).00.
c. 28.00.
d. $%.%/.
17. " spirits manufacturer is considering two potential production in*estmentsB
Eption " costs an initial 22 1illion and will in*ol*e *aria1le costs ;la1or and material< of 2)
per 1ottle of spirits. Eption + costs an initial 24 1illion and will in*ol*e *aria1le costs ;la1or
and material< of 23 per 1ottle of spirits. "ssuming an annual capital charge equal to 10
percent of the initial costs0 what is the a*erage fi9ed cost at production le*el of 2000000000
1ottles per !ear for the Eption + facilit!6
a. 23.
b. $20.
c. 223.
d. 210.
14. $uppose a new manufacturing technolog! results in an e9pansion in the suppl! of golf 1alls in the
Knited $tates of 1)L. If the elasticit! of demand of golf 1alls sold in the K$ is -0.40 the new
equili1rium price will 1e
a. 0.35)L lower.
1. 18L lower.
c. 35.)L higher.
d. 3/.50 lower.
20. -$mitt!Cs >ot +oiled MeanutsN recentl! reported that its re*enue increased from the pre*ious
quarter0 along with its profits. %hat is the most liel! e9planation for this change0 if the onl!
change $mitt!Ds made was in its price6
a. Mrice decreased and demand was inelastic.
b. 1rice increased and demand was inelastic.
c. Aemand was unit elastic.
d. Mrice decreased and demand was elastic.
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A B C D E A B C D E A B C D E
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2 12 22
3 13 23
4 14 24
5 15 25
6 16
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10 20
1rice of 'reast Reconstruction #s. 'reast (ugmentation 710 points8
Two similar surgeries0 1reast reconstruction and 1reast augmentation0 ha*e different prices. +reast
augmentation is cosmetic surger! not co*ered 1! health insurance. Matients who want the surger! must
pa! for it themsel*es. +reast reconstruction following 1reast remo*al due to cancer is co*ered 1!
insurance. The price for one of the surgeries has increased 1! a1out 10L each !ear since 144) while the
other has increased 1! onl! 2L per !ear. %hich of the surgeries has the lower inflation rate6
+&E"$T "K?ME#T"TIE# >"$ T>E @E%E& I#,@"TIE# &"TE. I#$K&"#=E AEE$ #ET M"(.
T>K$ MEEM@E +"&?"I# $E&IEK$@(. "@$E #ET " #E=E$$IT(0 AEM"#A ME&E E@"$TI=.
9mplementing 9ncenti#e 1a! 2!stems 710 points8
%ould incenti*e pa! wor 1etter for emplo!ees selling ticets at a mo*ie 1o9 office or emplo!ees selling
clothing at a retail store6
%E&'$ +ETTE& "T =@ET>I#? &ET"I@ $TE&E. T>E&E I$ ?&E"TE& &EEM ,E&
I#,@KE#=I#? +K(E&D$ =>EI=E.
4xtent #s. :iscrete 1roblems 710 points8
Identif! which of the following are e9tent decisions.
". Aecide whether to e9pand an e9isting product into a new region.
'. 3hat discount should be gi#en on products during the upcoming holida! sale;
&. 2hould the ad#ertising budget be changed for the upcoming !ear;
A. $hould !ou de*elop a new product for an e9isting product line6
<o! <ruc)s 710 points8
@ast !ear0 a to! manufacturer introduced a new to! truc that was a huge success. The compan! in*ested
22.) million for a plastic inOection molding machine ;which can 1e sold for 22.0 million< and 21000000 in
plastic inOection molds specificall! for the to! ;not *alua1le to an!one else<. @a1or and the cost of
)
materials necessar! to mae each truc is a1out 23. This !ear0 a competitor has de*eloped a similar to!
that has significantl! reduced demand for the to! truc. #ow0 the original manufacturer is deciding
whether the! should continue production of the to! truc. If the estimated demand is 1000000 trucs0
what is the 1rea-e*en price for the to! truc6 $hould !ou shut down6
2 million = 100 thousand > 3 ? $23 7abo#e 23 go on below 23 shut down8
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