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MBA 502 Midterm Exam (Economics for Business)




Question 1;Examine the Production Possibility Frontier chart below and explain the following. What;changes must occur for production in this economy to shift from point A to point C? What;changes must occur to shift from point A to point X? What changes must occur to shift from;point A to point Y? Which of these three production shifts is preferable and why?;Question 2;Explain the difference between accounting profit and economic profit. Which should business;owners be more concerned with and why? Provide an example that would illustrate how;accounting profit and economic profit differ.;Question 3;SkyWest, a regional airline, negotiated a financial arrangement with Delta and United Airlines to;provide regional jet service. SkyWest agreed to paint its jets the colors of Delta Connection and;United Express and to fly routes specified by the two airlines. In return, Delta and United agreed;to pay SkyWest a predetermined profit margin and to cover most of the regional airlines costs.;While the deal limited the amount of profit SkyWest could earn, it also insulated the smaller;airline from volatility in earnings since the major airlines covered SkyWests fuel costs;increased its percentage of seats occupied and managed its ticket prices.;Wall Street responded by increasing SkyWests market valuation from $143 million to $1.1;billion after the arrangement was made. Explain, in economic terms, how this arrangement with;Delta and United could have caused the value of SkyWest to increase so dramatically even;though it limited the amount of profit the company could earn.;Question 4;You are the manager of a California winery. How would you expect the following events to;affect the price you receive for a bottle of wine? You may include graphs if they help illustrate;your response.;a) The price of comparable import wines decreases;b) One hundred new wineries open in California;c) The unemployment rate in the United States increases;d) The price of cheese increases;e) The price of glass bottles increases significantly;f) A new wine-making technology is introduced that reduces production costs;g) The average age of consumers increases and older people drink less wine;Question 5;The market equilibrium price for coffee beans in Ecuador is $2.75/pound, a price at which;growers are unable to make a profit. Due to the lack of profits, many growers have stopped;production and the output of coffee beans has fallen from 400 tons per year (capacity for the;region) to 250 tons per year. As a result of pleas from the growers, the government steps in and;sets a floor price for coffee beans at $3.50/pound. What market response would you expect from;this government action? How would supply, demand, and price change? Use a graph to illustrate;your answer.;Question 6;As manager of City Racquet Club, you must determine the best price to charge for locker rentals.;Assume that the marginal cost of providing lockers is zero. The monthly demand for lockers is;estimated to be Q = 100 2P, where P is the monthly rental price and Q is the number of lockers;rented per month.;a) What price would you charge?;b) How many lockers would you expect to rent at this price?;c) Explain how you arrived at the price you chose.;Question 7;Assume that the demand for luxury cars is price elastic. Based on this assumption, explain why;each of the following statements is true or false.;a) When the price of luxury cars increases, the number of luxury cars purchased increases.;b) The percentage change in the price of luxury cars is less than the percentage change in;the quantity demanded.;c) If average family incomes fall, sales of luxury cars will decrease.;Question 8;During a time of increasing sales and production, the Sample Fabrication Company CEO hired;additional workers to handle the increased production. At the end of the first quarter after hiring;these new workers, the CEO discovered that productivity had declined with each new worker;hired. The CEO was upset and demanded that the production manager determine whether they;had hired lazy workers who should be fired or whether the supervisor was ineffective at;managing the new workers or both. Whatever the explanation, the CEO insisted that a solution;be found to bring productivity levels of the new employees up to the previous levels.;Using production theory as a basis, is the CEO correct in his assumption that lazy workers or;ineffective supervisors are to blame for the decline in productivity? What other explanations;might be possible?;Question 9;A price-taking firm has total fixed costs of $40 and faces a market-determined price of $2 per;unit of its output. The wage rate is $11 per unit of labor. Labor is the only variable input.;Complete the following table and then answer the questions that follow.;Marginal;Units of;Marginal;Revenue;Labor;Output;Product;Product;Marginal Cost;Profit;1;5;2;15;3;30;4;5;6;7;8;9;10;50;65;77;86;94;98;96;a) How much labor should management hire to maximize profit?;b) How much output should management produce to maximize profit?;c) Does it matter whether management chooses labor input or units of output to maximize;profit? Why?;d) How must labor should the manager hire if the wage rate rises to $15 per unit?;Question 10;Explain why the following statement is true or false: Firms operating in perfectly competitive;markets are price takers. Further, explain how firms in a perfectly competitive market can;maximize profits in the short run.;Question 11;Grocery stores and gas stations in large cities would appear to be examples of near-perfectly;competitive markets because there are numerous small sellers, each seller is a price taker, and the;products are quite similar. Do you agree with this statement? Could you make an argument that;these markets are not competitive?;Question 12;Using two different industries as examples, explain how companies can use barriers to entry to;discourage or even prevent competitors from entering the market.;Question 13;Is the following statement correct or incorrect: If a firm operating in a monopoly or imperfectly;competitive industry is trying to maximize profits, it will always charge the highest price that the;traffic will bear. Explain why or why not. If the statement is incorrect, how would you state it;correctly?;Question 14;How can collusion affect pricing in an oligopoly? Why is collusion difficult to detect? Would;you expect collusion to be more prevalent in an industry with three competitors or one with eight;competitors? Explain your answer.;Question 15;If the federal government enacts a tax on a monopoly, how would you expect the additional tax;to affect the following;a. Profits of the monopoly;b. Output produced by the monopoly;c. Prices charged by the monopoly


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