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MBA 502 Midterm Exam (Economics for Business)




Question;Question 1Examine the Production Possibility Frontier chart below and explain the following. Whatchanges must occur for production in this economy to shift from point A to point C? Whatchanges must occur to shift from point A to point X? What changes must occur to shift frompoint A to point Y? Which of these three production shifts is preferable and why?Question 2Explain the difference between accounting profit and economic profit. Which should businessowners be more concerned with and why? Provide an example that would illustrate howaccounting profit and economic profit differ.Question 3SkyWest, a regional airline, negotiated a financial arrangement with Delta and United Airlines toprovide regional jet service. SkyWest agreed to paint its jets the colors of Delta Connection andUnited Express and to fly routes specified by the two airlines. In return, Delta and United agreedto 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 smallerairline 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 $1.1billion after the arrangement was made. Explain, in economic terms, how this arrangement withDelta and United could have caused the value of SkyWest to increase so dramatically eventhough it limited the amount of profit the company could earn.Question 4You are the manager of a California winery. How would you expect the following events toaffect the price you receive for a bottle of wine? You may include graphs if they help illustrateyour response.a) The price of comparable import wines decreasesb) One hundred new wineries open in Californiac) The unemployment rate in the United States increasesd) The price of cheese increasese) The price of glass bottles increases significantlyf) A new wine-making technology is introduced that reduces production costsg) The average age of consumers increases and older people drink less wineQuestion 5The market equilibrium price for coffee beans in Ecuador is $2.75/pound, a price at whichgrowers are unable to make a profit. Due to the lack of profits, many growers have stoppedproduction and the output of coffee beans has fallen from 400 tons per year (capacity for theregion) to 250 tons per year. As a result of pleas from the growers, the government steps in andsets a floor price for coffee beans at $3.50/pound. What market response would you expect fromthis government action? How would supply, demand, and price change? Use a graph to illustrateyour answer.Question 6As 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 isestimated to be Q = 100 2P, where P is the monthly rental price and Q is the number of lockersrented 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 7Assume that the demand for luxury cars is price elastic. Based on this assumption, explain whyeach 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 inthe quantity demanded.c) If average family incomes fall, sales of luxury cars will decrease.Question 8During a time of increasing sales and production, the Sample Fabrication Company CEO hiredadditional workers to handle the increased production. At the end of the first quarter after hiringthese new workers, the CEO discovered that productivity had declined with each new workerhired. The CEO was upset and demanded that the production manager determine whether theyhad hired lazy workers who should be fired or whether the supervisor was ineffective atmanaging the new workers or both. Whatever the explanation, the CEO insisted that a solutionbe 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 orineffective supervisors are to blame for the decline in productivity? What other explanationsmight be possible?Question 9A price-taking firm has total fixed costs of $40 and faces a market-determined price of $2 perunit 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.MarginalUnits ofMarginalRevenueLaborOutputProductProductMarginal CostProfit152153304567891050657786949896a) 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 maximizeprofit? Why?d) How must labor should the manager hire if the wage rate rises to $15 per unit?Question 10Explain why the following statement is true or false: Firms operating in perfectly competitivemarkets are price takers. Further, explain how firms in a perfectly competitive market canmaximize profits in the short run.Question 11Grocery stores and gas stations in large cities would appear to be examples of near-perfectlycompetitive markets because there are numerous small sellers, each seller is a price taker, and theproducts are quite similar. Do you agree with this statement? Could you make an argument thatthese markets are not competitive?Question 12Using two different industries as examples, explain how companies can use barriers to entry todiscourage or even prevent competitors from entering the market.Question 13Is the following statement correct or incorrect: If a firm operating in a monopoly or imperfectlycompetitive industry is trying to maximize profits, it will always charge the highest price that thetraffic will bear. Explain why or why not. If the statement is incorrect, how would you state itcorrectly?Question 14How can collusion affect pricing in an oligopoly? Why is collusion difficult to detect? Wouldyou expect collusion to be more prevalent in an industry with three competitors or one with eightcompetitors? Explain your answer.Question 15If the federal government enacts a tax on a monopoly, how would you expect the additional taxto affect the following:a. Profits of the monopolyb. Output produced by the monopolyc. Prices charged by the monopoly


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