Assume you have an asset which will pay 5,000 dollars at the end of each year forever.

1. Assume you have an asset which will pay 5,000 dollars at the end of each year forever. Then, if the interest rate is 5% per year, the value of the asset is

a) 25,000 dollars

b) 50,000 dollars

c) 100,000 dollars

d) 500,000 dollars

2. Assume product A and product B are complements. Then, an increase in the price of product B

a) Will increase the demand for product A

b) Will decrease the demand for product A

c) Will have no effect on the demand for product A

d) May increase or decrease the demand for product A

3. Consider the market for SUVs and assume the market is initially in equilibrium. Then, an increase in the price of gasoline will

a) Increase the equilibrium price and decrease the equilibrium quantity

b) Increase the equilibrium price and the equilibrium quantity

c) Decrease the equilibrium price and increase the equilibrium quantity

d) Decrease the equilibrium price and the equilibrium quantity

4. Consider the market for electricity and assume the market is initially in equilibrium. Then, stricter environmental regulations intended to reduce greenhouse gas emissions will

a) Increase the equilibrium price and decrease the equilibrium quantity

b) Increase the equilibrium price and the equilibrium quantity

c) Decrease the equilibrium price and increase the equilibrium quantity

d) Decrease the equilibrium price and the equilibrium quantity

5. Assume the demand for a commodity is inelastic. Then, an increase in the price of the commodity

a) Will increase revenue

b) Will decrease revenue

c) Will have no effect on revenue

d) May increase or decrease revenue

6. Assume the price elasticity of demand for computers is E = -3/2. Then, a 10% increase in the price of computers will

a) Decrease the quantity demanded by 10%

b) Decrease the quantity demanded by 15%

c) Increase the quantity demanded by 10%

d) Increase the quantity demanded by 15%

7. Assume the cross price elasticity of demand for products A and B is positive. Then, the products must be

a) Complements

b) Substitutes

c) Electronics

d) Automobiles

8. Assume the marginal product of labor is MPL = 5 and the marginal product of capital is MPK = 10, while the price of labor is wL = 50 dollars and the price of capital is wK = 150 dollars. Then, if a manger wants to minimize the costs of production, the manager should use

a) An equal number of workers and machines

b) More workers and more machines

c) More machines and fewer workers

d) More workers and fewer machines

9. Assume the price of output is p = 10 dollars, the marginal product of labor is given by the equation MPL = 20 - (1/2)L, and the price of labor is wL = 100 dollars. Then, the optimal quantity of labor is

a) 5 workers

b) 10 workers

c) 20 workers

d) 25 workers

10. The quantity of an input, such as machines or workers, which maximizes profit is the quantity for which

a) The value of the marginal product of the input is equal to the price of the input

b) The value of the average product of the input is equal to the price of the input

c) The marginal product of the input is equal to the price of the input

d) The average product of the input is equal to the price of the input

11. A production process exhibits economies of scale if

a) The total cost of production decreases as output increases

b) The marginal cost of production decreases as output increases

c) The average cost of production decreases as output increases

d) The average cost of production increases as output increases

12. A business is more likely to vertically integrate and produce an input internally if

a) Specialized investments are important and the contracting environment is simple

b) Specialized investments are important and the contracting environment is complex

c) Specialized investments are not important and the contracting environment is simple

d) Specialized investments are not important and the contracting environment is complex

13. There are three businesses in an industry, with sales of 30 million, 15 million, and 15 million, respectively. The HHI index for this industry is

a) 3500

b) 3750

c) 4250

d) 4500

3

14. A business has a marginal cost of MC = 20 dollars and charges a price of p = 30 dollars. The Lerner Index of market power for this business is

a) 0.33

b) 0.50

c) 0.66

d) 0.75

15. If a monopoly has a marginal cost of MC = 20 dollars and the price elasticity of demand is E = 3, the optimal price for the monopoly is

a) 25 dollars

b) 30 dollars

c) 35 dollars

d) 50 dollars

Extra Credit [5 points]

You are the manager of a business that produces its product in two plants. The cost functions for Pant A and Plant B are CA(qA) = 100 + 10qA and CB(qB) = 50 + (1/10)(qB)2, respectively. If you want to produce a total of 150 units, how much should you produce in Plant A (qA) and Plant B (qB) to minimize your costs of production?

a) qA = 50 and qB = 100

b) qA = 25 and qB = 125

c) qA = 100 and qB = 50

d) qA = 125 and qB = 25