An all-you-can-eat buffet attracts two types of customers. Regular customers value the buffet at $20 and eat $5 of food in costs to the restaurant. Hungry customers value the buffet at $40 and eat $10 of food. If there are 100 of each type in the market for a buffet dinner, what is the restaurant’s maximum profit? a. $2,500 b. $3,000 c. $4,500 d. $6,500
> You, a real-estate developer, own a piece of land in Nassau, Bahamas, next to an equal size piece of land owned by a competitor. Both of you have the choice of building a casino or a hotel. Your payoffs are as follows: Your competitor Casino Hote
> Suppose the game is infinitely repeated. What strategies will each firm utilize? a. firm A will charge a low price, and firm B will charge a low price. b. firm A will charge a high price, and firm B will charge a low price. c. firm A will charge a low
> If this game is played once, then a. firm A will charge a low price, and firm B will charge a low price. b. firm A will charge a high price, and firm B will charge a low price. c. firm A will charge a low price, and firm B will charge a high price. d.
> In repeated games, all of the following make it easier to get out of bad situations except a. be nice, no first strikes. b. respond immediately to rivals. c. punish uncooperative players as much as you can. d. make sure your competitors can easily int
> In a Nash equilibrium, a. players are always maximizing their joint profit. b. one player is always earning a higher profit than the other. c. players must be playing the game sequentially. d. None of the above
> If collusion were not illegal, then it would be optimal a. for Megastore to advertise and for Superstore to advertise. b. for Megastore to advertise and for Superstore not to advertise. c. for Megastore not to advertise and for Superstore to advertise.
> When the stores reach the Nash equilibrium, their profits will be a. Megastore $95 and Superstore $80. b. Megastore $305 and Superstore $55. c. Megastore $65 and Superstore $285. d. Megastore $165 and Superstore $115.
> A Nash equilibrium is a. for Megastore to advertise and for Superstore to advertise. b. for Megastore to advertise and for Superstore not to advertise. c. for Megastore not to advertise and for Superstore to advertise. d. for Megastore not to adverti
> A Nash equilibrium a. is where one player maximizes his payoff and the other doesn’t. b. is where each player maximizes his own payoff given the action of the other player. c. is where both players are maximizing their total payoff. d. is a unique pr
> A multinational firm acquires many of its components pre-assembled from suppliers. One of these suppliers operates in a country with a much lower corporate income tax rate. How does this affect the vertical relationship between this supplier and the mult
> The intersection between demand for dollars and the supply of dollars is known as the a. Inflation rate b. Exchange rate c. Price d. Quantity
> Two hospitals are bargaining with an insurance company to get into its provider network. The insurance company can earn $100 if it puts one of the hospitals in its network and $200 if it puts both hospitals in its network. If both hospitals merge and b
> The game of chicken has a. a second-mover advantage. b. a first-mover advantage. c. no sequential-move advantage. d. potential sequential-move advantages, depending on the players.
> George and KC have been working jobs that pay $60,000 and $30,000 per year, respectively. They are trying to decide whether to quit their jobs and jointly open up a taco stand on the beach, which they estimate can earn $150,000 per year. How will the
> Pete and Lisa are entering into a bargaining situation in which Pete stands to gain up to $5,000 and Lisa stands to gain up to $1,000, provided they reach agreement. Who is likely to have the stronger bargaining position? a. Pete b. Lisa c. They will be
> Consider bargaining in which each party increases its outside option by $10,000. Which of the following is a likely result. a. The chance of a deal increases. b. Each party’s share of the bargaining surplus increases by $10,000. c. The bargaining split
> Consider a vendor-buyer relationship. Which of the following conditions would lead to the buyer having more bargaining power? a. Lots of substitutes for the vendor's product are available. b. There are relatively few buyers and many vendors. c. It costs
> In the game in Question 3, how much does Labor earn if they can move first? a. 10 b. 15 c. 18 d. 20
> How many pure strategy equilibria does the following game have? a. 0 b. 1 c. 2 d. 3 LABOR Bargain Hard Be Nice MANAGEMENT Bargain Hard 0,0 20, 10 Be Nice 12, 18 15, 15
> Fred and his employer both know that Fred can generate $200,000 of profit per year for his company. After negotiations, they agree that he will earn $110,000 in annual compensation. What does this imply for the value of his outside or next best alternati
> CUS Pharmacy wishes to carry Pepgro blue pills. But Daisy Pharmaceuticals, the maker of Pepgro, will not supply CUS unless CUS agrees to carry other medications that Daisy makes. This is an example of a. Exclusion b. Tying c. territory restriction d.
> You are considering entry into a market in which there is currently only one producer (incumbent). If you enter, the incumbent can take one of two strategies, price low or price high. If he prices high, then you expect a $60K profit per year. If he price
> You have two types of buyers for your product. Forty percent of buyers value your product at $10 and sixty percent value it at $6. What price maximizes your expected revenue? a. $10 b. $6 c. $7.60 d. $8
> Your production line has recently been producing a serious defect. One of two possible processes, A and B, could be the culprit. From past experience you know that the probability that A is causing the problem is 0.8 but investigating A costs $100,000 wh
> Your company has a customer list that includes 3000 people. Your market research indicates that 90 of them responded to the coupon. If you send a coupon to one customer at random, what’s the probability that he or she will use the coupon? a. 0.03 b. 0.0
> To test the effectiveness of a two Web advertising agencies, you increase your ad purchase with agency A by 50% without changing your purchase through agency B. The referrals to your website from agency A increased by only 34% but the referrals from agen
> Suppose an investment project has an NPV of $75 million if it becomes successful and an NPV of –$25 million if it is a failure. What is the minimum probability of success above which you should make the investment? a. 0.5 b. 1/3 c. 0.25 d. 0.1
> 4. Your software development company is considering investing in a new mobile app. If it goes viral (10% probability), you expect an NPV of $1,000,000; if it is moderately successful (20% probability), you expect an NPV of $200,000; and if it fails (70%
> 3. You’ve just decided to add a new line to your manufacturing plant. Compute the expected loss/profit from the line addition if you estimate the following: • There’s a 50% chance that profit will increase by $100,000. • There’s a 30% chance that profit
> In a first-price auction, you bid __________ your value, and in a second-price auction you bid _______ your value. a. at; above b. below; above c. below; at d. below; below
> A bidder’s value for a good may be low ($2), medium ($5), or high ($7). There is an equal number of potential bidders having each value. Suppose two bidders participate in a second-price auction. What is the best estimate of the expected revenue from the
> Why do vertical agreements typically pose less antitrust risk than horizontal agreements? a. Vertical agreements occur less often than horizontal agreements b. Vertical agreements often result in lower prices, which are beneficial to the consumer c. Vert
> Which of the following is true about the winner’s curse? a. The winner’s curse occurs primarily in private-value auctions. [each bidder knows his or her value in private value auctions, so there is no winner’s curse.] b. You successfully avoided the winn
> 7. You’ re holding an auction to license a new technology that your company has developed. One of your assistants raises a concern that bidders’ fear of the winner’s curse may encourage them to shade their bids. How might you address this concern? a. Rel
> If a seller is concerned about collusion among bidders, which of the following changes to the auction should the seller make? a. Hold frequent, small auctions instead of infrequent large auctions. b. Conceal the amount of winning bids. c. Publicly announ
> In a common-value auction, you should a. bid more aggressively the more competitors you face. b. bid less aggressively the more competitors you face. c. bid the same regardless of the number of competitors. d. bid more aggressively when others have bette
> In the above auction, if the bidders with the first- and third-highest values ($500 and $300) collude, which of these is closest to the winning price? a. $500 b. $400 c. $300 d. $200
> Suppose that five bidders with values of $500, $400, $300, $200, and $100 attend an oral auction. Which of these is closest to the winning price? a. $500 b. $400 c. $300 d. $200
> Which of the following is true about different ways of conducting a private-value auction? a. A first-price auction is strategically equivalent to a second-price auction. b. A first-price auction is strategically equivalent to an oral English auction. c
> You are bidding in a second-price auction for a painting that you value at $800. You estimate that other bidders are most likely to value the painting at between $200 and $600. Which of these is likely to be your best bid? a. $1,000 b. $800 c. $600 d. $
> A franchise restaurant chain is considering a new store in an unserved part of town. Its finance group estimates an NPV of $10 million if the population growth is 10% (40% probability), and NPV of $4 million of the population does not grow (30% probabili
> Which of the following is an example of adverse selection? a. A safe driver taking greater risk in a rental car than his own car. b. A terminally ill person purchasing life insurance. c. An employment contract encourages little effort on the part of emp
> In which of the following instances would an acquisition make the most sense? a. The target is a very profitable company b. Synergies exist between the acquirer and the target c. Integration costs are low between the two d. Synergy benefits outweigh t
> An insurance company suffers from adverse selection if a. safe customers are less likely to insure than risky customers. b. customers know their willingness to pay for insurance but the company does not. c. a customer takes on much greater risk because h
> Which of the following is a potential solution to the adverse selection problem faced by insurance companies? a. Offer plans with different deductibles so that higher-risk customers accept higher deductibles. b. Create a national database of customers t
> The demand for insurance arises primarily from people who are a. risk-seeking. b. risk-averse. c. risk-neutral. d. None of the above
> Which of the following is not an example of adverse selection? a. A business bets the proceeds of a bank loan on the next NFL game. b. An accident-prone driver buys auto insurance. c. A patient suffering from a terminal disease buys life insurance. d.
> Which of the following can be an example of a signal? a. An air-conditioning manufacturer offers a 50-year warranty. b. A lawyer offers to be paid only if the client wins. c. A student pursues an MBA. d. All of the above
> To combat the problem of adverse selection, ______ informed parties can employ _____ techniques. a. more; signaling b. less; signaling c. equally; screening d. equally; signaling
> An employer faces two types of employees. Regular workers are 70% of the population and generate $100,000 in productivity. Exceptional workers are 30% of the population, and generate $120,000 in productivity. Employees know their types, and reject salari
> An insurance company offers doctors malpractice insurance. Assume that malpractice claims against careful doctors cost $5,000 on average over the term of the policy and settling malpractice claims against reckless doctors costs $30,000. Doctors are risk-
> Which of the following is true about moral hazard? a. Moral hazard arises from actions that cannot be observed. b. Shirking is a form of moral hazard. c. Moral hazard refers to the taking of excessive risk. d. All of the above
> Why are contact lens manufacturers reluctant to sell their lenses through the Internet? a. The Internet price is too high due to double marginalization b. Search costs are lower, so the Internet sales are too competitive c. Doing so reduces the incentive
> Loan applications require a lot of information from applicants to avoid a. moral hazard. b. adverse selection. c. free riding. d. None of the above
> Restrictive covenants on loans are used to avoid a. moral hazard. b. adverse selection. c. free riding. d. None of the above
> Which of the following is true? a. Moral hazard is primarily an issue prior to a transaction. b. Adverse selection is primarily an issue after a transaction. c. Moral hazard is the result of an information asymmetry. d. Resolving adverse selection also
> Which of the following is not an example of moral hazard? a. People are more likely to lock their own car than a rental car. b. Skateboarders attempt more difficult maneuvers when wearing a helmet. c. Bad salespeople are less drawn to commission-based j
> You are taking a multiple-choice test that awards you one point for a correct answer and penalizes you 0.25 points for an incorrect answer. If you have to make a random guess and there are five possible answers, what is the expected value of guessing? a.
> For threats or commitments to be effective, they must be a. irrational. b. profitable. c. credible. d. None of the above.
> The prisoners’ dilemma is an example of a. a sequential game b. a simultaneous game. c. a shirking game. d. a dating game.
> On average, if demand is unknown and costs of underpricing are _______ than the costs of overpricing, then _________. a. smaller; overprice b. smaller; underprice c. larger; underprice d. None of the above
> Which of the following is an example of moral hazard? a. High-quality products being driven out of a market by low-quality products. b. A local charity raising insufficient funds because no one contributes, expecting that their neighbors will. c. A bake
> After running a promotional campaign, the owners of a local hardware store decided to decrease the prices for the advertised prices sold in their store. One can infer that a. the promotional expenditures made the demand for the advertised products more e
> A firm started advertising its product and this changed the product’s elasticity from -2 to -1.5. The firm should a. raise price from $10 to $15. b. reduce price from $15 to $10. c. raise price from $7.5 to $10. d. reduce price from $10 to $7.5.
> For products like parking lots and hotels, costs of building capacity are mostly fixed or sunk and firms in this industry typically face capacity constraints. Therefore, a. if MR>MC at capacity, then the firms should price to fill capacity. b. if MRLRM
> Firms tend to raise the price of their goods after acquiring a firm that sells a substitute good because a. they lose market power. b. there is an increase in the overall demand for their products. c. the aggregate demand for both goods is more elastic
> After firm A producing one good acquired another firm B producing another good, it lowered the prices for both goods. One can conclude that the goods were a. substitutes. b. complements. c. not related. d. None of the above
> A shoe-producing firm decides to acquire a firm that produces shoe laces. This implies that the firm’s aggregate demand (shoes + laces) will be: a. less elastic than the individual demands. b. more elastic than the individual demands. c. equally elastic
> A firm that acquires a substitute product can reduce cannibalization by a. doing nothing. b. repositioning a product so that it does not directly compete with the substitute. c. setting the same price on both products. d. lowering prices on the low-ma
> All of the following choices are examples of promoting a firm’s product, except a. celebrity endorsements. b. pricing c. discount coupons. d. end-of-aisle displays.
> After massive promotion of Rihanna’s latest music album, the producers reacted by raising prices for her albums. This implies that promotion expenditures made the album demand a. more elastic. b. unitary elastic. c. change due to psychological pricing.
> A manager of a clothing firm is deciding whether to add another factory in addition to one already in production. The manager would compare a. the total benefits gained from the two factories to the total costs of running the two factories. b. the incre
> Which of the following is not an example of a process designed to combat moral hazard problems? a. Banks include restrictive covenants in loan agreements. b. Universities have student’s complete evaluations of professor performance at the end of a class.
> Total costs increase from $1500 to $1800 when a firm increases output from 40 to 50 units. Which of the following is true if MC is constant? a. FC = $100 b. FC = $200 c. FC = $300 d. FC = $400
> A firm produces 500 units per week. It hires 20 full-time workers (40 hours/week) at an hourly wage of $15. Raw materials are ordered weekly and they costs $10 for every unit produced. The weekly cost of the rent payment for the factory is $2,250. How d
> Managers undertake an investment only if a. Marginal benefits of the investment are greater than zero b. MCs of the investment are greater than marginal benefits of the investment c. Marginal benefits are greater than MCs d. Investment decisions do not
> When economists speak of “marginal”, they mean a. opportunity b. scarcity c. incremental d. unimportant
> In the short run, a firm’s decision to shut down should not take into consideration a. avoidable costs. b. variable costs. c. fixed costs. d. MCs
> Break-even quantity is a point where a. the level of profit is maximized. b. the level of cost is minimized. c. only variable costs are covered. d. there are zero profits.
> If GDP is expected to increase at a steady rate of 3% per year, how many years would it take for living standards to double? a. 10 b. 20 c. 24 d. 30
> You are considering opening a new business to sell dartboards. You estimate that your manufacturing equipment will cost $100,000, facility updates will cost $250,000, and on average it will cost you $80 (in labor and material) to produce a board. If yo
> You expect to sell 500 cell phones a month, which have an MC of $50. If your fixed costs are $5,000 per month, what is the break-even price? a. $10 b. $50 c. $60 d. $100
> What is the net present value of a project that requires a $100 investment today and returns $50 at the end of the first year and $80 at the end of the second year? Assume a discount rate of 10%. a. $10.52 b. $11.57 c. $18.18 d. $30.00
> A salesperson can put in regular effort (resulting in a 40% chance of sale) or high effort (60% chance of sale). If high effort costs the salesperson $20 more than regular effort, how large a per-sale bonus is required to encourage high effort? a. $12 b
> Sarah’s Machinery Company is deciding to dump their current technology A for a new technology B with smaller fixed costs but bigger MCs. The current technology has fixed costs of $500 and MCs of $50 whereas the new technology has fixed costs of $250 and
> Assume a firm has the following cost and revenue characteristics at its current level of output: price=$10.00, average variable cost=$8.00 and average fixed cost =$4.00. This firm is a. incurring a loss of $2.00 per unit and should shut down. b. realizi
> The higher the discount rates a. the more value individuals place on future dollars b. the more value individuals place on current dollars c. the more investments will take place d. Does not affect the investment strategy
> Which of the following will increase the break-even quantity? a. A decrease in overall fixed costs b. A decrease in the marginal costs c. A decrease in the price level d. An increase in price level
> An individual’s value for a good or service is a. The amount of money he or she used to pay for a good. b. The amount of money he or she is willing to pay for it. c. The amount of money he or she has to spend on goods. d. None of the above
> You’re the manager of global opportunities for a U.S. Manufacturer, who is considering expanding sales into Asia. Your market research has identified the market potential in Malaysia, Philippines, and Singapore as described next: Success Level Malaysia
> Suppose the herbicide manufacturer mentioned in the chapter can vertically integrate only into home gardening retailing. Would this allow the manufacturer to price discriminate?
> Stores that sell wedding dresses do not typically permit photos, and do not have tags in the dresses that would identify the manufacturer and style type. What is the purpose of these rules? Suggest one other way of accomplishing the same objective.
> Australian cosmetics maker, Eternal Beauty Products, pressures online retailers to either sell goods at prices charged by brick and mortar stores or risk being cutoff. If online retailers are paying the same wholesale prices, why would Eternal not want o
> State utility commissions typically regulate local phone companies, but local phone companies also offer long-distance service to their customers. Rival long-distance carriers also connect to local phone lines to provide long-distance service to customer
> In a bad economy, a CEO has a 4% chance of meeting earnings estimates at regular effort, and a 5% chance at extraordinary effort. Extraordinary effort costs the CEO $10,000. How large a bonus should the CEO be paid for meeting estimates to encourage extr
> Intel made large loyalty payments to HP in exchange for HP buying most of their chips from Intel instead of rival AMD. AMD sued Intel under the antitrust laws, and Intel settled the case by paying $1.25 billion to AMD. What incentive conflict was being c
> Under a proposed healthcare reform, doctors’ fees will be capped at 80% of their current rate, but doctors can order blood tests that will be reimbursed at 90% of the current rate. How does vertical integration of physician groups into testing services i
> Futura Furniture Products manufactures upscale office furniture for the “Office of the Future.” The sales division comprises regionally based sales offices made up of sales representatives and regional managers. Sales representatives—who report to the re
> Discuss the advantages and disadvantages of using divisional profit as the basis of incentive compensation for division managers compared to using company profit as the basis.
> Your local fast food chain with two dozen stores uses the company’s internal corporate marketing department to produce signage, print ads, in-store displays, and so forth. When placing an order, store managers are assessed a chargeback (transfer price) t
