MBA 502 Midterm Exam (Economics for Business)v

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.
Units of
Product Labor
Marginal Cost



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 03
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
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