Study Guide Questions for Managerial Economics for Examination I True-False-Uncertain/Explain in an Essay: 1.

If a firm raises its price for Product X, TR will increase. 2. When MR > MC, MP (marginal profit) will be positive. 3. If a 10% increase in price leads to a 5% increase in TR, demand must be elastic. 4. If the cross price elasticity is positive for two goods X and Y, X and Y must be complements. 5. Maximizing TR is never a desirable goal for a firm. 6. When effort and productivity are not directly observable, it is more likely that a firm will be charged with discrimination. 7. When MC is close to 0, the firm should maximize SLS. 8. If price elasticity of demand is the same for all customers, using coupons as a marketing strategy would be ineffective. 9. The more inelastic the demand, the more likely it is that a firm can have regular price increases. 10. If EP = -1.25 for Group A, and EP = -.375 for Group B, and a firm uses price discrimination, Group A should pay a higher price than Group B. 11. A consumer spends 1% of her income on Good A and 25% on Good B. Price Elasticity of Demand should be greater for Good B. 12. Income elasticity for an inferior good is always negative. 13. Changes in FC have no effect on P* and Q*. 14. The more inelastic the demand, the flatter the demand curve. 15. If demand goes from P = 1850 - .05Q to P = 1700 - .05Q, Demand has increased. 16. If TC goes from TC = 1250 + .5Q to TC = 1200 + .6Q, FC have gone up and VC have gone down. 17. A firm is more likely to use internal production for Input X if X is a standardized product sold in a competitive world market. 18. Firms spend money on advertising the unique properties of a product to make demand for that product more elastic. Essays 19. Explain the principal-agent problem (separation of ownership and control) for large corporations, and explain why the conflict between sales maximization and profit maximization might be a principal-agent problem. 20. Explain why shirking might be part of the principal-agent problem at corporations, and how compensation can be structured to minimize and shirking and solve the principal-agent problem. 21. Explain moral hazard, explain why moral hazard might be a problem in insurance markets, and explain how private auto insurance companies minimize moral hazard. 22. Explain how hostile takeovers can help solve the principal-agent problem.