Q&A Hero

Q: Wally describes himself as a resilient fundamentalist when it comes to making investments in the stock market. At the moment, Wally uses only periodicals from the library when analyzing corporate fundamentals. The number of firms he can analyze in a day is given by the function: y(L) = 2, where L is the number of hours a day he works. Sketch Wally's total number of firms analyzed as he increases his hours of work. If Wally begins using internet sources to learn about corporate fundamentals, the number of firms he can analyze in a day is given by the function: y(L) = 5 Sketch Wally's total number of firms analyzed as he increases his hours of work and uses the internet.

Q: Ronald's Outboard Motor Manufacturing plant production function is y(K, L) = 25. Ronald is investigating a new outboard motor manufacturing technique. Ronald believes that if he adopts the new technique, his production function for outboard motors will become: y(K, L) = 36. Given that Ronald uses 4 units of machine hours, sketch his production function with the old technique and the new technique as he increases labor hours. With the new technique, do labor hours contribute more to production?

Q: Which of the following equations based on capital (K) and labor (L) inputs does not represent a plausible production function? A) F(K,L) = 3KL B) F(K,L) = 3K C) F(K,L) = K + L - 1 D) F(K,L) = 10(KL)0.5

Q: Which of the following actions is not an example of the production coordination provided by firms? A) Manage production activities of workers B) Pay wages to workers C) Establish industry safety regulations D) Set the production schedule for each week

Q: Some economists conduct empirical research on the theory of the firm by measuring the degree of technical efficiency achieved by actual firms. What type of research contributions are provided by these studies? A) Normative B) Positive C) Administrative D) Executive

Q: We manufacturer automobiles given the production function q = 5KL where q is the number of autos assembled per eight-hour shift, K is the number of robots used on the assembly line (capital) and L is the number of workers hired per hour (labor). If we use K=10 robots and L=10 workers in order to produce q = 450 autos per shift, then we know that production is: A) technologically efficient. B) technologically inefficient. C) maximized. D) optimal.

Q: For many firms, capital is the production input that is typically fixed in the short run. Which of the following firms would face the longest time required to adjust its capital inputs? A) Firm that makes DVD players. B) Computer chip fabricator C) Flat-screen TV manufacturer D) Nuclear power plant

Q: Suppose there are ten identical manufacturing firms that produce computer chips with machinery (capital, K) and labor (L), and each firm has a production function of the form q = 10KL0.5. What is the industry-level production function? A) Q = 10K10L5 B) Q = 100KL0.5 C) Q = 100L0.5 D) none of the above

Q: Joe owns a small coffee shop, and his production function is q = 3KL where q is total output in cups per hour, K is the number of coffee machines (capital), and L is the number of employees hired per hour (labor). If Joe's capital is currently fixed at K=3 machines, what is his short-run production function? A) q = 3L B) q = 3L2 C) q = 9L D) q = 3K2

Q: The short run is A) less than a year. B) three years. C) however long it takes to produce the planned output. D) a time period in which at least one input is fixed. E) a time period in which at least one set of outputs has been decided upon.

Q: Which of the following inputs are variable in the long run? A) labor. B) capital and equipment. C) plant size. D) all of these.

Q: A farmer uses L units of labor and K units of capital to produce Q units of corn using a production function F(K,L). A production plan that uses K' = L' = 10 to produce Q' units of corn where Q' < F(10, 10) is said to be A) technically feasible and efficient. B) technically unfeasible and efficient. C) technically feasible and inefficient. D) technically unfeasible and inefficient. E) none of the above

Q: Use the following two statements to answer this question: I. Production functions describe what is technically feasible when the firm operates efficiently. II. The production function shows the least cost method of producing a given level of output. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false.

Q: A function that indicates the maximum output per unit of time that a firm can produce, for every combination of inputs with a given technology, is called A) an isoquant. B) a production possibility curve. C) a production function. D) an isocost function.

Q: A production function assumes a given A) technology. B) set of input prices. C) ratio of input prices. D) amount of capital and labor. E) amount of output.

Q: A production function defines the output that can be produced A) at the lowest cost, given the inputs available. B) for the average firm. C) if the firm is technically efficient. D) in a given time period if no additional inputs are hired. E) as technology changes over time.

Q: An examination of the production isoquants in the diagram below reveals that: A) capital and labor will be used in fixed proportions. B) capital and labor are perfectly substitutable. C) the MRTS is constant. D) Both B and C are correct. E) none of the above

Q: An examination of the production isoquants in the diagram below reveals that: A) capital and labor must be used in fixed proportions. B) capital and labor are perfectly substitutable. C) except at the corners of the isoquants the MRTS is constant. D) Both B and C are correct. E) none of the above

Q: A production function in which the inputs are perfectly substitutable would have isoquants that are A) convex to the origin. B) L-shaped. C) linear. D) concave to the origin.

Q: If the isoquants are straight lines, then A) inputs have fixed costs at all use rates. B) the marginal rate of technical substitution of inputs is constant. C) only one combination of inputs is possible. D) there are constant returns to scale.

Q: The marginal rate of technical substitution is equal to the A) slope of the total product curve. B) change in output minus the change in labor. C) change in output divided by the change in labor. D) ratio of the marginal products of the inputs.

Q: If capital is measured on the vertical axis and labor is measured on the horizontal axis, the slope of an isoquant can be interpreted as the A) rate at which the firm can replace capital with labor without changing the output rate. B) average rate at which the firm can replace capital with labor without changing the output rate. C) marginal product of labor. D) marginal product of capital.

Q: The rate at which one input can be reduced per additional unit of the other input, while holding output constant, is measured by the A) marginal rate of substitution. B) marginal rate of technical substitution. C) slope of the isocost curve. D) average product of the input.

Q: As we move downward along a typical isoquant, the slope of the isoquant A) becomes flatter. B) becomes steeper. C) remains constant. D) becomes linear.

Q: Use the following two statements to answer this question: I. If the marginal product of labor is zero, the total product of labor is at its maximum. II If the marginal product of labor is at its maximum, the average product of labor is falling. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false.

Q: An upward sloping isoquant A) can be derived from a production function with one input B) can be derived from a production function that uses more than one input where reductions in the use of any input always reduces output C) cannot be derived from a production function when a firm is assumed to maximize profits D) can be derived whenever one input to production is available at zero cost to the firm E) none of the above

Q: Two isoquants, which represent different output levels but are derived from the same production function, cannot cross because A) isoquants represent different utility levels B) this would violate a technical efficiency condition C) isoquants are downward sloping D) additional inputs will not be used by profit maximizing firms if those inputs decrease output E) Both B and D are true.

Q: The function which shows combinations of inputs that yield the same output is called a(n) A) isoquant curve. B) isocost curve. C) production function. D) production possibilities frontier.

Q: Use the following statements to answer this question. I. The numerical labels attached to indifference curves are meaningful only in an ordinal way. II. The numerical labels attached to isoquants are meaningful only in an ordinal way. A) both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) both I and II are false.

Q: A firm uses two factors of production. Irrespective of how much of each factor is used, both factors always have positive marginal products which imply that A) isoquants are relevant only in the long run B) isoquants have negative slope C) isoquants are convex D) isoquants can become vertical or horizontal E) none of the above

Q: Use the following two statements to answer this question: I. Isoquants cannot cross one another. II. An isoquant that is twice the distance from the origin represents twice the level of output. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false.

Q: If we take the production function and hold the level of output constant, allowing the amounts of capital and labor to vary, the curve that is traced out is called: A) the total product. B) an isoquant. C) the average product. D) the marginal product. E) none of the above

Q: An isoquant A) must be linear. B) cannot have a negative slope. C) is a curve that shows all the combinations of inputs that yield the same total output. D) is a curve that shows the maximum total output as a function of the level of labor input. E) is a curve that shows all possible output levels that can be produced at the same cost.

Q: Laura's Internet Services firm can design computer systems according to the function y(K, L) = , where K is the amount of gigabyte storage she has available and L is the amount of labor hours she employs. Currently, Laura has 125 gigabytes of storage. Sketch the change in the marginal product of labor curve for Laura's firm for values of L= 1, 2, 3, 4, and 5, if she increases her gigabyte storage capacity to 216.

Q: Sarah's Pretzel Plant produces pretzels according to the function y(K, L) = 100. K is the number of ovens, and L is the number of labor hours Sarah uses to produce her pretzels. At the moment, Sarah uses 9 ovens. Also, she plans to hire 64 labor hours. Sarah can sell each unit of pretzels produced for $3.50. Fill in the table below. If Sarah increased her use of labor hours to 65, would the value of the marginal product of labor exceed the wage rate of $8.50? y(9, L) L MPL = $3.50  MPL 64 65

Q: Trisha's Fashion Boutique production function for dresses is y(K, L) = K1/2L1/3, where K is the number of sewing machines and L is the amount of labor hours employed. Trisha pays $15 per labor hour and sells each dress for $87.50. Also, Trisha currently has 4 sewing machines. Fill in the table below. How many units of labor will Trisha employ before the value of the marginal product of labor is less than the cost of a labor hour? y L MPL = $87.50(MPL) 1 20 40 60 80

Q: Tad's Baitshop currently uses no computers in determining inventory. The number of items that can be inventoried in a day is given by y(L) = , where L is the number of labor hours used. If Tad purchases a computer to be used for inventory purposes, the number of items that can be inventoried in a day becomes y(L) = 2. Use the information in the table below to sketch Tad's marginal product of labor curves before and after the use of the computer for inventory purposes. Old Quantity Inventoried New Quantity Inventoried L Old MP of labor New MP of labor 2 4 4 0.25 0.5 4 8 16 0.125 0.25 5 10 25 0.10 0.20

Q: The production function for Cogswell Cogs is y(K, L) = . K represents the number of robot hours used in the production process while L represents the number of labor hours. The marginal productivity of a labor hour is MPL = Fill in the empty columns in the table below. Use the information in the table to sketch Cogswell's marginal product of labor curve while robot hours are fixed at 9. Output Robot Hours Labor Hours MPL = 9 8 9 27 9 64 9 125

Q: The production function of pizzas for One Guy's Pizza shop is y(K, L) = 4. K represents the number of ovens One Guy's Pizza uses and is fixed in the short-run at 4 ovens. L represents the number of labor hours One Guy's Pizza employees and is variable in the short and long-run. Fill in the empty columns in the table below. Pizzas K L MPL (L, K) = MPK (K, L) = 4 1 4 4 4 9 4 16

Q: A bakery operating in the short run has found that when the level of employment in its baking room was increased from 4 to 10, in increments of one, its corresponding levels of production of bread were 110, 115, 122, 127, 130, 132, and 133. a. Calculate the marginal product of labor. b. Explain whether this production function exhibits diminishing marginal productivity of labor.

Q: Complete the following table:

Q: Which of the following is an example of anchoring in retail prices? A) Price tags on the merchandise list a "high" price that is charged at a competing retailer and the a much lower price that the store actually charges. B) An appliance store lists a commercial-quality coffee maker that has high capacity and is very expensive, and all of the other coffee makers are smaller and less expensive. C) Restaurant menus include a premium entree like a steak and lobster dinner that is very expensive, and all of the other entree choices are priced at lower values. D) all of the above

Q: Suppose your instructor gave hats with your school's logo to half of your economics classmates. She then asked these students to value the hats, and the average response was $9 per hat. Under the endowment effect, we should expect that the average value assigned by the economics students who did NOT receive the hats to be: A) higher. B) lower. C) the same. D) We cannot answer this question without knowing more about the risk preferences of the students.

Q: Which of the following actions may be explained by the law of small numbers?A) People buy lottery tickets.B) People buy air travel insurance.C) People purchase extended or long-term warranties or maintenance contracts for new automobiles and appliances.D) all of the above

Q: Standard game theory predicts a solution to the ultimatum game that is rarely observed when people actually play the game. The key reason that behavioral economists believe the predicted and observed outcomes differ is because people account for ________ of the outcome when making decisions.A) loss aversionB) fairnessC) efficiencyD) utility

Q: Behavioral economists argue that asset price bubbles and other examples of herd behavior may be due to biases resulting from the law of small numbers. In particular, the investors may observe unusually ________ returns for some asset and use this limited information to ________ the probability that returns will be high in the future.A) low, over-estimateB) low, under-estimateC) high, over-estimateD) high, under-estimate

Q: The law of small numbers describes:A) the tendency for people to overstate the probability associated with rare events.B) the ability to correctly estimate the expected outcome from a small number of events.C) the higher probability that small numbers (like 1, 2, and 3) occur in random samples relative to large number (like 8 or 9).D) the improved accuracy of averages to estimate relatively small numbers (on the order of 1 or 10) than relatively large numbers (on the order of 1,000 or 10,000).

Q: Some recent developments in financial research focus on ways to make portfolio allocations and other investment decisions in ways that largely ignore the possible gains but protect against large losses. These tools are designed to reflect ________ behavior among investors.A) risk neutralB) substitutionC) loss aversionD) anchoring

Q: To demonstrate the anchoring phenomenon, Kahneman and Tversky would ask research subjects very difficult questions that should be answered with a number between zero and 100. Before asking for the respondent's answer, they would also spin a large wheel that generated random number outcomes from zero to 100. If the respondents were subject to the anchoring effect, then we should expect that:A) their responses are uncorrelated with the numbers generated by the wheel.B) their responses are correlated with the numbers generated by the wheel.C) their responses are wrong most of the time.D) none of the above

Q: Some high-end retail stores that distribute mail-order catalogs will prominently offer some very high priced goods for sale (for example, a luxury sports car with gold-plated interior trim) in addition to their regular line of merchandise. Behavioral economists argue that the stores do not really plan to sell these goods, but they use these items to provide the customers with a high reference point for the prices of the other goods in the catalog. This practice is an example of:A) the ultimatim game.B) loss aversion.C) anchoring.D) none of the above

Q: Fine-dining restaurants commonly provide statements in their menus such as, "A 20% gratuity will be added to all checks for parties of six or more patrons." Given that this statement tends to raise the level of tips or gratuities left by other groups of diners, the statement is a good example of:A) the endowment effect.B) loss aversion.C) anchoring.D) none of the above

Q: The tendency for individuals to assign higher values to goods when they own the goods than when they do not possess the goods is known as the:A) substitution effect.B) endowment effect.C) income effect.D) anchoring effect.

Q: What is a reference point?A) the value of a good on the black marketB) the point from which an individual makes a consumption decisionC) a subjective valuation of a goodD) the minimum price that an individual would sell a good that she currently ownsE) none of the above

Q: Which of the following is NOT an example of consumer behavior consistent with the standard assumptions of microeconomic theory? A) People are less likely to leave tips at restaurants that they are unlikely to visit again. B) Waiters and waitresses have an incentive to provide good service in order to earn tips. C) Due to the convention of tipping, restaurants pay a lower wage to waiters and waitresses than they would in the absence of any tipping rule. D) Although tipping reduces the amount of income available for purchasing goods, people usually leave tips at restaurants. E) none of the above

Q: Which of the following is NOT an example of consumer behavior consistent with the standard assumptions of microeconomic theory? A) A concern for fairness can influence purchasing patterns. B) When demand increases, all else being equal, consumers expect price to rise. C) After a snowstorm, the demand for snow shovels increases. D) Snow shovels and snow plows are substitute goods. E) none of the above

Q: Based on what we know about asset price formation, what steps can a government use to restrict the formation of an asset price bubble? A) Lower interest rates in order to discourage savings and investment B) Loosen lending requirements for banks, which encourages investors to buy bank stock rather than the "bubbling" asset C) Increase the money supply D) Raise interest rates in order to increase the costs of financing asset purchases

Q: By 2011, how much had U.S. housing prices declined from their peak in 2006? A) 2 percent B) 33 percent C) 40 percent D) 50 percent

Q: Which major asset experienced a price bubble just before the housing price bubble of 2006-2009? A) Internet or tech-stocks B) Tulip bulbs C) Japanese real estate D) Railroad stocks

Q: Which of the following events will help to burst an asset price bubble? A) Speculative demand for the asset quickly declines. B) Speculative demand for the asset quickly increases. C) New information leads buyers to doubt that prices will continue to increase in the future. D) A and C are correct

Q: Which of the following statements is NOT true? A) The sharp decline in housing prices that first appeared in the U.S. during 2006 also spread to other countries around the world. B) The housing price bubble that burst in 2006 was the first housing bubble in U.S. history. C) One reason for the formation of the housing price bubble was an unfounded belief that housing prices always increased over time. D) Speculative demand was an important contributor to the most recent housing price bubble.

Q: What is an informational cascade? A) An excess flow of market information that makes it difficult for an investor to form a rational decision. B) A continual decline in the quality of market information from public sources due to sequential budget cuts. C) A continual increase in the quality of market information from public sources due to broader use of the internet by market participants. D) A sequence of decisions based on the actions of others rather than fundamental information.

Q: Which price index measures the change in housing prices from repeated sales information? A) S&P / Case-Shiller index B) GDP deflator C) Chain-weighted consumer price index D) Dow-Jones index

Q: When did housing prices start to fall during the most recent housing boom? A) 2005 B) 2006 C) 2007 D) 2008

Q: Which of the following statements is NOT true? A) Speculative demand for an asset may contribute to the formation of a bubble. B) Some asset prices purchased during the formation of a bubble may be rational. C) Asset price bubbles are always harmful to the general economy. D) Speculative demand is based on the assumption that the asset price will continue to rise.

Q: What form of irrational behavior can cause asset price bubbles? A) People do not based their investment decision on the fundamental value of the asset but only on the belief that the asset price will continue to increase. B) People accidentally buy assets that they did not want, and this drives up the asset price. C) Asset owners panic and begin to sell their assets as quickly as possible. D) People throw darts at a list of stocks and buy whatever the dart lands on without thinking about the reasons.

Q: Donna is considering the option of becoming a co-owner in a business. Her investment choices are to hold a risk free asset that has a return of Rjand co-ownership of the business, which has a rate of return of Rband a level of risk of σb. Donna's marginal rate of substitution of return for risk( / ) is = where RP is Donna's portfolio rate of return and σP is her optimal portfolio risk. Donna's budget constraint is given byRP = Rj + σP. Solve for Donna's optimal portfolio rate of return and risk as a function of Rj, Rband σb. Suppose the table below lists the relevant rates of returns and risks. Use this table to determine Donna's optimal rate or return and risk.InvestmentRate of ReturnRiskRisk Free0.060Business0.250.39

Q: Mel and Christy are co-workers with different risk attitudes. Both have investments in the stock market and hold U.S. Treasury securities (which provide the risk free rate of return). Mel's marginal rate of substitution of return for risk (/MURP, σP) is = where RP is the individual's portfolio rate of return and σP is the individual's portfolio risk. Christy's= . Each co-worker's budget constraint is RP= RF + σP, where Rj is the risk-free rate of return, Rm is the stock market rate of return, and σm is the stock market risk. Solve for each co-worker's optimal portfolio rate of return as a function of Rj, Rm, and σm.

Q: Joan Summers has $100,000 to invest and is considering two alternatives. She can buy a risk free asset that will pay 10% or she can invest in a stock that has a 0.4 chance of paying 15%, a 0.3 chance of paying 18%, and a 0.3 chance of providing a 6% return. Joan plans to invest $70,000 in the stock and $30,000 in the risk free asset. a. Determine the expected percentage return on the stock and the standard deviation. b. Calculate the weighted average return on the portfolio, given the planned investment strategy outlined above. c. Determine the standard deviation for the portfolio. d. Write the equation that represents the budget line in the risk-return tradeoff. What is the slope of the budget line? Interpret this slope.

Q: The risk-return indifference curves for a risk-neutral investor are: A) vertical lines. B) straight lines with slope equal to one. C) horizontal lines. D) upward sloping lines that are bowed downward.

Q: Use the following statements to answer this question: I. The real rate of return on an investment is the nominal return minus the rate of inflation. II. The real rate of return on an investment cannot be negative. A) I and II are true. B) I is true and II is false. C) II is true and I is false. D) I and II are false.

Q: Suppose an investor equally allocates their wealth between a risk-free asset and a risky asset. If the MRS of the current allocation is less than the slope of the budget line, then the investor should: A) shift more of their wealth to the risky asset. B) shift more of their wealth to the risk-free asset. C) keep the same asset allocation. D) We do not have enough information to answer this question.

Q: Is it possible for an investor to allocate more than 100% of their assets to the stock market? A) No, this is not theoretically plausible. B) No, federal law prohibits this kind of investment. C) Yes, investors can borrow money to buy stocks on margin. D) none of the above

Q: Consider the following statements when answering this question; I. The allocation of a risk averse investor's portfolio between a risk free asset and a risky asset never changes if the rate of return on both assets increases by the same amount. II. Given the choice between investing in a risk free asset or a risky asset with higher expected returns, the utility maximizing portfolio of a risk neutral or risk loving investor would never include the risk free asset. A) I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) I and II are false.

Q: Consider the following statements when answering this question; I. The variance of the returns of an investor's portfolio can be reduced by selling assets from the portfolio, and investing the proceeds in other assets where returns are positively correlated with the portfolio's remaining assets. II. The value of complete information is always positive. A) I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) I and II are false.

Q: Jack is near retirement and worried that if the stock market falls he will not be able to wait to take his funds out, and will have to sell at the bottom of the market. Richard thinks the probability of a stock market downturn is the same, but he is only 40 and could therefore wait for another turnaround. They face the same budget line. Jack's risk/return indifference curve A) will be concave; Richard's will be convex. B) will be convex; Richard's will be concave. C) will be tangent to the budget line at a point to the left of Richard's. D) will be tangent to the budget line at a point to the right of Richard's. E) must still be tangent to the budget line at the same point as Richard's.

Q: The indifference curves of two investors are plotted against a single budget line. Indifference curve A is shown as tangent to the budget line at a point to the left of indifference curve B's tangency to the same line. A) Investors A and B will hold the same portfolio. B) Investors A and B will have different portfolios of the same standard deviation. C) Investors A and B will have different portfolios of the same rate of return. D) Investors A and B will have different portfolios but have the same level of risk aversion. E) Investor A will expect to earn a lower rate of return than investor B.

Q: The indifference curves of two investors are plotted against a single budget line. Indifference curve A is shown as tangent to the budget line at a point to the left of indifference curve B's tangency to the same line. A) Investors A and B are equally risk averse. B) Investor A is more risk averse than investor B. C) Investor A is less risk averse than investor B. D) It is not possible to say anything about the risk aversion of the two investors, but they will hold the same portfolio. E) It is not possible to say anything about either the risk aversion or the portfolio of the two investors.

Q: The indifference curve between expected return and the standard deviation of return for a risk-averse investor A) is downward-sloping. B) is upward-sloping. C) is horizontal. D) is vertical. E) can take any shape.

Q: The budget line in portfolio analysis shows that A) the expected return on a portfolio increases as the standard deviation of that return increases. B) the expected return on a portfolio increases as the standard deviation of that return decreases. C) the expected return on a portfolio is constant. D) the standard deviation of a portfolio is constant. E) a riskless portfolio will earn a zero return.

Q: The slope of the budget line, faced by an investor deciding what percentage of her portfolio to place in a risky asset, increases when the A) standard deviation of the portfolio gets smaller. B) standard deviation of the risky asset gets larger. C) rate of return on the risk-free asset gets larger. D) rate of return on the risky asset gets larger. E) rate of return on money gets larger.