Practice Exam Emo

Practice exam

Economics of Markets and Organizations

Answers questions 1-30

1. Suppose the marginal cost curve is U-shaped in such a way that it hits the (downward

sloping) marginal revenue curve at two output levels. What is the profit-maximizing

output?

a. Profit is maximized at the output where marginal costs are equal to the price

b. Profit can be maximized at both output levels where the marginal cost curve and the

marginal revenue intersect

c. Profit is maximized at the lower output where the marginal cost curve and the marginal

revenue intersect

d. Profit is maximized at the higher output where the marginal cost curve and the

marginal revenue intersect

The MC curve intersects the MR first from above and then, at a higher quantity, intersects it

from below. From the point where MC intersects demand from above, increasing output

increases profit because the MR is greater than the MC. Profit is maximized when MC

intersects demand from below as from than point onwards MC is greater than the MR.

2. What is the value-maximization principle?

a. An allocation of goods and services is efficient (only) if it maximizes the total value

among the affected agents

b. Total value is increased by correcting for events that reduce the error with which the

principal measures a risk-averse agent’s performance

c. The value-maximizing intensity of incentives is higher the more responsive the agent is

to incentives and the greater the agent’s risk tolerance

d. An allocation of goods and services is efficient (only) if no reallocation of goods and

services exists that makes somebody better off without making someone else worse off

See the book, page 4.

3. What business strategy did Apple Inc. follow in the early 1980s in contrast to its

competitor IBM?

a.

b.

c.

d.

Apple followed an “open-architecture” model

Apple followed a product differentiation strategy

Apple followed a strict licensing and patent-regulated policy

Apple diffused its...