MBA 8000 PART 2 EXAM QUESTIONS WITH
100% COMPLETE ANSWERS
Monopoly - ANSWER 1 seller, many buyers. High barriers to entry. Managers get
significant price control
Demand curve for monopolies is - ANSWER downward sloping & also firm
demand=market demand
If effort is unobservable and revenues are riskless, firms can design
incentive-compatible compensation schemes by offering workers: - ANSWER Profit
shares.
What are some credible signals of product quality? - ANSWER A money-back guarantee
& product warranty
Donald has a beach house on the Outer Banks of North Carolina that was severely
damaged in the most recent hurricane to strike the coast. Due to beach erosion, he has
rebuilt twice in the past 20 years. He is intent on rebuilding, confident that
government-provided flood insurance will cover his expenses. This is an example of: -
ANSWER Moral Hazard
In recent years, individuals and state governments have sued various tobacco
companies to compensate for illness and injury allegedly caused by cigarette smoking.
Courts have awarded millions of dollars to victims in these cases. This product liability
law: - ANSWER encourages incentive compatibility between producers and consumers.
Insurance companies are able to offset the adverse selection in markets for life
insurance by: - ANSWER requiring medical exams from people whom they insure.
Consumer surplus in 1st degree is - ANSWER $0
To maximize profit, the firm must: - ANSWER mark-up marginal costs
In a monopoly for optimal pricing and quantity, we set Q where - ANSWER MR= MC
MR equation for monopolist - ANSWER MR = P [ 1 − ( 1 |η| ) ]
P equation for monopolist - ANSWER P = 1/(1-1/e)
Moral hazard vs adverse selection - ANSWER moral hazard is a hidden action, adverse
selection is hidden information
Adverse selection - ANSWER when one part in an economic relationship knows more
than the other
, Warranties can .... - ANSWER help signal product quality
Principal Agent Problem - ANSWER a problem caused by an agent pursuing his own
interests rather than the interests of the principal who hired him. Principal simply
cannot measure the effort provided by the agent to reward them correctly
Asset Substitution - ANSWER principal agent issue between shareholders and creditors.
IF limited liability, shareholders can simply walk away and not pay creditors.
Product Liability laws - ANSWER Require firms to pay for damagers caused by their
product and incentives safer products.
Price discrimination - ANSWER the business practice of selling the same good at
different prices to different customers
In third degree price discrimination - ANSWER Marginal cost = Marginal Revenues
first degree price discrimination - ANSWER Practice of charging each customer her
reservation price, captures all of consumer surplus
Two part tariffs charges a - ANSWER Entry fee and usage fee.
Two part tariff when all demanders are the same - ANSWER Optimal use fee is marginal
cost (P= MC) and entry fee is the consumer surplus
Two part tariff with different demand curves - ANSWER Either exclude the weaker
demander, or price the use fee at or above MC and entry fee= consumer surplus of
weaker demander.
For maximum profit in price discrimination with entry fee - ANSWER charge consumers
MC as use fee and recognize max profits
In a monopoly a manager recognizes maximum profit by setting output at the point
where - ANSWER Marginal Revenue= marginal cost
Monopolistic competition - ANSWER a market structure in which many companies sell
products that are similar but not identical
Demand curve for monopolistic competition - ANSWER Downward and to the right
In perfect competition the demand curve for a single firm - ANSWER is horiztonal
To maximize profit - ANSWER MR=MC
100% COMPLETE ANSWERS
Monopoly - ANSWER 1 seller, many buyers. High barriers to entry. Managers get
significant price control
Demand curve for monopolies is - ANSWER downward sloping & also firm
demand=market demand
If effort is unobservable and revenues are riskless, firms can design
incentive-compatible compensation schemes by offering workers: - ANSWER Profit
shares.
What are some credible signals of product quality? - ANSWER A money-back guarantee
& product warranty
Donald has a beach house on the Outer Banks of North Carolina that was severely
damaged in the most recent hurricane to strike the coast. Due to beach erosion, he has
rebuilt twice in the past 20 years. He is intent on rebuilding, confident that
government-provided flood insurance will cover his expenses. This is an example of: -
ANSWER Moral Hazard
In recent years, individuals and state governments have sued various tobacco
companies to compensate for illness and injury allegedly caused by cigarette smoking.
Courts have awarded millions of dollars to victims in these cases. This product liability
law: - ANSWER encourages incentive compatibility between producers and consumers.
Insurance companies are able to offset the adverse selection in markets for life
insurance by: - ANSWER requiring medical exams from people whom they insure.
Consumer surplus in 1st degree is - ANSWER $0
To maximize profit, the firm must: - ANSWER mark-up marginal costs
In a monopoly for optimal pricing and quantity, we set Q where - ANSWER MR= MC
MR equation for monopolist - ANSWER MR = P [ 1 − ( 1 |η| ) ]
P equation for monopolist - ANSWER P = 1/(1-1/e)
Moral hazard vs adverse selection - ANSWER moral hazard is a hidden action, adverse
selection is hidden information
Adverse selection - ANSWER when one part in an economic relationship knows more
than the other
, Warranties can .... - ANSWER help signal product quality
Principal Agent Problem - ANSWER a problem caused by an agent pursuing his own
interests rather than the interests of the principal who hired him. Principal simply
cannot measure the effort provided by the agent to reward them correctly
Asset Substitution - ANSWER principal agent issue between shareholders and creditors.
IF limited liability, shareholders can simply walk away and not pay creditors.
Product Liability laws - ANSWER Require firms to pay for damagers caused by their
product and incentives safer products.
Price discrimination - ANSWER the business practice of selling the same good at
different prices to different customers
In third degree price discrimination - ANSWER Marginal cost = Marginal Revenues
first degree price discrimination - ANSWER Practice of charging each customer her
reservation price, captures all of consumer surplus
Two part tariffs charges a - ANSWER Entry fee and usage fee.
Two part tariff when all demanders are the same - ANSWER Optimal use fee is marginal
cost (P= MC) and entry fee is the consumer surplus
Two part tariff with different demand curves - ANSWER Either exclude the weaker
demander, or price the use fee at or above MC and entry fee= consumer surplus of
weaker demander.
For maximum profit in price discrimination with entry fee - ANSWER charge consumers
MC as use fee and recognize max profits
In a monopoly a manager recognizes maximum profit by setting output at the point
where - ANSWER Marginal Revenue= marginal cost
Monopolistic competition - ANSWER a market structure in which many companies sell
products that are similar but not identical
Demand curve for monopolistic competition - ANSWER Downward and to the right
In perfect competition the demand curve for a single firm - ANSWER is horiztonal
To maximize profit - ANSWER MR=MC
