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HBX Economics for Managers Exam Preparation, 100% Pass | Graded A+
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HBX Economics for Managers Exam Preparation1. At the original price the demand is relatively inelastic
- The price elasticity of demand at the original price point would be equal to the
absolute value of [((4500-5000)/(5000)) / ((60-40)/(40))] = 0.2, relatively inelastic.
The company can make more revenue by charging a higher price.: A budding
tech startup has created a unique compression algorithm that consumers can use
to reduce the size of their computer files. The company was previously charging
$40 a month for their "unlimited plan" that allows users to compress as many files
as they want. The company decides that it is not making enough revenue, however,
and increases the price for their "unlimited plan" from $40 to $60. They notice that
the amount of users that subscribe to the unlimited plan decreases from 5,000 to
4,500 once the price change comes into effect.
Based on this information, which of the following must be true? (Note: This question
is based on one submitted by a previous HBS Online graduate)
2. A,B,C are correct
a. Price elasticity of demand is a better measure of price sensitivity than slope.
- This is true because slope measures absolute changes in quantity and is
sensitive to the units of measurement; in contrast, elasticity is not.
b. Price elasticity of demand tends to increase as price increases.
- This is generally true. The higher the price, the less willing consumers will
be to put up with increases in price for a particular product. For example,
consumers might be willing to put up with a 100% price increase for a $1 candy
bar, but not for a $20,000 car.
c. Price elasticity of demand for a particular product will tend to increase as
more substitute goods become available.
- The more available are substitute goods, the less willing consumers will be
to put up with increases in price for a particular product.
d. Price elasticity of demand tends to decrease over time.
- This is generally false. The longer the time horizon, the greater the chance of
competition in a market and/or the greater chance consumers have to switch
away to a substitute good. All else equal (for example, accounting for brand
loyalty, consumer habits and other factors), this would make consumers more
sensitive to changes in price over time.
e. Price elasticity of demand is necessarily equal to one halfway down a
demand curve.
, HBX Economics for Managers Exam Preparation
- False. This is only true for linear demand curves.: Which of the following
statements regarding price elasticity of demand is true? Select all that apply.
a. Price elasticity of demand is a better measure of price sensitivity than slope.
b. Price elasticity of demand tends to increase as price increases.
c. Price elasticity of demand for a particular product will tend to increase as more
substitute goods become available.
d. Price elasticity of demand tends to decrease over time.
e. Price elasticity of demand is necessarily equal to one halfway down a demand
curve.
3. B,D,E are correct
a. The buyer is time-sensitive
- Auctions are better for items that a buyer does not need right away, such as
rare items or antiques. Selling necessities or items with an expiration date,
such as concert tickets, via an auction would not be particularly effective.
b. The seller is time-sensitive
- Auctions are effective when a seller needs to sell an item by a certain date.
A seller could use a fixed price when he or she is not under time pressure.
c. Buyers' valuations are independent
- Auctions are more effective when bidders' valuations are interdependent—in
other words, buyers' willingness to pay can be forced upwards based on the
bids of those they are competing with for access to the item.
d. The seller does not know the WTP of its potential customers.
- Auctions are good for items for which there is not an easily available market
price. The auction format helps the seller to reveal the top buyer willingness
to pay.
e. Buyers' valuation of the auction item is within a narrow range.
- An auction will be especially effective if buyers' valuations of the item are
close together. This ensures that the sale price will be close to the WTP of the
second highest bidder (based on the Revenue Equivalence Result).: In which
of the following situations is an auction especially effective? Select all that apply.
a. The buyer is time-sensitive
b. The seller is time-sensitive
c. Buyers' valuations are independent
d. The seller does not know the WTP of its potential customers.
e. Buyers' valuation of the auction item is within a narrow range.
, HBX Economics for Managers Exam Preparation
4. a,b,d are correct
a. Randomization helps to account for systematic differences across groups
of interest.
- Randomization helps control for unobserved variables not being measured
in the experiment.
b. Randomization helps to ensure that the impact measured in a treatment
vs. control group is due solely to the variable that is manipulated in the
experiment.
- Randomization makes it so that the effect of other individual-specific vari-
ables, should, on average, cancel out across the treatment and control groups.
c. Randomization helps to ensure that the impact on two groups is more or
less the same because individuals in either group have an equal chance of
receiving the treatment effect.
- Randomization has nothing to do with the eventual effect of a treatment on
those in the group.
d. Randomization helps to eliminate the adverse effects of sample selec-
tion/selection bias.
- By randomly creating groups, experimenters can avoid biased samples
that may result, for example, when individuals select into groups based on
observable differences.
e. Randomization does not help overcome the problem of missing variables,
but instead helps deal with confirmation bias.
- This is not true. Confirmation bias involves finding something in an ex-
periment that one expects to find.: In what way does randomization help an
experimenter to overcome the "missing variables" problem? Select all that apply.
a. Randomization helps to account for systematic differences across groups of
interest.
b. Randomization helps to ensure that the impact measured in a treatment vs. control
group is due solely to the variable that is manipulated in the experiment.
c. Randomization helps to ensure that the impact on two groups is more or less the
same because individuals in either group have an equal chance of receiving the
treatment effect.
d. Randomization helps to eliminate the adverse effects of sample selection/selec-
tion bias.
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