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Test Bank For Managerial Economics, 9th Edition William F. Samuelson, Stephen G. Marks, Jay L. Zagorsky Chapter 1-18 File: Ch01; CHAPTER 1: Introduction to Economic Decision Making MULTIPLE CHOICE 1. Managerial economics can best be defined as the: a) macroeconomics and microeconomics for managers. b) study of economic incentives on consumer behavior and demand. c) analysis of the labor market through the behavior of workers and managers. d) analysis of major management decisions using economic tools. e) study of the strategic interaction between firms in a market. ANSWER: d SECTION REFERENCE: Introduction DIFFICULTY LEVEL: Easy

Which of the following is not one of the steps in managerial decision making? a) Predicting the consequences of a decision. b) Exploring the alternatives to the decision. c) Defining the problem and the objectives of the decision. d) Negotiating a consensus to implement the decision. e) Performing sensitivity analysis. ANSWER: d SECTION REFERENCE: Six Steps to Decision Making DIFFICULTY LEVEL: Easy

Profit maximization is an ambiguous guide to decision making in the private sector because: a) firms in the private sector usually do not aim at profit maximization. b) the goal of profit maximization contradicts the goal of satisfying the firm‘s shareholders. c) of the presence of risk and uncertainty. d) profit-maximization ignores social costs and benefits. e) None of the above answers is correct. ANSWER: c SECTION REFERENCE: Six Steps to Decision Making DIFFICULTY LEVEL: Easy

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Which of the following is true of economic models? a) Models are too theoretical to be applicable in real world decisions. b) Models are not useful because uncertainty prevents accurate forecasts. c) Models are simplified descriptions of processes, relationships, or other phenomena. d) Models describe real world situations in complete detail. e) Models are not useful because they do not take into account complicating and less important features of a problem. ANSWER: c SECTION REFERENCE: Six Steps to Decision Making DIFFICULTY LEVEL: Medium

Which of the following correctly describes a deterministic economic model? a) A deterministic model is a model for which the outcome is predicted with certainty. b) A deterministic model can only be used to explain short-run economic phenomena. c) A deterministic model is most useful in identifying long-term trends. d) A deterministic model is used in the study of normative economics. e) The outcome of a deterministic model is random and has probabilities attached. ANSWER: a SECTION REFERENCE: Six Steps to Decision Making DIFFICULTY LEVEL: Easy

Which of the following correctly explains a probabilistic model? a) A probabilistic model gives a description of real world economic phenomena. b) A probabilistic model shows the possibility of a range of outcomes. c) A probabilistic model examines the changes in economic variables over a period of time. d) A probabilistic model is based on value judgments. e) A probabilistic model is used to explain long-run economic phenomena ANSWER: b SECTION REFERENCE: Six Steps to Decision Making DIFFICULTY LEVEL: Easy

Maximizing profit by enumerating the profit outcomes of different courses of action a) Is only applicable to problems with a small number of alternatives. b) Becomes increasingly costly as the number of choices increase. c) Always discovers the best possible choice.

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d) Provides a useful shortcut to finding the optimal choice. e) Answers b and c are both correct. ANSWER: b SECTION REFERENCE: Six Steps to Decision Making DIFFICULTY LEVEL: Medium

A beverages company wants to launch a new diet soda aimed at diabetics and healthconscious customers. It will use a _____ economic model to identify its target customers. a) deterministic b) dynamic c) qualitative d) stochastic e) probabilistic ANSWER: a SECTION REFERENCE: Six Steps to Decision Making DIFFICULTY LEVEL: Medium

Given that the market share of a firm depends on many unpredictable factors, a firm will use a _____ economic model to estimate the market share for one of its products. a) deterministic b) dynamic c) qualitative d) probabilistic e) comparative statics ANSWER: d SECTION REFERENCE: Six Steps to Decision Making DIFFICULTY LEVEL: Medium

10. Sensitivity analysis is used by a firm to: a) analyze the impact of a change in the price of the good on the demand for the good. b) examine the static effects of an economic decision on the firm‘s profitability. c) analyze the social costs and benefits of an economic decision. d) examine the opportunity costs of an economic decision. e) examine how an optimal decision is affected if key economic facts vary. ANSWER: e SECTION REFERENCE: Six Steps to Decision Making

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DIFFICULTY LEVEL: Easy

11. A cosmetics company is conducting a second-year review of one of its newest products. The marketing department expects that the firm will continue to earn profits from the sale of the product in the third year as it did in the past two years. Senior management, however, feels that the profit projections would vary based on other factors such as the price of the competitor's products, the actual level of sales, and the possibility of cost reductions. In other words, the senior management is undertaking _____. a) a sensitivity analysis b) an enumeration study c) a benefit-cost analysis d) a contingent valuation study e) a strategic analysis ANSWER: a SECTION REFERENCE: Six Steps to Decision Making DIFFICULTY LEVEL: Medium

12. According to the satisficing model of management behavior, the goal of a firm is to: a) satisfy customers, employees, and shareholders. b) maximize the gain to society and not just to shareholders. c) achieve a satisfactory level of performance against a benchmark. d) maximize sales revenue and not necessarily the value of the firm. e) maximize its market share even at the cost of profit. ANSWER: c SECTION REFERENCE: Private and Public Decisions: An Economic View DIFFICULTY LEVEL: Easy

13. According to the theory of the firm, the management‘s ultimate objective is to: a) maximize short-term profit, even if this sacrifices long-term profit. b) maximize the value of the firm. c) increase production to the highest possible level. d) increase the market share of the firm. e) diversify into as many product lines as the firm can. ANSWER: b SECTION REFERENCE: Private and Public Decisions: An Economic View DIFFICULTY LEVEL: Easy

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14. A coffee shop decides that it will increase its market share to 55% by the end of the year by lowering the price of a cup of coffee. The price cut will certainly result in an increase in the firm‘s share but will lower its profits. Which of the following best explains the firm‘s decision? a) Satisficing behavior. b) Price discrimination. c) Social responsibility. d) A sensitivity analysis. e) Revenue maximization. ANSWER: e SECTION REFERENCE: Private and Public Decisions: An Economic View DIFFICULTY LEVEL: Medium

15. Ann is a manager at a private construction company. David works in the city planning department of the government. Based on this information, which of the following is most likely to be true? a) David will make decisions based on the value generated to shareholders. b) Ann will not have to factor in risk or uncertainty when making a decision. c) David will make decisions based on maximization of profit. d) Ann's decisions will be guided by the motive of social welfare. e) David will make decisions based on benefit-cost analysis. ANSWER: e SECTION REFERENCE: Private and Public Decisions: An Economic View DIFFICULTY LEVEL: Medium

16. A research study estimates that the direct cost of constructing a bridge connecting two boroughs in a city is $10 million. The revenue from the tolls on the bridge is estimated to be $8 million. The dollar value of pollution from the construction is estimated to be $5 million but the dollar value of the benefit to the city's residents is calculated to be $20 million. The construction of the bridge is most likely to be undertaken by: a) the government because revenues exceed costs. b) the government because the total benefits exceed total costs. c) a private firm because the total benefits exceed total costs. d) a private firm because revenues exceed direct costs. e) a private firm because the revenues exceed indirect costs. ANSWER: b SECTION REFERENCE: Private and Public Decisions: An Economic View

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DIFFICULTY LEVEL: Medium

17. In evaluating public programs, benefit-cost analysis: a) takes into account only the benefits that society gains from public programs. b) states that a program should be undertaken only if it generates revenue. c) states that a program should be undertaken only if total benefits exceed total costs. d) takes into account only the direct costs of the program. e) states that a program should be undertaken only if there are no indirect costs. ANSWER: c SECTION REFERENCE: Private and Public Decisions: An Economic View DIFFICULTY LEVEL: Easy

18. The government is deciding whether it should build a veteran‘s hospital in an urban area. It will choose to build the hospital only if: a) the hospital generates positive revenues. b) the cost of building the hospital is low. c) the profits from the hospital are positive. d) the opportunity cost of building the hospital is zero. e) the total benefits from the hospital exceed total costs. ANSWER: e SECTION REFERENCE: 4 DIFFICULTY LEVEL: Medium

19. The study of behavioral economics shows that decision makers: a) are not limited by cognitive constraints. b) are incapable of learning from their mistakes. c) are prone to biases, mistakes, and pitfalls. d) are guided solely by monetary incentives. e) make decisions in a highly calculative and rational manner. ANSWER: c SECTION REFERENCE: Private and Public Decisions: An Economic View DIFFICULTY LEVEL: Easy

SHORT ANSWERS 20. Carefully define managerial economics, and explain how it is useful in decision-making.

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