Advanced Managerial Economics
Pre-Test Questions
Course Introduction
Advanced Managerial Economics delves into the application of microeconomic and macroeconomic theories to managerial decision-making in complex and dynamic business environments. This course explores topics such as demand estimation and forecasting, production and cost analysis, market structures, pricing strategies, game theory, and risk analysis. Emphasis is placed on using quantitative techniques and economic models to solve real-world managerial problems and to support strategic planning. Students will develop analytical skills to assess market behavior, anticipate economic trends, and optimize firm performance in both domestic and global contexts.
Recommended Textbook
Managerial Economics Theory Applications and Cases 8th Edition by W. Bruce Allen
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) J.D.Power,the big management consulting firm,extols the reliability of Dell computers; this causes the:
A) demand for Dell computers to increase.
B) supply of Dell computers to increase.
C) quantity supplied of Dell computers to increase.
D) quantity supplied of Dell computers to decrease.
E) demand and supply of Dell computers to remain unchanged.
Answer: A
Q2) California imposes strict new regulations on the blending of gasoline that increase production costs.As a result,the:
A) demand for gasoline will increase.
B) demand for gasoline will decrease.
C) supply of gasoline will increase.
D) supply of gasoline will decrease.
E) demand for and supply of gasoline will not change.
Answer: D
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Chapter 2: Demand Theory
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Sample Questions
Q1) In the article "Colombia,Brazil Advance Proposal to Withhold 10 Percent of Export Output" (The Wall Street Journal,September 23,1991,p.B6),a Colombian delegate to the International Coffee Organization said that if all its members withheld 10% of export output,the international price would rise 20%.This statement implies that the price elasticity of demand for coffee is approximately:
A) -0.00.
B) -5.00.
C) -2.00.
D) -0.20.
E) -0.50.
Answer: E
Q2) Total revenue is rising with increases in output whenever:
A) output increases.
B) marginal revenue is positive.
C) average revenue is positive.
D) demand is inelastic.
E) average revenue is negative.
Answer: B
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Page 4
Chapter 3: Consumer Behavior and Rational Choice
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Sample Questions
Q1) Nancy has $100 to spend on books and compact disks.Books cost $10 and compact disks cost $20.The slope of Nancy's budget constraint (where the quantity of books is on the horizontal axis)is:
A) -0.5.
B) -2.
C) -5.
D) -10.
E) none of the above.
Answer: A
Q2) The consumer's optimal consumption of X and Y is characterized by:
A) (MU<sub>X</sub>)(MU<sub>Y</sub>) = P<sub>X</sub>P<sub>Y </sub>.
B) MU<sub>X</sub> = P<sub>X</sub>.
C) MU<sub>X</sub> / MU<sub>Y</sub> = P<sub>Y</sub> / P<sub>X </sub>.
D) MU<sub>X</sub> / P<sub>Y</sub> = MU<sub>X</sub> / P<sub>X </sub>.
E) MU<sub>X</sub> / MU<sub>Y</sub> = P<sub>X</sub> / P<sub>Y </sub>.
Answer: E
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Chapter 4: Estimating Demand Functions
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Sample Questions
Q1) The standard error of the estimate is also known as:
A) the root-mean-squared error.
B) the standard error of the coefficient estimate.
C) R-squared.
D) the t-ratio.
E) t-squared.
Q2) The statistic used to test for serial correlation is the:
A) R-squared statistic.
B) t-statistic.
C) Durbin-Watson statistic.
D) F-test statistic.
E) standard error of the estimate.
Q3) Serial correlation occurs when:
A) independent variables are correlated across observations.
B) dependent variables are correlated across observations.
C) error terms are correlated across observations.
D) R-squared is near 1 and the t-statistics are near 0.
E) R-squared is near 0 and the t-statistics are near 1.
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Chapter 5: Production Theory
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Sample Questions
Q1) The law of diminishing marginal returns is obvious because,if it didn't hold,it would be possible to:
A) feed everyone in the world by intensively cultivating one acre of land.
B) manufacture all of the cars in the world using just one of the world's existing factories.
C) increase total output of a product without employing additional inputs.
D) All of the above.
E) a and b.
Q2) When total product is at its maximum:
A) average product is greater than marginal product.
B) average product is maximized.
C) average product equals marginal product.
D) marginal product equals 1.
E) average product equals 1.
Q3) Isoquants usually slope downward (from left to right)because:
A) marginal products are usually positive.
B) marginal products are always positive.
C) marginal products will eventually decrease.
D) marginal products are always increasing.
E) average products are usually less than marginal products.
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Page 7
Chapter 6: The Analysis of Costs
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Sample Questions
Q1) If a firm is choosing cost-minimizing combinations of inputs,marginal cost can be defined as the price of any:
A) input divided by its average product.
B) variable input divided by its average product.
C) fixed input divided by its average product.
D) variable input divided by its marginal product.
E) fixed input divided by its marginal product.
Q2) Average variable cost is equal to the:
A) change in total variable cost divided by the change in output levels.
B) total variable cost divided by the level of output.
C) marginal cost divided by the average product of the variable input.
D) marginal cost divided by the marginal product of the variable input.
E) total variable cost divided by the change in output levels.
Q3) When average variable cost is at its minimum:
A) average total cost is increasing with increases in output.
B) average variable cost plus average fixed cost is increasing with increases in output.
C) average total cost is equal to average variable cost.
D) marginal cost is less than average total cost.
E) marginal cost is greater than average total cost.
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Page 8
Chapter 7: Perfect Competition
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Sample Questions
Q1) In the model of perfect competition,there:
A) are many firms producing differentiated products.
B) are a few firms producing undifferentiated products.
C) are a few firms producing differentiated products.
D) are many firms producing undifferentiated products.
E) is one firm producing a highly differentiated product.
Q2) In the model of perfect competition,firms produce a:
A) standardized product with considerable control over price.
B) differentiated product with considerable control over price.
C) standardized product with no control over price.
D) differentiated product with no control over price.
E) standardized or differentiated product with some control over price.
Q3) In the model of perfect competition,firms maximize profits by producing where:
A) the difference between marginal revenue and marginal cost is maximized.
B) marginal revenue equals price.
C) the difference between price and marginal cost is maximized.
D) price equals marginal cost.
E) the difference between price and marginal revenue is maximized.
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9
Chapter 8: Monopoly and Monopolistic Competition
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Sample Questions
Q1) For the Minnie Mice Company,the elasticity of demand is -6,and the profit-maximizing price is 30.If MC is marginal cost and AVC is average variable cost,then:
A) MC = 25.
B) AVC = 25.
C) MC = 30.
D) AVC = 36.
E) MC = 36.
Q2) To maximize profit,the firm must:
A) mark up average variable costs.
B) mark up marginal costs.
C) mark up average fixed costs.
D) set the markup equal to -1/(\(\eta\) + 1).
E) b and d
Q3) Firms offer promotions in order to:
A) build brand loyalty.
B) appeal to the price-sensitive consumers.
C) increase the demand elasticities of their loyal customers.
D) shift the market supply curve to the left.
E) shift the market demand curve to the left.
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Chapter 9: Managerial Use of Price Discrimination
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Sample Questions
Q1) Women are often charged more than men for haircuts performed by the same haircutter.This is not considered price discrimination because:
A) women receive more consumer surplus from haircuts than men receive.
B) haircutters claim to spend more time on women's hair, raising the cost of the haircut to the firm.
C) firms make up the extra cost to consumers by giving women free samples of products.
D) men receive more consumer surplus from haircuts than women receive.
E) women have a lower price elasticity of demand for haircuts.
Q2) If a firm supplies separable markets with price elasticities \(\eta\)<sub>1</sub> = -3 and \(\eta\)<sub>2</sub> = -2,it should set prices P<sub>1</sub> and P<sub>2</sub> so that:
A) P<sub>1</sub> = P<sub>2</sub>.
B) 3P<sub>1</sub> = 2P<sub>2</sub>.
C) 2P<sub>1</sub> = 3P<sub>2</sub>.
D) 2/3P<sub>1</sub> = 1/2P<sub>2</sub>.
E) 2P<sub>1</sub> = 2/3P<sub>2</sub>.
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Page 11
Chapter 10: Bundling and Intrafirm Pricing
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Sample Questions
Q1) The XYZ Steel Company produces its own coal for use in its production facility.The demand for steel is given by P<sub>s</sub> = 500 - 2Q<sub>s</sub> and the total cost of producing steel is given by TC<sub>s</sub> = 175Q<sub>s</sub>,where Q<sub>s</sub> is tons of steel per week.The price of coal in a perfectly competitive market outside the firm is $250 per ton,and the total cost of producing coal is given by TC<sub>c</sub> = 40 + 5Q<sub>c</sub><sup>2</sup>,where Q<sub>c</sub> is tons of coal per week.How much should XYZ steel charge itself for coal?
A) $250 per ton.
B) $350 per ton.
C) $500 per ton.
D) $750 per ton.
E) $1,000 per ton.
Q2) Transfer prices are needed when:
A) firms purchase raw materials from other firms.
B) consumers sell goods and services to one another.
C) markets must be simulated within firms.
D) products are bundled and sold as a package.
E) firms charge different prices to customers where there are no differences in production costs.
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Page 12
Chapter 11: Oligopoly
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Sample Questions
Q1) When an economist says an oligopoly has a "small" number of firms,the economist means:
A) exactly 1.
B) exactly 2, 3, or 4.
C) few enough to allow for interdependence.
D) few enough to allow for perfectly inelastic demand curves.
E) few enough to allow for four stages of industry development.
Q2) Suppose duopolists in the market for spring water share a market demand curve given by P = 50 - 0.02Q,where P is the price per gallon and Q is thousands of gallons of water per day.The marginal cost of producing water is near zero for both firms.If one firm acts as a first mover,the second firm will produce:
A) 0 gallons of water per day per firm.
B) 625 gallons of water per day.
C) 833 gallons of water per day.
D) 1,250 gallons of water per day.
E) 2,500 gallons of water per day.
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Chapter 12: Game Theory
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Sample Questions
Q1) By definition,a Nash equilibrium in a duopoly is the situation in which each player:
A) plays a dominant strategy.
B) plays the best strategy given the other's strategies.
C) gets the highest possible payoff.
D) gets the highest payoff possible without lowering the opponent's payoff.
E) is happy with the outcome.
Q2) Potential entrant E threatens to enter incumbent I's market and I threatens to lower price to P should E enter.It is crucial for E to believe I's threat that:
A) P > I's average total cost.
B) P > I's average variable cost.
C) P is low enough to discourage E.
D) I could conceivably charge P without E's threat.
E) I's profit with P and no entry are better than expected profits with entry.
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14
Chapter 13: Auctions
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Sample Questions
Q1) When significant uncertainty exists surrounding the true value of an object at auction,buyers contemplating a bid should bid less when:
A) they have less information about the true value of the item.
B) they are less confident in their own estimates of the true value of the object.
C) there are many other buyers bidding against them.
D) all of the above.
E) none of the above.
Q2) In recent years,auction sites,such as ebay,have flooded the Internet.Sellers expect to gain by using the Internet for conducting auctions because:
A) more bidders means that price discrimination is an option.
B) with more bidders, each submits a bid closer to his or her reservation price to increase the probability of a win.
C) with more bidders, sellers expect to realize greater profits.
D) consumer surplus will increase.
E) b and c
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Chapter 14: Risk Analysis
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Sample Questions
Q1) In a decision tree,a decision fork is represented by a(n):
A) X.
B) open circle.
C) closed circle.
D) triangle.
E) square.
Q2) A decision fork with payoffs given for each branch is assigned a value based on:
A) the highest-payoff branch.
B) the lowest-payoff branch.
C) an average of the highest- and lowest-payoff branches.
D) an evenly weighted average of all payoff branches.
E) a probability weighted average of all payoff branches.
Q3) Joe is risk-neutral with utility U = bR,where b is a positive constant and R is profit from a venture.If a gamble has a 0.4 chance of R = 1 and a 0.6 chance of R = 2,Joe's expected utility E(U)is:
A) b.
B) 1.4b.
C) 1.5b.
D) 1.6b.
E) 2b.
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Chapter 15: Principalagent Issues and Managerial Compensation
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Sample Questions
Q1) Optimal employment contracts for managers,given revenue risk and unobservable output,consist of:
A) a flat salary alone.
B) a flat salary plus some return to estimates of effort.
C) only a profit share.
D) a flat salary plus a profit share related only indirectly to individual effort.
E) a flat salary plus a profit share that is equal to the share accruing to owners.
Q2) A manager has a utility function U = C <sup>0.5</sup> if she doesn't work hard and U = C <sup>0.5</sup> - 1 if she does.Expected profit will increase from 1,500 to 1,600 if she works hard.The manager receives compensation C equal to 81 plus a portion x of any profit in excess of 1,500.What is the value of x that will make the manager indifferent between shirking and working hard?
A) 0.09.
B) 0.105.
C) 0.19.
D) 0.242.
E) None of the above.
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Page 17
Chapter 16: Adverse Selection
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Sample Questions
Q1) Which of the following is a credible signal of product quality?
A) A money-back guarantee.
B) High price.
C) A warranty.
D) Assurances by a salesperson.
E) a and c.
Q2) Insurance companies are able to offset the adverse selection in markets for life insurance by:
A) requiring premiums that are above the expected value of receipts.
B) only insuring people who appear to be sick.
C) insuring a wide variety of people so that gains on some policies offset losses on others.
D) requiring medical exams from people whom they insure.
E) requiring higher premiums from healthy people than from sick people.
Q3) From whom would you prefer to buy a used car,everything else being equal?
A) A mechanic.
B) A used-car dealer.
C) A family that is moving to China.
D) A person who is buying a new car.
E) You would have no preference among these choices.
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Chapter 17: Government and Business
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Sample Questions
Q1) The first federal antitrust law was the:
A) Sherman Act.
B) Clayton Act.
C) Federal Trade Commission Act.
D) Robinson-Patman Act.
E) Celler-Kefauver Act.
Q2) An effluent fee is a:
A) fine polluters must pay the government for discharging waste.
B) brokerage fee paid to the EPA by parties exchanging transferable emissions permits.
C) fine paid to the EPA by firms caught violating the pollution laws.
D) fine paid to the injured parties by firms caught violating the pollution laws.
E) way to reduce the costs of regulated firms.
Q3) If an activity produces an external diseconomy,then there will be too:
A) much of the activity undertaken by private parties from a social viewpoint.
B) little of the activity undertaken by private parties from a social viewpoint.
C) much of the activity undertaken by government from a private viewpoint.
D) much of the activity undertaken by private parties from a private viewpoint.
E) much of the activity undertaken by government from a social viewpoint.
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Chapter 18: Optimization Techniques
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Sample Questions
Q1) The chain rule of differentiation is:
A) Y = U(W(X)) \(\rarr\)dY/dX = dY/dX dW/dX.
B) Y = U(W(X))\(\rarr\) dY/dX = dU/dW dW/dX.
C) Y = U(W(X))\(\rarr\) dY/dX = dU/dX dW/dX.
D) Y = U(W(X)) \(\rarr\) dY/dX = dW/dU dU/dX.
E) Y = U(W(X)) \(\rarr\) dY/dX = dU/dU dU/dX.
Q2) Marginal profit is maximized when:
A) average profit is equal to marginal profit.
B) total profit is maximized.
C) average profit is increasing.
D) average profit is maximized.
E) average profit is decreasing.
Q3) If Y = -2 + X + 32X<sup>3</sup>,then dY/dX is:
A) 1 + 96X<sup>3</sup>.
B) -1 + 96X<sup>2</sup>.
C) 1 + 96X<sup>2</sup>.
D) 96X<sup>2</sup>.
E) X + 32X<sup>3</sup>.
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20
Chapter 19: Appendix Problems
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Q1) If the annual interest rate is 25%,the present discounted value of $100 to be received in one year is:
A) $75.
B) $80.
C) $100.
D) $120.
E) $125.
Q2) The present value of expected future profits will if the discount rate increases and will if expected future profits increase.
A) increase; not change
B) increase; increase
C) not change; decrease
D) decrease; increase
E) decrease; decrease
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