Economic Analysis for Managers
Exam Bank
Course Introduction
Economic Analysis for Managers equips students with essential economic principles and analytical tools relevant to managerial decision-making. The course covers topics such as demand and supply analysis, production and cost functions, market structures, pricing strategies, and the impact of government regulation. Emphasis is placed on applying microeconomic concepts to real-world business problems, fostering strategic thinking and data-driven problem-solving. By understanding the economic environment and its influence on business operations, students will develop the skills necessary to make informed and effective managerial decisions.
Recommended Textbook
Managerial Economics and Business Strategy 8th Edition by Michael Baye
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14 Chapters
1968 Verified Questions
1968 Flashcards
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Page 2
Chapter 1: The Fundamentals of Managerial Economics
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Sample Questions
Q1) "Our marginal revenue is greater than our marginal cost at the current production level." This statement indicates that the firm:
A) is maximizing profits.
B) should increase the quantity produced to increase profits.
C) should decrease the quantity produced to increase profits.
D) None of the statements associated with this question are correct.
Answer: B
Q2) Marginal benefits are the:
A) incremental benefits of a decision.
B) average benefits of a decision.
C) total benefits of a decision.
D) present discounted benefit of a decision.
Answer: A
Q3) Property owners move scarce resources toward the production of goods most valued by society because:
A) government controls the allocation of resources.
B) consumers demand inexpensive goods and services.
C) managers are solely pursuing the interests of society.
D) firms attempt to maximize profits.
Answer: B
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Chapter 2: Market Forces: Demand and Supply
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Sample Questions
Q1) Consider a market characterized by the following demand and supply conditions: P<sub>X</sub> = 15 - 2Q<sub>X</sub> and P<sub>X</sub> = 3 + 2Q<sub>X</sub>. The equilibrium price and quantity are, respectively,
A) $3 and 9 units.
B) $9 and 3 units.
C) $12 and 4 units.
D) $4 and 12 units.
Answer: B
Q2) Suppose the market demand for good X is given by Q<sub>X</sub><sup>d</sup> = 20 - 2P<sub>X</sub>. If the equilibrium price of X is $5 per unit, then the total value a consumer receives from consuming the equilibrium quantity is A) $100.
B) $75.
C) $50.
D) $25.
Answer: B
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Chapter 3: Quantitative Demand Analysis
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Sample Questions
Q1) When a demand curve is linear:
A) demand is elastic at low prices.
B) demand is inelastic at low prices.
C) demand is unitary elastic at low prices.
D) the elasticity is constant at all prices.
Answer: B
Q2) Several years ago the National Association of Broadcasters imposed restrictions on the amount of nonprogram material (commercials) that could be aired during children's television shows, effectively reducing the quantity of advertising allowed during children's viewing hours by 33 percent. Within four months, the price of a minute of advertising on network television increased by roughly 14 percent. What impact do you think this had on the revenues of the networks?
Answer: The own price elasticity of demand for advertising time is the percentage change in quantity demanded (-33 percent) divided by the percentage change in price (+14 percent), which is -2.36. Thus, the demand for advertising minutes by those who sell children's products is elastic. By the total revenue test, we would expect this to decrease network revenues.
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Page 5
Chapter 4: The Theory of Individual Behavior
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Sample Questions
Q1) The difference between a price decrease and an increase in income is that
A) A price decrease does not affect the consumption of other goods, while an increase in income does.
B) An increase in income does not affect the slope of the budget line, while a decrease in price does change the slope.
C) A price decrease decreases real income, while an increase in income increases real income.
D) A price decrease leaves real income unchanged, while an increase in income increases real income.
Q2) A worker's total earnings for one day is $100. He received a $20 fixed payment and consumes 14 hours of leisure. What is the hourly wage rate?
A) $10
B) $6
C) $4
D) $8
Q3) Suppose you are the manager of a firm that produces Ultrasweet, a sugar substitute. Show graphically the effect of a reduction in the price of Sweet and Healthy, a competitor's product, on a typical consumer's consumption of Ultrasweet.
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Chapter 5: The Production Process and Costs
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Sample Questions
Q1) The costs of production include:
A) the costs that appear on the income statements.
B) the opportunity costs foregone by producing a given product.
C) accounting costs.
D) accounting costs and opportunity costs.
Q2) Whenever an isoquant exhibits a diminishing marginal rate of technical substitution, the corresponding isoquants are:
A) convex to the origin.
B) concave to the origin.
C) L-shaped.
D) linear.
Q3) The manager institutes an incentive structure to ensure:
A) workers are in fact working at the expected potential.
B) workers are in fact working at their utility-maximizing effort level.
C) the firm produces on the production function.
D) the firm produces above the production function.
Q4) The maker of Turbotax produces software that prepares federal income tax returns. In addition, it produces software that prepares various state income tax returns. Why doesn't it pay for the firm to specialize in federal software?
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Chapter 6: The Organization of the Firm
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Sample Questions
Q1) Long-term contracts are LESS likely when:
A) specialized investments are important.
B) hold-up is likely.
C) the exchange environment is complex.
D) workers are paid based on piece rates.
Q2) Which of the following transactions are likely to result in relationship-specific exchange?
a. Purchasing gasoline for the company car
b. Hiring an employee to operate a machine that only your company uses
c. Buying napkins for the company snack bar
d. Purchasing coal for the factory furnace
e. Buying electricity
Q3) The principal-agent problem refers to the fact that the agent's goals:
A) do not always coincide with those of the principal.
B) coincide with those of the principal.
C) do not overlap with those of the principal.
D) overlap with those of the principal.
Q4) In general, automobile manufacturers produce their own engines but purchase tires from independent suppliers. Why?
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Chapter 7: The Nature of Industry
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Sample Questions
Q1) An electronics company takes over one of its original suppliers in a merger. This is an example of:
A) vertical integration.
B) horizontal integration.
C) cointegration.
D) conglomerate integration.
Q2) Conglomerate integration:
A) reduces the transaction costs of acquiring inputs.
B) improves cash flow by exploiting the cyclical nature of different product lines.
C) exploits economies of scope by merging the production of similar products.
D) All of the statements are correct.
Q3) The Dansby-Willig index measures the potential for a change in social welfare by examining the effect of changes in industry:
A) production cost.
B) output.
C) revenue.
D) profit.
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Chapter 8: Managing in Competitive, Monopolistic, and
Monopolistically Competitive Markets
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Sample Questions
Q1) The first-order conditions for a monopoly to maximize profits are:
A) dR(Q)/dQ = dC(Q)/dQ.
B) MR(Q) = MC(Q).
C) d (Q)/dQ = 0.
D) All of the statements associated with this question are correct.
Q2) In a monopoly where the marginal revenue and price are, respectively, given by $10 and $20, the price elasticity of demand is:
A) -1.
B) -2.
C) -0.5.
D) Cannot be determined based on the information in the question.
Q3) A monopoly has produced a product with a patent for the last few years. The patent is going to expire. What will happen after the patent expires?
A) The incumbent will leave the market.
B) The incumbent will retain its status as a monopoly but produce at a lower price.
C) Some firms will enter the industry.
D) None of the answers is correct.
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Page 10
Chapter 9: Basic Oligopoly Models
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Sample Questions
Q1) "An oligopoly is an oligopoly. Firms behave the same no matter what type of oligopoly it is." This statement is:
A) true.
B) false.
C) true of homogeneous product industries.
D) None of the answers is correct.
Q2) Two identical firms compete as a Cournot duopoly. The demand they face is P = 100 - 2Q. The cost function for each firm is C(Q) = 4Q. Each firm earns equilibrium profits of:
A) $1,024.
B) $2,048.
C) $4,096.
D) $512.
Q3) Which of the following is a profit-maximizing condition for a Cournot oligopolist?
A) MR = MC.
B) Q<sub>1</sub> = Q<sub>2</sub> = ... = Q<sub>n.</sub>
C) P = MR.
D) All of the statements associated with this question are correct.
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Chapter 10: Game Theory: Inside Oligopoly
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Sample Questions
Q1) There are two existing firms in the market for computer chips. Firm A knows how to reduce the production costs for the chip and is considering whether to adopt the innovation or not. Innovation incurs a fixed setup cost of C, while increasing the revenue. However, once the new technology is adopted, another firm, B, can adopt it with a smaller setup cost of C/3. If A innovates and B does not, A earns $30 in revenue while B earns $10. If A innovates and B does likewise, both firms earn $20 in revenue. If neither firm innovates, both earn $10. Under what condition will firm A innovate?
A) C > 30
B) C < 30
C) 10 > C > 0
D) 35 > C > 25
Q2) Based on your knowledge of one-shot and repeated games, would you expect tipping behavior to differ depending on whether a person is eating in a hometown diner or in a restaurant located in Timbuktu? Explain.
Q3) You are the owner-operator of the Better Gas Station in a small southeastern town. Over the past 20 years, you and your rival have successfully kept prices at a very high level. You recently learned that your competitor is retiring and closing his station in two weeks. What should you do today? Why?
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Chapter 11: Pricing Strategies for Firms With Market Power
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Sample Questions
Q1) You have just been hired as manager of a new health spa in Retirement Village, Florida. The owner has commissioned a market study that estimates the average customer's monthly demand curve for visiting the health spa to be Q<sup>d</sup> = 50 - 0.25P. The cost of operating is C(Q) = 3Q, where Q is the number of visits. The owner has been charging a $20 per month membership fee and a $5 per visit fee. Part of your salary is 10 percent of the monthly profits. Suggest a pricing strategy that will increase your salary.
Q2) You are a truck farmer and bring produce to a farmer's market every Wednesday. You have found that on a typical day, five other farmers bring their produce to market. Years of experience have taught you that you make the most money by pricing your produce at 1.15 times your marginal cost. What is your elasticity of demand in this Cournot oligopoly? What is the market elasticity of demand?
Q3) Most wholesalers post a "suggested retail price" on packages, which in turn are sold by retailers. Is there an economic basis for the suggested retail price? As the manager of a retailing outlet, what factors will determine whether you should charge the suggested retail price or some higher or lower price?
Q4) A monopolist is profit maximizing where the elasticity of demand is -2 and price is $4. What is the monopolist's marginal cost?
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Chapter 12: The Economics of Information
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Sample Questions
Q1) An apple farmer must decide how many apples to harvest for the world apple market. He knows that there is a one-third probability that the world price will be $1, a one-third probability that it will be $1.50, and a one-third probability that it will be $2. His cost function is C(Q) = 0.01Q<sup>2</sup>. What is the expected price in the world apple market?
A) $1.50
B) $1.80
C) $2.00
D) $1.40
Q2) Consider a consumer who is searching for the lowest price for good X. The consumer knows that 75 percent of the time she will find a store charging $10 and 25 percent of the times she will find a store charging $7. The consumer will search again if her marginal cost of searching is constant and is:
A) strictly higher than $3.
B) lower than or equal to $0.75.
C) between $1.00 and $2.25.
D) exactly $0.
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Page 14
Chapter 13: Advanced Topics in Business Strategy
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Sample Questions
Q1) Which of the following is an example of a network?
A) Wireless telephone service
B) Railroads
C) Internet
D) All of the examples associated with this question are networks.
Q2) A single firm that charges the monopoly price in the market earns $800. If another firm successfully enters the market, the incumbent's profits fall to $500 and the entrant earns $450. If the incumbent engages in limit pricing, its profits are $600. For what interest rate, i, is limit pricing a profitable strategy for the incumbent?
A) i < 0.5
B) 0.5 < i < 1.0
C) 1.0 < i < 1.5
D) i > 1.5
Q3) Which of the following makes it more difficult for an incumbent to successfully engage in limit pricing?
A) Complete information
B) Commitment mechanisms
C) Learning curve effects
D) A firm's past reputation for being tough on entrants
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Page 15
Chapter 14: A Managers Guide to Government in the Marketplace
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Sample Questions
Q1) If the government imposes a price ceiling below the monopolist's average cost curve, then in the long run the regulation makes:
A) consumers better off.
B) consumers worse off.
C) the monopolist better off.
D) None of the statements is correct.
Q2) In the absence of price regulation, a monopolist:
A) charges a price below MR.
B) charges a price above MC.
C) charges a price equal to MR.
D) charges a price above MC and equal to MR.
Q3) The domestic demand and supply for sugar are Q<sup>d</sup> = 60,000 - 400P and Q<sup>SD</sup> = 20,000 + 500P. The foreign supply is Q<sup>SF</sup> = 20,000 + 100P. How many units of sugar will domestic producers supply after the quota is imposed?
A) 35,000
B) 30,000
C) 58,000
D) 23,000
Page 16
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