Economic Decision Analysis
Exam Answer Key
Course Introduction
Economic Decision Analysis equips students with the tools and methodologies necessary to make informed financial decisions in uncertain and complex environments. The course explores concepts such as cost-benefit analysis, risk assessment, utility theory, decision trees, and sensitivity analysis, emphasizing both quantitative and qualitative approaches. Students learn to apply these principles to real-world scenarios in business, engineering, and policy-making, ultimately developing the analytical skills required to assess alternatives, optimize resources, and justify decisions effectively in economic contexts.
Recommended Textbook
Managerial Economics 5th Edition by Luke M. Froeb
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21 Chapters
1734 Verified Questions
1734 Flashcards
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Page 2
Chapter 1: The One Lessor of Business
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54 Verified Questions
54 Flashcards
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Sample Questions
Q1) A creative entrepreneur is one who knows how to
A)Run a business
B)Escape the burden of taxes
C)Profitably exploit money making opportunities
D)All of the above
Answer: C
Q2) A retailer X that is operating at a loss gets bought out by a larger chain of department stores,which shuts down the brand,using its assets for their own brand,
A)Wealth is destroyed since the company shut down
B)Wealth is created since the resources were of lesser value under the X brand and are now worth more
C)Wealth is neither created nor destroyed since the total amount of resources stay the same
D)None of the above
Answer: B
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Chapter 2: Benefits, Costs, and Decisions
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67 Flashcards
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Sample Questions
Q1) Jane makes 1000 items a day.Each day she spends 8 hours producing those items.If hired elsewhere she could have earned $250 an hour.The item sells for $15 each.Production occurs seven days a week.If the explicit costs total $150,000 per month,what is her accounting profit?
A)$300,000
B)$60,000
C)$450,000
D)$240,000
Answer: A
Q2) If a firm is earning negative economic profits,it implies
A)That the firm's accounting profits are necessarily zero
B)That the firm's accounting profits are necessarily positive
C)That the firm's accounting profits are necessarily negative
D)Economic profits alone cannot determine accounting profits
Answer: D
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4
Chapter 3: Extent How Much Decisions
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76 Flashcards
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Sample Questions
Q1) If AVC=$5 and AFC=15,then AC=
A)$10
B)$5
C)$15
D)$20
Answer: D
Q2) Total costs increase from $1,500 to $1,800 when a firm increases output from 40 to 50 units.Which of the following are true?
A)VC rise by $300
B)VC rise by $1,800
C)VC rise by $1,500
D)VC rise by $0
Answer: A
Q3) If the firm hires 5 workers,and produces 10 units,the average variable costs equals
A)$200
B)$50
C)$80
D)$20
Answer: D
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Page 5
Chapter 4: Investment Decisions: Look Ahead and Reason
Back
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Sample Questions
Q1) The higher the interest rates
A)the more value individuals place on future dollars
B)the more value individuals place on current dollars
C)individuals do not place any importance on either current or future dollars
D)does not affect the investment strategy
Q2) Project Delay
Prescott Labs is considering developing a defibrillator product.You know that will require extensive testing and possible modification before it can be launched.Still,you know that even if it is launched two years from now,the present value of sales over the expected 10 year product lifecycle will cover these costs.But now the boys down at the lab tell you that it may not launch for three years.How does this affect your assessment of going ahead with funding the product?
Q3) Which of the following variables are needed to determine the break-even quantity?
A)Marginal costs
B)Fixed Costs
C)Selling Price
D)All of the above
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Page 6
Chapter 5: Simple Pricing
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Sample Questions
Q1) A perfectly elastic demand curve
A)Is a horizontal line parallel to the x axis
B)Has an elasticity of demand between 0 and 1
C)Is the demand curve of a product that usually has no substitutes
D)None of the above
Q2) If the government wants to decrease the quantity consumed of alcohol by 20%,what percentage of tax would they have to levy on alcohol consumption?
A)20%
B)30%
C)40%
D)50%
Q3) Ingrid's Ice cream Parlor has an own price elasticity of 5.It has an approximate share of 10% in the market for ice cream.What is the aggregate own price elasticity of the market?
A)0.1%
B)0.5%
C)0.7%
D)1%
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Chapter 6: Economies of Scale and Scope
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Sample Questions
Q1) When a firm's marginal productivity declines as output increases,then the firm is experiencing
A)Diminishing returns to scale
B)Constant returns to scale
C)Increasing returns to scale
D)Increasing marginal product
Q2) A rising average cost implies that
A)marginal cost is equal to average cost
B)marginal cost is above average cost
C)marginal cost is below average cost
D)none of the above
Q3) It costs firm A $800 to produce five radios and it costs firm B $500 to produce five batteries.If Firm A merges with firm B,it can produce both the five radios and the five batteries for $1500.The firm has experienced
A)Economies of Scale
B)Economies of Scope
C)Diseconomies of Scale
D)Diseconomies of Scope
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8
Chapter 7: Understanding Markets and Industry Changes
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Sample Questions
Q1) The change in quantity demanded derived from a change in price is
A)the movement along a demand curve
B)the movement along a supply curve
C)a shift in the demand curve
D)a shift in the supply curve
Q2) At the equilibrium price
A)only sellers who value the product more than the equilibrium price would be willing to sell
B)only buyers who value the product less than the equilibrium price would be willing to buy
C)only buyers who value the product more than the equilibrium price would be willing to buy
D)None of the parties would be willing to trade
Q3) An increase in demand could arise from which of the following factors
A)an increase in income
B)a decrease in the price of a complement
C)an increase in the price of a substitute
D)all of the above
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9
Chapter 8: Market Structure and Long Run Equilibrium
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Sample Questions
Q1) The concept of mean reversion is defined by
A)the tendency of profits to revert to zero
B)the tendency of costs to revert to zero
C)the tendency of economic profits to revert to zero
D)the tendency of profits to revert to negative
Q2) The main reason(s)firms in a competitive market cannot earn positive profits in the long run is(are)
A)assets can quickly move in and out of the industry when demand fluctuates
B)an increase in demand leads to entry of firms which absorb the extra demand
C)a decrease in demand leads to exit of firms from the market such that there is no surplus
D)all of the above
Q3) A perfectly competitive firm has
A)A perfectly elastic demand for its products
B)A perfectly inelastic demand for its products
C)A downward sloping demand for its products
D)None of the above
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Chapter 9: Strategy: the Quest to Keep Profit From Eroding
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Sample Questions
Q1) Even if there are significant barriers to entry,firms may not be highly profitable
A)Substitute product offerings among rivals
B)The ability of consumers to switch to substitute products easily
C)All of the above
D)None of the above
Q2) One of the limitation of Five Forces is that they
A)Reduce producer surplus
B)For one firm to increase profit,the profit of another participant must decrease
C)Does not provide a firm with sustainable competitive advantage
D)Both b and c
Q3) Rivalry among firms would tend to be high if
A)There is a small number of firms in the market
B)There is a large number of firms in the market
C)There is only one firm in the market
D)None of the above
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Chapter 10: Foreign Exchange, Trade, and Bubbles
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Sample Questions
Q1) Holding other things constant,an appreciation of the US Dollar relative to the Chinese Yuan causes the demand for the Yuan to _____________ and the supply for Yuan to
A)Increase;decrease
B)Increase,increase
C)Decrease;Increase
D)Decrease;Decrease
Q2) Currency devaluations help suppliers because they make exports ________ expensive
A)Less
B)More
C)All of the above
D)None of the above
Q3) When interest rates go up,people are
A)More likely to borrow
B)Less likely to borrow
C)Does not affect a person's consumption
D)None of the above
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12
Chapter 11: More Realistic and Complex Pricing
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72 Flashcards
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Sample Questions
Q1) Which of the following is true?
A)To reduce cannibalization among products,reposition a product so that it does not directly compete with the other
B)After acquiring a substitute product,lower prices on both the products
C)After acquiring a complementary product,raise prices on both the products
D)All of the above
Q2) Firms should raise the prices on their goods
A)If the demand for the product is elastic
B)If it acquires a firm selling a complement good
C)If it acquires a firm selling a substitute good
D)Both a and c
Q3) The owner of a recently built cruise ship is deciding how to price its rooms.What advice would you give the owner?
A)Since MR<MC,do not price to fill capacity
B)Since MR<MC,price to fill capacity
C)Since MR>MC,price to fill capacity
D)Both A&C
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Chapter 12: Direct Price Discrimination
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84 Flashcards
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Sample Questions
Q1) Cowboy Hat Markets
Cody's Cowboy Hat Emporium has two stores Fort Worth,TX.One in the Stockyards area that caters to tourists and another a mile further north that caters to ranch hands.Why doesn't Cody sell to both customer types out of one store?
Q2) Given that the firm wants to sell both the versions,how high can the no-name brand be priced?
A)$30
B)$40
C)$60
D)$70
Q3) Firms can practice indirect price discrimination by
A)Offering volume discounts
B)Using two-part pricing
C)Offering a bundle containing a number of units
D)All of the above
Q4) Circle of Crust
Pie Five Pizzas has a frequent purchaser program,called Circle of Crust,in which patrons earn points with every purchase.With enough points,the patron's next purchase is free.How does this program alter customer decisions?
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Chapter 13: Strategic Games
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91 Verified Questions
91 Flashcards
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Sample Questions
Q1) If Sally decides to go to the boxing match,what is Sam's best response
A)Go to the ballet
B)Go to the boxing match
C)Run away
D)Hide
Q2) Nash equilibrium is:
A)where one player maximizes his payoff and the other doesn't
B)when each player's strategy is the best response to the other player's strategy
C)where the outcome is always efficient
D)difficult to determine
Q3) What would be the profits for Irene's Dairy in equilibrium?
A)5 million loss
B)5 million
C)10 million
D)20 million
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15
Chapter 14: Bargaining
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Sample Questions
Q1) In the strategic view of bargaining the outcome depends on
A)Who makes the first move
B)Who can commit to a position
C)Whether or not the other party can make a countermove
D)All of the above
Q2) Jim is haggling with a car dealer on the price of a used car.If the dealer is getting a bonus per sale made,in addition to the commission,Jim is more likely to be able to
A)Get the car cheap
B)Pay a higher price for the car
C)Walk away from the deal
D)All of the above
Q3) The firm would have a better bargaining position if
A)The firm can easily replace the workers with machinery
B)The workers are a critical part of the production process
C)The workers are highly specialized and would not find employment elsewhere easily
D)Both A&C
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16
Chapter 15: Making Decisions With Uncertainty
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Sample Questions
Q1) Four possibilities have probabilities 0.4,0.2,0.2 and 0.2 and values $10,$20,$30,and $40 respectively.The expected value is:
A)$22
B)$24
C)$26
D)$28
Q2) You are considering buying a store.In order to better access your return on the investment,your expectations of the return should be based on
A)Days where sales are high,costs are low
B)Days where sales are low and costs are high
C)Days where both sales and costs are low
D)A weighted average of all the above scenarios
Q3) Four possibilities have probabilities 0.4,0.2,0.2 and 0.2 and values $80,$30,$0,and -$80 respectively.The expected value is:
A)$22
B)$24
C)$26
D)$28
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Chapter 16: Auctions
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Sample Questions
Q1) To attract more bidders,and more aggressive bidders,to your common-value auction
A)withhold relevant information about the value of the object
B)don't allow bidders to know how others are bidding
C)allow potential bidders ample time to examine the object being sold
D)do not hold oral auctions
Q2) More bidders tend to increase the selling price in a second-price auction because A)bidders bid less aggressively
B)the true value of the losers is lower
C)the true values of the losers is higher
D)Both A&C
Q3) If the bidders at an oral auction have true values of $78,$72,$66,and $65,the item will sell for
A)$78
B)just under $78
C)$72
D)just over $72
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Chapter 17: The Problem of Adverse Selection
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Sample Questions
Q1) A risk neutral individual
A)Values a lottery at more than its expected value
B)Values a lottery at less than its expected value
C)Values a lottery at its expected level
D)Tends to play a lot of lotteries
Q2) Scatterbrain Samantha often forgets to lock her house.This has caused the probability of a burglary to be 30%.If her house gets broken into,she faces a property loss of $10,000,otherwise she gets to keep her $100,000.If Samantha is offered an insurance policy for her house to protect her from loss at $3,000,would she buy the insurance?
A)Yes because she gets to now enjoy her wealth risk-free
B)No,because she can take the risk and be better off
C)Yes,because she is a risk lover
D)None of the above
Q3) Screening is
A)actions by the informed party to reveal her true risks
B)actions by the informed party to conceal her true risks
C)actions by the uninformed party to uncover the true risks
D)actions by the uninformed party to conceal the true risks
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Chapter 18: The Problem of Moral Hazard
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Sample Questions
Q1) Moral hazard would lead to
A)Only risky drivers buying insurance
B)More risky drivers buying more insurance
C)Drivers taking on a lot more risk after buying insurance
D)Drivers becoming a lot more careful after buying insurance
Q2) The Value of Bonuses
Oscar's Outdoor Signage employs salesmen to find new advertisers for existing signs.In an average month,salaried sales staff can keep 80 of 100 signs under contract in a given month.When Oscar experimented with a bonus of $100 for each sign under contract this was increased to 90 of 100 signs.How large must the contribution margin on a sign be to make it profitable to offer the bonuses?
Q3) An example of moral hazard is
A)people drive less carefully in icy conditions with antilock brakes than without
B)people drive as safely with more airbags as without
C)football players avoid 'spearing' with their heads even with safer helmets
D)people read the medicine warnings as carefully when self-medicating as with a doctor's prescription
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Page 20
Chapter 19: Getting Employees to Work in the Firms Best Interest
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Sample Questions
Q1) In a franchising relationship
A)the franchisor is the principal
B)the agent is the franchisor
C)the franchisor is the agent
D)the principal is the franchisee
Q2) An incentive conflict is when
A)The agent and the principal have identical incentives
B)The agent has different incentives than does the principal
C)The agent and the principal neither have any incentives to work hard
D)None of the above
Q3) Adopt incentive compensation
A)Under all circumstances since it is the best solution
B)Only if it is effective in making the agent work harder
C)Only if its results exceed its costs
D)Only B&C
Q4) Sales agents being paid a fixed commission on the sales are more likely to
A)Tell their bosses that they need to price higher to make sales
B)Tell their bosses that they need to price lower to make sales
C)Not say anything to their boss
D)None of the above
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Chapter 20: Getting Divisions to Work in the Firms Best
Interest
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Sample Questions
Q1) Ways to "game" the budgeting process include
A)delaying sales if just short of a target
B)accelerating expenses if just short of a target
C)delaying sales once a target is met
D)delaying expenses costs once a target is met
Q2) Tom & Jerry are running Hanna Barbera's lemonade stand as two profit centers.Tom makes the lemonade while Jerry sells it.Jerry argues that Tom is transferring the lemonade to him priced too high,which forces him to charge the customers a high price,losing sales.Does the decision maker have the incentive to make a good decision?
A)Yes,because it increases the division profit
B)No,because it decreases division profit
C)Yes,because it does not affect division profit
D)No,because it increases company-wide profit
Q3) The efficient transfer price is
A)the upstream division's average cost
B)the upstream division's marginal cost
C)the downstream division's average cost
D)the downstream division's marginal cost
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Chapter 21: Managing Vertical Relationships
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Sample Questions
Q1) Vertical contracts that aim to decrease retailer prices typically
A)Benefit the consumer and the manufacturer but hurt the retailer
B)Benefit the manufacturer and retailer but hurt the consumer
C)Benefits the consumers,manufacturers and retailers
D)Hurts all the manufacturers,consumers and retailers
Q2) Which of the following is TRUE?
A)Purchase a supplier as long as the supplier is profitable
B)Purchasing a profitable customer would lead to an increase in profits
C)Purchasing a profitable supplier may not necessarily increase your profits
D)Purchasing a profitable supplier is a bad idea and would lead to decreased profits
Q3) Horizontal contracts often result in
A)Higher prices
B)Lower prices
C)Unchanged prices
D)None of the above
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