Managerial Economics
Chapter Exam Questions
Course Introduction
Managerial Economics is a course that integrates economic theory with business practice to facilitate decision-making and problem-solving within organizations. It explores how managers use microeconomic concepts such as supply and demand, production and costs, market structures, and pricing strategies to optimize resource allocation and achieve organizational objectives. The course emphasizes the application of quantitative tools and analytical frameworks to real-world business challenges, including risk analysis, forecasting, and competitive strategy. By bridging the gap between abstract economic principles and practical business decisions, Managerial Economics equips future managers with the skills needed to maximize value and efficiency in a dynamic market environment.
Recommended Textbook
Managerial Economics and Business Strategy 8th Edition by Michael Baye
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Page 2
Chapter 1: The Fundamentals of Managerial Economics
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Sample Questions
Q1) Compute the present value of a preferred stock that pays, in perpetuity, an annual cash flow of $200 at an annual interest rate of 5 percent.
A) $190.48
B) $210
C) $4,000
D) $4,200
Answer: C
Q2) In order to maximize net benefits, firms should produce where:
A) total benefits equal total costs.
B) profits are zero.
C) marginal cost is minimized.
D) marginal benefits equal marginal costs.
Answer: D
Q3) Accounting profits are:
A) total revenue minus total cost.
B) total cost minus total revenue.
C) marginal revenue minus total cost.
D) total revenue minus marginal cost.
Answer: A
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Chapter 2: Market Forces: Demand and Supply
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Q1) Other things held constant, the lower the price of a good
A) the lower the demand.
B) the higher the demand.
C) the greater the consumer surplus.
D) the lower the consumer surplus.
Answer: C
Q2) Suppose both supply and demand increase. What effect will this have on the equilibrium quantity?
A) It will fall.
B) It will rise.
C) It may rise or fall.
D) It will remain the same.
Answer: B
Q3) Suppose supply decreases and demand increases. What effect will this have on the price?
A) It will fall.
B) It will rise.
C) It may rise or fall.
D) It will remain the same.
Answer: B
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Chapter 3: Quantitative Demand Analysis
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Q1) Suppose the own price elasticity of demand for good X is -5, and the quantity of good X decreases by 5 percent. What would you expect to happen to the total expenditures on good X?
A) Increase
B) Decrease
C) Unchanged
D) Neither increase, decrease, nor remain unchanged
Answer: B
Q2) We would expect the demand for jeans to be:
A) more elastic than the demand for clothing.
B) less elastic than the demand for clothing.
C) the same as the demand for clothing.
D) neither more elastic, less elastic, nor the same elasticity as that of the demand for clothing.
Answer: A
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Chapter 4: The Theory of Individual Behavior
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Q1) Kate's money income is $250, the price of X is $3, and the price of Y is $2. Given these prices and income, Kate buys 60 units of X and 35 units of Y. Call this combination of X and Y bundle J. At bundle J, Kate's MRS is 3. At bundle J, if Kate increases consumption of Y by 1 unit, how many units of X must she give up in order to satisfy her budget constraint?
A) 3/2
B) 3
C) 2/3
D) 1
Q2) If the price of a good falls, then the equilibrium consumption of that good:
A) increases if it is an inferior good.
B) decreases if it is a normal good.
C) remains the same.
D) None of the statements is correct.
Q3) Sam Voter prefers Jack to Rob, Rob to Mark, and Jack to Mark. Sam's preferences:
A) are not consistent with our assumptions about consumer behavior.
B) indicate that he is a liberal.
C) are not complete.
D) are transitive.
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Chapter 5: The Production Process and Costs
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Q1) Given the linear production function Q = 10K + 5L, if Q = 10,000 and K = 500, how much labor is utilized?
A) 600 units
B) 800 units
C) 500 units
D) 1,000 units
Q2) If a firm is operating on the production function, then workers:
A) must be putting forth maximal effort.
B) may not be putting forth maximal effort.
C) are usually putting forth average effort.
D) are usually putting forth minimal effort.
Q3) The demand for an input is:
A) sloping upward.
B) the VMP of the input.
C) determined by MP<sub>L</sub> = W.
D) derived from input owner's profit-maximizing condition.
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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Q1) By instituting performance-based rewards to CEOs the profits of firms will:
A) rise.
B) fall.
C) remain constant.
D) None of the statements is correct.
Q2) Which of the following methods might be an efficient way of obtaining inputs when specialized investments are not important?
A) Spot exchange
B) Vertical integration
C) Profit-sharing
D) Long-term contracts
Q3) The most commonly used negative incentive used by firms is:
A) temporary layoffs.
B) dismissal.
C) unpaid suspensions.
D) verbal reprimands.
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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Q1) A host of best-selling books advance the thesis that increases in conglomerate mergers and concentration of U.S. industry are responsible for "obscene profits." Do you agree? Explain, using the Lerner index.
Q2) C<sub>4</sub> and HHI tend to ____________ the concentration in a domestic industry.
A) provide different rankings of
B) understate
C) overstate
D) understate or overstate, depending on the true geographic market
Q3) A firm has a Lerner index of 0.75 and charges a price of $150. The firm's marginal cost is:
A) $0.
B) $37.50.
C) $112.50.
D) There is not sufficient information to determine the firm's marginal cost.
Q4) Which of the following is NOT one class of a market structure?
A) Perfect competition
B) Dictatorship
C) Monopoly
D) Monopolistic competition
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Chapter 8: Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets
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Q1) The primary difference between monopolistic competition and perfect competition is:
A) the ease of entry and exit into the industry.
B) the number of firms in the market.
C) Both the ease of entry and exit into the industry and the number of firms in the market are correct.
D) None of the answers is correct.
Q2) In a competitive industry with identical firms, long-run equilibrium is characterized by:
A) P > min ATC.
B) P < AVC.
C) MR = MC = min ATC.
D) MR < P.
Q3) A monopoly has produced a product with a patent for the last few years. The patent is going to expire. What will likely happen to the demand for the patent-holder's product when the patent runs out?
A) Demand will increase.
B) Demand will decline.
C) Nothing.
D) None of the answers is correct.
Page 10
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Chapter 9: Basic Oligopoly Models
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Q1) The profits of the leader in a Stackelberg duopoly:
A) are less than those of the follower.
B) equal those of the follower.
C) are greater than those of the follower.
D) are less than those of a Sweezy oligopolist.
Q2) Suppose that the duopolists competing in Cournot fashion agree to produce the collusive output. Given that firm 2 commits to this collusive output, it pays firm 1 to:
A) cheat by producing a higher level of output.
B) cheat by producing a lower level of output.
C) cheat by raising prices.
D) None of the answers is correct.
Q3) Which would you expect to make the highest profits, other things equal?
A) Bertrand oligopolist
B) Cournot oligopolist
C) Stackelberg leader
D) Stackelberg follower
Q4) What real-world evidence would lead you to believe that firms were acting as Cournot oligopolists? Stackelberg oligopolists? Bertrand oligopolists?
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Page 11
Chapter 10: Game Theory: Inside Oligopoly
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Q1) Game theory is best applied to the analysis of:
A) perfect competition.
B) oligopoly.
C) monopoly.
D) All of the statements associated with this question are correct.
Q2) Management and a labor union are bargaining over how much of a $100 surplus to give to the union. The $100 is divisible up to one cent. The players have one shot to reach an agreement. Management has the ability to announce what it wants first, and then the labor union can accept or reject the offer. Both players get zero if the total amounts asked for exceed $100. Which of the following is NOT a Nash equilibrium?
A) Management requests $50 and the labor union accepts $50.
B) Management requests $70 and the labor union accepts $20.
C) Management requests $100 and the labor union accepts $0.
D) Neither management requesting $100 and the labor union accepting $0 nor management requesting $70 and the labor union accepting $20 are Nash equilibria.
Q3) Would collusion be more likely in the shoe industry or in the airline industry? Why?
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Page 12
Chapter 11: Pricing Strategies for Firms With Market Power
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Q1) A necessary cost-side condition for a firm to implement a cross-subsidization pricing strategy is:
A) economies of scale.
B) economies of scope.
C) constant marginal cost.
D) limited capacity.
Q2) A monopoly producing a chip at a marginal cost of $6 per unit faces a demand elasticity of -2.5. Which price should it charge to optimize its profits?
A) $6 per unit
B) $8 per unit
C) $10 per unit
D) $12 per unit
Q3) To engage in first-degree price discrimination, a firm must:
A) be able to set P > MC.
B) know each consumer's maximum willingness to pay.
C) prevent low-value consumers from reselling to high-value consumers.
D) All of the answers are correct.
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) Susan's search costs are $7 per search. She wants to buy a coat, and the lowest price she has found so far is $180. Susan thinks 25 percent of the stores charge $180 for this coat, 50 percent charge $160, and the other 25 percent charge $150. Susan's optimal decision is to:
A) continue to search for a lower price since the expected benefit of an additional search is $7.50, which exceeds her per-unit search costs.
B) stop searching and purchase a coat for $180.
C) continue to search for a lower price since the expected benefit of an additional search is $10, which exceeds her per-unit search costs.
D) continue to search for a lower price since the expected benefit of an additional search is $17.50, which exceeds her per-unit search costs.
Q2) You are the manager of a firm that has just created a new and improved version of a product you know to be superior to every other product on the market. To signal your quality, you have instructed your marketing department to change the label of your firm's product to include the phrase, "New and Improved." Based on this information, do you think it is prudent to contact your production department and instruct them to significantly expand capacity? Explain.
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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 a strategy that can be used only by vertically integrated firms?
A) Vertical foreclosure
B) Predatory pricing
C) Limit pricing
D) Penetration pricing
Q2) Firms 1 and 2 compete in a Cournot duopoly. If firm 1 adopts a strategy that raises firm 2's marginal cost:
A) firm 2 will increase its output.
B) firm 1 will lose market share.
C) firm 1 will enjoy higher profits.
D) All of the statements associated with this question are correct.
Q3) A network linking six users is typically:
A) less likely to exhibit bottlenecks than a network linking two users.
B) three times as valuable as a network linking two users.
C) more than three times as valuable as a network linking two users.
D) less than three times as valuable as a network linking two users.
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Chapter 14: A Managers Guide to Government in the Marketplace
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Q1) Section 16(a) of the Securities and Exchange Act of 1934, as amended in 1990, requires that the officers, directors, and principal shareholders of companies disclose the extent of their ownership of equity securities of the company and any changes in the ownership. Section 16(b) permits companies to recover trading profits realized by such people arising from short-swing transactions in company securities. Do you think that, as a result of these laws, the government will be forced to spend more money on its auditing and enforcement efforts? Explain.
Q2) Which of the following pieces of legislation is aimed at curbing the negative effects of externalities?
A) Robison-Patman Act
B) Clean Air Act
C) Lanham Act
D) Truth in Lending Simplification Act
Q3) Which of the following are characteristics of public goods?
A) Nonrivalry
B) Nonchivalrous
C) Nonexclusionary
D) Nonrivalry and nonexclusionary
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