Course Introduction
Managerial Economics
Chapter Exam Questions
Managerial Economics is a course designed to bridge economic theory and practical business decision-making. It focuses on the application of microeconomic principles to real-world business problems, enabling students to analyze and interpret market dynamics, demand forecasting, production and cost analysis, pricing strategies, and risk management. Emphasizing both qualitative and quantitative approaches, the course equips future managers with the analytical tools needed to optimize resource allocation, maximize profits, and make informed strategic decisions within the competitive and regulatory environments of modern organizations.
Recommended Textbook
Microeconomics 8th Edition by Jeffrey M. Perloff
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) The purpose of making assumptions in an economic model is to
A) force the model to yield the correct answer.
B) minimize the amount of work an economist must do.
C) simplify the model while keeping important details.
D) express the relationship mathematically.
Answer: C
Q2) Individuals use microeconomic models to determine
A) their optimal consumption of beer given an increase in inflation.
B) their optimal amount of leisure.
C) whether or not to go to college given current student loan interest rates.
D) All of the above.
Answer: D
Q3) In Faraway country,every citizen receives a birthday cake voucher as a gift for their birthday.What function of microeconomic analysis does this public policy address?
A) What goods/services to produce
B) How to produce the goods and services
C) Who gets the goods and services
D) A and B
Answer: C
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Page 3
Chapter 2: Supply and Demand
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Sample Questions
Q1) According to the Law of Demand,the demand curve for a good will
A) shift leftward when the price of the good increases.
B) shift rightward when the price of the good increases.
C) slope downward.
D) slope upward.
Answer: C
Q2) Suppose the market for a good is expressed as follows:
Inverse demand: P = 200 - 2Q
Inverse supply: P = 2Q
What is the equilibrium if the government imposes a supply quota of 75 units? What is the equilibrium if the government imposes a supply quota of 25 units?
Answer: The market equilibrium with no quota is P = $100 and Q = 50 units.A supply quota of 75 units is not binding so the equilibrium is unchanged.A supply quota of 25 units will change the supply curve.The new supply curve will be the same as the no quota supply curve until 25 units and then it will be vertical.The new equilibrium is P = $150 and Q = 25 units.
Q3) Explain why the equilibrium price is called the market clearing price.
Answer: At the equilibrium price,sellers want to sell the exact amount consumers want to buy.There is no excess demand or excess supply.The market is exactly cleared of all goods.
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Chapter 3: Applying the Supply-And-Demand Model
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Sample Questions
Q1) If the government decides to levy an ad valorem tax on product with a perfectly inelastic supply.The consumers tax incidence will be
A) 0
B) 1
C) .5
D) Cannot be determined.
Answer: A
Q2) The above figure shows the demand curve for crude oil.Suppose the price is currently $15.A supply shock suddenly raises the price to $17.What happens with the crude oil sales revenue?
A) Crude oil sales revenue stays the same.
B) Crude oil sales revenue increases by less than $250.
C) Crude oil sales revenue declines by more than $300.
D) Crude oil sales revenue declines by less than $300.
Answer: C
Q3) Explain why the price elasticity of demand changes along a linear demand curve.
Answer: The price elasticity of demand depends on BOTH the slope of the demand curve and on the term P/Q which changes as you move along the demand curve.
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Chapter 4: Consumer Choice
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Sample Questions
Q1) Lisa has an income of $100.She spends all of her income on pizza and burritos.A pizza costs $10 and a burrito costs $5.However,the store where Lisa buys her burritos has a special deal.After you've bought 6 burritos,then you can buy each burrito for $2.50.Draw Lisa's opportunity set.
Q2) Assuming that good "x" is measured on the x-axis and good "y" is measured on the y-axis,if the utility for the two goods "x" and "y" can be measured as U = x,then it can be concluded that
A) "x" and "y" are perfect complements.
B) "y" is a "bad".
C) the indifference curves on the x,y graph are upward sloping.
D) the indifference curves on the x,y graph are vertical.
Q3) Economists use a preference map to illustrate that A) more is better than less.
B) preferences are transitive.
C) preferences are complete.
D) All of the above.
Q4) Explain why most indifference curves are convex.
Q5) Indifference curves cannot ever be concave for two goods.
A)True
B)False
Page 6
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Chapter 5: Applying Consumer Theory
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Sample Questions
Q1) As the price of a good rises,the consumer will experience
A) a desire to consume a different bundle.
B) a decrease in utility.
C) a southern or western movement on the indifference map.
D) All of the above.
Q2) Draw budget constraints,indifference curves,and the income consumption curve for a good that has an income elasticity that is perfectly inelastic.
Q3) An increase in the price of a good causes
A) a change in the slope of the budget line.
B) an increase in the consumption of that good.
C) a rightward shift of the demand curve for that good.
D) a parallel rightward shift of the budget line.
Q4) The above figure shows Larry's indifference map and budget lines for ham and pork.Which of the following statements is TRUE?
A) Larry's Engel curve for pork will be upward sloping.
B) Larry's Engel curve for pork will be downward sloping.
C) Larry's Engel curve for pork will be backward bending.
D) Larry's Engel curve for pork cannot be derived from the information provided.
Q5) Why can't all goods be inferior?
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Chapter 6: Firms and Production
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Sample Questions
Q1) Joey's lawncutting service recently traded in its push mowers for gasoline-powered mowers.Joey still requires one worker per lawnmower; however,more grass is now cut in the same amount of time as before.This is an example of
A) labor-saving technical change.
B) non-neutral technical change.
C) neutral technical change.
D) organizational change.
Q2) How much capital does a firm require to produce q = 3200 when labor is 4 and they have a production function equal to q = 200L<sup>0.5</sup>K<sup>0.5</sup>?
A) K = 64
B) K = 8
C) K = 16
D) K = 25
Q3) Were it not for the law of diminishing marginal returns,we could grow the world's food supply from a flowerpot.
A)True
B)False
Q4) Explain why labor might not always be a variable input.
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Page 8
Chapter 7: Costs
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Q1) Suppose MP<sub>L</sub> = 0.5 (q/L)and MP<sub>K</sub> = 0.5 (q/K).In the long run,the firm will hire equal amounts of capital and labor
A) all of the time.
B) only when w = r.
C) only when w = 0.5 r.
D) at no point in time.
Q2) A firm's marginal cost can always be thought of as the change in total cost if A) the firm produces one more unit of output.
B) the firm buys one more unit of capital.
C) the firm's average cost increases by $1.
D) the firm moves to the next highest isoquant.
Q3) Economies of scale and Increasing Returns to Scale are the same thing looked at from either the production or cost perspective.
A)True
B)False
Q4) If increasing returns to scale are present,the long-run average cost increases as more output is produced.
A)True
B)False
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Chapter 8: Competitive Firms and Markets
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Q1) Explain why individual firms in competitive markets face more elastic demand curves than the market as a whole.
Q2) A competitive firm's supply curve is identical to its marginal cost curve.
A)True
B)False
Q3) Suppose a competitive firm's total revenue is $1,000,000 where MR = MC,its explicit variable costs are $900,000,its fixed costs are $90,000 of which $60,000 are sunk in the short run.If its implicit opportunity costs are $50,000,the firm should
A) produce because its economic profit is positive.
B) produce because its economic profit is zero.
C) produce even though its economic profit is negative.
D) shut down.
Q4) If a competitive firm maximizes short-run profits by producing some quantity of output,which of the following must be TRUE at that level of output?
A) p > MC
B) MR > MC
C) p AVC
D) All of the above.
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Page 10
Chapter 9: Applying the Competitive Model
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Q1) Policies that restrict supply could generate an increase in social welfare because the increase in producer surplus could exceed the decrease in consumer surplus.
A)True
B)False
Q2) Producer surplus is the sum of the profits earned by all firms in a market.
A)True
B)False
Q3) A minimum wage is an example of a
A) price floor.
B) price ceiling.
C) quantity quota.
D) free market equilibrium.
Q4) The above figure shows the market for rice in Japan.S represents the domestic supply curve,and the horizontal line at P =1 represents the world supply curve.If imported rice is banned,the loss in social welfare is
A) a + b + c + d + e.
B) a.
C) c + e.
D) i.
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Chapter 10: General Equilibrium and Economic Welfare
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Q1) If two grade-school children willingly trade their lunches with one another,we can conclude that at least one of them preferred the other's lunch to his own.
A)True
B)False
Q2) A government policy of providing free public K-12 education is most consistent with A) Pareto-efficiency.
B) the First Theorem of Welfare Economics.
C) the Second Theorem of Welfare Economics.
D) the contract curve.
Q3) If everyone's utility is given equal weight and a change in resource allocation results in one person's gain exceeding another person's loss,we can say that the new allocation
A) is Pareto superior to the original one.
B) increases social welfare.
C) decreases social welfare.
D) is efficient.
Q4) How does competition ensure that the efficient product mix is attained?
Q5) Explain why a government may select an inefficient allocation.
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Chapter 11: Monopoly
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Sample Questions
Q1) The government prefers an ad valorem tax to a specific tax that reduces the monopoly output by the same amount because
A) consumers are not harmed by the ad valorem tax.
B) the monopoly prefers the ad valorem tax.
C) consumers prefer the ad valorem tax.
D) the ad valorem tax transfers more revenue from the monopoly to the government.
Q2) A monopoly does not have a supply curve.
A)True
B)False
Q3) Market power guarantees profit.
A) True, which is why firm's locate as far away from each other as possible.
B) False, market power guarantees price greater than marginal cost.
C) True, market power guarantees price greater than average cost.
D) False, market power guarantees price equal to average cost.
Q4) The monopolist's marginal revenue curve
A) doesn't exist.
B) lies below the demand curve.
C) is identical to the demand curve.
D) lies above the demand curve.
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Chapter 12: Pricing and Advertising
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Sample Questions
Q1) Which of the following helps a monopoly perfectly price discriminate?
A) unit demand by each consumer
B) the product is perishable
C) the product is personalizable
D) All of the above.
Q2) Suppose a monopoly sells to two identifiably different types of customers,A and B,who are unable to practice arbitrage.The inverse demand curve for group A is P<sub>A</sub> = 10 - Q<sub>A</sub>,and the inverse demand curve for group B is P<sub>B</sub> = 18 - Q<sub>B</sub>.The monopolist is able to produce the good for either type of customer at a constant marginal cost of 2,and the monopolist has no fixed costs.If the monopolist practices group price discrimination,the profit-maximizing prices charged to each type of customer are
A) P<sub>A</sub> = 6, and P<sub>B</sub> = 10.
B) P<sub>A</sub> = 4 and P<sub>B</sub> = 8.
C) P<sub>A</sub> = 10, and P<sub>B</sub> = 6.
D) P<sub>A</sub> = 8, and P<sub>B</sub> = 4.
Q3) Since a monopoly faces no competitors,it need not advertise.
A)True
B)False
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Page 14
Chapter 13: Oligopoly and Monopolistic Competition
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Q1) Perfect competition and monopolistic competition are similar in that firms in both types of market structure will
A) act as price takers.
B) produce a level of output where price equals marginal cost.
C) earn zero profit in the long run.
D) act as price setters.
Q2) Suppose Cournot duopolist firms operate with each having a cost of 30q<sub>i</sub> (i = 1,2)so that each firm's marginal cost is 30.The inverse market demand curve is P = 120 - Q where Q = q<sub>1</sub> + q<sub>2</sub>.At the
Nash-Cournot equilibrium,the market price,P,is
A) 30.
B) 45.
C) 60.
D) 90.
Q3) Monopolistically competitive firms
A) have market power because they can set price above marginal cost.
B) have no market power because they earn zero economic profit.
C) have no market power because of free entry.
D) have no market power because price equals marginal cost.
Q4) What happens in a duopoly if both firms try to act as the Stackelberg leader?
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Chapter 14: Game Theory
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Q1) A mixed strategy may
A) be part of a Nash equilibrium.
B) be a set of probabilities of selecting each possible action.
C) lead identical firms to choose different actions.
D) All of the above.
Q2) The above figure shows a payoff matrix for two firms,A and B,that must choose between selling basic computers or advanced computers.How many Nash equilibria are there?
A) 0
B) 1
C) 2
D) 4
Q3) The game rock-paper-scissors has
A) a mixed strategy equilibrium.
B) a dominant strategy equilibrium.
C) no equilibrium.
D) a pure strategy equilibrium.
Q4) Why is collusion more likely in a repeated game?
Q5) Suppose market demand is p = 10 - Q.Firms incur no cost of production.If firm A is the incumbent,can it deter the entry of its rival,firm B?
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Chapter 15: Factor Markets
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Sample Questions
Q1) A union's success in raising the wage depends on
A) the elasticity of demand it faces.
B) members' ability to act collectively.
C) the share of the labor market that is unionized.
D) All of the above.
Q2) A firm faces competitive markets for its inputs and its output.At the profit-maximizing level of output,its marginal cost is $10 and the wage paid is $2.If the MPL = L<sup>-0.5</sup>,what is the marginal product of the firm?
A) 0.10
B) 0.2
C) 0.35
D) 5
Q3) Why does a monopsonist's marginal expenditure curve lie above the labor supply curve?
Q4) If the labor market is competitive,a monopoly output market will result in
A) a lower wage than that of a competitive output market.
B) a higher wage than that of a competitive output market.
C) less labor hired than in a competitive output market.
D) more labor hired than in a competitive output market.
Q5) Why is the short-run demand curve for labor downward sloping?
Page 17
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Chapter 16: Interest Rates, Investments, and Capital Markets
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Q1) The question "What are you going to do with that major?" implicitly questions
A) how much you learn in that major.
B) whether the major should be offered on campus.
C) how much the market values the human capital developed in the major.
D) western bias.
Q2) The spread between price and marginal cost of an exhaustible resource must grow by the rate of interest so that
A) resource owners earn a profit.
B) resource owners are willing to sell some of the resource in the future.
C) the price of the resource remains constant in real terms.
D) the marginal cost of extracting the resource declines.
Q3) Government debt increases the interest rate and private investment.
A)True
B)False
Q4) If inflation turns out to be higher than was anticipated,debtors are helped because
A) the real present value of their payments increases.
B) the real present value of their payments decreases.
C) the nominal present value of their payments increases.
D) the nominal present value of their payments decreases.
Page 18
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Chapter 17: Uncertainty
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Sample Questions
Q1) John's utility from an additional dollar increases more when he has $1,000 than when he has $10,000.From this,we can conclude that John
A) is risk averse.
B) is risk loving.
C) is risk neutral.
D) has a negative marginal utility of wealth.
Q2) For a risk-neutral person,the expected utility associated with various levels of wealth
A) is above the person's utility function.
B) is below the person's utility function.
C) is equal to the person's utility function.
D) does not exist.
Q3) All else held constant,as the variance of a payoff increases,the A) expected value of the payoff increases.
B) risk of the payoff increases. C) expected value of the payoff decreases.
D) risk of the payoff decreases.
Q4) Explain why the variance of an investment is a useful measure of the risk associated with it.
Q5) Explain why insurance companies usually do not offer earthquake insurance.
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Chapter 18: Externalities, Open-Access, and Public Goods
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Q1) Negative externalities are created when
A) an increase in the price of butterfat drives up the price of ice cream.
B) a driver leaves his car in a parking space after the meter expires and receives a ticket.
C) a driver drives recklessly on a busy highway.
D) a driver pulls over to help a stranded motorist fix a flat tire.
Q2) The U.S.Federal government limits the ability for private firms to harvest timber on much government land.This,it is argued,increases the amount of fuel for wildfires which often burn out of control and cost money and manpower to control.
A) This suggests that the policy addressing one positive externality might have created another positive externality.
B) This suggests that those who harvest timber are prone to starting wildfires.
C) This suggests that the policy addressing timber harvesting created a negative externality.
D) This suggests that government policy is destined to fail.
Q3) Suppose that the market for steel is shown in the above figure.What specific tax would result in a competitive market producing the socially optimal quantity of steel?
Q4) Explain why the optimal amount of pollution is often not zero.
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20
Chapter 19: Asymmetric Information
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Q1) The market for used cars is shown in the above figure.Buyers cannot tell whether any given car is a lemon.Ten percent (10%)of all cars are lemons.Which of the following statements is TRUE?
A) Only lemons are sold for $1,900.
B) Only lemons are sold for $1,000.
C) Buyers of lemons will pay too much for their cars.
D) Buyers of good cars will pay too much for their cars.
Q2) The market for used cars is shown in the above figure.Buyers cannot tell whether any given car is a lemon.For all cars offered for sale to be sold,the percent of all cars that are lemons is .What happens to if car buyers incur a $100 transaction cost when buying a used car?
Q3) Workers do not know the safety records at individual firms; they only know industry averages.As a result,
A) each firm tries to outdo each other in making safety improvements.
B) each firm has the incentive to be the safest in its industry.
C) the equilibrium level of safety is less than optimal.
D) the optimal level of safety is achieved.
Q4) Describe how a firm that sells only one brand of bleach may be able to increase its profit if it re-labels some of its bleach.
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Chapter 20: Contracts and Moral Hazards
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Q1) Suppose the principal offers to share a percentage of the profit with the agent.Such a contract
A) will yield the same income for the agent as a hire contract would.
B) is incentive compatible.
C) creates a production inefficiency.
D) would not be acceptable to any agent.
Q2) Production inefficiency is most likely to occur when the principal has more information about work performance than the agent does.
A)True
B)False
Q3) In the presence of asymmetric information,
A) all contracts are efficient.
B) efficiency in risk bearing cannot be achieved.
C) a trade-off exists between risk-bearing efficiency and production efficiency.
D) no contracting will take place.
Q4) In the presence of asymmetric information,a hire contract
A) achieves production efficiency.
B) can lead to opportunistic behavior on the part of the agent.
C) is impossible to write.
D) will result in the principal earning all of the profit.
Page 22
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