Managerial Economics
Chapter Exam Questions
Course Introduction
Managerial Economics is a specialized branch of economics that applies microeconomic and macroeconomic principles to decision-making processes within organizations. This course emphasizes the analysis of consumer behavior, production and cost functions, market structures, pricing strategies, and the impact of government regulation on business environments. Through case studies and practical examples, students learn how to utilize quantitative tools and economic theory to solve real-world managerial problems, optimize resource allocation, and develop effective business strategies. The course aims to equip future managers with the analytic skills necessary to make informed and rational decisions in dynamic and competitive markets.
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Managerial Economics 12th Edition by Mark Hirschey
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Chapter 1: Nature and Scope of Managerial Economics
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Q1) Economic profit equals:
A) normal profits plus opportunity costs.
B) business profits minus implicit costs.
C) business profits plus implicit costs.
D) normal profits minus opportunity costs.
Answer: B
Q2) Managers display less than optimal behavior if they seek:
A) to maximize leisure.
B) to maximize community well-being.
C) to maximize employee welfare.
D) an industry-average profit rate.
Answer: D
Q3) Nonvalue-maximizing behavior is most common:
A) in vigorously competitive markets.
B) when shareholders are poorly informed.
C) when managers own a significant ownership interest.
D) in the production of goods rather than services.
Answer: B
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Chapter 2: Economic Optimization
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Q1) Average cost minimization occurs at the point where:
A) MC = 0
B) MC = AC
C) AC = 0
D) Q = 0
Answer: B
Q2) If average profit increases with output marginal profit must be:
A) decreasing.
B) greater than average profit.
C) less than average profit.
D) increasing.
Answer: B
Q3) Marginal profit equals:
A) the change in total profit following a one-unit change in output.
B) the change in total profit following a managerial decision.
C) average revenue minus average cost.
D) total revenue minus total cost.
Answer: A
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Chapter 3: Demand and Supply
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Q1) Holding all else equal, if supply increases, the:
A) equilibrium price will decrease while the quantity produced and sold could increase, decrease or remain constant.
B) quantity produced and sold will increase while the equilibrium price could increase, decrease, or remain constant.
C) equilibrium price will increase while the quantity produced and sold could increase, decrease or remain constant.
D) none of these.
Answer: D
Q2) The equilibrium market price and quantity of beef would increase if:
A) consumers increasingly view beef as unhealthy.
B) the price of cattle feed decreased.
C) consumer income increased.
D) herd sizes fell following a severe drought.
Answer: C
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Chapter 4: Demand Analysis
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Q1) The utility derived from consumption is:
A) tangible.
B) revealed through purchase decisions for goods and services.
C) measured directly.
D) inversely related to the number of market baskets considered.
Q2) Point elasticity measures elasticity:
A) is measured over a given range of a function.
B) at a spot on a function.
C) over a given range along a function.
D) before non-price effects.
Q3) The increase in overall consumption made possible by a price cut is the:
A) income effect.
B) substitution effect.
C) income and substitution effect.
D) consumption effect.
Q4) An indifference curve is a set of market baskets that:
A) provide the same utility.
B) contain the same goods.
C) have identical marginal rates of substitution.
D) can be obtained for the same cost.
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Chapter 5: Demand Estimation
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Q1) Movement along a demand curve is indicated by the quantity effect of a change in:
A) advertising.
B) price of other goods.
C) income.
D) price.
Q2) Endogenous determinants of demand include:
A) competitor prices.
B) the weather.
C) interest rates.
D) firm advertising.
Q3) In a simple regression model, the correlation coefficient is:
A) equal to one.
B) greater than one.
C) less than one.
D) the square root of the coefficient of determination.
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Chapter 6: Forecasting
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Q1) Continuous Compounding. Elizabeth Corday, a quality control supervisor for Surgery Products, Inc., is concerned about an increase in distribution costs for disposable syringes from $40 to $50 per case over the last five years. Corday feels that setting up a new direct-sales distribution network at a cost of $58.50 per unit may soon be desirable.
A. Calculate the unit cost growth rate using the constant rate of change model with continuous compounding.
B. Forecast when unit distribution costs will exceed the current cost of direct-sales distribution.
Q2) A forecast method based on the informed opinion of several individuals is called:
A) personal insight.
B) panel consensus.
C) the Delphi method.
D) qualitative analysis.
Q3) Social habits that produce an annual pattern in a time series result in:
A) cyclical fluctuation.
B) seasonal variation.
C) irregular or random influences.
D) secular trend.
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Chapter 7: Production Analysis and Compensation Policy
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Q1) Right-angle shaped isoquants reflect inputs that are:
A) perfect complements.
B) perfect substitutes.
C) imperfect substitutes.
D) inefficient.
Q2) The production function Q = 0.25X<sup>0.5</sup>Y exhibits:
A) constant returns to scale.
B) increasing returns to scale.
C) increasing and then diminishing returns to scale.
D) diminishing returns to scale.
Q3) A new production function results following:
A) a new wage agreement following collective bargaining.
B) a surge in product demand.
C) a decrease in the availability of needed inputs.
D) the successful completion of a training program that enhances worker productivity.
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Chapter 8: Cost Analysis and Estimation
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Q1) A. If \( e_{c}>1 \), increasing returns to scale and decreasing average costs are inchcated.
B. Average cost exceeds marginal cost at the minimum efficient scale of plant.
C. When total fixed cost and price are held constant, a rechiction in average variable cost will typically cause a reduction in the breakeven activity level.
D. Anincrease in total fixed cost will alwaysincrease the degree of operatingleverage for firms maling a positive net profit.
E. When longrun average cost is decreasing it can pay to operate smaller plants at their peak efficiency rather than larger plants with some excess capacity.
Q2) The amount that must be paid for an item under prevailing market conditions is:
A) historical cost.
B) replacement cost.
C) incremental cost.
D) current cost.
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Chapter 9: Linear Programming
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Q1) When an LP objective function is to maximize profits:
A) resource constraints must be of the £ variety.
B) resource constraints must be of the ³ variety.
C) all input costs must be variable.
D) the total revenue function must not be linear.
Q2) When some capacity constraints are binding, although others are nonbinding:
A) the shadow price for new capacity is positive.
B) the shadow price for output is positive.
C) the marginal revenue product for new capacity is positive.
D) the marginal product of new capacity is positive.
Q3) If X > 0 in the primal solution:
A) the marginal value of inputs just equals the marginal value of output in X production.
B) the marginal value of inputs exceeds the marginal value of output in X production.
C) L<sub>X</sub> > 0 in the dual solution.
D) L<sub>X</sub> < 0 in the dual solution.
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Chapter 10: Competitive Markets
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Q1) Above-normal profits in a perfectly competitive market are caused by:
A) increases in demand that are successfully anticipated.
B) decreases in cost that are successfully anticipated.
C) increases in productivity that are successfully anticipated.
D) luck.
Q2) Effects of market structure are not typically measured in terms of:
A) the prices paid by consumers.
B) declining consumer popularity.
C) employment opportunities.
D) the pace of product innovation.
Q3) The following market cannot be described as perfectly competitive:
A) unskilled labor market.
B) milk market.
C) discount retailing.
D) agricultural grain markets.
Q4) Perfect competition always prevails in markets with:
A) few buyers and sellers.
B) many buyers and sellers.
C) an even balance of power between sellers and buyers.
D) a single buyer.
Page 12
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Chapter 11: Performance and Strategy in Competitive Markets
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Q1) Externalities are:
A) differences between social costs and social benefits.
B) differences between social benefits and private benefits.
C) social costs.
D) social benefits.
Q2) Who pays the economic cost of a tax is answered at the point of tax:
A) burden.
B) assessment.
C) collection.
D) incidence.
Q3) A price ceiling is a costly and seldom used mechanism for:
A) restraining excess supply.
B) restraining excess demand.
C) counteracting the effects of falling productivity.
D) counteracting the effects of rising productivity.
Q4) In competitive market equilibrium, social welfare is measured by the:
A) difference of net benefits derived by consumers and producers.
B) sum of net benefits derived by consumers and producers.
C) benefits derived by consumers.
D) benefits derived by producers.
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Chapter 12: Monopoly and Monopsony
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Q1) At the profit maximizing level of output for a monopolist:
A) P = AR and AR = AC
B) P = MC and MR > MC
C) P > MC and MR = MC
D) P = MR and AC = MC
Q2) To the extent that costs exceed benefits, a given mode of regulation is:
A) inequitable.
B) efficient.
C) inefficient.
D) fair.
Q3) A natural monopoly exists if:
A) marginal revenue is falling as output expands.
B) price equals average cost.
C) average cost falls as output expands.
D) marginal revenue equals marginal cost.
Q4) Utility price and profit regulation is based on the perception of:
A) externalities.
B) diseconomies of scale.
C) natural monopoly.
D) Consumers' surplus.
Page 14
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Chapter 13: Monopolistic Competition and Oligopoly
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Q1) In both monopolistic competition and oligopoly markets:
A) there is easy entry and exit.
B) consumers perceive differences among the products of various competitors.
C) economic profits may be earned in the long run.
D) there are many sellers.
Q2) An formal agreement to set prices and output is called:
A) collusion.
B) monopolistic competition.
C) kinked demand.
D) a cartel.
Q3) A perfectly functioning cartel results in:
A) oligopoly.
B) monopoly.
C) perfect competition.
D) monopolistic competition.
Q4) In monopolistically competitive markets, the firm demand curve is:
A) upward sloping.
B) downward sloping.
C) horizontal.
D) vertical.
Page 15
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Chapter 14: Game Theory and Competitive Strategy
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Q1) Game Theory Concepts.
Indicate whether each of the following statements is true or false, and explain your answer.
A. The theory of games is used to study irrational behavior by individuals and firms in interactive decision problems.
B. In a game, only a single player strives to maximize expected utility by choosing particular courses of action.
C. Game theory is applied during situations in which decision makers must take into account the reasoning of other decision makers.
D. All economic and business games share the common feature of decision payoff independence.
E. In competitive games, the outcome for each firm depends upon the strategies conducted by all competitors.
Q2) In a predatory pricing strategy:
A) P < AC
B) MR = MC
C) P > AVC
D) P < MC
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Chapter 15: Pricing Practices
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Q1) If the optimal markup on cost is 25%, the optimal markup on price is:
A) 20%
B) 25%
C) 50%
D) 100%
Q2) If a firm charges a price of $6 for a product with a cost of $4, the markup on cost equals:
A) 67%
B) 33%
C) 150%
D) 50%
Q3) Markup on Cost. Chim-Chimery, Inc., offers chimney sweepings in the Montpelier, Vermont area. The company recently initiated a policy of matching the lowest advertised competitor price. As a result, Chim-Chimery has been forced to reduce the average price for chimney cleaning by 4%, but has enjoyed an 8% increase in demand. Meanwhile, marginal costs have held steady at $25 per cleaning.
A. Calculate the point price elasticity of demand for chimney cleaning.
B. Calculate Chim-Chimery's optimal price and markup on cost.
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Chapter 16: Risk Analysis
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Q1) When the dispersion of possible returns is irrelevant, the decision maker is said to be:
A) risk averse.
B) risk neutral.
C) risk seeking.
D) none of these.
Q2) If profits are normally distributed with a mean of $12 and a standard deviation of $4, there is a 50/50 chance actual profits will exceed:
A) $12
B) $8
C) $16
D) $4
Q3) The difficulty of selling corporate assets at favorable prices under typical market conditions is:
A) derivative risk.
B) cultural risk.
C) liquidity risk.
D) currency risk.
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Chapter 17: Capital Budgeting
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Q1) Cost of Capital. Dartmouth Systems, Inc., is a leading supplier of sorters and collators to the copier and computer printer market. A security analyst's report issued by a national brokerage firm indicates that debt yielding 8%, comprises 50% of Dartmouth's overall capital structure. Furthermore, both earnings and dividends are not expected to grow during coming years.
Currently, common stock in the company is priced at $75, and it should pay $7.50 per share in dividends during the coming year. This yield compares favorably with the 7% return currently available on risk-free securities and the 13% average for all common stocks, given the company's estimated beta of 0.5.
A. Calculate Dartmouth's component cost of equity using both the capital asset pricing model and the dividend yields plus expected growth model.
B. Assuming a 40% marginal federal plus state income tax rate, calculate Dartmouth's weighted average cost of capital.
Q2) The pattern of returns for all potential investment projects is the:
A) investment opportunity schedule. B) marginal cost of capital. C) optimal capital budget. D) optimal capital structure.
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Chapter 18: Organization Structure and Corporate Governance
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Q1) The emerging business use of the Internet increases:
A) transaction costs.
B) search costs.
C) enforcement costs.
D) none of these.
Q2) High inside ownership at Microsoft reflects the company's:
A) low amenity potential.
B) low quality-control potential.
C) regulatory potential.
D) high quality-control potential.
Q3) The managerial myopia problem:
A) causes excessive risk-taking.
B) is caused by excessive risk-taking.
C) is reflected in a managerial preference for short-term performance
D) is the tendency by agents to be careless with the principal's resources.
Q4) A "flat" organization design reflects a:
A) "close-to-the-customer" management style.
B) U-form organization.
C) centralized decision authority.
D) "top-down" management style.
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Chapter 19: Government in the Market Economy
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Q1) Nonexclusion Concept. Many public goods display the attribute of being nonexclusionary in consumption.
A. Explain the nonexclusion concept, and how it differs from the nonrival consumption concept.
B. Does national defense display both the nonrival and nonexclusion attributes?
C. Is an optimal amount of national defense likely to be provided by the private sector?
Q2) Benefit-cost Analysis. The economic valuation of human life has consequences for a broad range of management decisions in both the private and public sectors. Because resources are limited for individual companies and for society as a whole, rational decision makers cannot argue that any individual company or society should spend "whatever it takes" to save a human life.
A. Explain how public sector managers might obtain reliable life value estimates based upon actual economic behavior.
B. Describe some of the limitations of such life value estimates based upon actual economic behavior.
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