Managerial Economics
Exam Answer Key
Course Introduction
Managerial Economics explores the application of economic theory and quantitative analysis to business decision-making. The course emphasizes how managers use concepts such as demand and supply, market structures, production and cost analysis, pricing strategies, and risk assessment to solve real-world organizational problems. Students learn to apply microeconomic principles in the context of strategic planning, resource allocation, and profit maximization, equipping them with analytical tools necessary for effective decision-making in a competitive business environment.
Recommended Textbook Microeconomics 5th Edition by David Besanko
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1033 Verified Questions
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Chapter 1: Analyzing Economic Problems
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Sample Questions
Q1) Which of the following statements has neither positive nor normative aspects to it?
A) On hot days, people drink more water.
B) Hot weather leads to greater numbers of heat exhaustion cases.
C) Providing free space heaters to poor people can reduce certain types of respiratory illness.
D) Hot weather is desirable.
Answer: D
Q2) Another term for equilibrium would be
A) a point of infinite supply.
B) a point of insatiable wants.
C) a point of stability.
D) a point of scarcity.
Answer: C
Q3) Which of the following represents an example of positive analysis?
A) How will the equilibrium price of corn be affected by a government subsidy?
B) What is the best way to assist low-income families with affordable housing?
C) Would taxes on emissions be the best way to reduce pollution?
D) How can the government best design a tax cut?
Answer: A
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Page 3
Chapter 2: Demand and Supply Analysis
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Sample Questions
Q1) Suppose that the market for soybeans is initially in equilibrium. Further suppose that there is a decrease in the price of fertilizer. Which of the following accurately describes the new equilibrium?
A) The equilibrium price will rise; the equilibrium quantity will fall.
B) The equilibrium price will rise; the equilibrium quantity will rise.
C) The equilibrium price will fall; the equilibrium quantity will fall.
D) The equilibrium price will fall; the equilibrium quantity will rise.
Answer: D
Q2) A curve that shows us the total quantity of goods that their suppliers are willing to sell at different prices is
A) Market supply curve
B) Law of supply
C) Demand curve
D) Market demand curve
Answer: A
Q3) What is the elasticity of the following demand curve? QP<sup>2</sup> = 100
Answer: \(\varepsilon\)<sub>Q,P</sub> = -2.
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4
Chapter 3: Consumer Preferences and the Concept of Utility
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Sample Questions
Q1) Economists sometimes represent two goods as having right-angled indifference curves (perfect complements). In reality, this violates:
A) the assumption of transitivity.
B) the assumption of completeness.
C) the law of diminishing returns.
D) the "more is better" assumption.
Answer: D
Q2) Suppose that MRS<sub>x, y </sub>= 10.
A) The consumer is willing to substitute 10 units of x for 1 unit of y to leave utility unchanged.
B) The consumer is willing to substitute 10 units of y for 1 unit of x to leave utility unchanged.
C) Regardless of prices, the consumer will consume only y .
D) Regardless of prices, the consumer will consume only x .
Answer: B
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Chapter 4: Consumer Choice
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Sample Questions
Q1) Suppose the price of A is $20, the price of B is $10, and that the consumer is currently spending all available income. At the consumer's current consumption basket the marginal utility of A is 8 and the marginal utility of B is 4.
A) The consumer is currently maximizing utility.
B) The consumer could increase utility by consuming more of good A and less of good B .
C) The consumer could increase utility by consuming more of good B and less of good A
D) Nothing can be said about the consumer's utility because we do not know the consumer's income or utility function.
Q2) A corner point solution is always the optimum for a consumer when A) a unique point of tangency exists between the consumer's indifference curve and the budget line
B) the consumer has straight line (constant slope) indifference curves
C) there is no point of tangency between the consumer's indifference curves and the budget line and the consumer does not have straight line indifference curves.
D) the consumer is indifferent to both goods equally.
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Chapter 5: The Theory of Demand
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Sample Questions
Q1) A graph that plots the consumer's level of consumption of a good against the consumer's income is called a(n)
A) price-consumption curve.
B) Engel curve.
C) demand curve.
D) good-consumption curve.
Q2) The consumer's demand curve can be obtained analytically by solving which two equations?
A) \(M U _ { x } / M U _ { y } = P _ { x } / P _ { y }\) ;\(U = \bar { U }\) where\(\bar { U }\) is the initial level of utility.
B) \(M U _ { x } / M U _ { y } = P _ { x } / P _ { y }\) ;\(P _ { x } X + P _ { y } Y = I\)
C) \(P _ { x } X + P _ { y } Y = I\) ;\(U = \bar { U }\) where\(\bar { U }\) is the initial level of utility.
D) \(M U _ { x } / M U _ { y } = P _ { x } / P _ { y }\) ;\(U = \bar { U }\) where\(\bar { U }\) is the final level of utility.
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Chapter 6: Inputs and Production Functions
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Sample Questions
Q1) Factors of production are
A) inputs and outputs.
B) outputs only
C) inputs only
D) the minimum set of inputs that can produce a certain fixed quantity of output.
Q2) If marginal product is greater than average product
A) total product must be increasing.
B) marginal product must be decreasing.
C) marginal product must be increasing.
D) average product may be increasing or decreasing.
Q3) Marginal productivity is maximized with the ___________ worker.
A) second
B) third
C) fourth
D) sixth
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8
Chapter 7: Costs and Cost Minimization
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Sample Questions
Q1) The expansion path graphs
A) the combinations of capital and labor that minimize total cost for various levels of output.
B) the combinations of capital and labor that have the same total cost for various levels of output.
C) the combinations of capital and labor that have the same level of output.
D) how the firm can expand output while holding total cost constant.
Q2) The cost-minimization problem of the firm is to
A) minimize total costs.
B) minimize average costs.
C) minimize total cost of producing a particular amount of output.
D) maximize output subject to a cost constraint.
Q3) Suppose in a particular production process that capital and labor are perfect substitutes so that three units of labor are equivalent to one unit of capital. If the price of capital is $4 per unit and the price of labor is $1 per unit, the firm should
A) employ capital only.
B) employ labor only.
C) use three times as much capital as labor.
D) use three times as much labor as capital.
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Page 9
Chapter 8: Cost Curves
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Sample Questions
Q1) A long-run total cost curve
A) must be equal to zero when the level of output is zero.
B) may be greater than or equal to zero when the level of output is zero.
C) must be decreasing when the level of output is zero.
D) will be equal to fixed cost, which is greater than zero, when the level of output is zero.
Q2) The short-run total cost curve is the sum of two components
A) Short-run and long-run
B) Total variable cost curve and total fixed cost curve
C) Average cost curve and marginal cost curve
D) Economies of scale and economies of scope
Q3) Economies of scope
A) are related to the average cost of producing a good when you double the scale of output.
B) are higher the more specialized a firm is in production.
C) means the rotation of the long-run total cost curve in a downward direction.
D) are a production characteristic in which the total cost of producing given quantities of two goods in the same firm is less than the total cost of producing those quantities in two single-product firms.
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Page 10
Chapter 9: Perfectly Competitive Markets
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Sample Questions
Q1) In an increasing cost industry, the long-run market supply curve is
A) downward sloping
B) horizontal
C) upward sloping
D) vertical
Q2) The short-run market supply curve is derived by ________ supplied of the individual firm supply curves.
A) vertically summing the prices and quantities
B) horizontally summing the prices and quantities
C) vertically summing the quantities
D) horizontally summing the quantities
Q3) Which of the following does not represent a profit-maximizing condition for a firm operating in a perfectly competitive industry?
A) \(P = M C\) .
B) \(M C = M R\) .
C) \(M C\) must be increasing.
D) MC must be falling.
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11
Chapter 10: Competitive Markets: Applications
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Sample Questions
Q1) Which of the following statements is not generally true of a production quota?
A) The market will not clear due to the excess supply of that good.
B) Consumer surplus increases when compared to the market before the quota.
C) Producer surplus may increase or decrease.
D) Some of the consumer surplus will be transferred to producers.
Q2) Suppose that the market for cigarettes is initially in equilibrium and is perfectly competitive. The demand curve can be expressed as \(P = 60 - Q ^ { d }\) ; the supply curve can be expressed as \(P = 0.5 Q ^ { s }\) . Quantity is expressed in millions of boxes per month. Now suppose that the federal government imposes a production quota on cigarettes of 30 million boxes per month. What is the level of excess supply in this market?
A) There is no excess supply. There is an excess demand of Q = 30.
B) There is no excess supply or demand.
C) There is an excess supply of Q = 30.
D) There is an excess supply of Q = 20.
Q3) In a perfectly competitive market, a production quota
A) sets a limit on the level of imports of a good.
B) has the effect of keeping the market price below the equilibrium level.
C) will create excess supply in the market.
D) creates no deadweight loss.
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Chapter 11: Monopoly and Monopsony
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Sample Questions
Q1) The monopolists average revenue can be defined as
A) Total revenue per unit of average revenue
B) Total revenue per unit of output
C) Average revenue per unit of input
D) AR = AR / Q
Q2) To compute the optimal monopoly price with a linear demand curve, the monopolist
A) should set MC = MR, which would determine the optimal quantity and price would equal MC and MR as well.
B) should set MC = MR, which would determine the optimal quantity and price would be found by inserting the optimal quantity into the monopolist's demand curve.
C) should set MC = MR, which would determine the optimal quantity and price would be found by doubling the marginal cost.
D) should set output where total revenue would be the greatest.
Q3) One argument for allowing monopolies to exist is
A) it would be inefficient to break up natural monopolies into smaller units.
B) monopolies lead to net economic benefits as a rule.
C) the free market acts as a more effective regulator than the government.
D) they allow for greater standardization of products and improved quality control.
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Page 13
Chapter 12: Capturing Surplus
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Sample Questions
Q1) If the firm does not bundle the products, what single price should the firm charge for product B to maximize profit?
A) 100
B) 200
C) 300
D) 400
Q2) Let the inverse demand curve for a monopolist's product be P = 100 - 2Q and the marginal cost of production be constant at MC = 10. Which of the following is the optimal two-block tariff for the firm?
A) P<sub>1</sub> = $70; Q<sub>1</sub> = 15; P<sub>2</sub> = $40; Q<sub>2</sub> = 30
B) P<sub>1</sub> = $60; Q<sub>1</sub> = 20; P<sub>2</sub> = $30; Q<sub>2</sub> = 15
C) P<sub>1</sub> = $80; Q<sub>1</sub> = 10; P<sub>2</sub> = $40; Q<sub>2</sub> = 15
D) P<sub>1</sub> = $55; Q<sub>1</sub> = 22.5; P<sub>2</sub> = $55; Q<sub>2</sub> = 22.5
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Page 14
Chapter 13: Market Structure and Competition
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Sample Questions
Q1) In the Cournot model, the curve that traces out the relationship between the market price and a firm's quantity when rival firms hold their outputs fixed is called
A) Reaction function
B) Best response
C) Residual demand curve
D) Cournot equilibrium
Q2) In the long run under monopolistic competition, profits will always be A) zero.
B) the industry average rate of return.
C) positive.
D) positive or zero, but never negative.
Q3) Which of the following is an example of horizontally differentiated products?
A) Product A, which everyone agrees is superior to Product B.
B) Product C, which everyone agrees is worse than Product D.
C) Product E, which some believe is better than Product F (while others believe Product F is better than Product E).
D) Product G, which everyone agrees is the same quality as product H.
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15
Chapter 14: Game Theory and Strategic Behavior
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Sample Questions
Q1) In Game 2 above,
A) Player A choosing A1 and Player B choosing B1 is a Nash equilibrium.
B) Player A choosing A1 and Player B choosing B2 is a Nash equilibrium.
C) Player A choosing A2 and Player B choosing B1 is a Nash equilibrium.
D) Player A choosing A2 and Player B choosing B2 is a Nash equilibrium.
Q2) Under a mixed strategy,
A) players move sequentially.
B) a player chooses among two or more pure strategies according to pre-specified probabilities.
C) the players may never reach a Nash equilibrium.
D) players obtain lower payoffs than in a pure strategy equilibrium.
Q3) Game 7 is an example of prisoners' dilemma. Thus, the payoff matrix contains jail sentences in terms of months. For this game,
A) the Nash equilibrium minimizes the total number of months spent in jail for both prisoners.
B) the Nash equilibrium does not minimize the total number of months spent in jail for both prisoners.
C) there is no Nash equilibrium.
D) neither player has a dominant strategy.
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Page 16
Chapter 15: Risk and Information
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Sample Questions
Q1) Consider a lottery with four equally likely outcomes, A, B, C, and D. The associated payoffs are: $10, $30, $70, and $150, respectively. The expected value of this lottery is
A) $30
B) $65
C) $130
D) $260
Q2) Your current disposable income is $10,000. There is a 10% chance you will get in a serious car accident, incurring damage of $1,900. (There is a 90% chance that nothing will happen.) Your utility function is \(U = \sqrt { I }\) , where I is income. What is the fair price of this policy?
A) $100
B) $190
C) $199
D) $270
Q3) A good way to deal with moral hazard faced by an insurance company would be to
A) fully indemnify its policy holders.
B) require applicants to take a physical examination.
C) require policy holders to pay a deductible.
D) conduct detailed investigations of every accident.
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Page 17
Chapter 16: General Equilibrium Theory
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Sample Questions
Q1) The significance of the First Fundamental Theorem of Welfare Economics is that:
A) even if the economy is in competitive general equilibrium, significant intervention will be required to bring about economic efficiency.
B) there is a possibility that an economy could simultaneously attain an efficient allocation and one in which the resulting distribution of utility is in some sense equitable.
C) Even though households and firms behave independently and each pursues its own self-interest, the resulting equilibrium is efficient in the sense that it exploits all possible mutually beneficial gains from trade or from reallocation of inputs.
D) resources are scarce in the economy and so must be managed for the long term.
Q2) The prices of complementary goods tend to be _______________.
A) positively correlated.
B) inversely related.
C) unrelated.
D) related to the prices of substitute goods.
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18
Chapter 17: Externalities and Public Goods
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Sample Questions
Q1) A non-rival good
A) is also nonexclusive.
B) is also exclusive.
C) must be free.
D) is one where the consumption of the good by one person does not reduce the quantity available for consumption by another person.
Q2) Which of the following is a key feature of a public good?
A) The good is rival in its consumption, but a consumer cannot be excluded from the good.
B) The good is non-rival in its consumption and a consumer cannot be excluded from the good.
C) The good is non-rival in its consumption, but a consumer can be excluded from the good.
D) The good is rival in its consumption and a consumer can be excluded from the good.
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