Managerial Economics
Exam Answer Key
Course Introduction
Managerial Economics is a course that bridges the concepts of economic theory with practical business applications, equipping students with analytical tools to solve managerial problems and make effective decisions. The course covers fundamental topics such as demand analysis, production and cost functions, pricing strategies, market structures, and risk analysis. Emphasis is placed on using economic reasoning to address real-world business challenges, optimize resource allocation, and formulate policy within organizations. Through case studies and quantitative methods, students develop skills in interpreting economic data and applying it to strategy and operations in various managerial contexts.
Recommended Textbook
Managerial Economics and Strategy 2nd Edition by Jeffrey
M. Perloff
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17 Chapters
1609 Verified Questions
1609 Flashcards
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Chapter 1: Introduction
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Sample Questions
Q1) The purpose of making assumptions in economic model building 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) Economic models are most often tested
A)using computer simulations.
B)using data from the distant past.
C)using data from the real world.
D)using logic alone.
Answer: C
Q3) If actual experience supports two competing theories, then both theories are proven to be true.
A)True
B)False
Answer: False
Q4) Explain why economists might disagree on the content of a model.
Answer: Economists might have different theories or might make different simplifying assumptions.
Page 3
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Chapter 2: Supply and Demand
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Sample Questions
Q1) The CB radio was very popular in the 1970s and 1980s for communicating while driving. People bought them because other drivers had them too and they could therefore talk with many others on their trips. This illustrates
A)that the demand curve for CB radios was inelastic.
B)the network effect.
C)that CB radios and gasoline are complementary goods.
D)the effects of mobile phones on the demand curve for CB radios.
Answer: B
Q2) If the government places a $1.20 tax on each pizza sold
A)consumers will have to pay $1.20 more for each pizza they buy.
B)the supply curve will shift left by $1.20.
C)the demand curve will shift right by $1.20.
D)both the demand curve and the supply curve will shift by 60 cents each. Answer: B
Q3) Assume Joe is only willing to pay $5 for a Ferrari sports car.
A)Joe is not considered part of the demand for Ferraris.
B)Joe won't be sold a Ferrari.
C)Joe is not considered rational.
D)Joe's willingness to pay is not indicative of how much he values the Ferrari.
Answer: B
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Chapter 3: Empirical Methods for Demand Analysis
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Sample Questions
Q1) If the demand curve is given by Q = a + bp, then a is
A)negative.
B)the quantity demanded when price is zero.
C)the slope of the demand curve.
D)measured in money.
Answer: B
Q2) When using extrapolation to forecast
A)a time series of past observations is used.
B)there is a large error term in the results.
C)predictions can only be made about the future.
D)dummy variables can skew the results.
Answer: A
Q3) If R2 is less than 1
A)the regression analysis is incorrect.
B)the observation data is suspect.
C)some observations do not lie on the regression line.
D)the probability of having the correct fit is very low.
Answer: C
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Chapter 4: Consumer Choice
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Sample Questions
Q1) Indifference curves cannot intersect.
A)True
B)False
Q2) If the consumer's income increases while the prices of both goods remain unchanged, what will happen to the budget line?
A)The budget line rotates inward from the intercept on the horizontal axis.
B)The budget line rotates outward from the intercept on the vertical axis.
C)The budget line shifts inward without a change in slope.
D)The budget line shifts outward without a change in slope.
Q3) If Fred's marginal utility of pizza equals 10 and his marginal utility of salad equals 2, then
A)he would give up 5 pizzas to get the next salad.
B)he would give up 5 salads to get the next pizza.
C)he will eat five times as much pizza as salad.
D)he will eat five times as much salad as pizza.
Q4) The assumption of completeness means that
A)the consumer can rank all possible consumption bundles.
B)more of a good is always better.
C)the consumers can rank all affordable consumption bundles.
D)all preferences conditions are met.
Page 6
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Chapter 5: Production
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Sample Questions
Q1) All of the following are considered process innovation EXCEPT
A)neutral technical progress.
B)labor saving technical progress.
C)organizational innovation.
D)nonneutral technical progress.
Q2) Given the production function q = 4L + K, what is the marginal product of labor when capital is fixed at 50?
A)54
B)4
C)50
D)250
Q3) Given the production function q = 1.37LK, what is the marginal product of labor?
A)1.37
B)0
C)1.37K
D)Cannot be determined with the information given.
Q4) Show that increasing returns to scale can co-exist with diminishing marginal productivity.
Q5) Explain why labor might not always be a variable input.
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Chapter 6: Costs
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Sample Questions
Q1) Suppose the short-run production function is q = 10 L. If the wage rate is $10 per unit of labor, then AFC equals A)0.
B)1.
C)10/q.
D)It cannot be determined from the information provided.
Q2) Suppose that each worker must use only one shovel to dig a trench, and shovels are useless by themselves. In the long run, an increase in the price of shovels will result in A)fewer shovels being purchased to produce the same number of trenches.
B)more workers being hired to produce the same number of trenches.
C)the firm wishing to produce more trenches.
D)no change in the firm's input mix.
Q3) Four years after graduating from college you must decide if you want to go on as an accountant (your college major)or if you want to make a career change and become a singer. The cost of your education will matter for your decision.
A)True
B)False
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Chapter 7: Firm Organization and Market Structure
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Sample Questions
Q1) 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
Q2) Vertical integration
A)is always driven by profitability concerns.
B)results in lower transaction costs.
C)may be undertaken to avoid government regulations.
D)hampers timely delivery of inputs into the production process.
Q3) Economists typically assume that the owners of firms wish to
A)produce efficiently.
B)maximize sales revenues.
C)maximize profits.
D)All of the above.
Q4) If a firm doesn't make an economic profit it will shut down.
A)True
B)False
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Chapter 8: Competitive Firms and Markets
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Sample Questions
Q1) Economists define a market to be competitive when the firms
A)spend large amounts of money on advertising to lure customers away from the competition.
B)watch each other's behavior closely.
C)are price takers.
D)All of the above.
Q2) The above figure shows the cost curves for a typical firm in a market and three possible market supply curves. If there are 100 identical firms, the market supply curve is best represented by
A)curve A.
B)curve B.
C)curve C.
D)either curve A or B, but definitely not C.
Q3) As the quantity produced of a good increases, the social welfare generated by that good increases.
A)True
B)False
Q4) A competitive firm's supply curve is identical to its marginal cost curve.
A)True
B)False
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Chapter 9: Monopoly
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Sample Questions
Q1) A monopoly shuts down when
A)the short run price is below its average variable costs.
B)the long run price is below its average variable costs.
C)the average cost is less than price.
D)never, because it can raise its prices as high as necessary to keep operating and maximize profits.
Q2) A patent
A)always gives rise to a monopoly.
B)may not provide a barrier to entry.
C)allows the patent owner to capture all of the consumer surplus.
D)increases total welfare.
Q3) A flour mill holding exclusive contracts to 95% of the wheat in a large geographic area may operate as a flour producing monopoly locally because
A)the mill has a very inelastic supply curve.
B)the mill is a natural monopoly.
C)the mill controls a key input.
D)the government will declare it a monopoly.
Q4) When would a profit-maximizing monopolist that operates with no government intervention choose to produce the competitive level of output?
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Chapter 10: Pricing With Market Power
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Sample Questions
Q1) Firms use various methods for identifying customers such as ________ and
A)observable characteristics such as willingness to wait in long lines; their actions such as whether or not they live a long time
B)observable characteristics such as age; their actions such as willingness to wait in long lines
C)the color of their hair; whether or not they roll their eyes at high prices
D)None of the above.
Q2) What is one reason suppliers might offer a discount for quantity purchases?
A)reduced storage costs
B)lower marginal cost
C)lower marginal benefit
D)price gouging
Q3) Which of the following helps a monopoly perfectly price discriminate?
A)Product demand by each consumer
B)The product is perishable
C)The product is personalizable
D)All of the above.
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12
Chapter 11: Oligopoly and Monopolistic Competition
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Sample Questions
Q1) When deciding on output levels, members of a cartel
A)set their output where MR = MC.
B)produce the same level of output as if they were in a competitive market.
C)take into account the impact of changes on members' profits.
D)act as if they were monopolies.
Q2) Minimum efficient scale refers to the lowest level of output at which
A)the firm can earn a profit.
B)average cost is minimized.
C)the firm will operate.
D)the average cost curve is downward sloping.
Q3) Which of the following conditions can help prolong the life of a cartel?
A)There are only a few firms in the market and they all belong to the cartel.
B)There are many firms in the market that are not members of the cartel.
C)It is difficult to know what price any cartel member is actually charging.
D)The cartel has no ability to punish members who cheat on the cartel.
Q4) A cartel is a group of firms that attempts to
A)maximize joint revenue.
B)maximize joint profit.
C)behave independently.
D)increase consumer surplus.
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Chapter 12: Game Theory and Business Strategy
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Sample Questions
Q1) A coordination game
A)is a game with multiple Nash equilibria where players can credibly coordinate to select one of the equilibria.
B)is a game where players coordinate to maximize joint profits.
C)cannot be solved with cheap talk.
D)always has one Nash equilibrium and no dominated strategies.
Q2) When both firms have dominant strategies
A)the outcome is called a dominant strategy solution.
B)joint profits are maximized.
C)there are multiple Nash equilibria.
D)there is a prisoners' dilemma.
Q3) In game theory, a strategy
A)is useless, because firms are subject to bounded rationality.
B)is useful in static games, but not in dynamic games.
C)defines the specific actions a firm will make.
D)determines the payoff matrix of the game.
Q4) In Dutch or first-price sealed-bid auctions, participants will bid less than their highest valuation.
A)True
B)False
Page 14
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Chapter 13: Strategies Over Time
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Sample Questions
Q1) An incumbent monopolist producing more output than necessary might be able to keep potential rivals from entering
A)by flooding the market with products below its marginal cost in the short run.
B)if learning by doing reduces marginal cost.
C)if the long-run marginal cost can be lowered below the potential entrant's short-run marginal cost.
D)All of the above.
Q2) Deterring entry might require a firm to
A)price their product closer to the competitive price than to the monopoly price.
B)price their product closer to the monopoly price than to the competitive price.
C)drop output almost to zero to show the consumers "who's boss."
D)drop price almost to zero to get price below marginal cost.
Q3) With regard to preventing entry, if identical firms act simultaneously
A)they cannot credibly threaten each other.
B)they will all incur losses.
C)only one firm will enter the market.
D)none of them will enter the market.
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Chapter 14: Managerial Decision-Making Under Uncertainty
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Sample Questions
Q1) Explain why insurance companies usually do NOT offer earthquake insurance.
Q2) Many people do NOT fully insure against risk because A)they are risk averse.
B)the insurance companies are all crooks.
C)the insurance offered is less than fair.
D)the insurance offered is more than fair.
Q3) If two events are positively correlated but NOT perfectly correlated, then
A)diversification is not necessary since there is no risk.
B)diversification eliminates all risk.
C)diversification does not reduce risk at all.
D)diversification can reduce risk.
Q4) The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. What is the most Bob would pay for insurance that would replace his $100 should it be stolen?
A)$30
B)$50
C)$70
D)$75
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Page 16
Chapter 15: Asymmetric Information
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Sample Questions
Q1) Adverse selection can occur when
A)all persons involved in a transaction have full information.
B)one person has information not available to others.
C)post-agreement incentives result in workers shirking.
D)nobody has any information about a particular product.
Q2) Which firm provides the better signal when trying to decide which of the firms' stock to buy?
A)Firm A, which uses an independent accounting firm for auditing.
B)Firm B, which uses an internal group for auditing.
C)Firm C, which has seen its stock go up by $20 per share in the last week.
D)Firm D, which hasn't been under SEC investigation for over 5 years.
Q3) Explain how product liability laws can reduce adverse selection.
Q4) Assume Health Insurance is provided universally by the government. This would
A)eliminate the problems of adverse selection.
B)result in adverse selection.
C)eliminate the problems of moral hazard.
D)All of the above.
Q5) How can a warranty at the seller's expense signal that a product is of high quality?
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Chapter 16: Government and Business
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Sample Questions
Q1) Laws that are used to prevent firms from colluding and setting high prices are called
A)anti-trust laws.
B)price ceiling laws.
C)anti-cartel laws.
D)anti-competition policies.
Q2) The above figure shows the market for steel ingots. If the market is competitive, then
A)the socially optimal quantity of steel is zero.
B)the socially optimal quantity of steel of 50 units is produced.
C)the socially optimal quantity of steel of 100 units is produced.
D)more than the socially optimal quantity of 50 units of steel is produced.
Q3) If all Pareto improvements have been made
A)the result is increased government regulations.
B)the outcome is Pareto efficient.
C)consumer surplus is maximized.
D)monopolists are unhappy.
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18
Chapter 17: Global Business
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Sample Questions
Q1) The ability to produce a good at a lower opportunity cost than someone else is called
A)competitive production.
B)comparative advantage.
C)selective advantage.
D)absolute advantage.
Q2) Your U.S.-based company is selling parts to a company in Chile and the company will pay you US$10,000 in 3 months. The current exchange rate is 490 pesos/US$. If the exchange rate at the time of payment is 510 pesos/US$
A)you earn additional profit.
B)the Chilean company will end up paying more for the goods.
C)the Chilean company will end up paying less for the goods.
D)you earn less profit.
Q3) The imposition of a quota on an imported good
A)shifts the demand curve down for the good.
B)shifts the supply curve up for the good.
C)Both A and B.
D)Not enough information to determine.
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