Managerial Economics
Exam Answer Key
Course Introduction
Managerial Economics focuses on the application of economic theory and quantitative methods to business decision-making. The course explores concepts such as demand analysis, production and cost functions, pricing strategies, and market structures, equipping students with analytical tools to solve real-world managerial problems. Emphasis is placed on understanding how economic forces influence organizations, resource allocation, and profit maximization. Through case studies and practical examples, students learn to synthesize economic concepts and data-driven insights to make informed and effective managerial choices in dynamic business environments.
Recommended Textbook
Managerial Economics and Business Strategy 7th Edition by Michael R. Baye
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14 Chapters
1912 Verified Questions
1912 Flashcards
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Page 2
Chapter 1: The Fundamentals of Managerial Economics
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136 Verified Questions
136 Flashcards
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Sample Questions
Q1) The optimal amount of studying is determined by comparing:
A)marginal benefit and the total cost of studying.
B)marginal benefit and the total benefit of studying.
C)marginal benefit and the marginal cost of studying.
D)total benefit and the total cost of studying.
Answer: C
Q2) Which is the correct statement about the relationship between government and the market?
A)Government should intervene on the consumers' behalf.
B)Government should intervene on the producers' behalf.
C)Government should not intervene on any party's behalf.
D)Government often plays a role in disciplining the market process.
Answer: D
Q3) Consumer-producer rivalry occurs because of:
A)consumers' high valuation and producers' low production cost of a good.
B)producers' high production cost and consumers' low valuation of a good.
C)the competing interests of consumers and producers.
D)none of the statements associated with this question are correct.
Answer: C
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Page 3
Chapter 2: Market Forces: Demand and Supply
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155 Verified Questions
155 Flashcards
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Sample Questions
Q1) The law of supply states that, holding all else constant, as the price of a good falls:
A)quantity demanded rises.
B)quantity supplied falls.
C)quantity supplied rises.
D)quantity demanded falls.
Answer: B
Q2) Which of the following is not a supply shifter?
A)Level of technology.
B)Prices of inputs.
C)Average income level.
D)Weather.
Answer: C
Q3) Given a linear demand function of the form Q<sub>X</sub><sup>d</sup> = 1000.5P<sub>X</sub>, find the inverse linear demand function.
A)P<sub>X</sub> = 200 - 2Q<sub>X</sub>.
B)P<sub>X</sub> = 100 - 0.5Q<sub>X</sub>.
C)P<sub>X</sub> = 100 - 2Q<sub>X</sub>.
D)P<sub>X</sub> = 100Q<sub>X</sub> - 0.5P<sub>X</sub>.
Answer: A
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Page 4
Chapter 3: Quantitative Demand Analysis
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166 Verified Questions
166 Flashcards
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Sample Questions
Q1) The statistical analysis of economic phenomenon is defined as:
A)standard error.
B)confidence intervals.
C)the t-statistic.
D)econometrics.
Answer: D
Q2) Suppose the demand for a product is Q<sub>x</sub><sup>d</sup> = 12 - 3 lnP<sub>x</sub> then product x is A)inelastic.
B)unitary elastic.
C)elastic.
D)cannot be determined without more information.
Answer: C
Q3) The demand curve for a good is horizontal when it is:
A)a perfectly inelastic good.
B)a unitary elastic good.
C)a perfectly elastic good.
D)an inferior good.
Answer: C
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Page 5
Chapter 4: The Theory of Individual Behavior
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174 Verified Questions
174 Flashcards
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Sample Questions
Q1) Running a supermarket involves
A)a lower level of risk than running a gourmet shop.
B)a higher level of risk than running a gourmet shop.
C)the same level of risk as running a gourmet shop.
D)all of the statements associated with this question are correct.
Q2) Suppose a worker is offered a wage of $8 per hour, plus a fixed payment of $100 per day, and he can use 24 hours per day.What is the equation for the worker's opportunity set? (E is total earnings and L is leisure)
A)E = 100 - 8L.
B)E = 192 - 8L.
C)E = 292 - 8L.
D)none of the statements associated with this question are correct.
Q3) What is the maximum amount of good Y that can be purchased if X and Y are the only two goods available for purchase and P<sub>x</sub> = $10, P<sub>y</sub> = $20, X = 0, and M = 400?
A)10.
B)20.
C)5.
D)0.
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Page 6
Chapter 5: The Production Process and Costs
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178 Verified Questions
178 Flashcards
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Sample Questions
Q1) You are an efficiency expert hired by a manufacturing firm that uses K and L as inputs.The firm produces and sells a given output.If w = $40, r = $100, MP<sub>L</sub> = 20, and MP<sub>K</sub> = 40 the firm:
A)is cost minimizing.
B)should use less L and more K to cost minimize.
C)should use more L and less K to cost minimize.
D)is profit maximizing but not cost minimizing.
Q2) The long-run average cost curve defines the minimum average cost of producing alternative levels of output, allowing for optimal selection of
A)fixed factors of production.
B)variable factors of production.
C)all factors of production.
D)sunk cost factors of production.
Q3) In the text, we showed that the multiproduct cost function
Q4) What is the total cost of producing 125 units of output?
A)1000.
B)2050.
C)1400.
D)2400.
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Chapter 6: The Organization of the Firm
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148 Verified Questions
148 Flashcards
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Sample Questions
Q1) A potential problem with paying workers based on a piece-rate is that
A)effort cannot be expended engaging in quality control.
B)effort should not be expended engaging in quality control.
C)workers will attempt to produce quality at the expense of quantity.
D)workers will attempt to produce quantity at the expense of quality.
Q2) Explain why people in the following occupations are compensated as they are.
a.Insurance agents.
b.Football players.
c.Authors.
d.CEOs of major corporations.
e.Food servers.
Q3) In the absence of worker incentives
A)everyone always gives maximum effort.
B)there is a natural tendency for workers to not give their maximum effort.
C)managers have little or no control.
D)none of the statements associated with this question are correct.
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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117 Verified Questions
117 Flashcards
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Sample Questions
Q1) When the relevant markets are local, the concentration and HHI based on figures for the entire United States tend to:
A)be biased downward.
B)be biased upward.
C)give a more precise description of the real situation.
D)ignore the presence of import goods.
Q2) Holding all else constant, higher prices will
A)increase the Lerner index.
B)decrease the Lerner index.
C)have no impact on the Lerner index.
D)may increase or decrease the Lerner index depending on the relative magnitude of the price increase.
Q3) The Dansby-Willig Index measures the potential for a change in social welfare by examining the affect of changes in industry
A)production cost.
B)output.
C)revenue.
D)profit.
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9
Chapter 8: Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets
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138 Verified Questions
138 Flashcards
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Sample Questions
Q1) U.S.Airways experienced huge losses for several years in the 1990s, yet it continued to operate its fleets.Why didn't U.S.Airways shut down its operations to avoid the losses?
Q2) In the long-run, monopolistically competitive firms:
A)charge prices equal to marginal cost.
B)have excess capacity.
C)produce at the minimum of average total cost.
D)have excess capacity and produce at the minimum of average total cost.
Q3) Would you expect an industry to be monopolistically competitive if consumers did not value variety in the market? Explain.
Q4) Which of the following is true about where a profit-maximizing monopoly will produce on a linear demand curve when it has positive marginal costs?
A)It will produce output on the inelastic portion of the demand curve.
B)It will produce output where MR < 0.
C)It will produce output where MR = 0.
D)It will produce output on the elastic portion of the demand curve.
Q5) If a monopolist has an own-price demand elasticity of -.8, is it maximizing profits? Explain.
Page 10
Q6) You are a monopolist with the following cost and demand conditions:
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Chapter 9: Basic Oligopoly Models
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125 Verified Questions
125 Flashcards
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Sample Questions
Q1) Consider a Stackelberg duopoly with the following inverse demand function: P = 1002Q<sub>1</sub> - 2Q<sub>2</sub>.The firms' marginal cost are identical and given by MC<sub>i</sub>(Q<sub>i</sub>) = 2Q<sub>i</sub>.Based on this information the Stackelberg follower's reaction function is
A)Q<sub>F</sub> = 24.5 - 0.25Q<sub>L</sub>.
B)Q<sub>F</sub> = 49 - 0.25Q<sub>F</sub>.
C)Q<sub>F</sub> = 24.5 - 0.5Q<sub>L</sub>.
D)Q<sub>F</sub> = 24.5 - Q<sub>L</sub>.
Q2) "An oligopoly is an oligopoly.Firms behave the same no matter what type of oligopoly it is." This statement is true of:
A)Bertrand and Cournot oligopolies.
B)Cournot and Stackelberg oligopolies.
C)Bertrand and Stackelberg oligopolies.
D)none of the statements associated with this question are correct.
Q3) Suppose you are the manager of a medium-sized firm that operates in an industry that has a four-firm concentration ratio of 100 percent.All firms in the industry are of equal size.In order to determine your firm's optimal output and price, you must obtain information about how rivals would respond to changes in your decisions.If you were the manager, how would you obtain this information?
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Page 11
Chapter 10: Game Theory: Inside Oligopoly
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134 Verified Questions
134 Flashcards
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Sample Questions
Q1) What are the Nash equilibrium strategies for this game?
A)(low price, low price).
B)(high price, high price).
C)(low price, low price) and (high price, high price).
D)none of the statements associated with this question are correct.
Q2) Game theory suggests that, in the absence of patents, the privately motivated innovation decisions of firms might lead to:
A)too little innovation.
B)too much innovation.
C)the socially efficient level of innovation.
D)none of the statements associated with this question are correct.
Q3) Which of the following strategies constitutes a Nash equilibrium of the game:
A)S1, t1.
B)S2, t2.
C)S2, t3.
D)S1, t2.
Q4) According to various trade publications, over 200,000 changes are made in airfares each day.Why do you think this is the case?
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Page 12
Chapter 11: Pricing Strategies for Firms With Market Power
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128 Verified Questions
128 Flashcards
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Sample Questions
Q1) If a product is perceived by consumers as homogeneous, which of the following strategies will work to induce brand loyalty?
A)Intensive advertising campaign.
B)Price wars with competitors.
C)Frequent buyer rebate programs.
D)None of the statements associated with this question are correct.
Q2) A local dentist read an article published by the American Dental Association estimating that the elasticity of demand for the representative dentist's services is -2.5.How much should the dentist mark up her price over marginal cost?
Q3) One of the conditions under which price discrimination is profitable is:
A)ability to identify consumer types.
B)inability to resell the good.
C)differences in demand elasticities.
D)all of the statements associated with this question are correct.
Q4) An auto dealer in Chicago recently told his mother that he makes no money on the sales of his cars but the markup on accessories is 200 percent.Can this possibly be a profit-maximizing strategy? Explain.
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13
Chapter 12: The Economics of Information
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137 Verified Questions
137 Flashcards
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Sample Questions
Q1) According to Wikipedia.com, Former Philippines president Marcos authorized construction of a new nuclear power plant on a known earthquake fault line in the providence of Bataan in the Philippines.The projected $500 million power plant was to be constructed by Westinghouse.The project was backed by EXIR - a U.S.government backed Export Credit Agency - which guaranteed Philippine loan to Westinghouse.The actual project cost amounted to $2.3 billion.Westinghouse was paid despite the fact that the nuclear plant never went online since it was built on a fault line.This illustrates an example of A)signaling.
B)screening.
C)moral hazard.
D)adverse selection.
Q2) Consider an auctioneer who is selling an item through an auction.It is known that the 25 risk-neutral bidders have affiliated values that are distributed between $0 and $500 million.Based on this information the auction type that will maximize expected revenue is A)English auction.
B)Second-price, seal-bid auction.
C)First-price, sealed-bid auction and Dutch auction.
D)English auction and Second-price, seal-bid auction.
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Page 14
Chapter 13: Advanced Topics in Business Strategy
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74 Verified Questions
74 Flashcards
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Sample Questions
Q1) Nodes are
A)examples of positive network externalities.
B)examples of negative network externalities.
C)different points in geographic or economic space linked by a network.
D)none of the statements associated with this question are correct.
Q2) If one more user is added to a two-way network, it will generally
A)benefit the new user more than the existing users.
B)benefit existing users more than the new user.
C)provide equal benefits to existing users and the new user.
D)unable to tell, because this analysis depends on the type of industry.
Q3) Vertical foreclosure is an example of a firm
A)raising its rivals' costs.
B)that merges with a rival firm with the intention of eliminating the rival firm's product from the market.
C)that controls an essential upstream input refusing to sell to other downstream firms that need the input.
D)raising its rivals' costs and that controls an essential upstream input refusing to sell to other downstream firms that need the input.
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15
Chapter 14: A Managers Guide to Government in the Marketplace
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102 Verified Questions
102 Flashcards
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Sample Questions
Q1) Suppose an import quota of 13,000 is imposed in the domestic market.What will be the new market price of sugar?
A)$15.
B)$20.
C)$30.
D)$45.
Q2) A lump - sum tariff imposed on foreign competitors will
A)always remove foreign competitors from the market.
B)increase the profits of domestic firms when demand is high.
C)have no impact on domestic firms' profits when demand for domestic goods is high.
D)decrease the profits of domestic firms when demand is high.
Q3) Which cost measures the cost to society of producing a good?
A)Internal cost.
B)External cost.
C)Social cost.
D)External cost and social cost.
Q4) Suppose the external marginal cost of pollution is
Q5) You are the manager of a monopoly that faces an inverse demand curve
Q6) Suppose the supply of wine by domestic firms is
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