Managerial Economics
Exam Answer Key
Course Introduction
Managerial Economics examines the application of microeconomic theory and quantitative analysis to business decision-making. The course explores how economic concepts such as demand, production, cost, pricing, and market structures inform the choices managers make in allocating resources and optimizing outcomes for their organizations. Through real-world case studies and analytical models, students develop skills to interpret market signals, forecast trends, evaluate risks, and create strategies that align with both the internal objectives of the firm and external market conditions. The course also emphasizes the integration of ethical considerations within economic analyses in the managerial context.
Recommended Textbook
Microeconomics 1st Canadian Edition by R. Glenn Hubbard
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Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) Economists assume that rational behavior is useful in explaining choices people make
A)because irrational people do not make economic choices.
B)even though people may not behave rationally all the time.
C)because individuals act rationally all the time in all circumstances.
D)even though people rarely, if ever, behave in a rational manner.
Answer: B
Q2) Suppose your provincial government encouraged new medical school graduates to take over rural and small town practices from doctors wishing to retire by paying both the new and retiring doctors $100,000.These doctors would be exemplifying the economic idea that
A)people are rational.
B)people respond to economic incentives.
C)optimal decisions are made at the margin.
D)equity is more important than efficiency.
Answer: B
Q3) Explain why economics is considered a social science.
Answer: Economics is a social science because it studies the actions of individuals.As a social science, economics considers human behavior, particularly decision-making behavior, in every context.
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Chapter 2: Trade-Offs, Comparative Advantage, and the Market System
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Sample Questions
Q1) Refer to Figure 2.1.Point B is
A)technically efficient.
B)unattainable with current resources.
C)inefficient in that not all resources are being used.
D)the equilibrium output combination.
Answer: A
Q2) Economic decline (negative growth)is represented on a production possibilities frontier model by the production possibility frontier
A)shifting outward.
B)shifting inward.
C)becoming steeper.
D)becoming flatter.
Answer: B
Q3) Refer to Table 2.3.What is Haley's opportunity cost of making a necklace?
A)3/4 of a bracelet
B)3 bracelets
C)1 1/3 necklaces
D)2 necklaces
Answer: A
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) Refer to Table 3.1.The table above shows the demand schedules for loose-leaf tea of two individuals (Sunil and Mia)and the rest of the market.At a price of $5, the quantity demanded in the market would be
A)51 kgs.
B)63 kgs.
C)76 kgs
D)146 kgs.
Answer: B
Q2) Olive oil producers want to sell more olive oil at a higher price.Which of the following events would have this effect?
A)an increase in the price of olive oil presses
B)a decrease in the cost of transporting olive oil to markets
C)an increase in the price of land used to plant olives
D)Research finds that consumption of olive oil reduces the risk of heart disease. Answer: D
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Chapter 4: Economic Efficiency, Government Price Setting, and Taxes
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Sample Questions
Q1) Refer to Figure 4.8.For each unit sold, the price sellers receive after the tax (net of tax)is
A)$20.
B)$22.
C)$27.
D)$32.
Q2) ________ is maximized in a competitive market when marginal benefit equals marginal cost.
A)Deadweight loss
B)Marginal profit
C)Economic surplus
D)Selling price
Q3) Marginal cost is the additional cost to a firm of producing one more unit of a good or service.
A)True
B)False
Q4) Will equilibrium in a market always result in an outcome that is economically efficient? Explain.
Q6) What is producer surplus? What does producer surplus measure? Page 6
Q5) What is "tax incidence"? What determines tax incidence in a competitive market?
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Chapter 5: Externalities, Environmental Policy, and Public Goods
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Sample Questions
Q1) What is an externality?
Q2) Refer to Figure 5.1.Suppose the current market equilibrium output of Q is not the economically efficient output because of an externality.The economically efficient output is Q .In that case, the diagram shows
A)the effect of a positive externality in the production of a good.
B)the effect of a negative externality in the production of a good.
C)the effect of an external cost imposed on a producer.
D)the effect of an external benefit such as a subsidy granted to consumers of a good.
Q3) Briefly explain the command-and-control approach in dealing with an externality such as pollution.Give an example of the U.S.government using the command-and-control approach to deal with the pollution problem.
Q4) Two countries that were not covered under the Kyoto Protocol were
A)China and the United States.
B)Canada and Zimbabwe.
C)The United States and the United Kingdom.
D)China and Japan.
Q5) State the Coase theorem.
Q6) Should the level of pollution be reduced to zero and if not, then to what level?
Page 8
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Chapter 6: Elasticity: the Responsiveness of Demand and Supply
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Sample Questions
Q1) Refer to Table 6.1.Which of the following statements is correct?
A)The publisher's analysis is correct only if the demand is perfectly elastic.
B)The publisher's analysis is correct only if the demand is elastic.
C)The publisher's analysis is correct only if the demand is perfectly inelastic.
D)The publisher's analysis is correct only if the demand is unit-elastic.
Q2) If demand is inelastic, the absolute value of the price elasticity of demand is A)one.
B)less than one.
C)greater than one.
D)greater than the absolute value of the slope of the demand curve.
Q3) Refer to Figure 6.4.The inelastic segment of the demand curve
A)is coincident with the horizontal axis.
B)is coincident with the vertical axis.
C)lies below the midpoint of the curve.
D)lies above the midpoint of the curve.
Q4) Refer to Figure 6.6.A perfectly elastic supply curve is shown in
A)Panel A.
B)Panel B.
C)Panel C.
D)Panel D.
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Chapter 7: Comparative Advantage and the Gains From International Trade
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Sample Questions
Q1) The World Trade Organization (WTO)promotes foreign trade and investment, or globalization.In recent years opposition to globalization has led to violent protests at meetings of the WTO.One reason for these anti-globalization protests is A)foreign trade and investment are examples of zero-sum games.
B)protesters believe that globalization will result in a return to communism in developing countries.
C)protesters believe that free trade destroys the distinctive cultures of many countries. D)protesters object to the loss of intellectual property (such as software programs and movies)that results from foreign trade and investment.
Q2) Refer to Table 7.1.Select the statement that accurately interprets the data in the table.
A)Sandy has a comparative advantage in dog grooming.
B)Linda has a comparative advantage in dog grooming.
C)Linda has a comparative advantage in dog grooming and dog bathing.
D)Sandy has a comparative advantage in dog bathing.
Q3) How have Canadian imports and exports, as a fraction of GDP, changed from 1981 to the present?
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Chapter 8: Consumer Choice and Behavioral Economics
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Sample Questions
Q1) If a consumer receives 20 units of utility from consuming two candy bars, and 25 units of utility from consuming three candy bars, the marginal utility of the third candy bar is
A)25 utility units.
B)20 utility units.
C)5 utility units.
D)unknown as more information is needed to determine the answer.
Q2) Which of the following is not a common mistake made by consumers?
A)the failure to take into account the implicit costs of an activity
B)the failure to ignore sunk costs
C)being overly optimistic about their future behavior
D)being overly pessimistic about their future behavior
Q3) If your total satisfaction increases when you consume another unit, your marginal utility must be
A)increasing.
B)decreasing.
C)negative.
D)positive.
Q4) What is a Giffen good?
Q5) What is marginal utility and what is the law of diminishing marginal utility?
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Chapter 9: Technology, Production, and Costs
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Sample Questions
Q1) Refer to Figure 9.3.What happens to the average fixed cost of production when the firm increases output from 150 to 200?
A)It remains constant.
B)It rises.
C)It falls.
D)It could rise or fall depending on what happens to total cost.
Q2) Explain how the listed events (a-d)would affect the following at Hilton Hotels.
i.Marginal cost
ii.Average variable cost
iii.Average fixed cost
iv.Average total cost
a.Hilton decides on an across-the-board 5 percent increase in executive salaries.
b.Hilton decides to eliminate all print advertising.
c.Hilton signs a new contract with the Culinary Workers Union that requires the company to increase wages for all its kitchen workers.
d.The federal government starts to levy a $5 room tax on all hotel rooms.
Q3) Describe how Magna International has used positive technological change to manage its inventory.
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Chapter 10: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) Refer to Figure 10.4.If the market price is $30 and the firm is producing output, what is the amount of the firm's profit or loss?
A)loss of $1,080
B)profit of $1,440
C)loss of $2,520
D)profit of $1,300
Q2) The perfectly competitive market structure benefits consumers because A)firms do not produce goods at the lowest possible price in the long run.
B)firms are forced by competitive pressure to be as efficient as possible.
C)firms add a much smaller markup over average cost than firms in any other type of market structure.
D)firms produce high quality goods at low prices.
Q3) If in the long run a firm makes zero profit, it should exit the industry.
A)True
B)False
Q4) If a firm's fixed cost exceeds its total revenue, the firm should stop production by shutting down temporarily.
A)True
B)False
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Chapter 11: Monopolistic Competition
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Sample Questions
Q1) Refer to Table 11.2.What is the marginal profit from producing and selling the 5th case?
A)$275
B)$145
C)$35
D)$20
Q2) For productive efficiency to hold,
A)price must equal the marginal cost of the last unit produced.
B)price must equal marginal revenue of the last unit sold.
C)average variable cost is minimized in production.
D)average total cost is minimized in production.
Q3) Refer to Figure 11.3.What is the area that represents the total revenue made by the firm?
A)0P aQ
B)0P bQ
C)0P cQ
D)0P dQ
Q4) For a monopolistically competitive firm, price equals average revenue.
A)True
B)False
Page 14
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Chapter 12: Oligopoly: Firms in Less Competitive Markets
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Sample Questions
Q1) Refer to Table 12.3.Which of the following statements is true?
A)The Nash equilibrium is a noncooperative, dominant strategy equilibrium.
B)The Nash equilibrium is a cooperative equilibrium.
C)The Nash equilibrium is a collusive equilibrium.
D)There is no Nash equilibrium in this game because each party pursues its dominant strategy.
Q2) Collusion would be common in an oligopoly and a monopolistically competitive industry.
A)True
B)False
Q3) A dominant strategy
A)is one that is the best for a firm, no matter what strategies other firms use.
B)is one that a firm is forced into following by government policy.
C)involves colluding with rivals to maximize joint profits.
D)involves deciding what to do after all rivals have chosen their own strategies.
Q4) Explain how collusion makes firms better off.Given the incentives to collude, briefly explain why every industry does not become a cartel.
Q5) What is an oligopoly? Give two examples of oligopolistic industries in Canada.
Q6) List the competitive forces in the five competitive forces model.
Page 15
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Chapter 13: Monopoly and Antitrust Policy
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Sample Questions
Q1) Governments grant patents to
A)compensate firms for research and development costs.
B)encourage competition.
C)encourage low prices.
D)encourage firms to reveal secret production techniques.
Q2) Refer to Figure 13.2.What happens to the monopolist represented in the diagram in the long run?
A)It will raise its price at least until it breaks even.
B)If the cost and demand curves remain the same, it will exit the market.
C)The government will subsidize the monopoly to enable it to break even.
D)It will be forced out of business by more efficient producers.
Q3) Refer to Figure 13.1.If the firm's average total cost curve is ATC , the firm will
A)suffer a loss.
B)break even.
C)make a profit.
D)face competition.
Q4) Explain why the monopolist has no supply curve?
Q5) What is the relationship between marginal revenue and average revenue for a monopolist and is it the same for a perfect competitor?
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Chapter 14: The Markets for Labour and Other Factors of Production
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Sample Questions
Q1) If education reform leads to a more skilled and better trained public, the economy would experience
A)an increase in human capital.
B)an increase in the supply of labour.
C)an increase in comparable worth.
D)a decrease in compensating differentials.
Q2) Refer to Table 14.1.Suppose the output price is $3.If the firm represented in the table is maximizing its profit by hiring six workers, what is the wage rate?
A)$120
B)$65
C)$40
D)There is insufficient information to answer the question.
Q3) Personnel economics is
A)the study of the factors that determine wage rates.
B)the study of how workers are affected by tax law changes.
C)the application of economic analyses to human resource issues.
D)the application of economic analysis to the hiring decision.
Q4) What are the five most important variables that cause the market demand curve for labour to shift?
Page 17
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Chapter 15: Public Choice, Taxes, and the Distribution of Income
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Sample Questions
Q1) Why would most people not consider a university student as suffering from poverty?
A)their low incomes are permanent
B)most people can't remember what being a student was like
C)students are likely to have incomes above the median in future
D)students make up such a small portion of the population
Q2) Suppose $1 billion is available in the budget and Parliament is considering allocating the funds to one of the following three alternatives:
a)subsidies for education
b)research on Alzheimer's
c)increased subsidies for daycare
If voters prefer a to b and b to c, then if preferences are transitive,
A)they should prefer a to c.
B)they should prefer c to a.
C)they should be indifferent between a and c.
D)it is not always possible to rank voters' preferences between a and c.
Q3) What is the difference between a marginal tax rate and an average tax rate? Which is more important in determining the impact of the tax system on economic behavior?
Q4) Describe the main factors economists believe cause inequality of income.
Page 18
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Chapter 16: Pricing Strategy
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Sample Questions
Q1) Refer to Table 16.2.How many tubes of toothpaste will Neem sell in Middle Fall and at what price?
A) Q = 2 units; P = $7
B) Q = 3 units; P = $6
C) Q = 4 units; P = $5
D)Q = 5 units; P = $4
Q2) A firm using a two-part tariff faces a tradeoff because
A)the only way to increase the fixed-fee portion of the price is to lower the per-unit portion of the price.
B)the only way to increase total revenue is to lower per-unit profit.
C)any increase in consumer surplus must be offset by a decrease in producer surplus.
D)the smaller the variation between the parts of the price, the greater the deadweight loss generated by the pricing scheme.
Q3) One reason why McDonald's charges a single price for its products is that it is difficult and costly for the company to determine each individual consumer's willingness to pay.
A)True
B)False
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Chapter 17: Firms, the Stock Market, and Corporate Governance
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Sample Questions
Q1) According to the article in the "An Inside Look" feature, Facebook is now a
A)publicly traded company.
B)privately held company.
C)government owned company.
D)sole proprietorship.
Q2) Laura's Pizza Place incurs $800,000 per year in explicit costs and $100,000 in implicit costs.The restaurant earns $1.3 million in revenues and has $5 million in net worth.Based on this information, what is economic profit for Laura's Pizza Place?
A)$200,000
B)$400,000
C)$500,000
D)$2.8 million
Q3) A normal rate of return refers to the ________ that investors must earn on the funds they invest in a firm, expressed as a percentage of the amount invested.
A)minimum amount
B)maximum amount
C)total amount
D)profit
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