Managerial Economics Exam Practice Tests
Course Introduction
Managerial Economics focuses on the application of microeconomic principles to decision-making processes within business organizations. The course explores how managers use economic concepts such as demand analysis, production and cost functions, market structures, pricing strategies, and risk analysis to solve practical problems and improve organizational efficiency. Emphasis is placed on integrating economic theory with quantitative techniques to forecast outcomes, assess opportunities, and formulate effective business strategies in a dynamic and competitive environment.
Recommended Textbook
Transactions and Strategies 1st Edition by
Robert J. Michaels
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17 Chapters
1179 Verified Questions
1179 Flashcards
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Chapter 1: Reasoning With Economics: Models and Information
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Sample Questions
Q1) The assumption of rationality in economics implies that:
A)people perfectly understand their own preferences.
B)people can overcome economic obstacles in the best possible way.
C)people can make accurate calculations and they have a perfect foresight.
D)people make choices with an eye toward attaining objectives they have chosen.
Answer: D
Q2) Carla had received very low annual return from her investment portfolio comprising of stocks of five companies for two years.Her decision to continue holding the same portfolio of assets will be an example of:
A)bounded rationality.
B)selfishness.
C)altruism.
D)systematically missed opportunities.
Answer: D
Q3) Heuristics economize on the mental capabilities of people.
A)True
B)False
Answer: True
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Chapter 2: Transactions and Institutions: the Building
Blocks
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Sample Questions
Q1) The production of 1,000 shirts leaves an apparel manufacturer with a capacity to produce no more than 1,100 trousers during a month.This implies:
A)the production level is inefficient.
B)that if the production of trousers is reduced, that of shirts will also decline.
C)that a reallocation of resources may make previously unachievable outcomes achievable.
D)the production level is efficient.
Answer: D
Q2) In a two-person economy, Adam and Brandon both produce corn and cars.Adam's marginal cost of producing a car is 50 tons of corn, while Brandon's marginal cost is 70 tons of corn.In this economy, Brandon should produce cars and Adam should produce corn.
A)True
B)False
Answer: False
Q3) What is a production set?
Answer: A production set is all possible combinations of goods and services that an economy can produce with its available resources.
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Chapter 3: Markets
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Sample Questions
Q1) What is the difference between the cross-elasticity of demand for two goods which are substitutes and two goods which are complements?
Answer: If the goods are substitutes, the cross-elasticity of demand is positive, and if they are complements the cross elasticity of demand is negative.
Q2) What is a price floor?
Answer: A legislation fixing the minimum price of a commodity above the market-clearing or the equilibrium price is called a price floor.
Q3) Why does the elasticity of demand for a commodity change over time?
Answer: Elasticity of demand for a good can change over time, as experience in using it accumulates, information about substitutes becomes available, and the costs of adjusting its use falls.
Q4) Bankers supported the Federal Reserve Board's Regulation Q because:
A)it allowed them to charge lower interest rates on loans.
B)it protected them from money market volatilities.
C)it increased the demand for loanable funds in the market.
D)it allowed them to borrow at a low rate of interest and lend out at a high rate of interest.
Answer: D
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Chapter 4: Cost and Production
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Sample Questions
Q1) Let the marginal product of capital (MPK ) be 6; the marginal product of labor (MPL) be 2; the price of labor is given by $10.What will be the price of capital such that the isocost and the isoquant are tangent to each other?
A)$30
B)$3
C)$60
D)$6
Q2) The profit-maximizing rule of production is to produce the level of output where price is equal to marginal cost.Since the marginal cost (MC) curve is U-shaped, the price line running horizontal to the X-axis intersects the MC curve at two points.How is the profit maximization rule applied in this case?
Q3) You decide that it is time to buy a big family car.The opportunity cost you consider is:
A)the cost of the car.
B)the increase in comfort for your family while traveling.
C)the return this money would have earned if it was invested otherwise.
D)the inconvenience you and your family are bearing on account of your old car.
Q4) What is a natural monopoly?
Q5) Identify the difference between the short-run and the long-run.
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Chapter 5: Extreme Markets I: Perfect Competition
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Sample Questions
Q1) What is the short-run breakeven point of operation in a perfectly competitive market?
Q2) Economists consider the model of perfect competition useful because:
A)it is a standard for analyzing producer and consumer benefits.
B)its assumptions exactly fit into actual conditions in some markets.
C)its assumptions can be easily replaced with realistic ones.
D)it is a standard for analyzing consumer choices.
Q3) State any two properties of the perfectly competitive market.
Q4) Assume that recent oil exploration coupled with a fall in demand reduced petroleum imports of a nation to zero.We can expect:
A)the domestic price of petroleum to fall below the world price.
B)the world price of petroleum to fall to equal the domestic price.
C)petroleum exported by the domestic producers to increase.
D)petroleum exported by the domestic producers to decrease.
Q5) If the long-run market supply curve is perfectly elastic, a decrease in variable cost will:
A)shift the supply curve upward to a higher market-clearing price level.
B)shift the supply curve downward to a lower market-clearing price level.
C)shift the supply curve to the right to a higher market-clearing output.
D)shift the supply curve to the left to a lower market-clearing output.
Page 7
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Chapter 6: Extreme Markets II: Monopoly
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Sample Questions
Q1) The greater the differences in demand elasticities of consumers within a market, the more the monopolist benefits from charging a uniform price for his product.
A)True
B)False
Q2) Why does rent-seeking behavior lead to deadweight loss?
Q3) In an equilibrium in otherwise identical markets, producer surplus is higher for a monopolist than for a competitive firm.
A)True
B)False
Q4) Refer to Figure .If the profit maximizing monopolist does not practice discrimination, what uniform price will he charge and how much profit will he earn?
A)He will charge a price of $6.5, and his profit will be $6.5.
B)He will charge a price of $5, and his profit will be $6.
C)He will charge a price of $4, and his profit will be $4.
D)He will charge a price of $3, and his profit will be $6.5.
Q5) What are cover and commodity charges?
Q6) What are the main differences between a monopolist and a perfectly competitive firm?
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Chapter 7: Between the Extremes: Interaction and Strategy
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Sample Questions
Q1) In oligopoly outcomes, the dominant firm's profitability depends on how the fringe, consisting of small competing sellers, responds to its choices.
A)True
B)False
Q2) Refer to Figure .Assume that in the long run new firms enter the market lowering the total cost incurred by the fringe firms below the same incurred by the dominant firm.Which of the following situations will arise?
A)The fringe supply will rotate leftward and downward reducing its profit.
B)The dominant firms market share and profit will both increase.
C)The dominant firm will be totally displaced by the fringe.
D)The fringe's market power will decrease.
Q3) Refer to Figure .If the market demand curve D rotates outward (while its vertical intercept remains unchanged), which of the following changes will be observed in the oligopoly market?
A)The fringe's market share will decline
B)The dominant firm's profits will decrease
C)The marginal cost will decrease
D)The overall market price will decline
Q4) Explain the concept of Nash equilibrium with an example.
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Chapter 8: Competition and Strategy
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Sample Questions
Q1) Which of the following industries can create barriers to the entry of new firms due to size and specificity?
A)A hydroelectric power plant
B)A garment manufacturer exporting apparels
C)An owner of a retail chain
D)An automobile manufacturing company
Q2) Which of the following activities undertaken by a competitive firm can improve its public relations?
A)Investing in assets that cannot easily be redeployed to other uses or locations.
B)Donating a portion of its annual profit to hurricane affected families
C)Providing good quality products at a high price.
D)Investing in in-house research
Q3) Refer to Figure .Which of the following can be concluded about the innovative firm which reduces its marginal and average cost by using the new technology?
A)The equilibrium output produced by this firm will increase.
B)The equilibrium output produced by this firm will decrease.
C)This firm will offer its produce at a price below P0.
D)This firm will offer its produce at a price above P0.
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Chapter 9: Beyond Markets; Property and Contracts
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Sample Questions
Q1) Sometimes a unitization contract between two oil field owners will require them to turn operations over to a third party because each owner has an incentive to secretly increase output.
A)True
B)False
Q2) Jeanie Reuter and Ruth Oslen are tenants in first and second floor apartments.Jeanie practices her piano lessons in the morning, while Ruth practices aerobics on drum beats at the same time.Further assume that the value of the practice to Jeanie is $10 while the value of aerobic exercises to Ruth is $6.Which of the following is a feasible solution to the problem if the cost of negotiation is zero?
A)Ruth will pay Jeanie $6 to make her change the time for piano practice.
B)Ruth will pay Jeanie $10 to make her change the time for piano practice.
C)Jeanie will pay Ruth $4 to make her change the time for aerobics exercises.
D)Jeanie will pay Ruth $6 to make her change the time for aerobics exercises.
Q3) Define a contract and explain with examples.
Q4) A contract between a bee keeper and an orchard farmer usually break because of the high cost of writing the contract.
A)True
B)False
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Chapter 10: The Economics of Contracts
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Sample Questions
Q1) If each of the parties to a contract controls a resource essential for the other's survival, opportunistic behavior by any of them will increase the value of the transaction.
A)True
B)False
Q2) When are liquidated damages required? Describe with an example.
Q3) Which of the following is true of opportunism?
A)Opportunism increases the possibility that a party can gain by disregarding the contract.
B)Opportunism lowers the cost of negotiation between parties when the contract is incomplete or unclear.
C)Opportunism allows parties to maximize the value of their transactions.
D)Opportunism leads to mutually beneficial outcomes.
Q4) Refer to Table .What would be the combined gain of the two owners if they maintain the unitization contract?
A)$22
B)$28
C)$20
D)$0
Q5) When should parties be allowed to breach a contract?
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Chapter 11: Risk and Information in Contracts
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Sample Questions
Q1) Which of the following situations can lead to a winner's curse?
A)A bid which is won by multiple bidders but fails to cover the expectations of the seller.
B)A win which makes a player over-enthusiastic about further gambles.
C)An overoptimistic bid which helps the bidder to win but fails to cover his costs.
D)A win which makes the player risk-averse toward future gambles.
Q2) Mention some of ways in which insurers control the problem of moral hazard.
Q3) The problem of _____ can arise when a seller cannot obtain reliable information from buyers.
A)moral hazard
B)adverse selection
C)lemons problem
D)incomplete information
Q4) What is the difference between the utility function of a risk averse person and a risk neutral person.
Q5) When is disclosure economically desirable?
Q6) Mention some of the ways in which the problem of asymmetric information can be reduced.
Q7) Explain the difference between adverse selection and moral hazard?
Page 13
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Chapter 12: Organizations in Concept and Practice
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Sample Questions
Q1) A person who performs supervisory activities will also be a _____ if she/he is financially responsible for investment and other contracted decisions.
A)residual claimant
B)director
C)shareholder
D)financial advisor
Q2) Independent workers using specialized capital save the costs of contracting but risk: A)generalization.
B)opportunism.
C)inefficiency.
D)over-utilization.
Q3) In a merger, the outsider buys the shares of a target firm with debt collateralized by its other assets and sometimes by the target's assets.
A)True
B)False
Q4) Why is it necessary to separate the management function in an organization from those of finance and residual claimancy?
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Chapter 13: Organizational Design
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Sample Questions
Q1) What factors determine how centralized or decentralized the decision-making in an organization should be?
Q2) With reference to the operations of the ABB Group discuss the functioning of matrix form organizations.
Q3) Globalization aids geographic divisionalization in an organization.
A)True
B)False
Q4) Categorization of activities in an organization along product or geographic lines is called:
A)globalization.
B)decentralization.
C)functionalization.
D)divisionalization.
Q5) Organizations which have branches in various locations can function efficiently as U-form organizations.
A)True
B)False
Q6) Identify a disadvantage of organizational charts.
Q7) When is centralization of decision-making desirable?
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Chapter 14: Vertical Relationships
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Sample Questions
Q1) In order to lessen the monitoring problems and opportunistic behavior of a franchisor and a franchisee, franchise contracts:
A)create provisions for high liquidated damages.
B)are complete in all respect.
C)have similar fixed charge and royalty arrangements.
D)include certain flexible clauses.
Q2) Mention the reasons behind the de-integration of American Steel producers.
Q3) Which of the following changes can facilitate the transfer or outsourcing of formerly internal activities of a firm?
A)Changes in technology and market structure
B)Decline in domestic input prices
C)Decline in net exports
D)Rapid pace of industrialization
Q4) If different people own the different stages of production of a commodity, a contract or market relationship helps to minimize transaction risks and creates economic value.
A)True
B)False
Q5) Why do vertical contracts impose restraints and obligations?
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Chapter 15: Employment Relationships
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Sample Questions
Q1) A firm that fills its vacancies in the upper levels of the hierarchy with its own employees:
A)avoids opportunistic behavior by employees.
B)uses an internal labor market.
C)avoids the difficult tasks of measuring and comparing the productivities of individual workers.
D)pays them according to their performance rather than seniority.
Q2) Identify the correct statement from the following.
A)Wages offered for a particular type of job are the same across the country.
B)The labor market exhibits rapid adjustment to changes in supply or demand conditions.
C)The labor market usually yields a range of wages rather than a unique equilibrium.
D)Wages exhibit frequent and prompt changes in response to changes in market conditions.
Q3) Which of the following will have a downward impact on efficiency wages?
A)Low monitoring costs
B)Excess supply in the labor market
C)High equilibrium wage rate
D)Excess demand in the labor market
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Chapter 16: Time, Risk and Options
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Sample Questions
Q1) Which of the following alternatives signify the difference between the present value of a $150 perpetuity and 2-year $150 annuity, both discounted at 15 percent per annum.
A)The perpetuity would require an initial investment worth $100 while the annuity would require an initial investment worth $244.07.
B)The perpetuity would require an initial investment worth $1,500 while the annuity would require an initial investment worth $115.07.
C)The perpetuity would require an initial investment worth $1,000 while the annuity would require an initial investment worth $244.07.
D)The perpetuity would require an initial investment worth $100 while the annuity would require an initial investment worth $115.07.
Q2) A probability distribution with a smaller percentage of its observations beyond a certain distance from the mean will have a higher variance.
A)True
B)False
Q3) Why are present value calculations used in real options?
Q4) Why are interest rates considered to be the opportunity cost of investments?
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Chapter 17: Conflict, Negotiation and Group Choice
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Sample Questions
Q1) The difference between the buyer's opportunity cost and the seller's valuation defines the zone of agreement in which the agreement will benefit both parties.
A)True
B)False
Q2) A, B, and C have the following preferences for fruits:
A: apples > bananas > peaches
B: bananas > apples > peaches
C: apples > peaches > bananas
Find the median voter's preference, if any, using a two-phase election.
A)Preferences are intransitive.
B)Apples
C)Bananas
D)Peaches
Q3) An empty core is more likely if the individuals in a group own highly complementary resources.
A)True
B)False
Q4) In what possible ways can the production of public goods be funded?
Q5) Identify the disadvantage of public goods.
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