Course Introduction
Managerial Economics Exam Preparation Guide
Managerial Economics is a course that blends economic theory with business practice to aid managerial decision-making and problem-solving in organizations. The curriculum covers fundamental concepts such as demand and supply analysis, production and cost functions, pricing strategies, market structures, and the role of government in business. Through case studies and analytical tools, students learn to apply economic reasoning to real-world business scenarios, optimize resource allocation, forecast business trends, and make informed decisions that enhance organizational efficiency and profitability.
Recommended Textbook
Managerial Economics 12th Edition by Mark Hirschey
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Page 2
Chapter 1: Nature and Scope of Managerial Economics
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Q1) A typical annual rate of return on invested capital is:
A) 5%.
B) 10%.
C) 15%.
D) 20%.
Answer: B
Q2) Managerial economics cannot be used to identify:
A) how macroeconomic forces affect the organization.
B) goals of the organization.
C) ways to efficiently achieve the organization's goals.
D) microeconomic consequences of managerial behavior.
Answer: B
Q3) Government regulation is important because government:
A) regulation reduces public-sector employment.
B) produces most of society's services output.
C) produces most of society's material output.
D) uses scarce resources.
Answer: D
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Chapter 2: Economic Optimization
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Q1) At the profit-maximizing level of output:
A) marginal profit equals zero.
B) marginal profit is less than average profit.
C) marginal profit exceeds average profit.
D) marginal cost equals average cost.
Answer: A
Q2) The comprehensive impact resulting from a decision is the:
A) gain or loss associated with a given managerial decision.
B) change in total cost.
C) change in total profit.
D) incremental change.
Answer: D
Q3) Marginal profit equals average profit when:
A) marginal profit is maximized.
B) average profit is maximized.
C) marginal profit equals marginal cost.
D) the profit minimizing output is produced.
Answer: B
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Chapter 3: Demand and Supply
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Q1) The effect on sales of an increase in price is a decrease in:
A) the quantity demanded.
B) demand.
C) supply.
D) the quantity supplied.
Answer: A
Q2) Demand Analysis. The demand for automobiles is often described as highly cyclical, and very sensitive to automobile prices and interest rates. Given these characteristics, describe the effect of each of the following in terms of whether it would increase or decrease the quantity demanded or the demand for automobiles. Moreover, when price is expressed as a function of quantity, indicate whether the effect of each of the following is an upward or downward movement along a given demand curve or instead involves an outward or inward shift in the relevant demand curve for autos. Explain your answers.
A. A decrease in auto prices
B. A fall in interest rates
C. A rise in interest rates
D. A severe economic recession
E. A robust economic expansion
Answer: 11ea7f01_0980_28ac_b9ea_a57f61ad727e_TB4098_00
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Page 5
Chapter 4: Demand Analysis
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Q1) If e<sub>P</sub> = -3 and MC = $0.66, the profit-maximizing price is:
A) $3
B) $0.99
C) $0.66
D) $1.98
Q2) When preferences are transitive, consumers are able to:
A) understand how much more one product is preferred over another product.
B) rank order the desirability of various goods and services.
C) need not know that one product is preferred to another product.
D) understand how much less preferred one product is versus another product.
Q3) When marginal cost is greater than zero, the profit-maximizing point price elasticity of demand must be:
A) greater than zero but less than one.
B) equal to one.
C) greater than one.
D) equal to zero.
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6
Chapter 5: Demand Estimation
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Q1) Demand is always reduced by unanticipated changes in:
A) technology that reduces production costs.
B) foreign competition.
C) government regulation that limits profits.
D) energy prices that increase production costs.
Q2) Suppose Q<sub>1</sub> = 50 when P<sub>1</sub> = $25, and Q<sub>2</sub> = 20 when P<sub>2</sub> = $40. A linear estimate of the demand curve is:
A) P = $50 - $0.5Q
B) P = $50 + $0.5Q
C) Q = 100 + 2P
D) Q = 100 - 0.5P
Q3) A deterministic relation is:
A) a simultaneous relation.
B) an imprecise link between two variables.
C) an association that is known with certainty.
D) a concurrent association.
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Chapter 6: Forecasting
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Q1) The accuracy of an econometric forecast would be most questionable when the:
A) stochastic error term is small and randomly distributed.
B) stochastic error term is large and randomly distributed.
C) stochastic error term is large and not randomly distributed.
D) expected value of the stochastic error term equals zero.
Q2) Sales Forecast Modeling. Kerry Weaver, office manager for Pediatric Medicine, Ltd., would like to generate a sales forecast based on the assumption that next year sales are a function of current income, advertising, and advertising by a competing local hospital:
A. Write an equation for predicting sales based on the assumption that the percentage change in sales is three times as large as the percentage change in income and advertising; but only one-fourth as large as, and of the opposite sign of, the percentage change in competitor advertising. Use the symbols S = sales, Y = income, A = advertising, and CA = competitor advertising.
B. During the current year, sales total $1,000,000, local disposable income is $78,750 per household, advertising is $90,000, and competitor advertising is $100,000. Previous period levels were $75,000 (income), $80,000 (advertising), and $125,000 (competitor advertising). Forecast next year sales.
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Chapter 7: Production Analysis and Compensation Policy
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Q1) Right-angle shaped isoquants reflect inputs that are:
A) perfect complements.
B) perfect substitutes.
C) imperfect substitutes.
D) inefficient.
Q2) The law of diminishing returns:
A) deals specifically with the diminishing marginal product of fixed input factors.
B) states that the marginal product of a variable factor must eventually decline as increasingly more is employed.
C) can be derived deductively.
D) states that as the quantity of a variable input increases, with the quantities of all other factors being held constant, the resulting output must eventually diminish.
Q3) The maximum output that can be produced for a given amount of input is called a:
A) discrete production function.
B) production function.
C) continuous production function.
D) discontinuous production function.
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9
Chapter 8: Cost Analysis and Estimation
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Q1) A firm's capacity is the output:
A) maximum that can be produced in the long-run.
B) level where short-run average costs are minimized.
C) level where long-run average costs are minimized.
D) maximum that can be produced in the short-run.
Q2) If the slope of a long-run total cost function decreases as output increases, the firm's underlying production function exhibits:
A) constant returns to scale.
B) decreasing returns to scale.
C) decreasing returns to a factor input.
D) increasing returns to scale.
Q3) The acquisition cost of an asset is:
A) a replacement cost.
B) an implicit cost.
C) an explicit cost.
D) an opportunity cost.
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Chapter 9: Linear Programming
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Q1) If the primal objective function is to minimize cost subject to output constraints, the dual objective function is to maximize:
A) revenue.
B) profits.
C) output.
D) the value of inputs employed.
Q2) When an LP objective function is to maximize profits:
A) resource constraints must be of the £ variety.
B) resource constraints must be of the ³ variety.
C) all input costs must be variable.
D) the total revenue function must not be linear.
Q3) Profit contribution equals total:
A) revenue minus variable cost.
B) revenue minus fixed cost.
C) profit.
D) revenue minus total cost.
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Chapter 10: Competitive Markets
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Q1) Entry and Exit Conditions. Signify whether each of the following statements is true or false and document why.
A. A barrier to mobility is any factor or industry characteristic that creates an advantage for incumbents over new arrivals.
B. A barrier to entry is any factor or industry characteristic that creates an advantage for large leading firms over smaller nonleading rivals.
C. Barriers to entry and mobility sometimes result in compensating advantages for consumers.
D. A barrier to exit is any restriction on the ability of incumbents to redeploy assets from one industry or line of business to another.
E. Government actions that create barriers to exit can have the unintended effect of retarding industrial development.
Q2) Industry cartels never:
A) give rise to price supports.
B) spur entry when barriers to entry are low.
C) spur exit when exit barriers are low.
D) prompt inefficiency and waste.
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Chapter 11: Performance and Strategy in Competitive Markets
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Q1) Undue market power is indicated when buyer influence results in:
A) higher than competitive prices.
B) less than competitive output.
C) less than competitive costs.
D) excess profits.
Q2) A price ceiling is a costly and seldom used mechanism for:
A) restraining excess supply.
B) restraining excess demand.
C) counteracting the effects of falling productivity.
D) counteracting the effects of rising productivity.
Q3) Competition in the cable television service industry is furnished by:
A) imports.
B) potential entrants.
C) large numbers of providers in local markets.
D) government regulation.
Q4) The costs of pollution taxes are shared by consumers and producers when:
A) supply is perfectly elastic.
B) supply is perfectly inelastic.
C) demand is perfectly inelastic.
D) none of these.
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Chapter 12: Monopoly and Monopsony
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Q1) The view of regulation as a government-imposed means of private-market control is called:
A) capture theory.
B) public choice theory.
C) public interest theory.
D) none of these.
Q2) Economic agents that have countervailing power in transactions with monopolists are:
A) other monopolists.
B) perfect competitors.
C) monopsonists.
D) individual consumers.
Q3) The demand curve for a unique product without substitutes is:
A) upward sloping.
B) downward sloping.
C) horizontal.
D) vertical.
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Chapter 13: Monopolistic Competition and Oligopoly
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Q1) Monopolistic competition is characterized by:
A) homogeneous products.
B) barriers to entry and exit.
C) perfect dissemination of information.
D) few buyers and sellers.
Q2) A successfully exploited niche market involves elements of:
A) perfect competition.
B) monopolistic competition.
C) monopoly.
D) monopsony.
Q3) The demand curve faced by a firm in a monopolistically competitive industry is:
A) the downward sloping industry demand curve.
B) downward sloping.
C) more elastic than the perfectly competitive firm's demand curve.
D) horizontal.
Q4) An formal agreement to set prices and output is called: A) collusion.
B) monopolistic competition.
C) kinked demand.
D) a cartel.
Page 15
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Chapter 14: Game Theory and Competitive Strategy
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Q1) In the Prisoner's Dilemma game:
A) complete solution is derived using the look ahead and extrapolate back principle.
B) each player moves in succession.
C) each player is aware of all prior moves.
D) none of these.
Q2) When bidders on a government contract collude to divide markets and eliminate uncertainty, their collusion can be describes as a:
A) cooperative game.
B) positive-sum game.
C) zero-sum game.
D) nonstrategic game.
Q3) Solving complex sequential games that involve millions of calculations:
A) requires a finite sequence of moves.
B) is impossible.
C) does not depend upon the look ahead and extrapolate back principle.
D) none of these.
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Chapter 15: Pricing Practices
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Q1) If the optimal markup on cost is 25%, the optimal markup on price is:
A) 20%
B) 25%
C) 50%
D) 100%
Q2) A 50% markup on price is equivalent to a markup on cost of:
A) 25%
B) 33%
C) 50%
D) 100%
Q3) When transferred products can be sold in perfectly competitive external markets, the optimal transfer price is the:
A) external market price.
B) marginal revenue of the transferred-to (buying) division.
C) marginal revenue in the output market.
D) marginal cost of the transferring (selling) division.
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Page 17
Chapter 16: Risk Analysis
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Q1) Standard Normal. Personal Business Cards, Inc. supplies customized business cards to commercial and individual customers. Although paper, ink, and other costs cannot be determined precisely, Personal anticipates that costs will be normally distributed around a mean of $15 per unit (each 500-card order) with a standard deviation of $2 per unit.
A. What is the probability that Personal would make a profit at a price of $15 per unit?
B. Calculate the unit price necessary to give Personal a 95% chance of making a profit on the order.
C. If Personal submits a successful bid of $18.20 per unit, what is the probability that it will make a profit?
Q2) A decision standard that selects the alternative with the best of the worst possible outcomes is:
A) game theory.
B) the maximin criterion.
C) the minimax criterion.
D) sensitivity analysis.
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18
Chapter 17: Capital Budgeting
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Q1) A firm must choose between two projects, X and Y. Project X has the highest net present value, but project Y has the highest profitability index. The firm should choose project Y if:
A) the firm is a risk seeker.
B) the firm is risk averse.
C) the firm has substantial investment resources.
D) the firm has limited investment resources.
Q2) NPV Analysis. The net present value (NPV), profitability index (PI), and internal rate of return (IRR) methods are often employed in project valuation. Indicate whether each of the following statements is true or false and explain why.
A. A PI < 1 describes a project with IRR < k.
B. Selection solely according to the PI criterion will tend to favor smaller as opposed to larger investment projects.
C. Use of the NPV criterion is especially appropriate for larger firms with easy access to capital markets.
D. The IRR method can tend to overstate the relative attractiveness of investment projects when the opportunity cost of cash flows is below the IRR.
E. When NPV > 0, the IRR exceeds the cost of capital.
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Chapter 18: Organization Structure and Corporate Governance
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Q1) Horizontal and Vertical Relations. Dell Computer Corp. designs, develops, manufactures, markets, services and supports a wide range of computer systems, including desktops, notebooks and network servers, and also markets software, peripherals and service and support programs. They are the world's leading direct computer systems company and one of the top five computer vendors in the world. Compaq Computer Corp. designs, develops, manufactures, and markets a wide range of personal computing products, including desktop personal computers, portable computers, PC servers and peripheral products that store and manage data in network environments. The company markets its products primarily to business, home, government, and education customers. Compaq operates in one principal industry segment across geographically diverse markets.
A. Do Dell and Compaq share important elements of a vertical relationship? If so, how?
B. Do Dell and Compaq share important elements of a horizontal relationship? If so, how?
Q2) A reasonable before-the-fact forecast of monetary implications describes:
A) monetary outcomes.
B) financial outcomes.
C) economic expectations.
D) economic realizations.
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Chapter 19: Government in the Market Economy
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Q1) Public vs Private Goods. Use the nonrival concept to classify each of the following goods and services as public goods or private goods. Also indicate whether or not the good or service in question can be characterized by the nonexclusion concept. Explain.
A. Lighthouse signals.
B. Small pox vaccinations.
C. Criminal justice system.
D. Local phone service.
E. The Simpsons television program provided on "free" TV.
Q2) Social marginal cost is the cost borne by:
A) all individuals in the economy.
B) individuals with no direct role in a given transaction.
C) all firms in the economy.
D) the government.
Q3) Social costs refer to costs borne by:
A) the government.
B) third-party individuals
C) foreign consumers.
D) public sector producers.
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