Managerial Economics Exam Solutions
Course Introduction
Managerial Economics focuses on applying microeconomic theories and quantitative methods to aid decision-making in business organizations. The course explores how economic concepts such as demand analysis, production and cost functions, market structures, and pricing strategies can be used to solve real-world managerial problems. Students learn to analyze business environments, forecast economic trends, optimize resource allocation, and assess the impact of governmental policies on firm behavior, equipping them with essential tools for informed, strategic decision-making in dynamic markets.
Recommended Textbook
Microeconomics 1st Canadian Edition by B.
Douglas Bernheim
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Page 2
Chapter 1: Introduction
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Q1) Which of the following is NOT an example of a market?
A) Retail trade of chocolate ice cream in Winnipeg
B) The buying and selling of homes in Halifax
C) The farmer's market in Bala
D) The buying and selling of used cars
Answer: C
Q2) How does marriage fall within the scope of microeconomics?
Answer: Economists study how the allocation of scarce resources depends on institutions and customs given the objectives that motivate choices.Potential spouses with desirable characteristics are scare.It is the characteristics of a potential spouse that motivates an individual to marry.Marriage also involves dating (a custom)and a contract (a marriage license)which requires the institution of government.(NOTE: Students may also apply some of the Themes of Microeconomics here.For example,marrying one individual means trading off the opportunity to marry another individual.The choice of whom to marry involves the comparison of costs and benefits.Marriage can make both partners better off.)
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Chapter 2: Supply and Demand3
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Q1) Which of the following is the formula for the elasticity of Y with respect to X?
A) E = (% Change in Y)/(% Change in X)
B) E = (% Change in X)/(% Change in Y)
C) E = (Change in Y)/(Change in X)
D) E = (Change in X)/(Change in Y)
Answer: A
Q2) Which of the following statements about elasticity measures is true?
A) Elasticities are always positive values
B) Values that are close to zero indicate greater responsiveness
C) Values that are further from zero indicate greater responsiveness
D) Values that are further from zero indicate less responsiveness
Answer: C
Q3) Refer to Figure 2.2.Which diagram represents the effect of a lower gasoline price on the supply of gasoline?
A) A
B) B
C) C
D) D
Answer: A
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Chapter 3: Balancing Benefits and Costs
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Q1) The No Marginal Improvement Principle tells us that,at the best choice,
A) The marginal benefit of the last unit must be at least as large as the marginal cost and the marginal benefit of the next unit must be no greater than the marginal cost
B) Marginal cost and marginal benefit of the last unit must always be equal
C) The marginal benefit of the last unit must be at least as large as the marginal cost and the marginal benefit of the next unit must be greater than the marginal cost
D) Small changes in the level of an activity will always increase net benefit
Answer: A
Q2) Figure 3.2 shows the total cost and total benefit curves for a professional guitarist.If the guitarist is currently practicing 1 hour per day,then
A) They should practice more because net benefits would increase
B) They should practice less because net benefits would decrease
C) They should practice less because net benefits would increase
D) They should practice more because net benefits would decrease
Answer: A
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Chapter 4: Principles and Preferences
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Q1) Intuitively,the marginal rate of substitution for X with Y does not tell us
A) How much Y a consumer needs to compensate them for a little less X
B) How much X must be taken away from a consumer to compensate them for an increase in Y
C) How much X a consumer needs to compensate them for a little less Y
D) How much more Y the consumer will buy if the price of Y increases
Q2) A marginal rate of substitution formula tells us
A) The rate at which the consumer is willing to exchange one good for another, given the level of utility
B) The rate at which the consumer is willing to exchange one good for another, given the amounts consumed
C) The rate at which the consumer is willing to exchange one good for another, given the consumer's income
D) The rate at which the consumer is willing to exchange one good for another, given the prices of the goods
Q3) Suppose that Frank is considering giving Mike eight paper back books in exchange for 2 CDs.Explain the conditions under which this trade would be mutually beneficial.Also explain the conditions under which Frank and Mike won't make the trade.
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Chapter 5: Constraints, Choices, and Demand
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Q1) Refer to Figure 5.6.Which diagram shows a decrease in income with bread being normal and soup being inferior?
A) A
B) B
C) C
D) D
Q2) Boundary solutions arise when
A) A good provides a consumer with little value per dollar relative to other alternatives
B) A consumer has a very low level of income
C) Indifference curves are convex
D) Indifference curves exhibit increasing MRS
Q3) A curve that shows how the best available consumption bundle changes as income changes (holding the consumer's preferences and all other prices fixed)is called
A) A price-consumption curve
B) An individual demand curve
C) An income-consumption curve
D) A budget line
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Chapter 6: Rom Demand to Welfare
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Q1) Refer to Figure 6.1.Point C represents the
A) Uncompensated effect on an increase in the price of soup
B) Compensated effect on a decrease in the price of soup
C) Uncompensated effect on a decrease in the price of soup
D) Compensated effect on an increase in the price of soup
Q2) Madison has an income of $50,which she spends on Pizza (P)and soft drinks (S).Her marginal rate of substitution is MRS<sub>PS</sub> = S/P.The price of pizza (P<sub>P</sub>)is $5 and the price of soft drinks (P<sub>S</sub>)is $2.50.Finally,the formula for her indifference curves is given by S = 2U/P.
a)Find Madison's uncompensated demand curve for pizza.
b)Find Madison's compensated demand curve for pizza.
Q3) Refer to Figure 6.1.The income effect is shown by the movement
A) From bundle A to bundle C
B) From bundle A to bundle B
C) From bundle B to bundle C
D) From bundle C to bundle B
Q4) Suppose an individual consumes just pizza and soda.Using a graph,explain how the substitution bias causes the Laspeyres price index to overstate the true change in the cost of living resulting from an increase in the price of pizza.
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Chapter 7: Technology and Production
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Q1) Refer to Figure 7.7.A technological improvement is best represented by
A) A movement from point a to point b
B) A movement from point d to point a
C) A movement from point c to point a
D) A movement from point c to point d
Q2) A firm's _______ summarizes all of its possible methods of producing its output.
A) Production technology
B) Efficient production frontier
C) Production function
D) Production possibilities curve
Q3) A firm's _______ shows the amount of output a firm can produce from given amounts of inputs using efficient production methods.
A) Production possibilities set
B) Efficient production frontier
C) Production function
D) Production possibilities curve
Q4) Using two carefully-labeled diagrams,explain how MP<sub>L</sub> and AP<sub>L</sub> can be derived from a firm's production function.In your answer,explain the relationship between average and marginal product.
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Chapter 8: Cost
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Q1) Refer to Figure 8.6,which shows just three of a firm's various possible short-run average cost curves.Which of the following statements is true?
A) The firm experiences increasing returns to scale at production levels above 130 units of output
B) The firm experiences constant returns to scale
C) The firm experiences increasing returns to scale up to a production level of 130 units of output
D) The firm experiences decreasing returns to scale up to a production level of 130 units of output
Q2) Using a graph,explain the relationship between average cost and marginal cost.
Q3) The strategy whereby a firm makes most of its own inputs is called
A) Economies of scope
B) Horizontal integration
C) Economies of scale
D) Vertical integration
Q4) Suppose a firm's technology is represented by the Cobb-Douglas production function F(L,K)= 5LK.The wage rate is $50 and the rental rate of capital is $10.What is the least-cost combination to produce 100 units of output?
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Page 10
Chapter 9: Rofit Maximization
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Sample Questions
Q1) Refer to Figure 9.1.What is the profit-maximizing sales quantity for baseball gloves?
A) 10
B) 20
C) 30
D) 60
Q2) Refer to Figure 9.5.Which area represents revenue?
A) ABCDE
B) CHGD
C) EDGF
D) ABHF
Q3) Refer to Figure 9.4.In the short run,how much should the firm produce at the price P1?
A) 0
B) Q1
C) Q2
D) Q3
Q4) Graphically illustrate the quantity rule and the shut down rule for a price-taking firm.
Q5) Using a graph,explain why the law of supply holds for a competitive firm.
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11
Chapter 10: Choices Involving Time
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Q1) What happens to borrowing when interest rates rise?
A) It increases
B) It decreases
C) It can increase or decrease
D) It is impossible to tell
Q2) The amount of time required before a project's total inflows match its total outflows is the
A) Break-even period
B) Payback period
C) Duration
D) Yield to maturity
Q3) The NPV criterion states that an investment project is profitable when its NPV is ______ and unprofitable when its NPV is ______.
A) Positive, positive
B) Positive, negative
C) Negative, positive
D) Negative, negative
Q4) Using a carefully-labeled graph,explain the Life Cycle Hypothesis.What are some of the implications of the Life Cycle Hypothesis?
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Chapter 11: Choices Involving Risk
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Q1) What is the certainty equivalent of the bundle described in problem 15?
A) 49
B) 52
C) 7
D) 25
Q2) Refer to Figure b.Suppose consumers choose to consume food in two different states,sunny weather,F<sub>S</sub> and during a hurricane,F<sub>H</sub>.As the consumer moves from point A to B along the indifference curve,the variability of consumption
A) Decreases
B) Increases
C) Remains constant
D) Increases for one good, but decreases for the other
Q3) Refer to Figures b and c.In the figures above,the probability of sunny weather,P,is higher in
A) Figure b
B) Figure c
C) P does not influence the slope of the indifference curve
D) Bundle A versus C in either figure
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Chapter 12: Choices Involving Strategy
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Sample Questions
Q1) John Nash shared the Nobel Prize in Economics with A) John Harsanyi and Reinhard Selton
B) Reinhard Selton
C) Robert Auman and Reinhard Selton
D) Milton Friedman
Q2) Refer to Figure e.Brandon and Allie want to go on a date one summer evening.Allie is a Red Sox fan,while Brandon is a Mets fan.Both teams are playing that evening,but not against each other.Each would rather watch their team,neither can force the other to watch a particular game and each is willing to suffer through the other's game if it means time together.Figure e illustrates both Allie and Brandon's payoffs for each choice,with Allie's payoff in the southwest corner of each cell and Brandon's in the northwest corner.If Brandon watch the Mets,what is Allie's best response?
A) Watch the Red Sox
B) Watch the Mets
C) Neither; she is indifferent between the Red Sox and the Mets
D) To not consider Brandon's choice
Q3) Use the concepts of reputation and asymmetric information to explain why some faculty members become less productive after gaining tenure.
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Chapter 13: Behavioral Economics
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Q1) Loss aversion occurs when
A) The consumer's valuation of an outcome is less sensitive, per dollar, to small losses than to small gains
B) The consumer's valuation of an outcome is more sensitive, per dollar, to small losses than to small gains
C) The consumer's valuation of an outcome is less sensitive, per dollar, to large losses than to small gains
D) Suppliers are inelastic to price changes
Q2) Suppose Hillary was offered the following choices: 1.Win $10 for sure or 2.Win $20,000 with odds of 1 in 2,000; otherwise win nothing.If Hillary is risk loving she will choose
A) Option 1
B) Option 2
C) She is indifferent between the two
D) Both with equal probability
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15
Chapter 14: Equilibrium and Efficiency
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Q1) Suppose the wiz-pop market is in long-run equilibrium.Suddenly,fixed costs decrease,although variable costs remain unchanged.Discuss the short-run and long-run changes in market equilibrium.
Q2) With free entry
A) The long run market supply curve is horizontal at the market price
B) The long run market supply curve is vertical at the market price
C) The short and long run market supply curves are the same
D) The short run market supply curve is horizontal at the market price
Q3) With free entry
A) There is a known and limited number of potential suppliers that can produce a good in the long run
B) There is an unlimited number of firms that can produce a good in the long run
C) The long run market demand curve is horizontal at the market price
D) Firms will always enter the market
Q4) Aggregate surplus
A) Is maximized under perfect competition
B) Is minimized under perfect competition
C) Is the sum of consumer and producer surpluses
D) A and C
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Chapter 15: Market Intervention
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Q1) There is no deadweight loss from a tax when
A) Demand is perfectly inelastic
B) Supply is perfectly inelastic
C) Demand is perfectly elastic
D) A and B
Q2) A quota
A) Is a tax on imports
B) Is a tax on exports
C) Directly limits the total quantity of a good that can be imported
D) Directly limits the total quantity of a good that can be exported
Q3) The incidence of a tax
A) Falls entirely on consumers if demand is perfectly elastic
B) Falls entirely on consumers if demand is perfectly inelastic
C) Is shared by suppliers and consumers if demand is perfectly elastic
D) Falls entirely on suppliers if demand is perfectly inelastic
Q4) A tariff
A) Is a tax on imports
B) Is a tax on exports
C) Directly limits the total quantity of a good that can be imported
D) Directly limits the total quantity of a good that can be exported
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Chapter 16: General Equilibrium, Efficiency, and Equity
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Q1) General equilibrium analysis
A) Concerns competitive equilibrium only in the factor markets
B) Concerns competitive equilibrium only in the product markets
C) Concerns competitive equilibrium in a single market, considered in isolation
D) Is the study of competitive equilibrium in many markets at the same time
Q2) A point on the utility possibility frontier is
A) Inefficient
B) Impossible
C) Efficient
D) Inefficient and Impossible
Q3) The production contract curve
A) Shows every efficient allocation of inputs between two firms in an Edgeworth box
B) Shows every efficient allocation of consumption goods in an Edgeworth box
C) Passes through the tangencies between pairs of isocosts in an Edgeworth box
D) Shows every inefficient allocation of inputs between two firms in an Edgeworth box
Q4) Compare and contrast the principles of utilitarianism,Rawlsianism and egalitarianism.Discuss the assumptions of each and the difficulties societies might face while trying to conform to them.
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Page 18
Chapter 17: Monopoly
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Q1) A loss leader
A) Is a product that is sold at a price above its direct marginal cost to encourage sales of a complementary product
B) Is a product that is sold at a price below its direct marginal cost to encourage sales of a substitutable good
C) Is a product that is sold at a price below its direct marginal cost to encourage sales of a complementary good
D) Is a product that is sold at a price below its variable cost to encourage sales of a complementary good
Q2) A firm's markup
A) Is the amount by which its price exceeds its marginal cost, expressed as a percentage of its price
B) Is the amount by which its marginal cost exceeds its average cost
C) Is the amount by which its average cost exceeds its marginal cost
D) Is the value of its profit
Q3) Explain the difference between a monopoly and a monophony.
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19
Chapter 18: Pricing Policies
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Q1) With a two-part tariff
A) Consumers simply pay a fixed fee if they buy anything at all
B) Consumers pay a fixed fee if they buy anything at all, plus a separate per-unit price for each unit they buy
C) Consumers pay a fixed fee if they buy anything at all, plus an annual fee for the right to purchase anything
D) Consumers simply pay a fee for the right to buy anything
Q2) A telephone company that charges both a monthly fee plus a price per minute used are employing
A) Quality dependent pricing
B) Ordinary price discrimination
C) A two-part tariff
D) Quantity dependent pricing
Q3) Firms bundle their products because
A) It is technologically efficient to do so
B) It can increase a firm's ability to extract consumer surplus
C) It can increase a firm's profits
D) All of these
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Chapter 19: Oligopoly
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Q1) In the infinitely repeated Bertrand model
A) Firms play the Bertrand pricing game over and over, with no definite end
B) Firms play the Bertrand pricing game one time
C) Firms play the Bertrand pricing game several times, with a clearly defined endpoint
D) Firms play the Bertrand pricing game at least two times, but no more than four
Q2) As products become less differentiated
A) Consumers are less willing to switch in response to price changes
B) Consumers are more willing to switch in response to price changes
C) Competition becomes less intense
D) Consumers are not willing to switch in response to price changes
Q3) At the Nash equilibrium of an oligopoly market
A) Only one firm is able to earn profits
B) Each firm is making a profit-maximizing choice, regardless of the choices of its rivals
C) Each firm is making a profit-maximizing choice given the choices of its rivals
D) Each firm produces the same quantity
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Chapter 20: Externalities and Public Goods
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Q1) A positive externality is created if
A) An action harms someone not involved in the market transaction
B) An action benefits someone not involved in the market transaction
C) Neither helps nor hurts someone not involved in the market transaction
D) An action harms someone involved in the market transaction
Q2) A good is nonrival if
A) There is no way to prevent a person from consuming or using it
B) More than one person can consume it at the same time without affecting its value to others
C) Consumption of it involves perfect rivalry
D) Consumption is completely excludable
Q3) A negative externality is created if
A) An action harms someone not involved in the market transaction
B) An action benefits someone not involved in the market transaction
C) Neither helps nor hurts someone not involved in the market transaction
D) An action benefits someone involved in the market transaction
Q4) Explain ways in which the government can remedy an externality.
Q5) Why might bargaining break down when parties negotiate to remedy a market failure and its associated externality?
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