Managerial Economics
Final Exam Questions
Course Introduction
Managerial Economics examines the application of economic theory and quantitative methods to business decision-making. The course explores fundamental economic concepts such as demand and supply, elasticity, production and cost analysis, market structures, pricing strategies, and risk analysis, all from a managerial perspective. By integrating economic reasoning with real-world business challenges, students learn to analyze market trends, forecast demand, evaluate business alternatives, and develop effective strategies to optimize resource allocation and maximize organizational objectives. The course equips future managers with critical tools for informed decision-making in a competitive and dynamic marketplace.
Recommended Textbook
Managerial Economics and Business Strategy 8th Edition by Michael Baye
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14 Chapters
1968 Verified Questions
1968 Flashcards
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Page 2
Chapter 1: The Fundamentals of Managerial Economics
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Sample Questions
Q1) New firms have incentive to enter an industry when there is(are):
A) new production technologies.
B) positive economic profits.
C) an abundance of labor.
D) high capital costs.
Answer: B
Q2) Compute the present value of a perpetual bond that pays a monthly cash flow of $1,000 at an annual interest rate of 12 percent.
A) $8,333.33
B) $9,333.33
C) $100,000
D) $101,000
Answer: C
Q3) If the interest rate is 12.5 percent, what is the present value of $200 received in one year?
A) $25
B) $177.78
C) $197
D) $225
Answer: B
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Chapter 2: Market Forces: Demand and Supply
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Sample Questions
Q1) You are the manager of a car dealership that sells luxury automobiles, which are normal goods. Although a recession is expected next year, you expect your clients' incomes to increase over the coming year. What will you do about ordering cars for next year as compared to last year? Why?
Answer: Since the income of your clients is expected to rise, demand is expected to increase. Hence, you should order more cars in the coming year as compared to last year's order.
Q2) Demand shifters do not include the A) price of the good.
B) consumer's tastes and preferences.
C) the price of the other related goods.
D) consumer's expectations about future prices of the good.
Answer: A
Q3) Demand shifters do not include
A) the price of the good.
B) the consumer's income.
C) the level of advertising.
D) the price of the other goods.
Answer: A
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Page 4
Chapter 3: Quantitative Demand Analysis
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Sample Questions
Q1) When the price of sugar was "low," consumers in the United States spent a total of $3 billion annually on its consumption. When the price doubled, consumer expenditures actually INCREASED to $4 billion annually. This indicates that:
A) the demand for sugar is elastic.
B) the demand curve for sugar is upward sloping.
C) sugar is a Giffen good.
D) None of the statements is correct.
Answer: D
Q2) The demand for good X is estimated to be Q<sub>x</sub><sup>d</sup> = 10, 0004P<sub>X</sub> + 5P<sub>Y</sub> + 2M + A<sub>X,</sub> where P<sub>X</sub> is the price of X, P<sub>Y</sub> is the price of good Y, M is income, and A<sub>X</sub> is the amount of advertising on X. Suppose the present price of good X is $50, P<sub>Y</sub> = $100, M = $25,000, and A<sub>X</sub> = 1,000 units. Based on this information, good X is: A) an inferior good.
B) a normal good.
C) a Giffen good.
D) a regular good.
Answer: B
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Page 5
Chapter 4: The Theory of Individual Behavior
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Sample Questions
Q1) The rate at which a consumer is willing to substitute one good for another, while still maintaining a given level of satisfaction, is called the
A) market rate of substitution.
B) average rate of substitution.
C) marginal rate of substitution.
D) budget constraint.
Q2) The substitution effect reflects how a consumer will react to a different:
A) marginal rate of substitution.
B) market rate of substitution.
C) level of real income.
D) level of nominal income.
Q3) The firm manager with horizontal indifference curves (output on the horizontal axis, profit on the vertical axis) views:
A) only profits to be "goods."
B) only output to be "goods."
C) both profits and outputs to be "goods."
D) None of the statements is correct.
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Chapter 5: The Production Process and Costs
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Sample Questions
Q1) Firm managers should use inputs at levels where the:
A) Marginal benefit equals marginal cost.
B) Price equals marginal product.
C) Value marginal product of labor equals wage.
D) Marginal benefit equals marginal cost and value marginal product of labor equals wage.
Q2) The manager institutes an incentive structure to ensure:
A) workers are in fact working at the expected potential.
B) workers are in fact working at their utility-maximizing effort level.
C) the firm produces on the production function.
D) the firm produces above the production function.
Q3) Suppose you are a manager of a factory. You purchase five (5) new machines at one million dollars each. If you can resell two of the machines for $500,000 and three of the machines for $200,000, what are the sunk costs of purchasing the machines?
A) $5 million
B) $500,000
C) $3.4 million
D) $1.6 million
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Chapter 6: The Organization of the Firm
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Sample Questions
Q1) A negative side of a revenue-sharing plan is that it:
A) does not induce hard or better work.
B) can be costly if revenues are low.
C) gives no incentive for workers to minimize costs.
D) can be difficult to manage from an accounting standpoint.
Q2) If a manager is not the owner, the manager:
A) receives the full benefit of good decisions.
B) bears the full cost of bad decisions.
C) does not receive the full benefit nor the full cost of his or her decisions.
D) None of the statements is correct.
Q3) The threat of a corporate takeover is an _________ incentive that helps to mitigate the _________ principal-agent problem.
A) internal; manager-worker
B) internal; manager-consumer
C) external; owner-manager
D) external; owner-consumer
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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Sample Questions
Q1) Which of the following statements is true?
A) The market structure of an industry frequently changes over time.
B) Most horizontal mergers are blocked by the government.
C) Most U.S. industries are perfectly competitive.
D) Most U.S. industries are monopolies.
Q2) Which of the following kinds of market structure are NOT associated with market power?
A) Oligopoly
B) Perfect competition
C) Monopolistic competition
D) Perfect competition and monopolistic competition
Q3) An industry consists of six firms with annual sales of $300, $500, $400, $700, $600, and $600. What is the industry's HHI?
A) 1,659
B) 1,779
C) 1,839
D) 1,909
Q4) It is sometimes said that a manager of a monopoly can charge any price and customers will still have to buy the product. Do you agree or disagree? Why?
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Chapter 8: Managing in Competitive, Monopolistic,
and Monopolistically Competitive Markets
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Sample Questions
Q1) Compute the marginal revenue when the price elasticity of demand is -0.10.
A) -9P, meaning marginal revenue is negative and 9 times greater than price.
B) 9P, meaning marginal revenue is positive and 9 times greater than price.
C) -3P, meaning marginal revenue is negative and 3 times greater than price.
D) 3P, meaning marginal revenue is positive and 3 times greater than price.
Q2) Which of the following is true under monopolistic competition in the short run?
A) Profits are always zero.
B) P > MC.
C) P = MR.
D) All of the choices are true in monopolistic competition.
Q3) 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.
Q4) Which of the following is true?
A) A monopolist produces on the inelastic portion of its demand.
B) A monopolist always earns an economic profit.
C) The more inelastic the demand, the closer marginal revenue is to price.
D) In the short run, a monopoly will shut down if P < AVC.
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Chapter 9: Basic Oligopoly Models
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Sample Questions
Q1) A decrease in firm 2's marginal cost will cause:
A) an upward shift in firm 1's reaction function, resulting in a new Cournot equilibrium where firm 1 is producing a higher quantity and firm 2 is producing a lower quantity.
B) a downward shift in firm 1's reaction function, resulting in a new Cournot equilibrium where firm 1 is producing a lower quantity and firm 2 is producing a higher quantity.
C) an upward shift in firm 2's reaction function, resulting in a new Cournot equilibrium where firm 1 is producing a lower quantity and firm 2 is producing a higher quantity.
D) a downward shift in firm 2's reaction function, resulting in a new Cournot equilibrium where firm 1 is producing a higher quantity and firm 2 is producing a lower quantity.
Q2) If firms are in Cournot equilibrium, they could increase profits by:
A) jointly increasing output.
B) jointly reducing output.
C) unilaterally increasing prices.
D) unilaterally reducing prices.
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11
Chapter 10: Game Theory: Inside Oligopoly
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Sample Questions
Q1) Management and a labor union are bargaining over how much of a $100 surplus to give to the union. The $100 is divisible up to one cent. The players have one shot to reach an agreement. Management has the ability to announce what it wants first, and then the labor union can accept or reject the offer. Both players get zero if the total amounts asked for exceed $100. Which of the following is NOT a Nash equilibrium?
A) Management requests $50 and the labor union accepts $50.
B) Management requests $70 and the labor union accepts $20.
C) Management requests $100 and the labor union accepts $0.
D) Neither management requesting $100 and the labor union accepting $0 nor management requesting $70 and the labor union accepting $20 are Nash equilibria.
Q2) Which of the following conditions are necessary for the existence of a Nash equilibrium?
A) The existence of dominant strategies for both players.
B) The existence of a dominant strategy for one player and the existence of a secure strategy for another player.
C) The existence of a secure strategy for both players.
D) None of the answers is correct.
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Page 12
Chapter 11: Pricing Strategies for Firms With Market Power
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Sample Questions
Q1) If a monopolist claims his profit-maximizing markup factor is 3, what is the corresponding price elasticity of demand?
A) -1.5.
B) -2.0.
C) -2.5.
D) -3.0.
Q2) The idea of charging two different groups of consumers two different prices is practiced in:
A) two-part pricing.
B) price matching.
C) commodity bundling.
D) None of the answers are correct.
Q3) A firm has capacity limitations and charges $30 for its service during daily peak times. If the market demand elasticity drops from -3 during peak times to -5 at off-peak times, how much should the firm charge to earn the maximum profit during off-peak times?
A) $20
B) $21
C) $24
D) Not enough information to determine
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Chapter 12: The Economics of Information
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Sample Questions
Q1) Why do life insurance policies have clauses stipulating that the company will not pay benefits for suicide within one year from the policy date?
Q2) You are considering opening your own hamburger restaurant. List the information that will influence your decision about whether to start your own restaurant or go with a franchise.
Q3) A consumer spends less time searching for a good when her reservation price is:
A) increased.
B) reduced.
C) fixed.
D) None of the answers are correct.
Q4) When managers of firms are given fixed salaries, which are not tied to the firm's profits, they generally put forth less effort than they otherwise would. This is an example of:
A) adverse selection.
B) moral hazard.
C) risk aversion.
D) None of the answers are correct.
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Chapter 13: Advanced Topics in Business Strategy
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Sample Questions
Q1) A single firm that charges the monopoly price in the market earns $1,300. If another firm successfully enters the market, the incumbent's profits fall to $700 and the entrant earns $575. If the interest rate is 0.5, how high must the firm's profits from limit pricing be for limit pricing to be a profitable strategy for the incumbent?
A) <sup>L</sup> > $200
B) <sup>L</sup> > $500
C) <sup>L</sup> > $900
D) <sup>L</sup> > $1,000
Q2) Predatory pricing is a strategy:
A) whereby an incumbent maintains a price below the monopoly level to prevent entry by potential competitors.
B) whereby a firm enjoys lower costs due to knowledge gained from its past production decisions.
C) whereby a firm temporarily prices below its marginal cost to drive competitors out of the market.
D) used by a vertically integrated firm to squeeze the margins of its competitors.
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Chapter 14: A Managers Guide to Government in the Marketplace
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Sample Questions
Q1) The manager of a paper mill is preparing for her most important test yet. On Tuesday morning, she must testify before a Senate committee to "justify" the firm's high price. One senator is particularly angry with the firm because its price is twice the firm's marginal cost. On Tuesday afternoon, the manager is scheduled to appear before the House Subcommittee on the Environment to explain why the firm should not be slapped with a per-unit tax on the firm's output to compensate for the pollution it discharges into a major river. What do you think will be the manager's game plan?
Q2) Which of the following raises domestic prices when demand is relatively high?
A) Domestic subsidies
B) Lump sum tariff
C) Excise tariff
D) Lump sum tariff and excise tariff
Q3) To prevent air pollution and breach of contract, which tools does the government use?
A) Penalties for both
B) Permits for both
C) Permits for pollution and penalties for breach
D) Penalties for pollution and permits for breach
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