Managerial Economics
Final Test Solutions
Course Introduction
Managerial Economics applies economic theories, concepts, and methodologies to decision-making processes within organizations. The course bridges microeconomic principles and business practices, enabling students to analyze market dynamics, demand forecasting, production costs, and pricing strategies. Emphasis is placed on optimization techniques, risk analysis, and the impact of governmental policies on business operations. Through real-world case studies and quantitative tools, students learn to make informed and effective managerial decisions that enhance organizational efficiency and competitiveness.
Recommended Textbook
Microeconomics Theory and Applications 12th Edition by Edgar K. Browning
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Page 2
Chapter 1: An Introduction to Microeconomics
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Q1) Do you think that the behavior of a student,who is focused on achieving superior grades and aims to top the class,will be described as goal-oriented behavior by economists?
Answer: The assumption of goal-oriented behavior is described as the behavior of market participants interested in fulfilling their own personal goals.It is often taken to indicate that individuals are self-interested.This assumption,however,does not imply that market participants care solely about their own pocketbooks.A student focused on achieving superior grades exhibits goal oriented behavior as the superior grades would leave him/her satisfied but would not affect the goals of the other students in the class.
Q2) A linear production possibility frontier exhibits a(n)_____ opportunity cost of producing either good.
A)increasing
B)decreasing
C)constant
D)variable
Answer: C
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3
Chapter 2: Supply and Demand
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Q1) Which of the following statements is not true about a demand curve?
A)The demand curve shows the maximum price consumers will pay for various quantities of a product.
B)Movements along a demand curve reflect changes in consumers' tastes.
C)The demand curve shows the quantities consumers will purchase at various prices.
D)Movements along a demand curve reflect consumers' response to price changes.
Answer: B
Q2) Corn farmers in a country are colluding to reduce the market supply of corn.This will successfully raise the farmers' incomes only if the demand for corn is:
A)elastic.
B)inelastic.
C)unit elastic.
D)infinitely-elastic.
Answer: B
Q3) Each row and column heading describes a shock to a market initially in equilibrium.Fill in the table indicating whether the new equilibrium price and quantity will increase,decrease,or not change.
Answer: 11ea857e_d75e_0ca3_a433_7309e79452fd_TB1826_00_TB1826_00
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Chapter 3: The Theory of Consumer Choice
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Sample Questions
Q1) A point lying inside the budget line indicates:
A)an unattainable market basket for the consumer.
B)the consumer is not spending all of his or her income.
C)the consumer has exhausted his income on consumption.
D)that one of the goods consumed is an economic bad.
Answer: B
Q2) If the vertical axis measures yams which cost $20 per unit and the horizontal axis measures xylophones which cost $5 a unit,the slope of the budget line is _____.
A)-20
B)-3
C)-0.25
D)-0.33
Answer: C
Q3) Indifference curves consistent with one good being an economic "neuter" are: A)convex.
B)straight lines with a slope of -1.
C)straight lines with a slope of 0.
D)L-shaped.
Answer: C
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Page 5
Chapter 4: Individual and Market Demand
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Q1) A market demand curve for a commodity may be obtained by:
A)dividing the total quantity demanded by all consumers by the price level.
B)dividing the total price paid by the consumers by the number of consumers.
C)adding the prices along individual demand curves for given quantities.
D)adding the quantities along individual demand curves for given prices.
Q2) Suppose red onions are on the horizontal axis and white onions on the vertical axis.If both are perfect substitutes with two white onions worth one red onion,and the price of red onions falls from four to three times the price of white onions,the consumer:
A)decreases her consumption of white onions and increases her consumption of red onions.
B)increases her consumption of white onions and decreases her consumption of white onions.
C)moves to a higher indifference curve
D)makes no change in his/her consumption of onions and experiences no income effect as a result of the price change.
Q3) A consumer's demand function for a good Q is of the form P = 20 - 2Q.Derive the consumer's price elasticity of demand for this good when price decreases to $6 from $8.What can be inferred about the shape of the consumer's price consumption curve?
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6
Chapter 5: Using Consumer Choice Theory
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Q1) Fred is considering consumption between two periods and is earning an income of $1,000 in both periods.If the interest rate is 8 percent,Fred borrows $500,but if the interest rate rises to 18 percent,Fred saves $500.Is this behavior economically reasonable?
A)No,Fred would borrow less because of the higher interest rate but would still borrow a positive amount.
B)No,Fred might not borrow at all,but would not start saving.If Fred wanted to save he would have saved at the lower interest rate too.
C)Yes,the change in interest rates will cause his endowment point to shift,allowing him to become a saver.
D)Yes,the higher interest rate will raise the cost of current consumption,inducing him to cut back current consumption.He could cut back so much that he becomes a saver.
Q2) In the intertemporal consumer choice model,an increase in _____ will alter the slope of the budget line.
A)saving
B)the interest rate
C)future income
D)borrowing
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Page 7
Chapter 6: Exchange, Efficiency, and Prices
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Q1) Which of the following describes the equilibrium in an Edgeworth box?
A)Any point where the indifference curves of the two individuals intersect
B)All points that show an equal distribution of the two goods between the two individuals
C)Any point inside the box representing scope for mutually beneficial trade.
D)A point of tangency between the indifference curves of the two individuals.
Q2) Economic efficiency is sometimes referred to as _____.
A)social welfare
B)Pareto optimality
C)equity
D)relative efficiency
Q3) Jane and Bill are indifferent between all of these baskets.From the information in Table 6.1,you can conclude that MRS<sub>PC</sub> is:
A)constant for Jane but not for Bill
B)constant for both Jane and Bill
C)constant for Bill but not for Jane
D)not constant for both Jane and Bill
Q4) Explain why a competitive equilibrium produces an efficient allocation of goods.
Q5) Are non-price allocation mechanisms efficient? Explain.
Q6) What did the moral philosopher Adam Smith mean by his invisible hand theorem?
Page 8
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Chapter 7: Production
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Sample Questions
Q1) Returns to scale can be evaluated by looking at how output changes along _____.
A)a ray from the origin
B)the points of intersection of two or more isoquants
C)the horizontal axis
D)an isoquant.
Q2) Refer to Table 7-4.When the firm increases production from 24 units of capital and 8 units of labor to 48 units of capital and 16 units of labor,the production function exhibits:
A)decreasing marginal rate of technical substitution.
B)constant returns to scale.
C)increasing returns to scale.
D)diminishing marginal returns
Q3) A carpenter hammers nails each day at work.During the first hour she can hammer 120 nails,the second hour 100 nails,the third hour 90 nails,the fourth hour 60 nails,and the fifth hour 10 nails.Her marginal product in the third hour is _____ nails.
A)10
B)-10
C)90
D)-60
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Chapter 8: The Cost of Production
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Q1) When labor is the only variable input used in production,marginal cost [MC]:
A)is inversely related to the marginal product of labor [MP<sub>L</sub>].
B)is inversely related to the wage rate [w].
C)is positively related to MP<sub>L</sub>.
D)is negatively related to labor supply [S<sub>L</sub>].
Q2) Which of the following statements about the relationship between marginal cost and average cost is correct?
A)When MC is falling,AC is rising.
B)AC equals MC at MC's lowest point.
C)When MC exceeds AC,AC must be rising.
D)When AC exceeds MC,MC must be rising.
Q3) Which of the following is true at every point on the expansion path?
A)It shows the combinations of inputs having the maximum productivity.
B)It shows the various levels of output that can be produced using a given level of inputs.
C)It shows the various combinations of inputs that can be used to produce a given level of output.
D)It shows the maximum output attainable at a given cost.
Q4) Do you think the marginal cost curve of a petroleum refinery will be U-shaped? Explain your answer.
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Chapter 9: Profit Maximization in Perfectly Competitive Markets
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Q1) The assumptions of perfect competition _____.
A)are satisfied in most real-world markets
B)do not readily apply to most real-world markets
C)are hardly ever satisfied and therefore make the study of perfect competition unwarranted
D)if satisfied,lead to equitable outcomes
Q2) In Figure 9-1,if the market price fell to $8 the firm would:
A)decrease production to OJ and would be operating at a loss.
B)decrease production to OJ and would be earning a normal return.
C)decrease production to OF where it would break even.
D)incur losses and shut down.
Q3) Assume that labor is the variable input for a firm.Which of the following will occur if the wage rate increases?
A)Its average variable cost,average fixed cost,average total cost,and marginal costs will increase.
B)Its average variable cost and average total costs will increase and profits will decrease.
C)Its marginal cost,average total costs,and output will increase.
D)Its marginal cost and average variable costs will increase.
Q4) Derive the first-order and second-order conditions for perfect competition.
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Chapter 10: Using the Competitive Model
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Q1) Suppose an increasing-cost competitive industry is in equilibrium at a price of $100 and an output of 1,000 units.When a price ceiling of $80 is imposed the quantity traded in the market reduces to 800 units.Which of the following is true?
A)Consumer surplus will increase and producer surplus will fall,but total surplus stays the same.
B)Consumer surplus will fall and producer surplus will increase,keeping total surplus unchanged.
C)Consumer surplus may or may not fall but producer surplus will fall.
D)Consumer surplus will remain unchanged,but producer surplus and total surplus will fall.
Q2) Suppose a city limits the number of cabs that can provide taxi service by issuing medallions.
If the medallions can be bought and sold and they command a positive price,you can conclude that:
A)fares are above the competitive levels.
B)no illegal cabs will operate in the city.
C)the demand for cabs is lesser than the supply of cabs.
D)the supply curve for taxicabs is horizontal.
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Page 12
Chapter 11: Monopoly
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Sample Questions
Q1) The marginal revenue curve of a monopolist lies below the demand curve because:
A)the demand curve is unit elastic.
B)the monopolist must lower price on all units sold in order to sell additional units.
C)the monopolist is a price taker.
D)the marginal revenue curve coincides with the average revenue curve.
Q2) If marginal costs are zero,a monopolist will maximize profit by producing at the point where:
A)average revenue is zero.
B)price is maximum.
C)total revenue is maximum.
D)marginal revenue is maximum.
Q3) Refer to Table 11-1.What is the marginal revenue when 3 units are sold?
A)$20
B)$30
C)$50
D)$70
Q4) For the same demand and cost conditions,how do price and output of a monopoly compare to those for a competitive firm and why is the deadweight loss of a monopoly a loss of welfare?
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Chapter 12: Product Pricing With Monopoly Power
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Q1) Peak-load pricing is typically introduced when:
A)there are several competing firms.
B)resale of the product is relatively easy.
C)production costs vary in different time periods.
D)consumer demands are highly stable.
Q2) A two-part tariff is a form of:
A)first-degree price discrimination because average cost falls with quantity purchased.
B)second-degree price discrimination because average price paid by the consumer falls with higher quantity purchased.
C)block pricing because marginal cost rises with quantity sold.
D)third-degree price discrimination because different customers pay different prices.
Q3) Refer to Figure 12-1. If the monopolist cannot price discriminate, profit will be equal to:
A)the area P<sub>3</sub>AP<sub>2</sub>.
B)the area P<sub>2</sub>AQ<sub>1</sub>O.
C)the area P<sub>2</sub>ABP<sub>1</sub>.
D)zero.
Q4) Why is it difficult to implement first-degree price discrimination?
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Chapter 13: Monopolistic Competition and Oligopoly
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Q1) Suppose a cartel is formed by the tomato farmers.Which of the following would increase the ability of this cartel to set output and prices in the domestic market?
A)Acreage restrictions by the government
B)Highly inelastic demand for tomatoes
C)A high supply elasticity for other tomato farmers
D)A high import tariff on tomatoes
Q2) How does the Stackelberg model of oligopoly differ from the dominant firm model?
A)The Stackelberg model assumes a single leader firm unlike the dominant firm model where all firms share output equally.
B)In the dominant firm model,the fringe firms are competitive while in the Stackelberg model,the follower firms display Cournot behavior.
C)The dominant firm model is only applicable to a duopoly while the Stackelberg model can be applied to all oligopolistic markets.
D)The Stackelberg leader produces along the market demand curve while the dominant firm produces along the residual demand curve.
Q3) What is a cartel and why are cartels considered to be inherently unstable?
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Page 15
Chapter 14: Game Theory and the Economics of Information
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Sample Questions
Q1) Karen hires a carpenter from a firm providing carpentry services,for remodeling the cabinets in her kitchen.She is unaware of the productivity of the carpenter who is sent by the firm.The carpenter,however,is perfectly aware of the labor hours required for the task.Which of the following problems is being faced by Karen in this situation?
A)A prisoner's dilemma
B)The asymmetric information problem
C)The moral hazard problem
D)The tragedy of commons
Q2) Health insurance companies often place limitations on the services covered by the insurance to deal with the:
A)prisoner's dilemma problem.
B)asymmetric information problem.
C)common resource problem.
D)limited price information problem.
Q3) An effective and enforceable collusion in a duopoly will result in:
A)a monopoly price and output in the market.
B)a perfectly competitive outcome.
C)an inefficient equilibrium.
D)a large consumer surplus.
Page 16
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Chapter 15: Using Noncompetitive Market Models
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Q1) Which of the following is necessary for a Nash equilibrium in a two-player game where both players have three strategies each?
A)The players should behave altruistically.
B)At least one of the two players should have a dominant strategy.
C)The game should be simultaneous and not sequential.
D)It is not necessary for either player to have a dominant strategy.
Q2) Suppose that the market in Figure 15-2 were served by an oligopoly such that the equilibrium output was 450.Then the welfare loss under oligopoly would be _____ percent of that under monopoly.
A)400
B)100
C)75
D)25
Q3) Refer to Figure 15-3.Which of the following price and output combinations would an unregulated monopolist choose?
A)P2,Q2
B)P1,Q1
C)P3,Q2
D)P4,Q3
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Chapter 16: Employment and Pricing of Inputs
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Q1) A monopoly firm faces the output demand curve P = 25 - 0.5Q,where P is the price of the final product and Q is the level of output.The production function is given by Q = 5X,where X is the only input used in production.Each unit of X is bought by the firm at a constant price of $25 per unit.Based on this information,what level of input would the profit-maximizing monopoly employ?
Q2) Answer the following:
A firm faces total costs,C,price of capital,r,and price of labor,w.
a)With capital (K)on the y-axis and labor (L)on the x-axis,graph a firm's optimal combination of inputs for producing Q<sub>0</sub> units of output.
b)Decompose the total effect of a wage decrease into the substitution and output effects on the same graph.
Q3) Which of the following will not determine the elasticity of demand for bank tellers,which is a competitive input industry?
A)The elasticity of demand for banking services
B)The availability of automated teller machines (ATMs)
C)The marginal product of ATM technicians
D)The elasticity of supply for computers used to record banking transactions
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Chapter 17: Wages, Rent, Interest, and Profit
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Q1) As a result of the income effect of a higher wage,hours of work will:
A)increase due to a lower opportunity cost of leisure time.
B)fall due to a higher real income enabling greater leisure time.
C)increase due to a higher real income eliciting greater leisure time.
D)fall due to a lower opportunity cost of leisure time.
Q2) Refer to Figure 17-1.If the number of leisure hours is OL<sub>2</sub> after a change in the wage rate,it implies that:
A)the income effect of the wage change is greater than the substitution effect.
B)the income effect of the wage change is less than the substitution effect.
C)the income effect of the wage change exactly offsets the substitution effect.
D)the income and substitution effects of a wage change operate in the same direction.
Q3) What does the height of the demand curve in a labor market represent?
A)The value of output produced by an incremental worker
B)The increase in revenue from the sale of an additional unit of output
C)The marginal cost of hiring an additional worker
D)The payment made to an individual worker
Q4) When might a compensating wage differential go the "wrong way"? Explain with a graph.
Q5) What are the sources of variation in wages across individuals?
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Chapter 18: Using Input Market Analysis
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Q1) The minimum wage law is not an effective instrument for fighting poverty because:
A)only skilled workers are covered under the minimum wage law.
B)many workers whose wages are affected by the law do not live in poor families.
C)only about half of employers comply with the law.
D)increases in the minimum wage cause large increases in unemployment.
Q2) Which of the following is most likely to occur after an increase in the minimum wage?
A)Low-skilled minority workers will face less discrimination in seeking employment.
B)The demand for skilled workers will fall.
C)Wages will rise in the sectors of the economy not covered by the law.
D)Employers will reduce the fringe benefits for workers who are covered by the law.
Q3) Which of the following is a true impact of a Social Security program on the labor market?
A)It shifts the demand curve for labor to the left.
B)It shifts the demand curve for labor outward.
C)It increases the before-tax wage rate.
D)It increases the after-tax wage rate.
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Page 20
Chapter 19: General Equilibrium Analysis and Economic Efficiency
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Q1) Which of the following is true of the points along the welfare frontier?
A)Every point along the frontier is efficient.
B)Every point along the welfare frontier shows a suboptimal allocation of resources.
C)Movements along the frontier makes one person better off without harming anyone.
D)The amount of resources available is different at different points on the welfare frontier.
Q2) Without trade the price of one unit of product Y is 1/3 that of one unit of X in a small country.
Products X and Y trade on the world market at equal prices.If the small country starts trading with the rest of the world:
A)the small country would import product Y.
B)the small country would export both product X and product Y.
C)the domestic price of product X would equal the world price.
D)the relative price of X and Y would not change in the small country.
Q3) Why is efficiency considered to be a reasonable goal for economic performance?
Q4) What is the difference between partial and general equilibrium analysis?
Q5) Explain why economic efficiency cannot be achieved under certain circumstances.
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Chapter 20: Public Goods and Externalities
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Q1) According to Figure 20-1,the efficient output is ______ than the equilibrium output by _____ units.
A)more;400
B)less;400
C)more;100
D)less;200
Q2) In Figure 20-1,the marginal external cost at the equilibrium output level is:
A)$0.
B)$40.
C)$10.
D)$28.
Q3) A beautiful sunset can be categorized as a good that is characterized by:
A)nonrivalry in consumption and nonexclusion.
B)rivalry in consumption and nonexclusion.
C)nonrivalry in consumption and exclusion.
D)rivalry in consumption and exclusion.
Q4) Explain with the help of a suitable figure,why the government needs to subsidize inoculation against a viral infection.
Q5) Mention some of the situations in which the Coase Theorem will not ensure an efficient outcome?
22
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