Managerial Economics
Final Test Solutions
Course Introduction
Managerial Economics is the application of economic theory and quantitative methods to business decision-making and problem-solving. This course explores how managers use concepts such as demand analysis, production and cost functions, pricing strategies, market structure, risk analysis, and capital budgeting to make informed and effective decisions within organizations. By linking economic principles with real-world business scenarios, the course equips students with the analytical tools necessary to address issues like resource allocation, profit maximization, and strategic planning in a competitive and dynamic marketplace.
Recommended Textbook Microeconomics 8th Edition by Jeffrey M. Perloff
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20 Chapters
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) Governments use microeconomic models to
A) predict the impact of a policy before adopting it.
B) consider the tradeoff between clean air and a high level of GDP.
C) determine the tradeoff between equity and efficiency.
D) All of the above.
Answer: D
Q2) Billy developed an economic model to describe the behavior of a stock market index.His model predicts that the index increases on Mondays and declines on the other days of the week.What can be said about Billy's model?
A) The model's predictions are ambiguous and cannot be tested.
B) The model's predictions are not ambiguous and cannot be tested.
C) The model's predictions are ambiguous and can be tested.
D) The model's predictions are not ambiguous and can be tested.
Answer: D
Q3) Microeconomics studies the allocation of A) decision makers.
B) scarce resources.
C) models.
D) unlimited resources.
Answer: B
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Chapter 2: Supply and Demand
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Sample Questions
Q1) Assuming plasma TVs are a normal good,an increase in consumer incomes will lead to
A) a rightward shift of the demand curve for plasma TVs.
B) a movement upward along the demand curve for plasma TVs.
C) a rightward shift of the supply curve for plasma TVs.
D) no change of the demand curve for plasma TVs.
Answer: A
Q2) Consumers and firms are known as price takers only if A) no market exists to determine the equilibrium price.
B) they can set the market price.
C) they cannot unilaterally affect the market price.
D) excess demand exists.
Answer: C
Q3) If pizza and tacos are substitutes,a decrease in the price of tacos would lead to a A) decrease in the demand curve for pizza.
B) decrease in the quantity demanded of pizza.
C) decrease in the price of pizza.
D) All of the above.
Answer: D
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Chapter 3: Applying the Supply-And-Demand Model
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Sample Questions
Q1) The market demand for wheat is Q = 100 - 2p + 1p<sub>b</sub>,where p<sub>b</sub> is the price of barley.If the price of wheat is $2,the price elasticity of demand
A) equals (-4/46).
B) equals (-46).
C) equals (-1).
D) cannot be calculated without more information.
Answer: D
Q2) Explain why a tax increase on cigarettes in one state might not lead to a substantial price increase for all consumers in that state.
Answer: Smuggling of non-taxed cigarettes and on-line buying where taxes don't apply by some consumers may prevent a price increase for these consumers.
Q3) Which of the following goods probably has the lowest (absolute value)short-run price elasticity of demand?
A) fresh fruit
B) frozen dinners
C) cars
D) refrigerators
Answer: A
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Page 5
Chapter 4: Consumer Choice
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Sample Questions
Q1) Joe's budget constraint equals 500 = 2F + 100S,where $500 is Joe's income,$2 is the price of food (F)and $100 is the price of shelter (S).How much food can Joe buy if he buys one unit of shelter?
A) 2 units
B) 200 units
C) 250 units
D) 400 units
Q2) Johnny has allocated $30 toward coffee and tea and feels that coffee and tea are perfect substitutes.Due to differences in caffeine levels,his MRS of tea for coffee equals 2.If coffee and tea sell for the same price,Johnny will
A) spend all $30 on tea.
B) spend all $30 on coffee.
C) spend $20 on coffee and $10 on tea.
D) be indifferent between any bundle of coffee and tea costing $30.
Q3) Indifference curves for perfect substitutes must be parallel lines with a slope of negative one.
A)True
B)False
Q4) What is the difference between ordinal and cardinal measurement?
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Chapter 5: Applying Consumer Theory
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Sample Questions
Q1) A true cost-of-living adjustment (COLA)in response to a change in prices would compensate consumers so that they would be able to
A) purchase the same bundle they purchased before prices changed.
B) achieve the same level of utility they did before prices changed.
C) face the same choices they did before prices changed.
D) achieve an increase in utility that is equal to the rate of inflation.
Q2) As the price of a good rises,the consumer will experience
A) a desire to consume a different bundle.
B) a decrease in utility.
C) a southern or western movement on the indifference map.
D) All of the above.
Q3) If a person supplies fewer hours of labor in response to a wage increase,then
A) the substitution effect is greater than the income effect.
B) the income effect is greater than the substitution effect.
C) the income effect equals the substitution effect.
D) the person is not maximizing utility.
Q4) Suppose a person's utility for leisure (L)and consumption (Y)can be expressed as U = Y + L<sup>0.5</sup>.Show what happens to the person's labor supply curve when the income tax is cut from 70 percent to 30 percent.Denote hours worked as H and wage per hour as w.
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Chapter 6: Firms and Production
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Sample Questions
Q1) In the long run,all factors of production are
A) variable.
B) fixed.
C) materials.
D) rented.
Q2) Average productivity will fall as long as
A) marginal productivity is falling.
B) it exceeds marginal productivity.
C) it is less than marginal productivity.
D) the number of workers is increasing.
Q3) Suppose firms A and B each make T-shirts.Firm A's production function is q = L<sup>0.5</sup>K<sup>0.5</sup>.Firm B's production function is q = 1.2 L<sup>0.5</sup>K<sup>0.5</sup>.If the two firms each hire the same amounts of capital and labor,compare the two firms in terms of AP<sub>L</sub> and MP<sub>L</sub>.
Q4) Economists typically assume that the owners of firms wish to A) produce efficiently.
B) maximize sales revenues.
C) maximize profits.
D) All of the above.
Q5) What do we mean by efficient production?
Page 8
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Chapter 7: Costs
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Sample Questions
Q1) The cost of waiting two months for health care to address a debilitating problem in Canada is most accurately described as
A) an explicit cost.
B) an accounting cost.
C) no real cost.
D) an opportunity cost.
Q2) If there are diseconomies of scale within a given range of output,which of following is (are)TRUE?
A) The short-run average cost curve must be upward sloping within that range of output.
B) The long-run average cost curve must be upward sloping within that range of output.
C) Long-run average cost must equal short-run average cost.
D) All of the above.
Q3) A production possibilities frontier that is a downward-sloping straight line implies
A) economies of scale.
B) diseconomies of scale.
C) economies of scope.
D) no economies of scope.
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9
Chapter 8: Competitive Firms and Markets
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Sample Questions
Q1) The above figure shows the cost curves for a competitive firm.If the firm is to operate in the short run,price must exceed
A) $0.
B) $5.
C) $10.
D) $11.
Q2) Suppose TC = 10 + (0.1 q<sup>2</sup>).If p = 10,the firm's profit-maximizing level of output is
A) 40.
B) 50.
C) 60.
D) 0, since the firm will shut down.
Q3) If a firm operates in a perfectly competitive market,then
A) all firms will advertise.
B) no firms will advertise.
C) the market leader will advertise.
D) new firms will advertise.
Q4) Suppose market demand is Q = 1000 - 4p.If all firms have LRAC = 50 - 5q + q<sup>2</sup>,how many identical firms will there be when this industry is in long-run equilibrium?
Page 10
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Chapter 9: Applying the Competitive Model
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Sample Questions
Q1) The above figure shows supply and demand curves for milk.If the government passes a $2 per gallon specific tax,the loss in producer surplus will equal
A) b + c + f + g.
B) f + g.
C) b + f.
D) c + g.
Q2) In economics,welfare analysis is useful to
A) gauge the validity of "mend it, don't end it."
B) determine who should receive income transfers.
C) determine who gains and who loses in a particular policy option.
D) prove which policy option is "best."
Q3) Sheri is currently purchasing 10 units of a normal good and her indifference curves exhibit diminishing marginal rate of substitution.Suppose there is a decrease in the market price of this good.Then
A) both her utility and her consumer surplus will increase.
B) her consumer surplus will increase, but her utility will remain the same.
C) her utility will increase, but her consumer surplus will remain the same.
D) her consumer surplus will increase, but the change in her utility is unknown without more information.
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Page 11
Chapter 10: General Equilibrium and Economic Welfare
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Sample Questions
Q1) General equilibrium analysis is the study of
A) how an equilibrium is determined in all markets simultaneously.
B) how an equilibrium is determined in all closely related markets.
C) the effects of a change in a market, and all spillover effects in all related markets.
D) Any of the above.
Q2) Comparing the distribution of wealth of the wealthiest 1% of the population in the United States before and after the recent Great Recession to what occurred before and after the Great Depression,
A) the percentage of the wealth of the wealthiest 1% increased after the recent Great Recession, unlike what happened after the Great Depression.
B) the percentage of the wealth of the wealthiest 1% increased after the recent Great Recession, similar to what happened after the Great Depression.
C) the percentage of the wealth of the wealthiest 1% declined after the recent Great Recession, unlike what happened after the Great Depression.
D) the percentage of the wealth of the wealthiest 1% declined after the recent Great Recession, similar to what happened after the Great Depression.
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Chapter 11: Monopoly
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Sample Questions
Q1) The introduction of satellite television systems would cause the demand curve for cable television to be
A) more elastic.
B) less elastic.
C) perfectly inelastic.
D) unchanged.
Q2) A monopoly's output decision depends only on the shape of its marginal cost curve.
A)True
B)False
Q3) What is one reason patents are required?
A) Information concerning innovation is private and secure.
B) Human nature is corrupt.
C) Information concerning innovation is generally not private and secure.
D) The patent only makes things better in the short run.
Q4) For a monopoly,marginal revenue is less than price because A) the firm is a price taker.
B) the firm must lower price if it wishes to sell more output.
C) the firm can sell all of its output at any price.
D) the demand for the firm's output is perfectly elastic.
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Chapter 12: Pricing and Advertising
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Sample Questions
Q1) At many municipal golf courses,local residents pay a lower fee to play than other golfers do.One necessary condition for the golf course to be able to successfully price discriminate according to residency is that
A) they can check the identification cards of golfers.
B) local resident golfers and other golfers have the same price elasticity of demand to play at the municipal course.
C) there are many golf courses nearby from which golfers can choose.
D) they require all golfers to rent a cart.
Q2) Under what conditions would firms be likely to support an industry-wide advertising ban?
Q3) A hotel with market power charges customers who check in before 5:00 pm more than those who check in after 5:00 pm.Those who check in early are much more likely to use the hotel's pool.Explain why this price difference may not be price discrimination.
Q4) A monopoly will NOT be able to perfectly price discriminate if A) obtaining information about each buyer's reservation price is too costly.
B) demand is very elastic.
C) demand is very inelastic.
D) resale is impossible.
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Page 14
Chapter 13: Oligopoly and Monopolistic Competition
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Sample Questions
Q1) Suppose that market demand can be represented as p = 100 - 2Q.There are 10 identical firms producing an undifferentiated product,each with the total cost function TC = 50 + q<sup>2</sup>.Compare the competitive outcome with the cartel outcome.What is the individual firm's incentive to cheat on the cartel?
Q2) Compared to a cartel,firms in a Cournot Oligopoly
A) make more joint profit.
B) sell less output.
C) make less joint profit.
D) act independently.
Q3) Monopolistically competitive firms face downward-sloping residual demand curves because these firms
A) have relatively few rivals (compared to competition).
B) sell differentiated products.
C) A and/or B.
D) None of the above.
Q4) Cartels are inherently self-destructive because each member firm has the incentive to cheat on the cartel agreement.
A)True
B)False
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Chapter 14: Game Theory
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Sample Questions
Q1) Suppose two firms,A and B,are simultaneously considering entry into a new market.If neither enters,both earn zero.If both enter,they both lose 100.If one firm enters,it gains 50 while the other earns zero.Set up the payoff matrix for this game and determine if any Nash equilibria exist.Can you predict the outcome? What if firm A gets to decide first?
Q2) Deterring entry might require a firm to
A) price their product closer to the competitive price than to the monopoly price. B) price their product closer to the monopoly price than to the competitive price.
C) drop output almost to zero to show the consumers "who's boss."
D) drop price almost to zero to get price below marginal cost.
Q3) The Internet auction site eBay is an example of a(n)
A) Sealed Bid Auction.
B) Second-Price Auction.
C) English Auction.
D) Both A and B.
Q4) Suppose market demand is p = 10 - Q.Firms have a fixed entry cost of 5 and no marginal cost.If firm A is the incumbent,can it deter the entry of its rival,firm B?
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Page 16
Chapter 15: Factor Markets
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Sample Questions
Q1) The marginal expenditure curve of a monopsonist
A) lies above the market supply curve.
B) lies between the market demand curve and the market supply curve.
C) lies parallel to the market demand curve.
D) lies below the market supply curve.
Q2) Suppose the marginal product of labor equals 1/L.If the firm can sell its output for $10 per unit,and the wage is $1 per unit,how many units of labor will the firm hire?
A) 0
B) 1
C) 10
D) 100
Q3) If a firm buys some labor in a competitive market and some labor as a monopsonist,the firm is most likely to
A) pay the same wage to both types of labor.
B) pay a lower wage to the labor purchased in the competitive market.
C) pay a higher wage to the labor purchased in the competitive market.
D) not exercise any of its monopsony power.
Q4) How does a competitive firm's demand for labor react to a specific tax on each unit of output it sells?
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Chapter 16: Interest Rates, Investments, and Capital Markets
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Sample Questions
Q1) A recent purchaser of a bond that agrees to pay an annual nominal amount would hope that interest rates do not rise.
A)True
B)False
Q2) If the interest rate is 10%,then $1 today is worth how much one year from now?
A) $1.10
B) $1.00
C) $0.91
D) $0.90
Q3) The growth over time in the spread between price and marginal cost of an exhaustible resource is equal to
A) zero.
B) one.
C) the interest rate.
D) the present value of the reserves.
Q4) Government policies that encourage savings
A) reduce interest rates.
B) increase interest rates.
C) have no effect on interest rates.
D) lower the net present value of all investments.
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Chapter 17: Uncertainty
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Sample Questions
Q1) Empirical evidence suggests that usury laws
A) help poor consumers by lowering the interest rate they pay.
B) hurt poor consumers by limiting their ability to borrow.
C) keep interest rates low.
D) limit the amount borrowed by wealthier consumers.
Q2) Sarah buys little stuffed animals for $5 each.They come in different varieties.If the producer stops making (retires)a certain variety,a stuffed animal of that variety will be worth $100; otherwise it is worth $0.There is 50% chance that any variety will be retired.When Sarah buys her next stuffed animal,the expected profit is
A) $50.
B) $47.50.
C) $45.00.
D) $0.
Q3) One reason health insurance is very expensive is because
A) it is likely a nearly fair insurance policy.
B) it is subject to manipulation through market power.
C) the government doesn't regulate the industry enough.
D) it is likely an unfair insurance policy.
Q4) Explain why insurance companies usually do not offer earthquake insurance.
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Chapter 18: Externalities, Open-Access, and Public Goods
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Q1) The efficient quantity of a pure public good occurs when the marginal cost of producing that good equals the
A) marginal benefit to the median voter.
B) marginal benefit to each individual.
C) sum of all individual marginal benefits.
D) sum of all individual marginal benefits divided by the number of voters.
Q2) The result that,under certain circumstances,no government action is needed to control an externality because it can be eliminated by bargaining between the affected parties is called
A) a Nash Equilibrium.
B) Coase Theorem.
C) Bargaining Theorem.
D) English Bargaining.
Q3) Over-fishing of common fishing grounds happens because fishing grounds are a common property and social and private incentive are the same.
A)True
B)False
Q4) You are having a party and one of your guests lights up a cigar without asking.Explain why this creates an externality.
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Chapter 19: Asymmetric Information
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Sample Questions
Q1) If bad drivers can usually avoid being ticketed by the police,then insurance companies will
A) use one's driving record as a signal.
B) use one's driving record as a screening device.
C) not be able to use one's driving record as a screening device.
D) request driving records directly from the police and not from the individual applicant.
Q2) Adverse selection occurs when an agreement encourages undesirable behavior.
A)True
B)False
Q3) The cost,c,of a college education that serves only as a signal of a high-quality worker is $10,000.The wage of a known high-quality worker,w<sub>h</sub>,is $30,000.The wage for a known low-quality worker,w<sub>l</sub>,is $10,000.For what value of the share of the work force that is of high quality,s,is a pooling equilibrium possible?
A) s > 0.5
B) s = 0
C) s = 0.25
D) s < 0.45
Q4) Explain how product liability laws can reduce adverse selection.
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Page 21
Chapter 20: Contracts and Moral Hazards
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Sample Questions
Q1) Workers can reduce the chance of an employer lying by
A) obtaining more information about the firm's performance.
B) having a representative on the board of directors.
C) requiring that employers share the cost of an economic downtown.
D) All of the above.
Q2) Which of the following workers is most likely to be asked to post a bond?
A) construction contractor
B) fast food worker
C) sanitation worker
D) book author
Q3) Suppose a plaintiff hires a lawyer to represent her in a court case.The lawyer will receive a share of the settlement if the plaintiff wins.Under this contract,
A) production efficiency cannot be achieved.
B) the client bears all of the risk.
C) the lawyer bears all of the risk.
D) the risk is shared.
Q4) Explain why checks on principals might be necessary.
Q5) Explain how more than one possible state of nature affects contract choices.
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