Managerial Economics
Mock Exam
Course Introduction
Managerial Economics bridges economic theory and practical business decision-making by equipping students with tools to analyze market dynamics, optimize resource allocation, and make informed managerial choices. Topics include demand and supply analysis, production and cost functions, pricing strategies, risk assessment, and market structures. Through case studies and real-world applications, the course emphasizes applying microeconomic concepts to solve complex managerial problems, supporting effective strategic planning, and maximizing organizational performance in competitive environments.
Recommended Textbook
Microeconomics Theory and Applications 12th Edition by Edgar K. Browning
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Chapter 1: An Introduction to Microeconomics
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Sample Questions
Q1) Macroeconomics deals primarily with:
A)aggregate economic factors.
B)the behavior of rational consumers.
C)the role of politics in economics.
D)a society's economic and cultural environment.
Answer: A
Q2) Which of the following economic decisions is not a part of the study of microeconomics?
A)A consumer's decision regarding how much of a good to purchase
B)A worker's decision concerning which job to take
C)A business firm's decision regarding how many machines to purchased.
D)The government's decision regarding the use of monetary or fiscal policy to control increasing prices
Answer: D
Q3) Economic theory:
A)can determine which public policy is the most desirable.
B)tries to account for all possible influences.
C)is a tool for understanding economic relationships.
D)uses no assumptions in deriving results.
Answer: C
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Chapter 2: Supply and Demand
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Sample Questions
Q1) The demand curve for soda is represented by the following equation: Q=12-2P.If at the current market price the elasticity of demand for soda is -2,what is the market price?
Answer: Using the information given,we can fill in part of the point elasticity formula and solve for P.
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Q2) Along a linear demand curve,the price elasticity:
A)is constant.
B)increases as price falls.
C)is equal to zero at the midpoint.
D)increases as the price level rises.
Answer: D
Q3) The cross-price elasticity of demand between substitutes:
A)is negative.
B)is positive.
C)is zero.
D)is negative if the own-price elasticity of each good is inelastic,but positive if the own-price elasticity of each good is elastic.
Answer: B
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Chapter 3: The Theory of Consumer Choice
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Sample Questions
Q1) If a consumer's marginal utility was 10 utils per unit of meat and 5 utils per unit of potatoes:
A)the consumer should purchase less potatoes and more meat to maximize his satisfaction.
B)the consumer would be in equilibrium if the per-unit price of meat was twice the price of potatoes.
C)the consumer would be in equilibrium if the price per unit of meat was half the price of potatoes.
D)the consumer's total utility could be increased by consuming more potatoes and less meat until the marginal utilities of the two goods were equal.
Answer: B
Q2) The consumption of the composite good is measured by:
A)total outlays on all goods included in the group.
B)adding up the quantities of all goods included in the group.
C)adding up the prices of all goods included in the group.
D)the relative prices of the goods included in the group.
Answer: A
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Chapter 4: Individual and Market Demand
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Q1) Suppose the government levies a tax on sugar at the rate of $0.50 per pound.Then the government returns the tax revenues to a family in the form of a cash grant equivalent to the average tax paid per family.If the family's cash refund just equals the total amount of tax they paid on sugar,which of the following statements would be true?
A)The family would consume less sugar and be better off.
B)The family would consume the same amount of sugar and be worse off.
C)The family would consume less sugar and be worse off.
D)The family would consume less sugar but their well-being would remain unchanged.
Q2) The substitution effect is the change in consumption due to:
A)a change in relative prices.
B)a change in income.
C)a change in utility.
D)a change in the availability of complements.
Q3) In the country of Aldeine,the market demand for Good A is derived from the individual demand curves of five consumers who consider A to be a Giffen good.Determine the shape of the market demand curve for A.How it is different from the market demand curve for normal goods.
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Chapter 5: Using Consumer Choice Theory
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Sample Questions
Q1) Expected return is defined as _____.
A)the summed value of each possible rate of return discounted for inflation
B)the average probability of profit on a fair investment
C)the expected probability of high returns on an investment
D)the summed value of each possible rate of return weighted by its probability
Q2) Based on Figure 5-2,the welfare cost of an excise tax (that raises price from P<sub>2</sub> to P<sub>1</sub>)is the area _____.
A)P<sub>1</sub>ACP<sub>2</sub>
B)P<sub>1</sub>BCP<sub>2</sub>
C)ADC
D)ABC
Q3) Consider a two-year period where a consumer has an income of $10,000 in year 1 and $8,000 in year 2.The consumer can borrow or lend at a rate of 10 percent.If the consumer decides to save $1,000 in year 1,it means:
A)his consumption will be equal in both years.
B)he will have a higher consumption in year 2 than in year 1.
C)he considers consumption in year 1 as an inferior good.
D)the cost of future consumption will increase.
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Chapter 6: Exchange, Efficiency, and Prices
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Q1) Qualifications to the tenet that voluntary exchange is mutually beneficial include the criterion that _____.
A)the individual's preferences will not change during the transaction B)the outcome of the exchange must be equitable as well as efficient C)one individual is made better off at the expense of the other D)benefit is evaluated after the transaction
Q2) Suppose,given their initial endowments of milk [M] and cookies [C],we know that: Ashley's marginal rate of substitution of cookies for milk [MRS<sub>CM</sub>] = 3M/1C;Bill's MRS<sub>CM</sub> = 8M/8C;and Carol's MRS<sub>CM</sub> = 5M/10C.Given this information we know that a mutually beneficial trade would involve Ashley selling ______ to Carol and Bill selling ______ to Ashley.
A)milk;cookies
B)milk;milk
C)cookies;milk
D)cookies;cookies
Q3) How are prices of goods that you buy in an auction,at a garage sale,and at a drugstore determined? Is the price discovery process the same in all these markets?
Q4) Explain why a competitive equilibrium produces an efficient allocation of goods.
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Chapter 7: Production
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Sample Questions
Q1) Mark is a farmer who faces the production function Q = a + bL + cK,where L is the labor input and K is capital.Show that the law of diminishing returns does not apply to Mark's farm in the short-run.
Q2) If isoquants are drawn as right angles,it implies:
A)that the two inputs are perfect substitutes for each other.
B)that the MRTS is constant.
C)that the inputs must be used in fixed proportions.
D)the isoquants can be intersecting.
Q3) In the long run,_____.
A)the marginal cost of each input differs by the ratio of their prices
B)all inputs to production are fixed
C)the marginal cost of each input equals the ratio of their prices
D)all inputs to production are variable
Q4) In Figure 7-2,at point C _____.
A)average product equals marginal product
B)marginal product is at a maximum
C)total product is increasing at an increasing rate
D)average product is declining but positive
Q5) What factors give rise to increasing returns to scale and decreasing returns to scale?
Page 9
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Chapter 8: The Cost of Production
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Sample Questions
Q1) Assume that with 20L and 30K a given firm can produce 100 units of output and with 40L and 60K it can produce 175 units (where L and K denote the labor and capital inputs).Based on this information,we can conclude that:
A)decreasing returns to scale exist.
B)average cost is decreasing.
C)average cost is constant.
D)increasing returns to scale exist.
Q2) The possibility of learning by doing ensures:
A)equal profits for all firms in an industry.
B)uniform price for a product.
C)lower production costs to a pioneering firm.
D)lower production costs to a market entrant.
Q3) If total fixed costs are $1,000,variable costs are constant at $5.00 per unit over the relevant range of output and average total cost is $6,what is total variable cost?
A)$100
B)$1,000
C)$5,000
D)$6,000
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Chapter 9: Profit Maximization in Perfectly Competitive Markets
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Q1) Eggs,which are standardized products,are sold within a city at higher prices than in the suburbs.Given that firms in the city are able to sustain the higher prices but do not make higher profits than firms in the suburbs,this means that:
A)the egg industry is a constant-cost industry.
B)the egg industry is not competitive as the prices of perfectly substitutable goods are different.
C)consumers do not have perfect information which leads to price differentials.
D)the convenience of buying eggs in the city weakens the homogeneous product assumption.
Q2) The perfectly competitive firm's demand curve is horizontal because:
A)the firm faces a constant-cost supply curve.
B)the demand for its goods is infinitely elastic.
C)firms in competitive industries collude and set the same prices.
D)the firm can change prices by varying its output.
Q3) Zero economic profit occurs when:
A)price equals minimum average variable cost.
B)a firm has existed for long enough to make normal profit.
C)price equals long-run average cost.
D)a firm operates at the minimum of its long-run marginal cost curve.
Page 11
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Chapter 10: Using the Competitive Model
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Sample Questions
Q1) Explain how entry restrictions imposed on taxis by a city affects fares and profits of licensed taxi owners as demand increases over time.
Q2) What is meant by consumer surplus?
A)It is the total quantity of a good bought by a consumer divided by the price paid.
B)It is a measure of an individual consumer's utility from the consumption of a good.
C)It is the difference between a consumer's maximum willingness to pay and the price.
D)It is a measure of the total benefit to consumers from the purchase of a good.
Q3) Which of the following is true of a quota in a competitive market?
A)A quota increases total surplus as the quantity produced and consumed in the domestic market increases.
B)A quota is a trade policy used to promote greater efficiency in production within world markets.
C)A quota reduces the welfare of domestic consumers more than it increases the welfare of producers.
D)A quota is imposed in a competitive market to increase total world output of goods and services.
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Page 12
Chapter 11: Monopoly
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Sample Questions
Q1) The monopolist's demand curve slopes downward because:
A)the good sold by a monopolist is easily substitutable.
B)the monopolist is a price maker in the market.
C)average revenue decreases with each unit sold.
D)the marginal product of labor is diminishing.
Q2) Refer to Figure 11-5.Between points A and F on the demand curve,the price elasticity of demand:
A)is equal to one.
B)exceeds one.
C)is equal to zero.
D)is less than one.
Q3) A monopolist faces the following conditions: Q = 500 - .5P and TC = 1000 + Q + Q<sup>2</sup>.What is the monopolist's profit maximizing price?
A)P = $650
B)P = $667
C)P = $675
D)P = $688
Q4) Given the price [P],marginal cost [MC],and price elasticity of demand [ ] for a monopolist,derive the condition for the profit-maximizing price.
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Chapter 12: Product Pricing With Monopoly Power
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Q1) Which of the following products/services provides the least scope for arbitrage?
A)Sports shoes
B)Live concerts
C)Jewelry
D)Books
Q2) Under perfect price discrimination,_____.
A)each customer pays the same price but receives a different quantity
B)each customer pays a different price based on their willingness to pay
C)efficiency loss is maximized
D)price is always above marginal revenue
Q3) With a two-part tariff,consumers pay:
A)a constant "average" price per unit of output.
B)higher prices for purchasing greater quantities of output.
C)an "average" price per unit of output that declines with the quantity purchased.
D)a flat fee followed by an increasing per unit price.
Q4) Why is it difficult to implement first-degree price discrimination?
Q5) Derive the first-order conditions for profit maximization for a monopolist practicing price-discrimination.
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Chapter 13: Monopolistic Competition and Oligopoly
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Q1) Which of the following has contributed to the success of OPEC [Organization of the Petroleum Exporting Countries] as an oil cartel?
A)The product supplied by OPEC is homogeneous and has few substitutes.
B)The supply elasticity of non-OPEC oil suppliers is relatively high.
C)The demand for oil is relatively price elastic,especially in the short run.
D)OPEC is formed by a large number of member countries that differ in size,cost,and other aspects.
Q2) The demand curve that a monopolistically competitive firm faces is _____.
A)downward-sloping but fairly elastic
B)upward-sloping but fairly inelastic
C)horizontal
D)vertical
Q3) In the dominant firm model,if the elasticity of market demand is 0.75,the dominant firm's market share is 0.25,and the elasticity of supply of the competitive fringe is 2,then the dominant firm's elasticity of demand is _____. A)3
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Chapter 14: Game Theory and the Economics of Information
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Q1) A prisoner's dilemma game is one in which:
A)only one of the two prisoners has a dominant strategy.
B)altruistic motives by each player leads to an outcome where all players are equally well off.
C)self-interest by each player leads to an outcome where all players are worse off than if they had cooperated.
D)self-interest by each player leads to an outcome where all players are better off than if they had cooperated.
Q2) People are not always fully informed about product quality because:
A)they are more concerned about prices and least concerned about quality.
B)their choices are typically affected by package design rather than the quality.
C)the benefits from acquiring information about quality may not be worth the cost of gathering that information.
D)the products available in a market are more or less homogenous,with very little price dispersion.
Q3) What is a prisoner's dilemma? Draw a payoff matrix which illustrates this game.
Q4) Explain how advertising,when undertaken by all competing firms,actually reduces the market power of the firms.
Page 16
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Chapter 15: Using Noncompetitive Market Models
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Q1) Intellectual property rights are protected by patents.One of the controversial aspects of the patent system is the patents that are granted to pharmaceutical companies.Critics of the patent system claim that these increase the price of life-saving drugs and make them unaffordable to the poor.For example,patents restrict the availability of AIDS medicine in developing countries that require them the most.What would happen if drugs were not allowed to be patented in the interests of increasing their availability at a lower price? How do the long-run and short-run effects differ?
Q2) Refer to Table 15-3.When Costello chooses the low-pricing strategy,Abbott's highest possible profit is:
A)$50
B)$21
C)$107
D)$115
Q3) In Table 15-2,company A's strategy of choosing a _____ price is dominated by a strategy of _____ price.
A)low;medium
B)medium;high
C)high;low
D)high;medium
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Chapter 16: Employment and Pricing of Inputs
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Q1) The law of diminishing marginal returns,when applied to labor,states that:
A)each worker makes a very small contribution to the total output.
B)each worker adds more to total output than the previous worker.
C)each additional worker contributes a smaller increase to total output.
D)each additional worker causes average output to rise at an increasing rate.
Q2) Refer to Figure 16-2.When the monopsonist is in equilibrium,the level of labor employed is _____.
A)A
B)B
C)C
D)D
Q3) Two inputs,labor and capital,are considered complements if:
A)a fall in the price of labor leads to a fall in the price of capital.
B)they can replace each other in the production process.
C)a fall in the price of labor leads to an increase in the price of capital.
D)increasing the quantity of labor increases the marginal product of capital.
Q4) Using a graph,show the welfare effects of a monopsony input market compared to a perfectly competitive input market.Assume upward sloping cost curves.
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Chapter 17: Wages, Rent, Interest, and Profit
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Q1) Which of the following correctly supports the argument for the presence of unions in an industry?
A)Unions counteract the monopsony power of big firms in the labor market.
B)As a result of negotiations by unions,employment in the industry is higher than it would have been without a union.
C)Any inefficiency arising from the presence of a union is outweighed by the benefits of unions.
D)The presence of unions does not lead to a deadweight loss in the labor market.
Q2) Refer to Figure 17-1.If the number of leisure hours is OL<sub>1</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) How do firms decide if an investment is feasible? In other words,how are investment projects valuated?
Q4) When might a compensating wage differential go the "wrong way"? Explain with a graph.
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Chapter 18: Using Input Market Analysis
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Sample Questions
Q1) According to the Fair Labor Standards Act,which of the following workers are not covered under the minimum wage law?
A)Farm workers
B)Retailers
C)Skilled professionals
D)Engineers
Q2) Which of the following is true for a competitive firm operating in an input market cartel?
A)The individual firm's demand curve for the input is downward sloping when it acts alone.
B)The individual firm's supply curve is horizontal when it acts alone and upward sloping with coordinated hiring.
C)The individual firm's supply curve is upward sloping when the firm acts alone but horizontal otherwise.
D)The individual firm's supply curve is horizontal when it acts alone and downward sloping with coordinated hiring.
Q3) What is the long run effect of a pay-as-you-go Social Security program on the gross domestic product [GDP] of a country?
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Chapter 19: General Equilibrium Analysis and Economic Efficiency
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Q1) A general competitive equilibrium:
A)must lie on the production contract curve.
B)requires the input prices to be equal to the respective marginal productivities.
C)can be attained only if the inputs are perfectly substitutable.
D)is attained at a point where two isoquants intersect each other.
Q2) Identify the correct statement:
A)Public goods are usually associated with negative externalities.
B)As public goods provide benefits to multiple consumers,it must be provided by the government.
C)Public goods are usually overproduced.
D)Public goods can result in inefficiency even if perfect competition prevails.
Q3) Partial equilibrium analysis is the study of:
A)how equilibrium is determined in more than one market simultaneously.
B)the determination of equilibrium in a market with incomplete information on price and output.
C)the determination of equilibrium in a given market,considering the influence of other markets.
D)how equilibrium is determined in a given market,independent of other markets.
Q4) Explain why economic efficiency cannot be achieved under certain circumstances.
Page 21
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Chapter 20: Public Goods and Externalities
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Q1) Which of the following helps to achieve efficiency in production?
A)Altruistic production and consumption behavior
B)Sufficient information to measure total social costs and benefits
C)Additional capital per worker
D)A rigid monetary and fiscal policy
Q2) When a positive externality generated from the production of a good has not been internalized,then:
A)the socially optimal quantity of output must be larger than the market level of output.
B)the socially optimal quantity of output must be less than the market level of output.
C)the socially optimal quantity of output must be equal to the market level of output.
D)the socially optimal quantity of output can be either larger or smaller than the market level of output.
Q3) Mention some of the situations in which the Coase Theorem will not ensure an efficient outcome?
Q4) Explain with the help of a suitable real life example how common resources are depleted if property rights are not ensured?
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