Managerial Economics Question
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Course Introduction
Managerial Economics explores the application of economic theory and analytical tools to business decision-making. The course covers fundamental concepts such as demand and supply analysis, production and cost functions, market structures, pricing strategies, and the impact of government policies on the business environment. Students learn how to interpret economic data, forecast trends, evaluate alternatives, and make informed choices that enhance organizational efficiency and profitability. Emphasis is placed on real-world cases and problem-solving techniques to illustrate how economic principles guide managers in planning, resource allocation, and strategic policy formulation.
Recommended Textbook
Managerial Economics 12th Edition by Mark Hirschey
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Page 2
Chapter 1: Nature and Scope of Managerial Economics
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Sample Questions
Q1) Managers who seek satisfactory rather than optimal results:
A) take actions that benefit parties other than stockholders.
B) are insensitive to social constraints.
C) are insensitive to self-imposed constraints.
D) increase allocative efficiency.
Answer: A
Q2) Value maximization is broader than profit maximization because it considers:
A) total revenues.
B) total costs.
C) real-world constraints.
D) interest rates.
Answer: D
Q3) Unfriendly takeovers have the greatest potential to enhance the market price of companies whose managers:
A) maximize short-run profits.
B) maximize the value of the firm.
C) satisfice.
D) maximize long-run profits.
Answer: C
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Page 3
Chapter 2: Economic Optimization
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Q1) Marginal profit equals average profit when:
A) marginal profit is maximized.
B) average profit is maximized.
C) marginal profit equals marginal cost.
D) the profit minimizing output is produced.
Answer: B
Q2) Average cost minimization occurs at the point where:
A) MC = 0
B) MC = AC
C) AC = 0
D) Q = 0
Answer: B
Q3) If total revenue increases at a constant rate as output increases, marginal revenue:
A) is greater than average revenue.
B) is less than average revenue.
C) is greater than average revenue at low levels of output and less than average revenue at high levels of output.
D) equals average revenue.
Answer: D
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Page 4
Chapter 3: Demand and Supply
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Q1) If demand increases while supply decreases for a particular good, the:
A) equilibrium price will increase while the quantity of the good produced and sold could increase, decrease, or remain constant.
B) quantity of the good produced and sold will decrease while its equilibrium price could increase, decrease, or remain constant.
C) quantity of the good produced and sold will increase while its equilibrium price could increase, decrease or remain constant.
D) equilibrium price will decrease while the quantity of the good produced and sold could increase, decrease, or remain constant.
Answer: A
Q2) The supply curve expresses the relation between the aggregate quantity supplied and:
A) price, holding constant the effects of all other variables.
B) aggregate quantity demanded, holding constant the effects of all other variables.
C) profit, holding constant the effects of all other variables.
D) each factor that affects supply.
Answer: A
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Chapter 4: Demand Analysis
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Q1) Consumer Surplus. Explain why each of the following statements is true or false.
A. Consumer surplus exists if an individual consumer is able to buy something for less than the maximum amount they are willing to pay.
B. Consumer surplus is the value of purchased goods and services and equals the amount paid to sellers.
C. A firm can enhance profits by charging each customer a per-unit fee equal to marginal cost, plus a fixed fee equal to the amount of consumer surplus generated at that per-unit fee.
D. The optimal bundle price is a single lump sum amount equal to the total area under the demand curve at that point.
E. If exact information about the value of each individual product for each individual consumer was available, the firm could earn maximum profits by precisely tying the price charged to the marginal value derived by each customer.
Q2) An increase in the quantity purchased following a price cut is:
A) unrelated to the law of diminishing marginal utility.
B) inconsistent with the law of diminishing marginal utility.
C) inconsistent with utility-maximizing behavior.
D) consistent with the law of diminishing marginal utility.
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Page 6
Chapter 5: Demand Estimation
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Q1) A decrease in demand can be expected following:
A) an increase in price.
B) a decrease in price.
C) a decrease in advertising.
D) an increase in the price of substitutes.
Q2) Movement along a demand curve is indicated by the quantity effect of a change in:
A) advertising.
B) price of other goods.
C) income.
D) price.
Q3) If P<sub>1</sub> = $5, Q<sub>1</sub> = 10,000, P<sub>2</sub> = $6 and Q<sub>2</sub> = 5,000, then a linear estimate of the demand curve is:
A) P = $7 - $0.002Q
B) P = $5 + $10,000Q
C) Q = 7 - 0.002P
D) Q = 35,000 - 5,000P
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Chapter 6: Forecasting
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Q1) Continuous Compounding. Elizabeth Corday, a quality control supervisor for Surgery Products, Inc., is concerned about an increase in distribution costs for disposable syringes from $40 to $50 per case over the last five years. Corday feels that setting up a new direct-sales distribution network at a cost of $58.50 per unit may soon be desirable.
A. Calculate the unit cost growth rate using the constant rate of change model with continuous compounding.
B. Forecast when unit distribution costs will exceed the current cost of direct-sales distribution.
Q2) Econometric methods:
A) combine economic theory with mathematical and statistical tools to analyze economic relations.
B) project the direction, but not the magnitude of, changes in the variable of interest.
C) rely solely on historical data as the basis for projection.
D) use nonmarket data to project the effects of changes in economic variables.
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Chapter 7: Production Analysis and Compensation Policy
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Q1) A new production function results following:
A) a new wage agreement following collective bargaining.
B) a surge in product demand.
C) a decrease in the availability of needed inputs.
D) the successful completion of a training program that enhances worker productivity.
Q2) Total output is maximized when:
A) average product equals zero.
B) marginal product is maximized.
C) average product is maximized.
D) marginal product equals zero.
Q3) When P<sub>X</sub> = $60, MP<sub>X</sub> = 5 and MP<sub>Y</sub> = 2, relative employment levels are optimal provided:
A) P<sub>Y</sub> = 16.7¢.
B) P<sub>Y</sub> = $24.
C) P<sub>Y</sub> = $60.
D) P<sub>Y</sub> = $150.
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9
Chapter 8: Cost Analysis and Estimation
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Q1) Profit Contribution Analysis. San Francisco's Pier 9, Inc., sells souvenir T-shirts at a price of $25. Of this amount, $15 is profit contribution. Pier 9 is considering differentiating its product from several other competitors by using higher quality T-shirts. Doing so would increase unit cost by $2.50 per shirt. Current monthly profits are $10,000 on 2,500 unit sales.
A. Assuming average variable costs are constant at all output levels, what is FWC's total cost function before the proposed change?
B. What will the total cost function be if higher quality t-shirts are used?
C. Assume shirt prices remain stable at $25. What percentage increase in sales would be necessary to maintain current profit levels?
Q2) The output level at which short-run average costs are minimized is:
A) minimum efficient scale.
B) where multi-plant economies of scale equal one.
C) where multi-plant economies of scale exceed one.
D) capacity.
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10
Chapter 9: Linear Programming
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Sample Questions
Q1) When the objective function coincides with the boundary of the feasible space:
A) an optimal solution cannot be determined.
B) there is only one optimal solution.
C) there are many possible optimal solutions.
D) an optimal solution does not exist.
Q2) If the objective function is to maximize revenue subject to a binding labor constraint, then the shadow price of labor is:
A) the marginal product of labor.
B) the marginal revenue product of labor.
C) negative.
D) zero.
Q3) Linear programming assumes:
A) falling input prices.
B) increasing returns to each factor input.
C) straight-line objective and constraint functions.
D) monopolistic competition.
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11
Chapter 10: Competitive Markets
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Sample Questions
Q1) In a perfectly competitive market:
A) sellers and buyers have perfect information.
B) entry and exit are difficult.
C) sellers produce similar, but not identical products.
D) each seller can affect the market price by changing output.
Q2) So long as P > AVC, the competitive firm's short-run supply curve is equal to:
A) AVC
B) P
C) MC
D) none of these.
Q3) Graphically, competitive market supply is measured by the:
A) vertical difference of competitor demand curves.
B) vertical sum of competitor demand curves.
C) horizontal difference of competitor MC curves.
D) horizontal sum of competitor MC curves.
Q4) In perfectly competitive markets, profits are maximized when:
A) MC = AC
B) P > AC
C) MR = MC
D) MR = P
Page 12
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Chapter 11: Performance and Strategy in Competitive Markets
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Q1) Profits stemming from market power reflect:
A) high prices.
B) superior efficiency.
C) exceptional capability.
D) rapid industry growth.
Q2) Failure by market structure is caused by:
A) positive spillover effects.
B) positive externalities.
C) negative externalities.
D) none of these.
Q3) Undue market power is indicated when buyer influence results in:
A) higher than competitive prices.
B) less than competitive output.
C) less than competitive costs.
D) excess profits.
Q4) In competitive markets:
A) high-wage workers tend to be those that are most productive.
B) companies earn excess profits by better serving customer needs.
C) fairness is sacrificed in the interest of efficiency.
D) firms dictate the quantity and quality of goods and services provided.
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Chapter 12: Monopoly and Monopsony
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Q1) A monopolist maximizes profits by producing a level of output where:
A) P = AC
B) P > MC
C) P < MC
D) P = MC
Q2) In monopoly markets, market demand is:
A) perfectly inelastic with respect to price.
B) perfectly elastic with respect to price.
C) elastic with respect to price.
D) inelastic with respect to price.
Q3) Holding supply conditions constant, the costs of regulation fall wholly on producers when:
A) e<sub>P</sub> = ¥
B) e<sub>P</sub> ³ 1
C) e<sub>P</sub> = 1
D) e<sub>P</sub> = 0
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Chapter 13: Monopolistic Competition and Oligopoly
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Q1) A perfectly functioning cartel results in:
A) oligopoly.
B) monopoly.
C) perfect competition.
D) monopolistic competition.
Q2) A successfully exploited niche market involves elements of:
A) perfect competition.
B) monopolistic competition.
C) monopoly.
D) monopsony.
Q3) The kinked demand curve theory of oligopoly assumes that rival firms:
A) react to price increases.
B) react to price increases and decreases.
C) do not react to price changes.
D) react to price decreases.
Q4) The demand faced by an industry price leader is:
A) market demand.
B) market demand plus the demand for output by follower firms.
C) market demand less the supply of output by follower firms.
D) kinked.
Page 15
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Chapter 14: Game Theory and Competitive Strategy
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Q1) In the Prisoner's Dilemma game:
A) complete solution is derived using the look ahead and extrapolate back principle.
B) each player moves in succession.
C) each player is aware of all prior moves.
D) none of these.
Q2) Economic games are set in a:
A) positive economic environment.
B) neutral economic environment.
C) negative economic environment.
D) none of these.
Q3) Limit pricing is a competitive strategy to set A) monopoly prices.
B) less than monopoly prices.
C) competitive prices.
D) less than competitive prices.
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Chapter 15: Pricing Practices
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Q1) Consumers' surplus represents:
A) total revenues.
B) total revenues less total costs.
C) the excess of revenues above and beyond the cost of output to producers.
D) the value of output to consumers above and beyond the amount paid to producers.
Q2) Optimal Price. Lean Jeans, Inc., recently offered rebates of $1 off the regular $50 price on their low-rider jeans. Sales responded, rising 4% over the previous month's level.
A. Calculate the point price elasticity of demand for Lean Jeans.
B. If marginal cost per unit is $20, was the original $50 price optimal?
Q3) Markup on Cost. King Midas Muffler, Inc., offers automobile muffler replacement at a number of outlets in the greater Boston area. The company recently initiated a policy of matching the lowest advertised competitor price. As a result, King Midas has been forced to reduce the average price for mufflers by 3%, but has enjoyed an 18% increase in customer traffic. Meanwhile, marginal costs have held steady at $74.97 per muffler.
A. Calculate the point price elasticity of demand for mufflers.
B. Calculate King Midas' optimal price and markup on cost.
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Chapter 16: Risk Analysis
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Q1) For a risk seeker the marginal utility of money is:
A) constant.
B) increasing.
C) positive.
D) diminishing.
Q2) When the dispersion of possible returns is irrelevant, the decision maker is said to be:
A) risk averse.
B) risk neutral.
C) risk seeking.
D) none of these.
Q3) Uncertainty is present when:
A) outcomes are unknown.
B) all possibilities are unknown.
C) all probabilities are unknown.
D) all of these.
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Page 18
Chapter 17: Capital Budgeting
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Q1) The cost of capital is the:
A) component cost of debt.
B) component cost of equity.
C) both A and B
D) discount rate.
Q2) The risk-free rate of return is the investor reward for:
A) risk-taking.
B) postponing consumption.
C) relative stock-price variability.
D) absolute stock-price variability.
Q3) When NPV is positive, the IRR:
A) is less than the cost of capital.
B) equals the cost of capital.
C) exceeds the cost of capital.
D) none of these.
Q4) Firms should finance a project if its:
A) expected cash flow is positive.
B) net cash flow is positive.
C) internal rate of return is positive.
D) net present value is positive.
Page 19
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Chapter 18: Organization Structure and Corporate Governance
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Q1) The merger between J.P. Morgan and Chase Manhattan banks that created JPMorgan Chase & Co. was a:
A) market extension merger.
B) conglomerate merger.
C) horizontal merger.
D) vertical merger.
Q2) Transactions Costs. Centex Corp. is one of the nation's largest home builders, building and delivering, through its subsidiary Centex Homes, over 10,000 homes per year. Centex's housing operations currently involve the construction and sale of single-family and multi-family homes in over 50 different markets nationwide. These activities also include the purchase and development of land.
A. Use transactions costs to explain the existence of firms like Centex.
B. When will less formal contracting arrangements supplant the need for a formal corporate structure?
Q3) The quality-control potential of high-tech firms tends to result in:
A) low institutional ownership.
B) high inside ownership.
C) high institutional ownership.
D) significant financial leverage.
Page 20
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Chapter 19: Government in the Market Economy
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Q1) Policies that are designed to reduce barriers to international trade are known as:
A) trade deficit policies.
B) free trade policies.
C) protectionist policies.
D) import quotas.
Q2) Market failure refers to a situation where:
A) nothing useful is produced.
B) markets fail to bring about an equality between losses and gains.
C) economic efficiency is not achieved.
D) scarcity is not eliminated.
Q3) All public goods involve:
A) nonrival consumption.
B) the nonexclusion concept.
C) both A and B.
D) none of these.
Q4) Nonrival Consumption Concept. The essential distinguishing characteristic of public goods is the concept of nonrival consumption.
A. Explain the nonrival consumption concept.
B. Cite some examples of goods that display the nonrival consumption attribute.
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