Managerial Economics
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Course Introduction
Managerial Economics explores the application of economic theory and quantitative methods to managerial decision-making processes within organizations. The course examines how market forces, consumer behavior, production costs, and competitive dynamics influence the strategies and choices of firms. Topics include demand analysis, pricing strategies, profit maximization, risk assessment, and resource allocation. Emphasis is placed on understanding how economic concepts can be used to solve real-world business problems, optimize operations, and enhance organizational performance in an ever-changing economic environment.
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Managerial Economics 5th Edition by Luke M. Froeb
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Page 2
Chapter 1: The One Lessor of Business
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Q1) If you are willing to sell your car business for $500,000 and someone offers you $420,000 for it,this transaction will generate:
A)There is no surplus created
B)$80,000 worth of seller surplus and unknown amount of buyer surplus
C)$40,000 worth of buyer surplus and $40,000 of seller surplus
D)$80,000 worth of buyer surplus and unknown amount of seller surplus
Answer: A
Q2) If you are willing to sell your lawn mower business for $355,000 and someone offers you $420,000 for it,this transaction will generate:
A)There is no surplus created
B)$65,000 worth of seller surplus and unknown amount of buyer surplus
C)$30,000 worth of buyer surplus and $35,000 of seller surplus
D)$65,000 worth of buyer surplus and unknown amount of seller surplus
Answer: B
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Chapter 2: Benefits, Costs, and Decisions
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Sample Questions
Q1) The fixed-cost fallacy occurs when
A)A firm considers sunk costs in making decisions
B)A firm ignores relevant costs
C)A firm considers overhead or depreciation costs in making decisions
D)Both a and c
Answer: D
Q2) Sarah can bake 200 cookies in an hour or watch her favorite tv show.If she chooses to watch her show,her opportunity cost is
A)200 cookies
B)100 cookies
C)150 cookies
D)Need more information
Answer: A
Q3) Which of the following statements is true?
A)Economic profits ignore implicit costs.
B)Economic profits include implicit costs.
C)Accounting profits include all of the opportunity costs.
D)Economists consider sunk costs in their decision making.
Answer: B
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Page 4
Chapter 3: Extent How Much Decisions
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Sample Questions
Q1) Total costs increase from $1,500 to $1,800 when a firm increases output from 40 to 50 units..Which of the following are true?
A)AC rise by $1.50
B)AC rise by $1.00
C)AC fall by $1.50
D)AC fall by $1.00
Answer: C
Q2) Marginal revenue is_____________.
A)The cost of producing an additional unit of output
B)The total revenue gained from production
C)The revenue from selling an additional unit of output
D)none of the above
Answer: C
Q3) If the firm hires 5 workers,total fixed costs equals
A)$250
B)$50
C)$200
D)$1,200
Answer: B
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Page 5
Chapter 4: Investment Decisions: Look Ahead and Reason
Back
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Sample Questions
Q1) If the price is $110 per unit,what is the break even amount of units for technology B?
A)20
B)25
C)30
D)None-They would have to shut down
Q2) A firm sells 300,000 units per week.It charges $ 35 per unit,the average variable costs are $40,and the average costs are $55.At what price does the firm consider shutting-down in the short run?
A)$45
B)$40
C)$95
D)$55
Q3) A firm sells 1000 units per week.It charges $15 per unit,the average variable costs are $10,and the average costs are $25.At what price does the firm consider shutting-down in the long run?
A)$25
B)$0
C)$15
D)$10
6
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Chapter 5: Simple Pricing
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Sample Questions
Q1) The demand for Dell laptops is more price elastic than the demand for laptops as a whole.This can be best explained by the fact that
A)There are fewer substitutes for Dell laptops than for laptops as whole
B)There are more substitutes for Dell laptops than for laptops as whole
C)Dell laptops are luxurious goods
D)Dell laptops are a necessity
Q2) Which of the three product has a unitary elastic demand curve?
A)Cigarettes
B)Alcohol
C)Sodas
D)None of the above
Q3) A product can be classified as an inferior good if an increase in the income causes
A)A decrease in the quantity demanded
B)A decrease in demand
C)An increase in demand
D)An increase in the quantity demanded.
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Chapter 6: Economies of Scale and Scope
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Sample Questions
Q1) If marginal costs rises above average costs,average costs must
A)Be increasing
B)Be decreasing
C)Stay constant
D)None of the above
Q2) When a firm is experiencing decreasing marginal costs,it implies
A)marginal productivity is decreasing
B)workers are getting more unproductive
C)a constant marginal productivity
D)increasing marginal productivity
Q3) The marginal cost curve:
A)Usually declines initially as output increases and then rises with further increases in output
B)Is equal to the average variable cost curve
C)Usually rises initially as output increases and declines with further increases in output
D)Is always constant
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Chapter 7: Understanding Markets and Industry Changes
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Sample Questions
Q1) A market maker faces the following demand and supply for widgets.Eleven buyers are willing to buy at the following prices: $15,$14,$13,$12,$11,$10,$9,$8,$7,$6,$5.Eleven sellers are also willing to sell at the same prices.If the market maker decides to only make one transaction what is his profit/bid-ask margin
A)$8
B)$10
C)$12
D)$16
Q2) The change in any factor other than ________ would shift the demand curve
A)Weather
B)interest rate
C)Price
D)all of the above
Q3) In a market where the equilibrium price is $7,any price higher than $7 would cause
A)a balanced demand and supply
B)an excess supply
C)an excess demand
D)none of the above
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Chapter 8: Market Structure and Long Run Equilibrium
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Sample Questions
Q1) Firemen generally are paid higher wages because
A)they are usually highly educated
B)they are usually working under riskier conditions
C)they are working long and uncertain hours
D)both B&C
Q2) In a competitive industry
A)firms sell more if price is above marginal cost
B)firms sell more is price is below marginal cost
C)firms sell less if price is above marginal cost
D)none of the above
Q3) Competitive firms can earn positive profits in the
A)Long run only
B)Long run and the short run
C)Short run only
D)All of the above
Q4) Nike faces a more__________ demand for its products than a shoe polish producer.
A)inelastic
B)elastic
C)perfectly elastic
D)perfectly inelastic
Chapter 9: Strategy: the Quest to Keep Profit From Eroding
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Sample Questions
Q1) Which of the following makes a firm's resources hard to imitate?
A)They flow from the firm's unique history
B)The link between resources and advantages is difficult to discern
C)Resources emanate from a socially complex organizational structure
D)All of the above
Q2) Firms maintain their completive edge by
A)Providing a good at lower costs than their rivals
B)Providing a superior product at the same cost as your rival
C)Being innovative
D)All the above
Q3) Supplier Power
Nora's Nicest Knick Knacks has produces a variety of products sold as souvenirs.She started out printing local sayings on tee-shirts, e.g. ,FDNY,and purchased plain tee-shirts from a single supplier.Since then,she has added coffee mugs,key chains,souvenirs spoons and many other items.For each of these,she has lined up one or more suppliers.How does the change in the sourcing of her inputs affect how much of the value she creates that she gets to capture?
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Chapter 10: Foreign Exchange, Trade, and Bubbles
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Sample Questions
Q1) A widget costs $1000 in the US and CAD$1200 in Canada.The current exchange rate is 1USD=1.09CAD.Given purchasing power parity,the Canadian dollar would_______to equilibrate prices
A)Appreciate
B)Depreciate
C)Not change
D)None of the above
Q2) If the price of a Canadian dollar went from 0.95 US dollars to 0.98 US dollars,we would say that the Canadian dollar has
A)Appreciated
B)Depreciated
C)Not changed in value
D)None of the above
Q3) A Swiss consumer wants to buy an American car.The exchange rate is 1USD=0.89CHF (Swiss Francs).The car costs $10,000.How much would the car cost him in Swiss Francs?
A)12,000 Francs
B)11,600Francs
C)8,900 Francs
D)7,500 Francs
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Page 12
Chapter 11: More Realistic and Complex Pricing
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Sample Questions
Q1) Beverage Merger
Cott Corp.markets a portfolio of beverages,bottled waters,beverage,and coffee delivery systems for homes and offices.In November,2014,it has agreed to merge with DS Services of America,a water and coffee direct-to-consumer services provider.What is the expected effect of this merger on price-cost margins?
Q2) Firm A owns produces both toothpaste and toothbrushes.In order to increase profits the firm must
A)Increase prices for both toothbrushes and toothpaste
B)Decrease prices for both toothbrushes and toothpaste
C)Increase prices on toothbrushes and increase the price on toothpaste
D)Increase prices on toothbrushes but keep the price on toothpaste constant
Q3) A Swiss watch company advertises its history of superior craftsmanship.The company thinks that this will
A)Make the demand for the product more elastic
B)Make the customers more sensitive to the price
C)Not impact the demand for their product
D)None of the above
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Page 13
Chapter 12: Direct Price Discrimination
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Sample Questions
Q1) Advance-purchase discounts offered by airlines are an example of A)Direct price discrimination
B)Indirect price discrimination
C)All of the above
D)None of the above
Q2) Which of the following are ways to sell a customer additional units without dropping the price on previous purchases
A)Offer quantity discounts
B)Offer two-part pricing ex: membership fees
C)Bundle the goods together
D)All of the above
Q3) Circle of Crust
Pie Five Pizzas has a frequent purchaser program,called Circle of Crust,in which patrons earn points with every purchase.With enough points,the patron's next purchase is free.How does this program alter customer decisions?
Q4) Hardcover Books
The marginal cost of printing a typical hard cover novel is $12.00 while the same book in paperback has a marginal cost of $2.00 lower.So why do publishers charge an average of $15 more for hard cover books?
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Chapter 13: Strategic Games
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Sample Questions
Q1) First-mover advantage is a characteristic of
A)A simultaneous-move game
B)A dominant strategy
C)A sequential-move game
D)All of the above
Q2) If Bratty Brenda decides to hit Tattling Tina,what would Tattling Tina's best response be
A)Tell
B)Not tell
C)Run
D)Hide
Q3) If the game continues for infinity,then the new Nash Equilibrium is
A)for one firm to charge a HP forever.
B)for your firm charge a LP when the other firm does.
C)for each firm to charge HP so long as the rival does,otherwise charge a LP.
D)for each firm to charge LP until the rival does,and then to charge a HP forever.
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Chapter 14: Bargaining
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Sample Questions
Q1) If the firm hires security guards to enforce a lockout,what are they implying?
A)They would always accommodate
B)They would always bargain hard
C)They would not accommodate
D)Both B&C
Q2) Armpit Homunculus
Prescott Pharmaceuticals is facing class action suit over side effects caused by its latest growth supplement.The lawyers representing the class are asking $200 million because they claim Prescott knew about and hid the fact that the supplement caused Armpit Homunculus.Prescott claims it had no foreknowledge of this and can take their chance at trial where they expect a $50 million payment.Just before the trial date,an internal Prescott email is discovered in which Dr.Colbert,D.F.A.is joking about "how hideous the armpits will be on all these giants." How does this affect the likely cost of settling the case?
Q3) The union would have a better bargaining position in the negotiations if
A)The firm can hire individual workers at a lower wage
B)The union has low wage workers who cannot afford to be off work
C)The union has a strike fund to pay workers during work stoppage actions
D)The firm can easily replace workers with machinery
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Page 16
Chapter 15: Making Decisions With Uncertainty
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Sample Questions
Q1) You want to run a difference-in-difference experiment with a price increase for your lawn chairs in Miami,FL.If you are worried about the "representativeness" of your control group,a good comparison city would be
A)Boston,MA
B)San Francisco,CA
C)St.Paul,MN
D)Tampa Bay,FL
Q2) Six possibilities are equally likely and have payoffs of $2,$4,$6,$8,$10,and $12.The expected value is:
A)$4
B)$5
C)$6
D)$7
Q3) The VP in charge of product launches hypothesizes that a particular product would be profitable,then launching an unprofitable product is a
A)Type I error
B)Type II error
C)Type III error
D)Type IV error
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Page 17
Chapter 16: Auctions
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Q1) Katy is holding an English auction.If she estimates the values of her bidders to be $2,$4,$10,$15 and $25,she should expect to be able to make ____ off the auction
A)Just above $10
B)Just below $10
C)Just above $15
D)Just below $15
Q2) Anna's Antiques expects to get two bidders for the unique china teacup it sells.Each of the bidders can either have a high-value of $100 or a low-value of $70 with equal probability.If Anna holds an auction between the two customers,the expected value of this auction is
A)$70
B)$78
C)$85
D)$100
Q3) Economists love auctions because
A)They maximize consumer surplus
B)They create efficiency by allotting the item to the highest-value bidder
C)They create efficiency by allotting the item to the lowest value bidder
D)All of the above
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Page 18
Chapter 17: The Problem of Adverse Selection
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Q1) To signal to your insurance company that you are a low risk individual you should
A)Accept an insurance policy with no co-payments
B)Accept an insurance policy with co-payments
C)Accept an insurance policy with a low deductible
D)None of the above
Q2) Scatterbrain Samantha often forgets to lock her house.This has caused the probability of a burglary to be 30%.If her house gets broken into,she faces a property loss of $10,000,otherwise she gets to keep her $100,000.What is the minimum price an insurance company could offer (if it had no other costs)?
A)$10,000
B)$3,000
C)$100,000
D)$5,000
Q3) Ideally,insurance companies would like to charge
A)High premium to low risk clients
B)Low premium to high risk clients
C)The same premium to all clients
D)High premium to high risk and low premium to low risk clients
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19
Chapter 18: The Problem of Moral Hazard
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Q1) For a mortgage lender that makes mortgage loans to borrowers,which one of the following would be an example of moral hazard?
A)After the loan has been made,individuals become careless with their finances
B)Individuals most likely to default are the ones most likely to apply for the loan
C)Lenders performing a credit check on all potential borrowers
D)None of the above
Q2) The following is NOT an example of a potential monitoring solution to moral hazard
A)blocking social network sites on company computers
B)rejecting a job candidate that fails to show up at the allotted interview time
C)GPS tracking devices in repair trucks
D)listening in on call center conversations
Q3) Which is NOT an example of moral hazard
A)people eat less at all-you-can-eat buffets
B)loggers clear-cut a tract of land when paying a fixed price rather than when paying per tree felled
C)Drivers of heavier,safer cares are more likely to run stop signs
D)workers on commission work harder than those paid an hourly wage
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Chapter 19: Getting Employees to Work in the Firms Best Interest
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Sample Questions
Q1) A firm could persuade the sales agent to accept profit based compensation if the new commission is
A)Positive sales biased
B)Negative sales biased
C)Sales neutral
D)None of the above
Q2) The ways to address agency costs include all EXCEPT
A)advertising for employee positions in as many outlets as possible
B)requiring employees to punch time clocks
C)spot checks of the quality of employee work
D)replacing closed offices with cubical office spaces
Q3) A franchisee is likely to command_____ earnings than a salaried manager
A)Higher
B)Lower
C)The same
D)None of the above
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Chapter 20: Getting Divisions to Work in the Firms Best
Interest
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Q1) Conflicts can arise between divisions because
A)Coordination between divisions does not benefit all divisions equally
B)managers of profit centers care too little about the effects of their decisions on other divisions
C)managers are rewarded only for actions that increase their own divisional profit regardless of their effects on other divisions
D)all of the above
Q2) Ways to "game" the budgeting process include
A)delaying sales if just short of a target
B)delaying expenses if just short of a target
C)accelerating sales once a target is met
D)delaying expenses costs once a target is met
Q3) Which of the following is TRUE about firms organized along functional lines?
A)Workers find it difficult to develop functional expertise
B)Workers find it difficult to share information within their division
C)They foster the exploitation of economies of scale
D)All of the above
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Page 22
Chapter 21: Managing Vertical Relationships
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Q1) Vertical contracts between manufacturers and retailers often aim to
A)Prevent the retailers from defeating upstream price discrimination through arbitrage
B)Reward the manufacturer for undertaking the risk inherent in introducing a new product
C)Serve as a "signal" of the retailer's belief of the likely success of his product
D)All of the above
Q2) Coco chocolate manufacturers recently decided to "gift" one of its retailers a refrigerator.Why would it want to do that?
A)To ensure the retailer knowledge of their generosity
B)To ensure the retailers knowledge of their quality
C)To ensure the freshness of the product that reaches their consumers
D)To ensure the retailers decrease in price
Q3) Antitrust risks from vertical integration are usually ______than those from horizontal integration
A)Higher
B)Lower
C)About the same as D)None of the above
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