Managerial Economics Test Bank
Course Introduction
Managerial Economics bridges economic theory with business practice, equipping students with analytical tools to make effective managerial decisions. The course focuses on concepts such as demand and supply analysis, production and cost functions, market structures, pricing strategies, and risk analysis. Through real-world case studies and quantitative methods, students learn to apply microeconomic principles to solve organizational problems, assess market opportunities, and devise strategies that enhance firm performance in a competitive environment.
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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) If a production possibility frontier (PPF)is drawn concave to the origin,with the quantity of shoes on the X-axis and the quantity of T-shirts on the Y-axis,a movement upward along the PPF reflects:
A)an increasing opportunity cost of producing T-shirts.
B)an increasing opportunity cost of producing shoes.
C)constant opportunity cost of producing T-shirts.
D)constant opportunity cost of producing shoes.
Answer: A
Q2) Which one of the following represents an economic,but not an accounting,cost of owning a restaurant?
A)The interest foregone by the owner on the personal savings invested in the restaurant
B)The labor hired used to operate the restaurant
C)The linens used to cover tables
D)The ingredients used to prepare the meals
Answer: A
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3
Chapter 2: Supply and Demand
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Sample Questions
Q1) When there is an excess demand for a good,there is:
A)downward pressure on price because buyers are willing to pay more.
B)downward pressure on price because firms accumulate unwanted inventories.
C)upward pressure on price because buyers are willing to pay more.
D)upward pressure on price because firms accumulate unwanted inventories.
Answer: C
Q2) If the average price of an automobile increased from $7,000 to $8,000 from 1979 to 1980,then we know that:
A)the real price of automobiles must have increased.
B)the absolute price of automobiles increased but its real price declined.
C)the absolute price of automobiles increased but we do not have enough information to say what happened to its real price.
D)the demand for automobiles increased during that period.
Answer: C
Q3) Which of the following is a valid interpretation of the demand curve?
A)The demand curve identifies the quantities purchased at various prices.
B)The demand curve identifies the taste and preference of the consumers.
C)The demand curve identifies the consumer's income level.
D)The demand curve identifies the availability of substitute goods.
Answer: A
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Chapter 3: The Theory of Consumer Choice
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Sample Questions
Q1) Incorporating altruistic preferences into the theory of consumer choice:
A)is not possible.
B)requires modifying the original assumptions of nonsatiation,completeness,and transitivity.
C)is possible,but results in corner solutions.
D)is possible without changing any assumptions.
Answer: D
Q2) Which of the following correctly describes an income-consumption curve?
A)It identifies consumer responses to decreases in prices which increase his or her real income.
B)It identifies the rate at which a consumer is able to substitute one good for another as income changes.
C)It identifies how a consumer's consumption pattern changes as real income changes while prices are constant.
D)It identifies the income effect of price changes.
Answer: C
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5
Chapter 4: Individual and Market Demand
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Sample Questions
Q1) Consider a commodity that is being demanded by only two individuals,A and B.If the demand curves of these two individuals is estimated by the following equations:
Q<sup>1</sup> = 12 - P and Q<sup>2</sup> = 14 - 1.5P,the market demand curve will be:
A)Q = 12 - 1.5P
B)Q = 26 - 2.5P
C)Q = 13 - 1.25P
D)Q = 14 - 1.5P
Q2) U = C<sup>\(\alpha\)</sup>M<sup>\(\alpha\)-1</sup> is an example of a:
A)Cobb-Douglas production function.
B)Cobb-Douglas utility function.
C)quadratic utility function.
D)quadratic production function.
Q3) A negative network externality is caused by the:
A)bandwagon effect.
B)snob effect.
C)herd effect.
D)fad effect.
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Chapter 5: Using Consumer Choice Theory
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Sample Questions
Q1) Prior to the subsidy,the family is in equilibrium at point J.Assume that public schooling cannot be supplemented with private tutoring.Refer to Figure 5-5.The fixed-quantity subsidy reduces schooling by _____.
A)G0
B)B0
C)BG
D)H0
Q2) A risk-averse individual who owns a $200,000 house and faces the prospect that the house will burn down with the probability 0.05 in any given year will be willing to pay how much of an annual premium to fully insure against such a loss?
A)$5,000
B)More than $10,000
C)No more than $5,000
D)Either more or less than $10,000 depending on whether housing is a normal or inferior good for the individual
Q3) Show and explain why substituting an unrestricted cash transfer for an excise subsidy of equal cost to the government must lead to less consumption of the subsidized good and more consumption of other goods.
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Chapter 6: Exchange, Efficiency, and Prices
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Sample Questions
Q1) Explain why a competitive equilibrium produces an efficient allocation of goods.
Q2) Allowing prices to ration goods among consumers results in an:
A)inefficient distribution of goods because the wealthy get the highest quantity.
B)efficient distribution of goods because goods go to those who value them the most.
C)inefficient distribution of goods because goods go to those who value them the most.
D)efficient distribution of goods because the wealthy consumers are unable to buy the quantity they wish.
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) In Table 6.1,if initially Jane has basket D and Bill has basket A,then we can conclude that a mutually beneficial trade _____.
A)does not exist
B)requires that Jane sell Pizza and Bill sell Coke
C)requires that Jane sell either Coke or Pizza
D)requires that Jane sell Coke and Bill sell Pizza
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Chapter 7: Production
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Sample Questions
Q1) The ratio of total product to the total quantity of the input being used is _____.
A)equal to marginal product
B)constant as the levels of the input vary
C)equal to average product
D)equal to the marginal rate of technical substitution
Q2) The slope of a ray from the origin to the total product curve measures _____.
A)the marginal rate of technical substitution
B)the marginal product of the variable factor
C)the average product of the variable factor
D)the maximum output
Q3) With capital (K)on the vertical axis and labor (L)on the horizontal axis,graphically illustrate increasing,constant,and decreasing returns to scale.
Q4) If the marginal product of labor is 25 and the marginal product of capital 10,what is the marginal rate of technical substitution of labor for capital?
A)0.6
B)1
C)1.5
D)2.5
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9
Chapter 8: The Cost of Production
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Sample Questions
Q1) Which of the following can be classified as an implicit cost of production?
A)The cost of raw materials
B)Rent forgone on the office building
C)Interest paid on debt
D)Salary paid to workers
Q2) Learning by doing:
A)results in higher costs in the long run than in the short run.
B)is a result of technological progress.
C)increases productivity of the inputs.
D)results from the increased use of inputs in production.
Q3) Dine-in restaurants provide two distinct products,food and a place to sit and eat.This is an example of:
A)economics of scale.
B)economies of scope.
C)a poor pricing strategy.
D)a loss leader.
Q4) Explain why the long-run average cost curve is usually U-shaped although all inputs are variable in the long run?
Q5) Do you think the marginal cost curve of a petroleum refinery will be U-shaped? Explain your answer.
Page 10
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Chapter 9: Profit Maximization in Perfectly Competitive Markets
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Sample Questions
Q1) For a perfectly competitive firm,the demand curve:
A)coincides with the marginal revenue curve.
B)is parallel to the vertical axis.
C)is upward sloping.
D)is convex to the origin.
Q2) Explain the difference between diminishing marginal returns to factor and a decreasing-cost industry.
Q3) Refer to Figure 9-3.At the profit-maximizing level of output:
A)the firm is earning economic profit.
B)profits per unit are the highest.
C)profit equals ZC.
D)costs exceed revenue.
Q4) Refer to Figure 9-4.The firm's average variable cost at the output level OB is _____.
Q5) Derive the first-order and second-order conditions for perfect competition.
Page 11
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Chapter 10: Using the Competitive Model
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Sample Questions
Q1) The total surplus gained by all the participants in a competitive market is the area between the _____ up to the equilibrium level of output.
A)demand curve and the equilibrium price line
B)demand curve and the supply curve
C)demand curve and the horizontal axis
D)equilibrium price line and the horizontal axis
Q2) If a commodity has a(n)_____,a greater share of the burden of an excise tax levied on the commodity would be borne by the consumers.
A)perfectly elastic demand curve and an elastic supply curve
B)perfectly elastic demand curve and perfectly inelastic supply curve
C)relatively inelastic supply curve
D)perfectly inelastic demand curve
Q3) The Civil Aeronautics Board (CAB).allowed airlines to charge prices above the equilibrium price.Even then the airlines were not profitable because:
A)their economic profits were zero.
B)nonprice competition between the airlines raised costs and eroded profits.
C)the demand was too low to make profit.
D)they were subject to heavy taxes by the government which drove down profits.
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Page 12
Chapter 11: Monopoly
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Sample Questions
Q1) A company is granted a patent on automobile technology which,when fitted in a car,will park the car into a parking spot automatically.
a)Assume that demand for this automatic parking technology is positive and show the equilibrium price and quantity in the market.
b)How will equilibrium price and quantity change when the patent expires in 17 years?
Q2) Refer to Figure 11-5.Total revenue is equal to zero at point(s)_____.
A)E and F
B)A
C)A and F
D)G
Q3) Which of the following would reduce the monopoly power of a single firm in a monopoly market?
A)The acquisition of a patent for its production process
B)An increase in the demand for the firm's product
C)An increase in the price of the firm's product
D)A reduction in the number of rival firms
Q4) Explain why a profit-maximizing monopolist will always sell at a price where demand is elastic.
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Chapter 12: Product Pricing With Monopoly Power
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Sample Questions
Q1) Derive the first-order conditions for profit maximization for a monopolist practicing price-discrimination.
Q2) Refer to Figure 12-1. If the monopolist perfectly price discriminates, profit will be equal to:
A)the area P<sub>3</sub>AP<sub>2</sub>.
B)the area P<sub>3</sub>CP<sub>1</sub>.
C)the area ABC.
D)zero.
Q3) Economists generally view the practice of perfect price discrimination favorably because it:
A)maximizes consumer surplus.
B)forces rich people to pay higher prices.
C)deters monopoly pricing.
D)eliminates deadweight loss.
Q4) With block pricing,consumers typically pay a price that:
A)reduces for additional quantities of output being purchased.
B)remains the same regardless of the quantity purchased.
C)is equal to the average cost of producing the output.
D)increases for additional quantities of output being purchased.
Q5) Why is it difficult to implement first-degree price discrimination?
Page 14
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Chapter 13: Monopolistic Competition and Oligopoly
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Sample Questions
Q1) In Cournot's duopoly model,a firm's profit-maximizing level of output:
A)depends on the market price of the good.
B)is based on the assumption that the other firm produces zero output.
C)based on the other firm's expected level of output,which is assumed to remain unchanged.
D)is equal to the other firm's expected level of output,which is assumed to remain unchanged.
Q2) Which of the following the best example of a cartel?
A)An association of tobacco companies that attempts to influence anti-tobacco legislation
B)A labor union that raises wages above competitive level by restricting the supply of labor
C)A group of countries that sign an agreement to lower trade barriers and exchange goods and services
D)Firms that register their headquarters in the Cayman Islands in order to evade corporate taxes
Q3) What is a cartel and why are cartels considered to be inherently unstable?
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15
Chapter 14: Game Theory and the Economics of Information
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Sample Questions
Q1) Given the information in Table 14-2,which firm has a dominant strategy?
A)Firm A
B)Firm B
C)Both Firm A and Firm B
D)Neither Firm A nor Firm B
Q2) The view that advertising serves as a source of information suggests that advertising is:
A)a low-cost way of providing information on price and quality of products and making markets work better.
B)a way of creating artificial product differentiation that induces consumers to buy products they really do not demand.
C)effective only when it is used by monopolists.
D)beneficial to consumers but adds to a firm's irrecoverable costs of production.
Q3) Which of the following is the best explains the moral hazard problem?
A)Chronically ill people are more likely to purchase health care insurance.
B)Only owners of poor quality used cares put them up for sale.
C)People who are highly risk-averse are less likely to invest in the stock market.
D)Drivers with airbags in their cars drive a little more recklessly.
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Chapter 15: Using Noncompetitive Market Models
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Sample Questions
Q1) In Figure 15-3,under marginal-cost pricing,the monopoly would earn:
A)negative economic profit equal to P<sub>3</sub>CBP<sub>2</sub>.
B)positive economic profit equal to P<sub>2</sub>BQ<sub>2</sub>O.
C)negative economic profit equal to FBQ<sub>2</sub>Q<sub>1</sub>.
D)positive economic profit equal to FCQ<sub>2</sub>Q<sub>1</sub>.
Q2) 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
Q3) Which of the following cannot directly be measured when calculating the deadweight loss from a monopoly?
A)The excess of price over marginal cost
B)The number of industries that are monopolistic in nature
C)The magnitude of output restriction
D)The actual output of monopolistic industries
Q4) What is a natural monopoly? Draw a diagram to illustrate the profit-maximizing output of a natural monopoly.
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Chapter 16: Employment and Pricing of Inputs
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Sample Questions
Q1) Which of the following will lead to a relatively inelastic industry demand for labor?
A)An increase in the use of the fixed input
B)An increase in the wage rate
C)A relatively inelastic demand for the output
D)A reduction in the price of output
Q2) Refer to Table 16-2.If the price of bread is $2 per loaf and the wage rate is $20 per hour,how many workers will the profit maximizing firm hire?
A)3
B)4
C)5
D)6
Q3) For which of the following is the supply curve of labor likely to be the most inelastic?
A)All industries in the economy
B)A single industry
C)An individual firm
D)A monopolist
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Chapter 17: Wages, Rent, Interest, and Profit
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Sample Questions
Q1) The key assumption of the income-leisure model:
A)is not applicable to the real world and so negates the usefulness of the model.
B)is not valid as employers will not cater to workers' income-leisure choices.
C)holds good in general because workers can vary work hours with overtime,leaves without pay and early retirement.
D)is only applicable to entrepreneurs and not salaried workers who are associated with less promising financial rewards.
Q2) How does the rate of return earned on capital in various industries equalize over time? Do the wages earned by labor in different industries and the interest rates for different assets also equalize in the long-run? Why?
Q3) When a firm earns a rate of return on an investment that _____,it makes a pure economic profit.
A)is above its accounting costs
B)is equal to its average variable cost
C)is above the cost of borrowed funds
D)just covers the firm's fixed costs
Q4) What are the sources of variation in wages across individuals?
Q5) How can the presence of a union in a labor market be beneficial?
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Chapter 18: Using Input Market Analysis
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Sample Questions
Q1) In a labor market characterized by a downward-sloping demand curve and an upward-rising supply curve,the disemployment effect of a minimum wage does not equal the total unemployment caused by the minimum wage.Which of the following can explain this difference?
A)The demand for unskilled labor increases with an increase in the wage rate
B)At a higher wage,more people may enter the job market
C)The demand for skilled labor increases with an increase in the wage rate
D)At a higher wage,the supply of labor becomes inelastic
Q2) A cartel agreement between input buyers would try to:
A)make the supply curve of their product more elastic.
B)shift their demand curve for labor to the right.
C)replicate monopsony and reduce input prices.
D)replicate monopoly and increase prices.
Q3) Explain graphically that a payroll tax imposed by the government either on the employers or on the employees will have a similar impact.
Q4) Explain how you would investigate whether wage differences are due to discrimination.
Q5) 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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Sample Questions
Q1) In Figure 19-1,point F represents a resource allocation that is:
A)is feasible but undesirable from the society's point of view.
B)inefficient.
C)desirable but not attainable.
D)both undesirable and unattainable.
Q2) If there is a monopoly in the capital market,whereas the labor market is competitive then:
A)the rental rate of capital will be greater than the wage rate.
B)the labor market will be in equilibrium,but there will be excess supply in the capital market.
C)the marginal rate of technical substitution must be greater than the input price ratio.
D)the capital market will be in equilibrium,but there will be excess demand in the labor market.
Q3) In which of the following situations would it be most important to use the general equilibrium analysis?
A)The impact of a price floor on the demand for corn
B)The impact of a rent control on the supply of rental apartments in a city
C)An increase in the tariff on imported automobiles
D)An increase in the national sales tax imposed on all goods
Page 21
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Chapter 20: Public Goods and Externalities
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Sample Questions
Q1) What would happen if the government tries to internalize an externality,generated from the production of a commodity,through taxation?
A)The commodity will be overproduced
B)The commodity will definitely be underproduced
C)The market level of output will coincide with the efficient level
D)The price of the commodity will decline
Q2) Patents generally encourage firms to invest in research and development when:
A)the marginal cost of the invention is greater than the marginal benefit.
B)the invention has nonrival benefits but exclusion is not possible.
C)the private cost of the invention is less than the social benefit.
D)the private cost of invention is equal to the social cost.
Q3) Jack benefits from keeping four dogs whose barking bothers his neighbor Jane.If Jane has the legal right to a quiet neighborhood,and mutual bargaining is expensive,which of the following will hold true?
A)Government intervention,in this case,is a necessity for achieving an efficient outcome.
B)If Jack's benefit exceeds Jane's cost,Jane pays Jacks to keep his dogs.
C)If Jack's benefit is less than Jane's cost,Jane pays Jack to keep his dogs.
D)Jack pays Jane to compensate for the external cost generated by him.
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