Managerial Economics
Textbook Exam Questions
Course Introduction
Managerial Economics is a course designed to equip students with the analytical tools and economic theories essential for effective decision-making within organizations. The curriculum explores the application of microeconomic principles such as demand and supply analysis, production and cost functions, market structures, and pricing strategies to real-world managerial problems. Students will learn how to evaluate business options, forecast economic trends, and optimize resource allocation to maximize organizational objectives. Through case studies and practical examples, the course bridges the gap between theoretical economic concepts and strategic business applications, preparing students to tackle complex managerial challenges in a dynamic economic environment.
Recommended Textbook
Microeconomic Theory Basic Principles and Extensions 12th Edition by Walter Nicholson
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Chapter 1: Preferences and Utility
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Q1) With this utility function,the bundle (3,2)provides the same utility as the bundle:
A)(2,3).
B)(2,4).
C)(2,5).
D)(3,3).
Answer: B
Q2) If bundles of goods A and B lie on the same indifference curve,one can assume the individual:
A)prefers bundle A to bundle B
B)prefers bundle B to bundle A.
C)enjoys bundle A and B equally.
D)bundle A contains the same goods as bundle B.
Answer: C
Q3) For this utility function,the MRS:
A)depends on the values of x and y.
B)is always 0.
C)is always 2.
D)is always 4.
Answer: C
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Chapter 2: Utility Maximization and Choice
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Q1) Suppose that at current consumption levels an individual's marginal utility of consuming an extra hot dog is 10 whereas the marginal utility of consuming an extra soft drink is 2.Then the MRS (of soft drinks for hot dogs)-that is,the number of hot dogs the individual is willing to give up to get one more soft drink-is:
A)5.
B)2.
C)1/2.
D)1/5.
Answer: D
Q2) Suppose that an individual has a constant MRS of shoes for sneakers of 4:3 (that is,he or she is always willing to give up 3 pairs of sneakers to get 4 pairs of shoes).Then,if sneakers and shoes are equally costly,he or she will:
A)buy only sneakers.
B)buy only shoes.
C)spend his or her income equally on sneakers and shoes.
D)wear sneakers only 3/4 of the time.
Answer: A
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Chapter 3: Income and Substitution Effects
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Sample Questions
Q1) The price elasticity of demand for a horizontal demand curve is:
A)0.
B)-1.
C)1.
D)- infinity.
Answer: D
Q2) Often economists measure the loss in consumer surplus by looking at the changing area below the Marshallian demand curve.This approach will provide a more accurate measure of the compensating variation of such a price increase if:
A)the good occupies a small portion of a person's budget.
B)the good occupies a large portion of a person's budget.
C)the good has many close substitutes.
D)the good has few substitutes.
Answer: A
Q3) The price elasticity of demand for good x is defined as:
A)percentage change in p<sub>x</sub> / percentage change in x.
B)percentage change in x /percentage change in p<sub>x</sub>.
C)percentage change in x/percentage change in income.
D)percentage change in x /percentage change in p<sub>y</sub>.
Answer: B
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Chapter 4: Demand Relationships Among Goods
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Q1) "Hicks' Third Law of Demand" states that "most" goods must be:
A)gross substitutes.
B)gross complements.
C)net substitutes.
D)net complements.
Q2) For the "Composite Commodity Theorem" to hold,all goods in the composite must:
A)have constant prices.
B)have constant relative prices.
C)be used in fixed proportions.
D)be net complements.
Q3) Two goods are Hicks (net)substitutes if a rise in the price of one causes a(n):
A)decline in the quantity demanded of the other holding nominal income constant.
B)increase in the quantity demanded of the other holding nominal income constant.
C)decline in the quantity demanded of the other holding utility constant.
D)increase in the quantity demanded of the other holding utility constant.
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Chapter 5: Uncertainty
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Q1) Risk aversion is best explained by:
A)timidness.
B)increasing marginal utility of wealth.
C)constant marginal utility of wealth.
D)decreasing marginal utility of wealth.
Q2) More risk-averse people will:
A)hold fewer risky assets because marginal utility is rapidly diminishing.
B)hold fewer risky assets because marginal utility is greater.
C)hold fewer risky assets because rates of return are more uncertain.
D)hold fewer risky assets because marginal utility is negative.
Q3) Risk-averse individuals will diversify their investments because this will:
A)increase their expected returns.
B)provide them with some much-needed variety.
C)reduce the variability of their returns.
D)reduce their transaction costs.
Q4) The expected value of a random variable is:
A)the measure of its variability.
B)the most likely outcome.
C)the outcome that will occur on average.
D)the relative frequency of a realization.
Page 7
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Chapter 6: Game Theory
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Q1) Which statement is true of the Battle of the Sexes game?
A)It is a coordination game.
B)The mixed-strategy Nash equilibrium provides players with lower expected payoffs than other equilibria.
C)The first mover has an advantage in the sequential version.
D)All of the above.
Q2) In experimental tests of the ultimatum game:
A)the proposer often offers an even split of the "pie",and responders often reject smaller offers,consistent with the predictions of game theory.
B)the proposer often offers an even split of the "pie",and responders often reject smaller offers,in contrast to the predictions of game theory.
C)the proposer often offers an unfair split,taking the lion's share of the "pie" for him or herself,and responders often accept such offers,consistent with the predictions of game theory.
D)the proposer often offers an unfair split,taking the lion's share of the "pie" for him or herself,and responders often accept such offers,in contrast to the predictions of game theory.
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Chapter 7: Production Functions
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Q1) The average productivity of labor reaches its maximum:
A)at the point of inflection of the total product curve.
B)where the slope of the total product curve is steepest.
C)where the slope of the total product curve is zero.
D)where marginal and average productivity are equal.
Q2) Graphically,the average productivity of labor is illustrated by:
A)the slope of the total product curve at the relevant point.
B)the slope of the marginal productivity curve at the relevant point.
C)the negative of the slope of the marginal productivity curve at the relevant point.
D)the slope of the chord connecting the origin with the relevant point on the total output curve.
Q3) The marginal physical productivity of labor is:
A)the slope of the total output curve at the relevant point.
B)the negative of the slope of the total output curve at the relevant point.
C)the slope of the line connecting the origin with the relevant point on the total output curve.
D)the negative of the slope of the line connecting the origin with the relevant point on the total output curve.
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Chapter 8: Cost Functions
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Q1) The opportunity cost of producing a bicycle refers to the:
A)out-of-pocket payments made to produce the bicycle.
B)value of the goods that were given up to produce the bicycle.
C)bicycle's retail price.
D)marginal cost of the last bicycle produced.
Q2) A firm whose production function displays increasing returns to scale will have a total cost curve that is:
A)a straight line through the origin.
B)a curve with a positive and continually decreasing slope.
C)a curve with a positive and continually increasing slope.
D)a curve with a negative and continually decreasing slope.
Q3) The average fixed cost curve always has a negative slope because:
A)marginal costs are below average fixed costs.
B)average variable costs exceed marginal costs.
C)total fixed costs always decrease.
D)total fixed costs do not change as output increases.
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Chapter 9: Profit Maximization
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Q1) Which of the following conditions would result in the short run marginal cost curve not correctly reflecting the supply behavior of a profit-maximizing firm?
A)The firm is a price taker.
B)Price exceeds average total cost.
C)The elasticity of demand facing the firm is -3.
D)the firm can vary several inputs in the short run.
Q2) In an input market,economic rent is defined as the:
A)total remuneration paid to a factor of production.
B)minimum amount required to retain a factor of production in its present use.
C)total cost for a firm of renting land,equipment,and buildings.
D)extent to which payments to a factor of production exceed the minimum amount required to retain it in its present use.
Q3) A profit-maximizing firm will never hire that quantity of a factor of production for which that factor has an increasing marginal productivity because:
A)it would not be maximizing output.
B)it would not be maximizing the productivity of labor.
C)it would not be minimizing costs.
D)it would not be maximizing profits.
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Chapter 10: The Partial Equilibrium Competitive Model
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Q1) In the short run,a sales tax is:
A)wholly absorbed by the producer.
B)shared between the consumer and the producer.
C)deferred until the market is able to re-establish an equilibrium price.
D)wholly absorbed by the consumer.
Q2) If a 1 percent increase in price leads to a .7 percent increase in quantity supplied,the short-run supply curve is:
A)elastic.
B)inelastic.
C)unit elastic.
D)perfectly inelastic.
Q3) A change in the distribution of income that leaves total income constant will not shift the market demand curve for a product providing:
A)everyone has an income elasticity of demand of zero for the product.
B)everyone has the same income elasticity of demand for the product.
C)individuals have differing income elasticities for the product,but the average income elasticity for income gainers is equal to the average income elasticity for income losers.
D)any of the above conditions occur.
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Chapter 11: General Equilibrium and Welfare
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Q1) If,in a given economy,production is taking place at a point inside the production possibility frontier:
A)resource allocation is technically and allocatively efficient.
B)resource allocation is technically efficient but allocatively inefficient.
C)resource allocation is technically inefficient and allocatively efficient.
D)resource allocation is technically and allocatively inefficient.
Q2) The "Classical Dichotomy" refers to:
A)a distinction between "value in use" and "value in exchange."
B)separate theories of demand and supply.
C)the possibility of Giffen's Paradox.
D)determination of relative prices independent of the nominal price level.
Q3) The First Theorem of Welfare Economics states that:
A)only Walrasian equilibria can be Pareto optimal.
B)all Walrasian equilibria are Pareto optimal.
C)a Walrasian equilibrium price vector can always be found.
D)some Walrasian equilibria may be unfair.
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Chapter 12: Monopoly
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Q1) All monopolies exist because of:
A)firms' desire to maximize profits.
B)failure of antitrust laws.
C)barriers to entry.
D)natural selection.
Q2) Perfect (first degree)price discrimination:
A)is a common occurrence in situations with many buyers.
B)occurs fairly often in situations with only a few buyers.
C)is only observed in competitive markets.
D)rarely occurs because firms do not have sufficient information to differentiate among specific buyers.
Q3) In this situation,the deadweight loss from monopoly is:
A)0.40.
B)0.16.
C)0.12.
D)0.08.
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Chapter 13: Imperfect Competition
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Q1) Which of the following factors might explain why the long-run equilibrium number of firms can in some instances exceed the socially optimal number?
A)The appropriability effect (the increase in consumers surplus following entry is not "appropriated" by entrants).
B)The feedback effect (an increase in the number of firms increases the competitiveness of the market).
C)The business-stealing effect (entry reduces rival firms' profits,a social loss that entrants do not account for).
D)The ratchet effect (the more profits the entrants earn,the more the stockholders expect them to earn in the future).
Q2) All of the following are problems associated with maintaining a cartel except that: A)cartels are illegal.
B)a large amount of information is needed to coordinate a cartel.
C)profits are not maximized by a cartel so it will evolve into a monopoly.
D)each member of the cartel has an incentive to "chisel" by expanding output.
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Chapter 14: Labor Markets
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Q1) When an individual's wage rises,the income effect tends to:
A)increase hours worked.
B)decrease hours worked.
C)leave hours worked unchanged.
D)an impossible prediction about what will happen to hours worked.
Q2) The Slutsky decomposition of the effect of the real wage on a person's labor supply decision suggests that the negative income effect of such a wage change will be larger:
A)the smaller is the quantity of labor supplied and the smaller is the effect of non-labor income.
B)the smaller is the quantity of labor supplied and the larger is the effect of non-labor income.
C)the larger is the quantity of labor supplied and the smaller is the effect of non-labor income.
D)the larger is the quantity of labor supplied and the larger is the effect of non-labor income.
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Chapter 15: Capital and Time
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Q1) Under competitive conditions,the relative price of a finite resource would be expected to:
A)rise at an increasing rate.
B)rise at a rate equal to the real interest rate.
C)rise at a rate equal to the nominal interest rate.
D)rise at a rate determined by demand conditions.
Q2) An increase in the corporate profits tax will most likely lead to:
A)a decrease in the rental rate of capital in the corporate sector.
B)no change in the rental rate of capital in the corporate sector.
C)no change in the rental rate of capital in the non-corporate sector.
D)an increase in the rental rate of capital in the corporate sector.
Q3) The present value of $1 payable in the future decreases:
A)the higher r is and the sooner it is to be paid.
B)the lower r is and the sooner it is to be paid.
C)the higher r is and the longer time until it is paid.
D)the lower r is and the longer time until it is paid.
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Chapter 16: Asymmetric Information
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Q1) Which contracting party gains from the use of a more sophisticated contract?
A)The principal,who offers the contract.
B)The agent,who accepts the contract.
C)Both parties may lose.
D)Both parties gain equally.
Q2) What is the term for the contract that maximizes the principal's payoff subject to the constraint that the principal lacks the agent's private information?
A)First best
B)Second best
C)Third best
D)Pareto optimum
Q3) Compared to the case in which a monopoly insurer offers the consumer a contract,if insurance is competitively provided:
A)any moral hazard or adverse-selection problem is alleviated.
B)any moral hazard or adverse-selection problem is worsened.
C)the essence of any moral hazard or adverse-selection problem would not change much.
D)insurers would no longer offer menus of contracts.
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Chapter 17: Externalities and Public Goods
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Q1) The "free-rider problem" of public goods refers to:
A)individuals' refusal to pay taxes.
B)individuals' attempts to hide their preferences for collective goods and to avoid paying for them.
C)individuals' over-use of collective goods.
D)the inelasticity of individuals' demands for public goods.
Q2) A non-rival good is a good which:
A)is produced by a monopoly.
B)is produced by a cartel.
C)can provide benefits to additional users at a zero marginal cost.
D)is sold in a single market.
Q3) In perfect competition,environmental externalities need not distort the allocation of resources providing:
A)transactions costs are zero.
B)average costs are constant for all output levels.
C)firms install pollution control equipment.
D)the government sets realistic pollution standards.
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