MBA Economics Practice Questions
Course Introduction
MBA Economics explores the foundational concepts and analytical tools of economics as they apply to managerial and business decision-making. The course covers microeconomic and macroeconomic principles, including market dynamics, consumer behavior, production and cost analysis, market structures, and the impact of government policies. Students also examine global economic trends, fiscal and monetary policy, and issues such as inflation, unemployment, and economic growth. By integrating real-world business scenarios and case studies, the course equips future managers and leaders with a systematic understanding of how economic forces shape the business environment and influence strategic choices within organizations.
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) Warren Buffett looks for "wonderful businesses" that feature:
A) ongoing innovation.
B) large capital investment.
C) consistent earnings growth.
D) complicated business strategies.
Answer: C
Q2) Managerial economics cannot be used to identify:
A) how macroeconomic forces affect the organization.
B) goals of the organization.
C) ways to efficiently achieve the organization's goals.
D) microeconomic consequences of managerial behavior.
Answer: B
Q3) Value maximization theory fails to address the problem of: A) risk.
B) uncertainty.
C) sluggish growth.
D) self-serving management.
Answer: D
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Chapter 2: Economic Optimization
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Sample Questions
Q1) Incremental profit is:
A) the change in profit that results from a unitary change in output.
B) total revenue minus total cost.
C) the change in profit caused by a given managerial decision.
D) the change in profits earned by the firm over a brief period of time.
Answer: C
Q2) Marginal profit equals:
A) the change in total profit following a one-unit change in output.
B) the change in total profit following a managerial decision.
C) average revenue minus average cost.
D) total revenue minus total cost.
Answer: A
Q3) Total revenue is maximized at the point where marginal:
A) revenue equals zero.
B) cost equals zero.
C) revenue equals marginal cost.
D) profit equals zero.
Answer: A
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4
Chapter 3: Demand and Supply
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Q1) Comparative Statics. Demand and supply conditions in the market for unskilled labor are important concerns to business and government decision makers. Consider the case of a federally mandated minimum wage set above the equilibrium or market clearing wage level. Some of the following factors have the potential to influence the demand or quantity demanded of unskilled labor. Influences on the supply or quantity supplied may also result. Holding all else equal, describe these influences as increasing or decreasing, and indicate the direction of the resulting movement along or shift in the relevant curve(s).
A. An increase in the popularity of self-service gas stations, car washes, and so on.
B. A fall in welfare benefits
C. An increase in the minimum wage
D. A rise in interest rates
E. A decrease in the quality of secondary education
Answer: 11ea7f01_0980_76cf_b9ea_4b85cd0a5056_TB4098_00
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Page 5
Chapter 4: Demand Analysis
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Q1) According to the law of diminishing marginal utility:
A) as the consumption of a given product rises, the added benefit eventually diminishes.
B) as the production cost for a given product rises, the added benefit eventually diminishes.
C) the demand curve for some products is upward-sloping.
D) as the price of a given product rises, the added benefit eventually diminishes.
Q2) When marginal cost is greater than zero, the profit-maximizing point price elasticity of demand must be:
A) greater than zero but less than one.
B) equal to one.
C) greater than one.
D) equal to zero.
Q3) The utility derived from consumption is:
A) tangible.
B) revealed through purchase decisions for goods and services.
C) measured directly.
D) inversely related to the number of market baskets considered.
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6
Chapter 5: Demand Estimation
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Q1) 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 at point P<sub>2</sub> an estimate of the point price elasticity e<sub>P</sub> equals:
A) -6
B) -2.5
C) -4.25
D) -0.12
Q2) Multicollinearity is caused by:
A) high correlation among the X variables.
B) a linear XY relation.
C) a log-linear XY relation.
D) high correlation between Y and at least one X variable.
Q3) Suppose Q<sub>1</sub> = 50 when P<sub>1</sub> = $25, and Q<sub>2</sub> = 20 when P<sub>2</sub> = $40. A linear estimate of the demand curve is:
A) P = $50 - $0.5Q
B) P = $50 + $0.5Q
C) Q = 100 + 2P
D) Q = 100 - 0.5P
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Chapter 6: Forecasting
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Q1) If an economic time series is growing by a constant dollar amount each period, the most accurate forecast model is:
A) a constant rate of growth model.
B) an exponential growth model.
C) a linear model.
D) log-linear model.
Q2) Continuous Compounding. Nicholas Nickelby, a quality control supervisor for Vinyl Windows, Inc., is concerned about an increase in distribution costs per unit from $10 to $13.80 over the last four years. Nickelby feels that setting up a new direct-sales distribution network at a cost of $17.50 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.
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8
Chapter 7: Production Analysis and Compensation Policy
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Q1) Total product divided by the number of units of variable input employed equals:
A) average product.
B) marginal revenue product.
C) returns to scale.
D) marginal product.
Q2) As the quantity of a variable input increases, the resulting rate of output increase eventually:
A) falls.
B) rises.
C) becomes constant.
D) none of these.
Q3) 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.
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Chapter 8: Cost Analysis and Estimation
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Q1) Opportunity Costs. Three graduate business students are considering operating a tofu burger stand in the Dalles, Oregon, windsurfing resort area during their summer break. This is an alternative to summer employment with a local fruit cannery where they would earn $7,500 each over the three-month summer period. A fully equipped facility can be leased at a cost of $8,000 for the summer. Additional projected costs are $2,000 for insurance, and 25¢ per unit for materials and supplies. Their tofu burgers would be priced at $1.50 per unit.
A. What is the accounting cost function for this business?
B. What is the economic cost function for this business?
C. What is the economic breakeven number of units for this operation? (Assume a $1.50 price and ignore interest costs associated with the timing of the lease payments.)
Q2) If a total product curve exhibits increasing returns to a variable input, the cost elasticity is:
A) equal to one.
B) greater than one.
C) unknown, without further information.
D) less than one.
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Page 10
Chapter 9: Linear Programming
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Sample Questions
Q1) When an LP objective function is to maximize profits:
A) resource constraints must be of the £ variety.
B) resource constraints must be of the ³ variety.
C) all input costs must be variable.
D) the total revenue function must not be linear.
Q2) For costs to be a linear function of output:
A) returns to each factor input must be constant.
B) input prices must change at a constant rate.
C) product prices must be constant.
D) returns to scale must be constant.
Q3) The cost of capacity subject to constraints is:
A) variable.
B) sunk.
C) semi-variable.
D) nonzero.
Q4) Unit costs are always constant if:
A) input prices are constant.
B) the total cost function is linear.
C) constant returns to scale are operative.
D) input prices are constant and the total cost function is linear.
11
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Chapter 10: Competitive Markets
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Q1) By itself, a reduction in import tariffs (taxes) will:
A) reduce quantity demanded.
B) enhance domestic competition.
C) enhance the profits of domestic competitors.
D) reduce import competition.
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) In the long run, firms will offer supply at the point where P = MR = MC if:
A) MC is rising.
B) MC is falling.
C) MC is constant.
D) P > AC
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) A price floor is a costly and commonly used mechanism for:
A) restraining excess supply.
B) restraining excess demand.
C) counteracting the effects of falling productivity.
D) counteracting the effects of rising productivity.
Q2) Who pays the economic cost of a tax is answered at the point of tax:
A) burden.
B) assessment.
C) collection.
D) incidence.
Q3) Producer surplus is the:
A) amount paid to sellers above and beyond the value received by consumers.
B) amount paid to sellers above and beyond the required minimum.
C) amount paid to sellers.
D) cost of production.
Q4) The costs of pollution taxes are shared by consumers and producers when:
A) supply is perfectly elastic.
B) supply is perfectly inelastic.
C) demand is perfectly inelastic.
D) none of these.
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Chapter 12: Monopoly and Monopsony
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Q1) In monopoly competitive markets, profits are maximized when:
A) MC = AC
B) P > AC
C) MR = MC
D) MR = P
Q2) Price Discrimination. During recent years, national hotel and restaurant chains in the United States have charged lower lodging and meal prices to senior citizens in an effort to profitably segment the market for their services. Thus, senior citizens have come to enjoy discounts of 10-25% off the prices paid by other (younger) full-price customers.
This two-tier pricing scheme has raised the ire of some consumers who view it as discriminatory and a violation of antitrust laws.
A. Is this pricing scheme discriminatory in the economic sense? What conditions would be necessary for it to be profitable to the hotel and restaurant industry?
B. Carefully describe how price discrimination could violate U.S. antitrust laws and be sure to mention which laws in particular might be violated.
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Chapter 13: Monopolistic Competition and Oligopoly
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Q1) Monopolistic competition is characterized by:
A) homogeneous products.
B) barriers to entry and exit.
C) perfect dissemination of information.
D) few buyers and sellers.
Q2) Competition Concepts. Indicate whether each of the following statements is true or false and why.
A. A high ratio of distribution cost to total cost tends to increase competition by widening the geographic area over which any individual producer can compete.
B. The price elasticity of demand will tend to fall as new competitors introduce substitute products.
C. Equilibrium in monopolistically competitive markets requires that firms be operating at the minimum point on the long-run average cost curve.
D. An increase in product differentiation will tend to decrease the slope of firm demand curves.
E. A perfectly functioning cartel would achieve the perfectly competitive industry price-output combination.
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15
Chapter 14: Game Theory and Competitive Strategy
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Q1) Game Theory Concepts.
Indicate whether each of the following statements is true or false, and explain your answer.
A. The theory of games is used to study irrational behavior by individuals and firms in interactive decision problems.
B. In a game, only a single player strives to maximize expected utility by choosing particular courses of action.
C. Game theory is applied during situations in which decision makers must take into account the reasoning of other decision makers.
D. All economic and business games share the common feature of decision payoff independence.
E. In competitive games, the outcome for each firm depends upon the strategies conducted by all competitors.
Q2) Trigger strategies can be used to:
A) solve the end of game problem.
B) resolve the lack of a Nash equilibrium in one-shot games.
C) ensure that the costs of breaking agreements exceed any resulting benefits.
D) solve finitely repeated game with a certain final period.
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16
Chapter 15: Pricing Practices
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Q1) When engaging in short-run incremental analysis, managers should ignore:
A) fixed costs.
B) implicit costs.
C) explicit costs.
D) effects on the costs of already existing products.
Q2) Markup on Cost. Stinging Pesticides, Inc., provides scorpion control services, to residential and business customers in the El Paso area. The company recently raised its service price from $70 to $80 per annual treatment. As a result, sales fell to 37,500 from 52,500 treatments in the year earlier period.
A. Calculate the arc price elasticity of demand for SPI service.
B. Assume that the arc price elasticity (from Part A) is the best available estimate of the point price elasticity of demand. If marginal cost is $48 per unit for labor and materials, calculate SPI's optimal markup on price and its optimal price.
Q3) When e<sub>P</sub> = -1, the optimal markup on price is:
A) 100%
B) 67%
C) 50%
D) 33%
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17
Chapter 16: Risk Analysis
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Q1) The minimax regret criterion directs the decision maker to select the alternative that:
A) maximizes opportunity cost.
B) provides the best outcome in the worse case scenario.
C) provides the worst outcome in the best case scenario.
D) minimizes opportunity loss.
Q2) Standard Normal. A leading company in the freight forwarding business offers Overnight Letter delivery service with a record of on-time delivery for 99% of shipped parcels. The price of this service is $15. Express Mail, offered by a leading competitor for $10, has an on-time delivery record of 95%.
A. Calculate the cost incurred due to late delivery that would make shippers indifferent to these deliver service alternatives.
B. Which delivery alternative is preferred if a $100 cost would be incurred due to late delivery?
Q3) Risk neutrality implies a:
A) constant marginal utility of income.
B) diminishing marginal utility of income.
C) increasing marginal utility of income.
D) constant utility of income.
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Chapter 17: Capital Budgeting
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Q1) The discount rate that equates present value of cash inflows and outflows is called the:
A) component cost of capital.
B) weighted average cost of capital.
C) after-tax weighted average cost of capital.
D) IRR.
Q2) Capital budgeting is the process of planning investment expenditures when returns are expected to:
A) be earned at any time in the future.
B) be earned within one year.
C) extend beyond one generation.
D) extend beyond one year.
Q3) The cost of capital is the:
A) component cost of debt.
B) component cost of equity.
C) both A and B
D) discount rate.
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19
Chapter 18: Organization Structure and Corporate Governance
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Q1) Horizontal and Vertical Relations. America Online, Inc., is a provider of online services to consumers in the United States. AOL offers subscribers a wide variety of services, including electronic mail, conferencing, news, sports, weather, stock quotes, software, computing support and online classes. These services can be accessed from a range of personal computers using AOL's proprietary software. Microsoft Corp. develops, manufactures, licenses, sells, and supports a wide range of software products, including operating systems for personal computers and servers; server applications for client/server environments, business and consumer productivity applications; interactive media programs; and Internet platform and development tools. Microsoft also offers online services, sells personal computer books and input devices, and researches and develops advanced technology software products.
A. Describe how AOL and Microsoft share important elements of a vertical relationship.
B. Describe how AOL and Microsoft have important elements of a horizontal relationship.
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Chapter 19: Government in the Market Economy
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Q1) At the socially efficient price-output level:
A) external costs equal zero.
B) marginal social benefit equals marginal private benefit.
C) marginal social cost equals marginal private cost.
D) social marginal benefit equals social marginal cost.
Q2) It is not generally considered to be an appropriate function of government to:
A) produce public goods.
B) alter individual preferences.
C) eliminate externalities.
D) stabilize the economy.
Q3) If investment in a public project makes at least one individual better off and no one worse off, the result is called:
A) Pareto satisfactory.
B) Pareto optimal.
C) a potential Pareto improvement.
D) none of these.
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