Microeconomics for Managers Exam Solutions
Course Introduction
Microeconomics for Managers introduces the fundamental principles of microeconomic theory and applies them to decision-making in business environments. The course explores concepts such as supply and demand, market equilibrium, elasticity, consumer behavior, production and cost analysis, and the dynamics of different market structures including perfect competition, monopoly, and oligopoly. Through case studies and real-world examples, students examine how managers leverage microeconomic insights for pricing strategies, resource allocation, risk analysis, and competitive positioning, ultimately developing skills to make informed and effective business decisions.
Recommended Textbook
Economics of Strategy 5th Edition by
David Besanko
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18 Chapters
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Page 2
Chapter 1: Basic Microeconomic Principles
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Q1) Suppose a factory is producing 100 units and the price of each unit is $10.If raising the price to $12 per unit results in a drop in sales of 12 units,what is the price elasticity of demand, ?
A)6
B).6
C)1.67
D).8
E).17
Answer: B
Q2) Which characteristic does not describe a perfectly competitive market?
A)Firms produce identical or nearly identical products
B)Market price is beyond the control of any individual firm
C)A firm's demand curve is perfectly horizontal at the market price
D)Industry-level price elasticity is finite
E)Firm-level price elasticity of demand facing another perfect competitor is infinite
Answer: D
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3
Chapter 2: Economies of Scale and Scope
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Q1) Which of the following is not a major source of scale or scope economy?
A)Indivisibilities and the spreading of fixed costs
B)Increased productivity of variable inputs (mainly having to do with specialization)
C)Movement of production from smaller to larger facilities
D)Inventories
E)Engineering principles associated with the "cube-square rule"
Answer: C
Q2) How does carrying inventories contribute to economies of scale?
A)Increases the interest on the expenses to produce the inventory
B)Inventory depreciates in value while waiting to be used or sold
C)Increases the storage facilities necessary
D)Increases competition with rivals for customers
E)Minimizes the chance of stock-out
Answer: E
Q3) Suppose the cost of advertising in a local newspaper is $5 per thousand papers.If the circulation for the paper is 1.5 million and the cost of preparing an ad for a company is $2500,what is the advertising cost per potential customer?
Answer: $.0067 per potential customer,or $6.67 per 1000 customers
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Chapter 3: Agency and Coordination
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Q1) What term describes situations in which aspects of the productive environment that are important to the principal cannot be observed?
A)Unobservable action
B)Hidden action
C)Covert information
D)Unobservable information
E)Hidden information
Answer: E
Q2) Which of the following is not a characteristic of performance based pay?
A)The slope of the relationship between pay and performance for an employee provides incentives for effort, not the level of pay
B)Employees will always prefer performance based pay thus aligning principal/agent objectives
C)The overall value maximizing effort level for an employee occurs when personal marginal benefit equals personal marginal cost
D)Performance based pay can resolve hidden information problems
E)Pay contracts approaching 100% commission and negative salaries can occur
Answer: B
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Page 5
Chapter 4: The Power of Principles - an Historical Perspective
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Q1) What significant government infrastructure project led to the development of national stock and commodity markets?
A)Transcontinental Railroad
B)Erie Canal
C)Union Pacific Railroad
D)Prime Meridian Conference
E)Central Pacific Railroad
Q2) What is a benefit of alliances and joint ventures over mergers and acquisitions?
A)Better organizational structure
B)Scale savings
C)Less vertical integration
D)Less horizontal integration
E)Lower likelihood of antitrust scrutiny
Q3) What economics game theory concept is demonstrated by the Erie Canal public works project?
A)Nash equilibrium
B)Lock-in
C)Backwards induction
D)Fair division
E)Prisoner's dilemma
Page 6
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Chapter 5: The Vertical Boundaries of the Firm
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Q1) What term describes features that need to relate to each other in a precise fashion otherwise they lose a significant portion of their economic value?
A)Design attributes
B)Critical components
C)Contract factors
D)Coordination factors
E)Relationship attributes
Q2) When contracts are incomplete,what must be well defined and enforceable to allow for smooth transactions to occur?
A)Contract performance measures
B)Contract roles
C)Contract costs
D)Contract triggers
E)Contract law
Q3) Suppose you manufacture 10 million hard drives per year specifically for Dell laptop computers.If your average variable cost C=$20/unit,annualized cost of investment to build a hard drive factory I=$30 million,and market price (bailout market price in the event Dell does not buy)Pm=$22/unit,what is your company's RSI (relationship specific investment)?
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Chapter 6: Organizing Vertical Boundariesvertical
Integration and Its Alternatives
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Q1) Which of the following in the late 19 century was predicted by the asset-specificity hypothesis?
A)Forward integration was most likely to occur for products that require specialized investments in human capital
B)Increases in the size of manufacturing firms led to independent wholesale and marketing agents losing scale/scope cost advantages and in turn led to manufacturers forward integrating into marketing and distribution
C)Forward integration was most likely to occur for products that do not require specialized investments in equipment and facilities
D)For industries with small manufacturers, marketing relied on specialized assets
E)For industries with small manufacturers, distribution relied on specialized assets
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8
Chapter 7: Diversificationpart Threemarket and Competitive Analysis
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Q1) What measure,that depends on how much of a firm's revenues are attributable to product market activities that have shared technological characteristics,production characteristics,or distribution channels,is used to determine how diversified a firm is at a given time?
A)Integration level
B)Rumelt score
C)Conglomerate level
D)Activity share
E)Relatedness
Q2) By satisfying which of the following conditions can shareholders prevent management driven acquisitions?
A)If shareholders could determine which acquisitions will lead to increased profits and which will not
B)If shareholders could direct management to undertake only those acquisitions that will increase shareholder value
C)If shareholders could provide management with the appropriate steps to conduct when performing acquisitions
D)a & b
E)None of the above
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Chapter 8: Competitors and Competition
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Q1) What criterion developed by the DOJ is used to identify all potential competitors within the market?
A)Market competition criterion
B)DOJ competition criterion
C)SSNIP criterion
D)SIC criterion
E)DOJ market criterion
Q2) In what type of market do the actions of individual firms materially affect the overall market?
A)Perfectly competitive
B)Monopolistically competitive
C)Oligopoly
D)Monopoly
E)Diversified
Q3) What kind of competition is generally described as price competition?
A)Bertrand competition
B)Cournot competition
C)Perfect competition
D)Chamberlin competition
E)Monopolistic competition
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Chapter 9: Strategic Commitment
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Q1) What is the most likely reason a firm would pursue the "mad-dog" commitment strategy of making a tough commitment when tactical variables are strategic complements,a strategy with harmful strategic effects?
A)For deterrence of new entrants by creating capacity competition
B)To exploit intangible weaknesses of other firms
C)To test the response of other market firms
D)For deterrence of new entrants by increasing price competition
E)They are following another firm
Q2) What tactical term best describes the pricing relationship between Toyota and Honda such that Toyota's response is to lower the price on the Camry if Honda were to first announce a large price cut on the Accord?
A)Tough commitment
B)Strategic complement
C)Soft commitment
D)Strategic substitute
E)Duopoly
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11
Chapter 10: The Dynamics of Pricing Rivalry
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Q1) In a six-firm market,if all firms charge the monopoly price,the profit equals $120,000.In that same six-firm market,if all firms instead charge the prevailing price,the profit is $60,000.If the pricing period is one-month long,what is the maximum monthly discount rate implied for each firm to still have an incentive to independently price at the monopoly level?
Q2) Which of the following statements is true about how the volatility of demand conditions affects the sustainability of cooperative pricing?
A)Price cutting is easier to detect when demand conditions are volatile
B)Pricing coordination becomes easier in a volatile demand condition because firms are chasing a moving target
C)Price cutting is harder to detect when demand conditions are stable
D)Demand volatility is an especially serious problem when the production involves substantial variable costs
E)Demand volatility is an especially serious problem when the production involves substantial fixed costs
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12
Chapter 11: Entry and Exit
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Q1) What term is defined as a firm selling goods at a price below their normal price (and generally below cost)usually as an export in international trade?
A)Predatory pricing
B)Cost plus pricing
C)Dumping
D)Marginal cost pricing
E)Price leading
Q2) Which of the following firms maintains a monopoly or cartel by controlling essential inputs thus creating a barrier to entry?
A)DeBeers in diamonds
B)Nike in shoes
C)Pepsi in beverages
D)Subway in sandwich fast food
E)Levis in denim jeans
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13
Chapter 12: Industry Analysispart Fourstrategic Position and Dynamics
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Q1) How did European governments help Airbus aggressively pursue a 50% market share in its early years of operation?
A)Subsidies
B)High-interest loans
C)Helping to ensure scope economies from military aircraft division
D)Paying in excess of cost for military aircraft
E)Guaranteeing a set level of annual aircraft purchases
Q2) Which of the following is the most likely substitute for commercial aircraft travel between Chicago and Tokyo?
A)Bicycle
B)Teleconferencing
C)Automobile
D)Commuter train
E)Walking
Q3) In which of the following ways can entry erode incumbents' profits?
A)Entrants divide market demand among fewer sellers
B)Entrants decrease market concentration
C)Entrants usually grow the market for all parties
D)Entrants increase market concentration
E)Entrants reduce internal rivalry
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Chapter 13: Strategic Positioning for Competitive Advantage
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Q1) Which of the following statements best describes a characteristic of geographic specialization focus strategies?
A)Offers a variety of products and/or sells to a variety of customer groups within a narrow geography
B)Offers an array of product varieties to a limited class of customers
C)Caters to the particular needs of the customer group served
D)Offers a limited set of products to an array of different customer groups
E)Does an especially good job satisfying a subset of the needs of the consumer groups being served
Q2) What type of good is one whose quality can be assessed only after the customer has used it for a while?
A)Apparel
B)Search good
C)Experience good
D)Office furniture
E)Airline tickets
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15
Chapter 14: Sustaining Competitive Advantage
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Q1) What term describes the situation where a firm does exceedingly well due to good luck or exceedingly poorly due to bad luck,but returns to normal performance following?
A)Regression to the mean
B)Competitive advantage
C)Persistent performer
D)Sustainable firm
E)Predictable performance
Q2) Which of the following is an example of an actual network?
A)Computer operating systems
B)E-mail
C)Video gaming
D)DVD players
E)iPods
Q3) Which of the following products and services depend on standards?
A)Cellular communications
B)Internet
C)Video gaming
D)High-definition television
E)All of the above
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Page 16
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Q1) Which of the following is a possible explanation for the reason that American steelmakers continued to invest in less efficient OH technology instead of newer more efficient BOF technology throughout the 1950s?
A)The replacement effect
B)Strategic intent
C)Strategic stretch
D)Efficiency effect
E)The sunk cost effect
Q2) Which of the following terms best describes a phenomenon whereby,despite equal innovative capabilities,an entrant is willing to spend more to develop an innovation?
A)The replacement effect
B)Strategic intent
C)Strategic stretch
D)Hypercompetition
E)The sunk cost effect
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Chapter 16: Performance Measurement and Incentives in Firms
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Q1) What type of performance measurement based process was used to determine Jack Welch's successor,Jeffrey Immelt,as CEO of GE?
A)Ratings compression
B)Merit ratings system
C)360-degree peer review system
D)Promotion tournament
E)Management-by-objective system
Q2) Which of the following terms describes a phenomenon whereby individuals ignore their own information about the best course of action and instead simply do what everyone else is doing?
A)Relative performance
B)Absolute performance
C)Herding
D)Risk sharing
E)Pay-for-performance
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Chapter 17: Strategy and Structure
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Q1) What type of organizational structure is one in which work groups may be organized by function,geography,or customer base,but where relationships between work groups are governed more by often-changing implicit and explicit requirements of common tasks than by the formal lines of authority that characterize other structures?
A)Unitary functional structure
B)Multidivisional structure
C)Matrix structure
D)Network structure
E)Individual structure
Q2) What type of organizational structure is one in which employees are subject to two or more sets of managers at once?
A)Unitary functional structure
B)Multidivisional structure
C)Matrix structure
D)Network structure
E)Individual structure
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Chapter 18: Environment, power, and Culture
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Q1) Which of the following is not a way firms suffering from dependence relationships can take action to reduce their dependence on buyers or suppliers?
A)Vertical integration
B)Using a monopolist buyer/supplier
C)Long-term contracting
D)Joint ventures
E)Alliances
Q2) Which of the following is least true with regard to presidential power?
A)Presidential power is the ability to influence the people who make and implement government policies
B)Presidential power only consists of the president taking direct action on some front
C)The bargaining advantage that comes with the presidential office enables the president to persuade others to work in his interest
D)A source of presidential power is professional reputation, which comprises the expectations of professional politicians, bureaucrats, and others in the political community regarding the president's power and his willingness to use it
E)The president's prestige among the public is a source of presidential power
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