Principles of Managerial Economics
Final Exam
Course Introduction
Principles of Managerial Economics introduces students to the fundamental concepts and analytical tools used to understand and solve business decision-making problems. The course explores microeconomic principles such as demand and supply analysis, production and cost structures, market behavior, and pricing strategies, emphasizing their practical application in managerial settings. By integrating economic theory with real-world business challenges, students learn how to optimize resource allocation, assess risk, forecast market trends, and make informed decisions that align with organizational objectives. The course also covers the impact of government regulation, global market dynamics, and ethical considerations on managerial practices.
Recommended Textbook Economics for Managers 3rd Edition by Paul
G. Farnham
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Chapter 1: Managers and Economics
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Sample Questions
Q1) Which of the following would be an illustration of a microeconomic issue affecting U.S.auto manufacturers?
A)An introduction of new, more fuel efficient models by Japanese competitors.
B)A recession in Europe that causes U.S. auto exports to Europe to decline.
C)A decline in the demand for new cars in the U.S. due to an economic downturn.
D)An appreciation of the U.S. dollar relative to the Japanese yen.
Answer: A
Q2) Which of the following would be considered an example of a macroeconomic problem?
A)Should Microsoft reduce the price of its Windows operating system?
B)Should the federal government extend the eligibility period for unemployment benefits?
C)Should Mitsubishi eliminate one of its production shifts?
D)Should JP Morgan Chase increase the interest rate it charges its credit card customers?
Answer: B
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3
Chapter 2: Demand, Supply, and Equilibrium Prices
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Sample Questions
Q1) Referring to the previous question, all else constant, a 5 unit increase in the wage index would cause:
A)quantity supplied to increase by 9 units and be shown by a movement up the supply curve.
B)quantity supplied to decrease by 9 units and be shown by a movement down the supply curve.
C)quantity supplied to increase by 9 units and be shown by a rightward shift of the supply curve.
D)quantity supplied to decrease by 9 units and be shown by a leftward shift of the supply curve.
Answer: D
Q2) Assume the demand function for good X can be written as
Qd = 80 - 3Px + 2Py + 10I where Px = the price of X, Py = the price of good Y, and I = Consumer income.
This equation implies that X and Y are substitutes.
A)True
B)False
Answer: True
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Chapter 3: Demand Elasticities
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Sample Questions
Q1) The "marginal rate of substitution" between two goods is measured by:
A)the ratio of the market prices of the two goods.
B)the number of units of a good consumed divided by the market price of the other good.
C)the number of units of one good a consumer would give up to consume one more unit of another good, while holding total utility constant.
D)the consumer's budget constraint divided by the price of each good.
Answer: C
Q2) At a price of $5, consumers buy 200 units of good X.When the price falls to $4, quantity demanded increases to 250 units.We can conclude that over this range, demand is:
A)elastic.
B)unit elastic.
C)inelastic.
D)perfectly inelastic.
Answer: B
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Chapter 4: Techniques for Understanding Consumer Demand and Behavior
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Q1) The t-test is used to test hypotheses concerning the individual regression coefficients.
A)True
B)False
Q2) Refer to Scenario 2.What is the estimated regression equation for determining the market value of houses?
Q3) The coefficient of determination represents the ratio of the regression sum of squares to the total sum of squares.
A)True
B)False
Q4) Given the demand function in log-linear form: Q = 120 - 1.5P + 12ADV where Q = quantity, P = price, and ADV = advertising expenditures, what is the price elasticity?
A)1)5, inelastic
B)-1.5, elastic
C)120, elastic
D)12, elastic
Q5) Why are estimated models of demand and consumer behavior useful to managers?
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Chapter 5: Production and Cost Analysis in the Short Run
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Q1) Refer to Scenario 3.Diminishing marginal returns are incurred when output is increased from:
A)1 to 2 units of output.
B)2 to 3 units of output.
C)3 to 4 units of output.
D)4 to 5 units of output.
Q2) The full opportunity costs of production are calculated as the sum of both explicit and implicit costs.
A)True
B)False
Q3) In the context of a production function, the remote order takers in the fast food industry would be classified as:
A)a fixed input.
B)a marginal input.
C)a variable input.
D)an inframarginal input.
Q4) Explain the difference between the short run and the long run as it relates to the firm's production function.Why is this distinction important to a firm's manager?
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Chapter 6: Production and Cost Analysis in the Long Run
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Q1) Assume a firm is currently employing 20 units of capital and 100 units of labor in its production process.Assume also that the marginal product of the 20 unit of capital is 40 units of output, the marginal product of the 100 unit of labor is 10 units of output and the per unit prices of capital and labor are $20 and $10, respectively.In this case, in order to minimize its costs of production the firm should:
A)hire more capital and less labor.
B)hire more labor and less capital.
C)hire less capital and less labor.
D)hire more capital and more labor.
Q2) Diseconomies of scale are illustrated graphically by an upward shift of the firm's long-run average cost curve.
A)True
B)False
Q3) Explain how "learning by doing" and transportation costs each affect the long-run average cost curve.
Q4) Economists describe short-run decisions as "constrained" decisions, while long-run decisions are described as "planning" decisions.Referring to a firm's short-run average cost function and long-run average cost function, explain this distinction.
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Chapter 7: Market Structure: Perfect Competition
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Q1) Assume there is a decrease in the supply of a product produced in a perfectly competitive market.All else constant, in the short run this will cause the profits of firms that produce substitutes for the good in question to increase.
A)True
B)False
Q2) Which of the following is not a characteristic of perfect competition?
A)Large number of firms in the industry.
B)Outputs of the firms are perfect substitutes for one another.
C)Firms face downward-sloping demand functions.
D)No barriers to entry or exit.
Q3) Consumers don't care which supplier they buy from in a perfectly competitive market because:
A)the outputs of the firms in a perfectly competitive market are all the same.
B)the consumers have no choice regarding who they buy from.
C)price is always low enough that the choice of supplier doesn't matter.
D)all of the above.
Q4) Explain why, when all adjustment have taken place, the perfectly competitive firm will operate at the minimum of its short-run and long-run average total cost curves and earn zero economic profit.
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Chapter 8: Market Structure: Monopoly and Monopolistic Competition
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Sample Questions
Q1) All of the following are cited as potential explanations for the decrease in demand for Kleenex-brand facial tissues except:
A)consumers switching to substitute products.
B)market entry by lower-priced private brands.
C)the failure of the producer of Kleenex tissues to develop any new and innovative products.
Q2) As the price elasticity of demand for a particular good decreases, the corresponding Lerner Index, and hence the amount of market power attributed to the firm that produces the product in question, decreases as well.
A)True
B)False
Q3) The Herfindahl-Hirschman Index is a measure of market power that focuses on:
A)the ratio of the price of a firm's product to the price elasticity of demand for the product.
B)the share of the market controlled by the X largest firms in the market.
C)the sum of the squares of the market share of each firm in an industry.
D)the difference between a firm's product price and its marginal costs of production.
Q4) Explain how network externalities act as a barrier to entry.
Page 10
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Chapter 9: Market Structure: Oligopoly
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Sample Questions
Q1) Why is the prisoner's dilemma game useful in studying oligopoly behavior?
A)Because oligopolies make out like bandits.
B)To illustrate the problems encountered when making decisions under uncertainty.
C)To show that oligopolies behave as monopolists in the long run and earn positive economic profits.
D)To illustrate how barriers to entry lead to economic profits.
Q2) In the prisoner's dilemma game, each player's dominant strategy is also the Nash equilibrium.
A)True
B)False
Q3) Assume that in an effort to discourage competitors, firm X has lowered its price below its average total costs of production.This is an illustration of the limit pricing form of strategic entry deterrence.
A)True
B)False
Q4) According to the kinked demand curve model, if there is a modest increase in a firm's variable production costs, what is likely to happen to the firm's profit-maximizing level of output and the amount of profit earned by the firm? Why?
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Chapter 10: Pricing Strategies for the Firm
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Q1) Assume there is a decrease in the number of substitutes for a good produced by a profit-maximizing price-setting firm.All else constant, this would cause the firm's ability to markup price above average cost to:
A)decrease.
B)stay the same.
C)increase.
D)cannot be determined with the information given.
Q2) The goal of "personalized pricing" is to determine how much each individual customer is willing to pay for a product.As such, it is an application of first-degree price discrimination.
A)True
B)False
Q3) Because it is more extensive, first-degree price discrimination is more profitable for the firm than is third-degree price discrimination.
A)True
B)False
Q4) Is the profit-maximizing price-taking firm able to mark up price above the marginal costs of production at the profit-maximizing level of output? Why or why not?
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Chapter 11: Measuring Macroeconomic Activity
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Q1) Prostitution is made legal in the United States, what is the impact on GDP?
A)GDP increases.
B)GDP decreases.
C)GDP is unchanged.
D)None of the above.
Q2) Policies adopted by a country's central bank that influence interest rates and credit conditions, which in turn influence consumer and business spending are called:
A)monetary policy.
B)fiscal policy.
C)foreign policy.
D)exchange rate policy.
Q3) In an open economy firms sell goods and services to:
A)households, government, and foreigners.
B)just households.
C)just the government.
D)none of the above.
Q4) Why are transfer payments excluded from government expenditure in the national income accounts?
Q5) What are the two policy options used to influence the economy?
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Chapter 12:
Spending by Individuals, Firms, and
Governments on Real Goods and Services
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Q1) What factors will shift the aggregate expenditure function for a given level of real domestic income?
Q2) Increase in business taxes will ________ the expenditure curve:
A)decrease.
B)increase.
C)not change.
D)none of the above.
Q3) Consumer confidence is measured by two indices: the Consumer Sentiment Index and the Consumer Confidence Index.
A)True
B)False
Q4) Assume that the U.S.dollar depreciates against the Japanese yen.What is the impact on aggregate expenditures and income?
A)Both increase.
B)Both decrease.
C)Aggregate expenditure increases and income decreases.
D)Aggregate expenditure decreases and income increases.
Q5) What are the determinants of investment spending?
Q6) Briefly explain how capacity utilization rates are used by forecasters.
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Chapter 13: The Role of Money in the Macro Economy
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Q1) The private financial market where banks borrow and loan reserves to meet the minimum research requirements is called:
A)federal funds market.
B)loanable funds market.
C)discount loans market.
D)repo market.
Q2) Open market purchases and sales are conducted at the:
A)Federal Reserve Bank of Kansas City.
B)Federal Reserve Bank of New York.
C)Federal Reserve Bank of Chicago.
D)Federal Reserve Bank of St. Louis.
Q3) Open market sale will result in:
A)increase in bank reserves and a decrease in the federal funds rate.
B)increase in bank reserves and an increase in the federal funds rate.
C)decrease in bank reserves and a decrease in the federal funds rate.
D)decrease in bank reserves and an increase in the federal funds rate.
Q4) In the context of the money market, graphically illustrate and explain the impact of an increase in the use of ATM machines on interest rates.
Q5) Define the three functions of money.
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Chapter 14: The Aggregate Model of the Macro Economy
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Sample Questions
Q1) Features of the U.S.federal government expenditure and taxation programs that tend to automatically slow the economy during times of high economic activity and boost the economy during periods of recession are called:
A)discretionary expenditures.
B)automatic stabilizers.
C)non-automatic stabilizers.
D)none of the above.
Q2) Leading, coincident, and lagging indicators are based on the concept that:
A)expectations of future inflation is the driving force of the economy.
B)expectations of future profits are the driving force of the economy.
C)expectations of future unemployment is the driving force of the economy.
D)none of the above.
Q3) An aggregate supply curve that is either horizontal or upward sloping, depending on whether the absolute price level increases as firms produce more output is called:
A)short-run aggregate supply curve.
B)long-run aggregate supply curve.
C)potential GDP.
D)NAIRU.
Q4) What are the reasons for a decrease in the NAIRU.
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Chapter 15: International and Balance of Payments Issues in the Macro Economy
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Sample Questions
Q1) Stating the dollar has strengthened against the yen means the dollar has depreciated.
A)True
B)False
Q2) Using the foreign exchange market diagram, graphically illustrate and explain the impact of U.S.interest rates that exceed foreign interest rates, all else constant, on the exchange rate.
Q3) When a country's export spending exceeds import spending, the country is experiencing a:
A)trade deficit.
B)trade surplus.
C)budget deficit.
D)none of the above.
Q4) Within the balance of payments, a current account deficit is offset by a:
A)financial account deficit.
B)financial account surplus.
C)budget deficit.
D)budget surplus.
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Q5) What did the European Central Bank (ECB)do to bolster the value of the euro in September 2000?
Chapter 16: Combining Micro and Macro Analysis for Managerial Decision Making
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Sample Questions
Q1) If a good is price elastic, a decrease in price will:
A)decrease total revenue.
B)increase total revenue.
C)not affect revenue.
D)none of the above.
Q2) The decrease in demand faced by McDonalds during 2001-2002 can be attributed to:
A)decrease in consumer preference for high-fat content food.
B)increase in lawsuits.
C)increase in competitive pressures.
D)all of the above.
Q3) In general, large current account deficits have to be financed by:
A)capital outflows abroad.
B)capital inflows from abroad.
C)trade barriers.
D)none of the above.
Q4) If a good is price elastic, an increase in price will increase total revenues.
A)True
B)False
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Q5) Give some examples of oligopolistic behavior among the major fast food companies.
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