Principles of Managerial Economics
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Course Introduction
Principles of Managerial Economics introduces students to the foundational concepts and analytical tools that managers use to make informed business decisions. The course covers topics such as demand and supply analysis, production and cost functions, pricing strategies, market structures, and the role of government in the economy. Emphasizing real-world applications, students learn how to apply economic reasoning to address managerial problems related to resource allocation, business optimization, and strategic planning in competitive environments.
Recommended Textbook
Economics for Managers 3rd Edition by
Paul G. Farnham
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2
Chapter 1: Managers and Economics
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Sample Questions
Q1) The key characteristic of an oligopolistic market is:
A)production of a homogeneous product.
B)mutual interdependence among firms in the market.
C)the absence of market power by any one firm.
D)ease of entry into, and exit out of, the market.
Answer: B
Q2) In the equation GDP = C + I + G + F, in which F equals net export spending (i.e., total spending on exports minus total spending on imports), imports are subtracted from the other types of expenditures because:
A)imports reduce national welfare.
B)other countries do not import goods from the U.S.
C)it represents a flow of expenditures out of the domestic economy to the rest of the world.
D)the value of imports is difficult to determine due to the fact that they are frequently stated in terms of foreign currency.
Answer: C
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Chapter 2: Demand, Supply, and Equilibrium Prices
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Sample Questions
Q1) Define the concept of demand and explain, on an intuitive level, why the demand curve for a good is downward sloping.
Answer: Demand refers to relationship between the price of a good and the quantity consumers are willing and able to buy at each price.It is assumed that there is an inverse relationship between price and quantity demanded.The intuitive explanation is that as the price of a good falls, consumers' purchasing power increases.At the same time, the good becomes cheaper relative to its substitutes.For these reasons, consumers are willing to buy more of the good.
Q2) Assume the income of consumers of good X (a normal good)increases.What occurs at the initial equilibrium price for X that signals market participants that the equilibrium price must change?
A)A surplus is created by an increase in supply.
B)A surplus is created by a decrease in demand.
C)A shortage is created by an increase in demand.
D)A shortage is created by a decrease in supply.
Answer: C
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4
Chapter 3: Demand Elasticities
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Sample Questions
Q1) When the government decides to impose a tax on sellers of a good or service, sellers try to pass the tax on to consumers by raising the price of the good being sold.Assume the government decides to place a $1 tax on each unit of a good sold, e.g., tires.Using the simple model of supply and demand, illustrate what would happen to the price and quantity of tires sold.Would the amount of tax paid by the consumer (as opposed to the producer)be greater when demand is elastic or inelastic? Why?
Answer: The imposition of the tax would cause the supply curve to shift left as suppliers raise the price of each unit offered by $1 in an effort to pass on the tax to consumers.This would cause the supply of tires to decrease, i.e., the supply curve would shift left, causing equilibrium price to rise and equilibrium quantity to decrease.However, assuming the supply and demand curves for tires have the usual shapes, equilibrium price would rise by something less than $1.The actual increase in the per unit price of tires would depend, all else constant, on the price elasticity of demand.The more inelastic demand is (as illustrated by a steeper demand curve), the greater the increase in price and vice versa.
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Chapter 4: Techniques for Understanding Consumer Demand and Behavior
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Sample Questions
Q1) Which of the following approaches to understanding and predicting consumer behavior depends primarily on the knowledge and experience of a firm's employees and its suppliers?
A)Direct consumer surveys.
B)Expert opinion.
C)Analysis of historical data.
D)Test marketing and price experiments.
Q2) Refer to Scenario 1.What is the coefficient of determination?
A)1)000
B)0)000
C)0)037
D)0)324
Q3) A constant-elasticity demand function can be obtained by:
A)taking the logarithm of the dependent variable only.
B)taking the logarithm of the independent variable(s)only.
C)taking the logarithm of the dependent and independent variable(s).
D)taking the reciprocal of the dependent variable(s).
Q4) The intercept of the equation: Y = .09 + 1.5X is 1.5.
A)True
B)False
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Chapter 5: Production and Cost Analysis in the Short Run
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Q1) Which of the following is true of the typical relationship between marginal product (MP)and average product (AP)?
A)If MP is greater than AP, then AP is falling.
B)The AP curve intersects the MP curve at minimum MP.
C)The MP curve intersects the AP curve at maximum AP.
D)If MP is less than AP, then AP is increasing.
Q2) Which of the following is an example of an "implicit cost"?
A)Interest that could have been earned on retained earnings used by the firm to finance expansion.
B)The payment of rent by the firm for the building in which it is housed.
C)The interest payment made by the firm for funds borrowed from a bank.
D)The payment of wages by the firm.
Q3) A firm's production function is the relationship between the factors of production and the resulting outputs of the production process.
A)True
B)False
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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Sample Questions
Q1) What are the two primary factors that influence a firm manager's choice between a labor-intensive and a capital-intensive method of production? How does each factor influence the manager's choice.
Q2) Assume a firm produces 500 units of a good by using two inputs, capital and labor, whose per unit prices are $10 and $4.Assume also that the marginal physical product of the last unit of capital is 30 and the marginal physical product of the last unit of labor is 10.Is this firm minimizing its costs of producing 500 units of output?
A)No, because the marginal products of the two inputs are not equal.
B)No, because the MRTS and the price ratio for the two inputs are not equal.
C)No, because the prices of the two inputs are not equal.
D)The answer cannot be determined without more information.
Q3) Assume that as a firm expands its scale of operation, the minimum point of its short-run average total cost curve is unchanged.In this case, we would say that the firm is experiencing diseconomies of scale.
A)True
B)False
Q4) Explain how "learning by doing" and transportation costs each affect the long-run average cost curve.
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Chapter 7: Market Structure: Perfect Competition
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Sample Questions
Q1) The market structure that is most different from the model of perfect competition is:
A)monopolistic competition.
B)monopsony
C)oligopoly.
D)monopoly.
Q2) Although an improvement in technology enables perfectly competitive firms to earn a positive economic profit in the short run, entry by new firms will ensure that those profits are eliminated over time.
A)True
B)False
Q3) Between 1999 and 2007, the behavior of firms in the trucking industry closely matched the outcome predicted by the model of perfect competition.
A)True
B)False
Q4) Explain why a firm should continue to operate in the short run so long as market price is greater the the firm's average variable cost at the profit-maximizing level of output.
Q5) Summarize the characteristics of a perfectly competitive market.
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Chapter 8: Market Structure: Monopoly and Monopolistic Competition
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Sample Questions
Q1) The Sherman Antitrust Act:
A)prohibits conspiracies in restraint of trade.
B)allows the formation of trusts so long as they are public enterprises.
C)allows a group of firms to form a trust only if it is done to take advantage of economies of scale.
D)prevents the military from using armored vehicles on the public streets.
Q2) Which of the following values of the Lerner Index indicates the greatest amount of market power?
A)0)313.
B)0)375.
C)0)6.
D)0)625.
Q3) The term "price setter" refers to a firm that faces a downward-sloping demand curve and must therefore set the combination of output and price that will maximize the firm's profits.
A)True
B)False
Q4) Explain how network externalities act as a barrier to entry.
10
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Chapter 9: Market Structure: Oligopoly
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Q1) The decision by the federal government to prohibit cigarette companies from advertising on television actually caused the companies' profits to increase, an outcome that is consistent with the prediction of the prisoner's dilemma game.
A)True
B)False
Q2) To maximize joint profits, the members of a cartel have to determine the level of industry output by setting marginal revenue qual to the cartel's joint marginal costs of production.
A)True
B)False
Q3) In comparing an oligopolistic firm to a perfectly competitive firm it is generally assumed that the price charged by the competitive firm will be higher than the price charged by the oligopolistic firm.
A)True
B)False
Q4) Explain the essential difference between games in which moves are simultaneous and those in which moves are sequential.
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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) Which of the following would not be categorized as a form of third-degree price discrimination?
A)Group pricing.
B)Promotional pricing.
C)Versioning.
D)Personalized pricing.
Q3) When demand is elastic, the marginal revenue resulting from a decrease in price is: A)positive.
B)zero.
C)negative.
D)cannot be determined without more information.
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Chapter 11: Measuring Macroeconomic Activity
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Q1) Inflation was a problem during the Great Depression.
A)True
B)False
Q2) Refer to Table 11.1.What is the value of net exports or the trade balance?
A)$300.
B)-$300.
C)$1,700.
D)-$1,700.
Q3) An economy with only a domestic sector is called:
A)a mixed economy.
B)an open economy.
C)a closed economy.
D)a command economy.
Q4) Declining real GDP for two quarters in a row is often called a recession.
A)True
B)False
Q5) Distinguish between real and nominal GDP.Which one is a better measure of the business cycle?
Q6) What are the costs associated with inflation?
Q7) What are some of the issues associated with the consumer price index?
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Chapter 12: Spending by
Individuals, Firms, and
Governments on Real Goods and Services
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Q1) For the U.S.economy, the largest expenditure category is:
A)government expenditures.
B)net export expenditures.
C)personal consumption expenditures.
D)investment expenditures.
Q2) In 2009, the U.S.Congress approved a fiscal stimulus measure which included additional spending by the U.S.government sector.Using the Keynesian cross diagram, graphically illustrate and explain the impact of such a policy on aggregate expenditure and income.
Q3) Business taxes increase.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.
Q4) Decrease in government spending will ________ the expenditure curve:
A)decrease.
B)increase.
C)not change.
D)none of the above.
Q5) What are the determinants of investment spending?
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Chapter 13: The Role of Money in the Macro Economy
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Q1) The central bank of the United States is the:
A)First American Bank.
B)Federal Reserve.
C)Federal Deposit Insurance Corporation.
D)U)S. Treasury.
Q2) Open market sale of government securities by the Fed decreases the federal funds rate.
A)True
B)False
Q3) The liquidity-money (LM)curve shows the alternative combinations of interest rates and real income that clears the money market.
A)True
B)False
Q4) The primary responsibility of conducting monetary policy rests with the:
A)Board of Governors.
B)Federal Open Market Committee.
C)Federal Deposit Insurance Corporation.
D)U)S. Treasury.
Q5) Why is the money multiplier smaller than the simple deposit multiplier?
Q6) Define the three functions of money.
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Chapter 14: The Aggregate Model of the Macro Economy
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Q1) Contractionary fiscal policy should be used if:
A)aggregate demand-aggregate supply equilibrium is below potential output.
B)aggregate demand-aggregate supply equilibrium is above potential output.
C)aggregate demand-aggregate supply equilibrium is equal to potential output.
D)none of the above.
Q2) Average weekly hours in manufacturing is an example of a:
A)leading indicator.
B)coincident indicator.
C)lagging indicator.
D)none of the above.
Q3) An increase in the costs of resources or inputs of production would shift the:
A)short-run aggregate supply curve rightward.
B)short-run aggregate supply curve leftward.
C)long-run aggregate supply curve rightward.
D)long-run aggregate supply curve leftward.
Q4) A decrease in consumer confidence would shift the aggregate demand curve rightward.
A)True
B)False
Q5) Why did the Fed shift its policy target towards the federal funds rate.
Page 16
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Chapter 15: International and Balance of Payments Issues in the Macro Economy
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Q1) Net exports are:
A)negatively related to domestic income, positively related to income in the rest of the world, and positively related to currency appreciation.
B)negatively related to domestic income, positively related to income in the rest of the world, and positively related to currency depreciation.
C)positively related to domestic income, positively related to income in the rest of the world, and positively related to currency appreciation.
D)positively related to domestic income, positively related to income in the rest of the world, and positively related to currency depreciation.
Q2) In January 2001, the euro/dollar exchange rate was 1.10, and in January 2002, the euro/dollar exchange rate was 1.120 What happened to the exchange rate during this period?
A)Euro appreciated against the dollar.
B)Euro depreciated against the dollar.
C)Dollar appreciated against the euro.
D)Both B and C.
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Chapter 16: Combining Micro and Macro Analysis for Managerial Decision Making
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Q1) If a good is price inelastic, a decrease in price will:
A)decrease total revenue.
B)increase total revenue.
C)not affect income.
D)none of the above.
Q2) 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.
Q3) If a good is price elastic, an increase in price will increase total revenues. A)True
B)False
Q4) In 2001-2002, the fast food industry underwent tremendous growth. A)True B)False
Q5) McDonalds has traditionally been popular among Chinese children. A)True B)False
Page 18
Q6) How did McDonalds address the obesity issue in China?
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