Economic Analysis for Managers Practice Exam
Course Introduction
Economic Analysis for Managers equips students with fundamental economic concepts and analytical tools crucial for effective managerial decision-making. The course covers microeconomic and macroeconomic principles, focusing on topics such as supply and demand analysis, market structures, pricing strategies, cost analysis, and the impact of government policies on business operations. By applying economic reasoning to real-world business scenarios, students develop the ability to assess market conditions, forecast trends, and make informed strategic choices that enhance organizational performance. Practical case studies and quantitative methods further strengthen students ability to interpret economic data and drive successful management outcomes.
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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Q1) The value of a firm is equal to:
A) the present value of tangible assets.
B) the present value of all future revenues.
C) the present value of all future cash flows.
D) current revenues less current costs.
Answer: C
Q2) Managers who seek satisfactory rather than optimal results:
A) take actions that benefit parties other than stockholders.
B) are insensitive to social constraints.
C) are insensitive to self-imposed constraints.
D) increase allocative efficiency.
Answer: A
Q3) The primary virtue of managerial economics lies in its: A) logic.
B) usefulness.
C) consistency.
D) mathematical rigor.
Answer: B
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Chapter 2: Economic Optimization
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Q1) The slope of a straight line from the origin to the total profit curve indicates:
A) marginal profit at that point.
B) an inflection point.
C) average profit at that point.
D) total profit at that point.
Answer: C
Q2) The optimal decision produces:
A) maximum revenue.
B) maximum profits.
C) minimum average costs.
D) a result consistent with managerial objectives.
Answer: D
Q3) Inflection is:
A) a line that touches but does not intersect a given curve.
B) a point of maximum slope.
C) a measure of the steepness of a line.
D) an activity level that generates highest profit.
Answer: B
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4
Chapter 3: Demand and Supply
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Q1) Holding all else equal, if supply increases, the:
A) equilibrium price will decrease while the quantity produced and sold could increase, decrease or remain constant.
B) quantity produced and sold will increase while the equilibrium price could increase, decrease, or remain constant.
C) equilibrium price will increase while the quantity produced and sold could increase, decrease or remain constant.
D) none of these.
Answer: D
Q2) Holding all else equal, an increase in mandatory payments by employers for universal health care coverage for workers would lead to a decrease in the:
A) supply of workers.
B) the quantity supplied of workers.
C) the quantity demanded of workers.
D) demand for workers.
Answer: D
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Chapter 4: Demand Analysis
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Q1) Arc elasticity is measured:
A) over a given range of a function.
B) at a spot on a function.
C) over a given range along a function.
D) before non-price effects.
Q2) With inelastic demand, a price increase produces:
A) higher profits.
B) lower profits.
C) lower marginal revenue.
D) lower total revenue.
Q3) The marginal rate of substitution is always equal to:
A) minus one times the ratio of marginal utilities for each product.
B) the marginal utility of either product.
C) the total utility of either product.
D) the slope of the budget constraint.
Q4) The demand for a product tends to be inelastic if:
A) it is expensive.
B) a small proportion of consumer's income is spent on the good.
C) consumers are quick to respond to price changes.
D) it has many substitutes.
6
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Chapter 5: Demand Estimation
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Q1) A. If \( x=1 \), there is a perfect direct line ar relation between the dependent \( Y \) variable and the independent \( X \) variable.
B. \( \quad R^{2} \) is the proportion of total variation in the independent variables that is explained by the dependent variable.
C. \( \mathrm{R}^{2}=75 \) when a given regression model is unable to explain \( 25 \% \) of the variation in the dependent \( Y \) variable.
D. When a simple regression model is unable to explain \( 19 \% \) of demand variation, the coefficient of correlation equals \( 90 \% \).
E. In a simple regression model with only one independent variable, the correlation coefficient falls in the range between 1 and 0
Q2) A deterministic relation is:
A) a simultaneous relation.
B) an imprecise link between two variables.
C) an association that is known with certainty.
D) a concurrent association.
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Chapter 6: Forecasting
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Q1) Which of the following forecasting methods is not qualitative?
A) survey techniques.
B) barometric method.
C) expert opinion.
D) delphi method.
Q2) Sales Forecasting. Samurai, Ltd., must forecast sales for a popular trivia game in order to avoid stockouts or excessive inventory charges during the coming Christmas season. In percentage terms, the company estimates that game sales fall at double the rate of price increases and grow at five times the rate of customer traffic increases. Furthermore, these effects seem to be independent.
A. Write an equation for estimating the Christmas season sales, using the symbols S = sales, P = price, T = traffic, and t = time.
B. Forecast this season's sales if Samurai sold 10,000 games last season at $20 each, this season's price is anticipated to be $25, and customer traffic is expected to rise by 10% over previous levels.
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Chapter 7: Production Analysis and Compensation Policy
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Q1) A production function describes the relation between output and:
A) technical progress.
B) one input.
C) total cost.
D) all inputs.
Q2) The production function Q = 0.25X<sup>0.5</sup>Y exhibits:
A) constant returns to scale.
B) increasing returns to scale.
C) increasing and then diminishing returns to scale.
D) diminishing returns to scale.
Q3) Returns to a factor denotes the relation between the quantity of an individual input employed and the:
A) optimal scale of a firm.
B) optimal size of production facilities.
C) optimal length of production runs.
D) level of output produced.
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Chapter 8: Cost Analysis and Estimation
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Q1) A cost-output relation for a specific plant and operating environment is the:
A) short-run cost curve.
B) long-run total cost curve.
C) long-run marginal cost curve.
D) long-run average cost curve.
Q2) In the decision process, management should always consider:
A) relevant costs.
B) sunk costs.
C) implicit costs only.
D) historical costs.
Q3) If the slope of a long-run total cost function decreases as output increases, the firm's underlying production function exhibits:
A) constant returns to scale.
B) decreasing returns to scale.
C) decreasing returns to a factor input.
D) increasing returns to scale.
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Chapter 9: Linear Programming
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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) Linear Programming Concepts. Indicate whether each of the following statements is true or false. Defend your answer.
A. Linear programming can be used for solving any type of constrained optimization problem where the relations involved can be approximated by linear equations.
B. Linear revenue, cost and profit relations will be observed when output prices, input prices, and average variable costs are constant.
C. Equal distances along a given production process ray in a linear programming problem always represent an identical level of output
D. At isoquant segment midpoints, each adjacent production process must be used to produce 50% of output efficiently.
E. Maximizing a LP profit contribution objective function always results in also maximizing total net profits.
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11
Chapter 10: Competitive Markets
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Q1) Price and product quality competition tends to be vigorous when:
A) entry barriers are low.
B) potential entrants are few.
C) product quality information is scarce.
D) the number of active sellers is few.
Q2) Product Differentiation. Suggest whether each of the following statements is true or false and illustrate why.
A. Sources of product differentiation include only physical differences, not merely perceived differences.
B. Price competition tends to be most vigorous for products with many actual or perceived differences.
C. The availability of good substitutes decreases the degree of competition.
D. Competition tends to be less vigorous when buyers and sellers have easy access to detailed price/product performance information.
E. The availability of good complements increases the degree of competition.
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12
Chapter 11: Performance and Strategy in Competitive Markets
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Q1) Profits stemming from market power reflect:
A) high prices.
B) superior efficiency.
C) exceptional capability.
D) rapid industry growth.
Q2) A per unit tax on pollution:
A) results in deadweight loss.
B) raises private benefits.
C) lowers social benefits.
D) lowers private costs.
Q3) Failure by market structure can occur when:
A) joint products are produced in variable proportions.
B) joint products are produced in fixed proportions.
C) externalities exist.
D) few buyers or sellers are present.
Q4) No externalities exist when:
A) private costs exceed social costs.
B) private costs and benefits equal social costs and benefits.
C) private benefits are less than social benefits.
D) private benefits exceed social benefits.
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Chapter 12: Monopoly and Monopsony
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Q1) Government seeks to aid economic efficiency in the case of natural monopoly through:
A) creating government-financed corporations to compete with the natural monopolist.
B) subsidizing competitors.
C) price regulation.
D) breaking the natural monopolist up into smaller competitors.
Q2) The Celler-Kefauver Act specifically prohibits:
A) mergers that reduce competition.
B) asset acquisitions that reduce competition.
C) tying contracts that reduce competition.
D) conspiracies in restraint of trade.
Q3) In monopoly competitive markets, profits are maximized when:
A) MC = AC
B) P > AC
C) MR = MC
D) MR = P
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Chapter 13: Monopolistic Competition and Oligopoly
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Q1) For a firm in monopolistically competitive market equilibrium:
A) MC ³ AC
B) MR £ AR
C) MR = MC
D) P ³ AC
Q2) The demand curve faced by a firm in a monopolistically competitive industry is:
A) the downward sloping industry demand curve.
B) downward sloping.
C) more elastic than the perfectly competitive firm's demand curve.
D) horizontal.
Q3) Monopolistic competition is characterized by:
A) homogeneous products.
B) barriers to entry and exit.
C) perfect dissemination of information.
D) few buyers and sellers.
Q4) Equilibrium in oligopoly markets is characterized by:
A) P > AC and MR = MC
B) P = MR and AC = MC
C) P < MR and AC < MC
D) P = AC and MR = MC
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Chapter 14: Game Theory and Competitive Strategy
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Q1) Sequential games:
A) incorporate the possibility of an irrational response.
B) that end after a finite sequence of moves can be solved completely.
C) involve players that move in succession.
D) involve players that are fully aware of all prior moves.
Q2) In a game:
A) there can be no more than two players.
B) agents strive to maximize their expected utility
C) payoffs are wholly determined by each player's own course of action
D) decision makers must take into account the reasoning of each other.
Q3) Monopoly profits reflect:
A) competitive advantage.
B) comparative advantage.
C) strategic advantage.
D) none of these.
Q4) Nash bargaining is a:
A) one-shot game.
B) simultaneous-move game of only limited duration.
C) simultaneous-move game of only unlimited duration.
D) simultaneous-move game of limited or unlimited duration.
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Chapter 15: Pricing Practices
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Q1) Markup on Price. TLC Tree Service, Inc., provides tree spraying services to residential customers in the Detroit area. The company recently raised its service price from $50 to $60 per tree. As a result, sales fell to 3,900 from 4,900 units in the prior year.
A. Calculate the arc price elasticity of demand for TLC 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 $12 per unit for labor and materials, calculate TLC's optimal markup on price and its optimal price.
Q2) Markup on Price. Carpet Magic, Inc., provides professional, in-the-home carpet cleaning services to residential customers in the Binghamton, New York area. The company recently raised its service price from $94.50 to $121.50 per room. As a result, sales fell to 5,000 from 7,000 units in the year-earlier period.
A. Calculate the arc price elasticity of demand for Carpet Magic 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 $30.375 per unit for labor and materials, calculate Carpet Magic's optimal markup on price and its optimal price.
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Chapter 16: Risk Analysis
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Q1) A probability distribution for total profit is a list of:
A) possible events.
B) probabilities.
C) possible events and probabilities.
D) occurrences.
Q2) A project with a 50% chance of earning $0 and a 50% chance of earning $100 has a standard deviation of:
A) $100
B) $50
C) $75
D) $0
Q3) 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?
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Chapter 17: Capital Budgeting
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Q1) Net present value is the:
A) current-dollar difference between marginal revenues and marginal costs.
B) change in net cash flows due to an investment project.
C) change in before-tax cash flows due to an investment project.
D) change in net after-tax cash flows due to an investment project.
Q2) Cost of Capital. Chock Full O'Coffee, Inc., processes and markets a leading brand of coffee. A security analyst's report issued by a national brokerage firm indicates that debt yielding 9%, comprises 60% of the company's overall capital structure. Furthermore, both earnings and dividends are expected to grow at a rate of 4% per year.
Currently, common stock in the company is priced at $20, and it should pay $1.40 per share in dividends during the coming year. This yield compares favorably with the 8% return currently available on risk-free securities and the 14% average for all common stocks, given the company's estimated beta of 0.5.
A. Calculate the component cost of equity using both the capital asset pricing model and the dividend yield plus expected growth model.
B. Assuming a 50% marginal federal plus state income tax rate, calculate the company's weighted average cost of capital.
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Chapter 18: Organization Structure and Corporate Governance
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Q1) The natural conflict between owners and managers is called the:
A) end-of game problem.
B) incentive problem.
C) agency problem.
D) capture problem.
Q2) Incentive Compensation. Salary and bonus payments tied to short-term performance often constitute a large part of the annual total compensation package earned by top management. Thus, top managers, like the chief executive officer (CEO), typically have huge personal incentives to turn in favorable year-to-year growth in revenues, profits and earnings per share. This can sometimes have the unfortunate effect of focusing managerial attention on near-term accounting performance to the detriment of long-term value maximization.
A. Explain some tools companies use to combat such myopic behavior.
B. Explain why a stock-option plan might be very appropriate for the CEO, but inappropriate for workers in general.
Q3) End-of-game Problem. One of the most vexing problems facing boards of directors and stockholders is the so-called "end-of-game" problem.
A. What is it?
B. How do firms efficiently deal with such difficulties?
Page 20
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Chapter 19: Government in the Market Economy
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Q1) Expenses that are not directly borne by producers or their customers are called:
A) marginal external costs.
B) marginal social costs.
C) marginal private costs.
D) opportunity costs.
Q2) External Social Benefits. Publicly-funded primary and secondary education is common throughout the world. This support is usually justified on the basis that there are significant external social benefits to having an articulate and well-educated populace. Some of the external benefits associated with a more highly educated populace include higher income tax revenues, reduced crime, higher voter participation, and so on.
A. Describe the nonrival consumption concept as it pertains to publicly-funded primary and secondary education.
B. Describe the nonexclusion consumption concept as it pertains to publicly-funded primary and secondary education.
C. In terms of the external social benefits of education argument, is the public support basis for college education as strong as it is for primary and secondary education?
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