Managerial Economics
Exam Answer Key
Course Introduction
Managerial Economics is a course that bridges the gap between economic theory and business practice, focusing on the application of economic principles to decision-making in organizations. Students learn to analyze market behavior, cost structures, pricing strategies, and the influence of government policies on business. The course emphasizes the use of quantitative tools and managerial decision models to solve real-world problems related to resource allocation, production planning, risk analysis, and optimizing business objectives in both competitive and noncompetitive markets. Through case studies and practical examples, students develop the analytical skills necessary to make informed, strategic decisions in dynamic business environments.
Recommended Textbook
Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson
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Page 2
Chapter 1: Economic Models
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Q1) If the production possibilities frontier can be expressed as \(4 X ^ { 2 } + Y ^ { 2 } = 16\) then the point \(\mathrm { X } = 1\) ; \(Y = 4\) is.
A)outside the production possibilities frontier
B)on the production possibilities frontier
C)inside the production possibilities frontier
D)in the wrong quadrant to be on the graph
Answer: A
Q2) Suppose you can write generic supply and demand curves such that and .If price must reach a certain level before firms supply anything \(\mathrm { Q } _ { \mathrm { S } } = \mathrm { A } + \mathrm { BP }\) , \(Q _ { D } = D + C P\) ,A must be.
A)positive
B)negative
C)0
Answer: B
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3
Chapter 2: Utility and Choice
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Q1) "If an individual is to maximize the utility received from consumption,he or she should spend all available income...." This statement assumes.
A) that saving is impossible.
B) that the individual is not satiated in all goods.
C) that no goods are "inferior."
D)Both a and b.
Answer: D
Q2) If a person's indifference curves can be represented as a straight line,the person views the goods as
A)perfect substitutes
B)perfect complements
C)complements (but not perfect)
D)substitutes (but not perfect)
Answer: A
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Chapter 3: Demand Curves
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Q1) If a good is normal and its price increases,
A)the income effect will be positive and the substitution effect will be positive.
B)the income effect will be negative and the substitution effect will be negative.
C)the income effect will be positive and the substitution effect will be negative.
D)the income effect will be negative and the substitution effect will be positive.
Answer: B
Q2) If a good is Giffen and its price increases,
A)the income effect will be positive and the substitution effect will be positive.
B)the income effect will be negative and the substitution effect will be negative.
C)the income effect will be positive and the substitution effect will be negative.
D)the income effect will be negative and the substitution effect will be positive.
Answer: C
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Chapter 4: Uncertainty
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Sample Questions
Q1) An individual will never buy complete insurance if
A)he or she is risk averse.
B)he or she is a risk taker.
C)insurance premiums are fair.
D)under any circumstances.
Q2) Continuing with the same family from the preceding question,suppose a risk neutral insurance company exists to provide vacation insurance.Suppose further that each vacation day requires a constant expenditure,and this expenditure is standard across everybody. This allows us to simplify the problem by considering all payments to be in terms of vacation days. What is the least the insurance company would charge (in terms of vacation days)?
A)3
B)4
C)5
D)6
Q3) Expected value is defined as
A)the profit on a fair bet.
B)the most likely outcome of a given experiment.
C)the outcome that will occur on average for a given experiment.
D)the relative frequency with which an event will occur.
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Chapter 5: Game Theory
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Sample Questions
Q1) Best-response functions
A)can only be used to analyze games with continuous actions.
B)are always downward sloping.
C)always intersect at Nash equilibria.
D)never intersect.
Q2) Two games that differ only in the timing of moves-one simultaneous,the other sequential move-can sometimes have completely different subgame-perfect equilibria. Why?
A)The second mover to choose non-credible threats.
B)The first mover can choose an action that it would deviate from if its action were secret.
C)Subgame-perfect equilibrium cannot be applied to simultaneous games.
D)All of the above.
Q3) Consider the game between the teens from the previous question. In addition to any pure-strategy Nash equilibrium,there is another one in mixed strategies. In it,each teen chooses to declare with probability
A)0.52
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Chapter 6: Production
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Q1) If Q = K<sup>2</sup>L<sup>2</sup> the MP<sub>L</sub> is
A)constant
B)diminishing
C)increasing
Q2) The marginal physical product of labor is
A)the slope of the total output curve at the relevant point.
B)the negative of the slope of the total output curve at the relevant point.
C)the slope of the line connecting the origin with the relevant point on the total output curve.
D)the negative of the slope of the line connecting the origin with the relevant point on the total output curve.
Q3) A rise in the average productivity of labor
A)always reflects technical progress.
B)reflects technical progress if other input usage hasn't changed.
C)reflects technical progress only if labor input hasn't changed.
D)reflects technical progress only if the quantity of output is increased.
Q4) A production function measures how an individual maximizes utility.
A)a firm transforms output into input.
B)a firm transforms inputs into output.
C)a firm minimizes cost.
Page 8
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Chapter 7: Costs
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Q1) The shape of a firm's expansion path depends upon A)the price of the labor input.
B)the price of the capital input.
C)the shape of the firm's production function.
D)all of these factors.
Q2) The shape of a firm's long-run average cost curve is determined by
A)the degree to which each input encounters diminishing marginal productivity.
B)the underlying nature of the firm's production function when all inputs are able to be varied.
C)how much the firm decides to produce.
D)the way in which the firm's expansion path reacts to changes in the rental rate on capital.
Q3) Suppose a cost function is TC = Aq<sup>3</sup> + bq<sup>2</sup> + cq +d. Then the average total cost is
A)Aq<sup>2</sup> + bq + cq +d/q
B)Aq<sup>2</sup> + bq + c
C)Aq<sup>3</sup> + bq<sup>2</sup>+ cq
D)d
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Chapter 8: Profit Maximization and Supply
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Q1) In general,microeconomic theory assumes that firms attempt to maximize the difference between
A)total revenue and accounting costs.
B)price and marginal cost.
C)total revenues and economic costs.
D)economic costs and average cost.
Q2) If a firm is a price taker,its marginal revenue is
A)equal to market price.
B)less than market price.
C)greater than market price.
D)a multiple of market price that may be either greater than or less than one.
Q3) In order to maximize profits,a firm should produce at the output level for which A)average cost is minimized.
B)marginal revenue equals marginal cost.
C)marginal cost is minimized.
D)price minus average cost is as large as possible.
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Chapter 9: Perfect Competition in a Single Market
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Q1) In the long run,the greater burden of a specific tax will usually be absorbed by A)consumers.
B)the party consumers or producers with the more elastic demand/supply curve.
C)the party with the least elastic demand/supply curve.
D)shareholders and employees of the firm in the form of reduced dividends and wages.
Q2) "Missing markets" result from
A)high transactions costs of such markets.
B)strict price controls.
C)the inability of producers to gain economies of scale.
D)foreign countries dominating a domestic market for a product.
Q3) Suppose demand for a good is Q<sub>D</sub> = 100 - P and supply is Q<sub>S</sub> = -20 + P.Suppose that a nationwide quota (of 20)is enforced so that more can be used in a war effort.What is the consumer surplus?
A)200
B)400
C)600
D)800
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Chapter 10: General Equilibrium and Welfare
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Q1) Suppose the Economics Department has a graduation party for its students but as a final test they must show they have learned something about trade.The men are given food when they walk in and the women are given drink.Suppose they have identical preferences where food and drink provide utility U = F D .The contract curve in the Edgeworth box using a representative man and woman would be
A)a right angle connecting the lower left corner with the upper right corner.
B)a curve (not necessarily a line) connecting the lower left corner with the upper right corner.
C)a line connecting the lower left corner with the upper right corner.
D)a right angle connecting the upper left corner with the lower right corner.
Q2) Under a perfectly competitive price system
A)an equitable allocation of the available resources will always result.
B)there is no opportunity for individuals to trade amongst themselves.
C)there is no reason to expect that voluntary trading will result in an equitable allocation of the available resources.
D)None of the above will result.
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Chapter 11: Monopoly
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Q1) Which might be a possible reason a cable television operator want to bundle channels together in packages ("tiers")?
A)delivering many channels to the consumer is not much more costly than delivering a few.
B)simplifies the consumer's choice and perhaps lowers administrative costs.
C)allows the firm to extract revenue from a consumer even if it does not know exactly which channels the consumer likes the most..
D)all of the above.
Q2) If the government requires a natural monopoly to price at marginal cost,
A)monopoly firms will earn zero economic profits because the price of the good equals the cost of producing that good.
B)monopoly firms will operate at a loss because P < AC.
C)more firms will be able to enter the market.
D)producer surplus will increase because quantity supplied is greater.
Q3) Which of the following is not a legal barrier to entry in a monopolized market?
A)A patent.
B)An exclusive franchise.
C)Decreasing average cost.
D)An exclusive license.
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Chapter 12: Imperfect Competition
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Q1) Suppose there are two firms,Boors and Cudweiser,each selling identical-tasting nonalcoholic beer.Consumers of this beer have no brand loyalty so market demand can be expressed as P = 5 - .001(QB + QC). Boors' marginal revenue function can be written MR = 5 - .001(2QB + QC)and symmetrically for Cudweiser. Boors operates with out-of-date technology and has constant cost of $2 per unit \(( M C = A C = 2 )\) whereas Cudweiser has constant cost of $1 per unit. Assuming the firms behave as Cournot competitors,Boor's best-response function is
A)QB = 2,000 - .5QC
B)QB = 1,500 - .5QC
C)QC = 2,000 - .5QB
D)QC = 1,500 - .5QB
Q2) In a Cournot equilibrium,each firm chooses an output level that
A)maximizes joint profits.
B)maximizes the price received.
C)maximizes profits given what the other firm produces.
D)maximizes revenue given what the other firm produces.
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Chapter 13: Pricing in Input Markets
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Q1) Suppose the market for labor is perfectly competitive and the demand for labor is \(L = 100 - 10 w\) and market supply is \(L = - 20 + 10 w\) .The equilibrium wage will be
A)5
B)6
C)7
D)8
Q2) A profit-maximizing firm will never hire that quantity of a factor of production for which that factor has an increasing marginal productivity because
A)it would not be maximizing output.
B)it would not be maximizing the productivity of labor.
C)it would not be minimizing costs.
D)it would not be maximizing profits.
Q3) In the study of labor supply,"leisure" refers to
A)time spent sleeping.
B)time spent doing absolutely nothing (except breathing).
C)time spent in one's place of residence.
D)time spent that is not spent in market work.
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Chapter 14: Capital and Time
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Q1) If real extraction costs do not change,the relative price of a finite resource would be expected to
A)fall over time.
B)remain constant over time.
C)rise at a rate given by the nominal rate of interest.
D)rise at a rate given by the real rate of interest.
Q2) The two-period budget line for incomes Y1 and Y2 and consumption C1 and C2 can be written as \(C _ { 2 } = Y _ { 1 } ( 1 + r ) + Y _ { 2 } - ( 1 + r ) C _ { 1 }\) ,if the interest rate were to fall the budget line would
A)shift to the left in a parallel fashion
B)shift to the right in a parallel fashion
C)rotate counter-clockwise pivoting on Y1,Y2
D)rotate clockwise pivoting on Y1,Y2
Q3) The present value of $1 payable in the future decreases
A)the higher r is and the sooner it is to be paid.
B)the lower r is and the sooner it is to be paid.
C)the higher r is and the longer time until it is paid.
D)the lower r is and the longer time until it is paid.
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Chapter 15: Asymmetric Information
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Sample Questions
Q1) Adverse selection arises in insurance markets because
A)insurance buyers have more information than insurance sellers.
B)insurance sellers have more information than insurance buyers.
C)individuals can select which insurance company to patronize.
D)insurance companies can exercise too much control over whom they insure.
Q2) The "lemons model" predicts quality deterioration in the used-car market because
A)used cars require increasing maintenance.
B)suppliers and demanders have different information about cars' quality.
C)used cars are generally of a lower quality than new cars.
D)people will usually buy new cars if they are available.
Q3) Which are social costs associated with the inability of shareholders to observe an executive's effort? (You may choose more than one.)
A)Excessive insurance offered.
B)The executive has to be exposed to risk to induce effort,and risk is costly.
C)The executive ends up exerting less than first-best effort.
D)Excessive effort induced.
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Chapter 16: Externalities and Public Goods
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Sample Questions
Q1) A nonrival good is a good that
A)is produced by a monopoly.
B)is produced by a cartel.
C)can provide benefits to additional users at a zero marginal cost.
D)is sold in a single market.
Q2) The opportunity cost doctrine suggests that which of the following are not costs of government educational programs?
A)The wages of teachers.
B)The foregone earnings of participants.
C)Stipends paid to participants.
D)Materials used by students.
Q3) Suppose the market for oranges is perfectly competitive and unregulated.Suppose also that the chemicals used to keep the oranges insect-free damage the environment by an estimated $1 per bushel of oranges.Suppose Q<sub>D</sub> = 1000 - 100P and Q<sub>S</sub> = -100 + 100P.The market equilibrium quantity is
A)400
B)450
C)500
D)550
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Chapter 17: Behavioral Economics
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Q1) Return to the market for cigarettes from the previous questions. Suppose the government implements the tax you found in the previous question. But suppose the government is making a mistake. The true demand curve is in fact ,and this is not a result of any behavioral bias. Compute the deadweight loss of the government's tax policy.
A)DWL = 0.
B)DWL = 500.
C)DWL = 1,000
D)DWL = 2,500.
Q2) Return to the case of Jan,the hyperbolic discounter from the previous question. Suppose she can sign a contract that requires her to give up money equivalent to a loss of X utils if she does not undertake the action. Assume she does not behave consistent with her plans without this contract. How high would the contractual value of X have to be to prevent her inconsistency?
A)C - B/2.
B)B.
C)C.
D)B + C.
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