Managerial Economics Exam Review
Course Introduction
Managerial Economics applies microeconomic theories and methodologies to solve practical problems faced by managers in decision making and planning. The course explores topics such as demand analysis and forecasting, production and cost analysis, market structure and pricing strategies, and the impact of government policies on business operations. Emphasizing the use of analytical tools and quantitative techniques, this course equips students with the skills to make informed managerial decisions aimed at maximizing firm value in competitive and dynamic environments.
Recommended Textbook
Microeconomics 12th Edition by Michael Parkin
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Chapter 1: What Is Economics
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Q1) Define economics and describe its branches of study.
Answer: Economics is the social science that studies the choices made by individuals, businesses, government, and entire societies as they cope with scarcity. It has two branches, microeconomics and macroeconomics. Microeconomics is the study of the choices made by individuals and businesses, the way they interact, and the influence that governments exert on these choices. Macroeconomics is the study of the aggregate (total) effects on the national economy and the global economy of the choices that individuals, businesses, and governments make.
Q2) The relationship between income and consumption illustrated in the figure above is
A) positive and linear.
B) positive and nonlinear.
C) negative and linear.
D) negative and nonlinear.
Answer: A
Q3) The slope of a straight line increases as the numbers on the x-axis become larger.
A)True
B)False
Answer: False
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Chapter 2: The Economic Problem
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Q1) Moving along a PPF, marginal cost is
A) the cost of producing the first unit of a good or service.
B) the total cost, less the production of the other good or service.
C) greater than the opportunity cost.
D) equal to the opportunity cost of producing one more unit of a good or service.
Answer: D
Q2) In the figure above, point E could be obtained if
A) resources were shifted from education to health care.
B) resources were used more efficiently.
C) society's resources increased.
D) resources were shifted from health care to education.
Answer: C
Q3) A PPF bows outward because
A) not all resources are equally productive in all activities.
B) consumers prefer about equal amounts of the different goods.
C) entrepreneurial talent is more abundant than human capital.
D) resources are used inefficiently.
Answer: A
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4
Chapter 3: Demand and Supply
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Q1) The price of a bag of corn chips is $3, and the price of a bottle of soda is $1. What is the relative price of a bag of corn chips?
A) 3 bottles of soda per bag of corn chips
B) 1/3 bottle of soda per bag of corn chips
C) $3
D) 33¢
Answer: A
Q2) Inferior goods are those for which demand increases as
A) the price of a substitute falls.
B) the price of a substitute rises.
C) income decreases.
D) income increases.
Answer: C
Q3) Which of the following decreases the supply of restaurant meals?
A) Waiters get a pay raise.
B) Consumers' incomes increase and restaurant meals are a normal good.
C) Consumers' incomes decrease and restaurant meals are a normal good.
D) The price of movies, a complement to restaurant meals, falls.
Answer: A
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Chapter 4: Elasticity
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Q1) Last year in the United States, the price of snowboards rose by 5 percent and the price rise resulted in a 15 percent increase in the quantity supplied. This outcome is an indication that
A) the supply curve of snowboards shifted rightward.
B) the supply of snowboards is price elastic.
C) some firms entered into the snowboard industry.
D) All of the above answers are correct.
Q2) Suppose that the demand for corn is price inelastic. If a technological advance makes corn farms more productive, the equilibrium price of corn will ________ and the farmers' total revenue will ________.
A) rise; increase
B) rise; decrease
C) fall; increase
D) fall; decrease
Q3) If the demand for a good is perfectly elastic, then the demand curve is horizontal.
A)True
B)False
Q4) What effect does a price increase have on producers' total revenue?
Q5) What is the price elasticity of demand and how is it measured?
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Chapter 5: Efficiency and Equity
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Q1) A used car was recently priced at $20,000.00. Seeing the car, Bobby thought, "It's nice, but if I have to pay more than $19,500 for this car, then I would rather do without it." After negotiations, Bobby purchased the car for $19,250.00. His consumer surplus was equal to A) $19,500.00.
B) $1,750.00.
C) $250.00.
D) $0.00.
Q2) The market supply curve is also the
A) marginal social cost curve.
B) marginal value curve.
C) marginal social benefit curve.
D) maximum-supply-price curve.
Q3) Jane is willing to pay $80 for a pair of shoes. The actual price of the shoes is $50. Her marginal benefit is A) $80.
B) $30.
C) $50.
D) $1300.
Q4) According to the "fair rules" view of fairness, are taxes fair? Explain.
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Chapter 6: Government Actions in Markets
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Q1) In the above figure suppose a minimum wage of $8 per hour is imposed. As a result, the quantity of labor supplied is ________ hours and the quantity of labor demanded is ________ hours.
A) 3,000; 4,000
B) 4,000; 4,000
C) 2,000; 4,000
D) 4,000; 2,000
Q2) The figure above shows the market for tickets to the Super Bowl the day of the game. Suppose the government imposes an entertainment tax of $100 per ticket.
a) What is the equilibrium price of a Super Bowl ticket before the tax? What is the price paid by buyers after the tax? What is the price received by sellers after the tax?
b) What is the equilibrium quantity of tickets before the tax? What is the equilibrium quantity after the tax?
c) Do buyers or sellers bear the largest incidence of the tax?
Q3) When a tax is imposed on sellers of a good, the resulting rise in the equilibrium price is usually less than the amount of the tax itself. Why doesn't the equilibrium price rise by the full amount of the tax?
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Chapter 7: Global Markets in Action
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Q1) An import quota specifies the
A) price that can be charged for any imported good.
B) amount of taxes that must be paid on any imported good.
C) maximum amount of a good that may be imported during a specified period.
D) minimum amount of a good that may be imported during a specified period.
Q2) Import quotas
A) are the same as tariffs.
B) set the maximum quantity of a good that can be imported.
C) are not used by the United States.
D) set the minimum percentage of the value of a product that must consist of imported components.
Q3) In 2008, Agriculture Secretary Ed Schafer announced that Chile's Livestock and Agricultural Service approved the U.S. inspection, control and certification systems for poultry, allowing these products to enter the Chilean market. What is NOT an effect of this change in Chilean policy on the Chilean poultry market?
A) Chile's tariff revenue will increase.
B) The quantity of poultry consumed in Chile will increase.
C) The quantity of Chilean imports will increase.
D) The price for poultry in Chile will decrease.
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Chapter 8: Utility and Demand
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Q1) Liane maximizes her total utility when she allocates all of her available income such that the marginal utility per dollar spent on each good ________.
A) is diminishing
B) is maximized
C) is the same
D) is increasing
Q2) Given the data in the above table, income of $13, a price of $1 for a bottle of water and $2 for a hamburger, what is the marginal utility per dollar spent on water and on hamburgers when the consumer is in consumer equilibrium?
A) 20 units of utility per dollar spent
B) 10 units of utility per dollar spent
C) 5 units of utility per dollar spent
D) 1 unit of utility per dollar spent
Q3) As you consume additional hamburgers, the relationship between total and marginal utility is that
A) both total and marginal utility increase continuously.
B) both total and marginal utility decrease continuously.
C) total utility increases, but marginal utility decreases.
D) total utility decreases, but marginal utility increases.
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Chapter 9: Possibilities, Preferences, and Choices
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Q1) The figure above contains several budget lines for Sarah, who uses her income to purchase two goods, cheese and crackers.
a) A movement between which two budget lines represents an increase in income?
b) A movement between which two budget lines represents an increase in the price of a pound of cheese?
c) A movement between which two budget lines represents an increase in the price of a box of crackers?
Q2) The curve in the above figure shows alternative combinations of gasoline and coffee that Sam likes equally well. This curve is called
A) a budget line.
B) a demand curve.
C) a consumption curve.
D) an indifference curve.
Q3) In the above figure, the budget line would rotate in the direction indicated as a result of a
A) rise in the price of a book.
B) decrease in income.
C) rise in the price of a movie.
D) fall in the price of a movie.
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Chapter 10: Organizing Production
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Questions
Q1) Sue owns a baking company. The company's total revenue for a month is $4000. The monthly costs of resources bought in the market and of resources owned by the firm are $2000 and monthly costs of resources supplied by the owner are $1000. Sue's economic profit for the month is equal to
A) $4000.
B) $3000.
C) $2000.
D) $1000.
Q2) The above table shows the percent of sales held by the four largest firms in an industry.
a) Calculate this industry's four-firm concentration ratio.
b) Is this industry competitive?
c) What market type does it most likely represent?
Q3) Which of the following are characteristics of a proprietorship? I. Single owner II) Limited liability
A) I only
B) II only
C) both I and II
D) neither I nor II
Q4) What is a firm?
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Chapter 11: Output and Costs
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Q1) A firm is operating in its range of economies of scale and is on both its LRAC curve and its short-run ATC curve. At that level of output, the slope of its LRAC curve is
A) zero and the slope of its ATC curve is zero.
B) zero and the slope of its ATC curve is negative.
C) negative and the slope of its ATC curve is zero.
D) negative and the slope of its ATC curve is negative.
Q2) In the above figure, the average variable cost curve is curve
A) A.
B) B.
C) C.
D) D.
Q3) A firm experiences ________ when its ________ downward as output increases.
A) diseconomies of scale; average total cost curve slopes
B) economies of scale; long-run average cost curve slopes
C) diminishing marginal returns; long-run average cost curve slopes
D) diminishing marginal returns; average total cost curve shifts
Q4) Explain why average total costs initially decrease and then increase as output increases.
Q5) What are economies of scale? What is the main source of economies of scale?
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Chapter 12: Perfect Competition
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Q1) In the short run, a perfectly competitive firm will shut down if at the profit maximizing quantity the
A) P < AVC.
B) AVC < ATC.
C) P > ATC.
D) P > MC.
Q2) The figure above shows a typical perfectly competitive corn farm, whose marginal cost curve is MC and average total cost curve is ATC. Assuming there are no changes in technology, in the long run the lowest possible price for corn is ________ per bushel.
A) $2.50
B) $2.00
C) $3.00
D) $3.50
Q3) A perfectly competitive firm shuts down if the price of its product is
A) greater than its minimum average variable cost.
B) less than its minimum average variable cost.
C) greater than its maximum variable cost.
D) less than its minimum total cost.
Q4) What role does economic profit play in a competitive market?
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Chapter 13: Monopoly
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Q1) If a marginal cost pricing rule is imposed on the firm in the figure above, the firm will produce
A) 5 units.
B) 20 units.
C) 30 units.
D) 40 units.
Q2) Rate of return regulation sets the price at a level that enables the regulated firm to earn a specified target percent return on its
A) total cost.
B) sales revenue.
C) capital.
D) variable cost.
Q3) If the natural monopoly shown in the figure above is unregulated, it will make an economic profit of
A) $2 million.
B) $4 million.
C) $9 million.
D) $0, that is, it earns a normal profit.
Q4) What are the conditions that define a monopoly?
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Chapter 14: Monopolistic Competition
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Q1) In the scenario above, as a result of increased advertising, Talbot's average total cost
A) falls by $20 per coat.
B) rises by $50 per coat.
C) rises by $30 per coat.
D) falls by $40 per coat.
Q2) In monopolistically competitive industries
A) entry and exit push economic profits toward zero.
B) there is no diversity of products.
C) firms do not respond to changes in demand.
D) firms produce where marginal cost equals the marginal benefit to the consumers.
Q3) In monopolistic competition, profit is maximized when the amount produced is such that
A) marginal revenue equals marginal cost.
B) marginal revenue is greater than marginal cost.
C) total revenue equals total cost.
D) total revenue is maximized.
Q4) What is product differentiation? What market structure is characterized by product differentiation?
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Chapter 15: Oligopoly
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Q1) Price wars can be the result of
A) a cooperative equilibrium.
B) a firm playing a tit-for-tat strategy in which last period the competitors complied with a collusive agreement.
C) new firms entering the industry and immediately agreeing to abide by a collusive agreement.
D) new firms entering an industry and all firms then finding themselves in a prisoners' dilemma.
Q2) The prisoners' dilemma describes a single-play game that features
A) an outcome in which the participants collude.
B) a large number of rivals cooperating with each other.
C) a situation in which one player has better odds than the other.
D) two players who are unable to communicate with each other.
Q3) Explain what a cartel is and the difficulties faced in maintaining a cartel.
Q4) In the United States, why are cartels among firms usually kept secret?
Q5) In a contestable market
A) two or more firms are competing.
B) the Herfindahl-Hirschman Index exceeds 1,800.
C) the four-firm concentration ratio exceeds 50 percent.
D) potential entry holds down prices.
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Chapter 16: Public Choices, Public Goods, and Healthcare
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Q1) When describing goods and services, what is meant by the terms "rival" and "nonrival?" Are private goods rival or nonrival? Are public goods rival or nonrival? Are common resources rival or nonrival?
Q2) Which of the following is a necessary characteristic of a public good? The good is A) excludable.
B) nonrival.
C) nonexcludable.
D) Both answers B and C are correct.
Q3) When consumption is rival and excludable, the product is a A) public good.
B) private good.
C) mixed good.
D) service, not a good.
Q4) Efficiency in the provision of a public good is achieved when its A) total social benefit equals its total social cost.
B) average social benefit equals its average social cost.
C) marginal social benefit equals its marginal social cost.
D) marginal social benefit equals zero.
Q5) What are the differences between public goods and private goods?
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Chapter 17: Externalities
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Q1) If the government creates a system of pollution permits, firms with low marginal costs of reducing pollution will
A) buy permits from other firms.
B) sell permits to other firms.
C) hold on to the permits they have been issued and not attempt to buy more.
D) not be issued permits.
Q2) "Suppose the market for aluminum is perfectly competitive and unregulated. If aluminum factories emit pollution, the marginal social cost of aluminum is less than the market price." True or false? Explain.
Q3) A copper ore refiner pollutes the water upstream from a brewery. These are the only two parties involved. The transactions costs of reaching an agreement between the refinery and the brewery are low. The amount of water pollution will be at the efficient level
A) only when the property right to the stream is assigned to the ore refinery.
B) only when the property right to the stream is assigned to the brewery.
C) when the property right to the stream is assigned to either the refinery or to the brewery.
D) when no one has clear property rights.
Q4) What are ITQs? Where are they used?
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Chapter 18: Markets for Factors of Production
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Q1) The above figure shows the market for labor. The employer is a monopsony. The firm will maximize its profit by hiring 400 hours of labor because at that point
A) MCL > W.
B) VMP > W.
C) MCL > VMP.
D) MCL = VMP.
Q2) A minimum wage might increase employment by a monopsony if it makes the supply of labor curve to that firm
A) steeper, that is, makes supply more elastic.
B) steeper, that is, makes supply less elastic.
C) flatter, that is, makes supply more elastic.
D) flatter, that is, makes supply less elastic.
Q3) An example of a bilateral monopoly would be when a union
A) bargains with many different employers.
B) deals directly with the final consumers.
C) bargains with a monopoly.
D) bargains with a monopsony.
Q4) Why does a monopsony increase employment when faced with an effective minimum wage law?
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Chapter 19: Economic Inequality
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Q1) Which is distributed more equally: income or wealth?
Q2) Consider the country of Inland. In Inland, people's average tax rates decrease with the level of income. Inland has a ________ tax structure.
A) progressive
B) regressive
C) proportional
D) flat-rate
Q3) Is the poverty rate the lowest among Hispanic households, black households, or white households?
Q4) Netflix, an online DVD rental service, was established in 1997. In 2008, Netflix has more than 8.2 million subscribers. This technology has ________ in the labor market for video rental clerks.
A) decreased demand
B) increased demand
C) increased supply
D) decreased supply
Q5) What is the difference between market income and money income? Which is more equally distributed?
Q6) What is the Gini ratio?
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Chapter 20: Uncertainty and Information
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Q1) Bobby is offered two fulltime jobs. In the first job, as a salesperson, he has a 50 percent chance to make $2,000 a month and a 50 percent chance to make $10,000 a month. The second job, as a construction worker, pays $4,500 a month with certainty. Bobby's utility of wealth curve is shown in the figure above. Bobby will take the ________ job because his expected ________ from this job is greater.
A) first; utility
B) second; utility
C) second; income
D) first; income
Q2) What does it mean to be risk averse?
Q3) Rhonda's utility of wealth is 65 units at $5,000, 80 units at $7,000, and 95 units at $10,000. Starting from zero wealth, she must choose between options A and B. Option A gives her $7,000 for sure. Option B gives her $5,000 with probability 0.6 or $10,000 with probability 0.4. Rhonda A) will choose A.
B) will choose B.
C) is indifferent between A and B. D) needs more information to make a choice.
Q4) How can we measure the cost of risk?
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