Managerial Economics
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Course Introduction
Managerial Economics bridges the gap between economic theory and business practice, equipping students with analytical tools to make effective managerial decisions. The course covers topics such as demand and supply analysis, production and cost functions, market structure, pricing strategies, and risk analysis. Emphasis is placed on applying microeconomic concepts to real-world business problems, allowing students to understand how economic forces impact organizational objectives and strategies. Case studies and practical examples are integrated throughout to enhance decision-making skills in areas such as resource allocation, profit maximization, and competitive positioning.
Recommended Textbook
Managerial Economics and Strategy 2nd Edition by
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Page 2
Jeffrey M. Perloff
Chapter 1: Introduction
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Sample Questions
Q1) Legislators argue that a minimum wage law is instituted to help poor people. Economists can attack the minimum wage law on two fronts. First, some argue that government should not help the poor. Second, some argue that minimum wage laws actually hurt the poor because it creates unemployment. Which argument is normative and which is positive?
Answer: An opinion about the role of government is a normative statement. An observation about the impact of a law is a positive statement.
Q2) Raising the price of a good by one dollar
A)increases profits.
B)decreases profits.
C)leaves profits unchanged.
D)leads to an indeterminant change in profits.
Answer: D
Q3) Economists tend to judge a model based upon
A)the reality of its assumptions.
B)the accuracy of its predictions.
C)its simplicity.
D)its complexity.
Answer: B
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Page 3
Chapter 2: Supply and Demand
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Sample Questions
Q1) A price ceiling that is set above the equilibrium price
A)causes suppliers to raise their prices.
B)is binding.
C)is non-binding.
D)creates a shortage.
Answer: C
Q2) If a government-imposed price ceiling causes the observed price in a market to be below the equilibrium price
A)there will be excess demand.
B)there will be excess supply.
C)the curves will shift to make a new equilibrium at the regulated price.
D)None of the above.
Answer: A
Q3) Technological innovation in the production of computers has led to
A)a decrease in the quantity demanded for computers.
B)a rightward shift of the supply curve for computers.
C)a decrease in the quantity supplied of computers.
D)None of the above.
Answer: B
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Page 4
Chapter 3: Empirical Methods for Demand Analysis
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Sample Questions
Q1) An R2 close to 1
A)does not happen with real data.
B)indicates that almost all of the variation in the dependent variable is explained by the regression.
C)does not explain variation as well as an R2 that is above 2.
D)means that the regression line does not fit the data very well.
Answer: B
Q2) If the price of orange juice rises 10%, and as a result the quantity demanded falls by 8%, the price elasticity of demand for orange juice is A)-1.25.
B)inelastic.
C)Both A and B above.
D)Neither A nor B above.
Answer: B
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Chapter 4: Consumer Choice
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Sample Questions
Q1) In behavioral economics, the endowment effect refers to the fact that
A)most people believe that most wealthy people inherit their wealth.
B)many people would be indifferent between being endowed with money or knowledge.
C)many people place a higher value on what they own than the same item they are considering purchasing.
D)most people respond to tax incentives to provide an endowment for their children.
Q2) Clifford lives by the motto "Eat, drink, and be merry today, for tomorrow doesn't matter." If today's consumption is represented by "x" and tomorrow's consumption is represented by "y," then which of the following best represents Clifford's utility function?
A)U = x - y
B)U = x/y
C)U = x
D)U = y
Q3) If more is better, how can you explain that more pollution doesn't violate this principle?
Q4) What is the difference between ordinal and cardinal measurement?
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Chapter 5: Production
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Sample Questions
Q1) The marginal rate of technical substitution shows
A)how many machines can be replaced by computers, keeping output constant.
B)how many computers are needed to replace workers so that output can increase.
C)the rate at which technology advances change marginal productivity.
D)how many workers can do the job of one computer, keeping output constant.
Q2) A production function tells the firm
A)the maximum output it can expect to produce with a given mix of inputs.
B)the average output it can expect to produce with a given mix of inputs.
C)the minimum output it can expect to produce with a given mix of inputs.
D)the average level of production for other firms in the industry.
Q3) Explain the difference between diminishing returns to labor and diminishing marginal returns to labor.
Q4) Joey cuts grass during the summer. He owns one lawn mower. For him, the short run is equal to
A)the amount of time it takes to acquire more customers.
B)the amount of time it takes to hire an additional employee.
C)the amount of time it takes to hire an additional employee and buy another lawn mower.
D)the amount of time it takes to mow one lawn.
Q5) Explain why labor might not always be a variable input.
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Chapter 6: Costs
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Sample Questions
Q1) Average variable cost (AVC)
A)is the variable cost divided by the average sales price of the final good.
B)is the variable cost divided by the quantity of output produced.
C)is equal to average fixed cost (AFC)when no output is produced.
D)is always less than average fixed cost (AFC).
Q2) Manisha could work for another firm making $10,000 per month, but she decides to open her own gourmet cheese store and pay herself $2,000 per month. In her first month of operations, she spends $6,000 on cheese, $1,000 on other items, and $2,500 on rent. She had a great opening month, and brought in revenues of $14,500. What are Manisha's economic profits?
A)$3,000
B)$4,000
C)-$5,000
D)-$6,000
Q3) Suppose the total cost of producing T-shirts can be represented as TC = 50 + 2q. The average cost of the 5th T-shirt is A)2.
B)12.
C)52.
D)60.
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Chapter 7: Firm Organization and Market Structure
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Sample Questions
Q1) A firm's horizontal dimension refers to
A)its size in its primary market.
B)its size in all markets in which is competes.
C)the level of supply chain integration the firm undertakes.
D)the number of stages in the production process that are upstream from the stages the firm undertakes.
Q2) A company that undertakes an activity so that it can "do well by doing good" is practicing
A)strategic corporate social responsibility.
B)altruistic corporate social responsibility.
C)profit sharing.
D)the survivor principle.
Q3) The above figure shows the cost curves for a competitive firm. The firm will incur economic losses if the price is less than
A)$0.
B)$5.
C)$10.
D)$11.
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9
Chapter 8: Competitive Firms and Markets
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Sample Questions
Q1) When is the profit a firm earns equal to the producer surplus? Explain.
Q2) The above figure shows the market demand curve for mobile telecommunications (time spent on a mobile phone). If the price were zero, consumer surplus equals
A)$301.00.
B)$924.50.
C)$1,225.50.
D)$1,250.00.
Q3) If a firm operates in a perfectly competitive market, then it will most likely A)advertise its product on television.
B)take the price of its product as determined by the market.
C)have a difficult time obtaining information about the market price.
D)have an easy time keeping other firms out of the market.
Q4) The competitive firm's supply curve is equal to A)its marginal cost curve.
B)the portion of its marginal cost curve that lies above AC.
C)the portion of its marginal cost curve that lies above AVC.
D)the portion of its marginal cost curve that lies above AFC.
Q5) A competitive firm's supply curve is identical to its marginal cost curve.
A)True B)False
Page 10
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Chapter 9: Monopoly
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Sample Questions
Q1) If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then the deadweight loss from monopoly equals
A)$21.
B)$441.
C)$882.
D)$1,764.
Q2) If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then the firm's Lerner Index equals
A)58/16.
B)16/42.
C)58/42.
D)42/58.
Q3) A monopoly can be formed by a bandwagon effect. Which of the following products would most closely match the bandwagon effect?
A)The Atlanta Braves baseball club
B)The Dell Computer
C)The Apple Watch
D)The Chevrolet Corvette
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Chapter 10: Pricing With Market Power
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Sample Questions
Q1) Assume you have four tickets to a U2 concert. You decide to sell each of them separately on an auction site such as eBay. Your auctions represent
A)price differentiation.
B)perfect price discrimination amongst those who bid for your tickets.
C)perfect price discrimination amongst all people who buy tickets for the concert. D)maximization of U2's producer surplus.
Q2) While price discrimination is possible between two markets it is not possible in more than two.
A)True
B)False
Q3) The above figure shows the market for a particular good. If the market is controlled by a perfect-price-discriminating monopoly, producer surplus equals
A)A + B + C + D + E.
B)D + E.
C)E.
D)zero.
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Chapter 11: Oligopoly and Monopolistic Competition
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Sample Questions
Q1) Suppose two Cournot duopolist firms operate at zero marginal cost. The market demand is p = a - bQ. Firm 1's best-response function is
A)q1 = (a - bq2)/2b.
B)q1 = (a - 2bq2)/2b.
C)q1 = a/b.
D)q1= a/2b.
Q2) In a Bertrand model, market power is a function of
A)marginal cost.
B)the number of firms.
C)price elasticity of supply.
D)product differentiation.
Q3) If a cartel is unable to monitor its members and punish those firms that violate their agreement, then
A)the member firms will each act as price setters.
B)the cartel will prosper in the long run.
C)the market will become a monopoly.
D)the cartel will fail.
Q4) In a Bertrand duopoly with product differentiation, explain how a change in one firm's marginal cost can have an effect on the price charged by the other firm.
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Chapter 12: Game Theory and Business Strategy
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Sample Questions
Q1) In a sealed-bid, second-price auction, you should bid
A)your estimate of what others value the good at.
B)one dollar more than your estimate of what the second-highest bid will be.
C)your highest value.
D)the common value of the good.
Q2) When a bargaining solution is reached
A)each player receives a net surplus greater than or equal to zero.
B)we have a Nash equilibrium.
C)the sum of the net surpluses is the Nash product.
D)Both A and C.
Q3) Rock-paper-scissors (Roshambo)is an example of a ________ game.
A)simultaneous
B)sequential
C)dominant strategy
D)weakly dominant
Q4) The winner's curse occurs when
A)bidders "shade" their bids.
B)the winning bid is higher than the good's common value.
C)the winner buys something he didn't need.
D)the winning bid is higher than the private value of the good.
Page 14
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Chapter 13: Strategies Over Time
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Sample Questions
Q1) In the Stackelberg model, the leader has a first-mover advantage because it
A)has lower costs than the follower.
B)chooses its output to manipulate the follower to produce the output that most benefits the leader.
C)reacts to the follower's decision.
D)differentiates its output.
Q2) In a dynamic game, rational players
A)will reject outcomes that are not subgame perfect.
B)use backward induction to determine best responses.
C)have strategies that select a Nash equilibrium in the game as a whole.
D)All of the above.
Q3) An exclusion contract
A)is a form of entry deferral.
B)gives a firm the right to be the exclusive provider of a good in a particular market.
C)may not always be profitable for the incumbent.
D)All of the above.
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15
Chapter 14: Managerial Decision-Making Under Uncertainty
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Sample Questions
Q1) The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. What is the most Bob would pay for insurance that would replace his $100 should it be stolen?
A)$30
B)$50
C)$70
D)$75
Q2) The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. Living with this risk gives Bob the same expected utility as if there was no chance of theft and his wealth was
A)$0.
B)$20.
C)$30.
D)$50.
Q3) If a person is risk neutral, then she
A)is indifferent about taking a fair bet.
B)will pay a premium to avoid a fair bet.
C)has a horizontal utility function.
D)has zero marginal utility of wealth.
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Page 16
Chapter 15: Asymmetric Information
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Sample Questions
Q1) A profit-maximizing firm that uses an efficiency wage and monitors will increase the wage it pays its workers until
A)the worker requires no monitoring.
B)the worker receives the market wage and requires full-time monitoring.
C)the cost of monitoring the worker equals the efficiency wage.
D)the change in the workers' productivity from being monitored times the per time unit cost of monitoring equals one.
Q2) Explain how product liability laws can reduce adverse selection.
Q3) If a health insurer charges a rate equal to the average cost of health care for the entire population, then it is likely that
A)everyone buys health insurance.
B)unhealthy people will not buy health insurance.
C)healthy people will not buy health insurance.
D)nobody will buy health insurance.
Q4) What is one reason the eBay seller reputation system is important?
A)eBay transactions tend to be isolated, one-off transactions.
B)eBay transactions tend to be repeat sales between the same seller and buyers.
C)eBay transactions often involve stolen products.
D)eBay transactions require a larger percentage than, say, Amazon transactions.
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Chapter 16: Government and Business
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Sample Questions
Q1) The government forcing a monopoly telecommunications company to allow other firms to use its cables is an attempt to
A)regulate prices.
B)decrease the monopoly market power by eliminating a natural monopoly.
C)decrease the monopoly market power by increasing competition.
D)None of the above.
Q2) If children go to school and become productive members of society
A)a negative externality is created by the schools.
B)a positive externality is created by the schools.
C)no externality is created by the schools.
D)an externality is created that may be positive or negative.
Q3) The above figure shows the market for steel ingots. An externality can be seen because
A)the social marginal cost exceeds the private marginal cost.
B)the private marginal cost exceeds the social marginal cost.
C)the optimal quantity of steel is zero.
D)not enough steel gets produced by the competitive market.
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Chapter 17: Global Business
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Sample Questions
Q1) The ability to produce a good at a lower opportunity cost than someone else is called
A)competitive production.
B)comparative advantage.
C)selective advantage.
D)absolute advantage.
Q2) According to the mini-case on the Barbie Doll, Mattel is successful because
A)it has been selling Barbie dolls for a long time.
B)the Barbie doll is the top import into the U.S.
C)international trade allows them to produce a wide variety of doll types at many price points.
D)there are low fixed costs for product design.
Q3) Your U.S.-based company is selling parts to a company in Bangladesh. If the Bangladeshi company purchases a futures contract
A)the Bangladeshi company bears the exchange rate risk.
B)your company bears the exchange rate risk.
C)the companies share in the exchange rate risk.
D)there is no exchange rate risk.
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