Chapter 1
The Nature and Scope of Managerial Economics
Multiple Choice Questions
1.Which of the following areas of study refers to the application of economic theory and the tools of analysis of decision science to examine how an organization can achieve its aims or objectives most efficiently?
A.Managerial economics
B.Microeconomics
C.Macroeconomics
D.Econometrics
Answer: A
2.Which of the following refers to the study of the economic behavior of individual decision-making units, such as individual consumers, resource owners, and business firms, in a free-enterprise system?
A.Managerial economics
B.Microeconomics
C.Macroeconomics
D.Econometrics
Answer: B
3.Which of the following refers to the study of the total or aggregate level of output, income, employment, consumption, investment, and prices for the economy viewed as a whole?
A.Managerial economics
B.Microeconomics
C.Macroeconomics
D.Econometrics
Answer: C
4.Which of the following refers to the study of the application of statistical tools (particularly regression analysis) to real-world data to estimate the models postulated by economic theory?
A.Managerial economics
B.Microeconomics
C.Macroeconomics
D.Econometrics
Answer: D
5.The modern theory of the firm postulates that the primary objective of managers is to maximize
A.the firm's total revenue.
B.the value of the firm's output.
C.the present value of the firm's expected future profits.
D.all of the above.
Answer: C
6.Which of the following is the best definition of economic profit?
A.Business profit minus implicit costs
B.Total revenue minus total explicit costs
C.Total revenue minus total implicit costs
D.Business profit minus explicit costs
Answer: A
7.In a free-enterprise system, profit is socially desirable because it
A.reallocates wealth from small firms to large firms.
B.attracts resources to the most desirable types of production.
C.allows firms to operate at higher levels of cost.
D.permits firms to hire more workers and thereby reduces that unemployment rate.
Answer: B
8.If you invest $100 now and end up with $200 at the end of one year, what is the interest rate?
A.50%
B.100%
C.200%
D.None of the above is correct.
Answer: B
9.What is the present value of $1.21 received at the end of two years if the interest rate is 10% and compounding is annual?
A.$1.31
B.$1.21
C.$1.10
D.$1.00
Answer: D
10.A firm must choose among three alternative ways to compensate its salaried employees. It can pay them at the end of each week, at the end of every other week (bi-weekly), or at the end of each month. If the annual rate of pay is the same in each case, which compensation system will maximize the value of the firm?
A.Weekly payments
B.Bi-weekly payments
C.Monthly payments
D.It makes no difference because annual pay is the same in every case.
Answer: C
11.Salaried employees of the XYZ Corporation are permitted to choose how they will receive their annual compensation. They can be paid at the end of each week, at the end of every other week (bi-weekly), or at the end of each month. If the annual rate of pay is the same in each case, which compensation system should an employee choose?
A.Weekly payments
B.Bi-weekly payments
C.Monthly payments
D.It makes no difference because annual pay is the same in every case.
Answer: A
12.Which of the following is an implicit cost?
A.Insurance payments
B.Property taxes
C.Interest payments on a loan
D.None of the above is an implicit cost.
Answer: D
13.Fred earns $50,000 business profit per year by selling donuts. He pays $12,000 per year in rent to his Uncle George for the building in which his business is located. If his Uncle George gives him the building, then Fred's
A.business profit will increase by $12,000 per year.
B.economic profit will increase by $12,000 per year.
C.implicit cost will decrease by $12,000 per year.
D.All of the above are correct.
Answer: A
14.George earns $50,000 business profit per year by selling donuts. He pays $12,000 per year in rent to his Uncle Fred for the building in which his business is located. If his Uncle Fred gives him the building, then George's
A.business profit will be unchanged.
B.economic profit will be unchanged.
C.implicit cost will decrease by $12,000 per year.
D.All of the above are correct.
Answer: B
15.Monica quit her $50,000 per year job, purchased a building that was previously rented by the operator of a candy store for $1,500 per month, and used the space to breed and sell tropical fish. In her first year she made a business profit of $60,000. What was her economic profit?
A.Her economic profit was the same as her business profit.
B.$42,000
C.$10,000
D.She made an economic loss of $8,000.
Answer: D
16.Monica quit her $40,000 per year job, purchased a building that was previously rented by the operator of a candy store for $1,500 per month, and used the space to breed and sell tropical fish. In her first year she made a business profit of $60,000. What was her economic profit?
A.Her economic profit was the same as her business profit.
B.$42,000
C.$20,000
D.$2,000
Answer: D
17.Which of the following is an explicit cost to a business firm?
A.The rental value of property owned by the firm
B.The cost of the owner's time
C.The cost of borrowing an amount equal to the value of the capital assets owned by the firm.
D.None of the above is an explicit cost.
Answer: D
18.The value of inputs owned and used by a firm is
A.an implicit cost.
B.an explicit cost.
C.subtracted from economic profit to yield business profit.
D.Both A and C are correct.
Answer: A
19.An economic theory is judged primarily on the basis of
A.the correspondence between its assumptions and reality.
B.its ability to accurately predict economic phenomena.
C.the ease with which it can be understood.
D.its normative qualities.
Answer: B
20.The contemporary theory of the firm is based on the assumption that firms make decisions that are intended to
A.maximize sales.
B.minimally satisfy stockholders' goals.
C.maximize profit.
D.maximize input employment levels.
Answer: C
21.Business ethics refers to
A.enforceable laws that govern business behavior.
B.an area of study of little relevance to actual business practices.
C.guidelines that describe appropriate behavior in the environment of business.
D.All of the above.
Answer: C
22.Businesses have responded to the incentive for ethical behavior by
A.establishing codes of ethical behavior for employees.
B.appointing “ethics officers” with responsibility for ensuring that employees behave in an ethical manner.
C.providing training sessions in ethical behavior for employees.
D.All of the above.
Answer: D
23.Which of the following is a question that is uniquely relevant to the subject of business ethics?
A.Should a firm buy foreign products that are made using child labor?
B.Should a firm falsify financial information reported to stockholders?
C.Should a firm collude with its competitors in setting prices?
D.Should a firm attempt to reduce its costs of production in order to compete more effectively?
Answer: A
24*.Which of the following is the best definition of managerial economics? Managerial economics is
A.a distinct field of economic theory.
B.a field that applies economic theory and the tools of decision science.
C.a field that combines economic theory and mathematics.
D.none of the above.
Answer: B
25*.The value of an economic theory in practice is determined by
A.how accurate the assumptions are.
B.how well the theory can be represented by a graph.
C.how well the theory can predict or explain.
D.how parsimonious the model is.
Answer: C
26*.Management decision problems are comprised of three elements. Which of the following is not one of them?
A.Profitability
B.Alternatives
C.Constraints
D.Objectives
Answer: A
27*.Which of the following areas of economic theory is the single most important element of managerial economics?
A.Mathematical economics
B.Econometrics
C.Macroeconomics
D.Microeconomics
Answer: D
28*.Which of the following is defined as the study of the aggregate economy studied as a whole?
A.Mathematical economics
B.Econometrics
C.Macroeconomics
D.Microeconomics
Answer: C
29*.Which of the following is most likely to employ statistical tools to estimate empirical models?
A.Mathematical economics
B.Econometrics
C.Macroeconomics
D.Microeconomics
Answer: B
30*.Firms do not continue to grow without limit because of
A.managerial limitations.
B.government regulation.
C.income taxes.
D.antitrust laws.
Answer: A
31*.The modern theory of the firm holds that firms behave in a way that is designed to maximize
A.profit.
B.wealth.
C.monopoly power.
D.total revenue.
Answer: B
32*.Which of the following functional areas of business has primary responsibility for a firm's total revenue?
A.Accounting
B.Finance
C.Marketing
D.Personnel
Answer: C
33*.Which of the following is an example of a resource constraint?
A.Pollution control laws
B.Inadequate demand
C.Excessive production costs
D.Inadequate financial capital
Answer: D
34*.The economic term for the costs associated with negotiating and enforcing a contract is
A.opportunity costs.
B.real costs.
C.functional costs.
D.transaction costs.
Answer: D
35*.The tendency for managers to operate a firm in a way that maximizes their personal utility rather than the firm's profits is referred to as the
A.consumer utility incentive.
B.principalagent problem.
C.hidden agenda scenario.
D.Modigliani hypothesis.
Answer: B
36*.By tying a manager's compensation to the performance of the firm relative to that of its competitors, corporate stockholders and directors create incentives that tend to resolve the
A.possibility of bankruptcy.
B.hidden agenda scenario.
C.principalagent problem.
D.firm's opportunity costs.
Answer: C
37*.The globalization of business is reflected in all of the following except
A.the international convergence of consumer tastes.
B.the increase in barriers to international trade.
C.the emphasis on global marketingmanagement training.
D.increasing domestic competition from foreign producers.
Answer: B
38*.Which of the following is not a result of the spread of information technology?
A.More rapid deliveries of products to consumers
B.Reduced inventories
C.Reduced productivity of workers
D.Reduced need for middle management
Answer: C
39*.Which of the alternatives to the modern theory of the firm holds that managers attempt to meet some goal that is defined in terms of a specified level of sales, profits, growth, or market share?
A.Sales maximization model
B.Management utility maximization model
C.Satisficing model
D.Profit maximization model
Answer: C
40*.Business profit is equal to total revenue minus
A.economic costs.
B.explicit costs.
C.implicit costs.
D.managerial costs.
Answer: B
41*.Which of the following is an example of an implicit cost?
A.Dividends paid out to stockholders
B.The uncompensated services of the spouse of a firm's owner
C.Payments made to workers who are unproductive
D.All of the above are implicit costs.
Answer: B
42*.Implicit cost is equal to
A.business profit minus economic profit.
B.business profit plus economic profit.
C.economic profit minus business profit.
D.economic profit minus explicit cost.
Answer: A
43*.Which theory of profit holds that profit will be higher in industries characterized by a high degree of variability in their revenues or their costs?
A.Risk-bearing theory
B.Frictional theory
C.Monopoly theory
D.Innovation theory
Answer: A
44*.Which theory of profit holds that profit will be higher in industries where firms in the industry are able to prevent other firms from entering the industry?
A.Risk-bearing theory
B.Frictional theory
C.Monopoly theory
D.Managerial efficiency theory
Answer: C
45*.Which theory of profit holds that a firm's profits can differ from zero only in the short run?
A.Risk-bearing theory
B.Frictional theory
C.Monopoly theory
D.Managerial efficiency theory
Answer: B
46*.Which theory of profit views profit as a reward for introducing a new product or technique?
A.Risk-bearing theory
B.Frictional theory
C.Monopoly theory
D.Innovation theory
Answer: D
47*.Which theory of profit views profit as a firm's reward for keeping costs below or revenues above the levels experienced by other firms in the industry?
A.Risk-bearing theory
B.Frictional theory
C.Innovation theory
D.Managerial efficiency theory
Answer: D
48*.What social function is served by profits in a free-enterprise system?
A.Taxes on profits support government programs
B.They provide an incentive for the reallocation of resources
C.Profits allow individuals to accumulate wealth and engage in capital investment
D.Profits result in higher levels of employment
Answer: B
49*.The market demand curve shows
A.the effect on market supply of a change in the demand for a good or service.
B.the quantity of a good that consumers would like to purchase at different prices.
C.the marginal cost of producing and selling different quantities of a good.
D.the effect of advertising expenditures on the market price of a good.
Answer: B
50*.At a price of $4.95, a pulp fiction novel is expected to sell 9,000 copies. If the novel is offered for sale at a price of $3.95, then the publisher can expect to sell
A.less than 9,000 copies.
B.9,000 copies.
C.more than 9,000 copies.
D.It is impossible to predict the effect of a lower price on sales.
Answer: C
51*.During a recession, economies experience increased unemployment and a reduced level of activity. How would a recession be likely to affect the market demand for new cars?
A.Demand will shift to the right.
B.Demand will shift to the left.
C.Demand will not shift, but the quantity of cars sold per month will decrease.
D.Demand will not shift, but the quantity of cars sold per month will increase.
Answer: B
52*.The market supply curve shows
A.the effect on market demand of a change in the supply of a good or service.
B.the quantity of a good that firms would offer for sale at different prices.
C.the quantity of a good that consumers would be willing to buy at different prices.
D.All of the above are correct.
Answer: B
53*.At a price of $299.95, the manufacturer of a portable gaspowered generator is willing to produce 19,000 units per quarter. At a price of $349.95, it is likely that the manufacturer will be willing to produce
A.more than 19,000 units per quarter.
B.19,000 units per quarter.
C.less than 19,000 units per quarter.
D.It is impossible to predict the effect of a higher price on the number of units of a product that a firm will be willing to produce.
Answer: A
54*.Unionized workers may be able to negotiate with management for higher wages during periods of economic prosperity. Suppose that workers at automobile assembly plants successfully negotiate a significant increase in their wage package. How would the new wage contract be likely to affect the market supply of new cars?
A.Supply will shift to the right.
B.Supply will shift to the left.
C.Supply will not shift, but the quantity of cars produced per month will decrease.
D.Supply will not shift, but the quantity of cars produced per month will increase.
Answer: B
55*.If automobile manufacturers are producing cars faster than people want to buy them,
A.there is an excess supply and price can be expected to decrease.
B.there is an excess supply and price can be expected to increase.
C.there is an excess demand and price can be expected to decrease.
D.there is an excess demand and price can be expected to increase.
Answer: A
56*.If a computer software company introduces a new program and finds that orders from wholesalers far exceed the number of units that are being produced,
A.there is an excess supply and price can be expected to decrease.
B.there is an excess supply and price can be expected to increase.
C.there is an excess demand and price can be expected to decrease.
D.there is an excess demand and price can be expected to increase.
Answer: D
57*.Market equilibrium refers to a situation in which market price
A.is high enough to allow firms to earn a fair profit.
B.is low enough for consumers to buy all that they want.
C.is at a level where there is neither a shortage nor a surplus.
D.is just above the intersection of the market supply and demand curves.
Answer: B
58*.If the price of a good increases while the quantity of the good exchanged on markets increases, then the most likely explanation is that there has been
A.an increase in demand.
B.a decrease in demand.
C.an increase in supply.
D.a decrease in supply.
Answer: A
59*.If the price of a good decreases while the quantity of the good exchanged on markets increases, then the most likely explanation is that there has been
A.an increase in demand.
B.a decrease in demand.
C.an increase in supply.
D.a decrease in supply.
Answer: C
60*.If the price of a good increases while the quantity of the good exchanged on markets decreases, then the most likely explanation is that there has been
A.an increase in demand.
B.a decrease in demand.
C.an increase in supply.
D.a decrease in supply.
Answer: D
61*.If the price of a good decreases while the quantity of the good exchanged on markets decreases, then the most likely explanation is that there has been
A.an increase in demand.
B.a decrease in demand.
C.an increase in supply.
D.a decrease in supply.
Answer: B
62*.An increase in the demand for a good will cause
A.an increase in equilibrium price and quantity.
B.a decrease in equilibrium price and quantity.
C.an increase in equilibrium price and a decrease in equilibrium quantity.
D.a decrease in equilibrium price and an increase in equilibrium quantity.
Answer: A
63*.An increase in the supply of a good will cause
A.an increase in equilibrium price and quantity.
B.a decrease in equilibrium price and quantity.
C.an increase in equilibrium price and a decrease in equilibrium quantity.
D.a decrease in equilibrium price and an increase in equilibrium quantity.
Answer: D
64*.Business ethics refers to any behavior by businesses that may
A.be illegal.
B.violate social or moral standards.
C.result in the maximization of profits.
D.All of the above.
Answer: B
65*.Businesses have responded to incentives for ethical behavior by doing all of the following except
A.lobbying for the abolition of laws that require ethical behavior.
B.appointing “ethics officers” with responsibility for ensuring that employees behave in an ethical manner.
C.providing training sessions in ethical behavior for employees.
D.establishing codes of ethical behavior for employees.
Answer: A
66*.Which of the following is a question that is uniquely relevant to the subject of business ethics?
A.Should a firm make false and slanderous statements about its competitor’s products?
B.Should a firm attempt to conceal evidence of the harmful effects of its products on the health of consumers?
C.Should a firm engage in illegal practices?
D.Should a firm use a production method in foreign countries that is banned in its home country?
Answer: D
True-False Questions
1*.The single most important element in managerial economics is the microeconomic theory of the firm.