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Chapter 1 Introduction
MULTIPLE CHOICE
1. Managerial economics uses ____________ to help managers solve problems.
a.
formal models
b.
prescribed behavior
c.
quantitative methods
d.
microeconomic theory
e.
all of the above
2. Managerial economics draws upon all of the following EXCEPT:
a.
finance
b.
microeconomics
c.
accounting
d.
marketing
e.
sociology
3. The economic theory of the firm assumes that the primary objective of a firm’s owner or
owners is to:
a.
behave in a socially conscientious manner
b.
maximize the firm’s profit
c.
maximize the firm’s total sales
d.
maximize the value of the firm
e.
All of these are primary objectives
4. If the annual interest rate is i, the present value of $X to be received at the end of each of the
next n years is:
a.
$X/i
b.
$X/(1 + i)n
c.
d.
$X[(1 + i)n] / [ i(1 + i)n – 1]
e.
$X / [i(1 + i)n – 1]
5. If the annual interest rate is i, the present value of $X to be received at the end of each future
year forever is:
a.
$X/(1 + i)
b.
$X/i
c.
$X/(1 + i)n
d.
$X/i n
e.
$Xn/i n
6. If the annual interest rate is 25 percent, the present discounted value of $100 to be received
in one year is:
a.
$75
b.
$80
c.
$100
d.
$120
e.
$125
7. You’ve just won the $25 million lottery. You are going to receive a check for $1 million
today and at the end of every year for the next 24 years. If the interest rate is 10 percent, the
present value of your prize is:
a.
$8,984,744
b.
$9,984,744
c.
$12,984,744
d.
$20,000,000
e.
$25,000,000
8. You borrow money from Fast Eddie’s Fast Cash at 20 percent per year interest and agree to
pay $500 at the end of each of the next four years. You must have borrowed approximately:
a.
$2,000
b.
$1,595
c.
$1,295
d.
$1,095
e.
$895
9. You buy your child a $100 savings bond that matures in 10 years and pays an annual
interest rate of 10 percent. At maturity the bond will be worth:
a.
$228.17
b.
$200
c.
$259.37
d.
$271.17
e.
$217.71
10. Your mortgage requires that you pay $12,000 at the end of each of the next 30 years. If the
annual interest rate is 12 percent, then you must have borrowed approximately:
a.
$117,660
b.
$96,660
c.
$78,660
d.
$63,660
e.
$133,660
11. The present value of expected future profits will _____ if the discount rate increases and
will _____ if expected future profits increase.
a.
increase; not change
b.
increase; increase
c.
not change; decrease
d.
decrease; increase
e.
decrease; decrease
12. If the annual interest rate is i, the present value of a payment of $X to be received n years
from now is:
a.
$X/(1 + i)
b.
$X/i
c.
$X/(1 + i )n
d.
$X/i n
e.
none of the above
13. In managerial economics, managers are assumed to maximize:
a.
current profits
b.
their take-home pay
c.
their employees’ welfare
d.
the value of their firm
e.
social welfare
14. Owner-supplied labor is a cost that is usually:
a.
included in both accounting costs and economic costs
b.
included in accounting costs but not in economic costs
c.
included in economic costs but not in accounting costs
d.
not included in either accounting costs or economic costs
e.
ignored because it is impossible to place a value on it
15. What is the relationship between economic and accounting profit?
a.
Economic profit is equal to accounting profit.
b.
Economic profit is greater than accounting profit.
c.
Economic profit is less than accounting profit.
d.
Economic profit may be equal to or less than accounting profit.
e.
Economic profit may be equal to or greater than accounting profit.
16. The difference between accounting and economic profit is:
a.
caused by confusion over tax laws
b.
the value of owned resources in their next best alternative use
c.
the result of superior training received by accountants
d.
proportionately very small for owner-managed firms
e.
a decreasing function of interest rates
17. Managers make decisions that contribute to the profitability of a firm by:
a.
exploiting market efficiencies
b.
taking on risks
c.
engaging in illegal behavior
d.
maximizing sales
e.
manipulating the share price of the firm’s stock
18. Economic profits may result from:
a.
innovation
b.
risk taking
c.
exploiting market inefficiencies
d.
all the above
e.
a and b
19. Which of the following would a manager NOT use to create market inefficiencies?
a.
establishing a brand name
b.
sophisticated pricing strategies
c.
diversification efforts
d.
output decisions
e.
building market entry barriers
20. The principal–agent problem refers to:
a.
the threat from foreign competition
b.
the need to manage inventory more effectively
c.
double-entry bookkeeping
d.
the potential costs of separation of ownership and control
e.
the time value of money
21. Managers may choose to pursue goals other than maximization of a firm’s value. This is
referred to as the _____ problem.
a.
slacker–shirking
b.
neuropathy
c.
generation X
d.
principal–agent
e.
none of the above
22. Managers may make decisions that are not consistent with the goals of stockholders. This is
referred to as the _____ problem.
a.
principal–agent
b.
economic disincentive
c.
incentive–compromise
d.
efficiency–inefficiency
e.
equilibrium
23. ConAgra has introduced a lean mixture of cereal and ground beef that is indistinguishable
from ground beef but has about the same amount of fat as chicken. As a result, the:
a.
demand for chicken increases
b.
demand for ground beef decreases
c.
demand for chicken decreases
d.
demand for cereal decreases
e.
supply of chicken increases
24. The price of computers has fallen, while the quantity purchased has remained constant. This
implies that the demand for computers has:
a.
decreased, while the supply of computers has increased
b.
increased
c.
decreased, while the supply of computers has decreased
d.
increased, while the supply of computers has increased
e.
become more volatile
25. Which of the following would be likely to reduce the demand for residential housing?
a.
high prices for residential housing units
b.
high mortgage interest rates
c.
high prices for lumber and other construction materials
d.
low unemployment rates
e.
low prices for residential housing units
26. The market demand curve shows the quantity of a good or service:
a.
households would sell at various prices
b.
households would buy at various outputs
c.
firms would sell at various prices
d.
firms would buy at various prices
e.
households would buy at various prices
27. J. D. Power, the big management consulting firm, extols the reliability of Dell computers;
this causes the:
a.
demand for Dell computers to decrease
b.
supply of Dell computers to increase
c.
quantity supplied of Dell computers to increase
d.
quantity supplied of Dell computers to decrease
e.
demand and supply of Dell computers to remain unchanged
28. California imposes strict new regulations on the blending of gasoline that increase
production costs. As a result, the:
a.
demand for gasoline will increase
b.
demand for gasoline will decrease
c.
supply of gasoline will increase
d.
supply of gasoline will decrease
e.
demand for and supply of gasoline will not change
29. The market supply curve shows the quantity of a good or service that _____, holding other
possible influences constant.
a.
households would sell at various prices
b.
households would buy at various outputs
c.
firms would sell at various prices
d.
firms would buy at various prices
e.
households would buy at various prices
Figure 1
30. In Figure 1, the equilibrium price and quantity are:
a.
Pa and Qa
b.
Pb and Qb
c.
Pc and Qc
d.
Pa and Qc
e.
Pc and Qa
31. In Figure 1, there will be an excess supply at any price:
a.
above Pb
b.
below Pb
c.
other than Pb
d.
below Pa
e.
above Pc
32. In Figure 1, there will be an excess demand at any price:
a.
below Pa
b.
below Pb
c.
other than Pb
d.
above Pb
e.
above Pc
33. As a result of historically high gasoline prices in 2008, traffic volume in the United States
(measured in terms of billions of miles driven per month) declined significantly. These
changes were caused by a _____ of gasoline and _____.
a.
surplus; a decrease in the quantity demanded of gasoline
b.
surplus; a decrease in the demand for gasoline
c.
shortage; a decrease in the quantity demanded of gasoline
d.
shortage; a decrease in the demand for gasoline
e.
shortage; an increase in the demand for gasoline
34. Microeconomic theory is primarily _____, and microeconomics is primarily _____.
a.
prescriptive; descriptive
b.
predictive; descriptive
c.
descriptive; predictive
d.
descriptive; prescriptive
e.
prescriptive; predictive
