Which of the following is the best example of how the question of “what goods and
services to produce?” is answered by the command process?
A) government subsidies for windmill energy production
B) laws regarding equal opportunity in employment
C) government allowance for the deduction of interest payments on private mortgages
D) government regulations concerning the dumping of hazardous waste
From a management policy perspective, which regression result is the most useful?
A) a regression equation that passes the F-test
B) a regression equation whose explanatory variables all pass the t-test
C) a regression equation that has the highest R2
D) a regression equation that has the least number of dummy variables
In the long run, the most helpful action that a monopolistically competitive firm can
take to maintain its economic profit is to
A) continue its efforts to differentiate its product.
B) raise its price.
C) lower its price.
D) do nothing, because it will inevitably experience a decline in profits.
Assuming the existence of economies of scale, if a firm finds that it can reduce its unit
cost by decreasing its scale of production, it means that
A) it has too much production capacity relative to its demand.
B) it should try to produce less.
C) the law of diminishing returns has not taken effect.
D) it has too much fixed overhead relative to its variable cost.
The payback period for a project, requiring an initial outlay of $10,000 and producing
ten uniform annual cash inflows of $1,500, is
A) six years.
B) six years and eight months.
C) six years and six months.
D) seven years.
An increase in net working capital required at the beginning of an expansion project
must be considered to be
A) a cash inflow.
B) a reallocation of assets.
C) a cash outflow.
D) None of the above
The learning curve indicates that
A) economies of scale are taking effect.
B) repetition of various production tasks cause unit costs to decrease.
C) workers must learn new skills in order to improve.
D) it takes time to learn a new skill.
Which of the following is the best example of a product or service that provides a
benefit externality?
A) the construction of a private road that allows vehicles if a toll is paid
B) a public library
C) a bookstore that is open to everyone
D) All of the above
E) None of the above
A manager will have the least confidence in an explanatory variable that
A) does not pass the F-test.
B) is expressed as a dummy variable.
C) does not pass the t-test.
D) constitutes only a small part of R2.
Under conditions of first-degree price discrimination
A) production will equal that which would exist under perfect competition.
B) production will exceed that which would prevail under perfect competition.
C) prices will be lower than under perfect competition.
D) production will always be lower than under perfect competition.
A merger between two companies in unrelated fields of business
A) will always lead to economies of scale.
B) will generally increase the value of the unified firm compared to the value of the two
companies before the merger because of the benefits of diversification.
C) may not have any synergistic effects.
D) will necessarily lead to an increase in the market power of the merged company.
The difference between sensitivity analysis and scenario analysis is
A) sensitivity analysis is a method for evaluating risk while scenario analysis is not.
B) sensitivity analysis is based on regression analysis while scenario analysis is not.
C) sensitivity analysis examines the impact on the overall results of a change in one
variable while scenario analysis examines the impacts on overall results of changes in
several variables at the same time.
D) None of the above
The table above shows the weekly relationship between output and number of workers for
a factory with a fixed size of plant.
a. Calculate the marginal product of labor.
b. At what point does diminishing returns set in?
c. Calculate the average product of labor.
d. Find the three stages of production.
MVA (Market Value Added)
A) will always be a positive number.
B) may be a negative number.
C) measures the market value of the firm.
D) None of the above
Short-run cost functions are estimated using
A) time-series regression analysis.
B) cross-sectional regression analysis.
C) nominal cost data.
D) present value cost data.
The F-test is used in forecasting to
A) establish confidence intervals for testing regression coefficients.
B) examine the degree of multicollinearity among independent variables.
C) determine how well a regression equation can account for dependent variable values.
D) determine whether an identification problem exists.
A firm must spend $10 million today on a project that is expected to bring in annual
revenues of $1.5 million for the next 10 years (beginning at the end of year 1).
a. If the firm’s cost of capital is 5%, what is the NPV of this project?
b. If the firm’s cost of capital is 10%, what is the NPV of this project?
c. What is the internal rate of return?
Marginal rates of technical substitution (MRTS) represent
A) the optimum combinations of inputs.
B) cost-minimizing combinations of inputs.
C) the degree to which one input can replace another without output changing.
D) All of the above
A market is in equilibrium when
A) supply is equal to demand.
B) the price is adjusting upward.
C) the quantity supplied is equal to the quantity demanded.
D) tastes and preference remain constant.
The demand for U.S. produced packaged food products in foreign countries is expected
to
A) grow.
B) slow down.
C) remain constant.
D) fluctuate.
As the U.S. population ages, the structure of the demand for food products will change
with
A) an increase in the demand for red meat products and a decrease in the demand for
fish and poultry.
B) an increase in the demand for dairy products and a decrease in the demand for red
meat.
C) an increase in the demand for fruits, vegetables and fish and a decrease in demand
for fried foods, dairy products and items that contain a lot of sugar.
D) an increase in the demand for beverages and drinks and a decrease in the demand for
solid food.
Managerial economics is best defined as the economic study of
A) how businesses can make the most profits.
B) how businesses can decide on the best use of scarce resources.
C) how businesses can operate at the lowest costs.
D) how businesses can sell the most products.
Which of the following is false?
A) A monopolist will sell less at a higher price.
B) A monopolist has a marginal revenue that is less than the price.
C) A monopolist will produce where MR = MC.
D) A monopolist is a price taker.
When analyzing a capital budgeting project, the analyst must include in his calculation
all of the following except
A) all revenues and costs in terms of cash flows.
B) only those cash flows that will change if the proposal is accepted (i.e., incremental
cash flows).
C) interest payments on debt financing connected with the project.
D) any effect (impact) the acceptance of the project under consideration will have on
other projects now in operation.
Which of the following actions has the best potential for experiencing economies of
scope?
A) producing a product that has appeal to a wider segment of the market
B) producing computers and software
C) producing spaghetti and soft drinks
D) producing cars and trucks
The time value of money can be best described as
A) a dollar today is worth more than a dollar tomorrow.
B) the basis on which net present values are calculated.
C) the basis on which internal rates of return are calculated.
D) All of the above
Unlike an accountant, an economist measures costs on a(n) ________ basis.
A) explicit
B) replacement
C) historical
D) conservative
For each of the following sets of supply and demand curves, calculate equilibrium price
and quantity.
a. QD = 2000 – 2P; QS = 2P
b. QD = 500 – P; QS = 50 + P
c. QD = 5000 – 10P; QS = -1000 + 5P
Scarcity is a condition that exists when
A) there is a fixed supply of resources relative to the demand for the product.
B) there is a large demand for a product.
C) resources are not able to meet the entire demand for a product.
D) All of the above
The rationing function of price
A) occurs when there is a movement of resources into or out of markets as a result of
changes in the equilibrium market price.
B) is also known as the guiding function of price.
C) occurs when consumers change their tastes and preferences.
D) occurs only when the market experiences severe shortages.
A major problem in projecting with a trend line is that
A) only straight-line projections can be accommodated.
B) it is valid only if the trend is upward.
C) it will not forecast turning points in activity.
D) it is a very complex method of forecasting.
Industry supply and demand are given by QD = 1000 – 2P and QS = 3P.
a. What is the equilibrium price and quantity?
b. At a price of $100, will there be a shortage or a surplus, and how large will it be?
c. At a price of $300, will there be a shortage or a surplus, and how large will it be?
Another name for stockholder wealth maximization is
A) profit maximization.
B) maximization of earnings per share.
C) maximization of the value of the common stock.
D) maximization of cash flows.
You’ve been hired by an unprofitable firm to determine whether it should shut down its
operation. The firm currently uses 70 workers to produce 300 units of output per day.
The daily wage (per worker) is $100, and the price of the firm’s output is $30. The cost
of other variable inputs is $500 per day. Although you don’t know the firm’s fixed cost,
you know that it is high enough that the firm’s total costs exceed its total revenue. You
know that the marginal cost of the last unit is $30. Should the firm continue to operate
at a loss? Carefully explain your answer.
If an expansion proposal is accepted, allowing an otherwise idle (and useless) machine
with a market value and book value of $2,000 to be utilized, should it be recorded as a
cash outflow, and if so, how much?
What are the major sources of risk for the firm?
The demand for salt is relatively price inelastic, while the demand for pretzels is
relatively price elastic. How can you best explain why?
The following table shows the relationship between output and number of workers in
the short run. If the wage is $50/day, find marginal cost of production.
Describe the process by which the competitive market establishes a price at which all
firms are just earning normal profits.
If $1,000 is placed in an account earning 8% annually on January 1, 1999, how much
would be in this account on January 1, 2013?
Describe the transition from short-run to long-run equilibrium in a monopolistically
competitive industry.
Suppose that a perfectly competitive industry is in long-run equilibrium, and demand
increases. Explain the short- and long-run effects on the firm and the industry.
You are given risky cash flow data for a three-year project:
The initial cash outflow is $6,000; the risk-free interest rate is 6%, and the risk-adjusted
discount rate is 10%.
Calculate the NPV by both the risk-adjusted discount rate method and the certainty
equivalent method in such a way that the NPV will be the same using either method.
Refer to the demand and supply equations. At a price of $35, there will be ________.
A monopolist sells to two consumer groups, students and non-students.
Demand for students: Q = 500 – 1/2P
Demand for non-students: Q = 750 – 2P
MC = 20
Find the profit-maximizing price/quantity combination in each market if the groups can
be separated.
Explain why risk can be insured against but uncertainty cannot.
Refer to the production function. The marginal product at 5 units equals ________
units.
What is “game theory”?
Describe the circumstances under which a producer of joint products in fixed
proportions might not sell all of one of the available joint products at the
profit-maximizing level of operations.
You are told that the price elasticity of demand for widgets is -0.75, the income
elasticity of widgets is 2, and the cross-price elasticity of widgets and gadgets is 4.
Carefully explain what information you can gather from each of these figures.
What does it mean to say that a perfectly competitive firm is a price taker? Can’t a firm
set any price it chooses?