Managerial Economics: Review Questions

A. Multiple Choice Questions:

1. Managerial economics deals with the problem of
a. An individual firm. c. An economy.
b. An industry. d. Global economy.
2. Managerial Economics as a specialized branch of Economics
a. Provide ready-made solutions to business problems.
b. Provide logic and methodology to find solutions to business problems.
c. Provide theoretical background to analyze business problems.
d. provide alternative answers to specific business problems.
3. Managerial economics as a new branch of Economics
a. Highlights on analyzing business problems.
b. Acts totally independent of other subjects.
c. Uses new techniques to identify business and management problems.
d. Applies economic theories and concepts to solve business and management problems.
4. Demand for a product refers to
a. Various quantities that are demanded by consumers.
b. Various amounts desired by consumers.
c. Total quantity of a product demanded during a given period of time.
d. Total quantity of a product demanded at a particular price in the market during a given
period of time.
5. The relationship between price and demand is
a. Direct. c. Proportionate.
b. Inverse. d. positive.
6. Which of the assumptions on which the demand is based are
a. Production Costs. d. Prices of other related goods and
b. Technology. tastes and preferences.
c. Prices of Inputs.
7. In case of increase in demand, the demand curve
a. Shifts backwards.
b. Shifts forward.
c. Will have upward slope.
d. Will be horizontal.
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 Managerial Economics: Review Questions
8. The Law of Demand assuming other things to remain constant, establishes the relationship
between
a. Income of the consumer and the quantity of a good demanded by him.
b. Price of a good and the quantity demanded.
c. Price of a good and the demand for its substitute.
d. Quantity demanded of a good and the relative prices of its complimentary goods.
9. Demand forecasting is made - for the
a. For the existing products only.
b. New products only.
c. For both the existing products & for the new products.
d. For the substitutes only.
10. A firm operating under conditions of perfect competition can
a. Determine the price of its product.
b. Determine only the size of its output.
c. Promote the sales through effective advertisement.
d. Capture the market by cutting down the price.
11. An increase in supply demand remaining constant will change the equilibrium
a. Causing a fall in price.
b. Causing a backward shift in supply curve.
c. Causing no change in price.
d. Causing a rise in price.
12. If the proportionate change in supply is exactly equal and proportionate to the change in price
than elasticity of supply is
a. Equal to zero. c. Less than one.
b. Greater than one. d. Equal to one.
13. Which of the following is not an economic activity?
a. A chartered accountant doing his own activity.
b. A teacher teaching in a college.
c. A son looking after his ailing mother.
d. A manager managing his organization.

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 Managerial Economics: Review Questions
14. Production function explains
a. The relationship between Qty of inputs employed & the corresponding total production cost.
b. The relationship between the firm’s total revenue and total production cost.
c. The relationship between qty of inputs used and the corresponding output obtained.
d. The relationship between market price charged and quantity supplied.
15. In case of short run production function Qty of fixed input remains constant and
a. Qty of either one or two variable inputs change.
b. Qty of one or two variable inputs are kept constant as Qty of fixed inputs change.
c. The Qty of both fixed as well as variable inputs remains constant.
d. The Qty of both variable and fixed input change.
16. In case of long run production
a. The Qty of both fixed and variable inputs are changed.
b. The Qty of both fixed and variable inputs are kept constant.
c. The Qty of both fixed and variable inputs are changed in the same proportions.
d. The Qty of both fixed and variable inputs are changed in different proportions.
17. Average revenue curve of the firm is the same as the demand curve of the consumer except in
the context of
a. Perfect competition. c. Monopoly.
b. Monopolistic competition. d. Discriminatory monopoly.
18. Total revenue will increase with the reduction in price when the price elasticity of demand for
the product is
a. Relatively elastic. c. Unitary elastic.
b. Relatively inelastic. d. Perfectly elastic.
19. A market situation where there are only a few large buyers for the product is called
a. Oligopoly. c. Oligopsony.
b. Pure competition. d. Duopsony.
20. Business profit is:
the residual of sales revenue minus the explicit accounting costs of doing business. a.
a normal rate of return. b.
economic profit. c.
the return on stockholders' equity. d.

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 Managerial Economics: Review Questions
21. To maximize the value of the firm, management must:
maximize short run revenue. a.
minimize short run average profit. b.
maximize long run profit. c.
maximize short run profit. d.
22. Economic profit equals:
normal profits plus opportunity costs. a.
business profits minus implicit costs. b.
business profits plus implicit costs. c.
normal profits minus opportunity costs. d.
23. The return to owner-provided inputs is an:
implicit cost. a.
economic rent. b.
entrepreneurial profit. c.
explicit cost. d.
24. The value of a firm is equal to:
the present value of tangible assets. a.
the present value of all future revenues. b.
the present value of all future cash flows. c.
current revenues less current costs. d.
25. The value of the firm decreases with a decrease in:
total revenue. a.
the discount rate. b.
the cost of capital. c.
total cost. d.
26. The value of the firm decreases with a decrease in:
total revenue. a.
the discount rate. b.
the cost of capital. c.
total cost. d.

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 Managerial Economics: Review Questions
27. If P = 1,000 - 4Q:
MR = 1,000 - 4Q a.
MR = 1,000 - 8Q b.
MR = 1,000Q - 4 c.
MR = 250 - 0.25P d.
28. The optimal output decision:
minimizes the marginal cost of production. a.
minimizes production costs. b.
is most consistent with managerial objectives. c.
minimizes the average cost of production. d.
29. The optimal decision produces:
maximum revenue. a.
maximum profits. b.
minimum average costs. c.
a result consistent with managerial objectives. d.
30. 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.
31. 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
32. 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

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 Managerial Economics: Review Questions
33. 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.
34. 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

Consider the following numbers for a demand and supply schedules and answer questions 35–37.
Demand Supply
P Q P Q
28 1 5 3
24 2 6 4
20 3 7 5
35. The equation for the demand curve is:
a. P = 16 - 2Q c. P = 32 - 4Q
b. P = 32 + 4Q d. P = 32 - 2Q
36. The equation for the supply curve is
a. P = 2 + Q c. P = 2 + 2Q
b. P = 2 - Q d. P = 2 + 4Q
37. The equilibrium price and quantity in this market is given by
a. P=8; Q=8 c. P=6; Q=4
b. P=8; Q=6 d. P=6; Q=6

Use the information provided in the table below to answer questions 38, 39 and 40.
Output 0 1 2 3 4 5 6 7 8
Total Cost 10 11 13 16 20 25 31 38 48
38. The average total cost of producing 5 units of output is
a. 20 c. 5
b. 4 d. 2.5
39. The average fixed cost of producing 5 units of output is
a. 13 c. 5
b. 6.5 d. 2
40. The marginal cost of producing the 6 unit of output is
th

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 Managerial Economics: Review Questions
a. 6 c. 6/31
b. 31 d. 31/6
41. If marginal cost (MC) is Birr 12 and average variable cost (AVC) is Birr 10 then AVC is
a. At a minimum c. Increasing
b. At a maximum d. Decreasing
42. If a firm’s total cost function is a straight line through the origin, then
a. Marginal cost is zero c. Marginal cost is constant
b. Average cost is zero d. All of the above are true
43. If average cost is at a minimum, then
a. It is equal to marginal cost c. Profit is at a maximum
b. Total cost is also at a minimum d. All of the above are true
44. If two goods are complements, then
a. The cross price elasticity of demand is negative
b. The cross price elasticity of demand is zero
c. The cross price elasticity of demand is positive
d. The cross price of elasticity of demand is infinity
45. Total revenue in the market will fall if :
a. Price rises on the elastic portion of the demand curve.
b. Price falls on the elastic portion of the demand curve.
c. Price rises on the inelastic portion of the demand curve.
d. Price falls on the elastic portion, but stops at the mid-point of the demand curve.
46. If the marginal revenue is zero, then
a. Total revenue is zero
b. Average revenue is zero
c. Total revenue is at a maximum or a minimum
d. Average revenue is at a maximum
47. As far as a monopoly is concerned, if marginal revenue is positive then demand is:
a. elastic. c. unit elastic.
b. inelastic. d. could be either elastic or inelastic.
48. The slope of the marginal revenue curve for a monopolist is:
a. always equal to one.
b. the same as the slope of the demand curve.
c. half as much as the slope of the demand curve.
d. twice as much as the slope of the demand curve.
49. A firm produces a product at a fixed marginal cost of Birr 2 and sells the product on two
different markets. The inverse demand in market A is P A = 10 - QA and the demand in
market B is PB = 20 - QB. What output should the firm sell in market A?
a. 4 c. 9
b. 6 d. 12
50. Use the same information given in Question 49. What output should the firm sell in market
B?

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 Managerial Economics: Review Questions
a. 4 c. 9
b. 6 d. 12
51. Consider the demand curve P = 100 – 2Q. Suppose a monopolist wished to MAXIMIZE
REVENUE. What quantity should he produce in that case?
a. 0 c. 25
b. 50 d. 10
52. Consider a monopolist whose Marginal Revenue is Birr 4 and the price elasticity of demand is
2 (in absolute value). This monopolist must be charging a price of Birr:
a. 8 c. 4
b. 16 d. 24
53. Consider a monopolist whose Marginal Cost is Birr 8. The price elasticity of demand is 2 (in
absolute value). IF THIS MONOPOLIST IS MAXIMIZING PROFIT at this level of output
and at this MC, then the price he must be charging is Birr:
a. 8 c. 4
b. 16 d. 24
54. Consider a monopolist who faces a demand curve of the form P = 100 – 2Q. His marginal
cost is constant and has the form MC=20. The profit maximizing output for this monopolist is
a. 10 c. 30
b. 20 d. 40
55. Use the information in Question 54. When the monopolist produces this level of output his
total revenue is:
a. $1000 c. $1500
b. $1200 d. Not enough information
56. Continue to use the information in Questions 54 and 55. In addition the monopolist’s
Average Cost is also constant (in fact if marginal cost is constant then so is average Cost)
and is equal to $20. Then the total amount of PROFIT that the monopolist makes when
producing the profit maximizing level of output is
a. $800 c. $1000
b. $400 d. $1200
57. Suppose a firm’s total revenue function is TR = 200Q - 20Q 2. What is average revenue equal
to when the firm produces one unit of output?
a. 180 c. 200
b. 20 d. 220
58. If a firm’s total revenue function is a straight line through the origin, then

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 a. Marginal revenue is zero
b. Average revenue is zero
c. Marginal revenue is equal to average revenue
d. All of the above are true

59. The shut-down point for a perfectly competitive firm is :

a. the lowest point on the ATC curve.
b. the point at which the firm's long-run supply curve ends.
c. the lowest point on the AVC curve.
d. the lowest point on the MC curve.
60. The sensitivity of demand of a product to price of other goods is best described by
______________ of demand.
A. Own price elasticity D. Quantity elasticity
B. Income elasticity E. All
C. Cross price elasticity F. None
61. Suppose of a product of a business firm is , the board of directors of the firm
decided to increase unit price of the product. Due to this decision, the quantity demand and
Revenue of the business firm respectively become:
A. Increase/increase C. Decrease/decrease E. All
B. Decrease/increase D. Decrease/unknown F. None
62. Neoclassical production function in the short-run time horizon is characterized by three
stages. This is mainly due to:
A. The law diminishing marginal returns (DMRS)
B. The law of variable proportions
C. Employment of variable and fixed inputs together
D. The law of returns to scale
E. A & C F. B & D G. All except C
63. If two goods are complements, then:
A. The cross price elasticity of demand is negative
B. The cross price elasticity of demand is zero
C. The cross price elasticity of demand is positive
D. The cross price of elasticity of demand is infinity
 E. All F. None
64. Suppose a firm’s total revenue function is . The average revenue of the
firm when a firm produces one unit of output is:
A. 180 C. 200 E. All
B. 90 D. 220 F. None
65. The shut-down point for a perfectly competitive firm is :
a. At the lowest point of the ATC curve
b. The point at which the firm's long-run supply curve ends
c. At the lowest point of the AVC curve
d. At the lowest point on the MC curve
e. At the lowest point of the AFC curve
f. All g. None
66. All are true about the production and costs in the short-run of a given business firm except;
A. When ATC is minimum, AP of a variable input is maximum
B. The maximum MP implies the minimum MC
C. MP is downward sloping in stage–II of the production process
D. The maximum TP implies MP is zero
E. All F. None
67. The relationship between price and quantity of a firm is inverse in all market structures
except:
A. Oligopoly D. Perfect competition
B. Monopolistic Competition E. All
C. Pure monopoly F. None
68. The LAC of a firm is and it is an envelope to all of a firm. The
reason behind this shape may attribute to:
A. Law of returns to scale D. Scale of operation
B. Managerial efficiency E. All
C. Law of variable proportions F. None
69. Identify true alternative among the given options.
A. Pure competition is non-existent in reality
B. Cement market in Ethiopia best describes oligopoly market
C. Perfumes, soaps, electronics, etc markets best characterize monopolistic competition
D. The more monopoly market power the more inefficient is the market
E. All F. None
True/False Questions

70. Sensitivity/responsiveness of demand is analysis of changes in factors that make up the

underlying demand function that is very critical for constructive managerial decision making.
71. The level of elasticity of demand may not give any clue whether to increase or decrease price
in order to influence the level of firm’s revenue.
72. Incurring cost is inevitable in any business activity.
73. Production function is derived from cost function and vice versa.
74. Pricing and output decisions are similar in any market structure since all market models are
equally efficient.

Short answer/Problem Solving

75. List the possible types of market structures that may face a business firm. Which one is best
for the society?

76. Suppose that the demand equation for a product is . If the price elasticity of
demand and Marginal cost are and , respectively.
a. Derive the marginal revenue equation
b. Calculate the optimal price that maximizes profit

77. Given:
o Total cost function of a form under perfectly competitive market:
o Total Revenue:
a. Derive the marginal cost ( ) equation
b. Find the optimum level of output ( that maximizes profit of the firm)
c. Find the maximum profit

78. Vincent purchased twelve hectares of land for $150,000. He quit his $40,000 a year job as a
postal employee and opened a stable for boarding horses on his land. The stable generates
$50,000 in annual net revenue after all day-to-day expenses have been covered. Assume that
the relevant discount rate is 10%. What is Vincent's business profit? What is his economic
profit?
79. Before Sam quit his job as a hairdresser, he was earning $34,000 per year. He rented an
office for $18,000 per year and opened a framing shop. He spends $88,000 per year for labor,
materials, utilities, and advertising.
(i) How much revenue will the business have to earn in order to break even in terms of business
profit?
(ii) How much revenue will the business have to earn in order to break even in economic
terms?
(iii)Suppose that Sam buys the building. How will this influence the amount that the business
will have to earn in order to break even in economic terms? In accounting terms?

80. Commercial Recording, Inc. is a manufacturer and distributor of reel-to-reel recording decks
for commercial recording studios. Revenue and cost relations are:
TR = 3,000Q - 0.5Q2 (1)
TC = 100,000 + 1,500Q + 0.1Q2 (2)
Calculate output which maximizing profit. Calculate the maximum profit

81. Restaurant Marketing Services, Inc., offers affinity card marketing and monitoring systems to
fine dining establishments nationwide. Fixed costs are $600,000 per year. Sponsoring
restaurants are paid $60 for each card sold, and card printing and distribution costs are $3 per
card. This means that RMS's marginal costs are $63 per card. Based on recent sales
experience, the estimated demand curve and marginal revenue relations for are:
P = $130 - $0.000125Q
Calculate output, price, total revenue, and total profit at the profit-maximizing activity level

82. A firm's demand function is Q = 40 - 2P and its total cost function is defined as:
TC = 100 + 2Q + 0.25Q2
Use these two functions to form the firm's profit function and then determine the level of output
that yields the profit maximum. What is the level of profit at the optimum level of output?