Managerial Economics and Strategy 2nd Edition Perloff Test Bank

Managerial Economics and Strategy
2nd Edition Perloff Test Bank

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Managerial Economics and Strategy, 2e (Perloff/Brander)
Chapter 7 Firm Organization and Market Structure
7.1 Ownership and Governance of Firms
1) In which governance form do shareholders own the company?

A) public sector
B) state-owned enterprise
C) corporation
D) non-profit
Answer: C
Skill: Definition
AACSB: Application of Knowledge
Status: New
2) Which of the following generally does NOT seek to maximize profit?

A) public sector companies
B) corporations
C) partnerships
D) sole proprietorships
Answer: A
Skill: Conceptual
Status: New
3) A mixed enterprise is one

A) where the government has significant ownership in a private company.
B) in which the company has more than one legal structure, such as limited liability and sole
proprietorship.
C) that combines for-profit activities with education.
D) that has both for-profit and non-profit operations.
Answer: A
Skill: Definition
Status: New
4) A ________ is a governance structure where owners are not personally liable.

A) sole proprietorship
B) partnership
C) mixed enterprise
D) corporation
Answer: D
Skill: Conceptual
Status: New
1
Copyright © 2017 Pearson Education, Inc.
5) An organization that converts inputs (like Labor, Capital etc.) into output can be a
A) firm.
B) sole proprietorship.
C) corporation.
D) All of the above.
Answer: D
Skill: Conceptual
Status: Old
6) Limited liability is a benefit available only to

A) sole proprietorships.
B) partnerships.
C) corporations.
Answer: C
Skill: Conceptual
Status: New
7) What is one of the biggest differences between a sole proprietorship and a corporation?
A) Sole proprietorships offer stock.
B) Corporation shareholders elect the managers of the firm.
C) Sole proprietorships have limited liability.
D) Corporations are the only profitable firms.
Answer: B
Skill: Conceptual
Status: Old
8) Which entity produces the greatest proportion of U.S. gross national product?
A) government
B) non-profit organizations such as hospitals
C) firms
D) universities
Answer: C
Skill: Conceptual
Status: Old
2
9) The board of a U.S. corporation usually includes
A) outside directors.
B) executives of competitors.
C) non-executive employees of the corporation.
Answer: A
Skill: Conceptual
Status: New
10) The board of a U.S. corporation usually includes

A) outside directors.
B) company executives.
C) former politicians.
Answer: D
Skill: Conceptual
Status: New
7.2 Profit Maximization
1) Economists typically assume that the owners of firms wish to

A) produce efficiently.
B) maximize sales revenues.
C) maximize profits.
Answer: C
Skill: Conceptual
Status: Old
2) If a firm makes zero economic profit, then the firm

A) has total revenues greater than its economic costs.
B) must shut down.
C) can be earning positive business profit.
D) must have no fixed costs.
Answer: C
Skill: Conceptual
Status: Old
3
3) A firm's profit is
A) usually negative when opportunity costs are included.
B) the difference between marginal revenue and marginal cost.
C) the opportunity cost of the firm's shareholders.
D) the difference between revenue and cost.
Answer: D
Skill: Definition
Status: New
4) A small business owner earns $50,000 in revenue annually. The explicit annual costs equal
$30,000. The owner could work for someone else and earn $25,000 annually. The owner's
business profit is ________ and the economic profit is ________.
A) $20,000, $20,000
B) $20,000, -$5,000
C) $25,000, -$5,000
D) $25,000, $20,000
Answer: B
Skill: Analytical
AACSB: Analytical Thinking
Status: New
5) A small business owner earns $75,000 in revenue annually. The explicit annual costs equal
$40,000. The owner could work for someone else and earn $20,000 annually. The owner's
accounting profit is ________ and owner's economic profit is ________.
A) $10,000, $10,000
B) $35,000, $10,000
C) $35,000, $55,000
D) $10,000, $55,000
Answer: B
Skill: Analytical
Status: New
6) If a firm traded on the New York Stock Exchange posts an accounting profit of $10 million,
then the firm is making a positive economic profit
A) only if the Securities and Exchange Commission (SEC) approves the accounting report.
B) only if the firm's opportunity cost is less than $10 million.
C) only if the firm's opportunity benefit is more than $10 million.
D) only if the firm's management receives stock compensation.
Answer: B
Skill: Conceptual
Status: Old
4
7) If a firm goes out of business because of negative economic profits, its books
A) might indicate a positive accounting profit.
B) might indicate that opportunity costs were zero.
C) might indicate that taxes are too high.
D) might suggest a mistaken value of explicit costs.
Answer: A
Skill: Conceptual
Status: Old
8) A firm sets its output where

A) marginal profit is zero.
B) marginal revenue is maximized.
C) marginal profit equals marginal revenue.
D) marginal profit is maximized.
Answer: A
Skill: Conceptual
Status: New
9) A firm sets its output where

A) marginal profit minus marginal cost equals zero (MP - MC = 0).
B) marginal revenue minus marginal profit equals zero (MR - MP = 0).
C) marginal revenue minus marginal cost equals zero (MR - MC = 0).
D) marginal revenue minus marginal cost is greater than zero (MR - MC > 0)
Answer: C
Skill: Conceptual
Status: New
10) If marginal revenue equals marginal cost, the firm is maximizing profits as long as
A) the resulting profits are positive.
B) marginal cost exceeds marginal revenue for greater levels of output.
C) the average cost curve lies above the demand curve.
D) All of the above are required.
Answer: B
Skill: Conceptual
Status: Old
5
11) If a firm is operating at an output level where losses are minimized the firm
A) has no incentive to stay in the industry.
B) is better of exiting the industry.
C) is maximizing profits.
D) will shut down
Answer: C
Skill: Conceptual
Status: Old
12) The above figure shows the cost curves for a competitive firm. If the firm is to earn
economic profit, price must exceed
A) $0.
B) $5.
C) $10.
D) $11.
Answer: C
Skill: Analytical
Status: Old
6
13) 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.
Answer: C
Skill: Analytical
Status: Old
14) The above figure shows the cost curves for a competitive firm. If the market price is $15 per
unit, the firm will earn profits of
A) $0.
B) $4.
C) $40.
D) $160.
Answer: D
Skill: Analytical
Status: Old
15) If a competitive firm maximizes short-run profits by producing some quantity of output,
which of the following must be TRUE at that level of output?
A) p = MC
B) MR = MC
C) p ≥ AVC
D) All of the above
Answer: D
Skill: Conceptual
Status: Old
16) If a competitive firm maximizes short-run profits by producing some quantity of output,
which of the following must be TRUE at that level of output?
A) p > MC
B) MR > MC
C) p ≥ AVC
D) All of the above
Answer: C
Skill: Conceptual
Status: Old
7
17) If a profit-maximizing firm finds that, at its current level of production, MR > MC, it will
A) earn greater profits than if MR = MC.
B) increase output.
C) decrease output.
D) shut down.
Answer: B
Skill: Conceptual
Status: Old
18) If a profit-maximizing firm finds that, at its current level of production, MR < MC, it will
A) decrease output.
B) increase output.
C) shut down.
D) operate at a loss.
Answer: A
Skill: Conceptual
Status: Old
19) If a manager is unsure what the entire profit function looks like, then she can
A) decrease output slightly to see if profits increase.
B) increase output slightly to see if profits increase.
C) Both A and B.
D) None of the above.
Answer: C
Skill: Conceptual
Status: New
20) A firm should always shut down if its revenue is

A) declining.
B) less than its average fixed costs.
C) less than its total costs.
D) less than its avoidable costs.
Answer: D
Skill: Conceptual
Status: Old
8
21) A firm will shut down in the short run if
A) total fixed costs are too high.
B) total revenue from operating would not cover all costs.
C) total revenue from operating would not cover variable costs.
D) total revenue from operating would not cover fixed costs.
Answer: C
Skill: Conceptual
Status: Old
22) If a competitive firm cannot earn a profit at any level of output during a given short-run
period, then which of the following is FALSE?
A) It will shut down in the short run and wait until the price increases sufficiently.
B) It will exit the industry in the long run.
C) It will operate at a loss in the short run.
D) It will minimize its loss by decreasing output so that price exceeds marginal cost.
Answer: D
Skill: Conceptual
Status: New
23) In deciding whether to operate in the short run, the firm must consider the relationship
between price and
A) total cost.
B) average variable cost.
C) total fixed cost.
D) the number of buyers.
Answer: B
Skill: Conceptual
Status: New
9
24) The above figure shows the cost curves for a competitive firm. If the firm is to operate in the
short run, price must exceed
A) $0.
B) $5.
C) $10.
D) $11.
Answer: B
Skill: Analytical
Status: Old
25) The above figure shows the cost curves for a competitive firm. If the profit-maximizing level
of output is 40, price is equal to
A) $0.
B) $15.
C) $10.
D) $11.
Answer: B
Skill: Analytical
Status: New
10
26) The above figure shows the cost curves for a competitive firm. The firm will shut down in
the short run if price falls below
A) $5.
B) $10.
C) $11.
D) $15.
Answer: A
Skill: Analytical
Status: New
27) If a short-run fixed cost is sunk, then

A) losses can be minimized by shutting down.
B) the firm should keep producing to cover the sunk cost.
C) the cost cannot be avoided by shutting down.
D) Both B and C.
Answer: C
Skill: Conceptual
Status: New
28) By shutting down, a firm

A) stops receiving revenue but continues to pay variable costs.
B) stops receiving revenue and is stuck with its fixed costs.
C) avoids its sunk costs as well as its variable costs.
D) can avoid paying taxes on its previously earned profits.
Answer: B
Skill: Conceptual
Status: New
29) A firm bought a pizza oven for $13,500 and if it shut down now, could sell the oven for
$9,500. Which of the following statements is TRUE?
A) The relevant cost of the oven when considering shutting down is $13,500.
B) The relevant cost of the oven when considering shutting down is $9,500.
C) The relevant cost of the oven when considering shutting down is $4,000.
D) The cost of the oven does not matter when deciding whether or not to shut down.
Answer: C
Skill: Analytical
Status: New
11
30) If the present value of all future profit is positive, then
A) the firm should remain operating, even if it earns negative profit in the short run.
B) the firm should shut down if it is earning a negative profit in the short run.
C) the firm should shut down if it cannot cover its fixed costs in the short run.
Answer: A
Skill: Conceptual
Status: New
31) If the present value of all future revenue is positive, then

A) the firm should remain operating, even if it earns negative profit in the short run.
B) the firm should shut down if it is earning a negative profit in the short run.
C) the firm should shut down if it cannot cover its fixed costs in the short run.
D) Unable to determine with the information given.
Answer: D
Skill: Conceptual
Status: New
For the following, please answer "True" or "False" and explain why.
32) Even though fixed costs do not affect the output decision, an increase in fixed costs results in
a wider range of prices for which the firm operates at a loss.
Answer: True. An increase in fixed costs will shift AC upward but leave AVC unchanged. The
gap between AVC and AC represents prices at which the firm will operate at a loss.
Skill: Conceptual
Status: Old
33) If a firm sets marginal revenue equal to marginal cost it will make an economic profit.
Answer: False. When a firm sets MR = MC it maximizes profits but the profit-maximizing level
of output might still be negative (the smallest loss possible).
Skill: Conceptual
Status: Old
34) If a firm doesn't make an economic profit it will shut down.

Answer: False. The firm compares its losses from operating with its losses when shutting down
and will shut down if the latter loss is less.
Skill: Conceptual
Status: Old
12
35) If a firm cannot earn profits in the short run, it will shut down.
Answer: False. A firm will operate at a loss if the loss incurred from production is less than the
loss incurred from shutting down. Even if the firm shuts down, it still must pay its fixed costs
because, in the short run, going out of business is not an option.
Skill: Conceptual
Status: Old
36) If the market price in a competitive market is below the minimum of average variable cost
the firm will shut down.
Answer: True. At this price total fixed costs are smaller than the operating loss. It pays for the
firm to shut down.
Skill: Conceptual
Status: Old
7.3 Owners' vs. Managers' Objectives
1) A conflict between an owner and a manager may occur when

A) the manager earns more when the firm has higher profits.
B) the manager is seeking to maximize leisure time.
C) the owner can easily observe the manager slacking off and punish him accordingly.
D) the firm is very small and the manager must perform multiple tasks.
Answer: B
Skill: Conceptual
Status: New
2) A common incentive owners offer managers is

A) the year-end bonus.
B) stock options.
C) profit sharing.
Answer: D
Skill: Conceptual
Status: New
3) Stock options
A) are a type of contingent reward.
B) allow you to pay people only $1 in salary.
C) force CEOs to try and maximize the share price in the short run.
Answer: A
Skill: Conceptual
Status: New
13
4) If manager performance is easily observable then
A) profits will be maximized for the firm.
B) the owner can directly reward the manager.
C) the manager will attempt to manipulate the reported profit.
D) the firm's stock price will go up.
Answer: B
Skill: Conceptual
Status: New
5) The agency problem can be avoided if

A) the firm is not subject to regulation by a government agency.
B) the manager and owner can manipulate reported profit.
C) the firm has positive profits.
D) the goals of the owner and manager are aligned.
Answer: D
Skill: Conceptual
Status: New
6) One problem with compensation systems is that

A) sometimes a manager is rewarded for an objective other than maximizing profits.
B) managers are often paid too much.
C) owners sometimes want to pursue social objectives.
D) the Dodd-Frank Act of 2010 requires shareholder votes on compensation that are non-
binding.
Answer: A
Skill: Conceptual
Status: New
7) Corporate Social Responsibility

A) is illegal in most countries.
B) minimizes conflict between owners and managers.
C) is the pursuit of social objectives by corporations.
D) disputes the stakeholder theory of R. Edward Freeman.
Answer: C
Skill: Definition
Status: New
14
8) Ronald McDonald Houses is an example of
A) altruistic corporate social responsibility.
B) reduction in shareholder value.
C) vertical integration.
D) strategic corporate social responsibility.
Answer: D
Skill: Conceptual
Status: New
9) 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.
Answer: A
Skill: Conceptual
Status: New
10) Monitoring a manager can be difficult if

A) the owner and manager do not have an enforceable contract.
B) the owner cannot easily observe the manager's actions.
C) the manager doesn't have to use a time clock.
D) the board does not have enough outside directors.
Answer: B
Skill: Conceptual
Status: New
11) Monitoring is often used by firms in an attempt to decrease

A) shirking.
B) piece rates.
C) adverse selection.
D) signaling.
Answer: A
Skill: Conceptual
Status: Old
15
12) According to the survivor principle
A) firms will get taken over by their larger rivals over time.
B) only firms that maximize profits survive in highly competitive markets.
C) managers only work hard if they are threatened with their survival at the firm.
D) eventually all firms merge to become one large monopoly.
Answer: B
Skill: Conceptual
Status: New
7.4 The Make or Buy Decision
1) A firm's vertical dimension refers to

A) its ability to grow its profits.
B) the size of its headquarters building.
C) the degree to which it participates in the various stages of producing the products and services
it sells.
D) the downstream stages of production.
Answer: C
Skill: Conceptual
Status: New
2) 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.
Answer: A
Skill: Conceptual
Status: New
3) Supply chain management refers to

A) the contracts put in place to manage a firm's suppliers.
B) the decisions around which stages of production to handle internally and which to buy from
others.
C) how the firm compensates the employees who work on the firm's internal stages of
production.
D) the 19th century practice of having barges move downstream with the flow of the river.
Answer: B
Skill: Definition
Status: New
16
4) A firm that backward vertically integrates
A) moves downstream in the production process.
B) requires that the production process be relatively simple.
C) has to merge with another firm.
D) may be producing its own inputs.
Answer: D
Skill: Conceptual
Status: New
5) A firm that is vertically integrated

A) participates in more than one successive stage of production.
B) has higher profits than firms that are not vertically integrated.
C) produces all of its own inputs.
D) relies on other firms to market its products.
Answer: A
Skill: Conceptual
Status: New
6) A McDonald's franchise is an example of

A) horizontal integration.
B) quasi-vertical integration.
C) a vertical merger.
Answer: B
Skill: Definition
Status: New
7) Vertical restraints in a contract

A) are generally illegal in the U.S.
B) usually benefit the firm that produces the raw inputs to the production process.
C) are used in vertical mergers.
D) can approximate the outcome of a vertical merger.
Answer: D
Skill: Conceptual
Status: New
17
8) Vertical integration
A) is always driven by profitability concerns.
B) results in lower transaction costs.
C) may be undertaken to avoid government regulations.
D) hampers timely delivery of inputs into the production process.
Answer: C
Skill: Conceptual
Status: New
9) Vertical integration can

A) lower transaction costs due to lower costs of writing and enforcing contracts.
B) increase management costs and complexity.
C) reduce problems between owners and managers.
Answer: D
Skill: Conceptual
Status: New
10) Toyota's just-in-time system is an example of

A) backward (upstream) integration.
B) quasi-vertical integration.
C) using transfer pricing to avoid price controls.
D) horizontal, downstream integration.
Answer: B
Skill: Conceptual
Status: New
11) Opportunistic behavior may occur when

A) a firm buys its inputs from multiple suppliers.
B) firms incur significant transaction costs when negotiating contracts.
C) a firm backwards vertically integrates.
D) a firm can buy a key component from only one supplier.
Answer: D
Skill: Conceptual
Status: New
18
12) Vertically integrated firms can use transfer pricing
A) to avoid government price controls.
B) as a way to compensate managers for transferring among departments in a vertically
integrated firm.
C) to avoid paying market prices for inputs.
D) to shift profit.
Answer: D
Skill: Conceptual
Status: New
13) Firms might vertically disintegrate when

A) it becomes more profitable for a firm to specialize.
B) the IRS cracks down on transfer pricing.
C) the industry becomes too large to support itself.
D) the industry shrinks in size.
Answer: A
Skill: Conceptual
Status: New
7.5 Market Structure
1) Market structure depends upon

A) the ease of entry and exit.
B) the ability of firms to differentiate their goods and services.
C) the number of firms in the market.
Answer: D
Skill: Conceptual
Status: New
2) According to economists, competitive firms

A) compete for the same customers.
B) are price takers.
C) differentiate their products.
D) are able to change output and affect the market price.
Answer: B
Skill: Definition
Status: New
19
3) Under perfect competition
A) information about prices is hard to obtain.
B) there is a maximum number of firms that can enter the market.
C) if a firm exits the market, price will rise.
D) transaction costs are low.
Answer: D
Skill: Conceptual
Status: New
4) A monopoly
A) must have a patent to protect its products.
B) is a price taker.
C) produces the market output.
D) doesn't lose any sales when it raises its price.
Answer: C
Skill: Conceptual
Status: New
5) An oligopoly
A) requires government licensing.
B) has relatively few firms, but they are still price takers.
C) always collude to keep prices high.
D) has barriers to entry.
Answer: D
Skill: Conceptual
Status: New
6) All of the following are characteristics of an oligopolistic market EXCEPT

A) firms must consider the actions of their rivals.
B) cartels eventually form to keep prices high.
C) firms have the ability to influence prices.
D) firms earn lower profits than a monopoly.
Answer: B
Skill: Conceptual
Status: New
20
7) In a monopolistically competitive market
A) firms are price setters.
B) barriers to entry are high.
C) firms earn positive economic profit in the long run.
D) products are undifferentiated.
Answer: A
Skill: Conceptual
Status: New
21

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Managerial Economics and Strategy

2nd Edition Perloff Test Bank

7.1 Ownership and Governance of Firms

1) In which governance form do shareholders own the company?

2) Which of the following generally does NOT seek to maximize profit?

3) A mixed enterprise is one

4) A ________ is a governance structure where owners are not personally liable.

6) Limited liability is a benefit available only to

10) The board of a U.S. corporation usually includes

7.2 Profit Maximization

1) Economists typically assume that the owners of firms wish to

2) If a firm makes zero economic profit, then the firm

8) A firm sets its output where

9) A firm sets its output where

20) A firm should always shut down if its revenue is

27) If a short-run fixed cost is sunk, then

28) By shutting down, a firm

31) If the present value of all future revenue is positive, then

34) If a firm doesn't make an economic profit it will shut down.

7.3 Owners' vs. Managers' Objectives

1) A conflict between an owner and a manager may occur when

2) A common incentive owners offer managers is

5) The agency problem can be avoided if

6) One problem with compensation systems is that

7) Corporate Social Responsibility

10) Monitoring a manager can be difficult if

11) Monitoring is often used by firms in an attempt to decrease

7.4 The Make or Buy Decision

1) A firm's vertical dimension refers to

2) A firm's horizontal dimension refers to

3) Supply chain management refers to

5) A firm that is vertically integrated

6) A McDonald's franchise is an example of

7) Vertical restraints in a contract

9) Vertical integration can

10) Toyota's just-in-time system is an example of

11) Opportunistic behavior may occur when

13) Firms might vertically disintegrate when

7.5 Market Structure

1) Market structure depends upon

2) According to economists, competitive firms

6) All of the following are characteristics of an oligopolistic market EXCEPT

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