Summer 2024 ECON S 1615—Managerial Economics A.

Tomic

Practice Exam I (KEY)

Chapters 1 - 3

1.If one defines incremental cost as the change in total cost resulting from a decision, and incremental revenue as
the change in total revenue resulting from a decision, any business decision is profitable if:
a. it increases revenue more than costs or reduces costs more than revenue
b. it decreases some costs more than it increases others (assuming revenues remain constant)
c. it increases some revenues more than it decreases others (assuming costs remain constant)
d. all of the above
e. b and c only
2. Which of the following (if any) is not a factor affecting the profit performance of firms:
a. differential risk
b. innovation
c. managerial skills
d. existence of monopoly power
e. all of the above are factors
3. Economic profit is defined as the difference between revenue and ____.
a. explicit cost
b. total economic cost
c. implicit cost
d. shareholder wealth
e. none of the above
4. The flat-screen plasma TVs are selling extremely well. The originators of this technology are earning
higher profits. What theory of profit best reflects the performance of the plasma screen makers?
a. risk-bearing theory of profit
b. dynamic equilibrium theory of profit
c. innovation theory of profit
d. managerial efficiency theory of profit
e. stochastic optimization theory of profit

5. Generally, investors expect that projects with high expected net present values also will be projects with
a. low risk
b. high risk
c. certain cash flows
d. short lives
e. none of the above
6. If demand were inelastic, then we should immediately:
a. cut the price.
b. keep the price where it is.
c. go to the Nobel Prize Committee to show we were the first to find an upward sloping demand curve.
d. stop selling it since it is inelastic.
e. raise the price.
 7. Demand is given by QD = 620 - 10·P and supply is given by QS = 100 + 3·P. What is the price and quantity
when the market is in equilibrium?
a. The price will be $30 and the quantity will be 132 units.
b. The price will be $11 and the quantity will be 122 units.
c. The price will be $40 and the quantity will be 220 units.
d. The price will be $35 and the quantity will be 137 units
e. The price will be $10 and the quantity will be 420 units.

8. Identify the reasons why the quantity demanded of a product increases as the price of that product
decreases.
a. as the price declines, the real income of the consumer increases
b. as the price of product A declines, it makes it more attractive than product B
c. as the price declines, the consumer will always demand more on each successive price
reduction
d. a and b
e. a and c

9. Those goods having a calculated income elasticity that is negative are called:
a. producers' goods
b. durable goods
c. inferior goods
d. nondurable goods
e. none of the above

10. Income tax payments are an example of ____.

a. implicit costs
b. explicit costs
c. normal return on investment
d. shareholder wealth
e. none of the above

11. Possible goals of Not-For-Profit (NFP) enterprises include all of the following EXCEPT:
a. maximize total costs
b. maximize output, subject to a breakeven constraint
c. maximize the happiness of the administrators of the NFP enterprise
d. maximize the utility of the contributors
e. a. and c.

12. Recently, the American Medical Association changed its recommendations on the frequency of pap-
smear exams for women. The new frequency recommendation was designed to address the family
histories of the patients. The optimal frequency should be where the marginal benefit of an additional
pap-test:
a. equals zero.
b. is greater than the marginal cost of the test
c. is lower than the marginal cost of an additional test
d. equals the marginal cost of the test
 e. both a and b.

13. A change in the level of an economic activity is desirable and should be undertaken as long as the
marginal benefits exceed the ____.
a. marginal returns
b. total costs
c. marginal costs
d. average costs
e. average benefits

14. Suppose we estimate that the demand elasticity for fine leather jackets is -.7 at their current prices. Then we
know that:
a. a 1% increase in price reduces quantity sold by .7%.
b. no one wants to buy leather jackets.
c. demand for leather jackets is elastic.
d. a cut in the prices will increase total revenue.
e. leather jackets are luxury items.

15. In this problem, demonstrate your knowledge of percentage rates of change of an entire demand function
(HINT: %Q = EP•%P + EY•%Y). You have found that the price elasticity of motor control devices at
Allen-Bradley Corporation is -2, and that the income elasticity is a +1.5. You have been asked to predict
sales of these devices for one year into the future. Economists from the Conference Board predict that
income will be rising 3% over the next year, and AB’s management is planning to raise prices 2%. You
expect that the number of AB motor control devices sold in one year will:
a. fall .5%.
b. not change.
c. rise 1%r.
d. rise 2%.
e. rise .5%.

16. Which of the following would tend to make demand INELASTIC?

a. the amount of time analyzed is quite long
b. there are lots of substitutes available
c. the product is highly durable
d. the proportion of the budget spent on the item is very small
e. no one really wants the product at all

17. If the cross price elasticity measured between items A and B is positive, the two products are referred to
as:
a. complements
b. substitutes
c. inelastic as compared to each other
d. both b and c
e. a, b, and c
18. A price elasticity (ED) of 1.50 indicates that for a ____ increase in price, quantity demanded will ____
by ____.
a. one percent; increase; 1.50 units
b. one unit; increase; 1.50 units
c. one percent; decrease; 1.50 percent
d. one unit; decrease; 1.50 percent
e. ten percent; increase; fifteen percent

19 A linear demand for lake front cabins on a nearby lake is estimated to be: Q D = 900,000 - 2P. What is the
point price elasticity for lake front cabins at a price of P = $300,000? [HINT: Ep = (Q/P)(P/Q)]
a. EP = -3.0
b. EP = -2.0
c. EP = -1.0
d. EP = -0.5
e. EP = 0

Chapters 4 and 5

20. A study of expenditures on food in cities resulting in the following equation:

Log E = 0.693 Log Y + 0.224 Log N
where E is Food Expenditures; Y is total expenditures on goods and services; and N is the size of the family.
This evidence implies:
a. that as total expenditures on goods and services rises, food expenditures falls.
b. that a one-percent increase in family size increases food expenditures .693%.
c. that a one-percent increase in family size increases food expenditures .224%.
d. that a one-percent increase in total expenditures increases food expenditures 1%.
e. that as family size increases, food expenditures go down.

21. When using a multiplicative power function (Y = a X1b1 X2b2 X3b3) to represent an economic relationship,
estimates of the parameters (a, and the b's) using linear regression analysis can be obtained by first
applying a ____ transformation to convert the function to a linear relationship.
a. semilogarithmic
b. double-logarithmic
c. reciprocal
d. polynomial
e. cubic

22. Novo Nordisk A/S, a Danish firm, sells insulin and other drugs worldwide. Activella, an estrogen and
progestin hormone replacement therapy sold by Novo-Nordisk, is examined using 33 quarters of data
Y = -204 + . 34X1 - .17X2
(17.0) (-1.71)
Where Y is quarterly sales of Activella, X1 is the Novo’s advertising of the hormone therapy, and X2 is
advertising of a similar product by Eli Lilly and Company, Novo-Nordisk’s chief competitor. The
parentheses contain t-values. Addition information is: Durbin-Watson = 1.9 and R 2 = .89.
 Using the data for Novo-Nordisk, which is correct?
a. Both X1 and X2 are statistically significant.
b. Neither X1 nor X2 are statistically significant.
c. X1 is statistically significant but X2 is not statistically significant.
d. X1 is not statistically significant but X2 is statistically significant.
e. The Durbin-Watson statistic shows significant problems with autocorrelation

23. The type of economic indicator that can best be used for business forecasting is the:
a. leading indicator
b. coincident indicator
c. lagging indicator
d. current business inventory indicator
e. optimism/pessimism indicator

24. Smoothing techniques are a form of ____ techniques which assume that there is an underlying pattern to
be found in the historical values of a variable that is being forecast.
a. opinion polling
b. barometric forecasting
c. econometric forecasting
d. time-series forecasting
e. none of the above

25. Emma uses a linear model to forecast quarterly same-store sales at the local Garden Center. The results of
her multiple regression is:

Sales = 2,800 + 200•T - 350•D

where T goes from 1 to 16 for each quarter of the year from the first quarter of 2006 (‘06I) through the
fourth quarter of 2009 (‘09 IV). D is a dummy variable which is 1 if sales are in the cold and dreary first
quarter, and zero otherwise, because the months of January, February, and March generate few sales at
the Garden Center. Use this model to estimate sales in a store for the first quarter of 2010 in the 17 th
month; that is: {2010 I}. Emma’s forecast should be:
a. 5,950
b. 6,200
c. 6,350
d. 6,000
e. 5,850