Managerial Economics Review questions

Multiple Choice Questions

1. One of the challenges facing managers nowadays is that they have to prove their work is
worthy what they receive, however, the problem with the compensation system is that:
a) Sometimes a manager is rewarded for an objective other than maximizing profits
b) The law requires shareholder votes on compensation that are non-binding
c) Managers are often paid too much
d) Business owners sometimes want to pursue other social objectives

2. A monopolist facing two markets with different price elasticities will

a) price independently of the difference in the price elasticity
b) use a uniform price
c) set a higher price in the market with the higher price elasticity
d) set a higher price in the market with the lower price elasticity

3. In indirect segment discrimination, the firm

a) utilizes the incentive compatibility constraint
b) needs to be able to prevent resale
c) uses differential prices within different identifiable customer segments
d) forces low valuation consumers to buy a low-quality good

4. For there to be economies of scale, it is necessary that

a) there are fixed costs of production
b) there are decreasing marginal costs
c) there are economies of scope
d) none of the above

5. Market structure depends upon

a) The number of firms in the market
b) The ease of entry
c) The ability of firms to differentiate their goods and services
d) All of the above

6. If a firm operates in a perfectly competitive market, then it will most likely

a) have a difficult time obtaining information about the market price.
b) take the price of its product as determined by the market.
c) advertise its product on television.
d) have an easy time keeping other firms out of the market.

7. A monopolist faces two markets with the following demand curves:

Market A: QA = 10 – PA
Market B: QB = 6 – PB
The marginal cost of production is constant and equal to one. The optimal price(s) is/are:
a) PA = PB = 8.5
b) PA = PB = 8
 c) PA = 4.5 and PB = 2.5
d) PA = 5.5 and PB = 3.5

8. The law of diminishing returns only applies in cases where:

a) there is increasing scarcity of factors of production.
b) the price of extra units of a factor is increasing.
c) there is at least one fixed factor of production.
d) capital is a variable input.

9. When marginal product reaches its maximum, what can be said of total product?
a) total product must be at its maximum
b) total product starts to decline even if marginal product is positive
c) total product is increasing if marginal product is still positive
d) total product levels off

10. If you know that with 8 units of output, average fixed cost is $12.50 and average variable
cost is $81.25, then total cost at this output level is:
a) $93.75.
b) $97.78.
c) $750.
d) $880.

11. Suppose MPL=.5 *(q/l) and MPK =.5 * (q/k). In the long run, the firm will hire equal
amounts of capital and labor
a) Only when w=.5 * r
b) All of time
c) Only when w=r
d) No point in time

12. Long run average cost is never greater than short run average cost because in the long-
run
a) Capital cost equals zero
b) The firm can move to the lowest possible isocost curve
c) Wages always decrease over time
d) Wages always increase over time

13. If the Cobb Douglas production function for a beer manufacturer is q=1.52L^0.6K^0.4. If
we assume the firms capital is fixed at 250 units and the rental rate of capital is 5 per unit,
then the average fixed cost is
a) 1.52L^.6 (250)^.4
b) 1250
c) 1250/q
d) Not enough information

14. With fixed costs of $400, a firm has average total costs of $3 and average variable costs
of $2.50. Its output is:
 a) 200 units.
b) 400 units.
c) 800 units.
d) 1,600 units.

15. If a more efficient technology was discovered by a firm, there would be:
a) an upward shift in the AVC curve.
b) an upward shift in the AFC curve.
c) a downward shift in the AFC curve.
d) a downward shift in the MC curve.

16. A firm encountering economies of scale over some range of output will have a:
a) rising long-run average cost curve.
b) falling long-run average cost curve.
c) constant long-run average cost curve.
d) rising, then falling, then rising long-run average cost curve.

17. The larger the diameter of a natural gas pipeline, the lower is the average total cost of
transmitting 1,000 cubic feet of gas 1,000 miles. This is an example of:
a) economies of scale.
b) normative economies.
c) diminishing marginal returns.
d) an increasing marginal product of labor.

18. If a market is not perfectly competitive, then government intervention

a) guarantees that societal well-being will be maximized.
b) is always justifiable
c) May increase economic well-being
d) will usually decrease economic well-being.

19. Suppose the short run production function is q=10* L. If the wage rate is 10 per unit of
labor, then AVC equals
a) 10/q
b) Q
c) Q/10
d) 1

20. If the marginal rate of technical substitution for a cost minimizing firm is 10, and the
wage rate for labor is 5$, what is the rental rate for capital in dollars
a) 5
b) 10
c) 2
d) 1
True or False Questions

1. The fundamental assumption of time-series analysis is that past patterns in time-series

data will continue to be unchanged in the future.

2. The use of a linear trend equation to forecast future values of a variable is based on the
assumption of a constant amount of change per time period.

3. If the firms in an industry are price takers, then every firm in the industry faces a
horizontal demand curve.

4. If a firm with marginal cost equal to $2 faces a demand curve defined as QD = 100 - 5P,
then revenue is at a maximum when price is $10.

5. One problem with the theory of monopolistic competition is that it is difficult to define a
market and to identify the firms that comprise it.

6. One of the reasons that capital budgeting is so important is that major capital investment
projects are generally irreversible.

7. A firm should continue to increase its level of capital investment so long as the rate of
return on the least profitable investment project that the firm undertakes is less than the
marginal cost of capital.

8. Qualitative forecasts based on surveys tend to perform particularly well during periods of
unexpected international political upheaval.

9. If profit maximizing firms in a perfectly competitive industry will produce 14,000 units
per day if the market price is $23 and consumers will purchase 14,000 units per day if the
market price is $20, then the market equilibrium quantity must be greater than 14,000.

10. Product variation is the result of quality control problems.

Conceptual Questions

1. Explain in detail the nature and scope of Managerial Economics.

2. What factors can influence managers’ perspectives on products’ elasticity of demand?
3. What is demand forecasting and why is it relevant for managers?
4. Explain the methods for demand forecasting.
5. 'The use of mathematical trend projections is by far the easiest and cheapest method of
forecasting long-run changes in product demand, and is likely to be just as reliable as any
alternative method.' Discuss.
6. Explain what is optimization and why is it relevant in managerial economics.
7. Explain the different methods for constrained optimization?
 8. What is slope? What is the use of slope in economic analysis?
9. What is the use of OLS method in regression techniques?
10. What are the general forms of function used in economic analysis?
11. Explain the conditions for consumer equilibrium both graphically and mathematically.
12. What is the importance of the concept of consumer’s surplus in today’s economic
scenario? Give example

Computational Questions

1. The market demand curve for AutoPro Garage is given by: Q = 1000 – 2P and the supply
curve is: Q = 3P. AutoPro is a small firm operating in a perfectly competitive market.
Compute AutoPro’s profit-maximising quantity and comment on your answer.
2. Mkuki Games wants to examine the impact of its advertising expenditures on its revenue.
Use linear regression technique to find out what turnover might be if the company
invested Tsh. 500,000 in advertising the following year (2020). Use the figures below to
do your estimations.

Years 2016 2017 2018 2019 2020

Revenue (Tsh. 8000 9,800 12,000 13,600
‘000)
Advertising 100 150 350 450 500
costs (‘000)

3. Given the production function: Q = 72X + 15 X2 - X3, where Q = Output and X = Input.
What is the Marginal Product (MP) when X = 8?

4. Market price is $50. The firm’s marginal cost curve is given by: MC = 10 + 2Q. Find the
profit-maximizing output for the firm.

5. From the data in the following table, show what happens to the firm’s output choice and
profit if the price of the product falls from $40 to $35.

Q P TR TC π MC MR TR MR π
P=40 P=40 P=40 P=40 P=35 P=35 P=35
0 40 50
1 40 100
2 40 128
3 40 148
4 40 162
5 40 180
6 40 200
7 40 222
 8 40 260
9 40 305
10 40 360
11 40 425

6. From the table below, determine the time series trend in a simple function like:

Y = a + bX, and forecast the value for months of 11 and 12.

X 1 2 3 4 5 6 7 8 9 10 11 12
Y 22 50 79 32 29 52 82 38 32 58