Managerial Economics Exam Questions and Rationales, Exams of Economics

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Managerial Economics

LATEST EXAM w/ RATIONALES

1. A firm is considering whether to invest in a new project that has an initial cost of $100,000 and is expected to generate a net cash flow of $20,000 per year for 10 years. The firm's cost of capital is 10%. What is the net present value (NPV) of the project? a) $61, b) $100, c) $200, d) - $38, Answer: a) $61, Rationale: NPV = sum of discounted cash flows - initial cost = ($20,000/1.1 + $20,000/1.1^2 + ... + $20,000/1.1^10) - $100,000 = $61,
2. A monopolist faces a demand curve given by Q = 100 - 2P, where Q is quantity and P is price. The monopolist's marginal cost is constant at $10. What is the profit- maximizing price and quantity for the monopolist? a) P = $35, Q = 30 b) P = $30, Q = 40 c) P = $25, Q = 50 d) P = $20, Q = 60 Answer: c) P = $25, Q = 50 Rationale: The profit-maximizing condition for a monopolist is to set marginal revenue equal to marginal cost. Marginal revenue is the derivative of total revenue with respect to quantity. Total revenue is given by PQ = (100 - 2Q)Q = 100Q - 2Q^2. Therefore, marginal revenue is 100 - 4Q. Setting marginal revenue equal to marginal

price. The demand curve faced by the manager is perfectly elastic or horizontal.

2. A manager is considering expanding production. Which of the following cost concepts should the manager consider while making the decision? A) Average total cost (ATC) B) Marginal cost (MC) C) Variable cost (VC) D) All of the above Answer: D) All of the above Rationale: In order to make an informed decision about expanding production, a manager should consider various cost concepts. Average total cost (ATC) provides a measure of average cost per unit, marginal cost (MC) provides the cost associated with producing an additional unit, and variable cost (VC) represents costs that vary with the level of production.
3. A manager wants to calculate the profit-maximizing level of output in the short run. Which cost concept should the manager focus on? A) Total cost (TC) B) Average fixed cost (AFC) C) Marginal cost (MC) D) Average variable cost (AVC) Answer: C) Marginal cost (MC) Rationale: In the short run, a manager should focus on

marginal cost (MC) to determine the profit-maximizing level of output. MC represents the additional cost incurred per unit of production and helps the manager determine whether producing an additional unit will increase or decrease profits.

4. When analyzing market demand, managers should consider: A) Individual consumer preferences and behaviors. B) Aggregate consumer preferences and behaviors. C) The impact of advertising and marketing strategies. D) All of the above. Answer: B) Aggregate consumer preferences and behaviors. Rationale: Managers need to analyze aggregate market demand, considering the preferences and behaviors of all consumers in the market. While individual consumer preferences and marketing strategies may influence demand, it is the aggregate demand that should be considered for decision-making purposes.
5. A manager wants to determine the price elasticity of demand for a product. Which of the following scenarios would likely result in a more elastic demand? A) The product is a necessity with few substitutes. B) The product constitutes a small portion of consumers' budgets. C) The product has a long-run price elasticity of - 0.4. D) The product has a short-run price elasticity of - 1.8.

B) Internal rate of return (IRR) C) Payback period D) All of the above Answer: D) All of the above Rationale: When evaluating the financial viability of a project, a manager should consider multiple methods. Net present value (NPV) helps determine the project's profitability, internal rate of return (IRR) assesses the project's rate of return, and payback period evaluates how long it takes to recover the initial investment.

8. When analyzing a firm's cost structure, a manager should focus on the concept of economies of scale. Economies of scale occur when: A) The firm's average total cost (ATC) decreases as output increases. B) The firm's average fixed cost (AFC) decreases as output increases. C) The firm's marginal cost (MC) decreases as output increases. D) The firm's average variable cost (AVC) decreases as output increases. Answer: A) The firm's average total cost (ATC) decreases as output increases. Rationale: Economies of scale refer to a situation where the average total cost (ATC) decreases as output increases. This occurs when a firm can spread its fixed costs over a larger output and benefit from cost savings.

9. A manager wants to implement price discrimination to increase profits. Which of the following conditions must be met for successful price discrimination? A) Different groups of consumers have different price elasticities of demand. B) Consumers can be easily segmented based on their willingness to pay. C) There are barriers preventing consumers from arbitrage. D) All of the above Answer: D) All of the above Rationale: Successful price discrimination relies on different groups of consumers having different price elasticities of demand, the ability to segment consumers based on willingness to pay, and barriers preventing consumers from arbitrage (buying low and selling high). When all of these conditions are met, price discrimination can increase profits.
10. A manager wants to analyze the level of competition in a market. Which of the following market structures has the highest level of competition? A) Perfect competition B) Monopolistic competition C) Oligopoly D) Monopoly Answer: A) Perfect competition Rationale: Perfect competition represents a market

C) Expanding internationally to access new markets. D) Focusing on core competencies to increase competitiveness. Answer: A) Expanding operations by acquiring suppliers or distributors. Rationale: Vertical integration involves expanding operations by acquiring suppliers or distributors in the same industry, either upstream or downstream in the supply chain. This strategy allows the manager to gain control over key components of production, reduce costs, and increase operational efficiencies.

13. A manager is analyzing the effects of macroeconomic factors on the firm's decision-making. Which macroeconomic factor is most likely to impact the firm's discretionary spending? A) Gross domestic product (GDP) B) Interest rates C) Inflation rate D) Government fiscal policy Answer: A) Gross domestic product (GDP) Rationale: Gross domestic product (GDP) represents the total market value of all goods and services produced within a country. Changes in GDP directly impact a firm's sales and overall economic activity, thereby influencing its discretionary spending decisions.
14. A manager wants to evaluate the risk associated with a

particular investment. Which of the following measures would be most appropriate? A) Standard deviation B) Expected value C) Coefficient of variation D) Risk-adjusted return Answer: A) Standard deviation Rationale: Standard deviation measures the variability or dispersion of returns around the average, indicating the risk associated with an investment. A higher standard deviation suggests greater risk, while a lower standard deviation suggests lower risk. C: In a perfectly competitive market, which of the following is true? a) There are many buyers and many sellers b) There are few buyers and many sellers c) There are many buyers and few sellers d) There are few buyers and few sellers Answer: a) There are many buyers and many sellers Rationale: Perfect competition is characterized by a large number of buyers and sellers where no individual firm has the power to influence market prices.

In the short run, a monopolist will maximize profit by producing where: a) Marginal revenue equals marginal cost b) Price equals marginal cost c) Average revenue equals average total cost d) Average revenue equals average variable cost Answer: a) Marginal revenue equals marginal cost Rationale: A monopolist maximizes profit by producing the quantity at which marginal revenue equals marginal cost. Which market structure is characterized by a few interdependent firms? a) Monopoly b) Oligopoly c) Monopolistic competition d) Perfect competition Answer: b) Oligopoly Rationale: Oligopoly is a market structure with a few interdependent firms, each of which is large relative to the size of the market. A firm in monopolistic competition faces a demand curve that is: a) Perfectly elastic b) Perfectly inelastic c) Downward sloping d) Upward sloping Answer: c) Downward sloping

Rationale: In monopolistic competition, firms face a downward-sloping demand curve due to product differentiation. Which of the following is a characteristic of a natural monopoly? a) Many firms producing a homogeneous product b) Economies of scale are absent c) High fixed costs and low marginal costs d) Low barriers to entry Answer: c) High fixed costs and low marginal costs Rationale: Natural monopolies often arise due to high fixed costs and low marginal costs, making it more efficient to have a single firm produce the entire output. If a firm in a perfectly competitive market is making an economic profit in the short run, what will happen in the long run? a) New firms will enter the market, driving down profits b) The firm will continue to make economic profit c) The firm will exit the market d) The market price will increase, leading to higher profits Answer: a) New firms will enter the market, driving down profits Rationale: In the long run, economic profits in a perfectly competitive market will attract new firms, increasing the supply and driving down profits. Which of the following is an example of price

Rationale: Public goods are non-excludable and non- rivalrous, such as national defense, which benefits everyone and cannot be easily withheld from individuals. The price elasticity of demand measures: a) The responsiveness of quantity demanded to changes in price b) The percentage change in quantity demanded given a percentage change in income c) The percentage change in price given a percentage change in quantity demanded d) The responsiveness of supply to changes in price Answer: a) The responsiveness of quantity demanded to changes in price Rationale: Price elasticity of demand measures how much quantity demanded responds to changes in price. Which of the following is a characteristic of a perfectly competitive market? a) Product differentiation b) Barriers to entry c) Price setting by individual firms d) Many buyers and sellers Answer: d) Many buyers and sellers Rationale: Perfectly competitive markets are characterized by many buyers and sellers, homogeneous products, and perfect information. A firm's long-run supply curve in a perfectly competitive market is:

a) Its marginal cost curve above the minimum average variable cost b) Its marginal cost curve above the minimum average total cost c) Equal to the minimum average total cost d) Horizontal at the market price Answer: d) Horizontal at the market price Rationale: In the long run, a perfectly competitive firm's supply curve is horizontal at the market price, reflecting the firm's ability to adjust production in response to price changes.