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Eight multiple-choice questions with rationales related to managerial economics. The questions cover topics such as net present value, monopolies, market demand, cost structure, financial evaluation methods, macroeconomic factors, and perfect competition. The rationales provide step-by-step explanations of how to arrive at the correct answer for each question. useful for students studying managerial economics or for anyone interested in testing their knowledge of the subject.
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price. The demand curve faced by the manager is perfectly elastic or horizontal.
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.
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.
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.
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.