TAKE HOME MIDTERM EXAMINATION- MANAGERIAL

ECONOMICS
Direction: Please write your answers in a yellow paper.

For multiple choice- Please write the correct letter in CAPITAL FORM. No need to
write the questions.

For graphical analysis-Please draw the diagram and write the effect in equilibrium price
and quantity due to the changes in demand or supply or both.

For case analysis- Please write eligibly your answers.

CONSUMER BEHAVIOR, DEMAND, SUPPLY & MARKET EQUILIBRIUM

Name: ____________________________ Course & Section: __________________

Directions: Each of the questions or incomplete statements below is followed by five

suggested answers or completions. Select the one that is best in each case and write the
correct letter of your answers in the space provided for.

___1. Utility is the

A) benefit or satisfaction that a person gets from the consumption of a good or service
B) measure of how useful a resource is in the production process
C) measure of productivity associated with a good or service
D) economic term for consumption possibilities
E) All of the above
___2. If Ann gets 100 units of utility from reading a book and 500 units of utility from
playing with her cat, we know that Ann
A) does not enjoy reading books
B) does not enjoy playing with her cat
C) prefers reading a book to playing with her cat
D) prefers playing with her cat to reading a book
E) None of the above
___3. As more of a good is consumed, total utility
A) increases
B) decreases
C) remains the same
D) becomes negative and then turns positive
E) All of the above
___4. Marginal utility is equal to which of the following
A) total income divided by the price of the product
B) the change in total utility from consuming one more unit of a good
C) the satisfaction obtained from consuming any number of units of a good
D) none of the above is correct
E) All of the above are correct

Managerial Economics by: Exequiel Mendoza Perez 6

4
___5. The first four dinner rolls Joan consumes have total utility of 15, 27, 37, and 45
respectively. What is the marginal utility of the 4th dinner roll?
A) 124 units of utility
B) 45 units of utility
C) 11.25 units of utility
D) 8 units of utility
E) None of the above is correct
___6. The goal of a consumer is to
A) acquire the largest possible quantity of goods
B) acquire the largest possible variety of goods
C) maximize utility
D) save money
E) All of the above
___7. The utility maximizing rule says that consumers must
A) only allocate the entire available budget
B) only make the marginal utility per dollar spent the same for all goods
C) both allocate the entire budget and make the marginal utility per dollar spent the same
for all goods
D) either allocate the available budget or make the marginal utility per dollar spent the
same
E) None of the above
___8. In a given time period, a person consumes more and more of a good and enjoys
each additional unit less and is willing to pay less for it, because of:
A) diminishing returns
B) diminishing marginal product
C) diminishing marginal utility
D) increasing costs
E) None of the above
___9. If your MU/P for gas is > than your MU/P for food, what should you do in order to
maximize utility?
A) spend less on gas
B) spend more on food
C) both
D) Neither
E) All of the above

Answer the next question(s) based on the table below showing the marginal utility
schedules for product X and product Y for a hypothetical consumer. The price of product
X is $4 and the price of product Y is $2. The income of the consumer is $20.

Managerial Economics by: Exequiel Mendoza Perez 6

5
___10. Refer to the above table. If the consumer buys both product X and product Y,
how much will the consumer buy of each to maximize utility?
A) 4X and 2Y
B) 3X and 4Y
C) 4X and 3Y
D) 5X and 3Y
E) None of the above
___11. Which best expresses the law of diminishing marginal utility?
A) The more of a product is consumed, the smaller is the total utility from the product
B) The less of a product is consumed,the greater is the marginal utility of the product
C) The more of a product is consumed, the greater is the total utility from the product
D) The less of a product consumed, the smaller is marginal utility of the product
E) None of the above
___12. Chris spent his entire income on two goods. At his current consumption, the
marginal utility of Y is 12 and the marginal utility of Z is 4. If the price of Y is $2.00 and
the price of Z is $1, then to what should he do to maximize utility?
A) consume more Y and Z
B) consume more Z and less Y
C) consumer more Y and less Z
D) maintain his consumption
E) None of the above
___13. Which of the following is true if consuming one unit of a good yields 100 utils
and consuming the second unit of the good increases satisfaction by 20 utils?
A) the MU of the 1st unit is 20
B) the MU of the 2nd unit is 80
C) the MU of the 2nd unit is 120
D) the total utility of consuming 2 units is 120
E) None of the above
___14. A consumer makes purchases of anexisting product X such that the marginal
utility is 10 and the price is $5. The consumer also tries a new product Y and at the
current level of consumption it has a marginal utility of 8 and a price of $1. The utility-
maximizing rule suggests that this consumer should:
A) Increase consumption of product X and decrease consumption of product Y.
B) Increase consumption of product X and increase consumption of product Y.
C) Increase consumption of product Y and decrease consumption of product X.
D) Decrease consumption of product Y and decrease consumption of product X.
E) All of the above
___15. Refer to the above table. Suppose that the consumer's income increased from $20
to $30. What would be the utility-maximizing combination of products X and Y?
A) 3X and 3Y
B) 4X and 4Y
C) 5X and 4Y
D) 5X and 5Y
E) None of the above
___16. During a recession, economies experience increased unemployment and a
reduced level of activity. How would a recession be likely to affect the market demand
for new cars?

Managerial Economics by: Exequiel Mendoza Perez 6

6
A) Demand will shift to the right.
B) Demand will shift to the left.
C) Demand will not shift, but the quantity of cars sold per month will decrease.
D) Demand will not shift, but the quantity of cars sold per month will increase.
E) All of the above
___17. Unionized workers may be able to negotiate with management for higher wages
during periods of economic prosperity. Suppose that workers at automobile assembly
plants successfully negotiate a significant increase in their wage package. How would the
new wage contract be likely to affect the market supply of new cars?
A) Supply will shift to the right.
B) Supply will shift to the left.
C) Supply will not shift, but the quantity of cars produced per month will decrease.
D) Supply will not shift, but the quantity of cars produced per month will increase.
E) All of the above
___18. An increase in the demand for a good will cause
A) an increase in equilibrium price and quantity.
B) a decrease in equilibrium price and quantity.
C) an increase in equilibrium price and a decrease in equilibrium quantity.
D) a decrease in equilibrium price and an increase in equilibrium quantity.
E) None of the above
___19. An increase in the supply of a good will cause
A) an increase in equilibrium price and quantity.
B) a decrease in equilibrium price and quantity.
C) an increase in equilibrium price and a decrease in equilibrium quantity.
D) a decrease in equilibrium price and an increase in equilibrium quantity.
E) None of the above
___20. The law of demand states that the quantity of a good demanded varies
A) inversely with its price. B) directly with population.C) directly with income.
D) inversely with the price of substitute goods E) None of the above
___21. Which of the following is consistent with the law of demand?
A) A decrease in the price of a gallon of milk causes a decrease in the quantity of milk
demanded.
B) An increase in the price of a soda causes a decrease in the quantity of soda demanded.
C) An increase in the price of a tape causes an increase in the quantity of tapes
demanded.
D) A decrease in the price of juice causes no change in the quantity of juice demanded.
E) None of the above
___22. A drop in the price of a compact disc shifts the demand curve for prerecorded
tapes leftward. Fromthat you know compact discs and prerecorded tapes are
A) normal goods. B) substitutes.C) inferior goods.D) complements. E) luxury
___23. A substitute is a good
A) of higher quality than another good. B) that is not used in place of another good.
B) that can be used in place of another good. D) of lower quality than another good. E)
None of the above
___24. People buy more of good 1 when the price of good 2 rises. These goods are
A) normal goods.B) complements.C) substitutes.D) inferior goods. E) luxury
___25. Which of the following pairs of goods are most likely substitutes?

Managerial Economics by: Exequiel Mendoza Perez 6

7
A) compact discs and compact disc players B) lettuce and salad dressing
B) cola and lemon lime soda D) peanut butter and gasoline E) None of tha above
___26. A complement is a good
A) used in conjunction with another good.
B) used instead of another good.
C) of lower quality than another good.
D) of higher quality than another good.
E) None of the above
___27. Suppose people buy more of good 1 when the price of good 2 falls. These goods
are A) substitutes.B) inferior.C) normal.D) complements. E. luxury
___28. A change in which of the following alters buying plans for cars but does NOT
shift the demand curve for cars?
A) a 10 percent decrease in the price of car insurance
B) a 20 percent increase in the price of a car
C) a 5 percent increase in people's income
D) an increased preference for walking rather than driving
E) All of the above
___29. Which of the following would NOT shift the demand curve for turkey?
A) a change in tastes for turkey
B) B) a decrease in the price of ham
C) an increase in income
D) a change in the price of a turkey
E) All of the above
___30. Which of the following does NOT shift the supply curve?
A) an increase in the price of the good
B) a fall in the price of a substitute in production
C) a decrease in the wages of labor used in production of the good
D) a technological advance
E) All of the above
____31. Graphical Analysis. Please indicate the effect in Pe and Qe. A new rumor
sweeps the country that eggs are great diet food and they don’t even raise cholesterol
levels. At the same time, advances in chicken husbandry increase the number of eggs that
can be produced. What happens to the price and quantity of eggs? (hint: both supply and
demand are affected)
A) Pe increase, Qe decrease
B) Pe decrease, Qe increase
C) Pe indeterminate, Qe increase
D) Pe increase, Qe indeterminate
E) None of the above is correct
____32. Graphical Analysis. Please indicate the effect in Pe and Qe. Bad weather wreaks
havoc with the tea crops.
A) Pe increase, Qe decrease
B) Pe decrease, Qe increase
C) Pe indeterminate, Qe increase
D) Pe increase, Qe indeterminate
E) None of the above is correct

Managerial Economics by: Exequiel Mendoza Perez 6

8
____33. Graphical Analysis. Please indicate the effect in Pe and Qe. A medical report
implying tea is bad for your health is published.
A) Pe increase, Qe decrease
B) Pe decrease, Qe increase
C) Pe indeterminate, Qe increase
D) Pe decrease, Qe decrease
E) None of the above is correct
____34. Graphical Analysis. Please indicate the effect in Pe and Qe. A technological
innovation lower the cost of producing tea.
A) Pe increase, Qe decrease
B) Pe decrease, Qe increase
C) Pe indeterminate, Qe increase
D) Pe decrease, Qe decrease
E) None of the above is correct
____35. Graphical Analysis. Please indicate the effect in Pe and Qe. Consumer income
falls and good is inferior.
A) Pe increase, Qe decrease
B) Pe decrease, Qe increase
C) Pe increase, Qe increase
D) Pe decrease, Qe decrease
E) None of the above is correct
____36. Graphical Analysis. Please indicate the effect in Pe and Qe. The price of
substitute good (in consumption) increases
A) Pe increase, Qe decrease
B) Pe decrease, Qe increase
C) Pe increase, Qe increase
D) Pe decrease, Qe decrease
E) None of the above is correct
____37. Graphical Analysis. Please indicate the effect in Pe and Qe. The price of inputs
used to produce the good increases.
A) Pe increase, Qe decrease
B) Pe decrease, Qe increase
C) Pe increase, Qe increase
D) Pe decrease, Qe decrease
E) None of the above is correct
_____38. Suppose that the generalized demand function for Good X is Qd = 60- 2Px+
0.01M + 7PR
Where:

Qd = quantity of X Demanded
Px = price of X
M = Average consumer income
PR = price of related good

Suppose that M = P40,000 and PR = P20. What is the demand function for Good X?

Managerial Economics by: Exequiel Mendoza Perez 6

9
A. 60-2Px
B. 160-2Px
C. 600+2Px
D. 60+2Px
E. None of the above.
_____39. Related to Number 28 (Demand Function for Good X), Suppose the supply
Function is Qs = -600 + 10 Px. What is equilibrium price and quantity?
A. Pe= 10; Qe=380
B. Pe= 100; Qe= 400
C. Pe= 95; Qe= 360
D. Pe= 110; Qe= 340
E. None of the above

_____40. From the demand equation, Qd = 12-2P and the supply equation, Qs = 2P,
solve for the equilibrium price and quantity.
A. Pe= 3; Qe= 6
B. Pe= 6; Qe= 3
C. Pe= 3; Qe = 3
D. Pe = 6; Qe= 6
E. None of the above
_____41. Which of the following is correct?
A. Budget lines are linear and upward sloping; indifference curves are downward sloping
and concave to the origin.
B. Budget lines are linear and downward sloping; indifference curves are downward
sloping and concave to the origin.
C. Budget lines are linear and downward sloping; indifference curves are downward
sloping and convex to the origin.
D. Budget lines are downward sloping and convex to the origin; indifference curves are
linear and downward sloping.
_____42. Which is true for indifference curves?
A) Lower indifference curves are preferred to higher ones.
B) Along one I.C., every point represents a constant level of satisfaction.
C) In general, I.C.s are upward sloping.
D) Some I.C.s can cross, if income is very high.
E) I.C.s are bowed inward, because the opportunity cost is increasing.
_____43. Which of the following is true from the following graph?
A) The consumer prefers A to C.
B) The optimal choice is D.
C) The consumer is indifferent between A and D.
D) The optimal choice is B.
E) C is preferred to B.

Managerial Economics by: Exequiel Mendoza Perez 7

0
_____44. Refer to the below table. Suppose that the consumer's income increased from
$20 to $30. The price of product X is $4 and the price of product Y is $2. What would be
the utility-maximizing combination of products X and Y?

A) 3X and 3Y
B) 4X and 4Y
C) 5X and 4Y
D) 5X and 5Y
E) None of the above
_____45. Which of the following statements is not true with regard to the standard
properties of indifference curves?
A. Indifference curves are downward sloping
B. Indifference curves do not cross each other
C. Higher indifference curves are preferred to lower ones
D. Indifference curves are bowed outward
E. All of the above
____46. If your MU/P for gas is > than your MU/P for food, what should you do in order
to maximize utility?
A) spend less on gas
B) spend more on food
C) both
D) Neither
E) All of the above

Managerial Economics by: Exequiel Mendoza Perez 7

1
____47. Indifference curves measure the consumer's willingness to trade one good for
another good while maintaining a constant level of satisfaction
A. True
B. False
C. Either A or B
D. Neither A or B E. Incomplete information
____48. The limit on the consumption bundles that a consumer can afford is known as
A. An indifference curve
B. The marginal rate of substitution
C. The budget constraint
D. The consumption limit
E. All of the above
____49. If income and prices were both to double, the budget line would
A. Shift outward in a parallel fashion
B. Shift inward in a parallel fashion
C. Stay the same
D. Rotate inward
E. Rotate outward
____50. Refer to the diagram below where xy is the relevant budget line and I1, I2, and
I3 are indifference curves. The equilibrium position for the consumer is at:

A. any point on xy.

B. point M.
C. point K.
D. point J
E. None of the above

Managerial Economics by: Exequiel Mendoza Perez 7

2
 Changes in Equilibrium

Name: ____________________________ Course & Section: __________________

1. Coffee: The Philippine Medical Association announces that caffeine in coffee causes
heart attack.
2. National Bookstore’s Books: Management engages in a one-month cut-price book
sale.
3. Rice: Government imports rice from Thailand.
4. Pork: Foot and mouth disease (FMD) hits thousands of pigs resulting in very high
mortality rate.
5. Cigarettes: Taxes on cigarettes are increased from P2.00 to P3.00 per pack.

Many changes are affecting the market for oil. Predict how each of the following
events will affect the equilibrium price and quantity in the market for oil. In each case,
state how the event will affect the supply and demand diagram. Create a sketch of the
diagram if necessary.

6. Cars are becoming more fuel efficient, and therefore get more miles to the gallon

7. The winter is exceptionally cold.

8. A major discovery of new oil is made off the coast of Norway.
9. The economies of some major oil-using nations, like Japan, slow down.
10. A war in the Middle East disrupts oil-pumping schedules.
11. Landlords install additional insulation in buildings.
12. The price of solar energy falls dramatically.
13. Chemical companies invent a new, popular kind of plastic made from oil.

14. Consider the demand for hamburgers. If the price of a substitute good (for example,
hot dogs) increases and the price of a complement good (for example, hamburger buns)
increases, can you tell for sure what will happen to the demand for hamburgers? Why or
why not? Illustrate your answer with a graph.

15. Suppose there is soda tax to curb obesity. What should a reduction in the soda tax do
to the supply of sodas and to the equilibrium price and quantity? Can you show this
graphically? Hint: assume that the soda tax is collected from the sellers.

Managerial Economics by: Exequiel Mendoza Perez 7

3
 Case Analysis in Demand & Supply

Name: ____________________________ Course & Section: __________________

Tools of Analysis: Demand and Supply

The concepts of demand and supply are among the most important in all economics.
They are of course not the only tools of analysis in the economist’s armory, but they
allow us to identify and understand the relevant factors in analyzing many economic
situations. It is assumed at this point that students already have some familiarity with
these concepts, but a brief review is in order here, so that we can then see their
application to a situation that has caused considerable controversy in recent years, the
subject of equal prize money in tennis.

a. Demand

In the economic sense demand refers to the quantities that people are or would be
willing to buy at different prices during a given time period, assuming that other factors
affecting these quantities remain the same. For reasons explained in Chapter 3 on
demand theory, there is generally an inverse relationship between the quantity demanded
and the price charged, and this is customarily shown in the downward-sloping demand
curve, although the relationship can equally be expressed in terms of a function or
equation. The demand relationship is determined by many factors, but consumer tastes
are fundamental. This applies both to products and to the services of people in the labor
market.

b. Supply

In the economic sense supply refers to the quantities that people are or would be
willing to sell at different prices during a given time period, assuming that other factors
affecting these quantities remain the same. When talking about the supply of products it
is often the costs of production that are most important in determining the supply
relationship, and generally there is a direct relationship between the quantity supplied
and the price offered, with more being supplied the higher the price. However, in factor
markets, in particular the labor market, supply is more complex. The availability of
people with the relevant skills, the pleasantness of the work and the opportunity cost
involved are all important factors.

Managerial Economics by: Exequiel Mendoza Perez 7

4
 In order to get a further flavor of what analysis in managerial economics is all about,
it is useful to consider the next case study, where there have been a lot of views expressed
which show a lack of understanding of economic fundamentals.
Case Study Analysis

Case Study : Equal Prize Money in Tennis

A British cabinet minister has now stepped into the debate regarding equal prize money
at Wimbledon, the British Open tennis championships. Patricia Hewitt (no relation to the
men’s winner), the Trade and Industry Secretary, announced that it is ‘simply wrong’
that the winner of the men’s singles should collect £525,000, while the women’s winner
should receive only £486,000, when they had both worked equally hard. The debate
regarding prize money is not new, and has aroused some strong feelings in the last ten
years. The 1996 men’s champion, Richard Krajicek, commented in 1992 that most
women players were ‘fat, lazy pigs’ who deserved to win less. This attracted a storm of
protest from many supporters of women’s tennis, and these supporters and lobbyists have
been successful in gradually reducing the differentials in prize money. Tim Henman, the
British number one player, attracted criticism in 1999 for accusing female players of
being ‘greedy’ in demanding more prize money in ‘Grand Slam’ tournaments. The
situation in 2002 was that in the four ‘Grand Slam’ tournaments the prize money was
equal for men and women at both the US and Australian Opens, but interestingly the
women’s prize money was only half that of the men’s at the French Open.
Let us consider some of the main arguments that have been put forward both for and
against equal prize money:
FOR
1 Women have to train just as long and hard as men.
2 The ball is in play longer in women’s matches, because the game involves more rallies
and less ‘serve and volley’ tactics, according to research by the Women’s Tennis
Association.
3 Female stars are just as popular with the crowds as male players.
4 Unequal pay is an example of unfair discrimination, which in many countries is illegal.
AGAINST
1 Men have to play the best of five sets, while women only play the best of three.
Therefore, men play longer. Research from Stirling University shows that, on this basis,
men earn less. The 1998 men’s singles champion, Pete Sampras, earned £26,270 per
hour, compared with £42,011 per hour received by the women’s champion, Jana
Novotna.

Managerial Economics by: Exequiel Mendoza Perez 7

5
2 Competition at the top of women’s tennis is less stiff, allowing female stars to compete
in the doubles more easily, and win two prizes. The combination of singles and doubles
prizes for women would exceed the singles prize for men.
3 Male players attract bigger crowds.
4 Women are not as good as men.
The last point has also raised argument, since it is difficult to make any objective
evaluation. On a purely objective measure, the top female stars serve nearly as fast as the
top male players, but obviously there are many other factors which make a top tennis
player apart from a fast serve. In a recent television interview John McEnroe, never one
to shy away from controversy, opined that the top female seed at Wimbledon in 2002,
Venus Williams, would only rank about number 400 in the world among male players.
Adding another dimension to the debate is sponsorship income. Anna Kournikova has
never won a major tournament; she is currently ranked number 55 in the world. Her
career total prize winnings amounted to just under £3 million at the end of 2001.
However, it is estimated that she has accumulated around £50 million in sponsorship
income, mainly from Adidas, the sportswear supplier. Although sponsorship income
tends to be directly related to the talent of the player, as reflected in computer rankings,
there are obviously other factors that are relevant.
However, one factor that is important here is that sponsorship income is determined
much more by the market forces of demand and supply than is the amount of prize
money in a tournament. The amount of tournament prize money at Wimbledon is
determined by the management committee of the All England Club. What do the public
make of all this? In a recent television poll by the BBC the viewers calling in were nearly
equally divided: 51 percent thought the men should receive more, 49 percent thought
prize money should be equal.
Questions
1 Do the observations by Patricia Hewitt make any sense in economic terms?
2 How relevant is hard training to determining prize money?
3 How relevant is length of playing time to determining prize money?
4 Why is sponsorship relevant to the prize money debate? Is it a good idea to relate
prize money to sponsorship?
5 Can you suggest any way of using economic forces to determine prize money? What
about having an ‘open’ championship where men play women, with no distinction
between men’s singles and women’s singles

Prepared by:

Managerial Economics by: Exequiel Mendoza Perez 7

6
 Exequiel M. Perez, MBA
CBAPA, Isabela State University

Managerial Economics by: Exequiel Mendoza Perez 7

7