BAM 040: Managerial Economics

Teachers’ Guide Module #26

Name:_____________________________________________________________ Permit number:

_ _______
Section: ____________ Date:_______________
Schedule:_____________________________________

THIRD PERIODICAL EXAMINATION Score:

___________
Multiple Choice (1 pt. each)
Direction: Write the letter of your answer on the space provided before the given number. Use CAPITAL
LETTERS ONLY.

1. In broad terms the difference between microeconomics and macroeconomics is that

A. microeconomics studies the effects of government taxes on the national unemployment
rate.
B. macroeconomics studies the effects of government regulation and taxes on the price of
individual goods and services whereas microeconomics does not.
C. they use different sets of tools and ideas.
D. microeconomics studies decisions of individual people and firms and macroeconomics
studies the entire national economy.

2. Which of the following is incorrect?

A. Accounting profits generally overstate economic profits.
B. Accounting profits do not take opportunity cost into account.
C. Economic costs include not only the accounting costs but also the opportunity costs of the
resources used in production.
D. Managers should only be interested in accounting profits.

3. According to the five forces framework, sustainable industry profits depend upon:
A. industry entry conditions.
B. the power of input suppliers.
C. the degree of industry rivalry.
D. All of the statements associated with this question are correct.

4. Porter’s Value chain is essentially a tool for

A. advising firms on how to price their products.
B. diagnosing and enhancing sources of competitive advantage within an organisation.
C. calculating what a firm is worth.
D. identifying the competitive forces within an industry.

5. A demand curve is the

A. curve that relates income with quantity demanded.
B. upward-sloping line relating price with quantity supplied.
C. downward-sloping line relating the price of the good with the quantity demanded.
D. None of the above answers is correct.

6. If good A is an inferior good, an increase in income leads to:

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 BAM 040: Managerial Economics
Teachers’ Guide Module #26

Name:_____________________________________________________________ Permit number:

_ _______
Section: ____________ Date:_______________
Schedule:_____________________________________

A. a decrease in the demand for good B.

B. a decrease in the demand for good A.
C. an increase in the demand for good A.
D. no change in the quantity demanded for good A.

7. Consumer surplus is:

A. the value consumers get from a supplier.
B. the value consumers do not pay because of a discount by a supplier.
C. the value consumers get from a good but do not pay for.
D. equal to the amount consumers pay for a good.

8. If the price of good X becomes lower, then the level of consumer surplus becomes
A. lower.
B. higher.
C. unchanged.
D. lower in the short run but higher in the long run.

9. Consider a market characterized by the following inverse demand and supply functions: PX = 10
− 2QX and PX = 2 + 2QX. Compute the equilibrium price and quantity in this market.
A. $24 and 24 units, respectively C. $2 and 6 units, respectively
B. $4 and 4 units, respectively D. $6 and 2 units, respectively

10. Suppose market demand and supply are given by Qd = 100 − 2P and Qs = 5 + 3P. If a price
ceiling of $15 is imposed:
A. there will be a surplus of 40 units.
B. there will be neither a surplus nor a shortage.
C. there will be a shortage of 40 units.
D. there will be a shortage of 20 units.

11. If apples have an own price elasticity of −1.2 we know the demand is:
A. unitary. C. elastic.
B. indeterminate. D. inelastic.

12. If quantity demanded for sneakers falls by 10 percent when price increases 25 percent, we know
that the absolute value of the own price elasticity of sneakers is:
A. 2.5. C. 2.0.
B. 0.4. D. 0.27

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 BAM 040: Managerial Economics
Teachers’ Guide Module #26

Name:_____________________________________________________________ Permit number:

_ _______
Section: ____________ Date:_______________
Schedule:_____________________________________

13. The price elasticity of demand is −2.0 for a certain firm's product. If the firm raises price, the firm
manager can expect total revenue to:
A. decrease.
B. increase.
C. remain constant.
D. either increase or remain constant, depending upon the size of the price increase.

14. If the cross-price elasticity between goods X and Y is positive, we know the goods are:
A. inferior goods. C. inelastic.
B. complements. D. substitutes.

15. The cross-price elasticity of demand between goods X and Y is −3.5. If the price of X decreases
by 7 percent, the quantity demanded of Y will:
A. decrease by 24.5 percent. C. increase by 24.5 percent.
B. decrease by 2.45 percent. D. increase by 2.45 percent.

16. An income elasticity less than zero tells us that the good is:
A. a normal good. C. an inferior good.
B. a Giffen good. D. an inelastic good.

17. How does a decrease in the price of good X affect the market rate of substitution between goods
X and Y?
A. It increases.
B. It decreases.
C. It remains unchanged.
D. Indeterminable without more information.

18. The difference between a price decrease and an increase in income is that
A. A price decrease does not affect the consumption of other goods, while an increase in income
does.
B. An increase in income does not affect the slope of the budget line, while a decrease in price does
change the slope.
C. A price decrease decreases real income, while an increase in income increases real income.
D. A price decrease leaves real income unchanged, while an increase in income increases real
income.

19. If you were running an advertising campaign for designer men's suits, you should target families
with:
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 BAM 040: Managerial Economics
Teachers’ Guide Module #26

Name:_____________________________________________________________ Permit number:

_ _______
Section: ____________ Date:_______________
Schedule:_____________________________________

A. lower incomes. C. poor taste in clothing.

B. higher incomes. D. similar tastes and preferences.

20. Consumers adjust their purchasing behavior so that:

A. they purchase as many scarce resources as possible.
B. marginal rate of substitution is maximized.
C. marginal rate of substitution is minimized.
D. the ratio of prices they pay equals their marginal rate of substitution.

21. As long as the principle of diminishing marginal utility is operating, any increased consumption of
a good
a. lowers total utility
b. produces negative total utility
c. lowers marginal utility and, therefore total utility
d. lowers marginal utility but may raise total utility

22. Among all the combinations of goods attainable by a consumer, the one that maximizes total
utility is the one that
a. maximizes the marginal utilities per dollar of each good.
b. maximizes the marginal utilities per pound of each good.
c. equates the marginal utilities per dollar of each good
d. equates the marginal utilities per pound of each good

23. The property that implies that indifference curves are convex to the origin is:
A. more is better. C. transitivity.
B. completeness. D. diminishing marginal rate of substitution.

24. Along the same indifference curve, MRS is ________ as more of one good is obtained.
A. constant C. decreasing
B. increasing D. varying irregularly

25. Whenever an isoquant exhibits a diminishing marginal rate of technical substitution, the
corresponding isoquants are:
A. convex to the origin. C. L-shaped
B. concave to the origin. D. linear.

26. The costs of production include:

A. the costs that appear on the income statements.
B. the opportunity costs foregone by producing a given product.
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 BAM 040: Managerial Economics
Teachers’ Guide Module #26

Name:_____________________________________________________________ Permit number:

_ _______
Section: ____________ Date:_______________
Schedule:_____________________________________

C. accounting costs.
D. accounting costs and opportunity costs.

27. For given input prices, isocosts farther from the origin are associated with:
A. lower costs. C. higher costs.
B. the same costs. D. initially lower, then higher costs.

28. Average fixed cost:

A. initially declines, reaches a minimum, and then begins to increase as output increases.
B. increases continuously as output increases.
C. declines continuously as output is expanded.
D. keeps constant as output is expanded.

29. In the short run, the marginal cost curve crosses the average total cost curve at:
A. a point just below the average fixed cost curve.
B. the minimum point of the average total cost curve.
C. the maximum point of the average total cost curve.
D. the point where the average total cost curve and average variable cost curve intersect.

30. Economies of scale exist whenever long-run average costs:

A. increase as output is increased.
B. decrease as output is increased.
C. remain constant as output is increased.
D. None of the preceding statements is correct.

31. Suppose the long-run average cost curve is U-shaped. When LRAC is in the increasing stage,
there exist:
A. economies of scope. C. economies of scale.
B. diseconomies of scope. D. diseconomies of scale.

32. In a perfectly competitive market, the process of entry or exit ends when
A. firms are operating with excess capacity.
B. firms are making zero economic profit.
C. firms experience decreasing marginal revenue.
D. price is equal to marginal cost.

33. One of the sources of monopoly power for a monopoly may be:
A. diseconomies of scale. C. patents.
B. differentiated products. D. free entry and exit.

34. In which of the following industries do firms set prices?

a. competitive markets, but not monopoly markets
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 BAM 040: Managerial Economics
Teachers’ Guide Module #26

Name:_____________________________________________________________ Permit number:

_ _______
Section: ____________ Date:_______________
Schedule:_____________________________________

b. monopoly markets, but not competitive markets

c. competitive and monopoly markets
d. neither competitive nor monopoly markets

35. Which of the following market structures would you expect to yield the greatest product variety?
A. Monopoly C. Bertrand oligopoly
B. Monopolistic competition D. Perfect competition

36. Which of the following is a correct representation of the profit maximization condition for firms
operating under perfect competition?
A. P = MR C. P = ATC + MR
B. MC > MR D. MR = MC + ATC

37. In the long run, perfectly competitive firms produce a level of output such that:
A. P = MC. C. P = MC and P = minimum of AC.
B. P = minimum of AC. D. None of the preceding answers is correct.

38. Cartels are often short-lived because

a. laws often prohibit explicit collusive agreements among competitors.
b. self-interest often conflicts with cooperation.
c. it is difficult to enforce agreements reached by cartels.
d. All of the above are correct.

39. Which of the following is NOT a pure public good?

A. Clean air
B. National defense
C. Telephones
D. All of the statements associated with this question are pure public goods.

40. When firms have an incentive to exit a competitive market, their exit will
a. necessarily raise the costs of firms that remain
in the market.
b. lower market price.
c. reduce demand for the product.
d. raise profits for firms that remain in the market.

41. As the degree of product differentiation increases among the products sold in a monopolistically
competitive
industry, which of the following occurs?
a. The cost of production falls.
b. The amount of marketing expenditures decreases for each firm.
c. The demand curve for each seller's product becomes more horizontal.
d. Each seller's demand becomes more inelastic
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 BAM 040: Managerial Economics
Teachers’ Guide Module #26

Name:_____________________________________________________________ Permit number:

_ _______
Section: ____________ Date:_______________
Schedule:_____________________________________

42. Recently in a small city, building contractors lobbied the city council to pass a law requiring all
people
working on residential dwellings be licensed by the city. Why would the contractors lobby for this
requirement?
a. to reduce the cost of building dwellings
b. There is no good explanation for this type of lobbying.
c. to guarantee that work on dwellings is of high quality
d. to create a legal barrier to entry

43. The presence of government in the market leads to:

A. benefits at no cost to society.
B. rent seeking.
C. externalities.
D. adverse selection.

44. Which of the following explains why big business typically spends more on rent-seeking activities
than consumers?
A. Lobbying is a public good to consumers.
B. Lobbying is a public good to businesses.
C. Labor unions in the involved firms.
D. Lobbying is a public good to businesses and labor unions in the involved firms.

45. Rent seeking:

A. involves resources paid to politicians to enhance one group at the expense of another.
B. results in less monopoly power.
C. results in externalities.
D. None of the statements are correct.

46. In the absence of price regulation, a monopolist:

A. charges a price below MR.
B. charges a price above MC.
C. charges a price equal to MR.
D. charges a price above MC and equal to MR.

47. If the absolute value of the own price elasticity of steak is 0.4, a decrease in price will lead to:
A. a reduction in total revenue.
B. an increase in total revenue.
C. no change in total revenue.
D. None of the preceding statements is correct.

48. Demand is more inelastic in the short term because consumers:

A. are impatient.
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 BAM 040: Managerial Economics
Teachers’ Guide Module #26

Name:_____________________________________________________________ Permit number:

_ _______
Section: ____________ Date:_______________
Schedule:_____________________________________

B. have no time to find available substitutes.

C. are present-oriented.
D. None of the preceding statements is correct.

49. If a consumer's income decreases, what will happen to the budget line?
A. It will shift outward.
B. It will become steeper.
C. It will become flatter.
D. It will shift inward.

50. Some individuals choose to undertake risky prospects while others choose safer ones because
they have different:
A. degrees of transitivity.
B. marginal rates of substitution between risk and reward.
C. income elasticities.
D. marginal utilities.

51. Suppose the production function is given by Q = 3K + 4L. What is the average product of capital
when 5 units of capital and 10 units of labor are employed?
A. 3
B. 4
C. 11
D. 45

52. If a firm's production function is Leontief and the wage rate goes up, the:
A. firm must use more labor in order to minimize the cost of producing a given level of output.
B. firm must use more capital in order to minimize the cost of producing a given level of output.
C. firm must use less labor in order to minimize the cost of producing a given level of output.
D. cost minimizing combination of capital and labor does not change.

53. Isoquants are normally drawn with a convex shape because:

A. inputs are perfectly substitutable.
B. inputs are perfectly complementary.
C. inputs are not perfectly substitutable.
D. inputs are not perfectly complementary.

54. In order to minimize the cost of producing a given level of output, a firm manager should use
more inputs when:
A. that input’s price rises.
B. that input’s price falls.
C. that input’s price remains the same.
D. the prices of other inputs fall.

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 BAM 040: Managerial Economics
Teachers’ Guide Module #26

Name:_____________________________________________________________ Permit number:

_ _______
Section: ____________ Date:_______________
Schedule:_____________________________________

55. Which cost measures the pollution cost to society?

A. Internal cost
B. External cost
C. Social cost
D. External cost and social cost

56. Which of the following statements is NOT true in the presence of externalities?
A. Social marginal cost equals the sum of internal and external marginal costs.
B. A competitive industry generally produces more than a monopoly.
C. A competitive industry always produces more than the socially efficient level of output.
D. A monopoly always produces more than the socially efficient level of output.

57. If a firm has been proven liable for a false ad, it has to:
A. terminate the false ad.
B. recall any product with the false claim on it.
C. compensate more than the damage it has caused.
D. All of the statements associated with this question are correct.

58. As additional consumers obtain the benefits of a pure public good, such as national defense, the
benefits to the existing consumers will:
A. decrease.
B. increase.
C. stay the same.
D. increase in the short run, but decrease in the long run.

59. In producing the efficient amount of a public good, government should take into account:
A. only the demand from high-demand consumers.
B. only the demand from low-demand consumers.
C. the vertical sum of all individual inverse demand curves.
D. the horizontal sum of all individual inverse demand curves.

60. The main purpose of antitrust policy is to:

A. reduce market power.
B. control negative externalities.
C. help make information easily obtainable for producers and consumers.
D. All of the statements associated with this question are correct.

“The longest and toughest journey is the most rewarding.”