Managerial Economics Quiz
Questions: 16 · 10 minutes
1. Producing one additional unit would generate $55 in additional revenue and $40 in additional cost. Other relevant conditions are unchanged. What does marginal analysis suggest?
Do not produce it because total cost will rise
Remain indifferent because both revenue and cost increase
Produce it only if average total cost is below $40
Produce it because it adds $15 to profit
2. When the price of Product A rises, demand for Product B increases, with other factors held constant. What does this imply?
The products are substitutes with positive cross-price elasticity
Product B is an inferior good
Demand for Product B is price inelastic
The products are complements with negative cross-price elasticity
3. Which situation most directly enables a firm with market power to practice price discrimination successfully?
Charging every buyer the same price regardless of demand
Facing perfectly elastic demand from all customers
Separating customers by willingness to pay while limiting resale
Producing where average fixed cost is minimized
4. At the output where a competitive firm would maximize short-run profit, market price is $18, average variable cost is $14, and average total cost is $24. What should the firm generally do in the short run?
Shut down because price is below average total cost
Raise its price to $24
Continue operating because price covers average variable cost and part of fixed cost
Expand output until price equals average total cost
5. For a firm facing a downward-sloping linear demand curve, how does marginal revenue generally compare with price for additional units sold?
Marginal revenue is below price
Marginal revenue is always equal to price
Marginal revenue is above price
Marginal revenue remains constant as price falls
6. A factory has idle capacity. A special order offers $30 per unit; variable cost is $22 per unit, and allocated fixed cost is $12 per unit. Fixed cost will not change. Ignoring other effects, what is the best decision?
Remain indifferent because fixed costs are already allocated
Reject because the full unit cost is $34
Accept only if the order price exceeds $42
Accept because the order adds $8 per unit toward profit
7. A manager spends an afternoon preparing a sales proposal instead of reviewing a production plan that could have saved the company $2,000. What is the opportunity cost of preparing the proposal?
The value of the production-plan review that was given up
Only the manager's wages for that afternoon
The total revenue expected from the sales proposal
Any money previously spent training the manager
8. A project requires an immediate investment of $100,000. The present value of its expected future cash inflows is $118,000. What is the project's net present value?
Negative $18,000
Positive $18,000
Positive $118,000
Positive $218,000
9. A firm cuts its price by 10%, and quantity demanded rises by 20%. Using percentage changes in absolute value, how should demand be classified?
Perfectly inelastic
Elastic, with an elasticity of about 2
Unit elastic
Inelastic, with an elasticity of about 0.5
10. Two rival firms can choose a high or low price. For each firm, choosing low gives a higher payoff regardless of the rival's choice. What is the Nash equilibrium of this one-period game?
Both choose high because joint profit is greatest
Both choose low because low is each firm's dominant strategy
No equilibrium exists because the firms have conflicting interests
One chooses high and the other is randomly assigned low
11. Consumer income rises by 8%, while demand for a particular product falls by 4%, other things equal. How is the product best classified?
A normal necessity
An inferior good
A normal luxury
A substitute good
12. At its current output, a firm's next unit would add $90 to total revenue and $70 to total cost. Assuming no other strategic effects, what should the firm do?
Expand output because the next unit adds $20 to profit
Keep output unchanged because average cost is unknown
Reduce output because total cost is increasing
Stop production because marginal cost is positive
13. A used-car seller knows about hidden defects that potential buyers cannot readily observe before purchase. Which economic problem does this illustrate most directly?
Diminishing marginal returns in production
Moral hazard caused by behavior after an agreement
A positive consumption externality
Adverse selection caused by pre-transaction information asymmetry
14. After obtaining comprehensive insurance, a business takes fewer precautions against theft because much of the loss would be reimbursed. Which concept best fits this behavior?
Adverse selection
Price discrimination
Moral hazard
Consumer surplus
15. A company's long-run average cost falls as it expands output and adjusts all inputs. Which concept best describes this pattern?
Diminishing marginal utility
Increasing opportunity cost
Diseconomies of scope
Economies of scale
16. A demand model is estimated as Q = 500 − 20P + 5A, where P is price in dollars and A is advertising expenditure in thousands of dollars. How should the price coefficient be interpreted?
A $20 price increase predicts one fewer unit demanded, regardless of advertising
A $1 price increase predicts 500 fewer units demanded
A $1 price increase predicts 20 fewer units demanded, holding advertising constant
A $1 price increase predicts five additional units demanded when advertising rises