Deck 1: The Nature and Scope of Managerial Economics

Question 1

Which of the following areas of study refers to the application of economic theory and the tools of analysis of decision science to examine how an organization can achieve its aims or objectives most efficiently?

A) Managerial economics
B) Microeconomics
C) Macroeconomics
D) Econometrics

Answer 1

Managerial economics

Question 2

Which of the following refers to the study of the economic behavior of individual decision-making units, such as individual consumers, resource owners, and business firms, in a free-enterprise system?

A) Managerial economics
B) Microeconomics
C) Macroeconomics
D) Econometrics

Answer 2

Microeconomics

Question 3

Which of the following refers to the study of the total or aggregate level of output, income, employment, consumption, investment, and prices for the economy viewed as a whole?

A) Managerial economics
B) Microeconomics
C) Macroeconomics
D) Econometrics

Answer 3

Macroeconomics

Question 4

Which of the following refers to the study of the application of statistical tools (particularly regression analysis) to real-world data to estimate the models postulated by economic theory?

A) Managerial economics
B) Microeconomics
C) Macroeconomics
D) Econometrics

Question 5

The modern theory of the firm postulates that the primary objective of managers is to maximize

A) the firm's total revenue.
B) the value of the firm's output.
C) the present value of the firm's expected future profits.
D) All of the above are correct.

Question 6

In a free-enterprise system, profit is socially desirable because it

A) reallocates wealth from small firms to large firms.
B) attracts resources to the most desirable types of production.
C) allows firms to operate at higher levels of cost.
D) permits firms to hire more workers and thereby reduces the unemployment rate.

Question 7

If you invest $100 now and end up with $200 at the end of one year, what is the annual interest rate?

A) 50 percent
B) 100 percent
C) 200 percent
D) None of the above is correct.

Question 8

What is the present value of $1.21 received at the end of two years if the interest rate is 10 percent and compounding is annual?

A) $1.31
B) $1.21
C) $1.10
D) $1.00

Question 9

A firm must choose among three alternative ways to compensate its salaried employees. It can pay them at the end of each week, at the end of every other week (bi-weekly), or at the end of each month. If the annual rate of pay is the same in each case, which compensation system will maximize the value of the firm?

A) Weekly payments
B) Bi-weekly payments
C) Monthly payments
D) It makes no difference because annual pay is the same in every case.

Question 10

Salaried employees of the XYZ Corporation are permitted to choose how they will receive their annual compensation. They can be paid at the end of each week, at the end of every other week (bi-weekly), or at the end of each month. If the annual rate of pay is the same in each case, which compensation system should an employee choose?

A) Weekly payments
B) Bi-weekly payments
C) Monthly payments
D) It makes no difference because annual pay is the same in every case.

Question 11

Which of the following is an implicit cost?

A) Insurance payments
B) Property taxes
C) Interest payments on a loan
D) None of the above is an implicit cost.

Question 12

Fred earns $50,000 business profit per year by selling donuts. He pays $12,000 per year in rent to his Uncle George for the building in which his business is located. If his Uncle George gives him the building, then Fred's

A) business profit will increase by $12,000 per year.
B) economic profit will increase by $12,000 per year.
C) implicit cost will decrease by $12,000 per year.
D) All of the above are correct.

Question 13

George earns $50,000 business profit per year by selling donuts. He pays $12,000 per year in rent to his Uncle Fred for the building in which his business is located. If his Uncle Fred gives him the building, then George's

A) business profit will be unchanged.
B) economic profit will be unchanged.
C) implicit cost will decrease by $12,000 per year.
D) All of the above are correct.

Question 14

Monica quit her $50,000 per year job, purchased a building that was previously rented by the operator of a candy store for $1,500 per month, and used the space to breed and sell tropical fish. In her first year she made a business profit of $60,000. What was her economic profit?

A) Her economic profit was the same as her business profit.
B) $42,000
C) $10,000
D) She had an economic loss of $8,000.

Question 15

Monica quit her $40,000 per year job, purchased a building that was previously rented by the operator of a candy store for $1,500 per month, and used the space to breed and sell tropical fish. In her first year she made a business profit of $60,000. What was her economic profit?

A) Her economic profit was the same as her business profit.
B) $42,000
C) $20,000
D) $2,000

Question 16

Which of the following is an explicit cost to a business firm?

A) The rental value of property owned by the firm
B) The cost of the owner's time
C) The cost of borrowing an amount equal to the value of the capital assets owned by the firm
D) None of the above is an explicit cost.

Question 17

The value of inputs owned and used by a firm is

A) an implicit cost.
B) an explicit cost.
C) subtracted from economic profit to yield business profit.
D) Both A and C are correct.

Question 18

An economic theory is judged primarily on the basis of

A) the correspondence between its assumptions and reality.
B) its ability to accurately predict economic phenomena.
C) the ease with which it can be understood.
D) its normative qualities.

Question 19

The contemporary theory of the firm is based on the assumption that firms make decisions that are intended to

A) maximize sales.
B) minimally satisfy stockholders' goals.
C) maximize profit.
D) maximize input employment levels.

Question 20

Business ethics refers to

A) enforceable laws that govern business behavior.
B) an area of study of little relevance to actual business practices.
C) guidelines that describe appropriate behavior in the environment of business.
D) All of the above are correct.

Question 21

Businesses have responded to the incentive for ethical behavior by

A) establishing codes of ethical behavior for employees.
B) appointing "ethics officers" with responsibility for ensuring that employees behave in an ethical manner.
C) providing training sessions in ethical behavior for employees.
D) All of the above are correct.

Question 22

Which of the following is a question that is uniquely relevant to the subject of business ethics?

A) Should a firm buy foreign products that are made using child labor?
B) Should a firm falsify financial information reported to stockholders?
C) Should a firm collude with its competitors in setting prices?
D) Should a firm attempt to reduce its costs of production in order to compete more effectively?

Question 23

Which of the following is the best definition of managerial economics? Managerial economics is

A) a distinct field of economic theory.
B) a field that applies economic theory and the tools of decision science.
C) a field that combines economic theory and mathematics.
D) None of the above is correct.

Question 24

The value of an economic theory in practice is determined by

A) how accurate the assumptions are.
B) how well the theory can be represented by a graph.
C) how well the theory can predict or explain.
D) how parsimonious the model is.

Question 25

Management decision problems are composed of three elements. Which of the following is not one of them?

A) Profitability
B) Alternatives
C) Constraints
D) Objectives

Question 26

Which of the following areas of economic theory is the single most important element of managerial economics?

A) Mathematical economics
B) Econometrics
C) Macroeconomics
D) Microeconomics

Question 27

Which of the following is defined as the study of the aggregate economy studied as a whole?

A) Mathematical economics
B) Econometrics
C) Macroeconomics
D) Microeconomics

Question 28

Which of the following is the discipline that studies the use of statistical tools to estimate economic models?

A) Mathematical economics
B) Econometrics
C) Macroeconomics
D) Microeconomics

Question 29

Firms do not continue to grow without limit because of

A) managerial limitations.
B) government regulation.
C) income taxes.
D) antitrust laws.

Question 30

The modern theory of the firm holds that firms behave in a way that is designed to maximize

A) profit.
B) the value of the firm.
C) monopoly power.
D) total revenue.

Question 31

Which of the following functional areas of business has primary responsibility for a firm's total revenue?

A) Accounting
B) Finance
C) Marketing
D) Personnel

Question 32

Which of the following is an example of a resource constraint?

A) Pollution control laws
B) Inadequate demand
C) Excessive production costs
D) Inadequate financial capital

Question 33

The last stage in the five-step decision process described in the text is to

A) determine the objective.
B) select the best possible solution.
C) implement the decision.
D) explain the decision to managers.

Question 34

The first stage in the five-step decision process described in the text is to

A) define the problem.
B) select the best possible solution.
C) determine the objective.
D) identify possible solutions.

Question 35

The tendency for managers to operate a firm in a way that maximizes their personal utility rather than the firm's profits is referred to as the

A) consumer utility incentive.
B) principal-agent problem.
C) hidden agenda scenario.
D) Modigliani hypothesis.

Question 36

By tying a manager's compensation to the performance of the firm relative to that of its competitors, corporate stockholders and directors create incentives that tend to resolve the

A) possibility of bankruptcy.
B) hidden agenda scenario.
C) principal-agent problem.
D) firm's opportunity costs.

Question 37

The globalization of business is reflected in all of the following except

A) the international convergence of consumer tastes.
B) the increase in barriers to international trade.
C) the emphasis on global marketing-management training.
D) increasing domestic competition from foreign producers.

Question 38

Which of the following is not a result of the spread of information technology?

A) More rapid deliveries of products to consumers
B) Reduced inventories
C) Reduced productivity of workers
D) Reduced need for middle management

Question 39

Which of the alternatives to the modern theory of the firm holds that managers attempt to meet some goal that is defined in terms of a specified level of sales, profits, growth, or market share?

A) Sales maximization model
B) Management utility maximization model
C) Satisficing model
D) Profit maximization model

Question 40

Business profit is equal to total revenue minus

A) economic costs.
B) explicit costs.
C) implicit costs.
D) managerial costs.

Question 41

Which of the following is an example of an implicit cost?

A) Dividends paid out to stockholders
B) The uncompensated services of the spouse of a firm's owner
C) Payments made to workers who are unproductive
D) All of the above are implicit costs.

Question 42

Implicit cost is equal to

A) business profit minus economic profit.
B) business profit plus economic profit.
C) economic profit minus business profit.
D) economic profit minus explicit cost.

Question 43

Which theory of profit holds that profit will be higher in industries characterized by a high degree of variability in their revenues or their costs?

A) Risk-bearing theory
B) Frictional theory
C) Monopoly theory
D) Innovation theory

Question 44

Which theory of profit holds that profit will be higher in industries where firms in the industry are able to prevent other firms from entering the industry?

A) Risk-bearing theory
B) Frictional theory
C) Monopoly theory
D) Managerial efficiency theory

Question 45

Which theory of profit holds that a firm's profits can differ from zero only in the short run?

A) Risk-bearing theory
B) Frictional theory
C) Monopoly theory
D) Managerial efficiency theory

Question 46

Which theory of profit views profit as a reward for introducing a new product or technique?

A) Risk-bearing theory
B) Frictional theory
C) Monopoly theory
D) Innovation theory

Question 47

Which theory of profit views profit as a firm's reward for keeping costs below or revenues above the levels experienced by other firms in the industry?

A) Risk-bearing theory
B) Frictional theory
C) Innovation theory
D) Managerial efficiency theory

Question 48

What social function is served by profits in a free-enterprise system?

A) Taxes on profits support government programs.
B) They provide an incentive for the reallocation of resources.
C) Profits allow individuals to accumulate wealth and engage in capital investment.
D) Profits result in higher levels of employment.

Question 49

Business ethics refers to any behavior by businesses that may

A) be illegal.
B) violate social or moral standards.
C) result in the maximization of profits.
D) All of the above.

Question 50

Businesses have responded to incentives for ethical behavior by doing all of the following except

A) lobbying for the abolition of laws that require ethical behavior.
B) appointing "ethics officers" with responsibility for ensuring that employees behave in an ethical manner.
C) providing training sessions in ethical behavior for employees.
D) establishing codes of ethical behavior for employees.

Question 51

Which of the following is a question that is uniquely relevant to the subject of business ethics?

A) Should a firm make false and slanderous statements about its competitor's products?
B) Should a firm attempt to conceal evidence of the harmful effects of its products on the health of consumers?
C) Should a firm engage in illegal practices?
D) Should a firm use a production method in foreign countries that is banned in its home country?

Question 52

In the XXI century, a manager has to also be able to address a number of new challenges such as

A) Risk and uncertainty of terrorism
B) Slower economic growth
C) Increased frequency of economic crises
D) All of the above

Question 53

Risk and uncertainty associated with terrorism have caused all except

A) Redirected resources from directly productive activities
B) Caused security and insurance costs to increase
C) In a way created a "tariff" on many business activities
D) Reversed the process of globalization

Question 54

Since 2001, several developments caused the process of globalization to slowdown. These include all but

A) Increased costs of security and insurance due to risks and uncertainty of terrorism
B) Financial crises and the impact they have on domestic economic policy and trade protectionism
C) Cyber attacks
D) Fragmentation of production globally

Question 55

Globalization has caused all except

A) Increased dependency between various economies
B) Strengthened economic growth and reduced the possibility of recessions spreading from one economy to another
C) Allowed business to access input markets outside of their home countries
D) Allowed business to access output markets outside of their home countries

Question 56

Which of the following does a manager need to consider when making a business decision?

A) Rent, utilities and labor costs
B) Costs of supplies and materials
C) Opportunity cost of firm's property
D) All of the above

Question 57

Which of the following is NOT a functional area of business administration?

A) Accounting
B) Finance
C) Transportation
D) Human Resources

Question 58

What constraints do firms usually face?

A) Legal
B) Resource
C) Managerial
D) All of the above

Question 59

Value of the firm is given by

A) present value of all expected future profits
B) the expected future revenues and costs
C) firm's ability to increase market share in the future
D) total sales and market share

Question 60

Which of the following is a threat to a firm due to the use of the Internet

A) Decrease in productivity
B) Cyber espionage
C) Increase in financial errors
D) None of the above

Question 61

Which of the following is NOT a part of the five steps in the decision-making process?

A) Define the problem
B) Identify competitors
C) Select the best possible solution
D) Implement the decision

Question 62

Which of the following has the highest net present value if the discount rate is 10%?

A) $1,000 now
B) $1,100 due in 1 year
C) $1,210 due in 2 years
D) They are all equal in net present value

Question 63

Which of the following has the highest net present value if the discount rate is 5%?

A) $500 now
B) $600 due in 4 years
C) $550 due in 2 years
D) They are all equal in net present value

Question 64

You will receive $1,000 payment in 1 year. What is its net present value assuming 5% discount rate?

A) 992
B) 952
C) 912
D) 852

Question 65

What is opportunity cost also known as?

A) Accounting cost
B) Business cost
C) Explicit cost
D) Implicit cost

Question 66

According to managerial efficiency theory, why even the efficient firms tend to earn only a normal return in the long run?

A) Costs of supplies increase in the long run
B) Efficient managers demand higher salaries
C) Efficient managers lose efficiency in the long run
D) All of the above

Question 67

The single most important element in managerial economics is the microeconomic theory of the firm.

Question 68

Management decision problems are not encountered by government agencies or nonprofit organizations.

Question 69

The economic theory of the firm assumes that businesses attempt to maximize their contribution to social welfare.

Question 70

Firms exist because they facilitate the efficient organization of factors of production.

Question 71

The value of a firm is equal to the sum of all future nominal profits that will be generated by the firm.

Question 72

If there was no inflation, the value of a dollar received now would be greater than the value of a dollar received a year from now.

Question 73

The value of a firm will increase if there is a reduction in the uncertainty associated with the firm's cash flows.

Question 74

An increase in the uncertainty associated with a firm's cash flows will cause a decrease in the discount rate that is applied to the valuation of the firm.

Question 75

The firm, as an organizational structure, exists in order to reduce transactions costs.

Question 76

Firms purchase goods and services from other firms instead of producing the goods and services internally because it will reduce transaction costs.

Question 77

The principal-agent problem can occur when the person who manages a firm is not the owner of the firm.

Question 78

Satisficing refers to the fact that profit maximization by corporate managers is a way of satisfying stockholders.

Question 79

Alternative theories of the firm have proven to be more satisfactory than the theory of profit maximization.

Question 80

Business profit is generally greater than economic profit.