Deck 1: The Nature and Scope of Managerial Economics, Optimization Techniques and New Management Tools

Question 1

marginal benefit of pollution is equal to the marginal cost of pollution.

Answer 1

True

Question 2

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

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

Answer 2

$1.00

Question 3

The economic term for the costs associated with negotiating and enforcing a contract is

A) opportunity costs.
B) real costs.
C) functional costs.
D) transaction costs.

Answer 3

transaction costs.

Question 4

At a price of $299.95, the manufacturer of a portable gas?powered generator is willing to produce 19,000 units per quarter. At a price of $349.95, it is likely that the manufacturer will be willing to produce

A) more than 19,000 units per quarter.
B) 19,000 units per quarter.
C) less than 19,000 units per quarter.
D) It is impossible to predict the effect of a higher price on the number of units of a product that a firm will be willing to produce.

Question 5

If a computer software company introduces a new program and finds that orders from wholesalers far exceed the number of units that are being produced,

A) there is an excess supply and price can be expected to decrease.
B) there is an excess supply and price can be expected to increase.
C) there is an excess demand and price can be expected to decrease.
D) there is an excess demand and price can be expected to increase.

Question 6

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.

Question 7

A theoretical model attempts to identify every possible determinant of an event.

Question 8

Management decision problems typically involve objectives and constraints.

Question 9

The ultimate test of the value of an economic theory is whether it is based on reasonable assumptions.

Question 10

Mathematical economics involves the application of statistical tools to estimate economic models.

Question 11

The functional areas of business administration are largely irrelevant to the study of managerial economics.

Question 12

Most of the goods and services in the United States are produced by government and the rest are produced by firms and not-for-profit organizations.

Question 13

The function of a firm is to purchase resources and then to transform them into goods and services and offer them for sale.

Question 14

The concept of the circular flow of economic activity illustrates the point that all economic activities are interdependent.

Question 15

The theory of the firm holds that the primary goal of a firm is to maximize the discounted present value of the positive difference between the firm's total revenue and the firm's total cost or to minimize the present value of the negative difference between the firm's total revenue and total cost.

Question 16

Profit is a constraint on the operation of a firm.

Question 17

The value of a firm under constrained optimization is generally below what it would be under unconstrained optimization.

Question 18

Transaction cost refer to the price paid for a good or service.

Question 19

The costs of negotiating and enforcing contracts are transaction costs.

Question 20

Firms typically provide employees with a list of all possible forms of unethical behavior.

Question 21

The Internet has had very little impact on the way that business is conducted.

Question 22

Before Sarah quit her job as a carpenter, she was earning $35,000 per year. She rented a building for $12,000 per year and opened a cabinet shop. She spends $148,000 per year for labor, materials, utilities, and advertising.
(i) How much revenue will the business have to earn in order to break even in terms of business profit?
(ii) How much revenue will the business have to earn in order to break even in economic terms?
(iii) Suppose that Sarah buys the building. Now how much will the business have to earn in order to break even in economic terms?

Question 23

Before Sam quit his job as a hairdresser, he was earning $34,000 per year. He rented an office for $18,000 per year and opened a framing shop. He spends $88,000 per year for labor, materials, utilities, and advertising.
(i) How much revenue will the business have to earn in order to break even in terms of business profit?
(ii) How much revenue will the business have to earn in order to break even in economic terms?
(iii) Suppose that Sam buys the building. How will this influence the amount that the business will have to earn in order to break even in economic terms? In accounting terms?