Question 1

Compensatory profit theory describes above-normal profits due to:&#10;A)barriers to entry that limit competition.&#10;B)anti-competitive practices.&#10;C)efficient operations.&#10;D)unanticipated changes in product demand or cost conditions.

Accepted Answer

C

Question 2

Above-normal profits that arise following successful invention or modernization are called:&#10;A)monopoly profits.&#10;B)innovation profits.&#10;C)frictional profits.&#10;D)compensatory profits.

Accepted Answer

Above-normal profits that arise following successful invention or modernization are called innovation profits. Monopoly profits refer to profits obtained by the single seller due to the absence of competition. Frictional profits refer to profits obtained from short-term price differentials between markets, and compensatory profits refer to profits attained by bearing the risk of business. Above-normal profits that arise following successful invention or modernization are called innovation profits. Monopoly profits arise from being the only supplier in a market and are not necessarily tied to innovation. Frictional profits are temporary profits that arise due to market inefficiencies or information asymmetry. Compensatory profits aim to compensate a firm for the risks it takes on in starting or growing its business but do not necessarily reflect the success of innovation.

Question 3

Satisficing behaviour is most common:&#10;A)in vigorously competitive markets.&#10;B)when institutional shareholders are vigilant.&#10;C)when economic profits are low.&#10;D)in markets sheltered from competition.

Accepted Answer

Satisficing behaviour is most common in markets that are sheltered from competition. In such markets, firms may be content with meeting only the minimum requirements for profitability, as they may not face pressure to continually improve performance from competitors or stakeholders. Satisficing behaviour is most commonly seen in markets where there is little competition, allowing firms to focus on meeting a satisfactory level of performance rather than striving for maximum profit.

Question 4

Managerial economics:&#10;A)is not applicable to the not-for-profit sector.&#10;B)helps managers identify choice alternatives.&#10;C)helps managers identify organization goals.&#10;D)cannot be used to identify the appropriate scale of operation.

Accepted Answer

Managerial economics helps managers identify choice alternatives by analyzing economic data and making informed decisions based on that analysis. It also provides a framework for assessing and comparing different strategies and their potential outcomes. While managerial economics is often applied in the for-profit sector, it can also be useful in the not-for-profit sector to help organizations make efficient use of their resources to achieve their goals. Additionally, managerial economics can be used to determine the appropriate scale of operation by analyzing data on fixed and variable costs, revenue potential, and market demand. Managerial economics helps managers identify various choice alternatives and their consequences. It is a tool that aids decision-making and enables managers to select the best course of action to achieve the organization's goals. Option A is incorrect because while not-for-profit sector's motive is different, managerial economics can still be applied to it. Option C is incorrect because identifying organization goals is beyond the scope of managerial economics. Option D is incorrect because identifying the appropriate scale of operation is one of the key applications of managerial economics.

Question 5

Holding all else equal, economic profits rise with an increase in:&#10;A)prices.&#10;B)owner-supplied labour.&#10;C)owner-supplied capital.&#10;D)interest rates.

Accepted Answer

Holding all else equal, economic profits increase as prices rise because the revenue generated from selling goods or services increases. Owner-supplied labor and capital may reduce costs, but they do not necessarily increase revenue, and interest rates affect costs of borrowing and investing, but not necessarily revenue. Holding all else equal, an increase in prices will lead to an increase in revenue, which will increase economic profits. Owner-supplied labor and capital may reduce costs, but they do not necessarily increase revenue. Interest rates may have an impact on the cost of capital for the business, but they do not necessarily increase revenue.

Question 6

Interest payments are an:&#10;A)explicit cost.&#10;B)economic rent.&#10;C)entrepreneurial profit.&#10;D)implicit cost.

Accepted Answer

Interest payments are considered an explicit cost because they are direct, out-of-pocket payments made by a business to cover the costs of borrowing or using someone else's money.

Question 7

Unconstrained value-maximizing behaviour does not include consideration of:&#10;A)the costs of owner-supplied inputs.&#10;B)social benefits.&#10;C)information costs.&#10;D)explicit costs.

Accepted Answer

Unconstrained value-maximizing behaviour only takes into account maximizing one's own profits or benefits, without considering any external factors such as social benefits or costs, information costs, or the cost of inputs provided by the owner. Unconstrained value-maximizing behaviour only considers maximizing individual benefits and does not take into account social benefits, which are externalities that affect others in society. Therefore, option B - social benefits - is not considered in unconstrained value-maximizing behaviour. The other options listed (A, C, and D) are all factors that could be taken into account in the decision-making process.

Question 8

Holding all else equal, the value of the firm rises with an increase in:&#10;A)wages.&#10;B)interest rates.&#10;C)prices.&#10;D)risk.

Accepted Answer

An increase in prices typically leads to an increase in revenue, which ultimately results in an increase in the value of the firm. An increase in prices means the firm can sell its products or services for more, resulting in higher revenue and potentially higher profits. This would lead to an increase in the value of the firm.

Question 9

Value maximization involves the optimization of:&#10;A)business profits.&#10;B)the present value of the firm's expected future net cash flows.&#10;C)economic profits.&#10;D)social welfare.

Accepted Answer

Value maximization involves the optimization of the present value of the firm's expected future net cash flows. This means that the focus is not just on short-term profits but on the long-term value of the firm. Economic profits and social welfare may be considered in the decision-making process, but the primary objective is to maximize the value of the firm. Therefore, option B is the correct answer. Value maximization involves optimizing the present value of the firm's expected future net cash flows. This means that the goal is to maximize the overall long-term value of the firm, including not only profits but also various other factors such as investment in research and development, social and environmental responsibility, etc. Economic profits (where total revenue is greater than explicit and implicit costs) are one way to measure value, but they do not necessarily capture all aspects of the firm's value. Social welfare is a broader societal objective that may or may not align with the interests of a particular firm. Therefore, B is the best choice.

Question 10

Sales revenue divided by total assets is the:&#10;A)total asset turnover ratio.&#10;B)return on assets.&#10;C)return on stockholders' equity.&#10;D)profit margin.

Accepted Answer

Sales revenue divided by total assets gives the total asset turnover ratio, which measures how efficiently a company is using its assets to generate sales. Sales revenue divided by total assets is the total asset turnover ratio, which measures the efficiency of a company in using its assets to generate revenue.

Deck 1: Nature and Scope of Managerial Economics