Multiple choice questions:
Question 1
To find economic profit from accounting profit, it is necessary to
Select one:
A. subtract dividends.
B. add depreciation expense.
C. subtract the opportunity cost of capital.
D. add retained earnings.
Question 2
The present value of expected future profits will _____ if the discount rate increases and will_____ if expected future profits increase.
Select one:
A. increase; not change
B. increase; increase
C. not change; decrease
D. decrease; increase
E. decrease; decrease
Question 3
Managerial economics draws upon all of the following EXCEPT:
Select one:
A. finance
B. microeconomics
C. accounting
D. marketing
E. sociology
Question 4
Managers may make decisions that are not consistent with the goals of stockholders. This is referred to as the _____ problem.
Select one:
A. principal-agent
B. economic disincentive
C. incentive-compromise
D. efficiency-inefficiency
E. equilibrium
Question 5
Marginal revenue can be defined as the:
A. percent increase in total revenue resulting from a one percent increase in output
B. increase in total revenue resulting from a one unit increase in output
C. total revenue divided by output
D. average revenue multiplied by output
E. average revenue multiplied by output divided by 4
Question 6
The cross-price elasticity of demand is defined as the:
Select one:
A. percentage change in the quantity demanded of a good divided by the percentage change in the good's price
B. percentage change in the quantity demanded of a good divided by the percentage change in a different good's price
C. percentage change in a good's price divided by the percentage change in a different good's price
D. change in the quantity demanded of a good divided by the change in its price
E. change in the quantity demanded of a good divided by the change in income
Question 7
Consumer surplus is defined as:
Select one:
A. the quantities of a good or service that bring equal utility to the consumer
B. the quantity of a good or service that is utility maximizing for the consumer
C. the difference between what a consumer is willing to pay and what he or she actually pays for a good or service
D. the difference between the market price and the marginal cost of producing a good or service
E. none of the above
Question 8
The demand for a product is more inelastic the:
Select one:
A. longer the time period covered
B. lower the average income of consumers
C. better the available substitutes
D. poorer the available substitutes
Question 9
If one day it was discovered that lime juice caused cancer, which of the following would likely result?
Select one:
A. The supply curve of lime juice would shift to the right.
B. The demand curve for lime juice would shift to the right.
C. The demand curve for lime juice would shift to the left.
D. The supply curve of lime juice would shift to the left.
Question 10
The demand curve's usual slope implies that consumers:
Select one:
A. buy more as the price of a good is increased
B. buy more as a good is advertised more
C. buy more at higher average incomes
D. buy less as the price of a good is increased
E. have tastes that sometimes change
Question 11
According to the above figure, the highest price that consumers would be willing to pay for quantity Q2 is
Select one:
A. P1.
B. P0.
C. P2.
D. cannot be determined from the diagram.
Question 12
The price elasticity of demand can be interpreted as the:
Select one:
A. percentage change in the quantity demanded divided by the percentage change in the good's price
B. percentage change in the quantity demanded divided by the percentage change in a substitute good's price
C. percentage change in the good's price divided by the percentage change in quantity demanded
D. change in the quantity demanded of a good divided by the change in its price
E. change in the quantity demanded of a good divided by the change in a related good's price
Question 13
If the demand for a product falls and the supply stays the same,
Select one:
A. the market clearing price will rise and the equilibrium quantity will fall.
B. both the market clearing price and the equilibrium quantity will fall.
C. both the market clearing price and the equilibrium quantity will rise.
D. the market clearing price will fall and the equilibrium quantity will rise.
Question 14
At a price of P0 in the above figure, which of the following statements is FALSE?
Select one:
A. P0 is the market clearing price.
B. There is a surplus equal to Q0.
C. There is an equilibrium in the market.
D. Quantity demanded equals quantity supplied.
Question 15
The demand for a product is more elastic the:
Select one:
A. longer the time period covered
B. higher the average income of consumers
C. smaller the share of a consumer's income the item represents
D. larger the number of firms in the market
Question 16
A good whose demand curve shifts to the left as income increases is a(n):
Select one:
A. normal good
B. substitute good
C. inferior good
D. inelastic good
E. abnormality good
Question 17
As we move down a linear demand curve, demand becomes:
Select one:
A. more elastic
B. less elastic at first and then more elastic
C. steeper
D. more elastic at first and then less elastic
E. less elastic
Question 18
Suppose that the price elasticity of demand is -0.5. A 20 percent
increase in the price will cause quantity demanded to _________
from 250 to ________.
Select one:
A. Increase; 200.
B. Increase; 225.
C. Decrease; 200.
D. Decrease; 225.
Question 19
Makers of disposable diapers must advertise 5 percent more to offset completely the 2 percent decline in sales due to heightened environmental concern. The advertising elasticity of demand is:
Select one:
A. 4.0
B. 0.4
C. 2.5
D. 0.25
E. 0.20
Question 20
The marginal rate of technical substitution between two inputs:
Select one:
A. shows the rate at which one input can be traded for another, holding output constant
B. shows the efficient combination of inputs
C. increases as we move down an isoquant
D. shows the rate at which output can be increased by using more of both inputs
E. shows the rate at which output decreases when using less of one of the inputs
Question 21
The marginal product of labor is defined by the:
Select one:
A. change in output divided by the change in labor input usage
B. change in labor input usage divided by the change in output
C. output divided by the labor input usage
D. labor input usage divided by the output level
E. output divided by the marginal product of labor
Question 22
The law of diminishing returns:
Select one:
A. Implies that productive resources are not efficiently employed.
B. Is a long-run phenomenon.
C. Can only occur when all inputs are increased proportionally.
D. Is a short-run phenomenon.
Question 23
The law of diminishing marginal returns states that:
Select one:
A. the marginal product of labor declines as all inputs are increased
B. production functions exhibit decreasing returns to scale
C. the marginal product of labor returns as more capital is used
D. the marginal product of a factor eventually diminishes as more of the input is used, holding other inputs fixed
E. the marginal product of a factor always diminishes as more of the input is used, holding other inputs fixed
Question 24
A production function is a table, a graph, or an equation showing the:
Select one:
A. least-cost method of producing output
B. optimal combination of inputs
C. maximum output that can be achieved from specified levels of inputs
D. combinations of inputs that can be produced with equal costs
E. optimal production technology that a firm should employ
Question 25
When average product is at a maximum, marginal product is:
Select one:
A. zero
B. increasing
C. equal to average product
D. greater than average product
E. less than average product
Question 26
An isoquant represents combinations of inputs that:
Select one:
A. produce the same level of output
B. produce increasing amounts of output
C. minimize costs
D. maximize output
E. create wealth
Question 27
Lines that represent bundles of inputs that cost the same total amount are called:
Select one:
A. total cost curves
B. isocost curves
C. cost curves
D. isoquants
E. isoprofit curves
Question 28
Consider the Cobb-Douglas production function Q = 33K0.30L0.60
where K is capital and L is labor. This production function exhibits:
Select one:
A. Increasing returns to scale.
B. Constant returns to scale.
C. Decreasing returns to scale.
D. Zero returns to scale.
Question 29
Suppose that the price elasticity of demand is -2.0 and the price of
the product is $10. Marginal revenue is:
Select one:
A. $2.
B. $3.
C. $4.
D. $5.
Question 30
Hedge Fun is a landscaping firm that specializes in topiary. Last year, the firm had 60 employees and served 120 customers. This year, it had 70 employees and served 140 customers. What is the marginal product of labor?
Select one:
A. 2
B. 3
C. 4
D. 5
Question 31
In the table below, the average product of labor at L = 3 is:
Select one:
A. 5
B. 8
C. 0.2
D. 2
E. 3
Question 32
In the table below, the marginal product of labor at L = 4 is:
Select one:
A. 7
B. 11
C. 17
D. 16
E. 6
Question 34
Managers at Stars corporation, which sells Specialty T-shirts decided that the demand function for their product can be represented by the following equation:
Q = 200 -3P -2 Pr + 0.1 I
Where Q is the quantity demanded per month, P is the price of a shirt, Pr is the price of a related product, and I is per capita disposable income. The current values for these variables are Pr =$12, and I= $5,000
As Pr =$12, and I= $5,000 so the demand function becomes,
Q = 200 -3P -2*12 + 0.1*5,000= 676-3P
a.If P =$10, how many shirts can the company sell per month?
Required number of sells,
Q = 676-3P=676-3*10 = 646
b.Given P = $10, what is the price elasticity of demand for shirts?
We can see that,
Thus elasticity at P =$10 is
c.Given your answer in part b, what pricing recommendation would you give the managers at Stars if they wish to increase Total Revenues? Explain.
The answer in part b shows that the demand is Inelastic. Thus if the price is increased the demand will decrease by less amount hence to increase total revenue they should increase the price.
d. What would you need to calculate to find the impact of a change in I on the quantity demanded for hats per month? How would you interpret your calculations? Explain your answer.
We can calculate the elasticity of I (i.e. income elasticity) that will tell us how much the income change is affecting the demand change and based on that information we can process forward.
Question 35
An electronics plant's production function is Q = 2LK, where Q is its output ?rate, L is the amount of labor it uses per period, and K is the amount of capital ?it uses per period. The price of labor is $ 6 per unit of labor, and the price ?of capital is $4 per unit of capital. The firm's vice president for manufacturing ?hires you to determine which combination of inputs the plant should use ?to produce 50 units of output per period. ??a.What advice would you give him?i.e. how many units of L and K should they hire? Explain to the vice president how you would go about solving this problem.??b. Suppose the price of labor decreases to $5 per unit. Without doing any calculations, what effect will this have on your recommendation, if any?
a) 1st of all they want to produce 50 units of output thus,
Q = 2LK = 50
ð LK = 25
Now as both L and K are integers thus there are only few choices,
1. L = 1, K = 25 => Total cost = 1*6+25*4 = $106
2. L = 5, K = 5=> Total cost = 5*6+5*4 = $50
3. L=25, K = 1 => Total cost = 25*6+1*4 = $154
So we can see that for option ii the cost is minimum thus they should hire 5 units of labor and 5 units of capital for production.
b) If the price of labor decreases the cost of all options will decrease but still we can clearly see that the option ii would be the best choice in that case as well.
Question 37
Suppose that the market supply and demand equations for a given
product are:
QD = 500 - 10P
QS = - 100 + 20P
Determine the equilibrium price and quantity for this market.
We know that at the equilibrium point,
QD = QS
Hence here at the equilibrium point,
500 - 10P = - 100 + 20P
ð 30P = 600
ð P=$20
ð Q = 500-10P = 500-10*20 = 300
Thus equilibrium price is $20 and quantity is 300.