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# TEST BANK for Managerial Economics.

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1. Managerial economics uses ____________ to help managers solve problems.

a. formal models

b. prescribed behavior

c. quantitative methods

d. microeconomic theory

e. all of the above

ANS: E PTS: 1

2. Managerial economics draws upon all of the following EXCEPT:

a. finance

b. microeconomics

c. accounting

d. marketing

e. sociology

ANS: E PTS: 1

3. The economic theory of the firm assumes that the primary objective of a firm’s owner or

owners is to:

a. behave in a socially conscientious manner

b. maximize the firm’s profit

c. maximize the firm’s total sales

d. maximize the value of the firm

e. All of these are primary objectives

ANS: D PTS: 1

O

O

O

Chapter 1: Introduction 2

4. If the annual interest rate is i, the present value of $X to be received at the end of each of the

next n years is:

a. $X/i

b. $X/(1 + i)n

c. =

+

n

t

X i t

1

$ 1/(1 )

d. $X[(1 + i)n] / [ i(1 + i)n – 1]

e. $X / [i(1 + i)n – 1]

ANS: C PTS: 1

5. If the annual interest rate is i, the present value of $X to be received at the end of each future

year forever is:

a. $X/(1 + i)

b. $X/i

c. $X/(1 + i)n

d. $X/i n

e. $Xn/i n

ANS: B PTS: 1

6. If the annual interest rate is 25 percent, the present discounted value of $100 to be received in

one year is:

a. $75

b. $80

c. $100

d. $120

e. $125

ANS: B PTS: 1

O

Chapter 1: Introduction 3

7. You’ve just won the $25 million lottery. You are going to receive a check for $1 million today

and at the end of every year for the next 24 years. If the interest rate is 10 percent, the present

value of your prize is:

a. $8,984,744

b. $9,984,744

c. $12,984,744

d. $20,000,000

e. $25,000,000

ANS: A PTS: 1

8. You borrow money from Fast Eddie’s Fast Cash at 20 percent per year interest and agree to

pay $500 at the end of each of the next four years. You must have borrowed approximately:

a. $2,000

b. $1,595

c. $1,295

d. $1,095

e. $895

ANS: C PTS: 1

9. You buy your child a $100 savings bond that matures in 10 years and pays an annual interest

rate of 10 percent. At maturity the bond will be worth:

a. $228.17

b. $200

c. $259.37

d. $271.17

e. $217.71

ANS: C PTS: 1

Chapter 1: Introduction 4

10. Your mortgage requires that you pay $12,000 at the end of each of the next 30 years. If the

annual interest rate is 12 percent, then you must have borrowed approximately:

a. $117,660

b. $96,660

c. $78,660

d. $63,660

e. $133,660

ANS: B PTS: 1

11. The present value of expected future profits will _____ if the discount rate increases and will

_____ if expected future profits increase.

a. increase; not change

b. increase; increase

c. not change; decrease

d. decrease; increase

e. decrease; decrease

ANS: D PTS: 1

12. If the annual interest rate is i, the present value of a payment of $X to be received n years from

now is:

a. $X/(1 + i)

b. $X/i

c. $X/(1 + i )n

d. $X/i n

e. none of the above

ANS: C PTS: 1

Chapter 1: Introduction 5

13. In managerial economics, managers are assumed to maximize:

a. current profits

b. their take-home pay

c. their employees’ welfare

d. the value of their firm

e. social welfare

ANS: D PTS: 1

14. Owner-supplied labor is a cost that is usually:

a. included in both accounting costs and economic costs

b. included in accounting costs but not in economic costs

c. included in economic costs but not in accounting costs

d. not included in either accounting costs or economic costs

e. ignored because it is impossible to place a value on it

ANS: C PTS: 1

15. What is the relationship between economic and accounting profit?

a. Economic profit is equal to accounting profit.

b. Economic profit is greater than accounting profit.

c. Economic profit is less than accounting profit.

d. Economic profit may be equal to or less than accounting profit.

e. Economic profit may be equal to or greater than accounting profit.

ANS: D PTS: 1

Chapter 1: Introduction 6

16. The difference between accounting and economic profit is:

a. caused by confusion over tax laws

b. the value of owned resources in their next best alternative use

c. the result of superior training received by accountants

d. proportionately very small for owner-managed firms

e. a decreasing function of interest rates

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