TEST BANK for Managerial Economics

Managerial Economics
SEVENTH EDITION
Robert Brooker
GANNON UNIVERSITY
B W • W • NORTON & COMPANY • NEW YORK • LONDON
Contents
Chapter 1 Introduction 1
Chapter 2 Demand Theory 13
Chapter 3 Consumer Behavior and Rational Choice 37
Chapter 4 Production Theory 60
Chapter 5 The Analysis of Costs 80
Chapter 6 Perfect Competition 103
Chapter 7 Monopoly and Monopolistic Competition 120
Chapter 8 Managerial Use of Price Discrimination 138
Chapter 9 Bundling and Intrafi rm Pricing 151
Chapter 10 Oligopoly 166
Chapter 11 Game Theory 184
Chapter 12 Auctions 197
Chapter 13 Risk Analysis 209
Chapter 14 Principal– Agent Issues and Managerial Compensation 229
Chapter 15 Adverse Selection 240
Chapter 16 Government and Business 249
Chapter 1: Introduction 1
Chapter 1
Introduction
MULTIPLE CHOICE
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
ANS: B PTS: 1
17. Managers make decisions that contribute to the profitability of a firm by:
a. exploiting market efficiencies
b. taking on risks
c. engaging in illegal behavior
d. maximizing sales
e. manipulating the share price of the firm’s stock
ANS: B PTS: 1
18. Economic profits may result from:
a. innovation
b. risk taking
c. exploiting market inefficiencies
d. all the above
e. a and b
ANS: D PTS: 1
Chapter 1: Introduction 7
19. Which of the following would a manager NOT use to create market inefficiencies?
a. establishing a brand name
b. sophisticated pricing strategies
c. diversification efforts
d. output decisions
e. building market entry barriers
ANS: A PTS: 1
20. The principal–agent problem refers to:
a. the threat from foreign competition
b. the need to manage inventory more effectively
c. double-entry bookkeeping
d. the potential costs of separation of ownership and control
e. the time value of money
ANS: D PTS: 1
21. Managers may choose to pursue goals other than maximization of a firm’s value. This is
referred to as the _____ problem.
a. slacker–shirking
b. neuropathy
c. generation X
d. principal–agent
e. none of the above
ANS: D PTS: 1
Chapter 1: Introduction 8
22. Managers may make decisions that are not consistent with the goals of stockholders. This is
referred to as the _____ problem.
a. principal–agent
b. economic disincentive
c. incentive–compromise
d. efficiency–inefficiency
e. equilibrium
ANS: A PTS: 1
23. ConAgra has introduced a lean mixture of cereal and ground beef that is indistinguishable
from ground beef but has about the same amount of fat as chicken. As a result, the:
a. demand for chicken increases
b. demand for ground beef decreases
c. demand for chicken decreases
d. demand for cereal decreases
e. supply of chicken increases
ANS: C PTS: 1
24. The price of computers has fallen, while the quantity purchased has remained constant. This
implies that the demand for computers has:
a. decreased, while the supply of computers has increased
b. increased
c. decreased, while the supply of computers has decreased
d. increased, while the supply of computers has increased
e. become more volatile
ANS: A