Deck 1: The Fundamentals of Managerial Economics

Question 1

Which of the following is an implicit cost to a firm that produces a good or service?

A)labor costs.
B)costs of operating production machinery.
C)foregone profits of producing a different good or service.
D)costs of renting or buying land for a production site.

Answer 1

C

Question 2

The primary inducement for new firms to enter an industry is:

A)increased technology.
B)availability of labor.
C)low capital costs.
D)presence of economic profits.

Answer 2

D

Question 3

As more firms enter an industry

A)accounting profits increase.
B)economic profits decrease.
C)prices rise.
D)none of the statements associated with this question are correct.

Answer 3

B

Question 4

If you put $1,000 in a savings account at an interest rate of 10%, how much money will you have in one year?

A)$1,200.
B)$909.
C)$950.
D)$1,100.

Question 5

To maximize profits, a firm should continue to increase production of a good until:

A)total revenue equals total cost.
B)profits are zero.
C)marginal revenue equals marginal cost.
D)average cost equals average revenue.

Question 6

If the interest rate is 5%, what is the present value of ten dollars received one year from now?

A)$9.50.
B)$10.05.
C)$9.52.
D)$9.77.

Question 7

A farm must decide whether or not to purchase a new tractor.The tractor will reduce costs by $2,000 in the first year, $2,500 in the second and $3,000 in the third and final year of usefulness.The tractor costs $9,000 today, while the above cost savings will be realized at the end of each year.If the interest rate is seven percent, what is the net present value of purchasing the tractor?

A)$6,764.
B)$9,362.
C)$18,362.
D)none of the statements associated with this question are correct.

Question 8

If the interest rate is five percent, the present value of $200 received at the end of five years is:

A)$121.34.
B)$156.71.
C)$176.41.
D)$132.62.

Question 9

Which of the following signals to the owners of scarce resources are the best uses of those resources?

A)profits of businesses.
B)government regulations.
C)economic indicators.
D)the accounting cost of those resources.

Question 10

Suppose the interest rate is five percent, the expected growth rate of the firm is two percent, and the firm is expected to continue forever.If current profits are $1,000, what is the value of the firm?

A)$31,000.
B)$30,000.
C)$26,500.
D)$35,000.

Question 11

Which of the following is an implicit cost of going to college?

A)tuition.
B)cost of books and supplies.
C)room and board.
D)foregone wages.

Question 12

The opportunity cost of receiving ten dollars in the future as opposed to getting that ten dollars today is:

A)the foregone interest that could be earned if you had the money today.
B)the taxes paid on any earnings.
C)the value of $10 relative to the total income of that person.
D)the value of $10 relative to the total income of all persons.

Question 13

Accounting profits are:

A)total revenue minus total cost.
B)total cost minus total revenue.
C)marginal revenue minus total cost.
D)total revenue minus marginal cost.

Question 14

The higher the interest rate:

A)the greater the present value of a future amount.
B)the smaller the present value of a future amount.
C)the greater the level of inflation.
D)none of the statements associated with this question are correct.

Question 15

Scarce resources are ultimately allocated toward the production of goods most wanted by society because:

A)firms attempt to maximize profits.
B)they are most efficiently utilized in these areas.
C)consumers demand inexpensive goods and services.
D)managers are benevolent.

Question 16

If the interest rate is 10% and cash flows are $1,000 at the end of year one and $2,000 at the end of year two, then the present value of these cash flows is

A)$2,562.
B)$3,200.
C)$439.
D)$3,000.

Question 17

When dealing with present value, a higher interest rate:

A)does not effect the present value of the future amount.
B)increases the present value of a future amount.
C)decreases the present value of a future amount.
D)none of the statements associated with this question are correct.

Question 18

A firm will have constant profits of $100,000 per year for the next four years and the interest rate is six percent.Assuming these profits are realized at the end of each year, what is the present value these future profits?

A)$325,816.
B)$376,741.
C)$400,000.
D)$346,511.

Question 19

Economic profits are:

A)total revenue minus total cost.
B)marginal revenue minus marginal cost.
C)total revenue minus total opportunity cost.
D)total profits of the economy as a whole.

Question 20

A firm will maximize the present value of future profits by maximizing current profits when the:

A)growth rate in profits is constant.
B)growth rate in profits is larger than the interest rate.
C)interest rate is larger than the growth rate in profits and both are constant.
D)growth rate and interest rate are constant and equal.

Question 21

Suppose total benefits and total costs are given by B(Y) = 100Y - 8Y² and C(Y) = 10Y².Then marginal costs are:

A)20Y².
B)40.
C)5Y.
D)20Y.

Question 22

What is the level of net benefits when four units are produced?

A)0.
B)70.
C)-70.
D)20.

Question 23

Under producer-producer rivalry, individual firms want to sell the product at the maximum price consumers will pay, but are unable to do this because of:

A)cost considerations.
B)the scarcity of resources.
C)competition among sellers.
D)competition among buyers.

Question 24

Suppose total benefits and total costs are given by B(Y) = 100Y - 8Y² and C(Y) = 10Y².Then marginal benefits are:

A)100-16Y.
B)100Y-8Y².
C)50-4Y.
D)200Y-10Y.

Question 25

What is the marginal cost of producing the fifth unit?

A)270.
B)110.
C)50.
D)0.

Question 26

Negotiations between the buyer and seller of a new house is an example of:

A)consumer-consumer rivalry.
B)consumer-producer rivalry.
C)producer-producer rivalry.
D)monopoly.

Question 27

Suppose total benefits and total costs are given by B(Y) = 100Y - 8Y² and C(Y) = 10Y².What is the maximum level of net benefits?

A)92.
B)139.
C)78.
D)none of the statements associated with this question are correct.

Question 28

What is the marginal revenue of producing the third unit?

A)250.
B)70.
C)0.
D)90.

Question 29

In order to maximize net benefits, firms should produce where:

A)total benefits equal total costs.
B)profits are zero.
C)marginal cost is minimized.
D)marginal benefits equal marginal costs.

Question 30

Given the benefit function B(Y) = 400Y - 2Y², the marginal benefit is:

A)200Y.
B)400-2Y².
C)400-4Y.
D)800-2Y.

Question 31

What is the marginal net benefit of producing the fourth unit?

A)-50.
B)0.
C)60.
D)40.

Question 32

The behavior of bidders in an auction is an example of:

A)consumer-consumer rivalry.
B)consumer-producer rivalry.
C)producer-producer rivalry.
D)none of the statements associated with this question are correct.

Question 33

The additional benefits that arise by using an additional unit of the managerial control variable is defined as the:

A)total benefit.
B)opportunity cost.
C)marginal benefit.
D)present value of benefits.

Question 34

If a producer offers a price that is in excess of a consumer's valuation of the good, the consumer:

A)must buy the good at that price.
B)will refuse to purchase the good.
C)must revalue the good.
D)none of the statements associated with this question are correct.

Question 35

At what level of output does marginal cost equal marginal revenue?

A)1.
B)2.
C)3.
D)4.

Question 36

Suppose total benefits and total costs are given by B(Y) = 100Y - 8Y² and C(Y) = 10Y².What level of Y will yield the maximum net benefits?

A)75/36.
B)75/18.
C)50/18.
D)100/36.

Question 37

The change in net benefits that arise from a one unit change in quantity is the:

A)marginal net benefits.
B)total net benefits.
C)variable benefits.
D)present value benefits.

Question 38

The difference between marginal benefits and marginal costs are the:

A)profits.
B)marginal net benefits.
C)opportunity cost.
D)accounting cost.

Question 39

Given the cost function C(Y) = 6Y², what is the marginal cost?

A)6Y.
B)Y².
C)3Y.
D)12Y.

Question 40

The additional cost incurred by using an additional unit of the managerial control variable is defined as the:

A)total cost.
B)net cost.
C)net benefit.
D)marginal cost.

Question 41

As the interest rate increases, the opportunity cost of waiting to receive a future amount:

A)increases.
B)decreases.
C)may rise or fall.
D)remains the same.

Question 42

If marginal benefits exceed marginal costs, it is profitable to:

A)increase Q.
B)decrease Q.
C)stay at that level of Q.
D)all of the statements associated with this question are correct.

Question 43

If marginal costs exceed marginal benefits, then:

A)the firm ends up with a net loss.
B)the firm's average costs exceed average benefits.
C)the firm should decrease its production level.
D)none of the statements associated with this question are correct.

Question 44

Which of the following is the main goal of a continuing company?

A)to maximize the value of the firm.
B)to minimize costs.
C)to improve product quality.
D)to enhance the service to its customers.

Question 45

Economics

A)exists because of the scarcity.
B)is not related to decision-making.
C)is the science for the rich.
D)has nothing to do with the allocation of resources.

Question 46

Which of the following is incorrect?

A)Accounting profits generally overstate economic profits.
B)Accounting profits do not take opportunity cost into account.
C)Economic costs include not only the accounting costs but also the opportunity costs of the resources used in production.
D)Managers should only be interested in accounting profits.

Question 47

In order to maximize net benefits, the managerial control variable should be used up to the point where:

A)total costs equal total benefits.
B)average costs equal marginal benefits.
C)average benefits equal marginal costs.
D)net marginal benefits equal zero.

Question 48

Managerial economics

A)has little to say about day-to-day decisions.
B)is valuable to the coordinator of a shelter for the homeless.
C)is not relevant for managers of "not-for-profit" groups.
D)is the study of how to get rich in the stock market.

Question 49

In the Wealth of Nations, Adam Smith argues that:

A)self-interest leads to the efficient allocation of resources.
B)benevolence leads to the efficient allocation of resources.
C)profits are maximized where marginal revenue equals net marginal benefits.
D)none of the statements associated with this question are correct.

Question 50

If the interest rate is 5%, $10 received at the end of 7 years is worth how much today?

A)100/(0.05)⁷.
B)100/(1 + 0.05)⁷.
C)100/(1 + 5)⁷.
D)100.

Question 51

Which of the following is (are) true?

A)Accounting costs generally understate economic costs.
B)Accounting profits generally overstate economic profits.
C)In the absence of any opportunity costs, accounting profits equal economic profits.
D)All of the statements associated with this question are correct.

Question 52

If the annual interest rate is 0%, the present value of receiving $1.10 in the next year is:

A)$1.00.
B)$1.01.
C)$1.11.
D)$1.10.

Question 53

The higher the interest rate, the greater the

A)present value.
B)net present value.
C)all of the statements associated with this question are correct.
D)none of the statements associated with this question are correct.

Question 54

The value of the firm is the:

A)current value of profits.
B)present discounted value of all future profits.
C)average value of all future profits.
D)total value of all future profits.

Question 55

What is the main role of economic profits?

A)To signal where resources are most highly valued.
B)To help firms cover their production costs.
C)To help consumers cover their opportunity cost.
D)None of the statements associated with this question are correct.

Question 56

Basic principles that comprise good management include

A)identifying goals and constraints.
B)recognizing the nature and importance of profits.
C)understanding incentives.
D)all of the statements associated with this question are correct.

Question 57

To an economist, maximizing profit is:

A)maximizing the value of the firm.
B)maximizing the current year's profits.
C)minimizing the permanent total costs.
D)minimizing the future risks.

Question 58

Marginal benefits are the:

A)incremental benefits of a decision.
B)average benefits of a decision.
C)total benefits of a decision.
D)present discounted benefit of a decision.

Question 59

The optimal amount of studying is determined by comparing:

A)marginal benefit and the total cost of studying.
B)marginal benefit and the total benefit of studying.
C)marginal benefit and the marginal cost of studying.
D)total benefit and the total cost of studying.

Question 60

Other things equal, the greater the interest rate:

A)the lower the NPV.
B)the higher the NPV.
C)the higher the PV.
D)none of the statements associated with this question are correct.

Question 61

Suppose the growth rate of the firm's profit is 5%, the interest rate is 6%, and the current profits of the firm are 80 million dollars.What is the value of the firm?

A)$89.2 million.
B)$1,413.3 million.
C)$8,480 million.
D)none of the statements associated with this question are correct.

Question 62

Incentive plans imply:

A)if managers get highly paid, then they work hard.
B)if managers put forth little effort, they receive little pay; if they put forth much effort and hence generate many sales, they receive a lot of pay.
C)managers are not selfish.
D)managers should be watched all the time.

Question 63

Maximizing the present value of all future profits is the same as maximizing current profits if the growth rate in profits is:

A)greater than the interest rate.
B)less than the interest rate.
C)equal to the interest rate.
D)not constant over time.

Question 64

Which of the following is the incorrect statement?

A)The marginal benefits curve is the slope of the total benefits curve.
B)dB(Q)/dQ = MB.
C)The slope of the net benefit curve is horizontal where MB = MC.
D)The difference in the slope of the total benefit curve and the total cost curve is maximized at the optimal level of Q.

Question 65

If the interest rate is 5% and cash flows are $3,000 at the end of year one and $5,000 at the end of year two, then the present value of these cash flows is

A)$7,392.29.
B)$8,400.34.
C)$4,222.50
D)$400.74.

Question 66

Generally when calculating profits as total revenue minus total costs, accounting profits are larger than economic profits because economists take into account

A)only explicit costs.
B)only implicit costs.
C)both explicit and implicit costs.
D)both types of profits are always equal because they account for the same costs.
E)

Question 67

Trade will take place:

A)if the maximum that a consumer is willing and able to pay is less than the minimum price the producer is willing and able to accept for a good.
B)if the maximum that a consumer is willing and able to pay is greater than the minimum price the producer is willing and able to accept for a good.
C)only if the maximum that a consumer is willing and able to pay is equal to the minimum price the producer is willing and able to accept for a good.
D)none of the statements associated with this question are correct.

Question 68

Consumer-consumer rivalry:

A)increases the negotiating power of consumers in the market place.
B)reduces the negotiating power of producers in the market place.
C)reduces the negotiating power of consumers in the market place.
D)increases the likelihood of government intervention in the market place.

Question 69

Because of producer-producer rivalry, the price will tend to:

A)be driven to a lower price.
B)rise up to the maximum price the consumers are willing and able to pay.
C)be the same as the competitive price.
D)be the same as the monopoly price.

Question 70

Consumer-producer rivalry occurs because of:

A)consumers' high valuation and producers' low production cost of a good.
B)producers' high production cost and consumers' low valuation of a good.
C)the competing interests of consumers and producers.
D)none of the statements associated with this question are correct.

Question 71

New firms have incentive to enter an industry when there is

A)new production technologies.
B)positive economic profits.
C)an abundance of labor.
D)high capital costs.

Question 72

Producer-producer rivalry functions:

A)only when multiple sellers for a product compete in the market.
B)only when single sellers for a product compete in the market.
C)regardless of the number of sellers.
D)even when customers are not scarce.

Question 73

When MB = 300 - 12Y and TC = 12Y + 108, the optimal level of Y is:

A)25.
B)4.5.
C)8.
D)24.

Question 74

Marginal benefit refers to:

A)the average benefits that arise by using an additional unit of the managerial control variables.
B)the additional benefits that arise by using an additional unit of the managerial control variables.
C)the change in average benefits arising from a change in the control variable.
D)none of the statements associated with this question are correct.

Question 75

Consumer-consumer rivalry arises because of:

A)human nature.
B)the limited number of suppliers.
C)the scarcity of goods available.
D)none of the statements associated with this question are correct.

Question 76

Suppose the growth rate of the firm's profit is 5%, the interest rate is 6%, and the current profits of the firm are 100 million dollars.What is the value of the firm?

A)$111.5 million.
B)$1,766.6 million.
C)$10,600 million.
D)none of the statements associated with this question are correct.

Question 77

Which is the correct statement about the relationship between government and the market?

A)Government should intervene on the consumers' behalf.
B)Government should intervene on the producers' behalf.
C)Government should not intervene on any party's behalf.
D)Government often plays a role in disciplining the market process.

Question 78

Which of the following is not the source of rivalry that exists in economic transactions?

A)consumer-producer rivalry.
B)producer-producer rivalry.
C)government-producer rivalry.
D)all of the statements associated with this question are correct.

Question 79

"Our marginal revenue is greater than our marginal cost at the current production level." This statement indicates that the firm

A)is maximizing profits.
B)should increase the quantity produced to increase profits.
C)should decrease the quantity produced to increase profits.
D)none of the statements associated with this question are correct.
E)

Question 80

Maximizing total benefits is equivalent to maximizing net benefits if and only if there are:

A)constant costs associated with achieving more benefits.
B)no costs associated with achieving more benefits.
C)increasing costs associated with achieving more benefits.
D)decreasing costs associated with achieving more benefits.