Deck 1: The Fundamentals of Managerial Economics

Question 1

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

A) Profits of businesses
B) Government regulations
C) Economic indicators
D) The accounting cost of those resources

Answer 1

A

Question 2

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.

Answer 2

B

Question 3

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 3

C

Question 4

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 5

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.

Question 6

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 7

If the interest rate is 5 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 8

A firm will have constant profits of $100,000 per year for the next four years,and the interest rate is 6 percent.Assuming these profits are realized at the end of each year,what is the present value of these future profits?

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

Question 9

Suppose the interest rate is 5 percent,the expected growth rate of the firm is 2 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 10

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 11

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.

Question 12

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 7 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 13

The opportunity cost of receiving $10 in the future as opposed to getting that $10 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 14

When dealing with present value,a higher interest rate:

A) does not affect 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 15

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

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

Question 16

If the interest rate is 10 percent 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

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 18

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 19

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 20

If the interest rate is 5 percent,what is the present value of $10 received one year from now?

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

Question 21

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

$\begin{array} { c c c } \text { No. Units Produced } & \text { Total Revenue } & \text {Total Costs } \\0 & 0 & 0 \\ 1 & 100 & 50 \\ 2 & 180 & 110 \\ 3 & 250 & 180 \\ 4 & 290 & 270 \\ 5 & 310 & 380 \end{array}$

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

Question 22

The change in net benefits that arises 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 23

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 24

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 (rounded to the nearest whole number)?

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

Question 25

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

$\begin{array} { c c c } \text { No. Units Produced } & \text { Total Revenue } & \text {Total Costs } \\0 & 0 & 0 \\ 1 & 100 & 50 \\ 2 & 180 & 110 \\ 3 & 250 & 180 \\ 4 & 290 & 270 \\ 5 & 310 & 380 \end{array}$

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

Question 26

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

$\begin{array} { c c c } \text { No. Units Produced } & \text { Total Revenue } & \text {Total Costs } \\0 & 0 & 0 \\ 1 & 100 & 50 \\ 2 & 180 & 110 \\ 3 & 250 & 180 \\ 4 & 290 & 270 \\ 5 & 310 & 380 \end{array}$

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

Question 27

The difference between marginal benefits and marginal costs is the:

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

Question 28

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 29

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

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

Question 30

What is the marginal cost of producing the fifth unit?

$\begin{array} { c c c } \text { No. Units Produced } & \text { Total Revenue } & \text {Total Costs } \\0 & 0 & 0 \\ 1 & 100 & 50 \\ 2 & 180 & 110 \\ 3 & 250 & 180 \\ 4 & 290 & 270 \\ 5 & 310 & 380 \end{array}$

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

Question 31

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

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

Question 32

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 33

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 34

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 35

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 36

What is the marginal revenue of producing the third unit?

$\begin{array} { c c c } \text { No. Units Produced } & \text { Total Revenue } & \text {Total Costs } \\0 & 0 & 0 \\ 1 & 100 & 50 \\ 2 & 180 & 110 \\ 3 & 250 & 180 \\ 4 & 290 & 270 \\ 5 & 310 & 380 \end{array}$

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

Question 37

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 38

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

A) 6Y
B) Y²
C) 3Y
D) 12Y

Question 39

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

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

Question 40

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 41

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 42

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 43

If the interest rate is 5 percent,$100 received at the end of seven 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 44

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 45

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 46

Economics:

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

Question 47

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 48

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 49

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 50

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 51

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 52

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 53

If the annual interest rate is 0 percent,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 54

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 55

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 56

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 57

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 58

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 service to its customers

Question 59

The higher the interest rate,the greater the:

A) present value.
B) net present value.
C) Both A and B are correct.
D) Neither A nor B is correct.

Question 60

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 61

Suppose the growth rate of the firm's profit is 5 percent,the interest rate is 6 percent,and the current profits of the firm are $100 million.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 62

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 63

Which of the following is NOT a source of rivalry 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 64

Suppose the growth rate of the firm's profit is 5 percent,the interest rate is 6 percent,and the current profits of the firm are $80 million.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 65

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.

Question 66

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 67

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 68

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 69

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 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

"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.

Question 72

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 73

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 74

New firms have incentive to enter an industry when there is(are):

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

Question 75

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 76

Consumer−consumer rivalry:

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

Question 77

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

A) constant marginal 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.

Question 78

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

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

Question 79

If the interest rate is 5 percent 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 80

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.