MANAGERIAL ECONOMICS

CHAPTER 1
QUESTION 1
Two distinctive features of the new economy are:
(A) Economies of scope and scale
(B) Scalability and network effects
(C) Network effects and economies of scope
QUESTION 2
Toyotas production of cars last year is a _____, while its inventory of cars at the end of last year is a ______.
(A) Flow, Stock
(B) Stock, Flow
(C) Flow, Flow
QUESTION 3
A model that explicitly focuses on the timing and sequence of actions and payments is called a ________
model.
(A) Dynamic
(B) Static
(C) Neither of the above
QUESTION 4
Do Los Angeles and New York cable TV providers belong to a single market?
(A) Yes
(B) No
QUESTION 5
All markets are global; no firm can avoid international competition.
(A) True
(B) False
SOLUTION
1B 2A 3A 4B 5B

CHAPTER 2
QUESTION 1
Demand curves slope downward because:
(A) Marginal benefit is diminishing
(B) More people buy when the price is lower
(C) Both of the above
QUESTION 2
If the buyers income increases, her demand curve for an inferior product will ________.
(A) Shift tot the left
(B) Not change
(C) Shift tot the right
QUESTION 3
The demand for durable goods depends on
(A) Price, buyer income, advertising
(B) Expectations of future prices and income, interest rates and price of the used goods
(C) All of the above
QUESTION 4
It is relatively more important to know the distribution of income in estimating the demand for a
(A) Neceessity
(B) Luxury product
(C) Substitute
QUESTION 5
A two-part price aims to __________.
(A) Extract the buyers surplus
(B) Encourage the buyer to purchase a larger quantity
(C) Reduce the average price to the buyer
SOLUTION
1C 2A 3C 4B 5A

CHAPTER 3
QUESTION 1
It has been observed that, when the price of music CDs rose by 1%, the market quantity demanded fell
by 1.83%. The own-price elasticity of market demand is:
(A) 1,83%
(B) -1,83%
(C) 0,55%
(D) -0,55%
QUESTION 2
Suppose that the own-price elasticity of the market demand for cigarettes is 0.4. If the price falls by
5%, the quantity demanded will change by:
(A) -2%
(B) +2%
(C) -0,8%
(D) +0,8%
QUESTION 3
The advertising elasticity of demand is:
(A) Usually negative
(B) Usually positive
(C) May be positive or negative
QUESTION 4
The long-run demand for a nondurable good ________ than the short-run demand.
(A) is more elastic
(B) is less elastic
(C) may be more or less elastic
SOLUTION
1B 2B 3B 4A

CHAPTER 4
QUESTION 1
The short run is a time horizon in which the seller ________.
(A) Cannot adjust one or more inputs
(B) Must work within the constraints of past commitments
(C) Both of the above
QUESTION 2
An increase in the fixed cost will ________ the marginal cost.
(A) reduce
(B) not change
(C) increase
QUESTION 3
The market supply curve slopes upward because:
(A) the market demand curve slopes downward
(B) the marginal cost curves of the individual sellers slope upward
(C) new businesses can enter in the long run
QUESTION 4
A cut in construction sector wages would ________ the supply of new apartments.
(A) reduce
(B) not change
(C) increase
QUESTION 5
The long-run supply is generally ________ elastic than the short-run supply.
(A) less
(B) equally
(C) more
SOLUTION
1C 2B 3B 4C 5C

CHAPTER 5
QUESTION 1
Conditions for a perfect competitive market
(A) Homogenous product
(B) Many buyers, each buying a small quantity
(C) Many sellers, each selling a small quantity
(D) All of the above
QUESTION 2
If a market experiences excess supply, the price will tend to:
(A) Fall
(B) Remain unchanged
(C) Rise
QUESTION 3
Suppose that the market demand is extremely elastic. If the market supply falls, the equilibrium price
will _______ .
(A) Fall
(B) Remain unchanged
(C) Rise
QUESTION 4
When demand or supply changes, it is possible that the market price does not change.
(A) True
(B) False
QUESTION 5
Prices are _________ volatile in the short than in the long run.
(A) Less
(B) Equally
(C) More
SOLUTION
1D 2A 3B 4A 5C

CHAPTER 6
QUESTION 1
If some supplier is operating at a lower marginal cost than others, it should _______ production so that the
use of resources will be economically efficient.
(A) Reduce
(B) Not change
(C) Raise
QUESTION 2
The objective of transfer pricing is to ________________ within an organization.
(A) Minimize cost
(B) Achieve economic efficiency
(C) Maximize benefit
QUESTION 3
Following a $10 increase in freight charges, the price of cement rose by $7. The incidence on sellers was
________.
(A) $10
(B) $7
(C) $3
(D) None of the above
QUESTION 4
The deadweight loss due to a price ceiling will be larger if _____________.
(A) The demand is more elastic and supply more elastic
(B) The demand is more elastic and supply more inelastic
(C) The demand is more inelastic and supply more elastic
(D) The demand is more inelastic and supply more inelastic
QUESTION 5
A minimum wage set at above the equilibrium wage for unskilled labor would ____________.
(A) Reduce employment
(B) Encourage employers to automate
(C) Encourage employers to substitute skilled for unskilled labor
(D) All of the above
SOLUTION
1C 2B 3C 4C 5D

CHAPTER 7
QUESTION 1
Economies of scale arise where ________.
(A) There are significant fixed inputs
(B) Average variable cost falls with the scale of production
(C) Either of the above
QUESTION 2
Economies of scope arise where ________.
(A) There are significant fixed inputs
(B) There are significant joint inputs
(C) Either of the above
QUESTION 3
To uncover relevant costs that are shown in conventional accounting statements, we should __________.
(A) Consider alternative courses of action
(B) Apply the concept of opportunity cost
(C) Both of the above
QUESTION 4
The transfer price of an internally-produced input should always be set equal to the marginal cost of the
input.
(A) True
(B) False
(C) True or false, depending on the circumstances
QUESTION 5
Conventional accounting statements may _________.
(A) Omit relevant costs
(B) Show sunk costs
(C) Both of the above
SOLUTION
1C 2B 3C 4C 5C

CHAPTER 8
QUESTION 1
The source of Microsofts market power over the Windows operating system is a __________ .
(A) Unique resource
(B) Copyright
(C) Patent
QUESTION 2
A monopoly is selling at a rate where marginal revenue is less than marginal cost. It should _________.
(A) Reduce sales / increase price
(B) Raise sales / decrease price
(C) Reduce or raise sales, depending on the circumstances
QUESTION 3
A monopoly is selling at a rate where marginal revenue equals marginal cost. Its marginal cost increases
by $2 per unit. It should _________.
(A) Increase price by $2 per unit
(B) Reduce sales / raise price
(C) Both of the above
QUESTION 4
A monopoly may set a price close to marginal cost because ________.
(A) Its demand is elastic
(B) It has few competitors
(C) It has few competitors
QUESTION 5
Cartel is less efficient when
(D) Low entry/exit barriers
SOLUTION
1B 2A 3B 4A 5D


CHAPTER 10
QUESTION 1
Question 1 refers to the following game in strategic form, where each cell shows the profits accruing to
Lucas Corp and Max Inc:

For Lucas Corporation, the strategy build new capacity is dominated by the strategy do not build.
(A) True
(B) False
(C) May be true or false, depending on the circumstances
QUESTION 2
In a situation of first-mover advantage, a strategic move would be to:
(A) Gain the opportunity to move first
(B) Influence the beliefs or actions of the other party in a favorable way
(C) Wait for the other party to move first
QUESTION 3
If the other player has adopted a Nash equilibrium strategy, I should
(A) Also adopt a Nash equilibrium strategy
(B) Look for a strategy that yields a higher return than the Nash equilibrium strategy
(C) May be (a) or (b), depending on the circumstances
QUESTION 4
In a randomized equilibrium strategy, the expected return from each of the possible moves should be
_______ .
(A) different
(B) equal
(C) different or equal, depending on the circumstances
SOLUTION
1B 2A 3A 4B


CHAPTER 11
QUESTION 1
Competition policy is needed to ___
(A) prevent cartels
(B) make informed decisions as to whether proposed mergers should be allowed or not
(C) prevent monopolization of the markets
(D) none of the above
(E) all of the above (except for answer d)
QUESTION 2
With horizontal product differentiation ____
(A) Everybody agrees which product(s) are better than others
(B) Nobody agrees on which product(s) are better than others
(C) Some people prefer one product, some another
QUESTION 3
HHI is not used as a decisive guideline in mergers.
(A) Not true
(B) True because changes in concentration alone is not indicative of changes in market power
(C) True because it does not map into a theoretical model of competition
QUESTION 4
In a model of Cournot (capacity) competition between firms:
(A) An increase in marginal costs shifts the best response (reaction) function downwards
(B) Quantities are strategic substitutes
(C) Both of the above
QUESTION 5
A best response function (reaction function)
(A) Tells us how a firm should react to a decision by its rival
(B) Characterizes all possible ...
(C) Depends on the value ...
QUESTION 6
When 2 decision variables are strategic complements, then
(A) When the rival increases the value of its decision variable, it is in a firm's interest to do so as
well
(B) When the rival increases the value of its decision variable, it is in a firm's interest to do the exact
opposite
(C) There are no capacity constraints
QUESTION 7
In a market with horizontal product differentiation, the firms want to locate away from each other in
order to ____
(A) increase market share
(B) lure away customers from the rival
(C) increase their ability to raise prices
QUESTION 8
The Bertrand trap is used to describe the situation where ____
(A) Prices are strategic substitutes
(B) There is no threat of entry
(C) Competition between two firms leads to the same outcome as perfectly competitive markets
SOLUTION
1E 2C 3B 4C 5A 6A 7C 8C


CHAPTER 13
QUESTION 1
Ali is borrowing money from Jupiter Bank to buy a house. Ali has better information about his future
earnings. Which of the following statements is true?
(A) The bank has imperfect information about Alis future earnings
(B) The bank bears risk with respect to Alis future earnings
(C) There is asymmetric information between Ali and the bank
(D) All of the above are true
QUESTION 2
In a market where some proportion of items for sale is of low quality, the actual marginal benefit of
buyers ____________ than the marginal benefit of buyers who receive high quality items.
(A) Is lower
(B) May be lower or higher
(C) Is higher
QUESTION 3
In indirect segment discrimination, the seller is ___________, and uses the discriminating variable to screen
among the buyer segments according to their _________.
(A) Less-informed, willingness to pay
(B) Better-informed, willingness to pay
(C) Less-informed; purchase size
(D) Better-informed; purchase size
QUESTION 4
Both screening and signaling rely on _________.
(A) Asymmetric information
(B) Appraisal
(C) Self-selection
(D) All of the above
QUESTION 5
In an eBay auction for multiple units of an item, all winning bidders pay the price of the lowest
successful bid. This illustrates a ________.
(A) Discriminatory auction
(B) Non-discriminatory auction
(C) Winners curse
(D) Reserve price
QUESTION 6
Suppose that a car manufacturer requires its employees to drive its own brand of cars. Is this a credible
signal of quality?
(A) Yes
(B) No
QUESTION 7
A clothing manufacturer wishes to attract hard-working employees. Which of the following
compensation schemes would screen most effectively among workers according to their work ethic?
(A) Fixed monthly salary
(B) Fixed monthly salary plus bonus for exceeding production quota
(C) Payment by quantity of clothing produced (piece-rate)
QUESTION 8
Screening is an initiative of the __________, while signaling is an initiative of the __________ to resolve
asymmetric information.
(A) Less-informed, better-informed
(B) Less-informed, less-informed
(C) Better-informed, less-informed
(D) Better-informed, better-informed
QUESTION 9
Moodys, Standard and Poors, and Fitch/IBCA resolve asymmetric information through ________.
(A) Appraisal
(B) Screening
QUESTION 10
If all bidders knew the true value of the item for sale, there would be no winners curse.
(A) True
(B) False
(C) May be true or false, depending on the circumstances
QUESTION 11
Which of the following statements is true?
(A) Asymmetric information can be resolved directly through appraisal, screening, or signalling
(B) Asymmetric information can be resolved indirectly through appraisal, screening, or signalling
(C) Neither statement is true
QUESTION 12
Typically, real estate agents are paid through commission they earn a percentage of the sale price if the
property is sold, and nothing otherwise. The commission is an example of _________.
(A) Screening
(B) Signaling
(C) Contingency fee
QUESTION 13
The demand for insurance arises from people who are _________.
(A) Risk-seeking
(B) Risk-neutral
(C) Risk-averse
(D) None of the above
QUESTION 14
Evan is an apple grower. Hailey works as a doctor and is not related to Evan. Which of the following
statements is correct?
(A) Only Evan has imperfect information about the price of apples and bears risk
(B) Only Hailey has imperfect information about the price of apples and bears risk
(C) Both Evan and Hailey have imperfect information about the price of apples, but only Evan bears
risk
(D) Both Evan and Hailey have imperfect information about the price of apples and bear risk
SOLUTION
1D 2B? 3A/C? 4C 5B? 6B 7C? 8A 9A 10A? 11C 12C 13C 14C




CHAPTER 14
QUESTION 1
To resolve moral hazard, it is necessary that performance incentives align the marginal benefit of effort
of the better-informed party to the marginal benefit of the less-informed party ___________
(A) at all effort levels
(B) around the economically efficient level of effort
(C) at the maximum effort level
QUESTION 2
A South Korean investor in the North Korean tourist industry set up a floating hotel. What is the
advantage of a floating hotel over one built on land?
(A) avoids vertical integration
(B) reduces specific investment
(C) equivalent to a complete contract
(D) all of the above
QUESTION 3
Which of the following would affect the distribution of ownership?
(A) horizontal integration
(B) vertical integration
(C) both of the above
QUESTION 4
The architecture of an organization includes ______
(A) distribution of ownership
(B) incentive schemes
(C) monitoring systems
(D) all of the above
QUESTION 5
For a party subject to moral hazard with respect to multiple responsibilities, strong performance
incentives for one responsibility may _______
(A) resolve moral hazard on that responsibility
(B) induce worse performance on other responsibilities
(C) both of the above
QUESTION 6
The owner of an asset has the rights to ____
(A) vertical integration
(B) residual control
(C) horizontal integration
QUESTION 7
Trucks may be equipped with computers to monitor location and usage. Employee-driven trucks are
more likely to have such computers than owner-driven trucks because ______
(A) there is a conflict of interest between employer and driver
(B) employees might hold up their employer
(C) the contract with employees is incomplete
QUESTION 8
Construction site supervisors are responsible for both the progress of work and worker safety. Which of
the following is true?
(A) if supervisors are given incentives linked to the speed of work, they will tend to neglect safety
(B) if supervisors are given incentives linked to safety, they will tend to neglect the speed of work
(C) both of the above
QUESTION 9
If a worker is subject to moral hazard, the marginal benefit of effort to the employer _____ the marginal
cost of effort by the worker.
(A) is less than
(B) equals
(C) exceeds
QUESTION 10
Performance incentives may impose risk because ______
(A) The party subject to incentives has imperfect information about extraneous factors that affect
the performance indicator
(B) The incentives are based on the performance indicator
(C) Both of the above
QUESTION 11
The contract between parties should be more detailed if ...
(A) the potential for holdup is small, and specific investments are not important.
(B) the potential for holdup is large, and specific investements are important.
(C) either of the above
QUESTION 12
A bank may be subject to moral hazard relative to the provider of deposit insurance. In this case, the
less-informed party is the ___________
(A) bank
(B) deposit insurer
(C) government
QUESTION 13
Vertical integration may reduce ______ but increase ______
(A) potential for holdup; moral hazard
(B) moral hazard; potential for holdup
(C) specific investments; internal monopoly power
(D) internal monopoly power; specific investments

SOLUTION
1B? 2D? 3B? 4D? 5C? 6B? 7A? 8A/C? 9A? 10A/C? 11B? 12A? 13C?