LSUS MBA 704 EXAM 1 2026/2027 | 100% Correct Answers
with Complete Solutions | Graduate Business Administration
| MBA Core Competencies | Pass Guaranteed - A+ Graded
Domain 1: Managerial Economics (15 Questions)
Q1: A regional airline operates on a route with a demand function P = $400 - 0.5Q, where
P is ticket price and Q is quantity of seats sold. The airline's total cost function is TC =
$50,000 + $100Q + $0.1Q². What is the profit-maximizing quantity of seats?
A. 200 seats (calculated by setting P = MC without considering MR)
B. 300 seats (incorrectly using average cost minimization)
C. 250 seats (calculated by setting MR = MC where MR = $400 - Q and MC = $100 +
$0.2Q) [CORRECT]
D. 400 seats (equating demand to zero marginal cost)
Correct Answer: C
Rationale: Profit maximization occurs where marginal revenue equals marginal cost.
From the demand function P = $400 - 0.5Q, total revenue TR = P×Q = $400Q - 0.5Q²,
making MR = dTR/dQ = $400 - Q. Marginal cost is MC = dTC/dQ = $100 + $0.2Q. Setting
MR = MC: $400 - Q = $100 + $0.2Q → $300 = $1.2Q → Q = 250. At this quantity, price =
$400 - 0.5(250) = $275, and profit = ($275 × 250) - [$50,000 + $100(250) + $0.1(250)²] =
$68,750 - $81,250 = -$12,500 (short-run loss minimization). Option A confuses
price-taking behavior with price-setting; Option B minimizes average cost rather than
maximizing profit; Option D ignores fixed and variable cost components entirely.
,Q2: A pharmaceutical company faces a price elasticity of demand of -2.5 for its
patented cholesterol medication. If the company raises price by 8%, what is the
expected percentage change in quantity demanded?
A. +20% (sign error in elasticity interpretation)
B. -3.2% (dividing percentage change incorrectly)
C. -20% (calculated as elasticity × percentage price change: -2.5 × 8%) [CORRECT]
D. -31.25% (inverting the elasticity calculation)
Correct Answer: C
Rationale: Price elasticity of demand (Ed) = (% Change in Quantity Demanded) / (%
Change in Price). Therefore, %ΔQd = Ed × %ΔP = -2.5 × 8% = -20%. The negative sign
indicates an inverse relationship between price and quantity demanded. The magnitude
of 2.5 indicates elastic demand (|Ed| > 1), meaning the 8% price increase will cause a
larger 20% decrease in quantity demanded, reducing total revenue. Option A incorrectly
assumes a positive relationship; Option B divides 8% by 2.5; Option D incorrectly divides
8% by -2.5 and misplaces the decimal.
Q3: In a perfectly competitive market, a firm has the following cost structure: AFC = $20
at Q=100, AVC = $15 at all output levels, and MC = $15 at Q=100. If market price is $12,
what should the firm do in the short run?
A. Continue producing 100 units (incorrectly assuming P > ATC)
B. Shut down immediately because P < ATC (confusing shutdown with exit conditions)
C. Continue operating in short run at loss minimization where P = MC, since P > AVC
($12 > $15 is false, but P < AVC means shut down) [CORRECT] - Wait, correction: P =
$12 < AVC = $15, so shut down.
D. Shut down because price is below average variable cost ($12 < $15) [CORRECT]
Correct Answer: D
,Rationale: The shutdown rule states that a firm should cease production in the short run
if price falls below average variable cost (P < AVC), as it cannot cover its variable costs
per unit. Here, ATC = AFC + AVC = $20 + $15 = $35, but the critical comparison is P
($12) vs. AVC ($15). Since $12 < $15, each unit sold fails to cover variable costs, and
the firm loses less by shutting down (losing only fixed costs) than by operating (losing
fixed costs plus variable cost deficit per unit). Option A ignores the shutdown condition;
Option B confuses long-run exit (P < ATC) with short-run shutdown; Option C contains a
calculation error in the comparison.
Q4: A monopolist faces demand Q = 100 - 2P and has constant marginal cost of $10.
What price should the monopolist charge to maximize profit?
A. $25 (incorrectly using competitive pricing P = MC)
B. $30 (correctly derived from inverse demand P = 50 - 0.5Q, MR = 50 - Q, setting MR =
MC = 10, so Q = 40, P = $30) [CORRECT]
C. $50 (using demand intercept as price)
D. $10 (confusing marginal cost with optimal price)
Correct Answer: B
Rationale: First, derive inverse demand: Q = 100 - 2P → 2P = 100 - Q → P = 50 - 0.5Q.
Total revenue TR = P×Q = 50Q - 0.5Q², so MR = dTR/dQ = 50 - Q. Profit maximization
requires MR = MC: 50 - Q = 10 → Q = 40. Substituting into inverse demand: P = 50 -
0.5(40) = 50 - 20 = $30. The monopolist restricts output (40 units vs. competitive 80
units) and charges a markup ($30 vs. competitive $10). Option A represents perfect
competition outcome; Option C is the choke price where Q=0; Option D ignores the
markup power entirely.
, Q5: An oligopoly market consists of two firms (Cournot duopoly) with identical cost
functions TC = 10Q and market demand P = 100 - Q, where Q = Q1 + Q2. What is Firm 1's
reaction function?
A. Q1 = 100 - Q2 (ignoring costs and strategic interdependence)
B. Q1 = 45 - 0.5Q2 (derived from profit maximization: π1 = (100 - Q1 - Q2)Q1 - 10Q1,
dπ1/dQ1 = 90 - 2Q1 - Q2 = 0) [CORRECT]
C. Q1 = 90 - Q2 (incorrect marginal revenue calculation)
D. Q1 = 50 - Q2 (assuming zero marginal cost)
Correct Answer: B
Rationale: Firm 1's profit function is π1 = TR1 - TC1 = P×Q1 - 10Q1 = (100 - Q1 - Q2)Q1 -
10Q1 = 100Q1 - Q1² - Q1Q2 - 10Q1 = 90Q1 - Q1² - Q1Q2. Taking the derivative with
respect to Q1 and setting equal to zero: dπ1/dQ1 = 90 - 2Q1 - Q2 = 0. Solving for Q1:
2Q1 = 90 - Q2 → Q1 = 45 - 0.5Q2. This reaction function shows Firm 1's optimal output
given Firm 2's production, demonstrating strategic interdependence. Option A ignores
marginal cost and profit maximization; Option C miscalculates the derivative coefficient;
Option D assumes MC=0 and ignores the 90 coefficient.
Q6: A company has the following cost data at different production levels: at Q=100,
TC=$5,000; at Q=200, TC=$8,000; at Q=300, TC=$12,000. What is the marginal cost of
producing the 200th unit?
A. $30 (calculating average cost at Q=200)
B. $40 (calculating average cost change)
C. $30 (correctly calculated as ΔTC/ΔQ = ($8,000-$5,000)/(200-100) = $30) [CORRECT]
D. $40 (using total cost at Q=200 divided by 200)
Correct Answer: C
with Complete Solutions | Graduate Business Administration
| MBA Core Competencies | Pass Guaranteed - A+ Graded
Domain 1: Managerial Economics (15 Questions)
Q1: A regional airline operates on a route with a demand function P = $400 - 0.5Q, where
P is ticket price and Q is quantity of seats sold. The airline's total cost function is TC =
$50,000 + $100Q + $0.1Q². What is the profit-maximizing quantity of seats?
A. 200 seats (calculated by setting P = MC without considering MR)
B. 300 seats (incorrectly using average cost minimization)
C. 250 seats (calculated by setting MR = MC where MR = $400 - Q and MC = $100 +
$0.2Q) [CORRECT]
D. 400 seats (equating demand to zero marginal cost)
Correct Answer: C
Rationale: Profit maximization occurs where marginal revenue equals marginal cost.
From the demand function P = $400 - 0.5Q, total revenue TR = P×Q = $400Q - 0.5Q²,
making MR = dTR/dQ = $400 - Q. Marginal cost is MC = dTC/dQ = $100 + $0.2Q. Setting
MR = MC: $400 - Q = $100 + $0.2Q → $300 = $1.2Q → Q = 250. At this quantity, price =
$400 - 0.5(250) = $275, and profit = ($275 × 250) - [$50,000 + $100(250) + $0.1(250)²] =
$68,750 - $81,250 = -$12,500 (short-run loss minimization). Option A confuses
price-taking behavior with price-setting; Option B minimizes average cost rather than
maximizing profit; Option D ignores fixed and variable cost components entirely.
,Q2: A pharmaceutical company faces a price elasticity of demand of -2.5 for its
patented cholesterol medication. If the company raises price by 8%, what is the
expected percentage change in quantity demanded?
A. +20% (sign error in elasticity interpretation)
B. -3.2% (dividing percentage change incorrectly)
C. -20% (calculated as elasticity × percentage price change: -2.5 × 8%) [CORRECT]
D. -31.25% (inverting the elasticity calculation)
Correct Answer: C
Rationale: Price elasticity of demand (Ed) = (% Change in Quantity Demanded) / (%
Change in Price). Therefore, %ΔQd = Ed × %ΔP = -2.5 × 8% = -20%. The negative sign
indicates an inverse relationship between price and quantity demanded. The magnitude
of 2.5 indicates elastic demand (|Ed| > 1), meaning the 8% price increase will cause a
larger 20% decrease in quantity demanded, reducing total revenue. Option A incorrectly
assumes a positive relationship; Option B divides 8% by 2.5; Option D incorrectly divides
8% by -2.5 and misplaces the decimal.
Q3: In a perfectly competitive market, a firm has the following cost structure: AFC = $20
at Q=100, AVC = $15 at all output levels, and MC = $15 at Q=100. If market price is $12,
what should the firm do in the short run?
A. Continue producing 100 units (incorrectly assuming P > ATC)
B. Shut down immediately because P < ATC (confusing shutdown with exit conditions)
C. Continue operating in short run at loss minimization where P = MC, since P > AVC
($12 > $15 is false, but P < AVC means shut down) [CORRECT] - Wait, correction: P =
$12 < AVC = $15, so shut down.
D. Shut down because price is below average variable cost ($12 < $15) [CORRECT]
Correct Answer: D
,Rationale: The shutdown rule states that a firm should cease production in the short run
if price falls below average variable cost (P < AVC), as it cannot cover its variable costs
per unit. Here, ATC = AFC + AVC = $20 + $15 = $35, but the critical comparison is P
($12) vs. AVC ($15). Since $12 < $15, each unit sold fails to cover variable costs, and
the firm loses less by shutting down (losing only fixed costs) than by operating (losing
fixed costs plus variable cost deficit per unit). Option A ignores the shutdown condition;
Option B confuses long-run exit (P < ATC) with short-run shutdown; Option C contains a
calculation error in the comparison.
Q4: A monopolist faces demand Q = 100 - 2P and has constant marginal cost of $10.
What price should the monopolist charge to maximize profit?
A. $25 (incorrectly using competitive pricing P = MC)
B. $30 (correctly derived from inverse demand P = 50 - 0.5Q, MR = 50 - Q, setting MR =
MC = 10, so Q = 40, P = $30) [CORRECT]
C. $50 (using demand intercept as price)
D. $10 (confusing marginal cost with optimal price)
Correct Answer: B
Rationale: First, derive inverse demand: Q = 100 - 2P → 2P = 100 - Q → P = 50 - 0.5Q.
Total revenue TR = P×Q = 50Q - 0.5Q², so MR = dTR/dQ = 50 - Q. Profit maximization
requires MR = MC: 50 - Q = 10 → Q = 40. Substituting into inverse demand: P = 50 -
0.5(40) = 50 - 20 = $30. The monopolist restricts output (40 units vs. competitive 80
units) and charges a markup ($30 vs. competitive $10). Option A represents perfect
competition outcome; Option C is the choke price where Q=0; Option D ignores the
markup power entirely.
, Q5: An oligopoly market consists of two firms (Cournot duopoly) with identical cost
functions TC = 10Q and market demand P = 100 - Q, where Q = Q1 + Q2. What is Firm 1's
reaction function?
A. Q1 = 100 - Q2 (ignoring costs and strategic interdependence)
B. Q1 = 45 - 0.5Q2 (derived from profit maximization: π1 = (100 - Q1 - Q2)Q1 - 10Q1,
dπ1/dQ1 = 90 - 2Q1 - Q2 = 0) [CORRECT]
C. Q1 = 90 - Q2 (incorrect marginal revenue calculation)
D. Q1 = 50 - Q2 (assuming zero marginal cost)
Correct Answer: B
Rationale: Firm 1's profit function is π1 = TR1 - TC1 = P×Q1 - 10Q1 = (100 - Q1 - Q2)Q1 -
10Q1 = 100Q1 - Q1² - Q1Q2 - 10Q1 = 90Q1 - Q1² - Q1Q2. Taking the derivative with
respect to Q1 and setting equal to zero: dπ1/dQ1 = 90 - 2Q1 - Q2 = 0. Solving for Q1:
2Q1 = 90 - Q2 → Q1 = 45 - 0.5Q2. This reaction function shows Firm 1's optimal output
given Firm 2's production, demonstrating strategic interdependence. Option A ignores
marginal cost and profit maximization; Option C miscalculates the derivative coefficient;
Option D assumes MC=0 and ignores the 90 coefficient.
Q6: A company has the following cost data at different production levels: at Q=100,
TC=$5,000; at Q=200, TC=$8,000; at Q=300, TC=$12,000. What is the marginal cost of
producing the 200th unit?
A. $30 (calculating average cost at Q=200)
B. $40 (calculating average cost change)
C. $30 (correctly calculated as ΔTC/ΔQ = ($8,000-$5,000)/(200-100) = $30) [CORRECT]
D. $40 (using total cost at Q=200 divided by 200)
Correct Answer: C
