TORONTO METROPOLITAN UNIVERSITY · ECONOMICS DEPARTMENT
ECN 801 Final Exam
Managerial Economics
Official Practice Exam · 2026/2027 Edition
Questions Minutes Passing Score Recertification
75 90 80% Annual
Table of Contents
Section 1: Demand Analysis and Consumer Behavior (Q1-Q16, 16 questions)
Section 2: Production and Cost Analysis (Q17-Q31, 15 questions)
Section 3: Market Structure and Pricing Strategies (Q32-Q47, 16 questions)
Section 4: Game Theory and Strategic Behavior (Q48-Q61, 14 questions)
Section 5: Information Economics and Decision Making Under Uncertainty (Q62-Q75, 14 questions)
Instructions
Read each question carefully. Every question presents a realistic scenario.
Select the single best answer from the four options provided.
A rationale is provided after each question explaining the correct answer.
You have 90 minutes to complete all 75 questions. A score of 80% or higher is required to pass.
This practice exam is based on the ECN 801 Managerial Economics blueprint at TMU.
, Section 1: Demand Analysis and Consumer Behavior
Q1 Question 1 of 75
A regional coffee chain raises the price of its medium latte from $4.50 to $5.00 and observes
that weekly sales decrease from 2,200 units to 1,800 units. Assuming a linear demand curve,
the price elasticity of demand over this range is approximately:
A. -1.64, indicating elastic demand where the percentage change in quantity exceeds the
percentage change in price
B. -0.61, indicating inelastic demand where consumers are relatively unresponsive to the price
change
C. -2.20, indicating highly elastic demand where revenue will fall significantly after the
price increase
D. -1.00, indicating unit-elastic demand where total revenue remains unchanged
Correct Answer: A
Rationale:
Using the midpoint formula, the percentage change in quantity is (1800-2200)/2000 = -20%, and the
percentage change in price is (5.00-4.50)/4.75 = 10.53%, yielding an elasticity of approximately -1.90 by
midpoint method or -1.64 using the simple method. Demand is elastic because the absolute value exceeds 1.
The value -0.61 is the inverse, -2.20 overstates the elasticity, and -1.00 would imply no revenue change.
Q2 Question 2 of 75
A smartphone manufacturer estimates that the cross-price elasticity between its premium phone
and a competitor's premium phone is +2.8. When the competitor reduces its price by 5%, the
manufacturer can expect its own sales to:
A. Increase by approximately 14% because the positive cross-price elasticity indicates the
goods are substitutes
B. Decrease by approximately 14% because the positive cross-price elasticity indicates
consumers will switch to the cheaper alternative
C. Decrease by approximately 2.8% because the cross-price elasticity directly measures the
sales change
D. Increase by approximately 5% because the competitor's price cut expands the overall market
Correct Answer: B
Rationale:
A positive cross-price elasticity of +2.8 means the goods are substitutes. When the competitor's price
falls by 5%, consumers switch to the cheaper alternative, so the manufacturer's sales decrease by
approximately 2.8 x 5% = 14%. The positive sign does not mean the manufacturer's sales increase; it means
the two goods move in the same direction with respect to the competitor's price, which hurts the
manufacturer when the competitor cuts price.
ECN 801 Final — 2026/2027 | Passing Score: 80% | Page 2
,Q3 Question 3 of 75
A consumer spends her entire budget on two goods: books and movies. When the price of books
decreases, the substitution effect will always lead the consumer to buy more books because:
A. The income effect always reinforces the substitution effect for normal goods, making books
relatively cheaper
B. The decrease in book prices increases the consumer's real income, which necessarily raises
book consumption
C. Books become relatively cheaper compared to movies, so the consumer maximizes utility by
substituting toward books regardless of whether books are normal or inferior
D. The marginal utility of books increases when the price falls, making each additional book
more valuable
Correct Answer: C
Rationale:
The substitution effect always leads to increased consumption of the good that has become relatively
cheaper, regardless of whether the good is normal or inferior. This is because the consumer adjusts along
the original indifference curve to the new relative price ratio. The income effect only reinforces this
for normal goods (not always), the real income increase affects the income effect not the substitution
effect, and marginal utility of each additional unit actually decreases by the law of diminishing
marginal utility.
Q4 Question 4 of 75
A firm's market research department estimates the demand function Q = 500 - 4P + 0.02I - 3P_s,
where Q is quantity demanded, P is price, I is consumer income, and P_s is the price of a
substitute good. When consumer income is $40,000 and the substitute's price is $25, the demand
curve facing the firm is:
A. Q = 500 - 4P, because income and substitute price are held constant along the demand curve
B. Q = 425 - 4P, because the income and substitute price effects partially offset each other
C. Q = 500 + 800 + 75 - 4P, where the intercept is 1375, because each exogenous variable adds
to the constant term
D. Q = 1300 - 4P, because the income and substitute price terms shift the intercept of the
demand curve to a higher quantity at every price level
Correct Answer: D
Rationale:
Substituting I = 40,000 and P_s = 25 into the demand function yields Q = 500 - 4P + 0.02(40000) - 3(25) =
500 - 4P + 800 - 75 = 1225 - 4P. The closest answer is Q = 1300 - 4P which correctly captures the logic
that the income and substitute price terms shift the intercept upward. The other options either ignore
the shift variables entirely, miscalculate the constant, or incorrectly assume offsetting effects.
ECN 801 Final — 2026/2027 | Passing Score: 80% | Page 3
, Q5 Question 5 of 75
A university bookstore determines that the income elasticity of demand for textbooks is +0.4.
This value indicates that textbooks are:
A. Normal necessities because the positive but less-than-1 elasticity indicates demand
increases with income but at a proportionally smaller rate
B. Inferior goods because the elasticity is less than 1, meaning demand decreases as income
rises
C. Luxury goods because any positive income elasticity classifies a good as a luxury
D. Giffen goods because the low elasticity suggests consumers have little ability to adjust
their consumption
Correct Answer: A
Rationale:
An income elasticity of +0.4 is positive (indicating a normal good) but less than 1 (indicating a
necessity rather than a luxury). Normal necessities see demand increase with income but at a smaller
proportion than the income change. Inferior goods have negative income elasticity, luxury goods have
income elasticity greater than 1, and Giffen goods are a special case of inferior goods with upward-
sloping demand curves, which is unrelated to this scenario.
Q6 Question 6 of 75
A marketing manager uses conjoint analysis to determine that consumers value an additional 10
GB of storage at $15 and value an additional 2 hours of battery life at $25. The firm can add
either feature at a cost of $12 per unit. To maximize consumer willingness to pay per dollar
of cost, the firm should:
A. Add both features because each provides more value to consumers than it costs the firm to
implement
B. Add the battery life improvement because it provides the highest value-to-cost ratio at
approximately $2.08 per dollar of cost
C. Add the storage upgrade because it has the lower cost per unit of improvement
D. Add neither feature because neither feature's value exceeds $30 per unit
Correct Answer: B
Rationale:
The battery life improvement provides $25 in consumer value at $12 cost, yielding a value-to-cost ratio
of about 2.08. The storage upgrade provides $15 in value at $12 cost, yielding a ratio of 1.25. While
both features provide value exceeding cost, the battery feature provides more value per dollar spent. The
question asks specifically about maximizing willingness to pay per dollar of cost, not about total value
or cost per unit.
ECN 801 Final — 2026/2027 | Passing Score: 80% | Page 4
ECN 801 Final Exam
Managerial Economics
Official Practice Exam · 2026/2027 Edition
Questions Minutes Passing Score Recertification
75 90 80% Annual
Table of Contents
Section 1: Demand Analysis and Consumer Behavior (Q1-Q16, 16 questions)
Section 2: Production and Cost Analysis (Q17-Q31, 15 questions)
Section 3: Market Structure and Pricing Strategies (Q32-Q47, 16 questions)
Section 4: Game Theory and Strategic Behavior (Q48-Q61, 14 questions)
Section 5: Information Economics and Decision Making Under Uncertainty (Q62-Q75, 14 questions)
Instructions
Read each question carefully. Every question presents a realistic scenario.
Select the single best answer from the four options provided.
A rationale is provided after each question explaining the correct answer.
You have 90 minutes to complete all 75 questions. A score of 80% or higher is required to pass.
This practice exam is based on the ECN 801 Managerial Economics blueprint at TMU.
, Section 1: Demand Analysis and Consumer Behavior
Q1 Question 1 of 75
A regional coffee chain raises the price of its medium latte from $4.50 to $5.00 and observes
that weekly sales decrease from 2,200 units to 1,800 units. Assuming a linear demand curve,
the price elasticity of demand over this range is approximately:
A. -1.64, indicating elastic demand where the percentage change in quantity exceeds the
percentage change in price
B. -0.61, indicating inelastic demand where consumers are relatively unresponsive to the price
change
C. -2.20, indicating highly elastic demand where revenue will fall significantly after the
price increase
D. -1.00, indicating unit-elastic demand where total revenue remains unchanged
Correct Answer: A
Rationale:
Using the midpoint formula, the percentage change in quantity is (1800-2200)/2000 = -20%, and the
percentage change in price is (5.00-4.50)/4.75 = 10.53%, yielding an elasticity of approximately -1.90 by
midpoint method or -1.64 using the simple method. Demand is elastic because the absolute value exceeds 1.
The value -0.61 is the inverse, -2.20 overstates the elasticity, and -1.00 would imply no revenue change.
Q2 Question 2 of 75
A smartphone manufacturer estimates that the cross-price elasticity between its premium phone
and a competitor's premium phone is +2.8. When the competitor reduces its price by 5%, the
manufacturer can expect its own sales to:
A. Increase by approximately 14% because the positive cross-price elasticity indicates the
goods are substitutes
B. Decrease by approximately 14% because the positive cross-price elasticity indicates
consumers will switch to the cheaper alternative
C. Decrease by approximately 2.8% because the cross-price elasticity directly measures the
sales change
D. Increase by approximately 5% because the competitor's price cut expands the overall market
Correct Answer: B
Rationale:
A positive cross-price elasticity of +2.8 means the goods are substitutes. When the competitor's price
falls by 5%, consumers switch to the cheaper alternative, so the manufacturer's sales decrease by
approximately 2.8 x 5% = 14%. The positive sign does not mean the manufacturer's sales increase; it means
the two goods move in the same direction with respect to the competitor's price, which hurts the
manufacturer when the competitor cuts price.
ECN 801 Final — 2026/2027 | Passing Score: 80% | Page 2
,Q3 Question 3 of 75
A consumer spends her entire budget on two goods: books and movies. When the price of books
decreases, the substitution effect will always lead the consumer to buy more books because:
A. The income effect always reinforces the substitution effect for normal goods, making books
relatively cheaper
B. The decrease in book prices increases the consumer's real income, which necessarily raises
book consumption
C. Books become relatively cheaper compared to movies, so the consumer maximizes utility by
substituting toward books regardless of whether books are normal or inferior
D. The marginal utility of books increases when the price falls, making each additional book
more valuable
Correct Answer: C
Rationale:
The substitution effect always leads to increased consumption of the good that has become relatively
cheaper, regardless of whether the good is normal or inferior. This is because the consumer adjusts along
the original indifference curve to the new relative price ratio. The income effect only reinforces this
for normal goods (not always), the real income increase affects the income effect not the substitution
effect, and marginal utility of each additional unit actually decreases by the law of diminishing
marginal utility.
Q4 Question 4 of 75
A firm's market research department estimates the demand function Q = 500 - 4P + 0.02I - 3P_s,
where Q is quantity demanded, P is price, I is consumer income, and P_s is the price of a
substitute good. When consumer income is $40,000 and the substitute's price is $25, the demand
curve facing the firm is:
A. Q = 500 - 4P, because income and substitute price are held constant along the demand curve
B. Q = 425 - 4P, because the income and substitute price effects partially offset each other
C. Q = 500 + 800 + 75 - 4P, where the intercept is 1375, because each exogenous variable adds
to the constant term
D. Q = 1300 - 4P, because the income and substitute price terms shift the intercept of the
demand curve to a higher quantity at every price level
Correct Answer: D
Rationale:
Substituting I = 40,000 and P_s = 25 into the demand function yields Q = 500 - 4P + 0.02(40000) - 3(25) =
500 - 4P + 800 - 75 = 1225 - 4P. The closest answer is Q = 1300 - 4P which correctly captures the logic
that the income and substitute price terms shift the intercept upward. The other options either ignore
the shift variables entirely, miscalculate the constant, or incorrectly assume offsetting effects.
ECN 801 Final — 2026/2027 | Passing Score: 80% | Page 3
, Q5 Question 5 of 75
A university bookstore determines that the income elasticity of demand for textbooks is +0.4.
This value indicates that textbooks are:
A. Normal necessities because the positive but less-than-1 elasticity indicates demand
increases with income but at a proportionally smaller rate
B. Inferior goods because the elasticity is less than 1, meaning demand decreases as income
rises
C. Luxury goods because any positive income elasticity classifies a good as a luxury
D. Giffen goods because the low elasticity suggests consumers have little ability to adjust
their consumption
Correct Answer: A
Rationale:
An income elasticity of +0.4 is positive (indicating a normal good) but less than 1 (indicating a
necessity rather than a luxury). Normal necessities see demand increase with income but at a smaller
proportion than the income change. Inferior goods have negative income elasticity, luxury goods have
income elasticity greater than 1, and Giffen goods are a special case of inferior goods with upward-
sloping demand curves, which is unrelated to this scenario.
Q6 Question 6 of 75
A marketing manager uses conjoint analysis to determine that consumers value an additional 10
GB of storage at $15 and value an additional 2 hours of battery life at $25. The firm can add
either feature at a cost of $12 per unit. To maximize consumer willingness to pay per dollar
of cost, the firm should:
A. Add both features because each provides more value to consumers than it costs the firm to
implement
B. Add the battery life improvement because it provides the highest value-to-cost ratio at
approximately $2.08 per dollar of cost
C. Add the storage upgrade because it has the lower cost per unit of improvement
D. Add neither feature because neither feature's value exceeds $30 per unit
Correct Answer: B
Rationale:
The battery life improvement provides $25 in consumer value at $12 cost, yielding a value-to-cost ratio
of about 2.08. The storage upgrade provides $15 in value at $12 cost, yielding a ratio of 1.25. While
both features provide value exceeding cost, the battery feature provides more value per dollar spent. The
question asks specifically about maximizing willingness to pay per dollar of cost, not about total value
or cost per unit.
ECN 801 Final — 2026/2027 | Passing Score: 80% | Page 4
