ECON 528 Midterm Exam Questions with Answers
Perfectly Solved
1.Managerial economics is best defined as the economic study of:: how
busi- nesses can decide on the best use of scarce resources.
2.Managerial economics helps managers: make decisions in the face of
scarcity.
3.Microeconomics includes the study of the: choices made by individuals
and businesses
4.The form of economics most relevant to managerial decision-making
within the firm: microeconomics
5.CEOs should focus on: maximizing firm profits.
6.Managerial economics generally refers to the integration of economic
the- ory with business: Practice
7.A managerial decision is not profitable if: it increases costs more than
revenue
8.According to the profit-maximization goal, the firm should attempt to
max- imize short-run profits since there is too much uncertainty associated
with long-run profits.: . False
9.Why is it useful to study Managerial Economics?: Studying and
understanding Managerial Economics is important to make crucial
business decisions to maximize profit and create value for the product
or service one is providing. By blending economic theory and empirical
data, managers can understand the "how" and "why" a certain business
decision will maximize wealth. Once managers understand this
reasoning behind economic theories, they can use data to refine the
theory aspect of managerial economics to better fit their business,
yielding continuous improved decisions and ultimately the most
desirable results. This helps managers to create value. Consumers, just
like firms, have scare resources. Consumers will invest their resources
in the product or service that meets their needs with the greatest value.
Understanding managerial economics gives managers an edge in
creating value for their products.
10.Why can Managerial Economics be applied to any business decision mak
ing process, regardless of the industry?: Managerial Economics is
applicable to different types of organizations like for-profit firms, not-for
profit-firms, and gov- ernment agencies. All of these types of
organizations provide goods and services, even though they do not all
have the same objectives when it comes to maximizing wealth.
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,According to the text, "[economic] models are simplified
representations of a real-world organization and its environment" and
managers can use these models to make decisions in a timely and cost
effective manner. The models to do match every detail of an
organization so, although the over arching objectives may be different
from firm to firm, business transactions generally conform to similar
standards and processes. A model can be used to redirect the outcome
of a decision and it does not judge wether the outcome does/does not
support the organizations objectives.
11.Microeconomics studies the allocation of: scarce resources
12.Microeconomic models are used to: make
predictions. explain real-life phenomena.
evaluate production alternatives.
13.Managerial Economics as a specialized branch of Economics: Provide
logic and methodology to find solutions to business problems
14.Unlike an accountant, an economist measures costs on a(n)
basis: replacement
15.When an economist uses the term "cost" referring to a firm, the
economist refers to the: opportunity cost of producing a good or service,
which includes both implicit and explicit cost
16.Accounting costs: are historical costs
17.A firm earns a normal profit when its total revenues just offset both the
cost and cost.: accounting; opportunity
18.If Melissa owns a software company that incurs no fixed costs, then:
her total cost equals her total variable cost
19.In the short run, a firm cannot change the amount of capital it
uses. Therefore the cost of capital is a: fixed cost.
20.Because the amount of labor a firm employs can be changed, the cost
of labor is known as: variable cost.
21.Marginal cost equals: the change in total cost that results from a
one-unit increase in output
22.Lauren runs a chili restaurant in San Francisco. Her total revenue last
year was $110,000. The rent on her restaurant was $48,000, her labor costs
were
$42,000, and her materials, food and other variable costs were $20,000.
Lauren could have worked as a biologist and earned $50,000 per year. An
economist calculates her implicit costs as: $50,000
23.A factor of production that can be easily changed in the relevant
time period is called a:: variable input.
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27
, 24.Golda Rush quit her job as a manager for Home Depot to start her own
hair dressing salon, Goldilocks. She gave up a salary of $40,000 per year,
invested her savings of $30,000 (which was earning 5 percent interest) and
borrowed
$10,000 from a close friend, agreeing to pay 5 percent interest per year. In
her first year, Golda spent $18,000 to rent a salon, hired a part-time assistant
for
$12,000 and incurred another $15,000 on equipment and hairdressing
materi- al. Based on this information, what is the amount of her implicit
costs?: 41,500
25.Accounting costs exclude implicit costs.: true
26.Adam spent $10,000 on new equipment for his small business, "Adam's
Fitness Studio." Membership at his fitness center is very low and at this
rate, Adam needs an additional $12,000 per year to keep his studio open.
Which of
the following is true?
a. The $10,000 Adam spent on equipment is the total cost of starting the
business and the $12,000 he'll need to continue operations is a marginal
cost.
b. The $10,000 Adam spent on equipment is a fixed cost of business and the
$12,000 he'll need to continue operations is a variable cost. Correct
c. The variable cost of running the studio is $22,000.
d. The fixed cost of running the studio is $22,000.: The $10,000 Adam
spent on equipment is a fixed cost of business and the $12,000 he'll
need to continue operations is a variable cost.
27.Which of the following is the best example of a short run adjustment?
a. Your local Wal-Mart hires two more associates.
b. Toyota builds a new assembly plant in Texas.
c. Smith University completed negotiations to acquire a large piece of land
to build its new library.
d. A local bakery purchases another commercial oven as part of its
capacity expansion.: Your local Wal-Mart hires two more associates.
28.If firms do not earn economic profits in a competitive equilibrium, why
would the firms choose to stay in business?: When firms earn no economic
profit but earn a normal profit, they earn precisely as much as they
could have earned by investing their time and money elsewhere. In
other words, each producer is able
to earn sufficient accounting profits to cover the opportunity cost of
invested factors (time and money) and to continue operating. The
source of the confusion stems from the difference between accounting
3/
27
Perfectly Solved
1.Managerial economics is best defined as the economic study of:: how
busi- nesses can decide on the best use of scarce resources.
2.Managerial economics helps managers: make decisions in the face of
scarcity.
3.Microeconomics includes the study of the: choices made by individuals
and businesses
4.The form of economics most relevant to managerial decision-making
within the firm: microeconomics
5.CEOs should focus on: maximizing firm profits.
6.Managerial economics generally refers to the integration of economic
the- ory with business: Practice
7.A managerial decision is not profitable if: it increases costs more than
revenue
8.According to the profit-maximization goal, the firm should attempt to
max- imize short-run profits since there is too much uncertainty associated
with long-run profits.: . False
9.Why is it useful to study Managerial Economics?: Studying and
understanding Managerial Economics is important to make crucial
business decisions to maximize profit and create value for the product
or service one is providing. By blending economic theory and empirical
data, managers can understand the "how" and "why" a certain business
decision will maximize wealth. Once managers understand this
reasoning behind economic theories, they can use data to refine the
theory aspect of managerial economics to better fit their business,
yielding continuous improved decisions and ultimately the most
desirable results. This helps managers to create value. Consumers, just
like firms, have scare resources. Consumers will invest their resources
in the product or service that meets their needs with the greatest value.
Understanding managerial economics gives managers an edge in
creating value for their products.
10.Why can Managerial Economics be applied to any business decision mak
ing process, regardless of the industry?: Managerial Economics is
applicable to different types of organizations like for-profit firms, not-for
profit-firms, and gov- ernment agencies. All of these types of
organizations provide goods and services, even though they do not all
have the same objectives when it comes to maximizing wealth.
1/
27
,According to the text, "[economic] models are simplified
representations of a real-world organization and its environment" and
managers can use these models to make decisions in a timely and cost
effective manner. The models to do match every detail of an
organization so, although the over arching objectives may be different
from firm to firm, business transactions generally conform to similar
standards and processes. A model can be used to redirect the outcome
of a decision and it does not judge wether the outcome does/does not
support the organizations objectives.
11.Microeconomics studies the allocation of: scarce resources
12.Microeconomic models are used to: make
predictions. explain real-life phenomena.
evaluate production alternatives.
13.Managerial Economics as a specialized branch of Economics: Provide
logic and methodology to find solutions to business problems
14.Unlike an accountant, an economist measures costs on a(n)
basis: replacement
15.When an economist uses the term "cost" referring to a firm, the
economist refers to the: opportunity cost of producing a good or service,
which includes both implicit and explicit cost
16.Accounting costs: are historical costs
17.A firm earns a normal profit when its total revenues just offset both the
cost and cost.: accounting; opportunity
18.If Melissa owns a software company that incurs no fixed costs, then:
her total cost equals her total variable cost
19.In the short run, a firm cannot change the amount of capital it
uses. Therefore the cost of capital is a: fixed cost.
20.Because the amount of labor a firm employs can be changed, the cost
of labor is known as: variable cost.
21.Marginal cost equals: the change in total cost that results from a
one-unit increase in output
22.Lauren runs a chili restaurant in San Francisco. Her total revenue last
year was $110,000. The rent on her restaurant was $48,000, her labor costs
were
$42,000, and her materials, food and other variable costs were $20,000.
Lauren could have worked as a biologist and earned $50,000 per year. An
economist calculates her implicit costs as: $50,000
23.A factor of production that can be easily changed in the relevant
time period is called a:: variable input.
2/
27
, 24.Golda Rush quit her job as a manager for Home Depot to start her own
hair dressing salon, Goldilocks. She gave up a salary of $40,000 per year,
invested her savings of $30,000 (which was earning 5 percent interest) and
borrowed
$10,000 from a close friend, agreeing to pay 5 percent interest per year. In
her first year, Golda spent $18,000 to rent a salon, hired a part-time assistant
for
$12,000 and incurred another $15,000 on equipment and hairdressing
materi- al. Based on this information, what is the amount of her implicit
costs?: 41,500
25.Accounting costs exclude implicit costs.: true
26.Adam spent $10,000 on new equipment for his small business, "Adam's
Fitness Studio." Membership at his fitness center is very low and at this
rate, Adam needs an additional $12,000 per year to keep his studio open.
Which of
the following is true?
a. The $10,000 Adam spent on equipment is the total cost of starting the
business and the $12,000 he'll need to continue operations is a marginal
cost.
b. The $10,000 Adam spent on equipment is a fixed cost of business and the
$12,000 he'll need to continue operations is a variable cost. Correct
c. The variable cost of running the studio is $22,000.
d. The fixed cost of running the studio is $22,000.: The $10,000 Adam
spent on equipment is a fixed cost of business and the $12,000 he'll
need to continue operations is a variable cost.
27.Which of the following is the best example of a short run adjustment?
a. Your local Wal-Mart hires two more associates.
b. Toyota builds a new assembly plant in Texas.
c. Smith University completed negotiations to acquire a large piece of land
to build its new library.
d. A local bakery purchases another commercial oven as part of its
capacity expansion.: Your local Wal-Mart hires two more associates.
28.If firms do not earn economic profits in a competitive equilibrium, why
would the firms choose to stay in business?: When firms earn no economic
profit but earn a normal profit, they earn precisely as much as they
could have earned by investing their time and money elsewhere. In
other words, each producer is able
to earn sufficient accounting profits to cover the opportunity cost of
invested factors (time and money) and to continue operating. The
source of the confusion stems from the difference between accounting
3/
27
