Quiz: Managerial Economics: Markets and Strategy — 36 questions

1. Which cost should be included when evaluating a forward-looking business decision?

A. The payment made for an asset that cannot be resold

B. The historical purchase price recorded in prior accounts

C. The earnings forgone from the next-best alternative use of resources

D. The expenditure already paid for an unrecoverable machine

Answer: (C)

Explanation

An opportunity cost represents the return forgone from the next-best alternative and therefore matters in a forward-looking decision. A sunk cost has already been incurred and cannot be recovered, so it should not affect the choice.

2. When should a project be undertaken under the economic-cost decision rule?

A. When its revenue exceeds its full economic cost

B. When its revenue exceeds its recorded accounting cost

C. When its opportunity cost exceeds its expected revenue

D. When its accounting cost exceeds its opportunity cost

Answer: (A)

Explanation

A project should be undertaken when revenue exceeds economic cost, which combines accounting cost and opportunity cost. Comparing revenue with accounting cost alone can make a project appear profitable while omitting forgone alternatives.

3. A factory experiences economies of scale when what happens as its output increases?

A. Average cost decreases as output increases

B. Total cost decreases while output increases

C. Marginal cost remains equal to total cost

D. Average cost increases as output increases

Answer: (A)

Explanation

Economies of scale describe a decline in average cost as the scale of output expands. Rising average cost with greater output instead describes diseconomies of scale.

4. A production process displays diseconomies of scale when what pattern occurs?

A. Marginal cost falls below fixed cost

B. Average cost increases as output increases

C. Average cost decreases as output increases

D. Total revenue increases faster than output

Answer: (B)

Explanation

Diseconomies of scale occur when expanding output raises average cost. A falling average cost as output expands is the defining pattern of economies of scale.

5. Which statement correctly distinguishes marginal cost from average cost?

A. Marginal cost is fixed cost per unit, while average cost is variable cost per unit

B. Marginal cost is the cost of one additional unit, while average cost is total cost per unit

C. Marginal cost is total cost per unit, while average cost is the cost of one additional unit

D. Marginal cost is total revenue from one unit, while average cost is total cost per unit

Answer: (B)

Explanation

Marginal cost measures the change in cost from producing an additional unit, whereas average cost divides total cost by total output. Treating marginal cost as total cost per unit confuses an incremental measure with an average measure.

6. At which points does the marginal cost curve cross the average cost curves?

A. At the output where fixed cost equals variable cost

B. At the maximum points of average variable cost and average cost

C. At the minimum points of average variable cost and average cost

D. At the output where total cost first becomes positive

Answer: (C)

Explanation

Marginal cost crosses each average cost curve at that curve’s minimum point. The crossing does not occur because fixed and variable costs become equal or because total cost first becomes positive.

7. How is economic profit calculated from total revenue and total cost?

A. $\Pi = TR + TC$

B. $\Pi = TR - TC$

C. $\Pi = TR \times TC$

D. $\Pi = TC - TR$

Answer: (B)

Explanation

Profit is the difference between total revenue and total cost, expressed as $\Pi = TR - TC$. Total revenue by itself measures receipts, not the amount remaining after costs.

8. What should a firm do when marginal revenue is greater than marginal cost?

A. Exit production because marginal cost is below marginal revenue

B. Increase output because an additional unit adds more revenue than cost

C. Hold output fixed because marginal revenue determines cost

D. Decrease output because an additional unit adds more revenue than cost

Answer: (B)

Explanation

When marginal revenue exceeds marginal cost, expanding output increases profit at the margin. Decreasing output is appropriate when marginal cost exceeds marginal revenue, not in this situation.

9. Under what condition is a firm’s profit maximized at its chosen output?

A. Average revenue equals average cost at the highest output level

B. Marginal revenue equals marginal cost at the top of the profit curve

C. Marginal cost remains below marginal revenue throughout production

D. Total revenue equals total cost at the lowest point of the cost curve

Answer: (B)

Explanation

Profit is maximized where marginal revenue equals marginal cost, provided that point identifies the top rather than the bottom of the profit curve. Equality alone is not sufficient if the marginal-cost condition does not identify a maximum.

10. Which combination best characterizes a perfectly competitive market?

A. Homogeneous products, free entry and exit, and price-taking firms

B. Homogeneous products, restricted entry, and a single price-setting firm

C. Differentiated products, restricted entry, and firms with pricing power

D. Differentiated products, free exit, and firms that choose market price

Answer: (A)

Explanation

Perfect competition combines homogeneous products, free entry and exit, and firms too small to influence the market price. A firm with substantial pricing power describes monopoly or another imperfectly competitive market structure.

11. A competitive firm faces a market price of $20$ and chooses its profit-maximizing output. Which condition should describe its supply decision at that output?

A. $P = MC > MR = 20$

B. $P > MR = MC = 20$

C. $MR > P = MC = 20$

D. $P = MR = MC = 20$

Answer: (D)

Explanation

For a competitive firm, price equals marginal revenue, and the profit-maximizing output satisfies $P = MR = MC$. The condition with marginal revenue below price applies to a monopolist rather than a price-taking firm.

12. When should a competitive firm shut down in the short run?

A. When price rises above marginal cost

B. When total revenue exceeds its variable cost

C. When price falls below minimum average cost

D. When price equals its maximum average cost

Answer: (C)

Explanation

A competitive firm shuts down in the short run when the price is below its minimum average cost. In that situation, operating cannot cover the relevant average cost at any feasible output level.

13. What happens in a competitive industry when existing firms earn positive economic profit in the long run?

A. The market price becomes fixed, preventing further industry adjustment

B. Firms restrict output, increasing market demand and raising profit

C. New firms enter, increasing industry supply and reducing profit

D. Existing firms exit, decreasing industry supply and reducing profit

Answer: (C)

Explanation

Positive economic profit attracts entry, which increases industry supply and places downward pressure on price and profit. Exit is the adjustment associated with negative rather than positive economic profit.

14. Which condition describes long-run competitive equilibrium for active firms?

A. Firms cover variable cost, earn negative economic profit, and have $P = MC < AC$

B. Firms maximize profit, earn positive economic profit, and have $P = AC > MC$

C. Firms minimize revenue, earn zero accounting profit, and have $P > MC > AC$

D. Firms maximize profit, earn zero economic profit, and have $P = MC = AC$

Answer: (D)

Explanation

Long-run competitive equilibrium requires profit maximization and zero economic profit, giving $P = MC = AC$ for active firms. Zero economic profit includes opportunity costs, so it is not equivalent to merely having zero accounting profit.

15. A monopolist sells quantity $Q$ at price $P(Q)$. How is its total revenue calculated?

A. $TR = P(Q)Q$

B. $TR = \frac{P(Q)}{Q}$

C. $TR = P(Q) + Q$

D. $TR = \frac{dP}{dQ}Q$

Answer: (A)

Explanation

Total revenue is the price received per unit multiplied by the quantity sold, expressed as $TR = P(Q)Q$. The derivative of total revenue with respect to quantity measures marginal revenue rather than total revenue itself.

16. For a monopolist facing inverse demand $P(Q)$, which expression gives marginal revenue?

A. $MR = P(Q) + \frac{dP}{dQ}Q$

B. $MR = P(Q) - \frac{dP}{dQ}Q$

C. $MR = P(Q)Q + \frac{dP}{dQ}$

D. $MR = \frac{P(Q)}{Q} + \frac{dP}{dQ}$

Answer: (A)

Explanation

Differentiating total revenue $TR = P(Q)Q$ with respect to quantity gives $MR = P(Q) + \frac{dP}{dQ}Q$. Because demand slopes downward, $\frac{dP}{dQ}$ is negative, so monopoly marginal revenue is below price.

17. How does a monopolist determine its profit-maximizing price and quantity?

A. Choose quantity where $MR = MC$, then find price from inverse demand

B. Choose price where $MR = AC$, then find quantity from total revenue

C. Choose quantity where $P = MR$, then find price from average cost

D. Choose price where $P = MC$, then find quantity from marginal revenue

Answer: (A)

Explanation

A monopolist first selects the quantity at which marginal revenue equals marginal cost and then reads the corresponding price from the inverse demand curve. Setting price equal to marginal cost is the competitive-firm condition, not the general monopoly pricing rule.

18. Which expression measures the price elasticity of demand while accounting for both price and quantity levels?

A. $E = \frac{dQ}{dP}\frac{Q}{P}$

B. $E = -\frac{dP}{dQ}\frac{Q}{P}$

C. $E = -\frac{dQ}{dP}$

D. $E = -\frac{dQ}{dP}\frac{P}{Q}$

Answer: (D)

Explanation

Price elasticity measures the percentage responsiveness of quantity demanded to price, which requires scaling the slope by the price-to-quantity ratio. The slope alone omits the current price and quantity levels and therefore does not measure elasticity by itself.

19. If demand is inelastic over a product’s current price range, what happens to total expenditure when the firm raises its price?

A. Total expenditure remains unchanged because price and quantity move in opposite directions.

B. Total expenditure decreases because quantity falls proportionally more than price rises.

C. Total expenditure becomes zero because some consumers leave the market.

D. Total expenditure increases because quantity falls proportionally less than price rises.

Answer: (D)

Explanation

With inelastic demand, the percentage decrease in quantity is smaller than the percentage increase in price, so total expenditure rises. Elastic demand would produce the opposite expenditure effect, with quantity responding proportionally more than price.

20. According to the monopoly markup rule, how is the markup over marginal cost related to elasticity?

A. $\frac{P-MC}{P}=\frac{P}{E}$

B. $\frac{P-MC}{P}=\frac{1}{E}$

C. $\frac{P-MC}{P}=\frac{MC}{E}$

D. $\frac{P-MC}{P}=E$

Answer: (B)

Explanation

The monopoly markup rule states that the price-cost margin as a share of price equals the reciprocal of demand elasticity. A larger elasticity therefore corresponds to a smaller proportional markup, holding the rule’s terms consistent.

21. Which situation is best described as a game rather than a decision problem involving one decision-maker?

A. A consumer selects a bundle while considering only personal preferences.

B. Each firm chooses an action while its payoff depends on the rival’s action.

C. A household decides how much to save without affecting another agent’s payoff.

D. A manager chooses a project based on the firm’s available budget.

Answer: (B)

Explanation

Game theory analyzes interdependent decisions in which each player’s outcome depends on the actions of others. The other situations describe choices by one decision-maker without the stated strategic dependence on another player.

22. What distinguishes a dominant strategy from a best response?

A. A dominant strategy gives a higher payoff for every action chosen by the opponent.

B. A dominant strategy is chosen when all players receive identical payoffs.

C. A dominant strategy guarantees the highest total payoff for every player.

D. A dominant strategy gives the highest payoff for one particular opponent action.

Answer: (A)

Explanation

A dominant strategy remains better regardless of what the other player does. A best response, by contrast, is optimal conditional on a particular action by the opponent, so it can change when that action changes.

23. What condition defines a Nash equilibrium in a strategic game?

A. No player can gain by changing strategy alone while the others keep their strategies fixed.

B. One player has a dominant strategy and every other player follows it.

C. Every player receives the largest payoff that could be achieved by any strategy combination.

D. All players choose the same strategy and therefore obtain identical payoffs.

Answer: (A)

Explanation

A Nash equilibrium is a strategy combination in which each player’s choice is optimal given the choices of the others, so unilateral deviation does not improve that player’s payoff. Equal strategies, maximum total payoffs, or the presence of a dominant strategy are not required.

24. How does backward induction solve a sequential game?

A. It assumes players move simultaneously and compares strategies without an action sequence.

B. It averages the payoffs from all possible paths before selecting the first player’s action.

C. It removes every branch that has a lower payoff for the player who moves first.

D. It determines optimal actions at final decision nodes and then reasons backward to earlier choices.

Answer: (D)

Explanation

Backward induction begins with the actions that are optimal at the last decision nodes and uses those conclusions to evaluate earlier choices. Simultaneous games lack the observed sequence of earlier and later decision nodes required for this procedure.

25. When is a threat in a sequential game credible?

A. The threat produces the highest payoff for the player who hears it.

B. Carrying out the threat would be optimal when the relevant decision node is reached.

C. The threat changes the game into one with simultaneous decisions.

D. The threat is announced before the other player chooses an initial action.

Answer: (B)

Explanation

A threat is credible when the player would rationally carry it out after reaching the relevant decision node. An announcement can influence behavior without making the threatened action optimal once that node is reached.

26. In a market-entry game, why is a monopolist’s threat to fight entry noncredible when accommodation is the better response after entry?

A. The entrant cannot observe the monopolist’s response after entering.

B. The monopolist would prefer accommodation at the post-entry decision node.

C. The entrant is required to enter regardless of the monopolist’s response.

D. The monopolist receives a higher payoff from fighting after entry.

Answer: (B)

Explanation

The threat is noncredible because, once entry occurs, accommodation gives the monopolist the better response and fighting would not be optimal. A threat that would not be carried out at the relevant node cannot rationally support the earlier deterrence outcome.

27. Which market structure is characterized by a finite number of firms whose decisions affect one another strategically?

A. Monopolistic competition with differentiated sellers

B. A monopoly with one unrestricted market supplier

C. An oligopoly with strategically interdependent firms

D. Perfect competition with independent price-taking firms

Answer: (C)

Explanation

An oligopoly contains a finite number of firms whose strategic decisions influence one another. Perfectly competitive firms are generally treated as price takers rather than strategically interdependent rivals.

28. What distinguishes Cournot competition from Bertrand competition?

A. Cournot firms sell differentiated goods, while Bertrand firms sell identical goods

B. Cournot firms choose prices, while Bertrand firms choose quantities

C. Cournot firms move sequentially, while Bertrand firms move simultaneously

D. Cournot firms choose quantities, while Bertrand firms choose prices

Answer: (D)

Explanation

Cournot competition models simultaneous quantity choices, whereas Bertrand competition models simultaneous price choices. The distinction concerns the strategic variable selected by firms, not whether moves are sequential or whether products are differentiated.

29. With homogeneous products, what can happen when firms compete by setting prices?

A. Firms may reduce output while leaving the market price unaffected

B. Firms may undercut one another until price reaches marginal cost

C. Firms may maintain prices above marginal cost because products are identical

D. Firms may raise prices together until demand becomes perfectly inelastic

Answer: (B)

Explanation

For homogeneous products, each firm can attract buyers by slightly undercutting its rivals, pushing price toward marginal cost. Identical products therefore intensify price competition rather than supporting stable price premiums.

30. Which change shifts a good’s demand curve rather than causing movement along that curve?

A. A change in consumers’ income

B. A change in the good’s own price

C. A change in quantity demanded caused by the good’s price

D. A movement to a different point on the same curve

Answer: (A)

Explanation

Income is a determinant of demand that shifts the entire demand curve. A change in the good’s own price changes quantity demanded along the existing curve rather than shifting it.

31. If the price of a substitute rises, what happens to demand for the good in question?

A. Demand for the good decreases because consumers switch away from it

B. Quantity supplied of the good increases along its supply curve

C. Demand for the good increases because consumers switch toward it

D. Demand remains unchanged because substitutes affect production costs

Answer: (C)

Explanation

When a substitute becomes more expensive, consumers tend to switch toward the good in question, increasing its demand. A complement has the opposite relationship, while substitute prices do not directly determine supply.

32. How does an increase in income affect demand for an inferior good?

A. It raises quantity supplied through higher household purchasing power

B. It increases demand for the inferior good

C. It decreases demand for the inferior good

D. It leaves demand unchanged at every market price

Answer: (C)

Explanation

Demand for an inferior good decreases as income rises because consumers may replace it with preferred alternatives. The income effect for a normal good is positive, but that relationship does not apply to inferior goods.

33. What condition defines market equilibrium?

A. Quantity demanded equals quantity supplied, so $Q_d = Q_s$

B. Quantity supplied exceeds quantity demanded, so $Q_s > Q_d$

C. Quantity demanded exceeds quantity supplied, so $Q_d > Q_s$

D. The market price equals zero, so $P = 0$

Answer: (A)

Explanation

Market equilibrium occurs when the quantity buyers want equals the quantity sellers offer, expressed as $Q_d = Q_s$. When the two quantities differ, the market instead has a shortage or surplus.

34. Which area represents consumer surplus in a competitive market diagram?

A. The area above the supply curve and below the market price

B. The area below the demand curve and above the market price

C. The area between the demand and supply curves below equilibrium quantity

D. The area below the supply curve and above the market price

Answer: (B)

Explanation

Consumer surplus measures buyers’ gains from trade and is shown as the area below the demand curve but above the market price. The area above supply and below price represents producer surplus, which measures sellers’ gains.

35. How does a per-unit tax imposed on sellers affect the market diagram?

A. It shifts the supply curve upward by the amount of the tax

B. It shifts the demand curve downward by the amount of the tax

C. It shifts the supply curve downward by the amount of the tax

D. It shifts the demand curve upward by the amount of the tax

Answer: (A)

Explanation

A per-unit tax on sellers raises the cost of supplying each unit, shifting the supply curve upward by the tax amount. A tax on buyers instead shifts the demand curve downward by the tax amount.

36. Why does a sales tax create deadweight loss?

A. It causes firms to receive the entire tax payment as revenue

B. It prevents some mutually beneficial trades from occurring

C. It transfers every buyer’s surplus into producer surplus

D. It increases total gains from trade by raising the market price

Answer: (B)

Explanation

A sales tax reduces total welfare because some trades whose benefits exceed their costs no longer occur. The lost gains from these unrealized trades form deadweight loss, rather than becoming a complete transfer to producers.