Questions and Answers of Fundamentals of Managerial Economics

i. Positive income elasticity implies positive price elasticity. True or False
x. Manager’s utility is a function of all except which of the following?a. Salary of a managerb. Actual profitc. Discretionary profitd. Discretionary investment
ix. A partnership deed would have which of the following information?a. Details of dependants of the partnersb. Other sources of income of the partnersc. Interest on a partner’s capitald.
viii. Which of the following ways is NOT adopted by a firm to make good of excess profits?a. Cash paymentsb. Debt paymentsc. Slack paymentsd. Side payments
vii. Which of the following only is true about a government department?a. It aims for revenue generation.b. It is a part of economic activities.c. It is run for a social utility.d. It looks after
vi. Retention ratio is the ratio between:a. Borrowed capital and owners’ capitalb. Retained profits and total profitsc. Current assets and current liabilitiesd. Retained profits and net profits
v. Find the odd one out:a. There is no limit on the maximum number of members in a public limited company.b. A joint stock company is a legal entity and its existence is independent of its members.c.
iv. A cooperative is:a. A non-profit organisationb. A political organisationc. A religious organisationd. A proprietory organisation
iii. Public sector suffers from all the following evils except:a. Delayed decision-makingb. Corruptionc. Decentralised powerd. Lack of incentive to perform
ii. Balanced growth of the firm is dependent on:a. Growth rate of demand for the firm’s productsb. Success rate of businessc. Brand image of the firmd. Utility function of managers
i. Advantages of sole proprietorship include all of the following except:a. Speedy decision-makingb. Transcending trade secretsc. Shared fruits of businessd. Easy inception
x. Ownership of capital investment lies with the in case of a PSU.
ix. Availability of funds in a partnership firm is dependent on of the partners.
viii. According to Simon, managers operate under rationality.
vii. Owners of debentures are of the company.
vi. Growth rate of demand for a firm’s product depends on success rate and .
v. In case of sole proprietorship any legal matter is settled in the name of the ______.
iv. The profit earned in a joint stock company is divided in the form of _______on basis of shares.
iii. A manager would prefer a high ________ ratio.
ii. _________are generally far less conspicuous than monetary benefits.
i. A person who has health insurance would have _______ tendency to take risks.
x. Moral hazard takes advantage of asymmetric information before a transaction. True or False
ix. A sole proprietor firm has a distinct entity separate from its owner. True or False
viii. Partners are mutual agents as well as principal. True or False
vii. Increase in profit is possible through increase in discretionary profit. True or False
vi. Owners have better knowledge about the market than managers. True or False
v. Shareholders of a company elect its Board of Directors. True or False
iv. In consumers’ cooperative, profits are divided among all the members. True or False
iii. The biggest disadvantage of PSUs is that they created the element of job security. True or False
ii. Satisficing of a variable would imply maximising its value. True or False
i. Profit is necessary to keep shareholders happy. True or False
x. Microeconomics helps determine the following:a. Equilibrium of the economy.b. Equilibrium of a firm.c. Equilibrium of an individual.d. Equilibrium of an industry.
ix. The study of unemployment is a part ofa. Normative economicsb. Microeconomicsc. Macroeconomicsd. Descriptive economics
viii. The problem with the marginal concept is that:a. Changes in variables may not be in bulk.b. Changes in variables may not be in single unit.c. Outflow and inflow of resources may not be equal.d.
vii. Welfare economics deals with:a. Whether resources are optimally generated.b. How to identify a socially efficient allocation of resources.c. For whom to produce resources.d. Whether distribution
vi. All of the following are sources of growth except:a. Growth of labourb. Growth of capitalc. Growth of currencyd. Growth of technology
v. A long run is a time period:a. Long enough for consumers and producers to adjust to any new situation.b. In which industrial capacity is assumed to be given.c. All factors are fixed.d. Technology
iv. The state in which all the industries in an economy are in equilibrium is of:a. General equilibriumb. Partial equilibriumc. Production possibility curved. Opportunity cost
iii. All of the following are in the purview of microeconomics except:a. What to produce?b. How to produce?c. For whom to produce?d. Is the economy growing?
ii. The most important aspects of decision sciences that are used in managerial economics include all of these except:a. Numerical and algebraic analysisb. Optimisationc. Game theoryd. Opportunity
i. The subject of economics is:a. A physical scienceb. A natural sciencec. An exact scienced. A social science
x. MCn = TCn – .
ix. Economic resources are scarce and needs are .
viii. Capital as an input is fixed in the .
vii. Positive statements are in nature.
vi. PVF refers to Present Value .
v. In the goods produced for sale in the market are taken as given and prices quickly adjust to clear markets.
iv. involves making a choice that gives the greatest benefit relative to cost.
iii. is maximised when the limited stock of resources yields the maximum possible volume of goods and services.
ii. Full employment is a situation in which unemployment is reduced to the minimum possible level.
i. If consumers measure and compare costs and benefits before taking a decision, they are individuals.
x. National product is distributed in a capitalist economy according to need principle. True or False
ix. Opportunity cost is the same as economic cost. True or False
viii. A producer can change his product line in the short run. True or False
vii. Positive economics analyses problems on the basis of facts. True or False
vi. Economics is a science in its application and art in its methodology. True or False
v. Marginal concept is applied usually when the changes are not necessarily in terms of a single unit, but in bulk. True or False
iv. Outflow and inflow of money and resources in business take place at different points of time. True or False
iii. Macroeconomics studies the choices made by individuals and societies in regard to the alternative uses of scarce resources which are employed to satisfy wants. True or False
ii. “Manufacturing output has increased 5 percent in 2007” is an illustration of positive economics. True or False
i. “The government should ensure that consumer spending is not deflated” is an illustration of normative economics. True or False
Describe some of the social benefits of international trade.
“Economic growth is ultimately constrained by finite natural resources. In a capitalist system, the population has a natural tendency to grow faster than food production and hence is only
Is government policy that increases the well-being of one generation at the expense of another just in the ethical sense?
Among health economists, the term moral hazard has come to explain why insurance provides incentives for the overconsumption of health-care services. Describe this idea and its economic implications.
What features of the health-care services market can lead to the purchase of poor quality, unnecessary, or high-cost services?
One of the most vexing issues to complicate the health-care debate is the problem that there is no simple link between general health and well-being and the amount spent on health care.Briefly
List some potential causes of the Great Depression and the range of factors that influence the timing and magnitude of economic fluctuations in general.
Does the fact that public decisions are sometimes made by self-interested politicians and bureaucrats undermine the basic premise of public choice theory?
Describe the traditional rationale for public management of economic resources. Is this rationale viable when government deficit spending is substantial?
What important purposes are served by the postaudit?
Recent academic studies in financial economics conclude that stockholders of target firms in takeover bids “win” (earn abnormal returns) and that stockholders of successful bidders do not lose
Explain why the intersection of the IOS and MCC curves defines an economically optimal capital budget.
In an earlier chapter, it was argued that factors should be used in such proportions that the marginal product/price ratios for all inputs are equal. In terms of capital budgeting, this implies that
Why do the NPV, PI, and IRR capital budgeting decision rules sometimes provide conflicting rank orderings of investment project alternatives?
Explain the underlying rationale for using the NPV approach to investment project selection.
Why do accounting income statements provide only an imperfect basis for investment decisions, and what steps must be taken to adjust these data?
When is it most useful to use game theory in decision analysis?
“Utility is a theoretical concept that cannot be observed or measured in the real world. Hence, it has no practical value in decision analysis.” Discuss this statement.
What is the main difficulty associated with making decisions solely on the basis of comparisons of expected returns?
Define the following terms:A. Probability distribution B. Expected value C. Standard deviation D. Coefficient of variation E. Risk F. Diminishing marginal utility of money G. Certainty equivalent H.
Is the deregulation movement consistent or inconsistent with the capture theory of economic regulation?
Define price discrimination. When is it legal? When is it illegal? Cite some common examples of price discrimination.
Define the term market failure and cite some causes. Also, cite some examples of market failure.
Illustrate the relation between the optimal markup on price and the point price elasticity of demand.
Identify and interpret the relation between the optimal markup on cost and the point price elasticity of demand.
Develop and explain the relation between the markup-on-cost and the markup-on-price formulas.
What is markup pricing?
Is short-run revenue maximization necessarily inconsistent with the more traditional long-run profit-maximizing model of firm behavior? Why or why not?
Will revenue-maximizing firms have short-run profits as large as or larger than profit-maximizing firms? If so, when? If not, why not?
“One might expect firms in a monopolistically competitive industry to experience greater swings in the price of their products over the business cycle than those in an oligopolistic industry.
Would you expect the demand curve for a firm in a monopolistically competitive industry to be more or less elastic after economic profits have been eliminated?
Explain the process by which economic profits are eliminated in a monopolistically competitive industry as compared to a perfectly competitive industry.
Describe the oligopolistic market structure and provide some examples.
Describe the monopolistically competitive market structure and provide some examples.
Why are both industry and firm demand curves downward sloping in monopoly market structure?
Why are the perfectly competitive firm and the perfectly competitive industry supply curves upward sloping?
Why is the firm demand curve horizontal in perfectly competitive markets? Does this mean that the perfectly competitive industry demand curve is also horizontal?
How are barriers to entry and exit similar? How are they different?
Describe the perfectly competitive market structure and provide some examples.

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