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Managerial Economics, 7e (Keat)

Chapter 1  Introduction


Multiple-Choice Questions


1) The best definition of economics is

A) how choices are made under conditions of scarcity.

B) how money is used.

C) how goods and services are produced.

D) how businesses maximize profits.




2) Managerial economics is best defined as the economic study of

A) how businesses can make the most profits.

B) how businesses can decide on the best use of scarce resources.

C) how businesses can operate at the lowest costs.

D) how businesses can sell the most products.



3) Managerial economics is best defined as

A) the study of economics by managers.

B) the study of the aggregate economic activity.

C) the study of how managers make decisions about the use of scarce resources.

D) All of the above are good definitions.



4) Scarcity is a condition that exists when

A) there is a fixed supply of resources relative to the demand for the product.

B) there is a large demand for a product.

C) resources are not able to meet the entire demand for a product.

D) All of the above



5) Which of the statements below best illustrates the use of the market process in determining the allocation of scarce resources?

A) “Let’s make this product because this is what we know how to do best.”

B) “We should consider shifting to products where we can earn even more money.”

C) “Everyone is opening video stores, why don’t we?”

D) “We can’t stop making this product. This product gave our company its start.”


6) Which of the following is not considered as a factor of production?

A) money

B) machinery and equipment

C) land

D) unskilled labor



7) Select the group that best represents the basic factors of production.

A) land, labor, capital, entrepreneurship

B) land, labor, money, management skills

C) land, natural resources, labor, capital

D) land, labor, capital, technology



8) Which of the following is the best example of how the question of “what goods and services to produce?” is answered by the command process?

A) government subsidies for windmill energy production

B) laws regarding equal opportunity in employment

C) government allowance for the deduction of interest payments on private mortgages

D) government regulations concerning the dumping of hazardous waste



9) Which of the following is the best example of “what goods and services should be produced?”

A) the use of a capital intensive versus a labor intensive process of manufacturing textiles

B) the production of SUVs versus the production of sub-compact cars

C) the manufacturing of computer workstations in China or in India

D) the leasing versus the purchasing of new capital equipment



10) Which of the following is the best example of “how goods and services should be produced?”

A) complying with the technical specifications in the production of an aircraft

B) the production of jet aircraft for the air force or for a commercial airline

C) the use of additional workers versus the use of machines in the production of goods

D) the production of a new manufacturing facility



11) From the standpoint of a soft drink company the question of “What goods and services should be produced?” is best represented by which of the following decisions?

A) whether or not to hire additional workers

B) whether or not to increase its advertising

C) whether or not to shut down selected manufacturing facilities

D) None of the above are examples.


12) Which of the following is the best example of the “command” process?

A) United Airlines buys Northwest Airlines.

B) Striking auto workers force General Motors to shut down its factories.

C) Banks raise their fees on late payments by credit card holders.

D) The FCC requires local telephone companies to provide access to their local networks before being able to offer long distance service.



13) A critical element of entrepreneurship (as opposed to managerial skills) is

A) leadership skills.

B) risk taking.

C) technology.

D) political skills.



14) In the text, the key question in the “economics of a business” is

A) whether the need to grow revenues is being met.

B) should the firm be in the business in which it is operating.

C) whether the firm faces rising labor costs.

D) can the firm affect its market share.



15) Opportunity cost is best defined as

A) the amount given up when choosing one activity over all other alternatives.

B) the amount given up when choosing one activity over the next best alternative.

C) the opportunity to earn a profit that is greater than the one currently being made.

D) the amount that is given up when choosing an activity that is not as good as the next best alternative.



16) The economic concept of “opportunity cost” is most closely associated with which of the following management considerations?

A) market structure

B) resource scarcity

C) product demand

D) technology


17) Which of the following is the best example of opportunity cost?

A) a company’s expenditures on a training program for its employees

B) the rate of return on a company’s investment

C) the amount of money that a company can earn by depositing excess funds in a money market fund

D) the profit that a company forgoes when it decides to drop one product line in favor of another one



18) Which of the following is the best example of the “traditional process”?

A) commercial bank mergers

B) minimum age limits for the purchase of alcoholic beverages

C) auctioning U.S. Treasury bills

D) colleges and universities give admissions preferences to children of alumni



Analytical Questions


1) What economic conditions are relevant in managerial decision making?


2) What factors lead to competitive advantage for a firm?


3) What are the typical types of risk faced by a firm?


4) How do the three basic economic questions relate to the firm?


5) What other business disciplines are related to Managerial Economics?

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