PAGE 4 Multiple-Choice Questions 1. The difference between the short-run and the long-run production function is: a. three months or one business quarter. b. the time it takes for firms to change all production inputs. c. the time it takes for firms to change only their variable inputs. d. more information is required to answer this question. 2. Which of the following statements about the short-run production function is true? a. MP always equals AP at the maximum point of MP. b. MP always equals zero when TP is at its maximum. c. TP starts to decline at the point of diminishing returns. d. When MP diminishes, AP is at its minimum point. e. None of the above is true. 3. Assume a firm employs 10 workers and pays each $15 per hour. Further assume that the MP of the 10th worker is 5 units of output and that the price of the output is $4. According to economic theory, in the short run a. the firm should hire additional workers b. the firm should reduce the number of workers employed c. the firm should continue to employ 10 workers. d. more information is required to answer this question. 4. A firm using two inputs, X and Y, is using them in the most efficient manner when a. MPX = MPY b. PX = PY and MPX = MPY c. MPX/PY = MPY/PX d. MPX/MPY = PX/PY 5. Average fixed cost is a. AC minus AVC b. TC divided by Q c. AVC minus MC d. TC minus TVC 6. Diseconomies of scale can be caused by a. the law of diminishing returns. b. bureaucratic inefficiencies. c. increasing advertising and promotional costs. d. all of the above. 7. Which of the following cost relationship is not true? a. AFC = AC - MC b. TVC = TC - TFC c. the change in TVC divided by the change in Q = MC d. the change in TC divided by the change in Q = MC 8. When a firm produces at the point where MR = MC, and the price of its product is higher that the cost per unit, the profit that it is earning is considered to be a. maximum b. normal c. above normal d. below normal 9. Which of the following is not characteristic of perfect competition? a. A differentiated product b. No barriers to entry c. Large number of buyers d. Complete knowledge of market price 10. Suppose a firm is currently maximizing its profits (i.e., following the MR = MC rule). Assuming that it wants to continue maximizing its profits, if its fixed costs increase, it should a. maintain the same price b. raise its price c. lower its price d. not enough information to answer this question 11. Which of the following is true about a monopoly? a. Its demand curve is generally less elastic than in more competitive markets. b. It will always earn economic profit. c. It will charge the highest possible price. d. It will always be subject to government regulations. 12. If an oligopolistic firm decides to raise its price, a. other firms will automatically follow. b. none of the other firms will follow. c. other firms may follow if it is the price leader. d. None of the above. 13.

1. PAGE
4
Multiple-Choice Questions
1. The difference between the short-run and the long-run
production function is:
a. three months or one business quarter.
b. the time it takes for firms to change all production inputs.
c. the time it takes for firms to change only their variable
inputs.
d. more information is required to answer this question.
2. Which of the following statements about the short-run
production function is true?
a. MP always equals AP at the maximum point of MP.
b. MP always equals zero when TP is at its maximum.
c. TP starts to decline at the point of diminishing returns.
d. When MP diminishes, AP is at its minimum point.
e. None of the above is true.
3. Assume a firm employs 10 workers and pays each $15 per
hour. Further assume that the MP of the 10th worker is 5 units
of output and that the price of the output is $4. According to
economic theory, in the short run

2. a. the firm should hire additional workers
b. the firm should reduce the number of workers employed
c. the firm should continue to employ 10 workers.
d. more information is required to answer this question.
4. A firm using two inputs, X and Y, is using them in the most
efficient manner when
a. MPX = MPY
b. PX = PY and MPX = MPY
c. MPX/PY = MPY/PX
d. MPX/MPY = PX/PY
5. Average fixed cost is
a. AC minus AVC
b. TC divided by Q
c. AVC minus MC
d. TC minus TVC
6. Diseconomies of scale can be caused by
a. the law of diminishing returns.
b. bureaucratic inefficiencies.
c. increasing advertising and promotional costs.
d. all of the above.

3. 7. Which of the following cost relationship is not true?
a. AFC = AC - MC
b. TVC = TC - TFC
c. the change in TVC divided by the change in Q = MC
d. the change in TC divided by the change in Q = MC
8. When a firm produces at the point where MR = MC, and the
price of its product is higher that the cost per unit, the profit
that it is earning is considered to be
a. maximum
b. normal
c. above normal
d. below normal
9. Which of the following is not characteristic of perfect
competition?
a. A differentiated product
b. No barriers to entry
c. Large number of buyers
d. Complete knowledge of market price
10. Suppose a firm is currently maximizing its profits (i.e.,
following the MR = MC rule). Assuming that it wants to
continue maximizing its profits, if its fixed costs increase, it

4. should
a. maintain the same price
b. raise its price
c. lower its price
d. not enough information to answer this question
11. Which of the following is true about a monopoly?
a. Its demand curve is generally less elastic than in more
competitive markets.
b. It will always earn economic profit.
c. It will charge the highest possible price.
d. It will always be subject to government regulations.
12. If an oligopolistic firm decides to raise its price,
a. other firms will automatically follow.
b. none of the other firms will follow.
c. other firms may follow if it is the price leader.
d. None of the above.
13. If nothing else changes, an increase in fixed cost will
a. decrease the break-even quantity point.
b. increase the break-even quantity point.

5. c. will have no effect on the break-even point.
d. may either increase or decrease the break-even point.
14. The degree of operating leverage can be defined as
a. the change in profit for a $1 change in quantity.
b. the change in quantity for a $1 change in profit.
c. the percentage change in quantity for a given percentage
change in profit.
d. the percentage change in profit for a given percentage change
in quantity/sales.
15. If a company wants to break-even at 20,000 units, its
variable cost per unit is $3, and its fixed cost per period is
$40,000, its selling price per unit will have to be
a. $5
b. $5.50
c. $6
d. $6.50
16. For a given percentage change in sales, the higher the
degree of operating leverage,
a. the higher will be the percentage change in profit.
b. the lower will be the percentage change in profit.

6. c. the higher will be the absolute change in profit.
d. the lower will be the absolute change in profit.
17. Prices under an ideal cartel situation will be equal to
a. monopoly prices.
b. competitive prices.
c. prices under monopolistic competition.
d. marginal cost.
18. Barometric price leadership exist when
a. one firm in the industry initiates a price change and the other
may or may not follow.
b. one firm imposes its best price on the rest of the industry.
c. all firms agree to change prices simultaneously.
d. one company forms a price umbrella for all others.
19. When state universities charge higher tuition fees to out-of-
state students than to local students, the universities are
practicing
a. first-degree discrimination.
b. second-degree discrimination.
c. third-degree discrimination.
d. fourth-degree discrimination.

7. 20. If a product which costs $8 is sold at $10, the mark-up is
a. $2.
b. 25 %.
c. 20 %.
d. impossible to determine.
Short-Answer Questions
21. What are the major sources of risk for the firm?
22. Savings accounts pay very low rates of interest. The
average return on the stock market is about 10-12 %, in the long
run. Why would anyone put money into a savings account?
23. Why do cartels tend to break?
24. Why would a firm choose to remain in the industry in which
it makes an economic profit of zero?
25. The following matrix shows the payoffs for advertising
game between Coke and Pepsi. The firms can choose
to advertise or to not advertise. Number in the matrix represent
profits; the first number in each cell is the payoff to Coke.
(Numbers in millions.)
Coke (rows)/Pepsi (columns)
Advertise
Don't Advertise
Advertise
(10, 10)
(500, -50)
Don't Advertise

8. (-50, 500)
(100, 100)
· Explain why this would be describes as a Prisoner's Dilemma
game.
· Explain the probable outcome of this game.
26. When an automaker begins offering low cost financing or
rebates, others tend to do the same. What two oligopoly models
might offer an explanation of this behavior?
27. Fast-food restaurants tend to cluster together. That is, on
one corner, there might be four similar fast-food restaurants.
How can this be explained using a location game theory model?
28. Would it ever make sense for a firm to charge a price at or
below the cost of the product?
29. McDonald's charges a higher price for a Big Mac in New
York City than it does in a small town in Iowa. Is this an
example of third-degree price discrimination? Explain.
30. What additional sources of risk come from international
investments?
Extra-Credit Question
A firm in an oligopolistic industry has the following demand
and total cost equations:
P = 600 – 20Q
TC = 700 + 160Q + 15Q2

9. Calculate:
a. quantity at which profit is maximized.
b. maximum profit.
c. quantity at which revenue is maximized.
d. maximum revenue.

10. e. maximum quantity at which profit will be at least $580.
f. maximum revenue at which profit will be at least $580.
PAGE
1
See the below questions for examples of some talking points
that should be used. Its your choice which words you want to
use.
1. 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. “Although we’re currently making a profit on the products we
make, 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.”
2. Which of the following is the best example of opportunity

11. cost?
a. a company’s expenditures on a training program for its
employees
b. the rate of return on company’s investment
c. the amount of money that a company can earn by depositing
excess funds in a money market fund
d. the amount of profit that a company foregoes when it decides
to drop a particular product line in favor of another one
3. A critical element of entrepreneurship (as opposed to
managerial skills) is
a. leadership skills
b. risk taking
c. technology
d. political skills
4. The accounting costs are:
a. implicit cots
b. replacement costs
c. historical costs
d. all of the above
5. The calculation of stockholder wealth involves

12. a. the time value of money concept
b. the cash flow stream
c. business and financial risk
d. all of the above
6. As an objective, the maximization of profits ignores
a. the timing of cash flows
b. the time value of money concepts
c. the riskiness of cash flows
d. all of the above
7. Which of the following will cause a decrease in the demand
for fish (shifts the demand curve)?
a. The price of red meat (a substitute product) increases.
b. The price of fish increases.
c. The price of chicken (a substitute product) decreases.
d. The number of fishing boats decreases.
8. Which of the following would indicate that price is
temporarily below its market equilibrium?
a. There are a number of producers who are left with unwanted
inventories.
b. There are a number of consumers who must be placed on

13. waiting lists for the product.
c. Firms decide to leave the market.
d. The government must step in and subsidize the product.
9. Which of the following refers to a shift in the demand curve?
a. “This new advertising campaign should really increase our
demand.”
b. “Let’s drop our price to increase our demand.”
c. “We dare not raise our price because our demand will drop.”
d. “If new sellers enter the market, the demand for our product
is bound to increase.”
10. A decrease in the price of personal computers can result
from
a. a decrease in the price of chips
b. improvements in methods of assembling computers
c. an increase in the gross domestic product
d. all of the above
e. both a. and b.
11. Which of the following is a key determinant of both supply
and demand?
a. Income

14. b. Future expectations about prices
c. Tastes and preferences
d. Sales tax
12. The sensitivity of the change in quantity consumed of one
product to a change in the price of a related product is called
a. cross-price elasticity of demand
b. substitute elasticity
c. complementary elasticity
d. price elasticity of demand
13. The government unit that wants to achieve “revenue
enhancement” will find it considerably more favorable to enact
an excise tax on products whose demand is
a. highly elastic
b. relatively elastic
c. highly inelastic
d. unitary elastic
14. When total revenue increase from $18,000 to $26,000 when
quantity increases from 8 to 10, marginal revenue is equal to
a. $3,000
b. $4,000

15. c. $8,000
d. $2,600
15. In general, if there are many good substitutes for a given
product, the demand elasticity will be
a. high
b. low
c. indeterminate
d. zero
16. If the consumption of sugar does not change at all following
a price increase from 49 cents to 58 cents per pound, the
demand for sugar is considered to be
a. relatively inelastic
b. perfectly elastic
c. perfectly inelastic
d. unitary elastic
17. If the income elasticity of a particular product is –0.2, it
would be considered
a. a superior good
b. a normal good
c. an inferior good

16. d. an elastic good
18. If a firm decreases the price of a product and total revenue
decreases, then
a. the demand for this product is price elastic
b. the demand for this product is price inelastic
c. the cross elasticity is negative
d. the income elasticity is less than 1
19. The owner of a produce store found that when the price of a
head of lettuce was raised from 50 cents to $1, the quantity sold
per hour fell from 18 to 8. The arc elasticity of demand for
lettuce is
a. –0.56
b. –1.15
c. –0.8
d. –1.57
20. If a regression coefficient passes the t-test, it means that
a. the regression equation is valid.
b. the regression coefficient is significantly different from zero.
c. the regression coefficient cannot be used for forecasting.
d. None of the above.

17. 21. Which of the following is a test of the statistical
significance of the entire regression equation?
a. t-test
b. R2 test
c. F-test
d. Durbin-Watson test
22. When R2 of a regression is very high, it indicates that
a. all the coefficients are statistically significant.
b. the intercept term has no economic meaning.
c. a high proportion of the variation in the dependent variable
can be accounted for by the variation in the independent
variables.
d. there is a good chance of serial correlation and so the
equation must be changed.
23. The forecasting method that involves using and average of
past observations to predict the future (if the forecaster feels
that the future is a reflection of some average of past results) is
the
a. moving average method
b. econometric forecasting method
c. exponential smoothing method
d. both a. and b.

18. e. both a. and c.
24. When the more recent observations are more relevant to the
estimate of the next period than previous observations, the
naïve forecasting method employed is
a. exponential smoothing
b. compound growth rate
c. trend analysis
d. moving averages
25. What costs do economists consider irrelevant? Give
examples.
26. What main factor explains the difference between
accounting and economic cost? Explain.
27. “Should we continue developing a new software application
that we began last year?” How the distinction between sunk and
incremental costs is helpful in answering this question?
Explain.
28. Explain the difference between diseconomies of scale and
diminishing returns.
29. The demand for salt is relatively price inelastic, while the
demand for pretzels is relatively price elastic. How can you
best explain why?
30. Governments impose excise taxes on goods that have
inelastic demand, such as cigarettes, more often than in other
cases. Explain why?

19. 31. Suppose that macroeconomic forecasters predict that the
economy will be expanding in the near future. How might
managers use this information?
Hint: Consider the income elasticity of demand for normal and
inferior goods.
32. What is the major problem in projecting with a trend line?
The Johnson Robot Company’s marketing officials report to the
company’s CEO that the demand curve for the company’s robots
in 2001 is
P = 3,000 – 40Q,
where P is the price of a robot, and Q is the number sold per
month.
a. What is the marginal revenue equation for the firm?
b. At what prices is demand for the firm’s product price elastic?
c. If the firm wants to maximize its dollar sales volume, what
price should it charge?
33. The difference between the short-run and the long-run
production function is:
a. three months or one business quarter.
b. the time it takes for firms to change all production inputs.

20. c. the time it takes for firms to change only their variable
inputs.
d. more information is required to answer this question.
34. Which of the following statements about the short-run
production function is true?
a. MP always equals AP at the maximum point of MP.
b. MP always equals zero when TP is at its maximum.
c. TP starts to decline at the point of diminishing returns.
d. When MP diminishes, AP is at its minimum point.
e. None of the above is true.
35. Assume a firm employs 10 workers and pays each $15 per
hour. Further assume that the MP of the 10th worker is 5 units
of output and that the price of the output is $4. According to
economic theory, in the short run
a. the firm should hire additional workers
b. the firm should reduce the number of workers employed
c. the firm should continue to employ 10 workers.
d. more information is required to answer this question.
36. A firm using two inputs, X and Y, is using them in the most
efficient manner when
a. MPX = MPY
b. PX = PY and MPX = MPY

21. c. MPX/PY = MPY/PX
d. MPX/MPY = PX/PY
37. Average fixed cost is
a. AC minus AVC
b. TC divided by Q
c. AVC minus MC
d. TC minus TVC
38. Diseconomies of scale can be caused by
a. the law of diminishing returns.
b. bureaucratic inefficiencies.
c. increasing advertising and promotional costs.
d. all of the above.
39. Which of the following cost relationship is not true?
a. AFC = AC - MC
b. TVC = TC - TFC
c. the change in TVC divided by the change in Q = MC
d. the change in TC divided by the change in Q = MC
40. When a firm produces at the point where MR = MC, and the
price of its product is higher that the cost per unit, the profit
that it is earning is considered to be

22. a. maximum
b. normal
c. above normal
d. below normal
41. Which of the following is not characteristic of perfect
competition?
a. A differentiated product
b. No barriers to entry
c. Large number of buyers
d. Complete knowledge of market price
42. Suppose a firm is currently maximizing its profits (i.e.,
following the MR = MC rule). Assuming that it wants to
continue maximizing its profits, if its fixed costs increase, it
should
a. maintain the same price
b. raise its price
c. lower its price
d. not enough information to answer this question
43. Which of the following is true about a monopoly?
a. Its demand curve is generally less elastic than in more
competitive markets.

23. b. It will always earn economic profit.
c. It will charge the highest possible price.
d. It will always be subject to government regulations.
44. If an oligopolistic firm decides to raise its price,
a. other firms will automatically follow.
b. none of the other firms will follow.
c. other firms may follow if it is the price leader.
d. None of the above.
45. If nothing else changes, an increase in fixed cost will
a. decrease the break-even quantity point.
b. increase the break-even quantity point.
c. will have no effect on the break-even point.
d. may either increase or decrease the break-even point.
46. The degree of operating leverage can be defined as
a. the change in profit for a $1 change in quantity.
b. the change in quantity for a $1 change in profit.
c. the percentage change in quantity for a given percentage
change in profit.

24. d. the percentage change in profit for a given percentage change
in quantity/sales.
47. If a company wants to break-even at 20,000 units, its
variable cost per unit is $3, and its fixed cost per period is
$40,000, its selling price per unit will have to be
a. $5
b. $5.50
c. $6
d. $6.50
48. For a given percentage change in sales, the higher the
degree of operating leverage,
a. the higher will be the percentage change in profit.
b. the lower will be the percentage change in profit.
c. the higher will be the absolute change in profit.
d. the lower will be the absolute change in profit.
49. Prices under an ideal cartel situation will be equal to
a. monopoly prices.
b. competitive prices.
c. prices under monopolistic competition.
d. marginal cost.

25. 50. Barometric price leadership exist when
a. one firm in the industry initiates a price change and the other
may or may not follow.
b. one firm imposes its best price on the rest of the industry.
c. all firms agree to change prices simultaneously.
d. one company forms a price umbrella for all others.
51. When state universities charge higher tuition fees to out-of-
state students than to local students, the universities are
practicing
a. first-degree discrimination.
b. second-degree discrimination.
c. third-degree discrimination.
d. fourth-degree discrimination.
52. If a product which costs $8 is sold at $10, the mark-up is
a. $2.
b. 25 %.
c. 20 %.
d. impossible to determine.
53. What are the major sources of risk for the firm?
54. Savings accounts pay very low rates of interest. The

26. average return on the stock market is about 10-12 %, in the long
run. Why would anyone put money into a savings account?
55. Why do cartels tend to break?
56. Why would a firm choose to remain in the industry in which
it makes an economic profit of zero?
57. The following matrix shows the payoffs for advertising
game between Coke and Pepsi. The firms can choose
to advertise or to not advertise. Number in the matrix represent
profits; the first number in each cell is the payoff to Coke.
(Numbers in millions.)
Coke (rows)/Pepsi (columns)
Advertise
Don't Advertise
Advertise
(10, 10)
(500, -50)
Don't Advertise
(-50, 500)
(100, 100)
· Explain why this would be describes as a Prisoner's Dilemma
game.
· Explain the probable outcome of this game.
58. When an automaker begins offering low cost financing or
rebates, others tend to do the same. What two oligopoly models
might offer an explanation of this behavior?
59. Fast-food restaurants tend to cluster together. That is, on
one corner, there might be four similar fast-food restaurants.
How can this be explained using a location game theory model?
60. Would it ever make sense for a firm to charge a price at or
below the cost of the product?

27. 61. McDonald's charges a higher price for a Big Mac in New
York City than it does in a small town in Iowa. Is this an
example of third-degree price discrimination? Explain.
62. What additional sources of risk come from international
investments?
A firm in an oligopolistic industry has the following demand
and total cost equations:
P = 600 – 20Q
TC = 700 + 160Q + 15Q2
Calculate:
d. quantity at which profit is maximized.

28. e. maximum profit.
f. quantity at which revenue is maximized.
g. maximum revenue.
h. maximum quantity at which profit will be at least $580.
i. maximum revenue at which profit will be at least $580.
BUSN6120
MIDTERM EXAMINATION
ANSWER SHEET FOR MULTIPLE-CHOICE QUESTIONS

29. 1 _________
2 _________
3 _________
4 _________
5 _________
6 _________
7 _________
8 _________
9 _________
10 ________
11 ________
12 ________
13 ________
14 ________
15 ________
16 ________
17 ________
18 ________

30. 19 ________
20 ________
21 ________
22 ________
23 ________
24 ________
Research Paper on Caterpillar Inc.
Research Paper: Managerial Economics in Action
Research a company of your choice and address the following
issues:
1. What is the degree of competition of the industry and what is
the competitive strategy of the company?
2. How the company manages its costs, revenue, and profit?
3. Analyze the financial performance of the company?
4. How investors value the company and its future prospects?
5. How the company deals with global challenges?
An A-graded paper should meet the following requirements:
■ Use at least five quality resources
■ The paper should not exceed 12 pages and be formatted using
MLA reference style
■ Organize the paper in five sections addressing the questions
above
■ Include a title page, an executive summary, and a concise
summary of findings
■ The student demonstrates understanding of all concepts and
terms relevant to the questions.
■ The students applies correctly the tools and concepts in
analyzing real-world situations.

31. The student determines the nature and extent of information
needed to effectively address the topic and uses high
quality sources of information.
■
■ The student uses efficiently critically evaluated relevant and
valid information sources to answer the question.
■ The student provides examples reinforcing her/his statements.
■ The student uses proper and clear language and organizes
logically her/his response.