Managerial Economics MBA
Homework No. 1
A- Multiple Choice Questions
Prof. M. El-Sakka
Dept. of Economics
1. Business profit is:
the residual of sales revenue minus the explicit accounting costs of doing business.
a normal rate of return.
economic profit.
the return on stockholders' equity.
a.
b.
c.
d.
2. To maximize the value of the firm, management must:
maximize short run revenue.
minimize short run average profit.
maximize long run profit.
maximize short run profit.
a.
b.
c.
d.
3. Economic profit equals:
normal profits plus opportunity costs.
business profits minus implicit costs.
business profits plus implicit costs.
normal profits minus opportunity costs.
a.
b.
c.
d.
4. The return to owner-provided inputs is an:
implicit cost.
economic rent.
entrepreneurial profit.
explicit cost.
a.
b.
c.
d.
5. The value of a firm is equal to:
the present value of tangible assets.
the present value of all future revenues.
the present value of all future cash flows.
current revenues less current costs.
a.
b.
c.
d.
6. The value of the firm decreases with a decrease in:
total revenue.
the discount rate.
the cost of capital.
total cost.
a.
b.
c.
d.
7. The value of the firm decreases with a decrease in:
total revenue.
the discount rate.
the cost of capital.
total cost.
a.
b.
c.
d.
8. If P = $1,000 - $4Q:
MR = $1,000 - $4Q
MR = $1,000 - $8Q
MR = $1,000Q - $4
MR = $250 - $0.25P
a.
b.
c.
d.
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9. The slope of a straight line from the origin to the total profit curve indicates:
marginal profit at that point.
an inflection point.
average profit at that point.
total profit at that point.
a.
b.
c.
d.
10. The optimal output decision:
minimizes the marginal cost of production.
minimizes production costs.
is most consistent with managerial objectives.
minimizes the average cost of production.
a.
b.
c.
d.
11. The optimal decision produces:
maximum revenue.
maximum profits.
minimum average costs.
a result consistent with managerial objectives.
a.
b.
c.
d.
12. Which of the following is an implicit cost?
A.
Insurance payments
B.
Property taxes
C.
Interest payments on a loan
D.
None of the above is an implicit cost.
13. What is the present value of $1.21 received at the end of two years if the interest rate
is 10% and compounding is annual?
A.
$1.31
B.
$1.21
C.
$1.10
D.
$1.00
13. Which of the following refers to the study of the economic behavior of individual
decision-making units, such as individual consumers, resource owners, and business
firms, in a free-enterprise system?
A.
Managerial economics
B.
Microeconomics
C.
Macroeconomics
D.
Econometrics
14. The modern theory of the firm postulates that the primary objective of managers is to
maximize
A.
the firm's total revenue.
B.
the value of the firm's output.
C.
the present value of the firm's expected future profits.
D.
all of the above.
15. Which of the following is the best definition of economic profit?
A.
B.
C.
D.
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Business profit minus implicit costs
Total revenue minus total explicit costs
Total revenue minus total implicit costs
Business profit minus explicit costs
B- Problem Solving
1. Vincent purchased twelve acres of land for $150,000. He quit his $40,000 a year job
as a postal employee and opened a stable for boarding horses on his land. The stable
generates $50,000 in annual net revenue after all day-to-day expenses have been
covered. Assume that the relevant discount rate is 10%. What is Vincent's business
profit? What is his economic profit?
2. Before Sam quit his job as a hairdresser, he was earning $34,000 per year. He rented
an office for $18,000 per year and opened a framing shop. He spends $88,000 per
year for labor, materials, utilities, and advertising.
(i)
How much revenue will the business have to earn in order to break
even in terms of business profit?
(ii)
How much revenue will the business have to earn in order to break
even in economic terms?
(iii)
Suppose that Sam buys the building. How will this influence the
amount that the business will have to earn in order to break even in
economic terms? In accounting terms?
3. Commercial Recording, Inc., is a manufacturer and distributor of reel-to-reel
recording decks for commercial recording studios. Revenue and cost relations are:
TR = $3,000Q - $0.5Q2
TC = $100,000 + $1,500Q + $0.1Q2
(1)
(2)
Calculate output which maximizing profit. Calculate the maximum profit
4. Restaurant Marketing Services, Inc., offers affinity card marketing and monitoring
systems to fine dining establishments nationwide. Fixed costs are $600,000 per year.
Sponsoring restaurants are paid $60 for each card sold, and card printing and
distribution costs are $3 per card. This means that RMS's marginal costs are $63 per
card. Based on recent sales experience, the estimated demand curve and marginal
revenue relations for are:
P = $130 - $0.000125Q
Calculate output, price, total revenue, and total profit at the profit-maximizing activity level
5. A firm's demand function is Q = 40 - 2P and its total cost function is defined as
TC = 100 + 2Q + 0.25 Q2 . Use these two functions to form the firm's profit function
and then determine the level of output that yields the profit maximum. What is the
level of profit at the optimum level of output?
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