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Course Name Managerial Economics

Program MCOM

Exam Final Term

Semester 1ST

Total Points 75

Time Allowed 2:00

Instructor Andleeb Akhtar

Allowed: 30
Minutes Total Marks: 25

Question No 1:
Choose the most appropriate option. Overwriting and cutting is not allowed.

1. 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

2. The process of decision making can be broken down into basic steps
A. Six
B. Seven
C. Five
D. Four

3. Marginal analysis is a process of considering in decision making

A. Big
B. Small
C. Internal
D. A,b,c,d

4. The common element in almost all business problems is

A. Short-term profit maximization.
B. Competitive strategy.
C. Market analysis.
D. Decision making.

5. In long run factor of production

a. Variable
b. Fixed
c. Constant
d. Moving
6. In a perfectly competitive market, a company demand curve is

A. perfectly elastic

B. perfectly inelastic

C. imperfect market

D. elastic

7. Buyers competent of making realistic purchases based on information given are

A. rational buyers

B. rational sellers

C. buyers

D. sellers

8. In monopolistic competition, companies attain some level of market power

A. by producing differentiated products.

B. because of barriers to exit from industry.

C. because of barriers to entry into industry.

D. by virtue of size alone

9. All customers and manufacturers are supposed to have ideal knowledge of price, usefulness,
worth and manufacturing ways of products are

A. perfect utility

B. less information

C. perfect information

D. imperfect information

10. In distinguish to a monopoly or oligopoly, it is impractical for a company in perfect

competition to produce economic profit in the

A. short run

B. year

C. a&b

D. long run

11. Supply curve for an ideal competitor is its

A. marginal Revenue curve

B. average total cost curve

C. marginal cost curve

D. marginal cost curve above its average variable cost curve

12. Each of following are means monopolistically competitive companies distinguish their
commodities EXCEPT

A. selling with slightly different physical characteristics.

B. offering different levels of service that come with a product.

C. creating a special aura or image for product with advertising.

D. none of above are exceptions they are all ways of differentiating products.

13. There is a kind of good that if supplier of that good can prevent people who do not pay from
consuming it is known as

A. excludable good

B. rivalry good

C. public good

D. bad good

14. When firm's marginal revenue is equals to firm's marginal cost, that situation is known as

A. equilibrium

B. profit maximization

C. pareto efficiency

D. efficient scale

15. Economic profit is concerned with implicit cost, explicit cost as well as

A. opportunity cost

B. accounting profit

C. economic losses
D. total cost

16. Feature that has a positive impact on economic growth of wealthy countries is called as

A. foreign direct investments

B. interest rates

C. balance of payment

D. taxes

17. Type of a market structure in which firms have many competitors, but each one sells a slightly
different product is called as

A. monopoly

B. oligopoly

C. free market

D. monopolistic competition

18. A type of activity performed like why two individuals might not cooperate, even if it appears
that it is in their best interest to do so is best example for

A. game theory

B. Nash equilibrium

C. prisoner's dilemma

D. dominant strategy

19. When price of popcorn reduces whereas price of movie tickets increases and vice versa, are to
be known as

A. inferior goods

B. complementary goods

C. substitutes

D. normal goods

20. A type of market where equilibrium of price of goods and quantity demanded is equally
efficient is known as

A. free market

B. oligopoly

C. imperfect market

D. monopoly

21. In a monopoly market, firm is able to set prices anywhere on demand curve and acts as a

A. price maker

B. price taker

C. producer

D. consumer

22. In a non-zero-sum game,

A. The players’ payoffs are in complete conflict; when one gains the other loses.
B. There is never an advantage from communication or cooperation.
C. Some outcomes may be mutually preferred to other outcomes.
D. It is always an advantage to move first.

23. Game theory applies to problems that arise in

A. Perfect competition.
B. Oligopolies.
C. Monopolies where new entry is impossible.
D. None of the Above

24. Decision trees are numerically evaluated

A. From left to right
B. From right to left.
C. By averaging at chance events.
D. Answers b and c are both correct.

25. In a particular market, price exceeds average cost over an extended interval of time. This
suggests that the market

A. Has few barriers to entry

B. Has numerous small competitors
C. Is an oligopoly.
D. Is perfectly competitive.


Short Questions: Please attempts all questions (Marks 5×3=15)

1. A pharmaceutical company has a monopoly on a new medicine. Under pressure by regulators and
consumers, the company is considering lowering the price of the medicine by 10 percent. The
company has hired you to analyze the effect of such a cut on its profits. How would you carry out
the analysis? What information would you need? (Chapter 8)
2. Venture capitalists provide funds to finance new companies (start-ups), usually in return for a share
of the firm’s initial profits (if any). Of course, venture capitalists look to back experienced
entrepreneurs with strong products (or at least product blueprints). But potential competitors and the
structure of the market into which the new firm enters also are important. According to the

conventional wisdom, the best start-up prospects involve entry into loose oligopolies. What
economic factors might be behind this conventional wisdom? (Chapter 9)
3. Consider a regulated natural monopoly. Over a 10-year period, the net present value of all the
investment projects it has undertaken has been nearly zero. Does this mean the natural monopoly is
inefficient? Does it mean the regulatory process has been effective? Explain. (Chapter 7)
4. Put yourself in the yacht dealer’s shoes. You currently are considering other order quantities in
addition to 50 and 100. Find the optimal order quantity, that is, the exact quantity that maximizes
your expected profit.
(Hint: From the two demand curves, find the expected price equation, that is, the expected sale price
for any given quantity of yachts. Given this expected-price equation, apply the MR _ MC rule to
maximize expected profit.) (Chapter 12)
5. Is it ever an advantage to move first in a zero-sum game? When is it an advantage to have the first
move in a non–zero-sum game? Provide an example in which it is advantageous to have the second
move. (Chapter 9)

Long Question Please attempts all questions. (Marks 10*2=20)

1. Potato farming (like farming of most agricultural products) is highly competitive. Price is
determined by demand and supply. Based on U.S. Department of Agriculture statistics, U.S. demand
for potatoes is estimated to be QD _ 184 _ 20P, where P is the farmer’s wholesale price (per 100
pounds) and QD is consumption of potatoes per capita (in pounds). In turn, industry supply is QS _
124 _ 4P.
a. Find the competitive market price and output.
b. Potato farmers in Montana raise about 7 percent of total output. If these farmers enjoy
bumper crops (10 percent greater harvests than normal), is this likely to have much effect on
price? On Montana farmers’ incomes?

c. Suppose that, due to favorable weather conditions, U.S. potato farmers as a whole have
bumper crops. The total amount delivered to market is 10 percent higher than that calculated
in part (a). Find the new market price. What has happened to total farm revenue? Is industry
demand elastic or inelastic? In what sense do natural year-to-year changes in growing
conditions make farming a boom-or-bust industry? (Chapter 7)
2. Firms J and K produce compact-disc players and compete against one another. Each firm can
develop either an economy player (E) or a deluxe player (D). According to the best available market
research, the firms’ resulting profits are given by the accompanying payoff table.
a. The firms make their decision independently, and each is seeking its own maximum profit.
Is it possible to make a confident prediction concerning their actions and the outcome?


E 30,55 50,60
D 40,75 25,50

b. Suppose that firm J has a lead in development and so can move first. What action should J
take, and what will be K’s response?
c. What will be the outcome if firm K can move first? (Chapter 10)


Our story about the town’s market for water is fictional, but if we change water to crude oil, and Jack and
Jill to Iran and Iraq, the story is quite close to being true. Much of the world’s oil is produced by a few
countries, mostly in the Middle East. These countries together make up an oligopoly. Their decisions about
how much oil to pump are much the same as Jack and Jill’s decisions about how much water to pump.
The countries that produce most of the world’s oil have formed a cartel, called the Organization of
Petroleum Exporting Countries (OPEC). As originally formed in 1960, OPEC included Iran, Iraq, Kuwait,
Saudi Arabia, and

Venezuela. By 1973, eight other nations had joined: Qatar, Indonesia, Libya, the United Arab Emirates,
Algeria, Nigeria, Ecuador, and Gabon. These countries control about three-fourths of the world’s oil
reserves. Like any cartel, OPEC tries to raise the price of its product through a coordinated reduction in
quantity produced. OPEC tries to set production levels for each of the member countries.
The problem that OPEC faces is much the same as the problem that Jack and Jill face in our story. The
OPEC countries would like to maintain a high price of oil. But each member of the cartel is tempted to
increase production in order to get a larger share of the total profit. OPEC members frequently agree to
reduce production but then cheat on their agreements.
OPEC was most successful at maintaining cooperation and high prices in the period from 1973 to 1985.
The price of crude oil rose from $2.64 a barrel in 1972 to $11.17 in 1974 and then to $35.10 in 1981. But in
the early 1980s member countries began arguing about production levels, and OPEC became ineffective at
maintaining cooperation. By 1986 the price of crude oil had fallen back to $12.52 a barrel.
During the 1990s, the members of OPEC met about twice a year, but the cartel failed to reach and enforce
agreement. The members of OPEC made production decisions largely independently of one another, and
the world market for oil was fairly competitive. Throughout most of the decade, the price of crude oil,
adjusted for overall inflation, remained less than half the level OPEC had achieved in 1981. In 1999,
however, cooperation among oil-exporting nations started to pick up (see the accompanying In the News
box). Only time will tell how persistent this renewed cooperation proves to be.


If the members of an oligopoly could agree on a total quantity to produce, what quantity would they
choose? If the oligopolists do not act together but instead make production decisions individually, do
they produce a total quantity more or less than in your answer to the previous question? Why?