Test Bank for Managerial Economics and Business Strategy, 7th Edition: Michael Baye

Test Bank for Managerial Economics

and Business Strategy, 7th Edition:
Michael Baye
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Chapter 01 - The Fundamentals of Managerial Economics

B. cost of books and supplies.

C. room and board.
D. foregone wages.

1-2
Chapter 01 - The Fundamentals of Managerial Economics

7. Which of the following signals to the owners of scarce resources are the best uses of those
resources?
A. profits of businesses.
B. government regulations.
C. economic indicators.
D. the accounting cost of those resources.

8. The primary inducement for new firms to enter an industry is:

A. increased technology.
B. availability of labor.
C. low capital costs.
D. presence of economic profits.

9. As more firms enter an industry

A. accounting profits increase.
B. economic profits decrease.
C. prices rise.
D. none of the statements associated with this question are correct.

10. Scarce resources are ultimately allocated toward the production of goods most wanted by
society because:
A. firms attempt to maximize profits.
B. they are most efficiently utilized in these areas.
C. consumers demand inexpensive goods and services.
D. managers are benevolent.

11. The opportunity cost of receiving ten dollars in the future as opposed to getting that ten
dollars today is:
A. the foregone interest that could be earned if you had the money today.
B. the taxes paid on any earnings.
C. the value of $10 relative to the total income of that person.
D. the value of $10 relative to the total income of all persons.

1-3
Chapter 01 - The Fundamentals of Managerial Economics

12. If the interest rate is 5%, what is the present value of ten dollars received one year from
now?
A. $9.50.
B. $10.05.
C. $9.52.
D. $9.77.

13. If you put $1,000 in a savings account at an interest rate of 10%, how much money will
you have in one year?
A. $1,200.
B. $909.
C. $950.
D. $1,100.

14. If the interest rate is five percent, the present value of $200 received at the end of five
years is:
A. $121.34.
B. $156.71.
C. $176.41.
D. $132.62.

15. When dealing with present value, a higher interest rate:

A. does not effect the present value of the future amount.
B. increases the present value of a future amount.
C. decreases the present value of a future amount.
D. none of the statements associated with this question are correct.

16. A farm must decide whether or not to purchase a new tractor. The tractor will reduce costs
by $2,000 in the first year, $2,500 in the second and $3,000 in the third and final year of
usefulness. The tractor costs $9,000 today, while the above cost savings will be realized at the
end of each year. If the interest rate is seven percent, what is the net present value of
purchasing the tractor?
A. $6,764.
B. $9,362.
C. $18,362.
D. none of the statements associated with this question are correct.

1-4
Chapter 01 - The Fundamentals of Managerial Economics

17. A firm will have constant profits of $100,000 per year for the next four years and the
interest rate is six percent. Assuming these profits are realized at the end of each year, what is
the present value these future profits?
A. $325,816.
B. $376,741.
C. $400,000.
D. $346,511.

18. A firm will maximize the present value of future profits by maximizing current profits
when the:
A. growth rate in profits is constant.
B. growth rate in profits is larger than the interest rate.
C. interest rate is larger than the growth rate in profits and both are constant.
D. growth rate and interest rate are constant and equal.

19. Suppose the interest rate is five percent, the expected growth rate of the firm is two
percent, and the firm is expected to continue forever. If current profits are $1,000, what is the
value of the firm?
A. $31,000.
B. $30,000.
C. $26,500.
D. $35,000.

20. To maximize profits, a firm should continue to increase production of a good until:
A. total revenue equals total cost.
B. profits are zero.
C. marginal revenue equals marginal cost.
D. average cost equals average revenue.

1-5
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