Managerial Economics Practice Final Exam Questions Answers PDF

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Managerial Economics Practice Final Exam Question #: 1 Revealed preference assumes that we can infer preferences from consumers' choices in real-life situations and transactions. Which of the following factors is least likely to be a reason that weakens the tool of revealed preference?

A. Consumers have incentives to lie about their preferences in most real-life choice data B. The incentives in particular situations may be too low for consumers to pay attention C. Consumers may not have had enough chances to learn about how to behave optimally in a particular market D. Consumers may not have sufficient information to make optimal choices Item Weight: 1.0 ____________________________________________________________________________ Question #: 2 An isoelastic demand curve exhibits a constant demand elasticity. The inverse demand function (demand curve) should be

A. Concave: As quantity demanded increases, the absolute value of the slope of the inverse demand function (demand curve) increases B. Convex: As quantity demanded increases, the absolute value of the slope of the inverse demand function (demand curve) decreases C. Linear: As quantity demanded increases, the absolute value of the slope of the demand curve remains unchanged D. Uncertain: All of (a), (b) and (c) are possible Item Weight: 2.0 ____________________________________________________________________________ Question #: 3 Suppose a consumer is trading off between two goods. When prices of both goods increase, the budget constraint

A. Pivots inward B. Pivots outward

C. Shifts inward D. Shifts outward Item Weight: 1.0 ____________________________________________________________________________ Question #: 4 The disposition effect is an anomaly discovered in behavioral finance. It relates to the tendency of investors to sell assets that have increased in value, while keeping assets that have dropped in value. This is consistent with

A. Loss aversion B. Anchoring Effect C. Both (a) and (b) D. None of (a) and (b) Item Weight: 1.0 ____________________________________________________________________________ Question #: 5 Which of the following are good examples of perfectly competitive markets?

A. Food stalls and restaurants in NUS B. Cell phone industry C. College/university education D. None of the above Item Weight: 1.0 ____________________________________________________________________________ Question #: 6 Economic incidence of a tax depends on (i) Statutory incidence: Whether the buyer or the seller pays the tax (ii) Elasticity of demand (iii) Elasticity of supply

A. (i) only

B. (i), (ii), and (iii) C. (ii) and (iii) only D. (ii) only Item Weight: 1.0 ____________________________________________________________________________ Question #: 7 Monopolies can arise because of

A. Markets in which firms lobby the government to create barriers to entry which lead to regulatory capture B. Markets in which customers value products more when other customers are using the product as well C. Both (a) and (b) D. None of (a) and (b) Item Weight: 1.0 ____________________________________________________________________________ Question #: 8 Intertemporal price discrimination is a more effective strategy for a firm with market power (relative to uniform pricing) if

A. Consumers with high willingness-to-pay are equally patient as those with low willingness-to-pay B. Consumers with high willingness-to-pay are less patient than those with low willingness-to-pay C. Both (a) and (b) D. None of (a) and (b) Item Weight: 1.0 ____________________________________________________________________________ Question #: 9 Consider a monopolistically competitive market where firms earn positive profits in the short run. Suppose these firms spend a lot to lobby the government such that all future entrants now have to pay a huge licensing fee to the government to enter the market. Which of the following conditions still hold in the long run?

(i) MR = MC (ii) P = AC (iii) Social costs = Deadweight loss

A. (i) only B. (iii) only C. (i) and (ii) only D. (ii) and (iii) only Item Weight: 1.0 ____________________________________________________________________________ Question #: 10 In a Nash equilibrium,

A. Each player has a dominant strategy B. Players best respond to one another C. Both (a) and (b) D. None of (a) and (b) Item Weight: 1.0 ____________________________________________________________________________ Question #: 11 Under what conditions do freemium trial periods ensure the "superior" equilibrium is reached in platform markets?

A. The freemium is large enough to make adopting a particular platform a dominant strategy B. Switching costs are prohibitive C. Both (a) and (b) D. None of (a) and (b) Item Weight: 1.0 ____________________________________________________________________________ Question #: 12

Which of the following actions are likely to lead incumbent (existing) firms to engage in moral hazard?

A. Government bailout of firms, i.e. governments save firms from dissolving due to bankruptcy B. State/Government ownership of firms C. Higher fees for entering firms to obtain an operating license D. All of the above Item Weight: 1.0

Answers 1. A Real-life choice data reflects real-world choices so as long as stakes are high and consumers have sufficient knowledge and information, such data should allow us to infer preferences well, and real-world choice should reflect real-world preferences and should not involve any need to “lie” to game the system, e.g. grocery purchases, housing purchases etc.

2. B Demand elasticity = dQ/dP * P/Q. If demand elasticity is constant, then as Q increases and P decreases, P/Q decreases which implies that the absolute value of dQ/dP should increase in order to ensure the elasticity remains constant. Therefore, the absolute value of the slope of the inverse demand function (demand curve) should decrease.

3. C Both intercepts decrease, leading to a shift inward of the budget constraint.

4. C Such investors anchor with respect to the initial value of the asset. They become more likely to hold assets and “gamble” when in loss as they become more risk seeking and vice versa.

5. D All of these markets involve sufficient differentiation for each individual firm/school.

6. C Economic incidence does not depend on statutory/physical incidence of a tax as illustrated in class. The pass-through formula shows that economic incidence (who gains or loses more from a tax) depends on elasticities of demand and supply.

7. C Barriers to entry and network effects can both lead to monopolies.

8. B If consumers with higher WTP are less patient, they will buy first such that those with lower WTP will buy later, allowing the firm to sell at higher prices to those with higher WTP as they lower the price over time.

9. A MR = MC holds as long as there is uniform pricing. If there are barriers to entry, incumbent firms no longer make zero economic profits in the long run as entrants are possibly prohibited from entry, hence P > AC. Social costs may include both deadweight loss (in the traditional sense of mutually beneficially trades that do not take place), gains from variety, as well as lobbying costs.

10. B Textbook definition: Nash equilibrium is defined as players best responding to one another. They may not necessarily have a dominant strategy. Dominant strategy equilibrium is a subset of Nash equilibrium, which implies that there may be Nash equilibria that are not dominant strategy equilibria.

11. C As shown in class, freemium can coordinate customers onto the superior platform and if switching costs are prohibitive, the superior platform can profit from such a scheme by charging higher in the later periods.

12. D If firms do not bear the costs of their actions, either because they get bailed out by the government or are owned by the government, they may have less incentives to manage risks or increase productivity and make profits, which is undesirable to the government. Higher fees for entering firms allows incumbent firms to slack off and decreases their incentives to increase productivity and make profits....