Chapter 01
The Fundamentals of Managerial Economics
Multiple Choice Questions
1. The higher the interest rate:
A. the greater the present value of a future amount.
B. the smaller the present value of a future amount.
C. the greater the level of inflation.
D. None of the statements associated with this question are correct.
2. If the interest rate is 10 percent and cash flows are $1,000 at the end of year one and $2,000 at
the end of year two, then the present value of these cash flows is:
A. $2,562.
B. $3,200.
C. $439.
D. $3,000.
3. Accounting profits are:
A. total revenue minus total cost.
B. total cost minus total revenue.
C. marginal revenue minus total cost.
D. total revenue minus marginal cost.
4. Economic profits are:
A. total revenue minus total cost.
B. marginal revenue minus marginal cost.
C. total revenue minus total opportunity cost.
D. total profits of the economy as a whole.
1-1
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
,5. Which of the following is an implicit cost to a firm that producеs a good or service?
A. Labor costs
B. Costs of operating production machinery
C. Foregone profits of producing a different good or service
D. Costs of renting or buying land for a production site
6. Which of the following is an implicit cost of going to college?
A. Tuition
B. Cost of books and supplies
C. Room and board
D. Foregone wages
7. Which оf the following are signals to the owners of scarce resources about 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.
1-2
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
,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 $10 in the future as opposed to getting that $10 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.
12. If the interest rate is 5 percent, what is the present value of $10 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 percent, 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 5 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.
1-3
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
, 15. When dealing with present value, a higher interest rate:
A. does not affect 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. Thе 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 7 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.
17. A firm will have constant profits of $100,000 per year for the next four years, and the interest rate
is 6 percent. Assuming these profits are realized at the end of each year, what is the present value
of 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 5 рercent, the expected growth rate оf the firm is 2 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
1-4
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
The Fundamentals of Managerial Economics
Multiple Choice Questions
1. The higher the interest rate:
A. the greater the present value of a future amount.
B. the smaller the present value of a future amount.
C. the greater the level of inflation.
D. None of the statements associated with this question are correct.
2. If the interest rate is 10 percent and cash flows are $1,000 at the end of year one and $2,000 at
the end of year two, then the present value of these cash flows is:
A. $2,562.
B. $3,200.
C. $439.
D. $3,000.
3. Accounting profits are:
A. total revenue minus total cost.
B. total cost minus total revenue.
C. marginal revenue minus total cost.
D. total revenue minus marginal cost.
4. Economic profits are:
A. total revenue minus total cost.
B. marginal revenue minus marginal cost.
C. total revenue minus total opportunity cost.
D. total profits of the economy as a whole.
1-1
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
,5. Which of the following is an implicit cost to a firm that producеs a good or service?
A. Labor costs
B. Costs of operating production machinery
C. Foregone profits of producing a different good or service
D. Costs of renting or buying land for a production site
6. Which of the following is an implicit cost of going to college?
A. Tuition
B. Cost of books and supplies
C. Room and board
D. Foregone wages
7. Which оf the following are signals to the owners of scarce resources about 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.
1-2
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
,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 $10 in the future as opposed to getting that $10 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.
12. If the interest rate is 5 percent, what is the present value of $10 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 percent, 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 5 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.
1-3
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
, 15. When dealing with present value, a higher interest rate:
A. does not affect 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. Thе 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 7 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.
17. A firm will have constant profits of $100,000 per year for the next four years, and the interest rate
is 6 percent. Assuming these profits are realized at the end of each year, what is the present value
of 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 5 рercent, the expected growth rate оf the firm is 2 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
1-4
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
