Test Bank for Managerial Economics and Business
Strategy, 2026 Release by Michael Baye
the return from the best alternative use of a resource (the best alternative use is the one that
would yield the highest return) - answer-Opportunity cost
How do you compute economic profit? - answer-total revenue= explicit costs + implicit costs
the comparison of the marginal benefit from an action to its marginal cost in order to decide
whether to take the action. - answer-marginal analysis
How to maximize profit? - answer-
What is the law of demand? - answer-keeping all other factors constant, the quantity
demanded decreases as price increases
What is the law of supply? - answer-All other things remaining the same, the higher the price of
the good or service, the larger the quantity supplied; the lower the price of the good or service,
the smaller the quantity supplied
What would happen to the demand curve if: change in income (normal good and inferior
good) - answer-If consumers' income increase, they can and will want to buy more of many
products. The demand curve will shift to the right
When an increase in income increases the demand for a good or service and a decrease in
income decreases that demand, the good or service is a ___________ ___________ - answer-
normal good
1
, When an increase in income decreases the demand for a good or service and a decrease in
income increases that demand, the good or service is a ___________ _________ - answer-
inferior good
What would happen to the demand curve if: change in price of related goods and services
(substitutes) - answer-If the price of a substitute rises, the demand for the good in question
increases, shifting its demand curve to the right. If the price of a substitute falls, the demand for
the good in question decreases and the demand curve shifts to the left.
What would happen to the demand curve if: change in price of related goods and services
(complements) - answer-If the price of a complement rises, the demand for the good in
question decreases, and its demand curve shifts to the left. If the price of a complement falls,
the demand for the good in question increases, and its demand curve shifts to the right
What would happen to the supply curve if: cost changes - answer-When the cost of producing a
good or service rises and nothing else changes, the profit from producing that good or service
decreases. Firms respond to the fall in profit by decreasing their production. Supply curve shifts
left.
What would happen to the supply curve if: changes in price of related goods (substitutes in
production) - answer-The supply of the first product decreases, and its supply curve shifts to the
left. IF the price of a substitute in production falls, the supply of the first good increases, and its
supply curve shifts to the right
Shift of the Supply Curve vs Movement along the supply curve - answer-a change in price results
in a MOVEMENT along the supply curve while a change in cost results in a SHIFT of the supply
curve.
What would happen to the supply curve if: changes in price of related goods (complements in
production) - answer-If the price of a complement in production rises, firms produce more of
the complement because it has become more profitable. When firms produce more the of the
2
Strategy, 2026 Release by Michael Baye
the return from the best alternative use of a resource (the best alternative use is the one that
would yield the highest return) - answer-Opportunity cost
How do you compute economic profit? - answer-total revenue= explicit costs + implicit costs
the comparison of the marginal benefit from an action to its marginal cost in order to decide
whether to take the action. - answer-marginal analysis
How to maximize profit? - answer-
What is the law of demand? - answer-keeping all other factors constant, the quantity
demanded decreases as price increases
What is the law of supply? - answer-All other things remaining the same, the higher the price of
the good or service, the larger the quantity supplied; the lower the price of the good or service,
the smaller the quantity supplied
What would happen to the demand curve if: change in income (normal good and inferior
good) - answer-If consumers' income increase, they can and will want to buy more of many
products. The demand curve will shift to the right
When an increase in income increases the demand for a good or service and a decrease in
income decreases that demand, the good or service is a ___________ ___________ - answer-
normal good
1
, When an increase in income decreases the demand for a good or service and a decrease in
income increases that demand, the good or service is a ___________ _________ - answer-
inferior good
What would happen to the demand curve if: change in price of related goods and services
(substitutes) - answer-If the price of a substitute rises, the demand for the good in question
increases, shifting its demand curve to the right. If the price of a substitute falls, the demand for
the good in question decreases and the demand curve shifts to the left.
What would happen to the demand curve if: change in price of related goods and services
(complements) - answer-If the price of a complement rises, the demand for the good in
question decreases, and its demand curve shifts to the left. If the price of a complement falls,
the demand for the good in question increases, and its demand curve shifts to the right
What would happen to the supply curve if: cost changes - answer-When the cost of producing a
good or service rises and nothing else changes, the profit from producing that good or service
decreases. Firms respond to the fall in profit by decreasing their production. Supply curve shifts
left.
What would happen to the supply curve if: changes in price of related goods (substitutes in
production) - answer-The supply of the first product decreases, and its supply curve shifts to the
left. IF the price of a substitute in production falls, the supply of the first good increases, and its
supply curve shifts to the right
Shift of the Supply Curve vs Movement along the supply curve - answer-a change in price results
in a MOVEMENT along the supply curve while a change in cost results in a SHIFT of the supply
curve.
What would happen to the supply curve if: changes in price of related goods (complements in
production) - answer-If the price of a complement in production rises, firms produce more of
the complement because it has become more profitable. When firms produce more the of the
2
