MBA 701 ECONOMIC ANALYSIS FOR
MANAGEMENT PRACTICE EXAM 1 (2026) |
Louisiana State University | Complete Study
Guide | Practice Questions, Verified Answers
& Detailed Explanations
MBA 701 ECONOMIC ANALYSIS FOR MANAGEMENT PRACTICE EXAM 1 (2026)
Louisiana State University | Complete Study Guide | Practice Questions,
Verified Answers & Detailed Explanations
DOCUMENT OVERVIEW
• This comprehensive exam guide contains 200 verified practice questions with
detailed explanations to reinforce your understanding of economic principles and
their practical application in management decision-making
• Study strategically by reviewing rationales carefully, identifying knowledge gaps
by topic area, and using this material to build mastery before your actual exam
assessment
Question 1: A firm operates in a perfectly competitive market. Which of the
following is a defining characteristic of this market structure?
A) Firms have significant control over pricing decisions
B) The product is differentiated across competitors
C) There are few firms in the market with significant barriers to entry
D) Firms are price takers who accept the market equilibrium price
E) Long-term profits remain consistently above normal levels
✓ CORRECT ANSWER: D) Firms are price takers who accept the market
equilibrium price
RATIONALE: In perfect competition, individual firms cannot influence the market
price because they are too small relative to the total market. Each firm must accept
the equilibrium price established by supply and demand forces in the market.
,Options A, B, and C describe characteristics of monopolistic competition or
monopoly markets. Option E is incorrect because competitive markets drive
economic profit to zero in the long run.
Question 2: Which economic principle explains why a manager should
continue producing units as long as marginal revenue exceeds marginal cost?
A) The law of diminishing returns
B) The principle of profit maximization
C) The concept of consumer surplus
D) The theory of comparative advantage
E) The doctrine of perfect competition
✓ CORRECT ANSWER: B) The principle of profit maximization
RATIONALE: Profit maximization occurs where MR = MC because producing
additional units when MR > MC adds more to revenue than to costs, thereby
increasing total profit. When MR < MC, producing additional units reduces profit.
This is a fundamental principle in managerial economics. The law of diminishing
returns (A) explains why marginal cost rises, not why firms should stop production
at MR = MC. Consumer surplus (C) and comparative advantage (D) address different
concepts. Perfect competition (E) is a market structure, not a profit maximization
principle.
Question 3: If demand for a product is price elastic, which action would
increase total revenue?
A) Increasing the price of the product
B) Decreasing the price of the product
C) Keeping the price constant while increasing supply
D) Implementing a price ceiling
,E) Maintaining current pricing strategy without adjustment
✓ CORRECT ANSWER: B) Decreasing the price of the product
RATIONALE: When demand is elastic (elasticity > 1), the percentage change in
quantity demanded exceeds the percentage change in price. Therefore, lowering
price causes quantity demanded to increase proportionally more, resulting in
higher total revenue (Price × Quantity). With inelastic demand, the opposite would
be true. Options C, D, and E do not directly address revenue optimization through
price adjustments.
Question 4: A manager must decide whether to continue operating a facility
with fixed costs of $50,000 annually and variable costs of $30 per unit. The
selling price is $35 per unit. What is the break-even point?
A) 10,000 units
B) 12,500 units
C) 1,667 units
D) 8,333 units
E) 6,250 units
✓ CORRECT ANSWER: A) 10,000 units
RATIONALE: Break-even occurs when Total Revenue = Total Cost. The contribution
margin per unit is Price - Variable Cost = $35 - $30 = $5. Break-even quantity = Fixed
Costs ÷ Contribution Margin = $50,000 ÷ $5 = 10,000 units. At this point, all fixed
costs are covered and the firm earns zero economic profit. The other options result
from incorrect calculations of contribution margin or fixed costs.
Question 5: When a firm experiences economies of scale, what happens to
average total cost as production increases?
A) Average total cost increases continuously
B) Average total cost remains constant
, C) Average total cost decreases
D) Average total cost initially decreases then increases
E) Average total cost becomes irrelevant to decision-making
✓ CORRECT ANSWER: C) Average total cost decreases
RATIONALE: Economies of scale occur when long-run average total cost falls as
output expands, typically due to factors such as improved technology, better
utilization of fixed assets, volume discounts on inputs, and specialization of labor.
This continues until minimum efficient scale is reached. Option D describes the
typical U-shaped ATC curve, which includes both economies and diseconomies of
scale. Options A, B, and E mischaracterize the relationship between production and
cost.
Question 6: A monopolist faces a downward-sloping demand curve. How does
this affect the relationship between marginal revenue and price?
A) Marginal revenue exceeds price at every quantity level
B) Marginal revenue equals price at every quantity level
C) Marginal revenue is less than price at every quantity level
D) The relationship varies randomly without pattern
E) Marginal revenue and price are unrelated concepts
✓ CORRECT ANSWER: C) Marginal revenue is less than price at every quantity
level
RATIONALE: In a monopoly, because the demand curve is downward-sloping, the
firm must lower price to sell additional units. Each new unit sold at a lower price
means revenue is lost on all previously sold units. Therefore, MR < P for all positive
quantities. In perfect competition, MR = P because firms face a horizontal (perfectly
elastic) demand curve. The relationship is consistent and predictable, not random.
Question 7: Which of the following best describes consumer surplus?
MANAGEMENT PRACTICE EXAM 1 (2026) |
Louisiana State University | Complete Study
Guide | Practice Questions, Verified Answers
& Detailed Explanations
MBA 701 ECONOMIC ANALYSIS FOR MANAGEMENT PRACTICE EXAM 1 (2026)
Louisiana State University | Complete Study Guide | Practice Questions,
Verified Answers & Detailed Explanations
DOCUMENT OVERVIEW
• This comprehensive exam guide contains 200 verified practice questions with
detailed explanations to reinforce your understanding of economic principles and
their practical application in management decision-making
• Study strategically by reviewing rationales carefully, identifying knowledge gaps
by topic area, and using this material to build mastery before your actual exam
assessment
Question 1: A firm operates in a perfectly competitive market. Which of the
following is a defining characteristic of this market structure?
A) Firms have significant control over pricing decisions
B) The product is differentiated across competitors
C) There are few firms in the market with significant barriers to entry
D) Firms are price takers who accept the market equilibrium price
E) Long-term profits remain consistently above normal levels
✓ CORRECT ANSWER: D) Firms are price takers who accept the market
equilibrium price
RATIONALE: In perfect competition, individual firms cannot influence the market
price because they are too small relative to the total market. Each firm must accept
the equilibrium price established by supply and demand forces in the market.
,Options A, B, and C describe characteristics of monopolistic competition or
monopoly markets. Option E is incorrect because competitive markets drive
economic profit to zero in the long run.
Question 2: Which economic principle explains why a manager should
continue producing units as long as marginal revenue exceeds marginal cost?
A) The law of diminishing returns
B) The principle of profit maximization
C) The concept of consumer surplus
D) The theory of comparative advantage
E) The doctrine of perfect competition
✓ CORRECT ANSWER: B) The principle of profit maximization
RATIONALE: Profit maximization occurs where MR = MC because producing
additional units when MR > MC adds more to revenue than to costs, thereby
increasing total profit. When MR < MC, producing additional units reduces profit.
This is a fundamental principle in managerial economics. The law of diminishing
returns (A) explains why marginal cost rises, not why firms should stop production
at MR = MC. Consumer surplus (C) and comparative advantage (D) address different
concepts. Perfect competition (E) is a market structure, not a profit maximization
principle.
Question 3: If demand for a product is price elastic, which action would
increase total revenue?
A) Increasing the price of the product
B) Decreasing the price of the product
C) Keeping the price constant while increasing supply
D) Implementing a price ceiling
,E) Maintaining current pricing strategy without adjustment
✓ CORRECT ANSWER: B) Decreasing the price of the product
RATIONALE: When demand is elastic (elasticity > 1), the percentage change in
quantity demanded exceeds the percentage change in price. Therefore, lowering
price causes quantity demanded to increase proportionally more, resulting in
higher total revenue (Price × Quantity). With inelastic demand, the opposite would
be true. Options C, D, and E do not directly address revenue optimization through
price adjustments.
Question 4: A manager must decide whether to continue operating a facility
with fixed costs of $50,000 annually and variable costs of $30 per unit. The
selling price is $35 per unit. What is the break-even point?
A) 10,000 units
B) 12,500 units
C) 1,667 units
D) 8,333 units
E) 6,250 units
✓ CORRECT ANSWER: A) 10,000 units
RATIONALE: Break-even occurs when Total Revenue = Total Cost. The contribution
margin per unit is Price - Variable Cost = $35 - $30 = $5. Break-even quantity = Fixed
Costs ÷ Contribution Margin = $50,000 ÷ $5 = 10,000 units. At this point, all fixed
costs are covered and the firm earns zero economic profit. The other options result
from incorrect calculations of contribution margin or fixed costs.
Question 5: When a firm experiences economies of scale, what happens to
average total cost as production increases?
A) Average total cost increases continuously
B) Average total cost remains constant
, C) Average total cost decreases
D) Average total cost initially decreases then increases
E) Average total cost becomes irrelevant to decision-making
✓ CORRECT ANSWER: C) Average total cost decreases
RATIONALE: Economies of scale occur when long-run average total cost falls as
output expands, typically due to factors such as improved technology, better
utilization of fixed assets, volume discounts on inputs, and specialization of labor.
This continues until minimum efficient scale is reached. Option D describes the
typical U-shaped ATC curve, which includes both economies and diseconomies of
scale. Options A, B, and E mischaracterize the relationship between production and
cost.
Question 6: A monopolist faces a downward-sloping demand curve. How does
this affect the relationship between marginal revenue and price?
A) Marginal revenue exceeds price at every quantity level
B) Marginal revenue equals price at every quantity level
C) Marginal revenue is less than price at every quantity level
D) The relationship varies randomly without pattern
E) Marginal revenue and price are unrelated concepts
✓ CORRECT ANSWER: C) Marginal revenue is less than price at every quantity
level
RATIONALE: In a monopoly, because the demand curve is downward-sloping, the
firm must lower price to sell additional units. Each new unit sold at a lower price
means revenue is lost on all previously sold units. Therefore, MR < P for all positive
quantities. In perfect competition, MR = P because firms face a horizontal (perfectly
elastic) demand curve. The relationship is consistent and predictable, not random.
Question 7: Which of the following best describes consumer surplus?
