Managerial Economics
Final Exam Review
Questions & Solutions
2025
©2025
, Question 1: Price Elasticity and Revenue Impact
Scenario: A technology firm sells its flagship gadget in a competitive
market. The estimated price elasticity of demand for the product is –1.5.
If the firm increases its price by 10%, what is the expected percentage
change in quantity demanded, and what is the likely effect on total
revenue?
- A. Quantity decreases by 15%; total revenue falls.
- B. Quantity decreases by 15%; total revenue rises.
- C. Quantity increases by 15%; total revenue falls.
- D. Quantity decreases by 10%; total revenue rises.
ANS: B
Rationale: With an elasticity of –1.5, a 10% price increase is expected
to result in a 15% drop in quantity (–1.5 × 10% = –15%). Because demand
is elastic (|–1.5| > 1), the percentage reduction in quantity exceeds the
percentage increase in price. However, in the standard theory, if demand
is elastic, a price increase usually lowers total revenue; but note here that
if you look at the revenue equation, Revenue = P × Q, a 10% increase in
price accompanied by a 15% drop in quantity implies lower revenue.
Thus, Option B indicates “total revenue rises” which is not consistent—so
we must check:
– For elastic demand, increasing price lowers total revenue.
Recalculate: A 10% increase in price and 15% decrease in quantity will
lead to revenue change of (1.10 × 0.85 = 0.935) which is a decline of
approximately 6.5%.
Thus, the correct ANS should be: quantity decreases by 15%, and total
revenue falls.
Correct ANS (revised): A
Rationale: With an elasticity of –1.5 (elastic), a 10% price hike produces
a 15% reduction in quantity; because the drop in quantity outweighs the
rise in price, total revenue declines.
©2025
, ---
Question 2: Marginal Analysis for Profit Maximization
Scenario: A widget manufacturer has a total cost (TC) function given by:
TC = 100 + 20Q + 2Q²
The firm sells widgets at a constant price of $40 each. What is the
profit‑maximizing output?
- A. 5 units
- B. 10 units
- C. 15 units
- D. 20 units
ANS: A
Rationale: Profit maximization occurs where marginal revenue (MR)
equals marginal cost (MC). Since the price is constant at $40, MR = 40.
Derivative of TC (MC) is 20 + 4Q; setting 20 + 4Q = 40 yields Q = 5.
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Question 3: Break‑Even Quantities
Scenario: A firm with fixed costs of $50,000, a selling price of $30 per
unit, and variable costs of $20 per unit wishes to compute its break‑even
quantity.
- A. 1,000 units
- B. 5,000 units
- C. 10,000 units
- D. 15,000 units
ANS: B
Rationale: The break‑even point is calculated as Fixed Costs / (Price –
Variable Cost). Thus, 50,000 / (30 – 20) = 50, = 5,000 units.
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©2025
Final Exam Review
Questions & Solutions
2025
©2025
, Question 1: Price Elasticity and Revenue Impact
Scenario: A technology firm sells its flagship gadget in a competitive
market. The estimated price elasticity of demand for the product is –1.5.
If the firm increases its price by 10%, what is the expected percentage
change in quantity demanded, and what is the likely effect on total
revenue?
- A. Quantity decreases by 15%; total revenue falls.
- B. Quantity decreases by 15%; total revenue rises.
- C. Quantity increases by 15%; total revenue falls.
- D. Quantity decreases by 10%; total revenue rises.
ANS: B
Rationale: With an elasticity of –1.5, a 10% price increase is expected
to result in a 15% drop in quantity (–1.5 × 10% = –15%). Because demand
is elastic (|–1.5| > 1), the percentage reduction in quantity exceeds the
percentage increase in price. However, in the standard theory, if demand
is elastic, a price increase usually lowers total revenue; but note here that
if you look at the revenue equation, Revenue = P × Q, a 10% increase in
price accompanied by a 15% drop in quantity implies lower revenue.
Thus, Option B indicates “total revenue rises” which is not consistent—so
we must check:
– For elastic demand, increasing price lowers total revenue.
Recalculate: A 10% increase in price and 15% decrease in quantity will
lead to revenue change of (1.10 × 0.85 = 0.935) which is a decline of
approximately 6.5%.
Thus, the correct ANS should be: quantity decreases by 15%, and total
revenue falls.
Correct ANS (revised): A
Rationale: With an elasticity of –1.5 (elastic), a 10% price hike produces
a 15% reduction in quantity; because the drop in quantity outweighs the
rise in price, total revenue declines.
©2025
, ---
Question 2: Marginal Analysis for Profit Maximization
Scenario: A widget manufacturer has a total cost (TC) function given by:
TC = 100 + 20Q + 2Q²
The firm sells widgets at a constant price of $40 each. What is the
profit‑maximizing output?
- A. 5 units
- B. 10 units
- C. 15 units
- D. 20 units
ANS: A
Rationale: Profit maximization occurs where marginal revenue (MR)
equals marginal cost (MC). Since the price is constant at $40, MR = 40.
Derivative of TC (MC) is 20 + 4Q; setting 20 + 4Q = 40 yields Q = 5.
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Question 3: Break‑Even Quantities
Scenario: A firm with fixed costs of $50,000, a selling price of $30 per
unit, and variable costs of $20 per unit wishes to compute its break‑even
quantity.
- A. 1,000 units
- B. 5,000 units
- C. 10,000 units
- D. 15,000 units
ANS: B
Rationale: The break‑even point is calculated as Fixed Costs / (Price –
Variable Cost). Thus, 50,000 / (30 – 20) = 50, = 5,000 units.
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©2025
