MBA 701
ECONOMIC ANALYSIS FOR MANAGEMENT
Midterm Exam Questions with Answers- Louisiana State
University
,1. Managerial economics primarily applies which type of analysis to business
decision-making?
A) Macroeconomic policy analysis
B) Microeconomic theory and quantitative tools
C) Sociological analysis of firms
D) Political theory
Answer: B
Rationale: Managerial economics is the application of microeconomic theory
and quantitative decision-science tools (optimization, statistics) to practical
business problems.
2. The primary objective assumed for a firm in most managerial economics
models is to:
A) Maximize sales revenue
B) Maximize market share
C) Maximize the value of the firm
D) Minimize costs regardless of revenue
Answer: C
Rationale: Value maximization — the present value of expected future profits
— is the standard normative goal because it accounts for both the size and
timing/riskiness of profit streams, unlike revenue or share targets.
3. Economic profit differs from accounting profit because economic profit
subtracts:
A) Only explicit costs
B) Only implicit costs
C) Both explicit and implicit (opportunity) costs
D) Taxes only
Answer: C
Rationale: Accounting profit only deducts explicit (out-of-pocket) costs;
economic profit also deducts implicit opportunity costs of owner-supplied
resources, giving a truer picture of whether resources are optimally deployed.
4. Which of the following is an example of an implicit cost?
A) Wages paid to employees
, B) Rent paid to a landlord
C) The forgone salary of an owner who works in her own firm
D) The cost of raw materials purchased
Answer: C
Rationale: Implicit costs represent the value of owner-supplied resources (time,
capital) in their next-best use; they involve no cash outlay but are real
opportunity costs.
5. If a firm earns exactly zero economic profit, this means:
A) The firm is losing money and should close immediately
B) Accounting profit exactly equals the opportunity cost of resources used
(normal profit)
C) Total revenue is zero
D) The firm has no accounting costs
Answer: B
Rationale: Zero economic profit ("normal profit") means the firm earns just
enough accounting profit to cover the opportunity cost of all resources,
including owner-supplied ones — it is a sustainable, not a failing, position.
6. In managerial decision-making, a "constraint" refers to:
A) Only the firm's advertising budget
B) A limitation — such as resources, legal rules, or contracts — that restricts
available choices
C) Only government regulation
D) Consumer opinion surveys
Answer: B
Rationale: Constraints are any binding limitations (budgetary, legal,
contractual, resource, or technological) within which a firm must optimize;
managerial economics studies constrained, not unconstrained, optimization.
7. The time value of money reflects the principle that:
A) All money is worth the same regardless of when received
B) A dollar received today is worth more than a dollar received in the future
C) Inflation has no effect on the value of money
D) Interest rates are irrelevant to valuation
, Answer: B
Rationale: Money available today can be invested to earn a return, so it has
greater value than an equal nominal amount received later — the foundation
of discounting.
8. The process of converting a future cash flow into its equivalent value today is
called:
A) Compounding
B) Discounting
C) Amortizing
D) Depreciating
Answer: B
Rationale: Discounting reduces a future cash flow to its present value using an
appropriate discount (interest) rate, the reverse of compounding.
9. The present value (PV) of a single future cash flow FV received in n years,
discounted at rate r, is calculated as:
A) PV = FV × (1+r)^n
B) PV = FV / (1+r)^n
C) PV = FV − (r × n)
D) PV = FV + (r × n)
Answer: B
Rationale: Discounting divides the future value by the compounding factor
(1+r)^n to find its present-day equivalent.
10. Holding the future cash flow constant, a higher discount rate will produce a:
A) Higher present value
B) Lower present value
C) Present value unaffected by the rate
D) Negative future value
Answer: B
Rationale: Because PV = FV/(1+r)^n, increasing r increases the denominator,
which lowers PV — higher required returns make future money worth less
today.
11. A project's net present value (NPV) is positive when:
ECONOMIC ANALYSIS FOR MANAGEMENT
Midterm Exam Questions with Answers- Louisiana State
University
,1. Managerial economics primarily applies which type of analysis to business
decision-making?
A) Macroeconomic policy analysis
B) Microeconomic theory and quantitative tools
C) Sociological analysis of firms
D) Political theory
Answer: B
Rationale: Managerial economics is the application of microeconomic theory
and quantitative decision-science tools (optimization, statistics) to practical
business problems.
2. The primary objective assumed for a firm in most managerial economics
models is to:
A) Maximize sales revenue
B) Maximize market share
C) Maximize the value of the firm
D) Minimize costs regardless of revenue
Answer: C
Rationale: Value maximization — the present value of expected future profits
— is the standard normative goal because it accounts for both the size and
timing/riskiness of profit streams, unlike revenue or share targets.
3. Economic profit differs from accounting profit because economic profit
subtracts:
A) Only explicit costs
B) Only implicit costs
C) Both explicit and implicit (opportunity) costs
D) Taxes only
Answer: C
Rationale: Accounting profit only deducts explicit (out-of-pocket) costs;
economic profit also deducts implicit opportunity costs of owner-supplied
resources, giving a truer picture of whether resources are optimally deployed.
4. Which of the following is an example of an implicit cost?
A) Wages paid to employees
, B) Rent paid to a landlord
C) The forgone salary of an owner who works in her own firm
D) The cost of raw materials purchased
Answer: C
Rationale: Implicit costs represent the value of owner-supplied resources (time,
capital) in their next-best use; they involve no cash outlay but are real
opportunity costs.
5. If a firm earns exactly zero economic profit, this means:
A) The firm is losing money and should close immediately
B) Accounting profit exactly equals the opportunity cost of resources used
(normal profit)
C) Total revenue is zero
D) The firm has no accounting costs
Answer: B
Rationale: Zero economic profit ("normal profit") means the firm earns just
enough accounting profit to cover the opportunity cost of all resources,
including owner-supplied ones — it is a sustainable, not a failing, position.
6. In managerial decision-making, a "constraint" refers to:
A) Only the firm's advertising budget
B) A limitation — such as resources, legal rules, or contracts — that restricts
available choices
C) Only government regulation
D) Consumer opinion surveys
Answer: B
Rationale: Constraints are any binding limitations (budgetary, legal,
contractual, resource, or technological) within which a firm must optimize;
managerial economics studies constrained, not unconstrained, optimization.
7. The time value of money reflects the principle that:
A) All money is worth the same regardless of when received
B) A dollar received today is worth more than a dollar received in the future
C) Inflation has no effect on the value of money
D) Interest rates are irrelevant to valuation
, Answer: B
Rationale: Money available today can be invested to earn a return, so it has
greater value than an equal nominal amount received later — the foundation
of discounting.
8. The process of converting a future cash flow into its equivalent value today is
called:
A) Compounding
B) Discounting
C) Amortizing
D) Depreciating
Answer: B
Rationale: Discounting reduces a future cash flow to its present value using an
appropriate discount (interest) rate, the reverse of compounding.
9. The present value (PV) of a single future cash flow FV received in n years,
discounted at rate r, is calculated as:
A) PV = FV × (1+r)^n
B) PV = FV / (1+r)^n
C) PV = FV − (r × n)
D) PV = FV + (r × n)
Answer: B
Rationale: Discounting divides the future value by the compounding factor
(1+r)^n to find its present-day equivalent.
10. Holding the future cash flow constant, a higher discount rate will produce a:
A) Higher present value
B) Lower present value
C) Present value unaffected by the rate
D) Negative future value
Answer: B
Rationale: Because PV = FV/(1+r)^n, increasing r increases the denominator,
which lowers PV — higher required returns make future money worth less
today.
11. A project's net present value (NPV) is positive when:
