Managerial Economics
Some Important Questions and Answers for the Final Examination
Managerial Economics
Section A: Objective Type
Part One:
Multiple choices:
1. It is a study of economy as a whole
a. Macroeconomics
b. Microeconomics
c. Recession
d. Inflation
Answer: a (Macroeconomics)
2. A comprehensive formulation which specifies the factors that influence the demand for
the product.
a. Market Demand
b. Demand Schedule
c. Demand Function
d. Income Effect
Answer: c (Demand Function)
3. It is computed when the data is discrete and therefore incremental changes is measurable
a. Substitution Effect
b. Arc Elasticity
c. Point Elasticity
d. Derived Demand
Answer: c (Point Elasticity)
4. Goods & Services used for final consumption is called
a. Demand
b. Consumer Goods
c. Producer Goods
d. Perishable Goods
Answer: b (Consumer Goods)
5. The curve at which satisfaction is equal at each point
a. Marginal Utility
b. Cardinal Measure of Utility
, c. The Indifference Curve
d. Budget Line
Answer: c (The Indifference Curve)
6. Costs that are reasonably expected to be incurred in some future period or periods.
a. Future Costs
b. Past Costs
c. Incremental Costs
d. Sunk Costs
Answer: a (Future Cost)
7. Condition When the firm has no tendency either to increase or to contract its output
a. Monopoly
b. Profit
c. Equilibrium
d. Market
Answer: c (Equilibrium)
8. Total market value of all finished goods & services produced in a year by a country’s
residents is known as
a. National Income
b. Gross National Product
c. Gross Domestic Product
d. Real GDP
Answer: c (Gross Domestic Product)
9. The sum of net value of goods & services produced at market prices
a. Government Expenditure
b. Product Approach
c. Income Approach
d. Expenditure Approach
Answer: c (Income Approach)
10. The market value of all the final goods & services mad within the borders of a nation in
an year
a. Globalization
b. Subsidies
c. GDP
d. GNP
,Answer: c (GDP)
Part Two:
Short Notes type Questions:
1. Define ‘Arc Elasticity’.
Answer
Introduction
Definition of 'Arc Elasticity'
The elasticity of one variable with respect to another between two given points. It is used
when there is no general function to define the relationship of the two variables. Arc elasticity
is also defined as the elasticity between two points on a curve.
Investopedia explains 'Arc Elasticity'
Price elasticity of demand is the percentage change in quantity demanded for a unit change in
price. Arc elasticity computes the percentage change between two points in relation to the
average of the two prices and the average of the two quantities, rather than the change from
one point to the next. This provides the average elasticity for the arc of the curve between the
two points. Hence, the term "arc elasticity."
One of the problems with the standard formulas for elasticity that are in many freshman texts
is the elasticity figure you come up with is different depending on what you use as the start
point and what you use as the end point. An example will help illustrate this.
When we looked at Price Elasticity of Demand we calculated the price elasticity of demand
when price went from $9 to $10 and demand went from 150 to 110 was 2.4005. But what if
we calculated what the price elasticity of demand when we started at $10 and went to $9? So
we'd have:
Price(OLD)=10
Price(NEW)=9
QDemand(OLD)=110
QDemand(NEW)=150
First we'd calculate the percentage change in quantity demanded: [QDemand(NEW) -
QDemand(OLD)] / QDemand(OLD)
By filling in the values we wrote down, we get:
[150 - 110] / 110 = (40/110) = 0.3636 (Again we leave this in decimal form)
Then we'd calculate the percentage change in price:
[Price(NEW) - Price(OLD)] / Price(OLD)
By filling in the values we wrote down, we get:
, [9 - 10] / 10 = (-1/10) = -0.1
We then use these figures to calculate the price-elasticity of demand:
PEoD = (% Change in Quantity Demanded)/(% Change in Price)
We can now fill in the two percentages in this equation using the figures we calculated
earlier.
PEoD = (0.3636)/(-0.1) = -3.636
When calculating a price elasticity, we drop the negative sign, so our final value is 3.636.
Obviously 3.6 is a lot different from 2.4, so we see that this way of measuring price elasticity
is quite sensitive to which of your two points you choose as your new point, and which you
choose as your old point. Arc elasticities are a way of removing this problem.
When calculating Arc Elasticities, the basic relationships stay the same. So when we're
calculating Price Elasticity of Demand we still use the basic formula:
PEoD = (% Change in Quantity Demanded)/(% Change in Price)
However how we calculate the percentage changes differ. Before when we calculated Price
Elasticity of Demand, Price Elasticity of Supply, Income Elasticity of Demand, or Cross-
Price Elasticity of Demand we'd calculate the percentage change in Quantity Demand the
following way:
[QDemand(NEW) - QDemand(OLD)] / QDemand(OLD)
To calculate an arc-elasticity, we use the following formula:
[[QDemand(NEW) - QDemand(OLD)] / [QDemand(OLD) + QDemand(NEW)]]*2
This formula takes an average of the old quantity demanded and the new quantity demanded
on the denominator. By doing so, we will get the same answer (in absolute terms) by
choosing $9 as old and $10 as new, as we would choosing $10 as old and $9 as new. When
we use arc elasticities we do not need to worry about which point is the starting point and
which point is the ending point. This benefit comes at the cost of a more difficult calculation.
If we take the example with:
Price(OLD)=9
Price(NEW)=10
QDemand(OLD)=150
QDemand(NEW)=110
We will get a percentage change of:
[[QDemand(NEW) - QDemand(OLD)] / [QDemand(OLD) + QDemand(NEW)]]*2
[[110 - 150] / [150 + 110]]*2 = [[-40]/[260]]*2 = -0.1538 * 2 = -0.3707
Some Important Questions and Answers for the Final Examination
Managerial Economics
Section A: Objective Type
Part One:
Multiple choices:
1. It is a study of economy as a whole
a. Macroeconomics
b. Microeconomics
c. Recession
d. Inflation
Answer: a (Macroeconomics)
2. A comprehensive formulation which specifies the factors that influence the demand for
the product.
a. Market Demand
b. Demand Schedule
c. Demand Function
d. Income Effect
Answer: c (Demand Function)
3. It is computed when the data is discrete and therefore incremental changes is measurable
a. Substitution Effect
b. Arc Elasticity
c. Point Elasticity
d. Derived Demand
Answer: c (Point Elasticity)
4. Goods & Services used for final consumption is called
a. Demand
b. Consumer Goods
c. Producer Goods
d. Perishable Goods
Answer: b (Consumer Goods)
5. The curve at which satisfaction is equal at each point
a. Marginal Utility
b. Cardinal Measure of Utility
, c. The Indifference Curve
d. Budget Line
Answer: c (The Indifference Curve)
6. Costs that are reasonably expected to be incurred in some future period or periods.
a. Future Costs
b. Past Costs
c. Incremental Costs
d. Sunk Costs
Answer: a (Future Cost)
7. Condition When the firm has no tendency either to increase or to contract its output
a. Monopoly
b. Profit
c. Equilibrium
d. Market
Answer: c (Equilibrium)
8. Total market value of all finished goods & services produced in a year by a country’s
residents is known as
a. National Income
b. Gross National Product
c. Gross Domestic Product
d. Real GDP
Answer: c (Gross Domestic Product)
9. The sum of net value of goods & services produced at market prices
a. Government Expenditure
b. Product Approach
c. Income Approach
d. Expenditure Approach
Answer: c (Income Approach)
10. The market value of all the final goods & services mad within the borders of a nation in
an year
a. Globalization
b. Subsidies
c. GDP
d. GNP
,Answer: c (GDP)
Part Two:
Short Notes type Questions:
1. Define ‘Arc Elasticity’.
Answer
Introduction
Definition of 'Arc Elasticity'
The elasticity of one variable with respect to another between two given points. It is used
when there is no general function to define the relationship of the two variables. Arc elasticity
is also defined as the elasticity between two points on a curve.
Investopedia explains 'Arc Elasticity'
Price elasticity of demand is the percentage change in quantity demanded for a unit change in
price. Arc elasticity computes the percentage change between two points in relation to the
average of the two prices and the average of the two quantities, rather than the change from
one point to the next. This provides the average elasticity for the arc of the curve between the
two points. Hence, the term "arc elasticity."
One of the problems with the standard formulas for elasticity that are in many freshman texts
is the elasticity figure you come up with is different depending on what you use as the start
point and what you use as the end point. An example will help illustrate this.
When we looked at Price Elasticity of Demand we calculated the price elasticity of demand
when price went from $9 to $10 and demand went from 150 to 110 was 2.4005. But what if
we calculated what the price elasticity of demand when we started at $10 and went to $9? So
we'd have:
Price(OLD)=10
Price(NEW)=9
QDemand(OLD)=110
QDemand(NEW)=150
First we'd calculate the percentage change in quantity demanded: [QDemand(NEW) -
QDemand(OLD)] / QDemand(OLD)
By filling in the values we wrote down, we get:
[150 - 110] / 110 = (40/110) = 0.3636 (Again we leave this in decimal form)
Then we'd calculate the percentage change in price:
[Price(NEW) - Price(OLD)] / Price(OLD)
By filling in the values we wrote down, we get:
, [9 - 10] / 10 = (-1/10) = -0.1
We then use these figures to calculate the price-elasticity of demand:
PEoD = (% Change in Quantity Demanded)/(% Change in Price)
We can now fill in the two percentages in this equation using the figures we calculated
earlier.
PEoD = (0.3636)/(-0.1) = -3.636
When calculating a price elasticity, we drop the negative sign, so our final value is 3.636.
Obviously 3.6 is a lot different from 2.4, so we see that this way of measuring price elasticity
is quite sensitive to which of your two points you choose as your new point, and which you
choose as your old point. Arc elasticities are a way of removing this problem.
When calculating Arc Elasticities, the basic relationships stay the same. So when we're
calculating Price Elasticity of Demand we still use the basic formula:
PEoD = (% Change in Quantity Demanded)/(% Change in Price)
However how we calculate the percentage changes differ. Before when we calculated Price
Elasticity of Demand, Price Elasticity of Supply, Income Elasticity of Demand, or Cross-
Price Elasticity of Demand we'd calculate the percentage change in Quantity Demand the
following way:
[QDemand(NEW) - QDemand(OLD)] / QDemand(OLD)
To calculate an arc-elasticity, we use the following formula:
[[QDemand(NEW) - QDemand(OLD)] / [QDemand(OLD) + QDemand(NEW)]]*2
This formula takes an average of the old quantity demanded and the new quantity demanded
on the denominator. By doing so, we will get the same answer (in absolute terms) by
choosing $9 as old and $10 as new, as we would choosing $10 as old and $9 as new. When
we use arc elasticities we do not need to worry about which point is the starting point and
which point is the ending point. This benefit comes at the cost of a more difficult calculation.
If we take the example with:
Price(OLD)=9
Price(NEW)=10
QDemand(OLD)=150
QDemand(NEW)=110
We will get a percentage change of:
[[QDemand(NEW) - QDemand(OLD)] / [QDemand(OLD) + QDemand(NEW)]]*2
[[110 - 150] / [150 + 110]]*2 = [[-40]/[260]]*2 = -0.1538 * 2 = -0.3707
