MANAGERIAL ECONOMICS — FROEB, 5TH EDITION
PREMIUM ORIGINAL EXAM & STUDY GUIDE
Problem Solving • Pricing • Strategy • Markets • Uncertainty • Organizational Design
Source note: The supplied Stuvia listing is a paid 2023–2024 test-bank resource for Froeb et al.'s Managerial Economics, 5th Edition. Publicly
available course/textbook information identifies the edition's progression through problem solving, costs, investment, pricing, economies of
scale and scope, market structure, strategy, foreign exchange, price discrimination, strategic games, bargaining, uncertainty, auctions,
information problems and organizational design. This guide is independently authored from those public topic areas and standard
managerial-economics principles. It does not reproduce or reconstruct the paid test bank, and the questions below are not represented as
official or verified publisher exam questions.
Managerial Economics — Independent Froeb 5e Study Resource Page 1
, 1. PROBLEM SOLVING & ECONOMIC THINKING
Question 1: What is the central purpose of managerial economics?
A. Apply economic reasoning to improve decisions
B. Memorize accounting rules only
C. Eliminate uncertainty completely
D. Replace all managerial judgment
Correct Answer: A
Rationale: Managerial economics applies economic concepts to decisions about resources, incentives, prices, costs, strategy and
organizational design.
Question 2: What is opportunity cost?
A. The value of the best alternative forgone
B. Only an item's cash price
C. A sunk cost
D. Total accounting expense
Correct Answer: A
Rationale: Opportunity cost measures what must be given up to choose one alternative rather than the best available alternative.
Question 3: Why is marginal analysis useful?
A. It compares the incremental benefit and incremental cost of a decision
B. It ignores changes at the margin
C. It uses only historical averages
D. It considers fixed costs only
Correct Answer: A
Rationale: A decision is attractive at the margin when the additional benefit exceeds the additional cost.
Question 4: A manager spends three hours on a project that could instead have produced $90 of value elsewhere. What
is the opportunity cost of the time?
A. $0
B. $30
C. $90
D. The project's accounting profit
Correct Answer: C
Rationale: The relevant opportunity cost is the value of the best alternative use of the three hours: $90.
Question 5: Which is a common economic problem-solving principle?
A. Identify the decision, alternatives, relevant costs/benefits and incentives
B. Ignore incentives
C. Treat sunk costs as avoidable
D. Use averages for every decision
Correct Answer: A
Rationale: Good economic analysis isolates the decision, identifies relevant incremental consequences and examines how incentives affect
behavior.
2. BENEFITS, COSTS & DECISIONS
Managerial Economics — Independent Froeb 5e Study Resource Page 2
, Question 6: What distinguishes a fixed cost from a variable cost in the short run?
A. Fixed cost does not change with output over the relevant range; variable cost does
B. Fixed costs are always larger
C. Variable costs never change
D. Fixed costs are always irrelevant
Correct Answer: A
Rationale: The distinction depends on how the cost responds to the decision variable over the relevant range and time period.
Question 7: What is the sunk-cost fallacy?
A. Letting an unrecoverable past expenditure improperly influence a current decision
B. Ignoring future opportunity costs
C. Comparing marginal benefits and costs
D. Discounting future cash flows
Correct Answer: A
Rationale: Sunk costs are already incurred and cannot be changed by the current decision, so they should generally not affect the
forward-looking choice.
Question 8: Why can accounting profit differ from economic profit?
A. Economic profit includes opportunity costs of resources
B. Accounting profit always includes every opportunity cost
C. Economic profit ignores explicit costs
D. They are always identical
Correct Answer: A
Rationale: Economic profit subtracts both explicit costs and relevant implicit opportunity costs.
Question 9: A manager paid $20,000 for specialized equipment last year. The equipment cannot be returned. Should
that $20,000 determine whether to produce one more unit today?
A. Yes, always
B. No, it is sunk; compare relevant incremental benefits and costs
C. Yes, because historical costs are always relevant
D. Only if output falls
Correct Answer: B
Rationale: The prior payment cannot be changed by today's marginal production decision.
Question 10: What is a hidden cost?
A. An opportunity cost that may not appear as an explicit accounting expense
B. A cost that never exists
C. A tax only
D. A sunk cost by definition
Correct Answer: A
Rationale: Using an owner's time or capital has an opportunity cost even when no explicit cash payment is recorded.
3. EXTENT DECISIONS & MARGINAL ANALYSIS
Managerial Economics — Independent Froeb 5e Study Resource Page 3
PREMIUM ORIGINAL EXAM & STUDY GUIDE
Problem Solving • Pricing • Strategy • Markets • Uncertainty • Organizational Design
Source note: The supplied Stuvia listing is a paid 2023–2024 test-bank resource for Froeb et al.'s Managerial Economics, 5th Edition. Publicly
available course/textbook information identifies the edition's progression through problem solving, costs, investment, pricing, economies of
scale and scope, market structure, strategy, foreign exchange, price discrimination, strategic games, bargaining, uncertainty, auctions,
information problems and organizational design. This guide is independently authored from those public topic areas and standard
managerial-economics principles. It does not reproduce or reconstruct the paid test bank, and the questions below are not represented as
official or verified publisher exam questions.
Managerial Economics — Independent Froeb 5e Study Resource Page 1
, 1. PROBLEM SOLVING & ECONOMIC THINKING
Question 1: What is the central purpose of managerial economics?
A. Apply economic reasoning to improve decisions
B. Memorize accounting rules only
C. Eliminate uncertainty completely
D. Replace all managerial judgment
Correct Answer: A
Rationale: Managerial economics applies economic concepts to decisions about resources, incentives, prices, costs, strategy and
organizational design.
Question 2: What is opportunity cost?
A. The value of the best alternative forgone
B. Only an item's cash price
C. A sunk cost
D. Total accounting expense
Correct Answer: A
Rationale: Opportunity cost measures what must be given up to choose one alternative rather than the best available alternative.
Question 3: Why is marginal analysis useful?
A. It compares the incremental benefit and incremental cost of a decision
B. It ignores changes at the margin
C. It uses only historical averages
D. It considers fixed costs only
Correct Answer: A
Rationale: A decision is attractive at the margin when the additional benefit exceeds the additional cost.
Question 4: A manager spends three hours on a project that could instead have produced $90 of value elsewhere. What
is the opportunity cost of the time?
A. $0
B. $30
C. $90
D. The project's accounting profit
Correct Answer: C
Rationale: The relevant opportunity cost is the value of the best alternative use of the three hours: $90.
Question 5: Which is a common economic problem-solving principle?
A. Identify the decision, alternatives, relevant costs/benefits and incentives
B. Ignore incentives
C. Treat sunk costs as avoidable
D. Use averages for every decision
Correct Answer: A
Rationale: Good economic analysis isolates the decision, identifies relevant incremental consequences and examines how incentives affect
behavior.
2. BENEFITS, COSTS & DECISIONS
Managerial Economics — Independent Froeb 5e Study Resource Page 2
, Question 6: What distinguishes a fixed cost from a variable cost in the short run?
A. Fixed cost does not change with output over the relevant range; variable cost does
B. Fixed costs are always larger
C. Variable costs never change
D. Fixed costs are always irrelevant
Correct Answer: A
Rationale: The distinction depends on how the cost responds to the decision variable over the relevant range and time period.
Question 7: What is the sunk-cost fallacy?
A. Letting an unrecoverable past expenditure improperly influence a current decision
B. Ignoring future opportunity costs
C. Comparing marginal benefits and costs
D. Discounting future cash flows
Correct Answer: A
Rationale: Sunk costs are already incurred and cannot be changed by the current decision, so they should generally not affect the
forward-looking choice.
Question 8: Why can accounting profit differ from economic profit?
A. Economic profit includes opportunity costs of resources
B. Accounting profit always includes every opportunity cost
C. Economic profit ignores explicit costs
D. They are always identical
Correct Answer: A
Rationale: Economic profit subtracts both explicit costs and relevant implicit opportunity costs.
Question 9: A manager paid $20,000 for specialized equipment last year. The equipment cannot be returned. Should
that $20,000 determine whether to produce one more unit today?
A. Yes, always
B. No, it is sunk; compare relevant incremental benefits and costs
C. Yes, because historical costs are always relevant
D. Only if output falls
Correct Answer: B
Rationale: The prior payment cannot be changed by today's marginal production decision.
Question 10: What is a hidden cost?
A. An opportunity cost that may not appear as an explicit accounting expense
B. A cost that never exists
C. A tax only
D. A sunk cost by definition
Correct Answer: A
Rationale: Using an owner's time or capital has an opportunity cost even when no explicit cash payment is recorded.
3. EXTENT DECISIONS & MARGINAL ANALYSIS
Managerial Economics — Independent Froeb 5e Study Resource Page 3
