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Optimal Decisions Using Marginal Analysis
Each question contains a code showing the section of the chapter text from which it was taken. The
codes for this chapter are:
Code
Section
1
A Simple Model of the Firm
2
Marginal Analysis
3
Marginal Revenue and Marginal Cost
4
Sensitivity Analysis
5
Appendix
MULTIPLE CHOICE
1.
In the simple model of the firm, management's main tasks are to
a)
Set the quantity of output and estimate costs.
b)
Set output quantity and price.
c)
Set price and estimate revenue.
d)
Determine the scale of operation and estimate profit.
e)
Set advertising spending and price.
ANSWER: b
SECTION: 1
2.
According to the model of the firm, management’s main goal is to
a)
Satisfy its shareholders.
b)
Maximize profit.
c)
Maximize its market share.
d)
Achieve efficiency – that is, minimize its average cost per unit.
e)
Maintain steady and predictable earnings growth.
ANSWER: b
SECTION: 1
3.
According to the law of demand, if a firm reduces the price of its good
a)
Consumers in aggregate will demand more units.
b)
Consumers will demand roughly the same number of units.
c)
Consumers will demand more units only if they have the income to pay for them.
d)
The effect is uncertain; it depends on the behavior of rival firms.
e)
Competing firms are sure to match the price cut.
ANSWER: a
SECTION: 1
4.
According to the simple model of the firm, management can predict
2-1

Optimal Decisions Using Marginal Analysis
a)
The market price only within a wide margin of error.
b)
The behavior of its main competitors with certainty.
c)
Costs with certainty, but revenues imprecisely.
d)
Nether revenues nor costs very precisely.
e)
Both revenues and costs with certainty.
ANSWER: e
SECTION: 1
5.
Demand is given by Q = 600 - 30P. At price P = $15, the firm’s unit sales are
a)
100.
b)
150.
c)
300.
d)
450.
e)
600.
ANSWER: b
SECTION: 1
6.
Demand is given by: P = 1,750 - 25Q. If the firm wishes to sell 50 units, the requisite price is
a)
$500.
b)
$400.
c)
$300.
d)
$200.
e)
$100.
ANSWER: a
SECTION: 1
7.
The firm’s demand curve is given by Q = 800 - 2P. Therefore, its inverse demand curve is
a)
MR = 800 – 4P.
b)
P = 800 – 2Q.
c)
P = 400 - .5Q.
d)
P = 800 - .5Q.
.
e)
There is insufficient information to determine the inverse demand curve.
ANSWER: c
SECTION: 1
8.
A firm’s total cost function is given by: C = 100 + 10Q + 2Q
2
. At Q = 10,
a)
Total cost is 400 and marginal cost is 10.
b)
Marginal cost is constant.
c)
Average cost is 50.
d)
Fixed cost is 100 and marginal cost is 50.
e)
None of the above answers is correct.
ANSWER: d
SECTION: 3
2-2

Chapter 2
9.
Marginal analysis measures the effect of
a)
Changing the firm’s objectives.
b)
Changes in demand on profit.
c)

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