Chapter 1 True or False Quiz

. The single most important element in managerial economics is the microeconomic theory of the firm.

. A theoretical model attempts to identify every possible determinant of an event.

. Managerial economics involves the application of economic theory and decision science.

. Management decision problems are not encountered by government agencies or non-profit organizations.

. Management decision problems typically involve objectives and constraints.

. The economic theory of the firm assumes that businesses attempt to maximize their contribution to social welfare.

. The ultimate test of the value of an economic theory is whether it is based on reasonable assumptions.

. Mathematical economics involves the application of statistical tools to estimate economic models.

. The functional areas of business administration are largely irrelevant to the study of managerial economics.

. Most of the goods and services in the United States are produced by government and the rest are produced by firms and not-for-profit organizations.

. Firms exist because they facilitate the efficient organization of factors of production.

. The function of a firm is to purchase resources and then to transform them into goods and services and offer them for sale.

. The value of a firm is equal to the sum of all future profits that will be generated by the firm.

. If there was no inflation, the value of a dollar received now would be greater than the value of a dollar received a year from now.

. The concept of the circular flow of economic activity illustrates the point that all economic activities are interdependent.

. The theory of the firm holds that the primary goal of a firm is to maximize the discounted present value of the positive difference between the firm's total revenue and the firm's total cost or to minimize the present value of the negative difference between the firm's total revenue and total cost.

. The value of a firm will increase if there is a reduction in the uncertainty associated with the firm's cash flows.

. An increase in the uncertainty associated with a firm's cash flows will cause a decrease in the discount rate that is applied to the valuation of the firm.

. Profit is a constraint on the operation of a firm.

. The value of a firm under constrained optimization is generally below what it would be under unconstrained optimization.

. The firm, as an organizational structure, exists in order to reduce transactions costs.

. Transaction cost refers to the price paid for a good or service.

. The costs of negotiating and enforcing contracts are transaction costs.

. Firms purchase goods and services from other firms, instead of producing the goods and services internally, because it will reduce transaction costs.

. The principal-agent problem can occur when the person who manages a firm is not the owner of the firm.

. Satisficing refers to the fact that profit maximization by corporate managers is a way of satisfying stockholders.

. Alternative theories of the firm have proven to be more satisfactory than the theory of profit maximization.

. Business profit is generally greater than economic profit.

. The wages paid to workers employed by a firm are an example of an explicit cost.

. Sales taxes paid to the state by a retail firm are an example of an implicit cost.

. Business profit is equal to total revenue minus all implicit costs.

. A building owned by a firm has an explicit cost of zero, but its implicit cost is not zero.

. Businesses are taxed on the basis of their economic profit.

. Implicit costs refer to the value of inputs owned and used by a firm.

. Economic profit is equal to total revenue minus all implicit costs.

. Business profit minus economic profit is equal to the total of all implicit costs.

. Economic cost is equal to the sum of explicit and implicit costs.

. Firms that operate in industries with relatively high levels of risk tend to have lower levels of profit.

. In the long run, competitive firms tend to earn risk-adjusted levels of economic profit equal to zero.

. The frictional theory of profits holds that firms in a competitive industry can have economic profits that differ from zero for long periods of time.

. The monopoly theory of profits argues that restricted entry into an industry tends to keep profits low.

. The idea that profits are a form of reward for the successful introduction of a new product or process is the frictional theory of profit.

. The managerial efficiency theory of profit holds that firms that enjoy higher levels of profit do so because they are more efficient than their competitors.

. Economic profit is an important mechanism for the efficient reallocation of resources in a free-enterprise economy.

. Managerial economics is largely independent of the internationalization of economic activity.

. Business ethics refers to enforceable laws of business conduct.

. Business ethics provides quidelines as to what is acceptable behavior in business transactions.

. Many firms have responded to the need for ethical behavior by establishing codes of ethical behavior.

. Firms typically provide employees with a list of all possible forms of unethical behavior.

. The Internet has had very little impact on the way that business is conducted.

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