Father Saturnino Urios University

Managerial Economics
COMPREHENSIVE EXAMINATION
Name: Date:
Instructor: Score:

Instruction: Answer the following questions. Write your final answer on the space before each item. Strictly no erasures.
An erasure is equivalent to a 5 point deduction to total scores. No cheating. Once caught, you will be called to have a talk
with the program dean. Pray before proceeding.

1. The amalgamation of economic theory with business practices so as to ease decision making and future planning
by management.
a. Management Accounting
b. Management Decision Making
c. Managerial Economics
d. Managerial and Economic Decisions
2. Which is not a factor of Managerial decision making?
a. Managerial Decision Issues
b. Econometrics
c. Economic Theory
d. Qualitative approach
3. It studies how individuals, businesses, governments, and nations make choices on allocating resources to satisfy
their wants and needs, trying to determine how these groups should organize and coordinate efforts to achieve
maximum output.
a. Macroeconomics
b. Economies of Scale
c. Economics
d. Microeconomics
4. Identify the two categories of economics:
a. __________________
b. __________________
5. List down the managerial decision areas:
a. ____________________________________________
b. ____________________________________________
____________________________________________
c. ____________________________________________
d. ____________________________________________
6. Which is not a basic internal issue?
a. Choice of technology
b. Sales Promotion
c. Investment Climate
d. Inventory Management
7. Deals with consumer behavior
a. Theory of Demand
b. Theory of Production
c. Pricing Theory
d. Theory of Capital and Investment
8. Which is not an issue related to Macroeconomics?
a. Price Trends
b. Government Policies and Regulations
c. National Output
d. New Investments
9. The forgone value
a. Sunk Cost
b. Historical Cost
c. Opportunity Cost
d. Variable and Fixed Cost
10. Mark’s marginal benefit per day from eating chocolate cake is given in the table below. If the price of the
chocolate cake is P350.00, the optimal number of chocolate cakes that Mark should eat is:

Marginal Benefit Chocolate Cakes

P 400.00 1
P 390.00 2
 P360.00 3
P280.00 4
a. 1
b. 2
c. 3
d. 4
11. Suppose, Klarizza, a businesswoman can buy either a photocopying machine or a t-shirt printing machine with
his limited resources and suppose that she can earn annually P 40,000 and P 60,000 respectively from the two
alternatives. As a rational businesswoman choose to buy a t-shirt printing machine that gives him a higher return.
Opportunity cost is
a. P 60,000
b. P 40,000
c. P 20,000
d. zero
12. Based on the preceding item, the economic profit is
a. P 60,000
b. P 40,000
c. P 20,000
d. Zero
13. If you are Klarizza, what will you choose? Explain briefly.
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14. KARABANSOS Company has P 7 million to spend on a project. The company can decide either to invest the money
for advertisement purpose of the particular product at the time of launch in the market or to invest the money
in production and to buy machinery. Which is the true?
a. If the company will invest the money for advertisement, the opportunity cost is the cost of
advertisement.
b. If the company will invest the money for the production and machinery, the opportunity cost is
unidentifiable.
c. If the company will invest the money for advertisement, the opportunity cost is the investment of money
in production and machinery.
d. If the company will choose either of the two alternatives, there will be no opportunity cost since there
is no cost involve.
15. Attributes of want to qualify as demand, which is not?
a. Desire to buy
b. Willingness to pay
c. Ability to pay
d. Willingness to live
16. State the Law of Demand:
___________________________________________________________________________________
___________________________________________________________________________________
17. Based on the following demand schedule, draw a demand curve:

Selling Price Quantity Demanded

900 70
800 60
700 50
600 40
500 30
400 20
300 10

18. In the course of their business operations, ZENAIDA Company is faced with a seasonal dilemma. External and
Internal factors are going crazy and is expected to go out of control if not taken care of. With the present situation
they are facing, they are considering to either raise their commodity prices or not but is afraid of its effects to
the demand. In this case, what analysis should ZENAIDA Company undertake?
a. None. They can’t do anything about it.
b. Anything, as long as no cost is involved.
c. Economies of Scale.
d. Elasticity of demand.
Identify and explain the following illustrations about the price elasticity of demand:

A.
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B.
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C.
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D.
______________________________________________________
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E.
______________________________________________________
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19. Henry Ford famously mass-produced cars at the beginning of the twentieth century, starting Ford Motor
Company. He made millions because mass production made cars cheap to make, and he passed some of the
savings to the consumer in the form of a low price. Cars became a common sight in the United States thereafter.
Keeping total revenue and its relationship with price in mind, do you expect the demand for cars to be elastic or
inelastic given the story of Henry Ford?
a. Inelastic
b. Elastic
20. If the elasticity of demand for college textbooks is -0.1, and the price of textbooks increases by 20%, how much
will the quantity demanded change, and in what direction?
a. The quantity demanded increases by 2%
b. The quantity demanded decreases by 20%
c. The quantity demanded decreases by 2%
d. The quantity demanded remains the same
21. If the elasticity of demand for summer break to Masao is -5, and if you notice that this year in Masao the quantity
of packages demanded increased by 10%, then what happened to the price of Masao vacation packages?
a. The price fell by 10 percent
 b. The price fell by 2 percent
c. The price increased by 2 percent
d. The price remained the same
22. In your college town, real estate developers are building thousands of new student-friendly apartments close to
campus. If you want to pay the lowest rent possible, should you hope that demand for apartments is elastic or
inelastic?
a. Elastic
b. Inelastic
23. In your college town, the local government decrees that thousands of apartments close to campus are
uninhabitable and must be torn down next semester. If you want to pay the lowest rent possible, should you
hope that demand for apartments is elastic or inelastic?
a. Elastic
b. Inelastic
24. The long-run elasticity of oil demand has been estimated at -0.5. If the price of oil rises by 10%, how much will
the quantity of oil demanded fall?
a. 5%
b. 0.5%
c. 2%
d. 20%
25. The long-run elasticity of oil demand has been estimated at -0.5. Does a 10% rise in oil prices increase or decrease
total revenues to the oil producers? *
a. Increase
b. Decrease
26. In the United States, the long-run elasticity of oil demand has been estimated at -0.5. Some policymakers and
environmental scientists would like to see the United States cut back on its use of oil in the long run. We can use
this elasticity estimate to get a rough measure of how high the price of oil would have to permanently rise in
order to get people to make big cuts in oil consumption. How much would the price of oil have to permanently
rise in order to cut oil consumption by 50%?
a. 5%
b. 25%
c. 50%
d. 100%
27. If the Price of flowers increases by 10% and over a period of several years, the quantity demanded falls by 5%,
then the long run elasticity of demand for flowers is:
a. 50%, inelastic
b. 2, elastic
c. -0.5, inelastic
d. .05, inelastic
28. If the income of managers increased by 10% and the demand for household accessories increased by 15%, what
is the income elasticity of demand?
a. 1.5, inferior goods
b. 0.6667, normal goods
c. 1.5, normal goods
d. 1.5, luxurious goods
29. If the income of construction workers increased by 25% and the demand for meat increased by 20%, what is the
income elasticity of demand?
a. 0.8, inferior goods
b. 0.8, normal goods
c. 1.25, luxurious goods
d. 1.25, inferior goods
30. Which graph indicates a curve for normal goods?
a. b. c. d.
[Case Study]
Will the Hard-Core Starbucks Customer Pay More? The Chain Plans to Find Out
By CLAIRE CAIN MILLER

SAN FRANCISCO — As the recession wears on and fewer people are splurging at Starbucks, the coffee chain’s response
is to raise prices. On Thursday, Starbucks stores in several cities started charging up to 30 cents more for some specialty
beverages, though the company is charging less for some basic drinks.
The price adjustments will be made at stores nationwide in coming months.
The move comes as Starbucks toes a tricky line between remaining a premium brand while retaining price sensitive
customers who can buy cheaper coffee at other shops. This summer, Starbucks has been fending off competition from
McDonald’s, which has introduced a new line of lower-priced espresso drinks that have proved popular.
The price of sugary Starbucks concoctions with several ingredients, like Frappuccinos and caramel macchiatos, will
increase an average 10 cents to 15 cents, but in some cases as much as 30 cents, or about 8 percent, said Valerie O’Neil,
a Starbucks spokeswoman.
The price of the most popular beverages — 12-ounce lattes and brewed coffees — will decrease an average of 5 cents
to 15 cents. This is the first time Starbucks has lowered prices, she said. It last increased the price of drinks by 5 cents in
2007.
“The goal of it is really to continue to find ways to balance the value we’re providing for our customers with the business
responsibilities,” Ms. O’Neil said. In the three months ending June 28, sales at Starbucks stores open at least a year fell 5
percent from the same period the year before.
Starbucks is also experimenting with other ways to make more money, like selling alcoholic beverages in a few stores in
Seattle. Starbucks is also trying to heighten its appeal with a redesign of some of its menus so they more prominently
feature less expensive brewed coffee, and it is running a summer promotion for iced drinks.
Raising prices in the middle of a big downturn in consumer spending might not be such a crazy idea, said J. Miguel Villas-
Boas, a marketing professor who studies pricing and consumer choice at the Haas School of Business of the University of
California, Berkeley. Though it is paradoxical, it is a strategy premium companies often take, he said.
“Given that McDonald’s is capturing some of the consumers less interested in the premium that Starbucks offers, then
the consumers left out for Starbucks are the consumers willing to pay more, so Starbucks says,
‘Let’s charge them,’ ” he said.
Connie Williams, 57, a saleswoman in Los Angeles, is one of those customers. She said the price changes would not affect
her daily habit of buying a 12-ounce nonfat cappuccino “with a little shake of chocolate” at Starbucks. “I’m hooked,” she
said. “It’s like asking a cocaine addict, ‘If I raise my prices, are you going to buy less?’ ”
But some customers said the price increase would make them turn away. Elise Walls, 24, a student in San Francisco, visits
Starbucks nearly every day for a 20-ounce green ginger tea. On Thursday, she noticed it cost 5 cents more. “I was like,
‘Wait a minute,’ because it’s already expensive anyway,” she said. She plans to start buying boxes of tea bags and making
it herself.
The sugary, creamy drinks that will now be more expensive at Starbucks are the same type of beverage that McDonald’s
has been marketing in a huge advertising campaign.
Starbucks is safe raising the prices of specialty drinks because they are where the company best differentiates itself, said
Kenneth Davids, editor of Coffee Review.
Mr. Davids recently published a taste test comparing espresso drinks at Starbucks and McDonald’s. The difference
between standard lattes was subtle, he said, but “what surprised me was how dramatic the difference was when it got
to the additives,” like syrup and whipped cream.
Starbucks customers get what they pay for, he said. “With McDonald’s, it was just terrible stuff that I don’t think anybody
except maybe a 5-year-old might like.”
Case Questions:
1. Will Understanding the elasticity of demand for the different Starbucks products help in identifying the best
strategy? Explain how this works.
2. Given the options of Starbucks and what you know from the case, what should they do to increase their
revenues? Support your recommendations with an analysis.

-End-