# Economic management exam trial solutions

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• Published : October 14, 2014

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Managerial Economics – Trial Exam – Theoretical Questions Part I: Indicate whether each of the following statements is True (T) or False (F). Comment. (5 Questions, Choose 4)
A

The law of diminishing returns takes effect, when a firm's both marginal product and average product decline after the latter reaching its maximum. False: The law of diminishing returns takes effect when MP reaches its maximum value and starts to diminish “decline”; then, MP equals AP when the latter reaches its maximum value.

B

Decreasing return to scale occurs when a firm has to increase all of its inputs at an increasing rate in order to maintain a constant rate of increase in its outputs.
True: The increase in all of its inputs at an increasing rate will make up for the increase in output at a decreasing rate, thereby resulting in a constant rate of increase in output.

C

Stage III of the production process begins at the point where the total product declines after reaching its maximum.
True: Stage III of the production process begins when the TP reaches its maximum value, and MP equals Zero.

D

Both AVC and ATC curves take a U- shape and they are intersecting over the production of output.
False: Both AVC and ATC curves take a U- shape, but they never intersect because the latter is always more than the AVC “ATC = AFC + AVC”.

E

The minimum point of the average total cost is normally located to the left of the minimum of average variable cost.
False: The minimum point of the ATC is normally located to the right of the minimum of AVC, because the AVC reaches its minimum value before the ATC.

As the number of labour increases, the average product of labour increases until it reaches its maximum then diminishes continuously till it becomes negative.

F

False: As the number of labour increases, the APL increases until it reaches its maximum then diminishes continuously, but it never reaches zero nor becomes negative.
G

Expert Opinion is better than Delphi Approach in conducting forecasting the market share for a company.
False: Delphi Approach is better than Expert Opinion because it’s more accurate, uses multiple experts and tries to reach an estimating consensus among them, and avoid prevailing opinions.

Write Short Notes on Following “5 Lines Max”. (4 Questions, Choose 2) 1.

Short Run Production Function vs. Long Run Production Function  A short-run production function is the period during which maximum output can be produced by varying certain inputs “variable inputs like labour” while other inputs remain unchanged “fixed input like capital". The short-run production function can be divided into three distinct stages (Stage I – Stage II – Stage III).

 A long-run production function is the period during which maximum output can be produced by varying all inputs “all inputs are variable”. Thus, there is really no difference between fixed and variable inputs. The increase in output that results from an increase in all of a firm's inputs by some proportion is called returns to scale.

2.