1. The form of economics most relevant to managerial decision-making within the firm is:

a. macroeconomics
b. welfare economics
c. free-enterprise economics
d. microeconomics
e. none of the above

2. If one defines incremental cost as the change in total cost resulting from a decision, and incremental revenue as the change in total revenue resulting from a decision, any business decision is profitable if:

a. it increases revenue more than costs or reduces costs more than revenue
b. it decreases some costs more than it increases others (assuming revenues remain constant)
c. it increases some revenues more than it decreases others (assuming costs remain constant)
d. all of the above
e. b and c only

3. In the shareholder wealth maximization model, the value of a firm's stock is equal to the present value of all expected future ____ discounted at the stockholders' required rate of return.

a. profits (cash flows)
b. revenues
c. outlays
d. costs
e. investments

4. Which of the following statements concerning the shareholder wealth maximization model is (are) true?

a. The timing of future profits is explicitly considered.
b. The model provides a conceptual basis for evaluating differential levels of risk.
c. The model is only valid for dividend-paying firms.
d. a and b
e. a, b, and c

5. According to the profit-maximization goal, the firm should attempt to maximize short-run profits since there is too much uncertainty associated with long-run profits.

6. According to the innovation theory of profit, above-normal profits are necessary to compensate the owners of the firm for the risk they assume when making their investments.

a. true
b. false

7. According to the managerial efficiency theory of profit, above-normal profits can arise because of high-quality managerial skills.

a. true
b. false

8. Which of the following (if any) is not a factor affecting the profit performance of firms:

a. differential risk
b. innovation
c. managerial skills
d. existence of monopoly power
e. all of the above are factors

9. Agency problems and costs are incurred whenever the owners of a firm delegate decision-making authority to management.

a. true
b. false

10. Economic profit is defined as the difference between revenue and ____.

a. explicit cost
b. total economic cost
c. implicit cost
d. shareholder wealth
e. none of the above