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Question 1Principles of Management and Organisational Behaviour

In Henri Fayol's fourteen principles of management, which principle states that an employee should receive orders from only one superior?

  1. Esprit de corps
  2. Unity of command Correct answer.
  3. Scalar chain
  4. Unity of direction

Explanation

Unity of command holds that each subordinate should report to a single superior so that conflicting instructions and divided loyalty are avoided. Unity of direction is a related but distinct principle concerned with one plan and one head for activities with the same objective.

Question 2Principles of Management and Organisational Behaviour

Frederick Taylor's approach to scientific management is best characterised by which of the following?

  1. Applying bureaucratic rules and impersonal offices to control behaviour
  2. Emphasising informal group norms as the main influence on output
  3. Designing jobs around employee autonomy and self-managed teams
  4. Using time-and-motion study to standardise work and select and train workers scientifically Correct answer.

Explanation

Taylor sought to replace rule-of-thumb methods with systematic study of tasks, standardised tools and procedures, scientific selection and training, and a division between planning and execution. His focus was efficiency at the level of the individual task.

Question 3Principles of Management and Organisational Behaviour

According to Maslow's hierarchy of needs, which need level must generally be satisfied before esteem needs become the dominant motivator?

  1. Physiological needs only
  2. Self-actualisation needs
  3. Belongingness and love needs Correct answer.
  4. Safety needs only

Explanation

Maslow arranged needs in a hierarchy in which lower-order needs are addressed first. Esteem needs sit above belongingness and love needs, so social needs must be reasonably met before esteem needs dominate.

Question 4Principles of Management and Organisational Behaviour

In Mintzberg's classification of managerial roles, which category includes the figurehead, leader and liaison roles?

  1. Decisional roles
  2. Technical roles
  3. Interpersonal roles Correct answer.
  4. Informational roles

Explanation

Mintzberg grouped ten managerial roles into three categories. The interpersonal category covers roles based on relationships with others: figurehead, leader and liaison.

Question 5Principles of Management and Organisational Behaviour

A production supervisor who spends most of the day giving instructions, checking task completion and correcting deviations is exercising which managerial function most strongly?

  1. Staffing
  2. Organising
  3. Controlling Correct answer.
  4. Planning

Explanation

Controlling involves monitoring performance against standards and taking corrective action when deviations occur. Giving instructions and correcting deviations in ongoing work is the essence of the control function.

Question 6Principles of Management and Organisational Behaviour

The Hawthorne studies are most often credited with shifting management thought toward which conclusion?

  1. Social and psychological factors in work groups substantially affect productivity Correct answer.
  2. Workers are motivated primarily by formal authority and economic incentives
  3. Output is determined mainly by machine capacity and layout design
  4. Bureaucratic rules are the most reliable means of coordination

Explanation

The Hawthorne experiments showed that attention from researchers, informal group norms and social relationships influenced output in ways that purely physical or economic explanations could not account for. This helped launch the human relations movement.

Question 7Principles of Management and Organisational Behaviour

A firm groups its staff into separate units for marketing, finance and operations, each serving all product lines. Which basis of departmentalisation does this describe?

  1. Product departmentalisation
  2. Geographic departmentalisation
  3. Functional departmentalisation Correct answer.
  4. Matrix departmentalisation

Explanation

Functional departmentalisation groups activities by the specialised function performed, such as marketing or finance, with each function serving the whole organisation. Product departmentalisation would instead group by product line.

Question 8Principles of Management and Organisational Behaviour

A project manager has responsibility for delivering a major system but lacks formal authority over the engineers assigned to her from other departments. According to the sources of managerial power, this is best described as which situation?

  1. High span of control
  2. Responsibility exceeding authority Correct answer.
  3. Centralised decision making
  4. High position power with low task structure

Explanation

The principle of parity of authority and responsibility holds that a manager who is accountable for outcomes should hold adequate authority to command the necessary resources. Where accountability exceeds formal authority, the manager must rely on persuasion and influence rather than legitimate power.

Question 9Principles of Management and Organisational Behaviour

In a matrix structure, an employee typically reports to both a functional head and a project manager. Which coordination problem is most characteristic of this arrangement?

  1. Dual authority and role conflict Correct answer.
  2. Loss of technical expertise across the firm
  3. Inability to share resources between projects
  4. Excessive specialisation of unskilled labour

Explanation

The defining feature of a matrix is that it overlays two lines of authority, so employees face two bosses and must balance competing priorities. This dual command creates role ambiguity and conflict, the very problem that unity of command was meant to prevent.

Question 10Principles of Management and Organisational Behaviour

A manager who is well liked and respected by colleagues is able to influence them through which type of power, according to French and Raven?

  1. Reward power
  2. Coercive power
  3. Legitimate power
  4. Referent power Correct answer.

Explanation

Referent power derives from identification with and admiration of the power holder, so people comply because they like or respect the person. Legitimate, reward and coercive power rest instead on formal position or control over outcomes.

Question 11Principles of Management and Organisational Behaviour

According to Herzberg's two-factor theory, which of the following would most directly generate job satisfaction rather than merely prevent dissatisfaction?

  1. Improving working conditions and lighting
  2. Increasing salary and fringe benefits
  3. Clarifying company policies and supervision
  4. Assigning challenging work with recognition for achievement Correct answer.

Explanation

Herzberg distinguished motivators, such as achievement, recognition, responsibility and the work itself, from hygiene factors such as pay, conditions and policy. Only motivators generate genuine satisfaction; hygiene factors mainly prevent dissatisfaction.

Question 12Principles of Management and Organisational Behaviour

A team member who quietly accepts a manager's request in public but privately disagrees and makes no effort to comply is displaying which response to influence?

  1. Identification
  2. Internalisation
  3. Compliance Correct answer.
  4. Commitment

Explanation

Compliance occurs when a person outwardly accepts an influence attempt but does not internalise it, so behaviour changes only while the influence is monitored. Internalisation and commitment involve genuine acceptance of the request.

Question 13Principles of Management and Organisational Behaviour

In Tuckman's model of group development, during which stage are intragroup conflict and disagreements about roles and leadership most likely to surface?

  1. Norming
  2. Storming Correct answer.
  3. Performing
  4. Forming

Explanation

Tuckman's storming stage is marked by conflict as members assert views on goals, roles and leadership. Forming is a period of orientation and politeness, while norming and performing follow once cohesion and shared norms are established.

Question 14Principles of Management and Organisational Behaviour

A committee of seven members takes longer to reach a decision than a single manager would, and the final decision is more moderate than the initial views of any individual member. Which group phenomenon does this illustrate?

  1. Social loafing
  2. Risky shift reversed into cautious shift, an outcome of group decision making Correct answer.
  3. Groupthink
  4. Group polarisation

Explanation

Groups often make decisions that are more extreme or more cautious than the average individual position, a phenomenon known as group shift or polarisation. The cautious outcome described is a shift toward caution produced by group interaction.

Question 15Principles of Management and Organisational Behaviour

Which of the following best describes the informal organisation within a firm?

  1. The network of personal relationships and social norms that emerges from interaction at work Correct answer.
  2. The system of written rules and procedures governing employee conduct
  3. The formal reporting lines set out in the organisation chart
  4. The structure created when a firm divides work by product line

Explanation

The informal organisation consists of the spontaneous social relationships, cliques and norms that develop alongside the formal structure. It can help or hinder formal objectives and is not captured by the organisation chart.

Question 16Principles of Management and Organisational Behaviour

A manager uses a participative style, consulting subordinates before deciding, but retains the final decision. In the Tannenbaum and Schmidt continuum of leadership behaviour, this approach sits where?

  1. At the subordinate-centred extreme, where the group decides within limits set by the manager
  2. At the boss-centred extreme, where the manager decides and announces
  3. Outside the continuum, because participation is not a leadership behaviour
  4. Between the extremes, moving decision influence toward subordinates while the manager still decides Correct answer.

Explanation

Tannenbaum and Schmidt portrayed leadership behaviour along a continuum from boss-centred to subordinate-centred. Consulting subordinates before deciding shifts influence toward them while the manager still makes the final choice.

Question 17Principles of Management and Organisational Behaviour

A manager tells a subordinate that completing the monthly report by Friday will be rewarded with a paid day off. According to Vroom's expectancy theory, which component is being strengthened by this statement?

  1. Equity, because the manager is comparing the subordinate's input to others
  2. Valence, because the manager is clarifying how much the reward is liked
  3. Expectancy, because the manager is clarifying how effort leads to performance
  4. Instrumentality, because performance is linked to a valued outcome Correct answer.

Explanation

Vroom's theory holds that motivation depends on expectancy, instrumentality and valence. Instrumentality is the perceived link between successful performance and the receipt of a valued outcome, which is precisely what the manager's promise establishes.

Question 18Principles of Management and Organisational Behaviour

In Adams's equity theory, an employee who perceives underpayment relative to a referent is most likely to respond in which way?

  1. Increase the outcomes of the referent person
  2. Increase effort to raise output and restore balance
  3. Reduce effort or seek a pay increase to restore the input-outcome ratio Correct answer.
  4. Ignore the comparison because equity perceptions are stable over time

Explanation

Equity theory predicts that perceived underpayment motivates actions that restore balance, such as reducing inputs, seeking more outcomes, changing the referent or leaving. The perceived ratio of inputs to outcomes is compared with a referent, and imbalance creates tension.

Question 19Principles of Management and Organisational Behaviour

A firm faces a stable environment, routine technology and strong cost pressures. Burns and Stalker's contingency framework would suggest which organisational form is most appropriate?

  1. A network structure with outsourced core activities
  2. A mechanistic structure with specialised tasks and vertical communication Correct answer.
  3. An organic structure with fluid roles and lateral communication
  4. A matrix structure combining functional and project authority

Explanation

Burns and Stalker contrasted mechanistic and organic forms, arguing that stable conditions favour mechanistic structures with specialised, clearly defined tasks and vertical communication. Organic forms suit changing, uncertain environments.

Question 20Principles of Management and Organisational Behaviour

Which statement best captures the difference between a leader and a manager in contemporary organisational behaviour literature?

  1. Managers focus on coping with complexity through planning and control, while leaders focus on coping with change through vision and direction Correct answer.
  2. Leadership and management are identical concepts and the terms are interchangeable
  3. Managers are concerned with interpersonal relations, while leaders are concerned only with administrative tasks
  4. Leaders always hold formal authority, while managers rely on informal influence

Explanation

Kotter's influential distinction holds that management copes with complexity through planning, budgeting and controlling, whereas leadership copes with change by setting direction and aligning people. The two roles can coexist in the same person but are conceptually distinct.

Question 21Accounting and Financial Management

A firm reports net profit after tax of ₹240,000, depreciation of ₹60,000, and an increase in trade receivables of ₹50,000. Using the indirect method, what is cash flow from operating activities?

  1. ₹150,000
  2. ₹250,000 Correct answer.
  3. ₹230,000
  4. ₹350,000

Explanation

Under the indirect method, non-cash depreciation is added back while an increase in receivables consumes cash. Hence 240,000 + 60,000 − 50,000 = ₹250,000.

Question 22Accounting and Financial Management

Which of the following best describes the accounting treatment of a contingent liability that is possible but not probable and cannot be reliably measured?

  1. Recognise it only when the cash outflow occurs
  2. Record it as a deferred expense
  3. Recognise it as a provision in the balance sheet
  4. Disclose it in the notes without recognition Correct answer.

Explanation

A contingent liability that is not probable and not reliably measurable is disclosed in the notes rather than recognised. Recognition as a provision requires both a present obligation and a reliable estimate.

Question 23Accounting and Financial Management

A company issues 10,000 equity shares of face value ₹10 at ₹45 each. What amount is credited to the securities premium account?

  1. ₹100,000
  2. ₹350,000 Correct answer.
  3. ₹550,000
  4. ₹450,000

Explanation

Securities premium is the excess of issue price over face value. The premium per share is ₹45 − ₹10 = ₹35, giving 10,000 × ₹35 = ₹350,000.

Question 24Accounting and Financial Management

Under the double-entry system, which pair of accounts is affected when goods are purchased on credit?

  1. Debit purchases, credit trade payables Correct answer.
  2. Debit cash, credit purchases
  3. Debit purchases, credit cash
  4. Debit trade payables, credit purchases

Explanation

A credit purchase increases the purchases expense (debit) and creates a liability to the supplier (credit trade payables). Cash is untouched until payment is made.

Question 25Accounting and Financial Management

A machine costing ₹500,000 has an estimated residual value of ₹50,000 and a useful life of 5 years. Using the straight-line method, what is the annual depreciation charge?

  1. ₹80,000
  2. ₹100,000
  3. ₹90,000 Correct answer.
  4. ₹110,000

Explanation

Straight-line depreciation equals (cost − residual value) ÷ useful life. That is (500,000 − 50,000) ÷ 5 = ₹90,000 per year.

Question 26Accounting and Financial Management

Which financial statement reports the changes in a firm's equity during an accounting period, including dividends paid?

  1. Statement of financial position
  2. Statement of cash flows
  3. Trial balance
  4. Statement of changes in equity Correct answer.

Explanation

The statement of changes in equity reconciles opening and closing equity, showing profit, dividends, and other equity movements. The balance sheet only shows equity at a single point in time.

Question 27Accounting and Financial Management

A firm's current assets are ₹600,000 and current liabilities are ₹400,000. It then pays ₹100,000 of trade payables in cash. What is the current ratio after payment?

  1. 1.25
  2. 2.00
  3. 1.50
  4. 1.67 Correct answer.

Explanation

Paying payables with cash reduces both current assets and current liabilities by ₹100,000. New ratio = 500,000 ÷ 300,000 ≈ 1.67, which is higher than the original 1.50.

Question 28Accounting and Financial Management

A company has profit before interest and tax of ₹800,000, interest expense of ₹200,000, and tax of ₹150,000. What is its interest coverage ratio?

  1. 4.0 times Correct answer.
  2. 3.25 times
  3. 5.33 times
  4. 2.67 times

Explanation

Interest coverage equals profit before interest and tax divided by interest expense. That is 800,000 ÷ 200,000 = 4.0 times, measuring the buffer available to service interest.

Question 29Accounting and Financial Management

Which costing method assigns fixed production overheads to units on the basis of normal capacity rather than actual output?

  1. Marginal costing
  2. Direct costing
  3. Standard marginal costing
  4. Absorption costing Correct answer.

Explanation

Absorption costing includes fixed production overhead in product cost, allocated using normal capacity so that unabsorbed overhead is not hidden in inventory. Marginal costing instead treats fixed overhead as a period cost.

Question 30Accounting and Financial Management

A project requires an initial outlay of ₹1,000,000 and generates annual cash inflows of ₹400,000 for four years. Using a discount rate of 10%, which statement is correct about its net present value?

  1. NPV is positive because total inflows exceed the outlay
  2. NPV is positive because the annuity factor exceeds 2.5 Correct answer.
  3. NPV is negative because the payback exceeds four years
  4. NPV is zero because inflows equal the outlay

Explanation

The 10% annuity factor for four years is about 3.17, so the present value of inflows is roughly ₹1,268,000, exceeding the outlay. The NPV is therefore positive, and this follows from the annuity factor exceeding 2.5.

Question 31Accounting and Financial Management

A company's earnings before interest and tax rise by 20% while sales rise by 10%. What does this indicate about its operating leverage?

  1. Operating leverage is high because profit grows faster than sales Correct answer.
  2. Operating leverage is negative because profit exceeds sales growth
  3. Operating leverage is low because profit growth is unrelated to sales
  4. Operating leverage is zero because costs are fixed

Explanation

Operating leverage reflects the sensitivity of operating profit to sales changes, driven by fixed costs. A 20% profit rise from a 10% sales rise implies a degree of operating leverage of about 2, indicating high leverage.

Question 32Accounting and Financial Management

Which of the following is deducted from gross profit to arrive at operating profit?

  1. Cost of goods sold
  2. Dividends declared
  3. Administrative and selling expenses Correct answer.
  4. Income tax expense

Explanation

Operating profit equals gross profit less operating expenses such as administrative and selling costs. Cost of goods sold is already deducted in arriving at gross profit.

Question 33Accounting and Financial Management

A firm reports inventory of ₹300,000 and cost of goods sold of ₹1,200,000. What is its inventory turnover ratio, and what does it suggest?

  1. 3.0 times, indicating inventory is turned over three times a year
  2. 4.0 times, indicating inventory is turned over four times a year Correct answer.
  3. 0.25 times, indicating slow inventory movement
  4. 5.0 times, indicating inventory is turned over five times a year

Explanation

Inventory turnover equals cost of goods sold divided by average inventory. Here 1,200,000 ÷ 300,000 = 4.0 times, meaning the stock is replaced roughly four times per year.

Question 34Accounting and Financial Management

Under the accrual basis of accounting, when should revenue from a sale be recognised?

  1. When the goods are delivered and control transfers to the buyer Correct answer.
  2. When the invoice is printed by the seller
  3. When the accounting period closes
  4. When the cash is received from the customer

Explanation

Accrual accounting recognises revenue when performance obligations are satisfied and control of the goods passes to the customer. Receipt of cash is a separate event and does not govern recognition.

Question 35Accounting and Financial Management

A company declares a final dividend of ₹5 per share on 200,000 shares. What is the total dividend, and how is it treated in the financial statements?

  1. ₹500,000, recorded as a reduction in share capital
  2. ₹1,000,000, shown as an expense in the income statement
  3. ₹200,000, shown as a liability at declaration
  4. ₹1,000,000, deducted from retained earnings in the statement of changes in equity Correct answer.

Explanation

The total is 200,000 × ₹5 = ₹1,000,000. Dividends are an appropriation of distributable profits, deducted from retained earnings rather than treated as an expense.

Question 36Accounting and Financial Management

A company has total debt of ₹800,000 and total equity of ₹400,000. What is its debt-to-equity ratio, and what does it indicate?

  1. 2.0, indicating debt is twice equity Correct answer.
  2. 1.33, indicating debt is slightly above equity
  3. 3.0, indicating debt is three times equity
  4. 0.5, indicating low leverage

Explanation

Debt-to-equity equals total debt divided by total equity. Here 800,000 ÷ 400,000 = 2.0, meaning creditors fund twice as much as shareholders, which signals higher financial risk.

Question 37Accounting and Financial Management

Which of the following correctly states the effect of writing off a bad debt under the allowance method?

  1. It increases bad debt expense and reduces trade receivables
  2. It reduces trade receivables and increases share capital
  3. It reduces the allowance for doubtful debts and reduces trade receivables Correct answer.
  4. It has no effect on total assets or profit

Explanation

Under the allowance method, writing off a specific debt debits the allowance account and credits trade receivables. Because the expense was recognised earlier when the allowance was created, the write-off itself does not affect profit.

Question 38Accounting and Financial Management

A firm's cash conversion cycle is 45 days, made up of inventory days of 60, receivable days of 30, and payable days of 45. If the firm reduces receivable days to 20, what is the new cycle?

  1. 50 days
  2. 40 days
  3. 25 days
  4. 35 days Correct answer.

Explanation

The cash conversion cycle equals inventory days plus receivable days minus payable days. With receivables at 20 days: 60 + 20 − 45 = 35 days, a 10-day improvement.

Question 39Accounting and Financial Management

In a process costing system, what does the term 'equivalent units' represent?

  1. The units sold during the period
  2. The notional number of fully complete units represented by partially finished work Correct answer.
  3. The number of physical units completed and transferred out
  4. The units rejected during quality inspection

Explanation

Equivalent units convert partially completed work into the number of fully complete units it represents, using a degree of completion. This allows costs to be spread consistently across completed and work-in-progress units.

Question 40Accounting and Financial Management

A company's contribution margin ratio is 40%, fixed costs are ₹200,000, and it wishes to earn a target profit of ₹100,000. What sales revenue is required?

  1. ₹500,000
  2. ₹750,000 Correct answer.
  3. ₹1,000,000
  4. ₹300,000

Explanation

Required sales equal (fixed costs + target profit) ÷ contribution margin ratio. That is (200,000 + 100,000) ÷ 0.40 = ₹750,000.

Question 41Managerial Economics and Business Environment

A firm's demand curve shows the relationship between the price of its product and the quantity of that product that buyers are willing and able to purchase. In managerial economics, this relationship is best described as which of the following?

  1. The quantity demanded at each price, holding other influences constant Correct answer.
  2. The total revenue the firm earns at each possible price
  3. The quantity buyers would purchase if the product were free
  4. The maximum quantity the firm can produce with its current plant

Explanation

A demand curve isolates the price-quantity relationship by holding other determinants such as income and rival prices constant. It therefore reports the quantity buyers are willing and able to buy at each price. Production capacity and revenue are separate concepts derived from cost and demand data.

Question 42Managerial Economics and Business Environment

A retailer raises the price of a product by 10 percent and observes that quantity demanded falls by 25 percent. Using the midpoint convention, the price elasticity of demand is approximately which value, and demand is best classified as what?

  1. 2.5, elastic Correct answer.
  2. 1.0, unit elastic
  3. 0.4, inelastic
  4. 0.25, perfectly inelastic

Explanation

Elasticity is the percentage change in quantity divided by the percentage change in price, giving 25 divided by 10, or 2.5. Because the absolute value exceeds one, demand is elastic and quantity is highly responsive to price. The midpoint convention matters mainly when the changes are large, but here the ratio clearly exceeds one.

Question 43Managerial Economics and Business Environment

A firm faces demand that is price elastic at the current price. If the firm raises its price slightly, what happens to total revenue, and why?

  1. Total revenue rises because elasticity guarantees higher margins
  2. Total revenue rises because the higher price applies to every unit sold
  3. Total revenue is unchanged because price and quantity offset exactly
  4. Total revenue falls because the percentage drop in quantity exceeds the percentage rise in price Correct answer.

Explanation

When demand is elastic, the proportional fall in quantity is larger than the proportional rise in price, so the revenue lost on fewer units outweighs the gain per unit. Total revenue therefore declines. This is the standard link between elasticity and the direction of the revenue effect of a price change.

Question 44Managerial Economics and Business Environment

Which of the following pairs of goods is most likely to exhibit a negative cross-price elasticity of demand?

  1. Two brands of bottled water sold side by side
  2. Butter and margarine used as spreads
  3. Printers and the ink cartridges used in them Correct answer.
  4. Coffee and tea consumed as morning beverages

Explanation

Cross-price elasticity is negative for complements, goods consumed together, because a rise in the price of one reduces demand for the other. Printers and ink cartridges are classic complements. The other pairs are substitutes, whose cross-price elasticity is positive.

Question 45Managerial Economics and Business Environment

A consumer's income rises by 5 percent and, other things equal, her purchases of a particular good fall by 2 percent. For this consumer, the good is best classified as which of the following?

  1. A normal good with income elasticity above one
  2. A Giffen good with positive price elasticity
  3. An inferior good with negative income elasticity Correct answer.
  4. A luxury good with income elasticity of exactly one

Explanation

Income elasticity of demand measures the percentage change in quantity demanded divided by the percentage change in income. A negative value, as here, defines an inferior good, since consumption falls as income rises. Normal and luxury goods have positive income elasticities, with luxuries above one.

Question 46Managerial Economics and Business Environment

The law of diminishing marginal utility states that as a consumer consumes additional units of a good within a given period, which of the following occurs?

  1. Total utility falls immediately after the first unit
  2. The consumer's budget constraint shifts outward
  3. The extra satisfaction from each additional unit eventually declines Correct answer.
  4. Marginal utility becomes negative from the first unit onward

Explanation

Diminishing marginal utility concerns the increment to satisfaction from successive units, which declines as consumption increases, even while total utility may still be rising. Total utility falls only once marginal utility turns negative. The budget constraint is unaffected by preferences.

Question 47Managerial Economics and Business Environment

A consumer allocates a fixed budget across two goods. At the current consumption bundle, the marginal utility per rupee spent on good X exceeds that on good Y. Assuming standard preferences, what adjustment increases the consumer's total utility?

  1. Buy more of both goods by borrowing against future income
  2. Keep the bundle unchanged because total spending is fixed
  3. Buy more Y and less X until the marginal utility per rupee is equalized
  4. Buy more X and less Y until the marginal utility per rupee is equalized Correct answer.

Explanation

Utility maximization requires equal marginal utility per unit of money spent across goods. If X delivers more utility per rupee than Y, shifting spending toward X raises total utility until the ratios equalize. The budget itself does not change, only its allocation.

Question 48Managerial Economics and Business Environment

In the short run, a firm's total fixed cost is 500 and total variable cost at 10 units of output is 1,000. What is the firm's average total cost at that output level?

  1. 100
  2. 1,500
  3. 150 Correct answer.
  4. 50

Explanation

Total cost equals fixed plus variable cost, here 1,500, and average total cost is total cost divided by output, giving 150. Average fixed cost alone would be 50 and average variable cost alone 100. The sum of those averages equals average total cost.

Question 49Managerial Economics and Business Environment

A firm's marginal cost curve crosses its average total cost curve from below at the minimum point of average total cost. This relationship implies which of the following?

  1. Marginal cost is constant whenever average total cost is at its minimum
  2. Average total cost is rising whenever marginal cost is below it
  3. Average total cost falls whenever marginal cost is below it Correct answer.
  4. Average variable cost always exceeds average total cost

Explanation

Marginal cost pulls the average: when the cost of the next unit is below the current average, the average falls, and when it is above, the average rises. The crossing therefore occurs at the minimum of average total cost. The same logic applies to average variable cost.

Question 50Managerial Economics and Business Environment

In a perfectly competitive market, a profit-maximizing firm that is currently producing will choose its output level at the point where which condition holds?

  1. Price equals average total cost
  2. Price equals marginal cost Correct answer.
  3. Marginal revenue exceeds marginal cost by the largest margin
  4. Total revenue is at its maximum

Explanation

A price-taking firm faces a horizontal demand curve, so marginal revenue equals price. Profit is maximized where marginal revenue equals marginal cost, which reduces to price equals marginal cost. Producing where marginal revenue exceeds marginal cost leaves profitable units unexploited.