5 Questions 2 points each = 10 points

Select the best answer.

1. A firm continues funding a failing project because it has already invested $5 million. This is an example of:

A. Marginal analysis

B. Elastic demand

C. Sunk cost fallacy

D. Opportunity cost optimization

2. If a company raises prices and total revenue falls, demand is most likely:

A. Perfectly inelastic

B. Inelastic

C. Elastic

D. Unit elastic

3. A sharp increase in labor costs will most directly cause:

A. A movement along the supply curve

B. A shift of the supply curve to the left

C. A shift of the demand curve to the right

D. No effect on equilibrium

4. Productivity is best defined as:

A. Total output in the economy

B. Output per worker

C. Total revenue minus total cost

D. Inflation-adjusted GDP

5. Opportunity cost is:

A. The explicit accounting cost of a decision

B. The value of the next best alternative forgone

C. Any sunk cost already incurred

D. A fixed production expense

SECTION II Short Answer (10 points)

5 Questions 2 points each = 10 points

Answer clearly and concisely.

1. Explain why doing nothing is still a decision in economic terms.
2. Distinguish between a movement along the demand curve and a shift of the demand curve.
3. Why should sunk costs not affect future managerial decisions?
4. Why does elasticity matter for pricing strategy?
5. Why can GDP growth occur while an individual firm struggles?

SECTION III Applied MBA Case (10 points)

Case Scenario:

A firm faces rising input costs due to inflation while demand for its product becomes more price-sensitive. Leadership must decide whether to raise prices, cut costs, or invest in productivity improvements.

Answer the following:

a. What is happening on the supply side? (3 points)

b. What does increased price sensitivity imply about elasticity? (3 points)

c. As an executive, which strategic direction would you prioritize and why? Use economic reasoning. (4 points)