ECO 550 MIDTERM PART 1. THREE VERSIONS POSTED MAKING 75 QUESTIONS Version 3 Which of the following will increase (V0), the shareholder wealth maximization model of the firm: V0?(shares outstanding) = ??t=1 (? t ) / (1+ke)t + Real Option Value. Answer Decrease the required rate of return (ke). Decrease the stream of profits (?t). Decrease the number of periods from ? to 10 periods. Decrease the real option value. The moral hazard in team production arises from Answer poorly designed team membership lack of proper assignment of individual tasks disorganization in groups a conflict between tactically best interest and oneÂ’s duty insufficient experience The form of economics most relevant to managerial decision-making within the firm is: Answer macroeconomics welfare economics free-enterprise economics microeconomics Possible goals of Not-For-Profit (NFP) enterprises include all of the following EXCEPT: Answer maximize total costs maximize output, subject to a breakeven constraint maximize the happiness of the administrators of the NFP enterprise maximize the utility of the contributors To reduce Agency Problems, executive compensation should be designed to: Answer create incentives so that managers act like owners of the firm. avoid making the executives own shares in the company. be an increasing function of the firmâ€™s expenses. be an increasing function of the sales revenue received by the firm. The flat-screen plasma TVs are selling extremely well. The originators of this technology are earning higher profits. What theory of profit best reflects the performance of the plasma screen makers? Answer risk-bearing theory of profit dynamic equilibrium theory of profit innovation theory of profit managerial efficiency theory of profit stochastic optimization theory of profit A change in the level of an economic activity is desirable and should be undertaken as long as the marginal benefits exceed the ____. Answer marginal returns total costs marginal costs average costs average benefits The level of an economic activity should be increased to the point where the ____ is zero. Answer marginal cost average cost net marginal cost net marginal benefit An closest example of a risk-free security is Answer General Motors bonds AT&T commercial paper U.S. Government Treasury bills San Francisco municipal bonds an I.O.U. that your cousin promises to pay you $100 in 3 months Generally, investors expect that projects with high expected net present values also will be projects with Answer low risk high risk certain cash flows short lives The approximate probability of a value occurring that is greater than one standard deviation from the mean is approximately (assuming a normal distribution) Answer 68.26% 2.28% 34% 15.87% The primary difference(s) between the standard deviation and the coefficient of variation as measures of risk are: Answer the coefficient of variation is easier to compute the standard deviation is a measure of relative risk whereas the coefficient of variation is a measure of absolute risk the coefficient of variation is a measure of relative risk whereas the standard deviation is a measure of absolute risk the standard deviation is rarely used in practice whereas the coefficient of variation is widely used When demand is ____ a percentage change in ____ is exactly offset by the same percentage change in ____ demanded, the net result being a constant total consumer expenditure. Answer elastic; price; quantity unit elastic; price; quantity inelastic; quantity; price inelastic; price; quantity Songwriters and composers press music companies to lower the price for music downloads because Answer demand for on-line music is inelastic profits are maximized where price elasticity of demand is -1.0 songwriter royalties are a percentage of sales revenue profits and total revenue are maximized at different quantities profits are maximized at the same prices as sales revenue Iron ore is an example of a: Answer durable good producersâ€™ good nondurable good consumer good An increase in each of the following factors would normally provide a subsequent increase in quantity demanded, except: Answer price of substitute goods level of competitor advertising consumer income level consumer desires for goods and services Which of the following would tend to make demand INELASTIC? Answer the amount of time analyzed is quite long there are lots of substitutes available the product is highly durable the proportion of the budget spent on the item is very small no one really wants the product at all Auto dealers slash prices at the end of the model year in response to deficient demand/excess inventory but restaurants facing the same problem slash production because Answer auto customers are less price sensitive than restaurant customers price elasticity of demand (in absolute values) is higher for auto than restaurant customers price elasticity of supply is lower in auto than in restaurants restaurant food spoils quickly and is much more perishable price elasticity of supply in autos is smaller than the absolute value of price elasticity of demand but the reverse is true for restaurants An income elasticity (Ey) of 2.0 indicates that for a ____ increase in income, ____ will increase by ____. Answer one percent; quantity supplied; two units one unit; quantity supplied; two units one percent; quantity demanded; two percent one unit; quantity demanded; two units ten percent; quantity supplied; two percent Demand functions in the multiplicative form are most common for all of the following reasons except: Answer elasticities are constant over a range of data ease of estimation of elasticities exponents of parameters are the elasticities of those variables marginal impact of a unit change in an individual variable is constant One commonly used test in checking for the presence of autocorrelation when working with time series data is the ____. Answer F-test Durbin-Watson test t-test z-test All of the following are reasons why an association relationship may not imply a causal relationship except: Answer the association may be due to pure chance the association may be the result of the influence of a third common factor both variables may be the cause and the effect at the same time the association may be hypothetical Even though insignificant explanatory variables can raise the adjusted R2 of a demand function, one should not interpret their effects on the regression when Answer testing marketing hypotheses about the determinants of demand analyzing inventory relative to capacity requirements forecasting unit sales for operations planning sales revenue reaches its peak planning for capital budgets In testing whether each individual independent variables (Xs) in a multiple regression equation is statistically significant in explaining the dependent variable (Y), one uses the: Answer F-test Durbin-Watson test t-test z-test The estimated slope coefficient (b) of the regression equation (Ln Y = a + b Ln X) measures the ____ change in Y for a one ____ change in X. Answer percentage, unit percentage, percent unit, unit unit, percent Version 1 Question 1 In the shareholder wealth maximization model, the value of a firmâ€™s stock is equal to the present value of all expected future ____ discounted at the stockholdersâ€™ required rate of return. Answer profits (cash flows) revenues outlays costs investments Question 2 The flat-screen plasma TVs are selling extremely well. The originators of this technology are earning higher profits. What theory of profit best reflects the performance of the plasma screen makers? Answer risk-bearing theory of profit dynamic equilibrium theory of profit innovation theory of profit managerial efficiency theory of profit stochastic optimization theory of profit Question 3 Income tax payments are an example of ____. Answer implicit costs explicit costs normal return on investment shareholder wealth Question 4 The Saturn Corporation (once a division of GM) was permanently closed in 2009. What went wrong with Saturn? Answer SaturnÂ’s cars sold at prices higher than rivals Honda or Toyota, so they could not sell many cars. Saturn sold cars below the prices of Honda or Toyota, earning a low 3% rate of return. Saturn found that young buyers of Saturn automobiles were very loyal to Saturn and GM. Saturn implemented a change management view that helped make first time Saturn purchasers trade up to Buick or Cadillac. Question 5 Recently, the American Medical Association changed its recommendations on the frequency of pap-smear exams for women. The new frequency recommendation was designed to address the family histories of the patients. The optimal frequency should be where the marginal benefit of an additional pap-test: Answer equals zero. is greater than the marginal cost of the test is lower than the marginal cost of an additional test equals the marginal cost of the test Question 6 To reduce Agency Problems, executive compensation should be designed to: Answer create incentives so that managers act like owners of the firm. avoid making the executives own shares in the company. be an increasing function of the firmâ€™s expenses. be an increasing function of the sales revenue received by the firm. Question 7 The standard deviation is appropriate to compare the risk between two investments only if Answer the expected returns from the investments are approximately equal the investments have similar life spans objective estimates of each possible outcome is available the coefficient of variation is equal to 1.0 Question 8 The approximate probability of a value occurring that is greater than one standard deviation from the mean is approximately (assuming a normal distribution) Answer 68.26% 2.28% 34% 15.87% Question 9 The ____ is the ratio of ____ to the ____. Answer standard deviation; covariance; expected value coefficient of variation; expected value; standard deviation correlation coefficient; standard deviation; expected value coefficient of variation; standard deviation; expected value Question 10 Based on risk-return tradeoffs observable in the financial marketplace, which of the following securities would you expect to offer higher expected returns than corporate bonds? Answer U.S. Government bonds municipal bonds common stock commercial paper Question 11 An closest example of a risk-free security is Answer General Motors bonds AT&T commercial paper U.S. Government Treasury bills San Francisco municipal bonds an I.O.U. that your cousin promises to pay you $100 in 3 months Question 12 The primary difference(s) between the standard deviation and the coefficient of variation as measures of risk are: Answer the coefficient of variation is easier to compute the standard deviation is a measure of relative risk whereas the coefficient of variation is a measure of absolute risk the coefficient of variation is a measure of relative risk whereas the standard deviation is a measure of absolute risk the standard deviation is rarely used in practice whereas the coefficient of variation is widely used Question 13 An income elasticity (Ey) of 2.0 indicates that for a ____ increase in income, ____ will increase by ____. Answer one percent; quantity supplied; two units one unit; quantity supplied; two units one percent; quantity demanded; two percent one unit; quantity demanded; two units ten percent; quantity supplied; two percent Question 14 When demand elasticity is ____ in absolute value (or ____), an increase in price will result in a(n) ____ in total revenues. Answer less than 1; elastic; increase more than 1; inelastic; decrease less than 1; elastic; decrease less than 1; inelastic; increase Question 15 Those goods having a calculated income elasticity that is negative are called: Answer producersâ€™ goods durable goods inferior goods nondurable goods Question 16 Suppose we estimate that the demand elasticity for fine leather jackets is .7 at their current prices. Then we know that: Answer a 1% increase in price reduces quantity sold by .7%. no one wants to buy leather jackets. demand for leather jackets is elastic. a cut in the prices will increase total revenue. leather jackets are luxury items. Question 17 Auto dealers slash prices at the end of the model year in response to deficient demand/excess inventory but restaurants facing the same problem slash production because Answer auto customers are less price sensitive than restaurant customers price elasticity of demand (in absolute values) is higher for auto than restaurant customers price elasticity of supply is lower in auto than in restaurants restaurant food spoils quickly and is much more perishable price elasticity of supply in autos is smaller than the absolute value of price elasticity of demand but the reverse is true for restaurants Question 18 If demand were inelastic, then we should immediately: Answer cut the price. keep the price where it is. go to the Nobel Prize Committee to show we were the first to find an upward sloping demand curve. stop selling it since it is inelastic. raise the price Question 19 Marginal revenue (MR) is ____ when total revenue is maximized. Answer greater than one equal to one less than zero equal to zero equal to minus one Question 20 The constant or intercept term in a statistical demand study represents the quantity demanded when all independent variables are equal to: Answer 1.0 their minimum values their average values 0.0 Question 21 The standard deviation of the error terms in an estimated regression equation is known as: Answer coefficient of determination correlation coefficient Durbin-Watson statistic standard error of the estimate Question 22 In regression analysis, the existence of a significant pattern in successive values of the error term constitutes: Answer heteroscedasticity autocorrelation multicollinearity nonlinearities a simultaneous equation relationship Question 23 All of the following are reasons why an association relationship may not imply a causal relationship except: Answer the association may be due to pure chance the association may be the result of the influence of a third common factor both variables may be the cause and the effect at the same time the association may be hypothetical Question 24 In testing whether each individual independent variables (Xs) in a multiple regression equation is statistically significant in explaining the dependent variable (Y), one uses the: Answer F-test Durbin-Watson test t-test z-test Question 25 In which of the following econometric problems do we find Durbin-Watson statistic being far away from 2.0? Answer the identification problem autocorrelation multicollinearity heteroscedasticity agency problems Version 2 Question 1 To reduce Agency Problems, executive compensation should be designed to: a. create incentives so that managers act like owners of the firm. b. avoid making the executives own shares in the company. c. be an increasing function of the firmâ€™s expenses. d. be an increasing function of the sales revenue received by the firm. e. all of the above Question 2 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 Question 3 Possible goals of Not-For-Profit (NFP) enterprises include all of the following EXCEPT: a. maximize total costs b. maximize output, subject to a breakeven constraint c. maximize the happiness of the administrators of the NFP enterprise d. maximize the utility of the contributors e. a. and c. Question 4 Various executive compensation plans have been employed to motivate managers to make decisions that maximize shareholder wealth. These include: a. cash bonuses based on length of service with the firm b. bonuses for resisting hostile takeovers c. requiring officers to own stock in the company d. large corporate staffs e. a, b, and c only Question 5 Income tax payments are an example of ____. a. implicit costs b. explicit costs c. normal return on investment d. shareholder wealth e. none of the above Question 6 The moral hazard in team production arises from a. poorly designed team membership b. lack of proper assignment of individual tasks c. disorganization in groups d. a conflict between tactically best interest and oneÂ’s duty e. insufficient experience Question 7 The primary difference(s) between the standard deviation and the coefficient of variation as measures of risk are: a. the coefficient of variation is easier to compute b. the standard deviation is a measure of relative risk whereas the coefficient of variation is a measure of absolute risk c. the coefficient of variation is a measure of relative risk whereas the standard deviation is a measure of absolute risk d. the standard deviation is rarely used in practice whereas the coefficient of variation is widely used e. c and d Question 8 The ____ is the ratio of ____ to the ____. a. standard deviation; covariance; expected value b. coefficient of variation; expected value; standard deviation c. correlation coefficient; standard deviation; expected value d. coefficient of variation; standard deviation; expected value e. none of the above Question 9 Generally, investors expect that projects with high expected net present values also will be projects with a. low risk b. high risk c. certain cash flows d. short lives e. none of the above Question 10 The standard deviation is appropriate to compare the risk between two investments only if a. the expected returns from the investments are approximately equal b. the investments have similar life spans c. objective estimates of each possible outcome is available d. the coefficient of variation is equal to 1.0 e. none of the above Question 11 The level of an economic activity should be increased to the point where the ____ is zero. a. marginal cost b. average cost c. net marginal cost d. net marginal benefit e. none of the above Question 12 Based on risk-return tradeoffs observable in the financial marketplace, which of the following securities would you expect to offer higher expected returns than corporate bonds? a. U.S. Government bonds b. municipal bonds c. common stock d. commercial paper e. none of the above Question 13 An income elasticity (Ey) of 2.0 indicates that for a ____ increase in income, ____ will increase by ____. a. one percent; quantity supplied; two units b. one unit; quantity supplied; two units c. one percent; quantity demanded; two percent d. one unit; quantity demanded; two units e. ten percent; quantity supplied; two percent Question 14 An increase in each of the following factors would normally provide a subsequent increase in quantity demanded, except: a. price of substitute goods b. level of competitor advertising c. consumer income level d. consumer desires for goods and services e. a and b Question 15 Which of the following would tend to make demand INELASTIC? a. the amount of time analyzed is quite long b. there are lots of substitutes available c. the product is highly durable d. the proportion of the budget spent on the item is very small e. no one really wants the product at all Question 16 If demand were inelastic, then we should immediately: a. cut the price. b. keep the price where it is. c. go to the Nobel Prize Committee to show we were the first to find an upward sloping demand curve. d. stop selling it since it is inelastic. e. raise the price. Question 17 Marginal revenue (MR) is ____ when total revenue is maximized. a. greater than one b. equal to one c. less than zero d. equal to zero e. equal to minus one Question 18 When demand elasticity is ____ in absolute value (or ____), an increase in price will result in a(n) ____ in total revenues. a. less than 1; elastic; increase b. more than 1; inelastic; decrease c. less than 1; elastic; decrease d. less than 1; inelastic; increase e. none of the above Question 19 Iron ore is an example of a: a. durable good b. producersâ€™ good c. nondurable good d. consumer good e. none of the above Question 20 The constant or intercept term in a statistical demand study represents the quantity demanded when all independent variables are equal to: a. 1.0 b. their minimum values c. their average values d. 0.0 e. none of the above Question 21 When two or more â€œindependentâ€ variables are highly correlated, then we have: a. the identification problem b. multicollinearity c. autocorrelation d. heteroscedasticity e. complementary products Question 22 One commonly used test in checking for the presence of autocorrelation when working with time series data is the ____. a. F-test b. Durbin-Watson test c. t-test d. z-test e. none of the above Question 23 The estimated slope coefficient (b) of the regression equation (Ln Y = a + b Ln X) measures the ____ change in Y for a one ____ change in X. a. percentage, unit b. percentage, percent c. unit, unit d. unit, percent e. none of the above Question 24 In regression analysis, the existence of a high degree of intercorrelation among some or all of the explanatory variables in the regression equation constitutes: a. autocorrelation b. a simultaneous equation relationship c. nonlinearities d. heteroscedasticity e. multicollinearity Question 25 The method which can give some information in estimating demand of a product that hasnÂ’t yet come to market is: a. the consumer survey b. market experimentation c. a statistical demand analysis d. plotting the data e. the barometric method