# Eco 550 Midterm Part 1 Three Versions Posted Making 75 Questions

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 ones 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 firm’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

producers’ 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 firm’s stock is equal to the present value of all expected future ____ discounted at the stockholders’ 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

Saturns 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 firm’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

producers’ 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 firm’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 ones 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. producers’ 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 “independent” 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 hasnt 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

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