ECO 550 Midterm Part 1 and 2 (All Possible Questions)
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Chapter 1—Introduction and Goals of the Firm
1. The form of economics most relevant to managerial decision-making within the firm is:
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:
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.
4. Which of the following statements concerning the shareholder wealth maximization model is (are) true?
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.
7. According to the managerial efficiency theory of profit, above-normal profits can arise because of high-quality managerial skills.
8. Which of the following (if any) is not a factor affecting the profit performance of firms:
9. Agency problems and costs are incurred whenever the owners of a firm delegate decision-making authority to management.
10. Economic profit is defined as the difference between revenue and ____.
11. Income tax payments are an example of ____.
12. Various executive compensation plans have been employed to motivate managers to make decisions that maximize shareholder wealth. These include:
13. The common factors that give rise to all principal-agent problems include the
14. The Saturn Corporation (once a division of GM) was permanently closed in 2009. What went wrong with Saturn?
15. A Real Option Value is:
16. Which of the following will increase (V0), the shareholder wealth maximization model of the firm:
V0∙(shares outstanding) = S¥t=1(pt ) / (1+ke)t + Real Option Value.
17. The primary objective of a for-profit firm is to ___________.
18. Possible goals of Not-For-Profit (NFP) enterprises include all of the following EXCEPT:
19. 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?
20. To reduce Agency Problems, executive compensation should be designed to:
21. 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:
1. A change in the level of an economic activity is desirable and should be undertaken as long as the marginal benefits exceed the ____.
2. The level of an economic activity should be increased to the point where the ____ is zero.
3. The net present value of an investment represents
4. Generally, investors expect that projects with high expected net present values also will be projects with
5. An closest example of a risk-free security is
6. The standard deviation is appropriate to compare the risk between two investments only if
7. The approximate probability of a value occurring that is greater than one standard deviation from the mean is approximately (assuming a normal distribution)
8. 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?
9. The primary difference(s) between the standard deviation and the coefficient of variation as measures of risk are:
10. The ____ is the ratio of ____ to the ____.
11. Sources of positive net present value projects include
12. Receiving $100 at the end of the next three years is worth more to me than receiving $260 right now, when my required interest rate is 10%.
13. The number of standard deviations z that a particular value of r is from the mean ȓ can be computed as z = (r - ȓ)/ s. Suppose that you work as a commission-only insurance agent earning $1,000 per week on average. Suppose that your standard deviation of weekly earnings is $500. What is the probability that you zero in a week? Use the following brief z-table to help with this problem.
14. Consider an investment with the following payoffs and probabilities:
15. Consider an investment with the following payoffs and probabilities:
16. An investment advisor plans a portfolio your 85 year old risk-averse grandmother. Her portfolio currently consists of 60% bonds and 40% blue chip stocks. This portfolio is estimated to have an expected return of 6% and with a standard deviation 12%. What is the probability that she makes less than 0% in a year? [A portion of Appendix B1 is given below, where z = (x - m)/s , with m as the mean and s as the standard deviation.]
17. Two investments have the following expected returns (net present values) and standard deviations:
1. Suppose that the firm's cost function is given in the following schedule (where Q is the level of output):
2. Complete the following table.
3. A firm has decided to invest in a piece of land. Management has estimated that the land can be sold in 5 years for the following possible prices:
Chapter 3—Demand Analysis
1. Suppose we estimate that the demand elasticity for fine leather jackets is .7 at their current prices. Then we know that:
2. If demand were inelastic, then we should immediately:
3. In this problem, demonstrate your knowledge of percentage rates of change of an entire demand function (HINT: %DQ = EP•%DP + EY•%DY). You have found that the price elasticity of motor control devices at Allen-Bradley Corporation is -2, and that the income elasticity is a +1.5. You have been asked to predict sales of these devices for one year into the future. Economists from the Conference Board predict that income will be rising 3% over the next year, and AB’s management is planning to raise prices 2%. You expect that the number of AB motor control devices sold in one year will:
4 A linear demand for lake front cabins on a nearby lake is estimated to be: QD = 900,000 - 2P. What is the pointprice elasticity for lake front cabins at a price of P = $300,000?
5. Property taxes are the product of the tax rate (T) and the assessed value (V). The total property tax collected in your city (P) is: P = T•V. If the value of properties rise 4% and if Mayor and City Council reduces the property the tax rate by 2%, what happens to the total amount of property tax collected? [HINT: the percentage rate of change of a product is approximately the sum of the percentage rates of change.}
6. Demand is given by QD = 620 10•P and supply is given by QS = 100 + 3•P. What is the price and quantity when the market is in equilibrium?
7. Which of the following would tend to make demand INELASTIC?
8. Which of the following best represents management's objective(s) in utilizing demand analysis?
9. Identify the reasons why the quantity demanded of a product increases as the price of that product decreases.
10. An increase in the quantity demanded could be caused by:
11. Iron ore is an example of a:
12. If the cross price elasticity measured between items A and B is positive, the two products are referred to as:
13. 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.
14. Marginal revenue (MR) is ____ when total revenue is maximized.
15. The factor(s) which cause(s) a movement along the demand curve include(s):
16. An increase in each of the following factors would normally provide a subsequent increase in quantity demanded, except:
17. Producers' goods are:
18. The demand for durable goods tends to be more price elastic than the demand for non-durables.
19. A price elasticity (ED) of -1.50 indicates that for a ____ increase in price, quantity demanded will ____ by ____.
20. Those goods having a calculated income elasticity that is negative are called:
21. An income elasticity (Ey) of 2.0 indicates that for a ____ increase in income, ____ will increase by ____.
22. When demand elasticity is ____ in absolute value (or ____), an increase in price will result in a(n) ____ in total revenues.
23. Empirical estimates of the price elasticity of demand [in Table 3.4] suggest that the demand for household consumption of alcoholic beverages is:
1. The manager of the Sell-Rite drug store accidentally mismarked a shipment of 20-pound bags of charcoal at $4.38 instead of the regular price of $5.18. At the end of a week, the store's inventory of 200 bags of charcoal was completely sold out. The store normally sells an average of 150 bags per week.
2. The Future Flight Corporation manufactures a variety of Frisbees selling for $2.98 each. Sales have averaged 10,000 units per month during the last year. Recently Future Flight's closest competitor, Soaring Free Company, cut its prices on similar Frisbees from $3.49 to $2.59. Future Flight noticed that its sales declined to 8,000 units per month after the price cut.
3. The British Automobile Company is introducing a brand new model called the "London Special." Using the latest forecasting techniques, BAC economists have developed the following demand function for the "London Special":
4. Hanna Corporation markets a compact microwave oven. In 2010 they sold 23,000 units at $375 each. Per capita disposable income in 2010 was $6,750. Hanna economists have determined that the arc price elasticity for this microwave oven is -1.2.
Chapter 4—Estimating Demand
1. Using a sample of 100 consumers, a double-log regression model was used to estimate demand for gasoline. Standard errors of the coefficients appear in the parentheses below the coefficients.
2. In a cross section regression of 48 states, the following linear demand for per-capita cans of soda was found:
3. A study of expenditures on food in cities resulting in the following equation:
4. All of the following are reasons why an association relationship may not imply a causal relationship except:
5. In regression analysis, the existence of a significant pattern in successive values of the error term constitutes:
6. In regression analysis, the existence of a high degree of intercorrelation among some or all of the explanatory variables in the regression equation constitutes:
7. When using a multiplicative power function (Y = a X1b1 X2b2 X3b3) to represent an economic relationship, estimates of the parameters (a, and the b's) using linear regression analysis can be obtained by first applying a ____ transformation to convert the function to a linear relationship.
8. The correlation coefficient ranges in value between 0.0 and 1.0.
9. The coefficient of determination ranges in value between 0.0 and 1.0.
10. The coefficient of determination measures the proportion of the variation in the independent variable that is "explained" by the regression line.
11. The presence of association between two variables does not necessarily imply causation for the following reason(s):
12. 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.
13. The standard deviation of the error terms in an estimated regression equation is known as:
14. 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:
15. One commonly used test in checking for the presence of autocorrelation when working with time series data is the ____.
16. The method which can give some information in estimating demand of a product that hasn’t yet come to market is:
17. Demand functions in the multiplicative form are most common for all of the following reasons except:
18. The Identification Problem in the development of a demand function is a result of:
19. Consider the following linear demand function where QD = quantity demanded, P = selling price, and Y = disposable income:
20. Consider the following multiplicative demand function where QD = quantity demanded, P = selling price, and Y = disposable income:
21. One shortcoming of the use of ____ in demand analysis is that the participants are generally aware that their actions are being observed and hence they may seek to act in a manner somewhat different than normal.
22. The constant or intercept term in a statistical demand study represents the quantity demanded when all independent variables are equal to:
23. Novo Nordisk A/S, a Danish firm, sells insulin and other drugs worldwide.Activella, an estrogen and progestin hormone replacement therapy sold by Novo-Nordisk, is examined using 33 quarters of data
Y = -204 + . 34X1 - .17X2
Where Y is quarterly sales of Activella, X1 is the Novo’s advertising of the hormone therapy, and X2 is advertising of a similar product by Eli Lilly and Company, Novo-Nordisk’s chief competitor. The parentheses contain t-values. Addition information is: Durbin-Watson = 1.9 and R2 = .89.
Using the data for Novo-Nordisk, which is correct?
24. In which of the following econometric problems do we find Durbin-Watson statistic being far away from 2.0?
25. When there is multicollinearity in an estimated regression equation,
26. When two or more "independent" variables are highly correlated, then we have:
27. Which is NOT true about the coefficient of determination?
1. Phoenix Lumber Company uses the number of construction permits issued to help estimate demand (sales). The firm collected the following data on annual sales and number of construction permits issued in its market area:
2. Lenny's, a national restaurant chain, conducted a study of the factors affecting demand (sales). The following variables were defined and measured for a random sample of 30 of its restaurants:
3. The following demand function has been estimated for Fantasy pinball machines:
4. Given the following demand function:
Q = 2.0 P-1.33 Y2.0 A.50
Chapter 5—Business and Economic Forecasting
1. Time-series forecasting models:
2. The forecasting technique which attempts to forecast short-run changes and makes use of economic indicators known as leading, coincident or lagging indicators is known as:
3. The use of quarterly data to develop the forecasting model Yt = a +bYt-1 is an example of which forecasting technique?
4. Variations in a time-series forecast can be caused by:
5. The variation in an economic time-series which is caused by major expansions or contractions usually
of greater than a year in duration is known as:
6. The type of economic indicator that can best be used for business forecasting is the:
7. Consumer expenditure plans is an example of a forecasting method. Which of the general categories best described this example?
8. In the first-order exponential smoothing model, the new forecast is equal to a weighted average of the old forecast and the actual value in the most recent period.
9. Simplified trend models are generally appropriate for predicting the turning points in an economic time series.
10. Smoothing techniques are a form of ____ techniques which assume that there is an underlying pattern to be found in the historical values of a variable that is being forecast.
11. Seasonal variations can be incorporated into a time-series model in a number of different ways, including:
12. For studying demand relationships for a proposed new product that no one has ever used before, what would be the best method to use?
13. Which of the following barometric indicators would be the most helpful for forecasting future sales for an industry?
14. An example of a time series data set is one for which the:
15. Examine the plot of data.
16. Emma uses a linear model to forecast quarterly same-store sales at the localGardenCenter. The results of her multiple regression is:
17. Select the correct statement.
18. If two alternative economic models are offered, other things equal, we would
19. Mr. Geppettouses exponential smoothing to predict revenue in his wood carving business. He uses a weight of w = .4 for the naïve forecast and (1-w) = .6 for the past forecast. What revenue did he predict for March using the data below? Select closet answer.
20. Suppose a plot of sales data over time appears to follow an S-shape as illustrated below.
Which of the following is likely that the best forecasting functional form to use for sales data above?
1. The Accuweather Corporation manufactures barometers and thermometers for weather forecasters. In an attempt to forecast its future needs for mercury, Accuweather's chief economist estimated average monthly mercury needs as:
2. Milner Brewing Company experienced the following monthly sales (in thousands of barrels) during 2010:
Chapter 6—Managing Exports
1. Using demand and supply curves for the Japanese yen based on the $/¥ price for yen, an increase in US INFLATION RATES would
2. If the British pound (₤) appreciates by 10% against the dollar:
3. Purchasing power parity or PPP says the ratios composed of:
4. If Ben Bernanke, Chair of the Federal Reserve Board, begins to tighten monetary policy by raising US interest rates next year, what is the likely impact on the value of the dollar?
5. If the domestic prices for traded goods rises 5% in Japan and rises 7% the US over the same period, what would happened to the Yen/US dollar exchange rate?
6. US and Canada can both grow wheat and can do mining. Use the following table to look for which country has a comparative advantage in mining.
7. The optimal currency area involves a trade-off of reducing transaction costs but the inability to use changes in exchange rates to help ailing regions. If the US, Canada, and Mexico had one single currency (the Peso-Dollar) we would tend to see all of the following EXCEPT:
8. If the value of the U.S. dollar rises from 1.0 per dollar to 1.3 per dollar,
9. An appreciation of the U.S. dollar has what impact on Harley-Davidson (HD), a U.S. manufacturer of motorcycles?
10. In the last twenty-five years, the Yen and German mark and now the Euro have
11. In an open economy with few capital restrictions and substantial import-export trade, a rise in interest rates and a decline in the producer price index of inflation will
12. When a manufacturer's home currency appreciates substantially,
13. An increase in the exchange rate of the U.S. dollar relative to a trading partner can result from
14. The purchasing power parity hypothesis implies that an increase in inflation in one country relative to another will over a long period of time
15. Trading partners should specialize in producing goods in accordance with comparative advantage, then trade and diversify in consumption because
16. European Union labor costs exceed U.S. and British labor costs primarily because
17. Companies that reduce their margins on export products in the face of appreciation of their home currency may be motivated by a desire to
18. In a recession, the trade balance often improves because
1. Suppose nominal interest rates in the U.S. rise from 4.6% to 5% and decline in Britain from 6% to 5.5%, while U.S. consumer inflation remains unchanged at 1.9% and British inflation declines from 4% to 3%. In addition suppose, real growth in the U.S. is forecasted for next year at 4% and in Britain real growth is forecasted at 5%. Finally, suppose producer price inflation in the U.S. is declining from 2% to 1% while in Britain producer price inflation is rising from 2% to 3.2%. Explain what effect each of these factors would have on the long-term trend exchange rate ( per $) and why?
Chapter 7—Production Economics
1. What’s true about both the short-run and long-run in terms of production and cost analysis?
2. The marginal product is defined as:
3. Fill in the missing data to solve this problem.
4. The following is a Cobb-Douglas production function: Q = 1.75K0.5∙L0.5. What is correct here?
5. Suppose you have a Cobb-Douglas function with a capital elasticity of output (α) of 0.28 and a labor elasticity of output (β) of 0.84. What statement is correct?
6. The Cobb-Douglas production function is: Q = 1.4*L0.6*K0.5. What would be the percentage change in output (%∆Q) if labor grows by 3.0% and capital is cut by 5.0%?
7. If the marginal product of labor is 100 and the price of labor is 10, while the marginal product of capital is 200 and the price of capital is $30, then what should the firm?
8. The marginal rate of technical substitution may be defined as all of the following except:
9. The law of diminishing marginal returns:
10. The combinations of inputs costing a constant C dollars is called:
11. In a relationship among total, average and marginal products, where TP is maximized:
12. Holding the total output constant, the rate at which one input X may be substituted for another input Y in a production process is:
13. Which of the following is never negative?
14. Concerning the maximization of output subject to a cost constraint, which of the following statements (if any) are true?
15. In a production process, an excessive amount of the variable input relative to the fixed input is being used to produce the desired output. This statement is true for:
16. Marginal revenue product is:
17. The isoquants for inputs that are perfect substitutes for one another consist of a series of:
18. In production and cost analysis, the short run is the period of time in which one (or more) of the resources employed in the production process is fixed or incapable of being varied.
19. Marginal revenue product is defined as the amount that an additional unit of the variable input adds to ____.
20. Marginal factor cost is defined as the amount that an additional unit of the variable input adds to ____.
21. The isoquants for inputs that are perfect complements for one another consist of a series of:
22. Given a Cobb-Douglas production function estimate of Q = 1.19L.72K.18 for a given industry,&
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