ECO 550/ECO 550 Midterm questions

ECO 550/ECO 550 Midterm

Question 1

 

A Real Option Value is:

 

Answer

 

An option that been deflated by the cost of living index makes it a “real” option.

 

An opportunity cost of capital.

 

An opportunity to implement cost savings or revenue expansion in a flexible business plan.

 

An objective function and a decision rule that comes from it.

 

Question 2

 

The Saturn Corporation (once a division of GM) was permanently closed in 2009. What went wrong with Saturn?

 

Answer

 

Saturn’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 3

 

The form of economics most relevant to managerial decision-making within the firm is:

 

Answer

 

macroeconomics

 

welfare economics

 

free-enterprise economics

 

microeconomics

 

Question 4

 

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 5

 

Income tax payments are an example of ____.

 

Answer

 

Implicit costs

 

Explicit costs

 

Normal return on investment

 

Shareholder wealth

 

Question 6

 

Which of the following will increase (V0), the shareholder wealth maximization model of the firm: V0∙(shares outstanding) = Σ∞t=1 (π t ) / (1+ke)t + Real Option Value. Answer

 

Decrease the required rate of return (ke).

 

Decrease the stream of profits (πt).

 

Decrease the number of periods from ∞ to 10 periods.

 

Decrease the real option value.

 

Question 7

 

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 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 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

 

Question 10

 

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 11

 

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 12

 

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

 

Question 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.

 

Answer

 

elastic; price; quantity

 

unit elastic; price; quantity

 

inelastic; quantity; price

 

inelastic; price; quantity

 

Question 14

 

A price elasticity (ED) of −1.50 indicates that for a ____ increase in price, quantity demanded will ____ by ____.

 

Answer

 

one percent; increase; 1.50 units

 

one unit; increase; 1.50 units

 

one percent; decrease; 1.50 percent

 

one unit; decrease; 1.50 percent

 

ten percent; increase; fifteen percent

 

Question 15

 

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

 

Question 16

 

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 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

 

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 20

 

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

 

Question 21

 

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

 

Question 22

 

The Identification Problem in the development of a demand function is a result of:

 

Answer

 

the variance of the demand elasticity

 

the consistency of quantity demanded at any given point

 

the negative slope of the demand function

 

the simultaneous relationship between the demand and supply functions

 

Question 23

 

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

 

Question 24

 

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 25

 

In regression analysis, the existence of a high degree of intercorrelation among some or all of the explanatory variables in the regression equation constitutes:

 

Answer

 

autocorrelation

 

a simultaneous equation relationship

 

nonlinearities

 

heteroscedasticity

 

multicollinearity

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