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ECO 550 MIDTERM / 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 decisionmaking within the firm is:
Answer
macroeconomics
welfare economics
freeenterprise economics
microeconomics
Question 4
Recently, the American Medical Association changed its recommendations on the frequency of papsmear 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 paptest: 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 riskreturn 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
Ftest
DurbinWatson test
ttest
ztest
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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