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) = ??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.
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