ECO 550 MIDTERM (100% ANSWER) - 88161

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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
Solution Description

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

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