ECO 550 Midterm Exam (Part 1 & 2) ANSWER 100% - 90415

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Midterm Exam Part 1 Question 1 Income tax payments are an example of ____. Answer implicit costs explicit costs normal return on investment shareholder wealth Question 2 The primary objective of a for-profit firm is to ___________. Answer maximize agency costs minimize average cost maximize total revenue set output where total revenue equals total cost maximize shareholder value Question 3 To reduce Agency Problems, executive compensation should be designed to: Answer create incentives so that managers act like owners of the firm. avoid making the executives own shares in the company. be an increasing function of the firm's expenses. be an increasing function of the sales revenue received by the firm. Question 4 Possible goals of Not-For-Profit (NFP) enterprises include all of the following EXCEPT: Answer maximize total costs maximize output, subject to a breakeven constraint maximize the happiness of the administrators of the NFP enterprise maximize the utility of the contributors Question 5 Economic profit is defined as the difference between revenue and ____. Answer explicit cost total economic cost implicit cost shareholder wealth Question 6 The moral hazard in team production arises from Answer poorly designed team membership lack of proper assignment of individual tasks disorganization in groups a conflict between tactically best interest and one’s duty insufficient experience Question 7 The primary difference(s) between the standard deviation and the coefficient of variation as measures of risk are: Answer the coefficient of variation is easier to compute the standard deviation is a measure of relative risk whereas the coefficient of variation is a measure of absolute risk the coefficient of variation is a measure of relative risk whereas the standard deviation is a measure of absolute risk the standard deviation is rarely used in practice whereas the coefficient of variation is widely used 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 ____ 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 10 A change in the level of an economic activity is desirable and should be undertaken as long as the marginal benefits exceed the ____. Answer marginal returns total costs marginal costs average costs average benefits 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 An closest example of a risk-free security is Answer General Motors bonds AT&T commercial paper U.S. Government Treasury bills San Francisco municipal bonds an I.O.U. that your cousin promises to pay you $100 in 3 months Question 13 Marginal revenue (MR) is ____ when total revenue is maximized. Answer greater than one equal to one less than zero equal to zero equal to minus one 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 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 16 Those goods having a calculated income elasticity that is negative are called: Answer producers' goods durable goods inferior goods nondurable goods Question 17 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 18 The factor(s) which cause(s) a movement along the demand curve include(s): Answer increase in level of advertising decrease in price of complementary goods increase in consumer disposable income decrease in price of the good demanded uestion 19 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 20 The standard deviation of the error terms in an estimated regression equation is known as: Answer coefficient of determination correlation coefficient Durbin-Watson statistic standard error of the estimate uestion 21 In which of the following econometric problems do we find Durbin-Watson statistic being far away from 2.0? Answer the identification problem autocorrelation multicollinearity heteroscedasticity agency problems Question 22 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. Answer Semilogarithmic double-logarithmic reciprocal polynomial cubic Question 23 The method which can give some information in estimating demand of a product that hasn’t yet come to market is: Answer the consumer survey market experimentation a statistical demand analysis plotting the data the barometric method Question 24 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 25 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 Take Test: Midterm Exam Part 2 Question 1 The use of quarterly data to develop the forecasting model Yt= a +bYt?1 is an example of which forecasting technique? Answer Barometric forecasting Time-series forecasting Survey and opinion Econometric methods based on an understanding of the underlying economic variables involved Input-output analysis Question 2 Time-series forecasting models: Answer are useful whenever changes occur rapidly and wildly are more effective in making long-run forecasts than short-run forecasts are based solely on historical observations of the values of the variable being forecasted attempt to explain the underlying causal relationships which produce the observed outcome Question 3 Consumer expenditure plans is an example of a forecasting method. Which of the general categories best described this example? Answer time-series forecasting techniques barometric techniques survey techniques and opinion polling econometric techniques input-output analysis Question 4 Which of the following barometric indicators would be the most helpful for forecasting future sales for an industry? Answer lagging economic indicators. leading economic indicators. coincident economic indicators. wishful thinking Question 5 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. Answer opinion polling barometric forecasting econometric forecasting time-series forecasting Question 6 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: Answer secular trend cyclical variation seasonal effect unpredictable random factor Question 7 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 Answer raise the value of the currency lower the nominal interest rate increase the volume of trading in the foreign exchange market lower the trade-weighted exchange rate increase consumer inflation. Question 8 In a recession, the trade balance often improves because Answer service exports exceed manufactured good exports banks sell depressed assets fewer households can afford luxury imports direct investment abroad declines the capital account exceeds the current account Question 9 An appreciation of the U.S. dollar has what impact on Harley-Davidson (HD), a U.S. manufacturer of motorcycles? Answer domestic sales of HD motorcycles increase and foreign sales of HD motorcycles increase domestic sales of HD motorcycles decrease and foreign sales of HD motorcycles increase domestic sales of HD motorcycles increase and foreign sales of HD motorcycles decrease domestic sales of HD motorcycles decrease and foreign sales of HD motorcycles decrease Question 10 If the British pound (?) appreciates by 10% against the dollar: Answer both the US importers from Britain and US exporters to Britain will be helped by the appreciating pound. the US exporters will find it harder to sell to foreign customers in Britain. the US importer of British goods will tend to find that their cost of goods rises, hurting its bottom line. both US importers of British goods and exporters to Britain will be unaffected by changes in foreign exchange rates. Question 11 European Union labor costs exceed U.S. and British labor costs primarily because Answer worker productivity is lower in the EU union wages are higher in the EU layoffs and plant closings are more restrictive in the U.S. and Britain the amount of paid time off is higher in the EU labor-management relations are better in the EU Question 12 Purchasing power parity or PPP says the ratios composed of: Answer interest rates explain the direction of exchange rates. growth rates explain the direction of exchange rates. inflation rates explain the direction of exchange rates. services explain the direction exchange rates. public opinion polls explain the direction of exchange rates. Question 13 Trading partners should specialize in producing goods in accordance with comparative advantage, then trade and diversify in consumption because Answer out-of-pocket costs of production decline free trade areas protect infant industries economies of scale are present manufacturers face diminishing returns more goods are available for consumption Question 14 Given a Cobb-Douglas production function estimate of Q = 1.19L.72K.18for a given industry, this industry would have: Answer increasing returns to scale constant returns to scale decreasing returns to scale negative returns to scale Question 15 Marginal factor cost is defined as the amount that an additional unit of the variable input adds to ____. Answer marginal cost variable cost marginal rate of technical substitution total cost Question 16 The marginal rate of technical substitution may be defined as all of the following except: Answer the rate at which one input may be substituted for another input in the production process, while total output remains constant equal to the negative slope of the isoquant at any point on the isoquant the rate at which all combinations of inputs have equal total costs equal to the ratio of the marginal products of X and Y Question 17 The primary purpose of the Cobb-Douglas power function is to: Answer allow one to make estimates of cost-output relationships allow one to make predictions about a resulting increase in output for a given increase in the inputs aid one in gaining accurate empirical values for economic variables calculate a short-run linear total cost function Question 18 The marginal product is defined as: Answer The ratio of total output to the amount of the variable input used in producing the output The incremental change in total output that can be produced by the use of one more unit of the variable input in the production process The percentage change in output resulting from a given percentage change in the amount The amount of fixed cost involved. Question 19 Which of the following is never negative? Answer marginal product average product production elasticity marginal rate of technical substitution slope of the isocost lines Question 20 ____ are defined as costs which are incurred regardless of the alternative action chosen in a decision-making problem. Answer Opportunity costs Marginal costs Relevant costs Sunk costs Question 21 Economies of Scope refers to situations where per unit costs are: Answer Unaffected when two or more products are produced Reduced when two or more products are produced Increased when two or more products are produced Demonstrating constant returns to scale Demonstrating decreasing returns to scale Question 22 For a short-run cost function which of the following statements is (are) not true? Answer The average fixed cost function is monotonically decreasing. The marginal cost function intersects the average fixed cost function where the average variable cost function is a minimum. The marginal cost function intersects the average variable cost function where the average variable cost function is a minimum. The marginal cost function intersects the average total cost function where the average total cost function is a minimum. Question 23 If TC = 321 + 55Q - 5Q2, then average total cost at Q = 10 is: Answer 10.2 102 37.1 371 321 Question 24 The existence of diseconomies of scale (size) for the firm is hypothesized to result from: Answer transportation costs imperfections in the labor market imperfections in the capital markets problems of coordination and control encountered by management Question 25 The cost function is: Answer a means for expressing output as a function of cost a schedule or mathematical relationship showing the total cost of producing various quantities of output similar to a profit and loss statement incapable in being developed from statistical regression analysis
Solution Description

Midterm Exam Part 1

Question 1

Income tax payments are an example of ____.

Answer

implicit costs

explicit costs

normal return on investment

shareholder wealth

Question 2

The primary objective of a for-profit firm is to ___________.

Answer

maximize agency costs

minimize average cost

maximize total revenue

set output where total revenue equals total cost

maximize shareholder value

Question 3

To reduce Agency Problems, executive compensation should be designed to:

Answer

create incentives so that managers act like owners of the firm.

avoid making the executives own shares in the company.

be an increasing function of the firm's expenses.

be an increasing function of the sales revenue received by the firm.

Question 4

Possible goals of Not-For-Profit (NFP) enterprises include all of the following EXCEPT:

Answer

maximize total costs

maximize output, subject to a breakeven constraint

maximize the happiness of the administrators of the NFP enterprise

maximize the utility of the contributors

Question 5

Economic profit is defined as the difference between revenue and ____.

Answer

explicit cost

total economic cost

implicit cost

shareholder wealth

Question 6

The moral hazard in team production arises from

Answer

poorly designed team membership

lack of proper assignment of individual tasks

disorganization in groups

a conflict between tactically best interest and one’s duty

insufficient experience

Question 7

The primary difference(s) between the standard deviation and the coefficient of variation as measures of risk are:

Answer

the coefficient of variation is easier to compute

the standard deviation is a measure of relative risk whereas the coefficient of variation is a measure of absolute risk

the coefficient of variation is a measure of relative risk whereas the standard deviation is a measure of absolute risk

the standard deviation is rarely used in practice whereas the coefficient of variation is widely used

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 ____ 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 10

A change in the level of an economic activity is desirable and should be undertaken as long as the marginal benefits exceed the ____.

Answer

marginal returns

total costs

marginal costs

average costs

average benefits

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

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