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ECO 55O MIDTERM EXAM PART 1 LATEST
NOTE: TWO VERSIONS POSTED
Version 1
Question 1
In the shareholder wealth maximization model, the value of a firm's stock is equal to the present value of all expected future ____ discounted at the stockholders' required rate of return.
Answer
profits (cash flows)
revenues
outlays
costs
investments
Question 2
The flat-screen plasma TVs are selling extremely well. The originators of this technology are earning higher profits. What theory of profit best reflects the performance of the plasma screen makers?
Answer
risk-bearing theory of profit
dynamic equilibrium theory of profit
innovation theory of profit
managerial efficiency theory of profit
stochastic optimization theory of profit
Question 3
Income tax payments are an example of ____.
Answer
implicit costs
explicit costs
normal return on investment
shareholder wealth
Question 4
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 5
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 6
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 7
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 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
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 11
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 12
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 13
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 14
When demand elasticity is ____ in absolute value (or ____), an increase in price will result in a(n) ____ in total revenues.
Answer
less than 1; elastic; increase
more than 1; inelastic; decrease
less than 1; elastic; decrease
less than 1; inelastic; increase
Question 15
Those goods having a calculated income elasticity that is negative are called:
Answer
producers' goods
durable goods
inferior goods
nondurable goods
Question 16
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 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
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 20
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 21
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
Question 22
In regression analysis, the existence of a significant pattern in successive values of the error term constitutes:
Answer
heteroscedasticity
autocorrelation
multicollinearity
nonlinearities
a simultaneous equation relationship
Question 23
All of the following are reasons why an association relationship may not imply a causal relationship except:
Answer
the association may be due to pure chance
the association may be the result of the influence of a third common factor
both variables may be the cause and the effect at the same time
the association may be hypothetical
Question 24
In testing whether each individual independent variables (Xs) in a multiple regression equation is statistically significant in explaining the dependent variable (Y), one uses the:
Answer
F-test
Durbin-Watson test
t-test
z-test
Question 25
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
Version 2
Question 1
To reduce Agency Problems, executive compensation should be designed to:
a. create incentives so that managers act like owners of the firm.
b. avoid making the executives own shares in the company.
c. be an increasing function of the firm's expenses.
d. be an increasing function of the sales revenue received by the firm.
e. all of the above
Question 2
Economic profit is defined as the difference between revenue and ____.
a. explicit cost
b. total economic cost
c. implicit cost
d. shareholder wealth
e. none of the above
Question 3
Possible goals of Not-For-Profit (NFP) enterprises include all of the following EXCEPT:
a. maximize total costs
b. maximize output, subject to a breakeven constraint
c. maximize the happiness of the administrators of the NFP enterprise
d. maximize the utility of the contributors
e. a. and c.
Question 4
Various executive compensation plans have been employed to motivate managers to make decisions that maximize shareholder wealth. These include:
a. cash bonuses based on length of service with the firm
b. bonuses for resisting hostile takeovers
c. requiring officers to own stock in the company
d. large corporate staffs
e. a, b, and c only
Question 5
Income tax payments are an example of ____.
a. implicit costs
b. explicit costs
c. normal return on investment
d. shareholder wealth
e. none of the above
Question 6
The moral hazard in team production arises from
a. poorly designed team membership
b. lack of proper assignment of individual tasks
c. disorganization in groups
d. a conflict between tactically best interest and one’s duty
e. insufficient experience
Question 7
The primary difference(s) between the standard deviation and the coefficient of variation as measures of risk are:
a. the coefficient of variation is easier to compute
b. the standard deviation is a measure of relative risk whereas the coefficient of variation is a measure of absolute risk
c. the coefficient of variation is a measure of relative risk whereas the standard deviation is a measure of absolute risk
d. the standard deviation is rarely used in practice whereas the coefficient of variation is widely used
e. c and d
Question 8
The ____ is the ratio of ____ to the ____.
a. standard deviation; covariance; expected value
b. coefficient of variation; expected value; standard deviation
c. correlation coefficient; standard deviation; expected value
d. coefficient of variation; standard deviation; expected value
e. none of the above
Question 9
Generally, investors expect that projects with high expected net present values also will be projects with
a. low risk
b. high risk
c. certain cash flows
d. short lives
e. none of the above
Question 10
The standard deviation is appropriate to compare the risk between two investments only if
a. the expected returns from the investments are approximately equal
b. the investments have similar life spans
c. objective estimates of each possible outcome is available
d. the coefficient of variation is equal to 1.0
e. none of the above
Question 11
The level of an economic activity should be increased to the point where the ____ is zero.
a. marginal cost
b. average cost
c. net marginal cost
d. net marginal benefit
e. none of the above
Question 12
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?
a. U.S. Government bonds
b. municipal bonds
c. common stock
d. commercial paper
e. none of the above
Question 13
An income elasticity (Ey) of 2.0 indicates that for a ____ increase in income, ____ will increase by ____.
a. one percent; quantity supplied; two units
b. one unit; quantity supplied; two units
c. one percent; quantity demanded; two percent
d. one unit; quantity demanded; two units
e. ten percent; quantity supplied; two percent
Question 14
An increase in each of the following factors would normally provide a subsequent increase in quantity demanded, except:
a. price of substitute goods
b. level of competitor advertising
c. consumer income level
d. consumer desires for goods and services
e. a and b
Question 15
Which of the following would tend to make demand INELASTIC?
a. the amount of time analyzed is quite long
b. there are lots of substitutes available
c. the product is highly durable
d. the proportion of the budget spent on the item is very small
e. no one really wants the product at all
Question 16
If demand were inelastic, then we should immediately:
a. cut the price.
b. keep the price where it is.
c. go to the Nobel Prize Committee to show we were the first to find an upward sloping demand curve.
d. stop selling it since it is inelastic.
e. raise the price.
Question 17
Marginal revenue (MR) is ____ when total revenue is maximized.
a. greater than one
b. equal to one
c. less than zero
d. equal to zero
e. equal to minus one
Question 18
When demand elasticity is ____ in absolute value (or ____), an increase in price will result in a(n) ____ in total revenues.
a. less than 1; elastic; increase
b. more than 1; inelastic; decrease
c. less than 1; elastic; decrease
d. less than 1; inelastic; increase
e. none of the above
Question 19
Iron ore is an example of a:
a. durable good
b. producers' good
c. nondurable good
d. consumer good
e. none of the above
Question 20
The constant or intercept term in a statistical demand study represents the quantity demanded when all independent variables are equal to:
a. 1.0
b. their minimum values
c. their average values
d. 0.0
e. none of the above
Question 21
When two or more "independent" variables are highly correlated, then we have:
a. the identification problem
b. multicollinearity
c. autocorrelation
d. heteroscedasticity
e. complementary products
Question 22
One commonly used test in checking for the presence of autocorrelation when working with time series data is the ____.
a. F-test
b. Durbin-Watson test
c. t-test
d. z-test
e. none of the above
Question 23
The estimated slope coefficient (b) of the regression equation (Ln Y = a + b Ln X) measures the ____ change in Y for a one ____ change in X.
a. percentage, unit
b. percentage, percent
c. unit, unit
d. unit, percent
e. none of the above
Question 24
In regression analysis, the existence of a high degree of intercorrelation among some or all of the explanatory variables in the regression equation constitutes:
a. autocorrelation
b. a simultaneous equation relationship
c. nonlinearities
d. heteroscedasticity
e. multicollinearity
Question 25
The method which can give some information in estimating demand of a product that hasn’t yet come to market is:
a. the consumer survey
b. market experimentation
c. a statistical demand analysis
d. plotting the data
e. the barometric method