# 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