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ECO 550 Midterm Part 1 and 2 (All Possible Questions)
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ECO 550 Midterm Part 1 and 2 (All Possible Questions)

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Chapter 1—Introduction and Goals of the Firm

 

MULTIPLE CHOICE

 

1. The form of economics most relevant to managerial decision-making within the firm is:

 

2. If one defines incremental cost as the change in total cost resulting from a decision, and incremental revenue as the change in total revenue resulting from a decision, any business decision is profitable if:

 

3. 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.

 

4. Which of the following statements concerning the shareholder wealth maximization model is (are) true?

 

5. According to the profit-maximization goal, the firm should attempt to maximize short-run profits since there is too much uncertainty associated with long-run profits.

 

 

6. According to the innovation theory of profit, above-normal profits are necessary to compensate the owners of the firm for the risk they assume when making their investments.

 

7. According to the managerial efficiency theory of profit, above-normal profits can arise because of high-quality managerial skills.

 

8. Which of the following (if any) is not a factor affecting the profit performance of firms:

 

9. Agency problems and costs are incurred whenever the owners of a firm delegate decision-making authority to management.

 

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

 

11. Income tax payments are an example of ____.

 

 

 

12. Various executive compensation plans have been employed to motivate managers to make decisions that maximize shareholder wealth. These include:

 

13. The common factors that give rise to all principal-agent problems include the

 

14. The Saturn Corporation (once a division of GM) was permanently closed in 2009.  What went wrong with Saturn?

 

15.  A Real Option Value is:

 

 

16. Which of the following will increase (V0), the shareholder wealth maximization model of the firm:

V0∙(shares outstanding) = S¥t=1(pt ) / (1+ke)t   + Real Option Value.

 

 

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

 

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

 

19. 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?

 

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

 

 

 

21. 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: 

 

 

 

Chapter 2

 

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

 

2. The level of an economic activity should be increased to the point where the ____ is zero.

 

3. The net present value of an investment represents

 

4. Generally, investors expect that projects with high expected net present values also will be projects with

 

5. An closest example of a risk-free security is

 

6. The standard deviation is appropriate to compare the risk between two investments only if

 

7. The approximate probability of a value occurring that is greater than one standard deviation from the mean is approximately (assuming a normal distribution)

 

8. 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?

 

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

 

10. The ____ is the ratio of ____ to the ____.

 

 

 

11. Sources of positive net present value projects include

 

12. Receiving $100 at the end of the next three years is worth more to me than receiving $260 right now, when my required interest rate is 10%.

 

 

13.  The number of standard deviations z that a particular value of r is from the mean ȓ can be computed as z = (r - ȓ)/ s. Suppose that you work as a commission-only insurance agent earning $1,000 per week on average.  Suppose that your standard deviation of weekly earnings is $500.  What is the probability that you zero in a week?  Use the following brief z-table to help with this problem.

 

t

 

T

 

14. Consider an investment with the following payoffs and probabilities:

 

 

 

15. Consider an investment with the following payoffs and probabilities:

 

16. An investment advisor plans a portfolio your 85 year old risk-averse grandmother.  Her portfolio currently consists of 60% bonds and 40% blue chip stocks.  This portfolio is estimated to have an expected return of 6% and with a standard deviation 12%.  What is the probability that she makes less than 0% in a year? [A portion of Appendix B1 is given below, where z = (x - m)/s , with m as the mean and s as the standard deviation.]

17. Two investments have the following expected returns (net present values) and standard deviations:

 

PROBLEMS

 

1. Suppose that the firm's cost function is given in the following schedule (where Q is the level of output):

 

 

 

2. Complete the following table. 

3. A firm has decided to invest in a piece of land. Management has estimated that the land can be sold in 5 years for the following possible prices:

 

 

Chapter 3—Demand Analysis

 

MULTIPLE CHOICE

 

1. Suppose we estimate that the demand elasticity for fine leather jackets is  .7 at their current prices.  Then we know that:

 

 

2. If demand were inelastic, then we should i

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