ECO 550 NEW Midterm Part 1 & 2 (2016) LATEST


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

explicit cost

total economic cost

implicit cost

shareholder wealth

2. 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.

Profits (cash flows)





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

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.

4. 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?

risk-bearing theory of profit

dynamic equilibrium theory of profit

innovation theory of profit

managerial efficiency theory of profit

stochastic optimization theory of profit

5. A Real Option Value is:

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 a new cost savings or revenue expansion activity that arises from business plans that the managers adopt.

An objective function and a decision rule that comes from it.

Both a and b.

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


welfare economics

free-enterprise economics


none of the above

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

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

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





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

marginal cost

average cost

net marginal cost

net marginal benefit

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

low risk

high risk

certain cash flows

short lives

none of the above

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

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

12. 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

13. Iron ore is an example of a:

durable good

producers’ good

nondurable good

consumer good

none of the above

14. An income elasticity (Ey) of 2.0 indicates that for a ____ increase in income, ____ will increase by ____.

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

15. Those goods having a calculated income elasticity that is negative are called:

producers’ goods

durable goods

inferior goods

nondurable goods

16. 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.

elastic; price; quantity

unit elastic; price; quantity

inelastic; quantity; price

inelastic; price; quantity

none of the above

17. The factor(s) which cause(s) a movement along the demand curve include(s):

increase in level of advertising

decrease in price of complementary goods

increase in consumer disposable income

decrease in price of the good demanded

18. Marginal revenue (MR) is ____ when total revenue is maximized.

greater than one

equal to one

less than zero

equal to zero

equal to minus one

19. A price elasticity (ED) of -1.50 indicates that for a ____ increase in price, quantity demanded will ____ by ____.

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

20. The standard deviation of the error terms in an estimated regression equation is known as:

coefficient of determination

correlation coefficient

Durbin-Watson statistic

standard error of the estimate

none of the above

21. The constant or intercept term in a statistical demand study represents the quantity demanded when all independent variables are equal to:


their minimum values

their average values


none of the above

22. All of the following are reasons why an association relationship may not imply a causal relationship except:

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

both c and d

23. Demand functions in the multiplicative form are most common for all of the following reasons except:

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

c and d

24. In which of the following econometric problems do we find Durbin-Watson statistic being far away from 2.0?

the identification problem




agency problems

25. The method which can give some information in estimating demand of a product that hasn’t yet come to market is.

the consumer survey

market experimentation

a statistical demand analysis

plotting the data

the barometric method

Part 2

1. When there is an Equilibrium (or a Nash Equilibrium), we expect that:

once the firm’s get there, no one will change their strategy.

firms will tend to select a randomized strategy.

neither firm will care what it does.

this is always a dominated strategy.

2. In adopting mixed Nash equilibrium strategy, a player is attempting to

randomize his or her own behavior

make the opponent favor a course of action preferred by the first player

randomize the outcome of actions

make the opponent indifferent between one action and another

none of the above

3. Credible promises and hostage mechanisms can support a continuous stream of cooperative exchanges except when

the promisor is better off fulfilling than ignoring his promise

neither party has a prior dominant strategy

the hostage can be revoked for just causes

the hostage is more valuable than any given exchange

the hostage is difficult to replace

4. A dominant strategy differs from a Nash equilibrium strategy in that

Nash equilibrium strategy does not assume best reply responses

dominant strategy assumes best reply responses

only Nash strategy applies to simultaneous games

one dominant strategy is sufficient to predict behavior in a multi-person game

Nash strategy is often unique

5. Cooperation in repeated prisoner’s dilemma situations seems to be enhanced by all of the following except.

limited punishment schemes

clarity of conditional rewards

grim trigger strategy

provocabilityi.e., credible threats of punishment

tit for tat strategy

6. Electricity pricing that varies in its billing expense throughout the day is called

full pricing

marginal cost pricing

dynamic pricing

variable pricing

full cost pricing 

7. Vacation tours to Europe invariably package visits to disparate regions:  cities, mountains, and the seaside.  Bundling, a type of second degree price discrimination, is most profitable when:

The preference rankings of vacationers travelling together are negatively correlated 

A preference of cities is always higher than preferences for mountain vistas. 

preference rankings of vacationers travelling together are positively correlated.

preference for the seaside is always higher than preferences for city excursions.

no one wants to take a European vacation package to cities, mountains, and the seaside.

8. Which of the following pricing policies best identifies when a product should be expanded, maintained, or discontinued?

full-cost pricing policy

target-pricing policy

marginal-pricing policy

market-share pricing policy

markup pricing policy

9. To maximize profits, a monopolist that engages in price discrimination must allocate output in such a way as to make identical the ____ in all markets.

Ratio of price to marginal cost

Ratio of marginal cost to marginal utility

Ratio of price to elasticity

Marginal revenue

None of the above 

10.    ____ is the price at which an intermediate good or service is transferred from the selling to the buying division within the same firm.

Incremental price

Marginal price

Full-cost price

Transfer price

None of the above

11. When retail bicycle dealers advertise and perform warranty repairs but do not deliver the personal selling message that Schwinn has designed as part of the marketing plan but cannot observe at less than prohibitive cost, the manufacturer has encountered a problem of ____.

Reliance relationship


Moral hazard

Creative ingenuity

Insurance reliance 

12. When borrowers who do not intend to repay are able to hide their bad credit histories, a lender’s well-intentioned borrowers should

Complain to regulatory authorities

Withdraw their loan applications

Offer more collateral in exchange for lower interest charges

Divulge still more information on their loan applications

Hope for a pooling equilibrium 

13. To accomplish its purpose a linear profit-sharing contract must

Induce the employee to moonlight

Communicate a  code of conduct that will be monitored and enforced

Meet either the participation or the incentive compatibility constraint

Establish a separation equilibrium

Not realign incentives 

14. To accomplish its purpose a linear profit-sharing contract must

15. When someone contracts to do a task but fails to put full effort into the performance of an agreement, yet the lack of effort is not independently verifiable, this lack of effort constitutes a

Breach of contractual obligations

Denial of good guarantee

Loss of reputation

Moral hazard 

16. The Herfindahl-Hirschman index (also shortened to just the Herfindahl index) is a measure of ____.

Market concentration

Income distribution

Technological progressiveness 

Price discrimination

None of the above 

17. The antitrust laws regulate all of the following business decisions except ____.



Monopolistic practices

Price discrimination

Wage levels

18. The lower the barriers to entry and exit, the more nearly a market structure fits the ____ market model.

Monopolistic competition

Perfectly contestable 



None of the above

19. ____ yields the same results as the theory of perfect competition, but requires substantially fewer assumptions than the perfectly competitive model.

Baumol’s sales maximization hypothesis

The Pareto optimality condition

The Cournot model

The theory of contestable markets

None of the above 

20. ____ occurs whenever a third party receives or bears costs arising from an economic transaction in which the individual (or group) is not a direct participant.

Pecuniary benefits and costs



Monopoly costs and benefits

None of the above 

21. Cost-benefit analysis is the public sector counterpart to ____ used in private, profit-oriented firms.

ratio analysis 

break-even analysis 

capital budgeting techniques 

economic forecasting 

none of the above 

22. The weights used in calculating the firm’s weighted-average cost of capital are equal to the proportion of debt and equity ____.

used to finance the project 

used to finance the projects undertaken last year 

in the industry average capital structure 

in the firm’s target capital structure 

none of the above

23. In order to help assure that all relevant factors will be considered, the capital-expenditure selection process should include the following steps except:

generating alternative capital-investment project proposals

estimating cash flows for the project proposals

reviewing the investment projects after they have been implemented

allocate manpower to the various divisions within the firm

a and d

24. The social rate of discount is best approximated by:

the cost of government borrowing 

the opportunity cost of resources taken from the private sector 

3 percent 

30 percent 

none of the above

25.    In the constant-growth dividend valuation model, the required rate of return on common stock (i.e., cost of equity capital) can be shown to be equal to the sum of the dividend yield plus the ____.


present value yield 

risk-free rate 

dividend growth rate 

none of the above 

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