ECO 550 NEW Midterm Part 1 2016

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

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