ECON 414 Exam 1 – Flashcards
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The form of economics most relevant to managerial decision-making within the firm
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Microeconomics
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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
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Profit (cash flows)
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According to the innovation theory or profit, above-normal profits are necessary to compensate the owners of the firm for the risk they assume hen making their investments
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False
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Agency problems and costs are incurred whenever the owners of a firm delegate decision-making authority to management
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True
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The common factors that give rise to all principal-agent problems include:
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Unobservability of some manager-agent action & presence of random disturbances in team production
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A real option value is:
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Opportunity to implement cost savings or revenue expansion in a flexible business plan
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The primary objective of a for-profit firm is to:
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Maximize shareholder value
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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:
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Equals the marginal cost of the test
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The moral hazard in team production arises from
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A conflict between tactically best interest and one's duty
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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?
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Innovation theory of profit
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A change in the level of an economic activity is desirable and should be undertaken as long as the marginal benefits exceed the _______.
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Marginal costs
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The net present value of an investment represents:
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The expected contribution of that investment to the goal of shareholder wealth maximization
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The closest example of a risk-free security is:
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U.S. government treasury bills
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The approximate probability of a value occurring that is greater than one standard deviation from the mean is approximately (assuming a normal distribution)
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15.87%
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The primary difference(s) between the standard deviation and the coefficient of variation as measures of risk are:
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The coefficient of variation is a measure of relative risk whereas the standard deviation is a measure of absolute risk
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Sources of positive net present value projects include:
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Buyer preferences for established brand names, economics of large-scale production and distribution, and patent control of superior product designs or production techniques
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Receiving $100 each at the end of the new three years is worth more to me than receiving $260 right now, when my required interest rate is 10%.
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False
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Consider an investment with the following payoffs and probabilities: State of the Economy Probability Return Stability .50 1,000 Good Growth .50 2,000 Determine the expected return for this investment.
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1,500
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If demand were inelastic, then we should immediately:
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Raise the price
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Demand is given by Qd = 620 - 10·P and supply is given by Qs = 100 + 3·P. What is the price and quantity when the market is in equilibrium?
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The price will be $40 and the quantity will be 220 units.
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A linear demand for lake front cabins on a nearby lake is estimated to be: QD = 900,000 - 2P. What is the point price elasticity for lake front cabins at a price of P = $300,000? [Hint: Ep = (∂Q/∂P)(P/Q) where ∂Q/∂P = -2]
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EP = -2.0
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An increase in the quantity demanded could be caused by:
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An increase in the price of substitute goods, a decrease in the price of complementary goods, an increase in consumer income levels
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If the cross price elasticity measured between items A and B is positive, the two products are referred to as:
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Substitutes
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An increase in each of the following factors would normally provide a subsequent increase in quantity demanded, except:
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Level of computer advertising
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A price elasticity (ED) of -1.50 indicates that for a ____ increase in price, quantity demanded will ____ by ____.
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one percent; decrease; 1.50 percent
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An income elasticity (Ey) of 2.0 indicates that for a ____ increase in income, ____ will increase by ____.
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one percent; quantity demanded; two percent
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Empirical estimates of the price elasticity of demand suggests that the demand for household consumption of alcoholic beverages is:
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Price inelastic
