ECON 414 Exam 1

question

The form of economics most relevant to managerial decision-making within the firm
answer

Microeconomics
question

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
answer

Profit (cash flows)
question

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
answer

False
question

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

True
question

The common factors that give rise to all principal-agent problems include:
answer

Unobservability of some manager-agent action & presence of random disturbances in team production
question

A real option value is:
answer

Opportunity to implement cost savings or revenue expansion in a flexible business plan
question

The primary objective of a for-profit firm is to:
answer

Maximize shareholder value
question

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 the marginal cost of the test
question

The moral hazard in team production arises from
answer

A conflict between tactically best interest and one’s duty
question

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?
answer

Innovation theory of profit
question

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

Marginal costs
question

The net present value of an investment represents:
answer

The expected contribution of that investment to the goal of shareholder wealth maximization
question

The closest example of a risk-free security is:
answer

U.S. government treasury bills
question

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

15.87%
question

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

The coefficient of variation is a measure of relative risk whereas the standard deviation is a measure of absolute risk
question

Sources of positive net present value projects include:
answer

Buyer preferences for established brand names, economics of large-scale production and distribution, and patent control of superior product designs or production techniques
question

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%.
answer

False
question

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.
answer

1,500
question

If demand were inelastic, then we should immediately:
answer

Raise the price
question

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?
answer

The price will be $40 and the quantity will be 220 units.
question

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]
answer

EP = -2.0
question

An increase in the quantity demanded could be caused by:
answer

An increase in the price of substitute goods, a decrease in the price of complementary goods, an increase in consumer income levels
question

If the cross price elasticity measured between items A and B is positive, the two products are referred to as:
answer

Substitutes
question

An increase in each of the following factors would normally provide a subsequent increase in quantity demanded, except:
answer

Level of computer advertising
question

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

one percent; decrease; 1.50 percent
question

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

one percent; quantity demanded; two percent
question

Empirical estimates of the price elasticity of demand suggests that the demand for household consumption of alcoholic beverages is:
answer

Price inelastic

Get instant access to
all materials

Become a Member