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Eco 550 complete quiz bank week 1 11 strayer university - latest & complete


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Eco 550 complete quiz bank week 1 11 strayer university - latest & complete

  1. 1. ECO 550Managerial EconomicsStrayer University To Purchase Complete Quiz Bank for ECO 550 Strayer University Follow this Link 1 Quiz: 1. The form of economics most relevant to managerial decision-making within the firm is:a. macroeconomicsb. welfare economicsc. free-enterprise economicsd. microeconomicse. none of the above 2. If one defines incremental cost as the change in total cost resulting from a decision, andincremental revenue as the change in total revenue resulting from a decision, any businessdecision is profitable if:a. it increases revenue more than costs or reduces costs more than revenueb. it decreases some costs more than it increases others (assuming revenues remain constant)c. it increases some revenues more than it decreases others (assuming costs remain constant)d. all of the above
  2. 2. e. b and c only 3. In the shareholder wealth maximization model, the value of a firms stock is equal to thepresent value of all expected future ____ discounted at the stockholders required rate of return.a. profits (cash flows)b. revenuesc. outlaysd. costse. investments 4. Which of the following statements concerning the shareholder wealth maximizationmodel is (are) true?a. The timing of future profits is explicitly considered.b. The model provides a conceptual basis for evaluating differential levels of risk.c. The model is only valid for dividend-paying firms.d. a and be. a, b, and c 5. According to the profit-maximization goal, the firm should attempt to maximize short-runprofits since there is too much uncertainty associated with long-run profits.a. trueb. false
  3. 3. 6. According to the innovation theory of profit, above-normal profits are necessary tocompensate the owners of the firm for the risk they assume when making their investments.a. trueb. false 7. According to the managerial efficiency theory of profit, above-normal profits can arisebecause of high-quality managerial skills.a. trueb. false 8. Which of the following (if any) is not a factor affecting the profit performance of firms:a. differential riskb. innovationc. managerial skillsd. existence of monopoly powere. all of the above are factors 9. Agency problems and costs are incurred whenever the owners of a firm delegate decision-making authority to management.a. true
  4. 4. b. false 10. Economic profit is defined as the difference between revenue and ____.a. explicit costb. total economic costc. implicit costd. shareholder wealthe. none of the above 11. Income tax payments are an example of ____.a. implicit costsb. explicit costsc. normal return on investmentd. shareholder wealthe. none of the above 12. Various executive compensation plans have been employed to motivate managers tomake decisions that maximize shareholder wealth. These include:a. cash bonuses based on length of service with the firmb. bonuses for resisting hostile takeoversc. requiring officers to own stock in the company
  5. 5. d. large corporate staffse. a, b, and c only 13. The common factors that give rise to all principal-agent problems include thea. unobservability of some manager-agent actionb. presence of random disturbances in team productionc. the greater number of agents relative to the number of principalsd. a and b onlye. none of the above14. The Saturn Corporation (once a division of GM) was permanently closed in 2009. Whatwent wrong with Saturn?a. Saturn’s cars sold at prices higher than rivals Honda or Toyota, so they could not sell manycars.b. Saturn sold cars below the prices of Honda or Toyota, earning a low 3% rate of return.c. Saturn found that young buyers of Saturn automobiles were very loyal to Saturn and GM.d. Saturn implemented a change management view that helped make first time Saturnpurchasers trade up to Buick or Cadillac.e. all of the above15. A Real Option Value is: a. An option that been deflated by the cost of living index makes it a “real” option. b. An opportunity cost of capital.
  6. 6. c. An opportunity to implement a new cost savings or revenue expansion activity that arisesfrom business plans that the managers adopt. d. An objective function and a decision rule that comes from it. e. Both a and b.16. Which of the following will increase (V0), the shareholder wealth maximization model ofthe firm: V0·(shares outstanding) = ??t=1 (? t ) / (1+ke)t + Real Option Value.a. Decrease the required rate of return (ke).b. Decrease the stream of profits (?t).c. Decrease the number of periods from ? to 10 periods.d. Decrease the real option value.e. All of the above.17. The primary objective of a for-profit firm is to ___________.a. maximize agency costsb. minimize average costc. maximize total revenued. set output where total revenue equals total coste maximize shareholder value18. Possible goals of Not-For-Profit (NFP) enterprises include all of the following EXCEPT:a. maximize total costsb. maximize output, subject to a breakeven constraint
  7. 7. c. maximize the happiness of the administrators of the NFP enterprised. maximize the utility of the contributorse. a. and c.19. The flat-screen plasma TVs are selling extremely well. The originators of this technologyare earning higher profits. What theory of profit best reflects the performance of the plasmascreen makers?a. risk-bearing theory of profitb. dynamic equilibrium theory of profitc. innovation theory of profitd. managerial efficiency theory of profite. stochastic optimization theory of profit20. To reduce Agency Problems, executive compensation should be designed to: a. create incentives so that managers act like owners of the firm. b. avoid making the executives own shares in the company. c. be an increasing function of the firms expenses. d. be an increasing function of the sales revenue received by the firm. e. all of the above21. Recently, the American Medical Association changed its recommendations on thefrequency of pap-smear exams for women. The new frequency recommendation was designed toaddress the family histories of the patients. The optimal frequency should be where the marginalbenefit of an additional pap-test:a. equals zero.b. is greater than the marginal cost of the test
  8. 8. c. is lower than the marginal cost of an additional testd. equals the marginal cost of the teste. both a and b. To Purchase Complete Quiz Bank for ECO 550 Strayer University Follow this Link 2 Quiz:1. A change in the level of an economic activity is desirable and should be undertaken aslong as the marginal benefits exceed the ____.a. marginal returnsb. total costsc. marginal costsd. average costse. average benefits 2. The level of an economic activity should be increased to the point where the ____ is zero.a. marginal costb. average costc. net marginal costd. net marginal benefit
  9. 9. e. none of the above 3. The net present value of an investment representsa. an index of the desirability of the investmentb. the expected contribution of that investment to the goal of shareholder wealth maximizationc. the rate of return expected from the investmentd. a and b onlye. a and c only 4. Generally, investors expect that projects with high expected net present values also will beprojects witha. low riskb. high riskc. certain cash flowsd. short livese. none of the above 5. An closest example of a risk-free security isa. General Motors bondsb. AT&T commercial paperc. U.S. Government Treasury bills
  10. 10. d. San Francisco municipal bondse. an I.O.U. that your cousin promises to pay you $100 in 3 months 6. The standard deviation is appropriate to compare the risk between two investments only ifa. the expected returns from the investments are approximately equalb. the investments have similar life spansc. objective estimates of each possible outcome is availabled. the coefficient of variation is equal to 1.0e. none of the above 7. The approximate probability of a value occurring that is greater than one standarddeviation from the mean is approximately (assuming a normal distribution)a. 68.26%b. 2.28%c. 34%d. 15.87%e. none of the above 8. Based on risk-return tradeoffs observable in the financial marketplace, which of thefollowing securities would you expect to offer higher expected returns than corporate bonds?a. U.S. Government bonds
  11. 11. b. municipal bondsc. common stockd. commercial papere. none of the above 9. The primary difference(s) between the standard deviation and the coefficient of variationas measures of risk are:a. the coefficient of variation is easier to computeb. the standard deviation is a measure of relative risk whereas the coefficient of variation is ameasure of absolute riskc. the coefficient of variation is a measure of relative risk whereas the standard deviation is ameasure of absolute riskd. the standard deviation is rarely used in practice whereas the coefficient of variation is widelyusede. c and d 10. The ____ is the ratio of ____ to the ____.a. standard deviation; covariance; expected valueb. coefficient of variation; expected value; standard deviationc. correlation coefficient; standard deviation; expected valued. coefficient of variation; standard deviation; expected valuee. none of the above
  12. 12. 11. Sources of positive net present value projects includea. buyer preferences for established brand namesb. economies of large-scale production and distributionc. patent control of superior product designs or production techniquesd. a and b onlye. a, b, and c12. Receiving $100 at the end of the next three years is worth more to me than receiving $260right now, when my required interest rate is 10%. a. True b. False13. The number of standard deviations z that a particular value of r is from the mean ? can becomputed as z = (r - ?)/ ????Suppose that you work as a commission-only insurance agentearning $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 helpwith this problem. Z value Probability -3 .0013 -2 .0228 -1 .1587 0 .5000
  13. 13. a. 1.3% chance of earning nothing in a weekb. 2.28% chance of earning nothing in a weekc. 15.87% chance of earning nothing in a weekd. 50% chance of earning nothing in a weeke. none of the abovet T14. 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.a. 1,300b. 1,500 c. 1,700 d. 2,000 e. 3,00015. Consider an investment with the following payoffs and probabilities:State of the Economy Probability Return
  14. 14. GDP grows slowly .70 1,000GDP grow fast .30 2,000 Let the expected value in this example be 1,300. How do we find the standard deviation of theinvestment?a. ? = ? { (1000-1300)2 + (2000-1300)2 }b. ? = ? { (1000-1300) + (2000-1300) }c. ??= ? { (.5)(1000-1300)2 + (.5)(2000-1300)2 }d. ??= ? { (.7)(1000-1300) + (.3)(2000-1300) }e. ??= ? { (.7)(1000-1300)2 + (.3)(2000-1300)2 }16. An investment advisor plans a portfolio your 85 year old risk-averse grandmother. Herportfolio currently consists of 60% bonds and 40% blue chip stocks. This portfolio is estimatedto have an expected return of 6% and with a standard deviation 12%. What is the probabilitythat she makes less than 0% in a year? [A portion of Appendix B1 is given below, where z = (x- ???????with ??as the mean and ??as the standard deviation.]a. 2.28%b. 6.68%c. 15.87%d. 30.85%e. 50%17. Two investments have the following expected returns (net present values) and standarddeviations: PROJECT Expected Value Standard Deviation Q $100,000 $20,000 X $50,000 $16,000
  15. 15. Based on the Coefficient of Variation, where the C.V. is the standard deviation dividend bythe expected value.a. All coefficients of variation are always the same.b. Project Q is riskier than Project Xc. Project X is riskier than Project Qd. Both projects have the same relative risk profilee. There is not enough information to find the coefficient of variation.PROBLEMS 1. Suppose that the firms cost function is given in the following schedule (where Q is thelevel of output):Output TotalQ (units) Cost0 71 252 373 454 505 536 587 66
  16. 16. 8 789 9610 124Determine the (a) marginal cost and (b) average total cost schedules2. Complete the following table. Total Marginal AverageOutput Profit Profit Profit0 ?48 0 ______1 ?26 ______ ______2 ?8 ______ ______3 6 ______ ______4 16 ______ ______5 22 ______ ______6 24 ______ ______7 22 ______ ______8 16 ______ ______9 6 ______ ______10 ?8 ______ ______
  17. 17. 3. A firm has decided to invest in a piece of land. Management has estimated that the landcan be sold in 5 years for the following possible prices:Price Probability10,000 .2015,000 .3020,000 .4025,000 .10(a) Determine the expected selling price for the land.(b) Determine the standard deviation of the possible sales prices.(c) Determine the coefficient of variation.Chapter 3 Quiz:
  18. 18. 1. Suppose we estimate that the demand elasticity for fine leather jackets is .7 at their currentprices. Then we know that: a. a 1% increase in price reduces quantity sold by .7%. b. no one wants to buy leather jackets. c. demand for leather jackets is elastic. d. a cut in the prices will increase total revenue. e. leather jackets are luxury items.2. If demand were inelastic, then we should immediately:a. cut the price.b. keep the price where it is.c. go to the Nobel Prize Committee to show we were the first to find an upward slopingdemand curve.d. stop selling it since it is inelastic.e. raise the price.3. In this problem, demonstrate your knowledge of percentage rates of change of an entiredemand function (Hint: %?Q = EP•%?P + EY•%?Y). You have found that the price elasticity ofmotor control devices at Allen-Bradley Corporation is -2, and that the income elasticity is a+1.5. You have been asked to predict sales of these devices for one year into the future.Economists from the Conference Board predict that income will be rising 3% over the next year,and AB’s management is planning to raise prices 2%. You expect that the number of AB motorcontrol devices sold in one year will:a. fall .5%.b. not change.
  19. 19. c. rise 1%r.d. rise 2%.e. rise .5%.4 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)]a. EP = -3.0b. EP = -2.0c. EP = -1.0d. EP = -0.5e. EP = 05. Property taxes are the product of the tax rate (T) and the assessed value (V). The totalproperty tax collected in your city (P) is: P = T•V. If the value of properties rise 4% and ifMayor and City Council reduces the property the tax rate by 2%, what happens to the totalamount of property tax collected? [hint: the percentage rate of change of a product isapproximately the sum of the percentage rates of change.}a. It rises 6 %.b. It rises 4 %.c. It rises 3 %.d. It rises 2 %e. If falls 2%.
  20. 20. 6. Demand is given by QD = 620 10•P and supply is given by QS = 100 + 3•P. What is theprice and quantity when the market is in equilibrium? a. The price will be $30 and the quantity will be 132 units. b. The price will be $11 and the quantity will be 122 units. c. The price will be $40 and the quantity will be 220 units. d. The price will be $35 and the quantity will be 137 units e. The price will be $10 and the quantity will be 420 units.7. Which of the following would tend to make demand INELASTIC?a. the amount of time analyzed is quite longb. there are lots of substitutes availablec. the product is highly durabled. the proportion of the budget spent on the item is very smalle. no one really wants the product at all8. Which of the following best represents managements objective(s) in utilizing demandanalysis?a. it provides insights necessary for the effective manipulation of demandb. it helps to measure the efficiency of the use of company resourcesc. it aids in the forecasting of sales and revenuesd. a and be. a and c
  21. 21. 9. Identify the reasons why the quantity demanded of a product increases as the price of thatproduct decreases.a. as the price declines, the real income of the consumer increasesb. as the price of product A declines, it makes it more attractive than product Bc. as the price declines, the consumer will always demand more on each successive pricereductiond. a and be. a and c 10. An increase in the quantity demanded could be caused by:a. an increase in the price of substitute goodsb. a decrease in the price of complementary goodsc. an increase in consumer income levelsd. all of the abovee. none of the above11. Iron ore is an example of a:a. durable goodb. producers goodc. nondurable goodd. consumer goode. none of the above
  22. 22. 12. If the cross price elasticity measured between items A and B is positive, the two productsare referred to as:a. complementsb. substitutesc. inelastic as compared to each otherd. both b and ce. a, b, and c13. When demand is ____ a percentage change in ____ is exactly offset by the samepercentage change in ____ demanded, the net result being a constant total consumer expenditure.a. elastic; price; quantityb. unit elastic; price; quantityc. inelastic; quantity; priced. inelastic; price; quantitye. none of the above14. Marginal revenue (MR) is ____ when total revenue is maximized.a. greater than oneb. equal to onec. less than zero
  23. 23. d. equal to zeroe. equal to minus one15. The factor(s) which cause(s) a movement along the demand curve include(s):a. increase in level of advertisingb. decrease in price of complementary goodsc. increase in consumer disposable incomed. decrease in price of the good demandede. all of the above16. An increase in each of the following factors would normally provide a subsequent increasein quantity demanded, except:a. price of substitute goodsb. level of competitor advertisingc. consumer income leveld. consumer desires for goods and servicese. a and b17. Producers goods are:a. consumers goodsb. raw materials combined to produce consumer goodsc. durable goods used by consumersd. always more expensive when used by corporations
  24. 24. e. none of the above18. The demand for durable goods tends to be more price elastic than the demand for non-durables.a. trueb. false19. A price elasticity (ED) of ?1.50 indicates that for a ____ increase in price, quantitydemanded will ____ by ____.a. one percent; increase; 1.50 unitsb. one unit; increase; 1.50 unitsc. one percent; decrease; 1.50 percentd. one unit; decrease; 1.50 percente. ten percent; increase; fifteen percent20. Those goods having a calculated income elasticity that is negative are called:a. producers goodsb. durable goodsc. inferior goodsd. nondurable goodse. none of the above21. An income elasticity (Ey) of 2.0 indicates that for a ____ increase in income, ____ willincrease by ____.
  25. 25. a. one percent; quantity supplied; two unitsb. one unit; quantity supplied; two unitsc. one percent; quantity demanded; two percentd. one unit; quantity demanded; two unitse. ten percent; quantity supplied; two percent22. When demand elasticity is ____ in absolute value (or ____), an increase in price will resultin a(n) ____ in total revenues.a. less than 1; elastic; increaseb. more than 1; inelastic; decreasec. less than 1; elastic; decreased. less than 1; inelastic; increasee. none of the above23. Empirical estimates of the price elasticity of demand [in Table 3.4] suggest that the demandfor household consumption of alcoholic beverages is:a. highly price elasticb. price inelasticc. unitarily elasticd. an inferior goode. none of the above
  26. 26. PROBLEM1. The manager of the Sell-Rite drug store accidentally mismarked a shipment of 20-poundbags of charcoal at $4.38 instead of the regular price of $5.18. At the end of a week, the storesinventory of 200 bags of charcoal was completely sold out. The store normally sells an averageof 150 bags per week.(a) What is the stores arc elasticity of demand for charcoal?(b) Give an economic interpretation of the numerical value obtained in part (a)2. The Future Flight Corporation manufactures a variety of Frisbees selling for $2.98 each.Sales have averaged 10,000 units per month during the last year. Recently Future Flights closestcompetitor, Soaring Free Company, cut its prices on similar Frisbees from $3.49 to $2.59. FutureFlight noticed that its sales declined to 8,000 units per month after the price cut.(a) What is the arc cross elasticity of demand between Future Flights and Soaring FreesFrisbees?(b) If Future Flight knows the arc price elasticity of demand for its Frisbees is ?2.2, what pricewould they have to charge in order to obtain the same level of sales as before Soaring Freesprice cut?3. The British Automobile Company is introducing a brand new model called the "LondonSpecial." Using the latest forecasting techniques, BAC economists have developed the followingdemand function for the "London Special": QD = 1,200,000 ? 40PWhat is the point price elasticity of demand at prices of (a) $8,000 and (b) $10,000?
  27. 27. 4. Hanna Corporation markets a compact microwave oven. In 2010 they sold 23,000 units at$375 each. Per capita disposable income in 2010 was $6,750. Hanna economists havedetermined that the arc price elasticity for this microwave oven is ?1.2.(a) In 2011 Hanna is planning to lower the price of the microwave oven to $325. Forecast salesvolume for 2011 assuming that all other things remain equal.(b) However, in checking with government economists, Hanna finds that per capita disposableincome is expected to rise to $7,000 in 2011. In the past the company has observed an arcincome elasticity of +2.5 for microwave ovens. Forecast 2011 sales given that the price isreduces to $325 and that per capita disposable income increases to $7,000. Assume that the priceand income effects are independent and additive.Chapter 4 Quiz:1. Using a sample of 100 consumers, a double-log regression model was used to estimatedemand for gasoline. Standard errors of the coefficients appear in the parentheses below thecoefficients.Ln Q = 2.45 -0.67 Ln P + . 45 Ln Y - .34 Ln Pcars (.20) (.10) (.25)Where Q is gallons demanded, P is price per gallon, Y is disposable income, and Pcars is a priceindex for cars. Based on this information, which is NOT correct?a. Gasoline is inelastic.b. Gasoline is a normal good.c. Cars and gasoline appear to be mild complements.
  28. 28. d. The coefficient on the price of cars (Pcars) is insignificant.e. All of the coefficients are insignificant.2. In a cross section regression of 48 states, the following linear demand for per-capita cans ofsoda was found: Cans = 159.17 – 102.56 Price + 1.00 Income + 3.94Temp Coefficients Standard Error t StatIntercept 159.17 94.16 1.69Price -102.56 33.25 -3.08Income 1.00 1.77 0.57Temperature 3.94 0.82 4.83 R-Sq = 54.1% R-Sq(adj) = 51.0%From the linear regression results in the cans case above, we know that:a. Price is insignificantb. Income is significantc. Temp is significantd. As price rises for soda, people tend to drink less of ite. All of the coefficients are significant3. A study of expenditures on food in cities resulting in the following equation: Log E = 0.693 Log Y + 0.224 Log N
  29. 29. where E is Food Expenditures; Y is total expenditures on goods and services; and N is the size ofthe family. This evidence implies:a. that as total expenditures on goods and services rises, food expenditures falls.b. that a one-percent increase in family size increases food expenditures .693%.c. that a one-percent increase in family size increases food expenditures .224%.d. that a one-percent increase in total expenditures increases food expenditures 1%.e. that as family size increases, food expenditures go down.4. All of the following are reasons why an association relationship may not imply a causalrelationship except:a. the association may be due to pure chanceb. the association may be the result of the influence of a third common factorc. both variables may be the cause and the effect at the same timed. the association may be hypotheticale. both c and d5. In regression analysis, the existence of a significant pattern in successive values of theerror term constitutes:a. heteroscedasticityb. autocorrelationc. multicollinearityd. nonlinearitiese. a simultaneous equation relationship
  30. 30. 6. In regression analysis, the existence of a high degree of intercorrelation among some or allof the explanatory variables in the regression equation constitutes:a. autocorrelationb. a simultaneous equation relationshipc. nonlinearitiesd. heteroscedasticitye. multicollinearity7. When using a multiplicative power function (Y = a X1b1 X2b2 X3b3) to represent aneconomic relationship, estimates of the parameters (a, and the bs) using linear regressionanalysis can be obtained by first applying a ____ transformation to convert the function to alinear relationship.a. semilogarithmicb. double-logarithmicc. reciprocald. polynomiale. cubic8. The correlation coefficient ranges in value between 0.0 and 1.0.a. trueb. false
  31. 31. 9. The coefficient of determination ranges in value between 0.0 and 1.0.a. trueb. false10. The coefficient of determination measures the proportion of the variation in theindependent variable that is "explained" by the regression line.a. trueb. false11. The presence of association between two variables does not necessarily imply causation forthe following reason(s):a. the association between two variables may result simply from pure chanceb. the association between two variables may be the result of the influence of a third commonfactorc. both variables may be the cause and the effect at the same timed. a and be. a, b, and c12. The estimated slope coefficient (b) of the regression equation (Ln Y = a + b Ln X)measures the ____ change in Y for a one ____ change in X.a. percentage, unitb. percentage, percent
  32. 32. c. unit, unitd. unit, percente. none of the above13. The standard deviation of the error terms in an estimated regression equation is known as:a. coefficient of determinationb. correlation coefficientc. Durbin-Watson statisticd. standard error of the estimatee. none of the above14. In testing whether each individual independent variables (Xs) in a multiple regressionequation is statistically significant in explaining the dependent variable (Y), one uses the:a. F-testb. Durbin-Watson testc. t-testd. z-teste. none of the above15. One commonly used test in checking for the presence of autocorrelation when workingwith time series data is the ____.
  33. 33. a. F-testb. Durbin-Watson testc. t-testd. z-teste. none of the above16. The method which can give some information in estimating demand of a product thathasn’t yet come to market is:a. the consumer surveyb. market experimentationc. a statistical demand analysisd. plotting the datae. the barometric method17. Demand functions in the multiplicative form are most common for all of the followingreasons except:a. elasticities are constant over a range of datab. ease of estimation of elasticitiesc. exponents of parameters are the elasticities of those variablesd. marginal impact of a unit change in an individual variable is constante. c and d
  34. 34. 18. The Identification Problem in the development of a demand function is a result of:a. the variance of the demand elasticityb. the consistency of quantity demanded at any given pointc. the negative slope of the demand functiond. the simultaneous relationship between the demand and supply functionse. none of the above19. Consider the following linear demand function where QD = quantity demanded, P = sellingprice, and Y = disposable income: QD = ?36 ?2.1P + .24YThe coefficient of P (i.e., ?2.1) indicates that (all other things being held constant):a. for a one percent increase in price, quantity demanded would decline by 2.1 percentb. for a one unit increase in price, quantity demanded would decline by 2.1 unitsc. for a one percent increase in price, quantity demanded would decline by 2.1 unitsd. for a one unit increase in price, quantity demanded would decline by 2.1 percente. none of the above20. Consider the following multiplicative demand function where QD = quantity demanded, P= selling price, and Y = disposable income:
  35. 35. The coefficient of Y (i.e., .2) indicates that (all other things being held constant):a. for a one percent increase in disposable income, quantity demanded would increase by .2percentb. for a one unit increase in disposable income, quantity demanded would increase by .2 unitsc. for a one percent increase in disposable income quantity demanded would increase by .2unitsd. for a one unit increase in disposable income, quantity demanded would increase by .2percente. none of the above21. One shortcoming of the use of ____ in demand analysis is that the participants aregenerally aware that their actions are being observed and hence they may seek to act in a mannersomewhat different than normal.a. market experimentsb. consumer clinicsc. statistical (econometric) methodsd. a and be. none of the above22. The constant or intercept term in a statistical demand study represents the quantitydemanded when all independent variables are equal to:
  36. 36. a. 1.0b. their minimum valuesc. their average valuesd. 0.0e. none of the above23. Novo Nordisk A/S, a Danish firm, sells insulin and other drugs worldwide. Activella, anestrogen and progestin hormone replacement therapy sold by Novo-Nordisk, is examined using33 quarters of dataY = -204 + . 34X1 - .17X2 (17.0) (-1.71)Where Y is quarterly sales of Activella, X1 is the Novo’s advertising of the hormone therapy,and X2 is advertising of a similar product by Eli Lilly and Company, Novo-Nordisk’s chiefcompetitor. The parentheses contain t-values. Addition information is: Durbin-Watson = 1.9 andR2 = .89.Using the data for Novo-Nordisk, which is correct?a. Both X1 and X2 are statistically significant.b. Neither X1 nor X2 are statistically significant.c. X1 is statistically significant but X2 is not statistically significant.d. X1 is not statistically significant but X2 is statistically significant.e. The Durbin-Watson statistic shows significant problems with autocorrelation24. In which of the following econometric problems do we find Durbin-Watson statistic beingfar away from 2.0?
  37. 37. a. the identification problemb. autocorrelationc. multicollinearityd. heteroscedasticitye. agency problems25. When there is multicollinearity in an estimated regression equation, a. the coefficients are likely to be small. b. the t statistics are likely to be small even though the R2 is large. c. the coefficient of determination is likely to be small. d. the problem of omitted variables is likely. e. the error terms will tend to have a cyclical pattern.26. When two or more "independent" variables are highly correlated, then we have:a. the identification problemb. multicollinearityc. autocorrelationd. heteroscedasticitye. complementary products27. Which is NOT true about the coefficient of determination?
  38. 38. a. As you add more variables, the R-square generally rises.b. As you add more variables, the adjusted R-square can fall. c. If the R-square is above 50%, the regression is considered significant.d. The R-square gives the percent of the variation in the dependent variable that is explained bythe independent variables.e. The higher is the R-square, the better is the fit.PROBLEMSPROBLEMS1. Phoenix Lumber Company uses the number of construction permits issued to help estimatedemand (sales). The firm collected the following data on annual sales and number ofconstruction permits issued in its market area: No. of Construction SalesYear Permits Issued (000) (1,000,000)2003 6.50 10.302004 6.20 10.102005 6.60 10.502006 7.30 10.802007 7.80 11.20
  39. 39. 2008 8.20 11.402009 8.30 11.30(a) Which variable is the dependent variable and which is the independent variable?(b) Determine the estimated regression line.(c) Test the hypothesis (at the .05 significance level) that there is no relationship between thevariables.(d) Calculate the coefficient of determination. Give an economic interpretation to the valueobtained.(e) Perform an analysis of variance on the regression including an F-test (at the .05 significancelevel) of the overall significance of the results.(f) Suppose that 8,000 construction permits are expected to be issued in 2010. What would bethe point estimate of Phoenix Lumber Companys sales for 2010?2. Lennys, a national restaurant chain, conducted a study of the factors affecting demand(sales). The following variables were defined and measured for a random sample of 30 of itsrestaurants:Y = Annual restaurant sales ($000)X1 = Disposable personal income (per capita) of residents within 5 mile radiusX2 = License to sell beer/wine (0 = No, 1 = Yes)X3 = Location (within one-half mile of interstate highway--0 = No, 1 = Yes)X4 = Population (within 5 mile radius)X5 = Number of competing restaurants within 2 mile radius
  40. 40. The data were entered into a computerized regression program and the following results wereobtained:MULTIPLE R .889R-SQUARE .79STD. ERROR OF EST. .40ANALYSIS OF VARIANCE DF Sum Squares Mean Sqr. F-StatRegression 5 326.13 65.226 18.17Error 24 86.17 3.590Total 29 412.30Variable Coefficient Std. Error T-ValueConstant .363 .196 1.852X-1 .00275 .00104 2.644X-2 76.65 93.70 .818X-3 164.3 235.4 .698X-4 .00331 .00126 2.627X-5 46.2 12.1 ?3.818
  41. 41. Questions:(a) Give the regression equation for predicting restaurant sales.(b) Give an interpretation of each of the estimated regression coefficients.(c) Which of the independent variables (if any) are statistically significant at the .05 level in"explaining" restaurant sales?(d) What proportion of the variation in restaurant sales is "explained" by the regressionequation?(e) Perform an F-test (at the .05 significance level) of the overall explanatory power of theregression model.3. The following demand function has been estimated for Fantasy pinball machines: QD = 3,500 ? 40P + 17.5Px + 670U + .0090A + 6,500Nwhere P = monthly rental price of Fantasy pinball machines Px = monthly rental price of Old Chicago pinball machines (their largest competitor) U = current unemployment rate in the 10 largest metropolitan areas A = advertising expenditures for Fantasy pinball machines N = fraction of the U.S. population between ages 10 and 30(a) What is the point price elasticity of demand for Fantasy pinball machines when P = $150,Px = $100, U = .12, A = $200,000 and N = .35?(b) What is the point cross elasticity of demand with respect to Old Chicago pinball machinesfor the values of the independent variables given in part (a)?
  42. 42. 4. Given the following demand function: Q = 2.0 P?1.33 Y2.0 A.50where Q = quantity demanded (thousands of units) P = price ($/unit) Y = disposable income per capita ($ thousands) A = advertising expenditures ($ thousands)determine the following when P = $2/unit, Y = $8 (i.e., $8000), and A = $25 (i.e., $25,000)(a) Price elasticity of demand(b) The approximate percentage increase in demand if disposable income percentage increasesby 3%.(c) The approximate percentage increase in demand if advertising expenditures are increasedby 5 percent.Chapter 5 Quiz:1. Time-series forecasting models:a. are useful whenever changes occur rapidly and wildly
  43. 43. b. are more effective in making long-run forecasts than short-run forecastsc. are based solely on historical observations of the values of the variable being forecastedd. attempt to explain the underlying causal relationships which produce the observed outcomee. none of the above2. The forecasting technique which attempts to forecast short-run changes and makes use ofeconomic indicators known as leading, coincident or lagging indicators is known as:a. econometric techniqueb. time-series forecastingc. opinion pollingd. barometric techniquee. judgment forecasting3. The use of quarterly data to develop the forecasting model Yt = a +bYt?1 is an example ofwhich forecasting technique?a. Barometric forecastingb. Time-series forecastingc. Survey and opiniond. Econometric methods based on an understanding of the underlying economic variablesinvolvede. Input-output analysis
  44. 44. 4. Variations in a time-series forecast can be caused by:a. cyclical variationsb. secular trendsc. seasonal effectsd. a and b onlye. a, b, and c5. The variation in an economic time-series which is caused by major expansions orcontractions usuallyof greater than a year in duration is known as:a. secular trendb. cyclical variationc. seasonal effectd. unpredictable random factore. none of the above6. The type of economic indicator that can best be used for business forecasting is the:a. leading indicatorb. coincident indicatorc. lagging indicatord. current business inventory indicatore. optimism/pessimism indicator
  45. 45. 7. Consumer expenditure plans is an example of a forecasting method. Which of the generalcategories best described this example?a. time-series forecasting techniquesb. barometric techniquesc. survey techniques and opinion pollingd. econometric techniquese. input-output analysis8. In the first-order exponential smoothing model, the new forecast is equal to a weightedaverage of the old forecast and the actual value in the most recent period.a. trueb. false9. Simplified trend models are generally appropriate for predicting the turning points in aneconomic time series.a. trueb. false
  46. 46. 10. Smoothing techniques are a form of ____ techniques which assume that there is anunderlying pattern to be found in the historical values of a variable that is being forecast.a. opinion pollingb. barometric forecastingc. econometric forecastingd. time-series forecastinge. none of the above11. Seasonal variations can be incorporated into a time-series model in a number of differentways, including:a. ratio-to-trend methodb. use of dummy variablesc. root mean squared error methodd. a and b onlye. a, b, and c12. For studying demand relationships for a proposed new product that no one has ever usedbefore, what would be the best method to use?a. ordinary least squares regression on historical datab. market experiments, where the price is set differently in two markets
  47. 47. c. consumer surveys, where potential customers hear about the product and are asked theiropinionsd. double log functional form regression modele. all of the above are equally useful in this case13. Which of the following barometric indicators would be the most helpful for forecastingfuture sales for an industry? a. lagging economic indicators. b. leading economic indicators. c. coincident economic indicators. d. wishful thinking e. none of the above14. An example of a time series data set is one for which the: a. data would be collected for a given firm for several consecutive periods (e.g., months). b. data would be collected for several different firms at a single point in time. c. regression analysis comes from data randomly taken from different points in time. d. data is created from a random number generation program. d. use of regression analysis would impossible in time series.15. Examine the plot of data.
  48. 48. Sales ? ? ? ? ? ? ? ? ? ? TimeIt is likely that the best forecasting method for this plot would be:a. a two-period moving averageb. a secular trend upwardc. a seasonal pattern that can be modeled using dummy variables or seasonal adjustmentsd. a semi-log regression modele. a cubic functional form16. Emma uses a linear model to forecast quarterly same-store sales at the local Garden Center.The results of her multiple regression is:Sales = 2,800 + 200•T - 350•D where T goes from 1 to 16 for each quarter of the year from the first quarter of 2006 (‘06I)through the fourth quarter of 2009 (‘09 IV). D is a dummy variable which is 1 if sales are in thecold and dreary first quarter, and zero otherwise, because the months of January, February, andMarch generate few sales at the Garden Center. Use this model to estimate sales in a store forthe first quarter of 2010 in the 17th month; that is: {2010 I}. Emma’s forecast should be:a. 5,950
  49. 49. b. 6,200c. 6,350d. 6,000e. 5,85017. Select the correct statement. a. Qualitative forecasts give the direction of change. b. Quantitative forecasts give the exact amount or exact percentage change. c. Diffusion forecasts use the proportion of the forecasts that are positive to forecast up ordown. d. Surveys are a form of qualitative forecasting. e. all of the above are correct.18. If two alternative economic models are offered, other things equal, we would a. tend to pick the one with the lowest R2. b. select the model that is the most expensive to estimate. c. pick the model that was the most complex. d. select the model that gave the most accurate forecasts e. all of the above
  50. 50. 19. Mr. Geppetto uses exponential smoothing to predict revenue in his wood carving business.He uses a weight of ? = .4 for the naïve forecast and (1-?) = .6 for the past forecast. Whatrevenue did he predict for March using the data below? Select closet answer. MONTH REVENUE FORECAST Nov 100 100 Dec 90 100 Jan 115 ----Feb 110 ---- MARCH ? ?a. 106.2b. 104.7c. 103.2d. 102.1e. 101.720. Suppose a plot of sales data over time appears to follow an S-shape as illustrated below. Sales • • • • • •
  51. 51. TimeWhich of the following is likely that the best forecasting functional form to use for sales dataabove?a. A linear trend, Sales = a + b Tb. A quadratic shape in T, using T-squared as another variable, Sales = a + b T + cT2.c. A semi-log form as sales appear to be growing at a constant percentage rate, Ln Sales = a +bTd. A cubic shape in T, using T-squared and T-cubed as variables, Sales = a + b T + cT2 + d T3.e. A quadratic shape in T and T-squared as variables, Sales = a + b T + cT2PROBLEM 1. The Accuweather Corporation manufactures barometers and thermometers for weatherforecasters. In an attempt to forecast its future needs for mercury, Accuweathers chief economistestimated average monthly mercury needs as: N = 500 + 10Xwhere N = monthly mercury needs (units) and X = time period in months (January 2008= 0). Thefollowing monthly seasonal adjustment factors have been estimated using data from the past fiveyears:Month Adjustment FactorJanuary 15%
  52. 52. April 10%July ?20%September 5%December ?10%(a) Forecast Accuweathers mercury needs for January, April, July, September, and Decemberof 2010.(b) The following actual and forecast values of mercury needs in the month of November havebeen recorded: Year Actual Forecast 2008 456 480 2009 324 360 2007 240 240What seasonal adjustment factor should the firm use for November? 2. Milner Brewing Company experienced the following monthly sales (in thousands ofbarrels) during 2010:Jan. Feb. Mar. Apr. May June100 92 112 108 116 116
  53. 53. (a) Develop 2-month moving average forecasts for March through July.(b) Develop 4-month moving average forecasts for May through July.(c) Develop forecasts for February through July using the exponential smoothing method (withw = .5). Begin by assuming .Chapter 6 Quiz:MULTIPLE CHOICE1. Using demand and supply curves for the Japanese yen based on the $/¥ price for yen, anincrease in US INFLATION RATES woulda. Decrease the demand for yen and decrease the supply of the yen.b. Increase the demand for yen and decrease the supply of the yen.c. Increase the demand and increase the supply of yen.d. Decrease both the supply and the demand of yen.e. Have no impact on the demand or supply of the yen.2. If the British pound (£) appreciates by 10% against the dollar:a. both the US importers from Britain and US exporters to Britain will be helped by theappreciating pound.b. the US exporters will find it harder to sell to foreign customers in Britain.
  54. 54. c. the US importer of British goods will tend to find that their cost of goods rises, hurting itsbottom line.d. both US importers of British goods and exporters to Britain will be unaffected by changesin foreign exchange rates.e. all of the above.3. Purchasing power parity or PPP says the ratios composed of:a. interest rates explain the direction of exchange rates.b. growth rates explain the direction of exchange rates.c. inflation rates explain the direction of exchange rates.d. services explain the direction exchange rates.e. public opinion polls explain the direction of exchange rates.4. If Ben Bernanke, Chair of the Federal Reserve Board, begins to tighten monetary policy byraising US interest rates next year, what is the likely impact on the value of the dollar? a. The value of the dollar falls when US interest rates rise. b. The value of the dollar rises when US interest rates rise. c. The value of the dollar is not related to US interest rates. d. This is known as Purchasing Power Parity or PPP. e. The Federal Reserve has no impact at all on interest rates.
  55. 55. 5. If the domestic prices for traded goods rises 5% in Japan and rises 7% the US over the sameperiod, what would happened to the Yen/US dollar exchange rate? HINT: S1/S0 = (1+?h) / (1+?f) where S0 is the direct quote of the yen at time 0, the current period.a. The direct quote of the yen ($/¥) rises, and the value of the dollar falls.b. The direct quote of the yen ($/¥) falls, and the value of the dollar rises.c. The direct quote of the yen would remain the same.d. Purchasing power parity does not apply to inflation rates.e. Both a and d.6. US and Canada can both grow wheat and can do mining. Use the following table to look forwhich country has a comparative advantage in mining. (HINT: Find the cost of mining in termsof wheat in each country.) Absolute Cost in US Absolute Cost in CanadaWheat $5 C$8Mining $10 C$12a. Canada has a comparative advantage in mining.b. The US has a comparative advantage in mining.c. No comparative advantage in mining exists for either nation.d. We must first know the exchange rate to be able to answer this question.e. Both a and b.
  56. 56. 7. The optimal currency area involves a trade-off of reducing transaction costs but the inabilityto use changes in exchange rates to help ailing regions. If the US, Canada, and Mexico had onesingle currency (the Peso-Dollar) we would tend to see all of the following EXCEPT:a. Even more intraregional trade of goods across the three countries.b. Lower transaction costs of trading within North America.c. A greater difficulty in helping Mexico as you can no longer deflate the Mexican peso.d. Less migration of workers across the three countries.e. An elimination of correlated macroeconomic shocks across the countries.8. If the value of the U.S. dollar rises from 1.0 per dollar to 1.3 per dollar,a. imports of automobiles from Germany will declineb. American inflation will increasec. German exports of all traded goods will declined. American exports to Germany will decreasee. sales by American manufacturers for the export markets will increase.9. An appreciation of the U.S. dollar has what impact on Harley-Davidson (HD), a U.S.manufacturer of motorcycles?a. domestic sales of HD motorcycles increase and foreign sales of HD motorcycles increaseb. domestic sales of HD motorcycles decrease and foreign sales of HD motorcycles increasec. domestic sales of HD motorcycles increase and foreign sales of HD motorcycles decreased. domestic sales of HD motorcycles decrease and foreign sales of HD motorcycles decreasee. only manufacturers who produce traded goods are affected
  57. 57. 10. In the last twenty-five years, the Yen and German mark and now the Euro havea. fluctuated widely against the dollarb. appreciated against the dollar and then depreciated against the dollarc. exchanged without restrictionsd. all of the abovee. none of the above11. In an open economy with few capital restrictions and substantial import-export trade, arise in interest rates and a decline in the producer price index of inflation willa. raise the value of the currencyb. lower the nominal interest ratec. increase the volume of trading in the foreign exchange marketd. lower the trade-weighted exchange ratee. increase consumer inflation.12. When a manufacturers home currency appreciates substantially,a. domestic sales declineb. foreign sales declinec. company-owned foreign plant and equipment will increased. margins often decline
  58. 58. e. all of the above13. An increase in the exchange rate of the U.S. dollar relative to a trading partner can resultfroma. higher anticipated costs of production in the U.S.b. higher interest rates and higher inflation in the U.S.c. higher growth rates in the trading partners economyd. a change in the terms of tradee. lower export industry productivity14. The purchasing power parity hypothesis implies that an increase in inflation in one countryrelative to another will over a long period of timea. increase exportsb. reduce the competitive pressure on pricesc. lower the value of the currency in the country with the higher inflation rated. increase foreign aide. increase the speculative demand for the currency15. Trading partners should specialize in producing goods in accordance with comparativeadvantage, then trade and diversify in consumption becausea. out-of-pocket costs of production declineb. free trade areas protect infant industries
  59. 59. c. economies of scale are presentd. manufacturers face diminishing returnse. more goods are available for consumption16. European Union labor costs exceed U.S. and British labor costs primarily becausea. worker productivity is lower in the EUb. union wages are higher in the EUc. layoffs and plant closings are more restrictive in the U.S. and Britaind. the amount of paid time off is higher in the EUe. labor-management relations are better in the EU17. Companies that reduce their margins on export products in the face of appreciation of theirhome currency may be motivated by a desire toa. sacrifice market share abroad but build market share at homeb. increase production volume to realize learning curve advantagesc. sell foreign plants and equipment to lower their debtd. reduce the costs of transportatione. all of the above18. In a recession, the trade balance often improves becausea. service exports exceed manufactured good exports
  60. 60. b. banks sell depressed assetsc. fewer households can afford luxury importsd. direct investment abroad declinese. the capital account exceeds the current accountPROBLEM 1. Suppose nominal interest rates in the U.S. rise from 4.6% to 5% and decline in Britainfrom 6% to 5.5%, while U.S. consumer inflation remains unchanged at 1.9% and Britishinflation declines from 4% to 3%. In addition suppose, real growth in the U.S. is forecasted fornext year at 4% and in Britain real growth is forecasted at 5%. Finally, suppose producer priceinflation in the U.S. is declining from 2% to 1% while in Britain producer price inflation is risingfrom 2% to 3.2%. Explain what effect each of these factors would have on the long-term trendexchange rate ( per $) and why?Chapter 7 Quiz:1. What’s true about both the short-run and long-run in terms of production and cost analysis?a. In the short-run, one or more of the resources are fixedb. In the long-run, all the factors are variablec. The time horizon determines whether or not an input variable is fixed or notd. The law of diminishing returns is based in part on some factors of production being fixed, asthey are in the short run.
  61. 61. e. All of the above2. The marginal product is defined as:a. The ratio of total output to the amount of the variable input used in producing the outputb. The incremental change in total output that can be produced by the use of one more unit ofthe variable input in the production processc. The percentage change in output resulting from a given percentage change in the amountd. The amount of fixed cost involved.e. None of the above3. Fill in the missing data to solve this problem.Variable Total Average MarginalInput Product Product Product4 ? 70 ----5 ? ? 406 350 ? ?What is the total product for 5 units of input, and what is the marginal product for 6 units ofinput?a. 320 and 30b. 350 and 20c. 360 and 15
  62. 62. d. 400 and 10e. 430 and 84. The following is a Cobb-Douglas production function: Q = 1.75K0.5·L0.5. What is correcthere?a. A one-percent change in L will cause Q to change by one percentb. A one-percent change in K will cause Q to change by two percentc. This production function displays increasing returns to scaled. This production function displays constant returns to scalee. This production function displays decreasing returns to scale5. Suppose you have a Cobb-Douglas function with a capital elasticity of output (a) of 0.28 anda labor elasticity of output (ß) of 0.84. What statement is correct?a. There are increasing returns to scaleb. If the amount of labor input (L) is increased by 1%, the output will increase by 0.84%c. If the amount of capital input (K) is decreased by 1%, the output will decrease by 0.28%d. The sum of the exponents in the Cobb-Douglas function is 1.12.e. All of the above6. The Cobb-Douglas production function is: Q = 1.4*L0.6*K0.5. What would be thepercentage change in output (%?Q) if labor grows by 3.0% and capital is cut by 5.0%?[HINT: %?Q = (EL * %?L) + (EK * %?K)]
  63. 63. a. %?Q = + 3.0%b. %?Q = + 5.0%c. %?Q = - 0.70%d. %?Q = - 2.50%e. %?Q = - 5.0%7. If the marginal product of labor is 100 and the price of labor is 10, while the marginalproduct of capital is 200 and the price of capital is $30, then what should the firm?a. The firm should use relatively more capitalb. The firm should use relatively more laborc. The firm should not make any changes – they are currently efficientd. Using the Equimarginal Criterion, we can’t determine the firm’s efficiency levele. Both c and d8. The marginal rate of technical substitution may be defined as all of the following except:a. the rate at which one input may be substituted for another input in the production process,while total output remains constantb. equal to the negative slope of the isoquant at any point on the isoquantc. the rate at which all combinations of inputs have equal total costsd. equal to the ratio of the marginal products of X and Ye. b and c
  64. 64. 9. The law of diminishing marginal returns:a. states that each and every increase in the amount of the variable factor employed in theproduction process will yield diminishing marginal returnsb. is a mathematical theorem that can be logically proved or disprovedc. is the rate at which one input may be substituted for another input in the production processd. none of the above10. The combinations of inputs costing a constant C dollars is called:a. an isocost lineb. an isoquant curvec. the MRTSd. an isorevenue linee. none of the above11. In a relationship among total, average and marginal products, where TP is maximized:a. AP is maximizedb. AP is equal to zeroc. MP is maximizedd. MP is equal to zeroe. none of the above
  65. 65. 12. Holding the total output constant, the rate at which one input X may be substituted foranother input Y in a production process is:a. the slope of the isoquant curveb. the marginal rate of technical substitution (MRTS)c. equal to MPx/MPyd. all of the abovee. none of the above13. Which of the following is never negative?a. marginal productb. average productc. production elasticityd. marginal rate of technical substitutione. slope of the isocost lines14. Concerning the maximization of output subject to a cost constraint, which of the followingstatements (if any) are true?a. At the optimal input combination, the slope of the isoquant must equal the slope of theisocost line.b. The optimal solution occurs at the boundary of the feasible region of input combinations.c. The optimal solution occurs at the point where the isoquant is tangent to the isocost lines.
  66. 66. d. all of the abovee. none of the above15. In a production process, an excessive amount of the variable input relative to the fixedinput is being used to produce the desired output. This statement is true for:a. stage IIb. stages I and IIc. when Ep = 1d. stage IIIe. none of the above16. Marginal revenue product is:a. defined as the amount that an additional unit of the variable input adds to the total revenueb. equal to the marginal factor cost of the variable factor times the marginal revenue resultingfrom the increase in output obtainedc. equal to the marginal product of the variable factor times the marginal product resultingfrom the increase in output obtainedd. a and be. a and c17. The isoquants for inputs that are perfect substitutes for one another consist of a series of:a. right anglesb. parallel lines
  67. 67. c. concentric circlesd. right trianglese. none of the above18. In production and cost analysis, the short run is the period of time in which one (or more)of the resources employed in the production process is fixed or incapable of being varied.a. trueb. false19. Marginal revenue product is defined as the amount that an additional unit of the variableinput adds to ____.a. marginal revenueb. total outputc. total revenued. marginal producte. none of the above20. Marginal factor cost is defined as the amount that an additional unit of the variable inputadds to ____.a. marginal costb. variable costc. marginal rate of technical substitution
  68. 68. d. total coste. none of the above21. The isoquants for inputs that are perfect complements for one another consist of a series of:a. right anglesb. parallel linesc. concentric circlesd. right trianglese. none of the above22. Given a Cobb-Douglas production function estimate of Q = 1.19L.72K.18 for a givenindustry, this industry would have:a. increasing returns to scaleb. constant returns to scalec. decreasing returns to scaled. negative returns to scalee. none of the above23. The primary purpose of the Cobb-Douglas power function is to:a. allow one to make estimates of cost-output relationships
  69. 69. b. allow one to make predictions about a resulting increase in output for a given increase in theinputsc. aid one in gaining accurate empirical values for economic variablesd. calculate a short-run linear total cost functione. a and b24. The original Cobb-Douglas function was given as . It was subsequently rewritten as . Whatbenefit was derived in the revision?a. the function becomes a non-linear relationship so it would fit to production curves having an"S" shapeb. returns to scale can be shown in the revisionc. returns to scale become constantd. a and b onlye. a, b, and c25. The Cobb-Douglas production function has which of the following properties?a. output is a linear increasing function of each of the inputsb. it provides a good fit to the traditional S-shaped production functionc. the elasticity of production is constant and equal to 1 minus the exponent of the appropriatevariabled. all of the abovee. none of the above
  70. 70. 26. In the Cobb-Douglas production function ( ):a. the marginal product of labor (L) is equal to ?1b. the average product of labor (L) is equal to ?2c. if the amount of labor input (L) is increased by 1 percent, the output will increase by ?1percentd. a and be. a and cPROBLEMS1. Emco Company has an assembly line of fixed size A. Total output is a function of thenumber of workers (crew size) as shown in the following schedule:Crew Size Total Output(No. of Workers) (No. of Units)0 01 102 353 504 565 59
  71. 71. 6 607 608 58Determine the following schedules:(a) marginal productivity of labor(b) average productivity of labor(c) elasticity of production with respect to labor2. A certain production process employs two inputs--labor (L) and raw materials (R). Output(Q) is a function of these two inputs and is given by the following relationship: Q = 6L2 R2???.10L3 R3Assume that raw materials (input R) are fixed at 10 units.(a) Determine the total product function (TPL) for input L.(b) Determine the marginal product function for input L.(c) Determine the average product function for input L.(d) Find the number of units of input L that maximizes the total product function.(e) Find the number of units of input L that maximizes the marginal product function.(f) Find the number of units of input L that maximizes the average product function.
  72. 72. (g) Determine the boundaries for the three stages of production.3. An industry can be characterized by the following production function: Q = 2.5L.60 C.40(a) What is the algebraic expression for the marginal productivity of labor?(b) What is the algebraic expression for the average productivity of labor?(c) How would you characterize the returns-to-scale in the industry?Chapter 8 Quiz:1. Economies of Scope refers to situations where per unit costs are:a. Unaffected when two or more products are producedb. Reduced when two or more products are producedc. Increased when two or more products are producedd. Demonstrating constant returns to scalee. Demonstrating decreasing returns to scale2. Economies of scale exist whenever long-run average costs:
  73. 73. a. Increase as output is increasedb. Remain constant as output is increasedc. Decrease as output is increasedd. Decline and then rise as output is increasede. None of the above3. Which of the following is true with regards to a long-run cost function?a. The shape of the firm’s long-run cost function is important in decisions to expand the scaleof operationsb. The long-run average cost curve is U-shapedc. The long-run average cost curve is flatter than the short-run average cost curve.d. The curve consists of the lower boundary of all the short-run cost curvese. All of the above4. If TC = 321 + 55Q - 5Q2, then average total cost at Q = 10 is:a. 10.2b. 102c. 37.1d. 371e. 3215. Suppose that total cost is cubic: TC = 200 + 5Q – 0.4Q2 + 0.001Q3a. Fixed cost (FC) is $200b. Variable cost (VC) is 5Q – 0.4Q2 + 0.001Q3
  74. 74. c. Average variable cost (AVC) is 5 – 0.4Q + 0.001Q2d. Marginal cost (MC) is 5 – 0.8Q +.003Q2e. All of the above are correct6. What method of inventory valuation should be used for economic decision-makingproblems?a. book valueb. original costc. current replacement costd. cost or market, whichever is lowere. historical cost7. According to the theory of cost, specialization in the use of variable resources in the short-run results initially in:a. decreasing returns and declining average and marginal costsb. increasing returns and declining average and marginal costsc. increasing returns and increasing average and marginal costsd. decreasing returns and increasing average and marginal costse. none of the above8. For a short-run cost function which of the following statements is (are) not true?a. The average fixed cost function is monotonically decreasing.
  75. 75. b. The marginal cost function intersects the average fixed cost function where the averagevariable cost function is a minimum.c. The marginal cost function intersects the average variable cost function where the averagevariable cost function is a minimum.d. The marginal cost function intersects the average total cost function where the average totalcost function is a minimum.e. b and c9. The cost function is:a. a means for expressing output as a function of costb. a schedule or mathematical relationship showing the total cost of producing variousquantities of outputc. similar to a profit and loss statementd. incapable in being developed from statistical regression analysise. none of the above10. Which of the following statements about cost functions is true?a. Variable costs will always increase in direct proportion to the quantity of output produced.b. The less capital equipment employed in the production process relative to labor and otherinputs, the longer will be the period of time required to increase significantly the scale ofoperation.c. The shape of the firms long-run cost function is important in decisions to expand the scaleof operations.d. none of the above
  76. 76. 11. Which of the following statements concerning the long-run average cost curve of economictheory is true?a. It is L-shapedb. It is ?-shapedc. It is ?-shapedd. It is ?-shapede. It is M-shaped12. Possible sources of economies of scale (size) within a production plant include:a. specialization in the use of capital and laborb. imperfections in the labor marketc. transportation costsd. a and be. a and c13. The existence of diseconomies of scale (size) for the firm is hypothesized to result from:a. transportation costsb. imperfections in the labor marketc. imperfections in the capital marketsd. problems of coordination and control encountered by managemente. All of the above
  77. 77. 14. The relevant cost in economic decision-making is the opportunity cost of the resourcesrather than the outlay of funds required to obtain the resources.a. trueb. false15. ____ are defined as costs which are incurred regardless of the alternative action chosen in adecision-making problem.a. Opportunity costsb. Marginal costsc. Relevant costsd. Sunk costse. None of the above16. ____ include the opportunity costs of time and capital that the entrepreneur has invested inthe firm.a. Implicit costsb. Explicit costsc. a and bd. None of the above
  78. 78. 17. A cottage industry exists in the home-manufacture of ‘country crafts’. Especially treasuredare handmade quilts. If the fourth completed quilt took 30 hours to make, and the eighth quilttook 28 hours. What is the percentage learning? Hint: Percentage learning = 100% -(c2/c1)•100%.a. 5%b. 6.7%c. 10%d. 100%e. 122%PROBLEMS 1. During the last few days the Superior Company has been running into problems with itscomputer system. The last run of the production cost schedule resulted in the incomplete listingshown below. From your knowledge of cost theory, fill in the blanks.Q TC TFC TVC ATC AFC AVC MC 0 40 _____ _____ x x x x 1 _____ _____ _____ 52 _____ _____ _____ 2 _____ _____ 20 _____ _____ _____ _____ 3 _____ _____ _____ 21.33 _____ _____ _____ 4 _____ _____ _____ _____ _____ _____ 4 5 _____ _____ 40 _____ _____ _____ _____ 6 _____ _____ _____ 15.67 _____ _____ _____ 7 _____ _____ _____ _____ _____ 10 _____
  79. 79. 8 _____ _____ 96 _____ _____ _____ _____ 9 _____ _____ _____ _____ _____ 15 _____10 _____ _____ _____ _____ _____ _____ 452. The Jones Company has the following cost schedule:Output Total Cost(Units) ($) 0 3000 50 3750100 4275150 4675200 5000250 5300300 5700350 6250400 7050450 8225Prepare (a) average total cost and (b) marginal cost schedules for the firm.3. A firm has determined that its variable costs are given by the following relationship:
  80. 80. VC = .05Q3???5Q2 + 500Qwhere Q is the quantity of output produced.(a) Determine the output level where average variable costs are minimized.(b) Determine the output level where marginal costs are minimized.Chapter 9 Quiz:1. Evidence from empirical studies of short-run cost-output relationships lends support to the:a. existence of a non-linear cubic total cost functionb. hypothesis that marginal costs first decrease, then gradually increase over the normaloperating range of the firmc. hypothesis that total costs increase quadratically over the ranges of output examinedd. hypothesis that total costs increase linearly over the range of output examinede. none of the above2. The short-run cost function is:
  81. 81. a. where all inputs to the production process are variableb. relevant to decisions in which one or more inputs to the production process are fixedc. not relevant to optimal pricing and production output decisionsd. crucial in making optimal investment decisions in new production facilitiese. none of the above3. Theoretically, in a long-run cost function:a. all inputs are fixedb. all inputs are considered variablec. some inputs are always fixedd. capital and labor are always combined in fixed proportionse. b and d4. Break-even analysis usually assumes all of the following except:a. in the short run, there is no distinction between variable and fixed costs.b. revenue and cost curves are straight-lines throughout the analysis.c. there appears to be perfect competition since the price is considered to remain the same re-gardless of quantity.d. the straight-line cost curve implies that marginal cost is constant.e. both c and d
  82. 82. 5. What is another term meaning the degree of operating leverage?a. The measure of the importance of fixed cost.b. The operating profit elasticity.c. The measure of business risk.d. D.O.L.e. All of the above.6. In a study of banking by asset size over time, we can find which asset sizes are tending tobecome more prominent. The size that is becoming more predominant is presumed to be leastcost. This is called:a. regression to the mean analysis.b. breakeven analysis.c. survivorship analysis.d. engineering cost analysis.e. a Willie Sutton analysis.7. George Webb Restaurant collects on the average $5 per customer at its breakfast & lunchdiner. Its variable cost per customer averages $3, and its annual fixed cost is $40,000. If GeorgeWebb wants to make a profit of $20,000 per year at the diner, it will have to serve__________customers per year.a. 10,000 customersb. 20,000 customersc. 30,000 customersd. 40,000 customers
  83. 83. e. 50,000 customers8. In determining the shape of the cost-output relationship only ____ depreciation is relevant.a. directb. indirectc. usaged. timee. scheduled9. Which of the following is not a limitation of the survivor technique for measuring theoptimum size of firms within an industry?a. since the technique does not employ actual cost data in the analysis, there is no way to assessthe magnitude of the cost differentials between firms of varying size and efficiency.b. the managerial and entrepreneurial aspects of the production process are not included in theanalysisc. because of legal factors, the long-run cost curve derived by this technique may be distortedand may not measure the cost curve postulated in economic theoryd. a and be. b and c10. The primary disadvantage of engineering methods for measuring cost functions is that theydeal with the managerial and entrepreneurial aspects of the production process or plant.
  84. 84. a. trueb. false11. A linear total cost function implies that:a. marginal costs are constant as output increasesb. average total costs are continually decreasing as output increasesc. a and bd. none of the above12. A ____ total cost function implies that marginal costs ____ as output is increased.a. linear; increase linearlyb. quadratic; increase linearlyc. cubic; increase linearlyd. a and be. none of the above13. A ____ total cost function implies that marginal costs ____ as output is increased.a. linear; increase linearlyb. quadratic; are constantc. cubic; increase linearly
  85. 85. d. linear; are constante. none of the above14. A ____ total cost function yields a U-shaped average total cost function.a. cubicb. quadraticc. lineard. a and b onlye. a, b, and c15. In the linear breakeven model, the difference between selling price per unit and variablecost per unit is referred to as:a. variable margin per unitb. variable cost ratioc. contribution margin per unitd. target margin per unite. none of the above16. Which of the following is not an assumption of the linear breakeven model:a. constant selling price per unitb. decreasing variable cost per unit
  86. 86. c. fixed costs are independent of the output leveld. a single product (or a constant mix of products) is being produced and solde. all costs can be classified as fixed or variable17. In the linear breakeven model, the breakeven sales volume (in dollars) is equal to fixedcosts divided by:a. unit selling price less unit variable costb. contribution margin per unitc. one minus the variable cost ratiod. a and b onlye. a, b, and c18. The degree of operating leverage is equal to the ____ change in ____ divided by the ____change in ____.a. percentage; sales; percentage; EBITb. unit; sales; unit; EBITc. percentage; EBIT; percentage; salesd. unit; EBIT; unit; salese. none of the above19. The linear breakeven model excludes ____ from the analysis.
  87. 87. a. financing costsb. taxesc. contribution margind. a and b onlye. a, b, and c20. In the linear breakeven model, the relevant range of output is that range where the linearityassumptions of the model are assumed to hold.a. trueb. false21. In the linear breakeven model, the breakeven sales volume (in dollars) can be found bymultiplying the breakeven sales volume (in units) by:a. one minus the variable cost ratiob. contribution margin per unitc. selling price per unitd. standard deviation of unit salese. none of the above22. In the linear breakeven model, a firm incurs operating losses whenever output is less thanthe breakeven level.a. true
  88. 88. b. falsePROBLEMS1. For each of the following cost-output relationships, describe the shape (U-shape, decreasing,increasing, constant) of the average total cost and marginal cost functions (C = total cost, Q =output):(a) C = 42,500,000 + 2550Q(b) C = 8.48 + 0.65Q + .00220Q22. Offshore Petroleums fixed costs are $2,500,000 and its debt repayment requirements are$1,000,000. Selling price per barrel of oil is $18 and variable costs per barrel are $10.(a) Determine the breakeven output (in dollars).(b) Determine the number of barrels of oil that offshore must produce and sell in order to earna target (operating) profit of $1,500,000.(c) Determine the degree of operating leverage at an output of 400,000 barrels.(d) Assuming that sales of oil are normally distributed with a mean of 362,500 barrels and astandard deviation of 100,000 barrels, determine the probability that Offshore will incur anoperating loss.
  89. 89. Chapter 10 Quiz:1. The main difference between perfect competition and monopolistic competition is:a. The number of sellers in the marketb. The ease of entry and exit in the industryc. The degree of information about market priced. The degree of product differentiatione. Whether it is the short run or the long run2. Long distance telephone service has become a competitive market. The average cost per callis $0.05 a minute, and it’s declining. The likely reason for the declining price for long distanceservice is:a. Governmental pressure to lower the priceb. Reduced demand for long distance servicec. Entry into this industry pushes prices downd. Lower price for a barrel of crude oile. Increased cost of providing long distance service3. What is the profit maximization point for a firm in a purely competitive environment?a. The output where P = MCb. The output where P < MC
  90. 90. c. The output where P > MCd. The output where MR = MCe. The output where AVC < P4. All of the following are true for both competition and monopolistic competition in the longrun, except one of them. Which is it?a. P = MCb. P = ACc. Economic profits become zero in the long-rund. The barriers to entry and exit are relatively easye. None of the above is an exception5. Which of the following statements is (are) true concerning a pure competition situation?a. Its demand curve is represented by a vertical line.b. Firms must sell at or below market price.c. Marginal revenue is equal to price.d. both b and ce. both a and b6. In pure competition:a. the optimal price-output solution occurs at the point where marginal revenue is equal to price
  91. 91. b. a firms demand curve is represented by a horizontal linec. a firm is a price-taker since the products of every producer are perfect substitutes for theproducts of every other producerd. a and b onlye. a, b, and c7. In the short-run for a purely competitive market, a manufacturer will stop production when:a. the total revenue is less than total costsb. the contribution to fixed costs is zero or lessc. the price is greater than AVCd. operating at a losse. a and b8. In the purely competitive case, marginal revenue (MR) is equal to:a. costb. profitc. priced. total revenuee. none of the above
  92. 92. 9. In long-run equilibrium, all firms in a pure competition market situation operating under acondition of certainty will have identical costs even though they may use different productionand operation techniques.a. trueb. false10. If price exceeds average costs under pure competition, ____ firms will enter the industry,supply will ____, and price will be driven ____.a. more; decrease; downb. more; decrease; upc. more; increase; downd. more; increase; upe. none of the above11. A firm in pure competition would shut down when:a. price is less than average total costb. price is less than average fixed costc. price is less than marginal costd. price is less than average variable cost12. In the long-run, firms in a monopolistically competitive industry willa. earn substantial economic profits
  93. 93. b. tend to just cover costs, including normal profitsc. seek to increase the scale of operationsd. seek to reduce the scale of operations13. Uncertainty includes all of the following except ____.a. unknown effects of deliberate actionsb. incomplete information as to the type of competitorc. random disturbancesd. unverifiable claimse. accidents due to weather hazards14. Experience goods are products or servicesa. that the customer already knowsb. whose performance is highly unusualc. whose quality is undetectable when purchasedd. not likely to cause repeat purchasese. all of the above15. Buyers anticipate that the temporary warehouse seller of unbranded computer equipmentwilla. deliver high quality products consistent with expectations
  94. 94. b. not attempt to establish any warranty enforcement mechanismsc. offer several prices and qualitiesd. produce only one qualitye. none of the above16. All of the following are mechanisms which reduce the adverse selection problem except____.a. warranties from established enterprises with non-redeployable assetsb. high interest ratesc. large collateral requirementsd. brand names and product-specific promotions and retail displayse. higher prices in repeat customer transactions17. Asset specificity is largest whena. value in first best use is largeb. value in second best use is largec. customers choose their supplier at randomd. very valuable assets are non-redeployablee. customers are loyal to a particular seller18. Under asymmetric information,
  95. 95. a. you never get what you pay forb. you sometimes get cheatedc. you always get cheatedd. at best you get what you pay fore. sellers make profits in excess of competitive returns19. To escape adverse selection and elicit high quality experience goods buyers cana. offer price premiums to new firms in the marketb. seek out unbranded goodsc. buy from generic storefronts that have leased temporary spaced. secure warranties from warehouse retailerse. none of the above20. The problems of asymmetric information exchange arise ultimately becausea. one party to the exchange possesses different information than anotherb. one party has more information than anotherc. one party knows nothingd. one party cannot independently verify the information of anothere. information is scarce
  96. 96. 21. The market for "lemons" is one in whicha. the rational buyer discountsb. the sellers product claims are unverifiable at the point of purchasec. "the bad apples drive out the good"d. the problem of adverse selection is rampante. all of the above22. The fraudulent delivery of low quality experience goods at high prices is more likely ifa. interest rates declineb. information about notorious firms is speedily disseminatedc. price premiums for allegedly high quality increased. sellers invest in non-transferable reputatione. none of the above23. An "experience good" is one that:a. Only an expert can useb. Has undetectable quality when purchasedc. Can be readily experienced simply by touching or tastingd. Improves with age, like a fine winee. All of the above
  97. 97. 24. A "search good" is:a. One that depends on how the product behaves over timeb. A product whose quality is only found out over time by finding how durable it isc. Like a peach that can be examined for flawsd. Like a used car, since it is easy to determine its inherent qualitye. None of the above25. The price for used cars is well below the price of new cars of the same general quality.This is an example of:a. The Degree of Operating Leverageb. A Lemons Marketc. Redeployment Assetsd. Cyclical Competitione. The Unemployment RatePROBLEMS1. Sunrise Juice Company sells its output in a perfectly competitive market. The firms totalcost function is given in the following schedule:Output Total Cost
  98. 98. (Units) ($) 0 5010 12020 17030 21040 26050 33060 430Total costs include a "normal" return on the time (labor services) and capital that the owner hasinvested in the firm. The prevailing market price is $7 per unit.(a) Prepare (i) marginal cost and (ii) average total cost schedules for the firm.(b) What is the firms profit maximizing output level?(c) Is the industry in long-run equilibrium? Justify your answer.2. Superior Metals Company has seen its sales volume decline over the last few years as theresult of rising foreign imports. In order to increase sales (and hopefully, profits), the firm isconsidering a price reduction on luranium--a metal that it produces and sells. The firm currentlysells 60,000 pounds of luranium a year at an average price of $10 per pound. Fixed costs ofproducing luranium are $250,000. Current variable costs per pound are $5. The firm hasdetermined that the variable cost per pound could be reduced by $.50 if production volume couldbe increased by 10 percent (fixed costs would remain constant). The firms marketing departmenthas estimated the arc elasticity of demand for luranium to be ?1.5.(a) How much would Superior Metals have to reduce the price of luranium in order to achievea 10 percent increase in the quantity sold?
  99. 99. (b) What would the firms (i) total revenue, (ii) total cost, and (iii) total profit be before andafter the price cut?Chapter 11 Quiz:1. Unique Creations has a monopoly position in magnometers. If the marginal cost for amagnometer is $50 and the price elasticity for magnometers is -4, what is the optimal monopolyprice? Hint: P (1 +1/E) = MC.a. $37.50b. $41.25c. $66.67d. $75.00e. $82.502. Land’s End estimates a demand curve for turtleneck sweaters to be:Log Q = .41 + 2.3 Log Y - 3 Log Pwhere Q is quantity, P is price, and Y is a measure on national income. If the marginal cost ofimported turtleneck sweaters is $9.00. (HINT: P (1 +1/E) = MC). The optimal monopoly pricewould be:a. P = $13.50b. P = $26.50
  100. 100. c. P = $27.50d. P = $34.50e. P = $56.223. Declining cost industriesa. have upward rising AC curves.b. have upward rising demand curves.c. have ?-shaped total costs.d. have diseconomies of scale.e. have marginal cost curves below their average cost curve.4. A monopolist seller of Irish ceramics faces the following demand function for its product: P= 62 - 3Q. The fixed cost is $10 and the variable cost per unit is $2. What is the maximizingQUANTITY for this monopoly? Hint: MR is twice as steep as the inverse demand curve: MR= 62 – 6 Q. (Pick closest answer)a. Q = 10b. Q = 15c. Q = 22d. Q = 37e. Q = 41
  101. 101. 5. Globo Public Supply has $1,000,000 in assets. Its demand curve is: P = 206 - .20•Q and itstotal cost function is: TC = 20,000 + 6•Q where TC excludes the cost of capital. If Globo PublicSupply is UNREGULATED, find Globos optimal price.a. $206b. $106c. $56d. $6e. $36. A monopolist faces the following demand curve: P = 12 - .3Q with marginal costs of $3.What is the monopolistic PRICE?a. P = $5.50b. P = $6.50c. P = $7.50d. P = $8.50e. P = $9.507. In natural monopoly, AC continuously declines due to economies in distribution or inproduction, which tends to found in industries which face increasing returns to scale. If pricewere set equal to marginal cost, then:a. price would equal average cost.b. price would exceed average cost.c. price would be below average cost.d. price would be at the profit maximizing level for natural monopoly
  102. 102. e. all of the above8. The profit-maximizing monopolist, faced with a negative-sloping demand curve, willalways produce:a. at an output greater than the output where average costs are minimizedb. at an output short of that output where average costs are minimizedc. at an output equal to industry output under pure competitiond. a and ce. none of the above9. In the case of pure monopoly:a. one firm is the sole producer of a good or service which has no close substitutesb. the firms profit is maximized at the price and output combination where marginal costequals marginal revenuec. the demand curve is always elasticd. a and b onlye. a, b, and c10. A monopoly will always produce less than a purely competitive industry, ceteris paribus.