Eco 550 Week 2 Quiz Chapter 1,2 & All Questions

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ECO 550 Week 2 Quiz Chapter 1,2 & All Questions

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<strong>ECO 550 WK 2 Quiz Chapter 1,2</strong><div><strong>Chapter 1—Introduction and Goals of the Firm</strong><span style="line-height: 1.5;"> </span></div><strong>MULTIPLE CHOICE</strong>1. The form of economics most relevant to managerial decision-making within the firm is:<table border="0" cellspacing="0" cellpadding="0"><tbody><tr><td valign="top" width="24">a.</td><td valign="top" width="540">macroeconomics</td></tr><tr><td valign="top" width="24">b.</td><td valign="top" width="540">welfare economics</td></tr><tr><td valign="top" width="24">c.</td><td valign="top" width="540">free-enterprise economics</td></tr><tr><td valign="top" width="24">d.</td><td valign="top" width="540">microeconomics</td></tr><tr><td valign="top" width="24">e.</td><td valign="top" width="540">none of the above</td></tr></tbody></table>2. If one defines incremental cost as the change in total cost resulting from a decision, and incremental revenue as the change in total revenue resulting from a decision, any business decision is profitable if:<table border="0" cellspacing="0" cellpadding="0"><tbody><tr><td valign="top" width="24">a.</td><td valign="top" width="540">it increases revenue more than costs or reduces costs more than revenue</td></tr><tr><td valign="top" width="24">b.</td><td valign="top" width="540">it decreases some costs more than it increases others (assuming revenues remain constant)</td></tr><tr><td valign="top" width="24">c.</td><td valign="top" width="540">it increases some revenues more than it decreases others (assuming costs remain constant)</td></tr><tr><td valign="top" width="24">d.</td><td valign="top" width="540">all of the above</td></tr><tr><td valign="top" width="24">e.</td><td valign="top" width="540">b and c only</td></tr></tbody></table>3. 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.<table border="0" cellspacing="0" cellpadding="0"><tbody><tr><td valign="top" width="24">a.</td><td valign="top" width="540">profits (cash flows)</td></tr><tr><td valign="top" width="24">b.</td><td valign="top" width="540">revenues</td></tr><tr><td valign="top" width="24">c.</td><td valign="top" width="540">outlays</td></tr><tr><td valign="top" width="24">d.</td><td valign="top" width="540">costs</td></tr><tr><td valign="top" width="24">e.</td><td valign="top" width="540">investments</td></tr></tbody></table>4. Which of the following statements concerning the shareholder wealth maximization model is (are) true?<table border="0" cellspacing="0" cellpadding="0"><tbody><tr><td valign="top" width="24">a.</td><td valign="top" width="540">The timing of future profits is explicitly considered.</td></tr><tr><td valign="top" width="24">b.</td><td valign="top" width="540">The model provides a conceptual basis for evaluating differential levels of risk.</td></tr><tr><td valign="top" width="24">c.</td><td valign="top" width="540">The model is only valid for dividend-paying firms.</td></tr><tr><td valign="top" width="24">d.</td><td valign="top" width="540">a and b</td></tr><tr><td valign="top" width="24">e.</td><td valign="top" width="540">a, b, and c</td></tr></tbody></table>5. According to the profit-maximization goal, the firm should attempt to maximize short-run profits since there is too much uncertainty associated with long-run profits.<table border="0" cellspacing="0" cellpadding="0"><tbody><tr><td valign="top" width="24">a.</td><td valign="top" width="540">true</td></tr><tr><td valign="top" width="24">b.</td><td valign="top" width="540">false</td></tr></tbody></table><span style="line-height: 1.5;"> 6. According to the innovation theory of profit, above-normal profits are necessary to compensate the owners of the firm for the risk they assume when making their investments.</span><table border="0" cellspacing="0" cellpadding="0"><tbody><tr><td valign="top" width="24">a.</td><td valign="top" width="540">true</td></tr><tr><td valign="top" width="24">b.</td><td valign="top" width="540">false</td></tr></tbody></table>7. According to the managerial efficiency theory of profit, above-normal profits can arise because of high-quality managerial skills.<table border="0" cellspacing="0" cellpadding="0"><tbody><tr><td valign="top" width="24">a.</td><td valign="top" width="540">true</td></tr><tr><td valign="top" width="24">b.</td><td valign="top" width="540">false</td></tr></tbody></table>8. Which of the following (if any) is not a factor affecting the profit performance of firms:<table border="0" cellspacing="0" cellpadding="0"><tbody><tr><td valign="top" width="24">a.</td><td valign="top" width="540">differential risk</td></tr><tr><td valign="top" width="24">b.</td><td valign="top" width="540">innovation</td></tr><tr><td valign="top" width="24">c.</td><td valign="top" width="540">managerial skills</td></tr><tr><td valign="top" width="24">d.</td><td valign="top" width="540">existence of monopoly power</td></tr><tr><td valign="top" width="24">e.</td><td valign="top" width="540">all of the above are factors</td></tr></tbody></table>9. Agency problems and costs are incurred whenever the owners of a firm delegate decision-making authority to management.<table border="0" cellspacing="0" cellpadding="0"><tbody><tr><td valign="top" width="24">a.</td><td valign="top" width="540">true</td></tr><tr><td valign="top" width="24">b.</td><td valign="top" width="540">false</td></tr></tbody></table>10. Economic profit is defined as the difference between revenue and ____.<table border="0" cellspacing="0" cellpadding="0"><tbody><tr><td valign="top" width="24">a.</td><td valign="top" width="540">explicit cost</td></tr><tr><td valign="top" width="24">b.</td><td valign="top" width="540">total economic cost</td></tr><tr><td valign="top" width="24">c.</td><td valign="top" width="540">implicit cost</td></tr><tr><td valign="top" width="24">d.</td><td valign="top" width="540">shareholder wealth</td></tr><tr><td valign="top" width="24">e.</td><td valign="top" width="540">none of the above</td></tr></tbody></table>11. Income tax payments are an example of ____.<table border="0" cellspacing="0" cellpadding="0"><tbody><tr><td valign="top" width="24">a.</td><td valign="top" width="540">implicit costs</td></tr><tr><td valign="top" width="24">b.</td><td valign="top" width="540">explicit costs</td></tr><tr><td valign="top" width="24">c.</td><td valign="top" width="540">normal return on investment</td></tr><tr><td valign="top" width="24">d.</td><td valign="top" width="540">shareholder wealth</td></tr><tr><td valign="top" width="24">e.</td><td valign="top" width="540">none of the above</td></tr></tbody></table>12. Various executive compensation plans have been employed to motivate managers to make decisions that maximize shareholder wealth. These include:<table border="0" cellspacing="0" cellpadding="0"><tbody><tr><td valign="top" width="24">a.</td><td valign="top" width="540">cash bonuses based on length of service with the firm</td></tr><tr><td valign="top" width="24">b.</td><td valign="top" width="540">bonuses for resisting hostile takeovers</td></tr><tr><td valign="top" width="24">c.</td><td valign="top" width="540">requiring officers to own stock in the company</td></tr><tr><td valign="top" width="24">d.</td><td valign="top" width="540">large corporate staffs</td></tr><tr><td valign="top" width="24">e.</td><td valign="top" width="540">a, b, and c only</td></tr></tbody></table>13. The common factors that give rise to all principal-agent problems include the<table border="0" cellspacing="0" cellpadding="0"><tbody><tr><td valign="top" width="24">a.</td><td valign="top" width="540">unobservability of some manager-agent action</td></tr><tr><td valign="top" width="24">b.</td><td valign="top" width="540">presence of random disturbances in team production</td></tr><tr><td valign="top" width="24">c.</td><td valign="top" width="540">the greater number of agents relative to the number of principals</td></tr><tr><td valign="top" width="24">d.</td><td valign="top" width="540">a and b only</td></tr><tr><td valign="top" width="24">e.</td><td valign="top" width="540">none of the above</td></tr></tbody></table><span style="line-height: 1.5;">14. The Saturn Corporation (once a division of GM) was permanently closed in 2009. What went wrong with Saturn?</span>a. Saturn’s cars sold at prices higher than rivals Honda orToyota, so they could not sell many cars.b. Saturn sold cars below the prices of Honda orToyota, 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 Saturn purchasers 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.c. An opportunity to implement a new cost savings or revenue expansion activity that arises from 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 of the firm:V₀∙(shares outstanding) = S^¥_t=1 (p _t) / (1+k_e)^t+ Real Option Value.<ol> <li>Decrease the required rate of return (k_e).</li> <li>Decrease the stream of profits (p_t).</li> <li>Decrease the number of periods from ¥ to 10 periods.</li> <li>Decrease the real option value.</li> <li>All of the above. <span style="line-height: 1.5;"> </span></li></ol><ol> <li>The primary objective of a for-profit firm is to ___________.</li></ol>a. maximize agency costsb. minimize average costc. maximize total revenued. set output where total revenue equals total coste maximize shareholder value<ol> <li>Possible goals of Not-For-Profit (NFP) enterprises include all of the following EXCEPT:</li> <li>maximize total costs</li></ol>b. maximize output, subject to a breakeven constraintc. 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 technology are earning higher profits. What theory of profit best reflects the performance of the plasma screen makers?<ol> <li>risk-bearing theory of profit</li> <li>dynamic equilibrium theory of profit</li> <li>innovation theory of profit<ol> <li>managerial efficiency theory of profit</li> <li>stochastic optimization theory of profit<span style="line-height: 1.5;"> </span></li></ol></li></ol>20. 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 firm's 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 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:<ol> <li>equals zero.</li> <li>is greater than the marginal cost of the test</li> <li>is lower than the marginal cost of an additional test</li> <li>equals the marginal cost of the test</li> <li>both a and b.<span style="line-height: 1.5;"> </span></li></ol><strong>Chapter 2—Fundamental Economic Concepts</strong><strong>MULTIPLE CHOICE</strong>1. A change in the level of an economic activity is desirable and should be undertaken as long as the marginal benefits exceed the ____.<table border="0" cellspacing="0" cellpadding="0"><tbody><tr><td valign="top" width="24">a.</td><td valign="top" width="540">marginal returns</td></tr><tr><td valign="top" width="24">b.</td><td valign="top" width="540">total costs</td></tr><tr><td valign="top" width="24">c.</td><td valign="top" width="540">marginal costs</td></tr><tr><td valign="top" width="24">d.</td><td valign="top" width="540">average costs</td></tr><tr><td valign="top" width="24">e.</td><td valign="top" width="540">average benefits</td></tr></tbody></table><span style="line-height: 1.5;"> 2. The level of an economic activity should be increased to the point where the ____ is zero.</span><table border="0" cellspacing="0" cellpadding="0"><tbody><tr><td valign="top" width="24">a.</td><td valign="top" width="540">marginal cost</td></tr><tr><td valign="top" width="24">b.</td><td valign="top" width="540">average cost</td></tr><tr><td valign="top" width="24">c.</td><td valign="top" width="540">net marginal cost</td></tr><tr><td valign="top" width="24">d.</td><td valign="top" width="540">net marginal benefit</td></tr><tr><td valign="top" width="24">e.</td><td valign="top" width="540">none of the above</td></tr></tbody></table>3. The net present value of an investment represents<table border="0" cellspacing="0" cellpadding="0"><tbody><tr><td valign="top" width="24">a.</td><td valign="top" width="540">an index of the desirability of the investment</td></tr><tr><td valign="top" width="24">b.</td><td valign="top" width="540">the expected contribution of that investment to the goal of shareholder wealth maximization</td></tr><tr><td valign="top" width="24">c.</td><td valign="top" width="540">the rate of return expected from the investment</td></tr><tr><td valign="top" width="24">d.</td><td valign="top" width="540">a and b only</td></tr><tr><td valign="top" width="24">e.</td><td valign="top" width="540">a and c only</td></tr></tbody></table>4. Generally, investors expect that projects with high expected net present values also will be projects with<table border="0" cellspacing="0" cellpadding="0"><tbody><tr><td valign="top" width="24">a.</td><td valign="top" width="540">low risk</td></tr><tr><td valign="top" width="24">b.</td><td valign="top" width="540">high risk</td></tr><tr><td valign="top" width="24">c.</td><td valign="top" width="540">certain cash flows</td></tr><tr><td valign="top" width="24">d.</td><td valign="top" width="540">short lives</td></tr><tr><td valign="top" width="24">e.</td><td valign="top" width="540">none of the above</td></tr></tbody></table><span style="line-height: 1.5;">5. An closest example of a risk-free security is</span><table border="0" cellspacing="0" cellpadding="0"><tbody><tr><td valign="top" width="24">a.</td><td valign="top" width="540">General Motors bonds</td></tr><tr><td valign="top" width="24">b.</td><td valign="top" width="540">AT&T commercial paper</td></tr><tr><td valign="top" width="24">c.</td><td valign="top" width="540">U.S. Government Treasury bills</td></tr><tr><td valign="top" width="24">d.</td><td valign="top" width="540">San Franciscomunicipal bonds</td></tr><tr><td valign="top" width="24">e.</td><td valign="top" width="540">an I.O.U. that your cousin promises to pay you $100 in 3 months</td></tr></tbody></table><span style="line-height: 1.5;">6. The standard deviation is appropriate to compare the risk between two investments only if</span><table border="0" cellspacing="0" cellpadding="0"><tbody><tr><td valign="top" width="24">a.</td><td valign="top" width="540">the expected returns from the investments are approximately equal</td></tr><tr><td valign="top" width="24">b.</td><td valign="top" width="540">the investments have similar life spans</td></tr><tr><td valign="top" width="24">c.</td><td valign="top" width="540">objective estimates of each possible outcome is available</td></tr><tr><td valign="top" width="24">d.</td><td valign="top" width="540">the coefficient of variation is equal to 1.0</td></tr><tr><td valign="top" width="24">e.</td><td valign="top" width="540">none of the above</td></tr></tbody></table><span style="line-height: 1.5;">7. The approximate probability of a value occurring that is greater than one standard deviation from the mean is approximately (assuming a normal distribution)</span><table border="0" cellspacing="0" cellpadding="0"><tbody><tr><td valign="top" width="24">a.</td><td valign="top" width="540">68.26%</td></tr><tr><td valign="top" width="24">b.</td><td valign="top" width="540">2.28%</td></tr><tr><td valign="top" width="24">c.</td><td valign="top" width="540">34%</td></tr><tr><td valign="top" width="24">d.</td><td valign="top" width="540">15.87%</td></tr><tr><td valign="top" width="24">e.</td><td valign="top" width="540">none of the above</td></tr></tbody></table><span style="line-height: 1.5;"> 8. Based on risk-return tradeoffs observable in the financial marketplace, which of the following securities would you expect to offer higher expected returns than corporate bonds?</span><table border="0" cellspacing="0" cellpadding="0"><tbody><tr><td valign="top" width="24">a.</td><td valign="top" width="540">U.S. Government bonds</td></tr><tr><td valign="top" width="24">b.</td><td valign="top" width="540">municipal bonds</td></tr><tr><td valign="top" width="24">c.</td><td valign="top" width="540">common stock</td></tr><tr><td valign="top" width="24">d.</td><td valign="top" width="540">commercial paper</td></tr><tr><td valign="top" width="24">e.</td><td valign="top" width="540">none of the above</td></tr></tbody></table><span style="line-height: 1.5;">9. The primary difference(s) between the standard deviation and the coefficient of variation as measures of risk are:</span><table border="0" cellspacing="0" cellpadding="0"><tbody><tr><td valign="top" width="24">a.</td><td valign="top" width="540">the coefficient of variation is easier to compute</td></tr><tr><td valign="top" width="24">b.</td><td valign="top" width="540">the standard deviation is a measure of relative risk whereas the coefficient of variation is a measure of absolute risk</td></tr><tr><td valign="top" width="24">c.</td><td valign="top" width="540">the coefficient of variation is a measure of relative risk whereas the standard deviation is a measure of absolute risk</td></tr><tr><td valign="top" width="24">d.</td><td valign="top" width="540">the standard deviation is rarely used in practice whereas the coefficient of variation is widely used</td></tr><tr><td valign="top" width="24">e.</td><td valign="top" width="540">c and d</td></tr></tbody></table><span style="line-height: 1.5;"> 10. The ____ is the ratio of ____ to the ____.</span><table border="0" cellspacing="0" cellpadding="0"><tbody><tr><td valign="top" width="24">a.</td><td valign="top" width="540">standard deviation; covariance; expected value</td></tr><tr><td valign="top" width="24">b.</td><td valign="top" width="540">coefficient of variation; expected value; standard deviation</td></tr><tr><td valign="top" width="24">c.</td><td valign="top" width="540">correlation coefficient; standard deviation; expected value</td></tr><tr><td valign="top" width="24">d.</td><td valign="top" width="540">coefficient of variation; standard deviation; expected value</td></tr><tr><td valign="top" width="24">e.</td><td valign="top" width="540">none of the above</td></tr></tbody></table><span style="line-height: 1.5;">11. Sources of positive net present value projects include</span><table border="0" cellspacing="0" cellpadding="0"><tbody><tr><td valign="top" width="24">a.</td><td valign="top" width="540">buyer preferences for established brand names</td></tr><tr><td valign="top" width="24">b.</td><td valign="top" width="540">economies of large-scale production and distribution</td></tr><tr><td valign="top" width="24">c.</td><td valign="top" width="540">patent control of superior product designs or production techniques</td></tr><tr><td valign="top" width="24">d.</td><td valign="top" width="540">a and b only</td></tr><tr><td valign="top" width="24">e.</td><td valign="top" width="540">a, b, and c</td></tr></tbody></table><span style="line-height: 1.5;">12. Receiving $100 at the end of the next three years is worth more to me than receiving $260 right now, when my required interest rate is 10%.</span>a. Trueb. FalseMore Questions are Included
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