ECO 550 Midterm Exam Part 1 & 2
Question 1
The Saturn Corporation (once a division of GM) was permanently closed in 2009. What went wrong with Saturn?
Saturns cars sold at prices higher than rivals Honda or Toyota, so they could not sell many cars.
Saturn sold cars below the prices of Honda or Toyota, earning a low 3% rate of return.
Saturn found that young buyers of Saturn automobiles were very loyal to Saturn and GM.
Saturn implemented a change management view that helped make first time Saturn purchasers trade up to Buick or Ca
Question 2
Various executive compensation plans have been employed to motivate managers to make decisions that maximize shareholder wealth. These include:
cash bonuses based on length of service with the firm
bonuses for resisting hostile takeovers
requiring officers to own stock in the company
large corporate staffs
Question 3
A Real Option Value is:
An option that been deflated by the cost of living index makes it a real option.
An opportunity cost of capital.
An opportunity to implement cost savings or revenue expansion in a flexible business plan.
An objective function and a decision rule that comes from it.
Question 4
To reduce Agency Problems, executive compensation should be designed to:
create incentives so that managers act like owners of the firm.
avoid making the executives own shares in the company.
be an increasing function of the firms expenses.
be an increasing function of the sales revenue received by the firm.
Question 5
The moral hazard in team production arises from
poorly designed team membership
lack of proper assignment of individual tasks
disorganization in groups
a conflict between tactically best interest and ones duty
insufficient experience
Question 6
Income tax payments are an example of ____.
implicit costs
explicit costs
normal return on investment
shareholder wealth
Question 7
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?
U.S. Government bonds
municipal bonds
common stock
commercial paper
Question 8
The approximate probability of a value occurring that is greater than one standard deviation from the mean is approximately (assuming a normal distribution)
68.26%
2.28%
34%
15.87%
Question 9
Generally, investors expect that projects with high expected net present values also will be projects with
low risk
high risk
certain cash flows
short lives
Question 10
The ____ is the ratio of ____ to the ____.
standard deviation; covariance; expected value
coefficient of variation; expected value; standard deviation
correlation coefficient; standard deviation; expected value
coefficient of variation; standard deviation; expected value
Question 11
An closest example of a risk-free security is
General Motors bonds
AT&T commercial paper
U.S. Government Treasury bills
San Francisco municipal bonds
an I.O.U. that your cousin promises to pay you $100 in 3 months
Question 12
A change in the level of an economic activity is desirable and should be undertaken as long as the marginal benefits exceed the ____.
marginal returns
total costs
marginal costs
average costs
average benefits
Question 13
Marginal revenue (MR) is ____ when total revenue is maximized.
greater than one
equal to one
less than zero
equal to zero
equal to minus one
Question 14
When demand is ____ a percentage change in ____ is exactly offset by the same percentage change in ____ demanded, the net result being a constant total consumer expenditure.
elastic; price; quantity
unit elastic; price; quantity
inelastic; quantity; price
inelastic; price; quantity
Question 15
Producers goods are:
consumers goods
raw materials combined to produce consumer goods
durable goods used by consumers
always more expensive when used by corporations
Question 16
Auto dealers slash prices at the end of the model year in response to deficient demand/excess inventory but restaurants facing the same problem slash production because
auto customers are less price sensitive than restaurant customers
price elasticity of demand (in absolute values) is higher for auto than restaurant customers
price elasticity of supply is lower in auto than in restaurants
restaurant food spoils quickly and is much more perishable
price elasticity of supply in autos is smaller than the absolute value of price elasticity of demand but the reverse is true for restaurants
Question 17
Iron ore is an example of a:
durable good
producers good
nondurable good
consumer good
Question 18
Suppose we estimate that the demand elasticity for fine leather jackets is .7 at their current prices. Then we know that:
a 1% increase in price reduces quantity sold by .7%.
no one wants to buy leather jackets.
demand for leather jackets is elastic.
a cut in the prices will increase total revenue.
leather jackets are luxury items.
Question 19
If demand were inelastic, then we should immediately:
cut the price.
keep the price where it is.
go to the Nobel Prize Committee to show we were the first to find an upward sloping demand curve.
stop selling it since it is inelastic.
raise the price.
Question 20
In regression analysis, the existence of a high degree of intercorrelation among some or all of the explanatory variables in the regression equation constitutes:
autocorrelation
a simultaneous equation relationship
nonlinearities
heteroscedasticity
multicollinearity
Question 21
In which of the following econometric problems do we find Durbin-Watson statistic being far away from 2.0?
the identification problem
autocorrelation
multicollinearity
heteroscedasticity
agency problems
Question 22
One commonly used test in checking for the presence of autocorrelation when working with time series data is the ____.
F-test
Durbin-Watson test
t-test
z-test
Question 23
All of the following are reasons why an association relationship may not imply a causal relationship except:
the association may be due to pure chance
the association may be the result of the influence of a third common factor
both variables may be the cause and the effect at the same time
the association may be hypothetical
Question 24
When using a multiplicative power function ( X1b1 X2b2 X3b3) to represent an economic relationship, estimates of the parameters (a, and the bs) using linear regression analysis can be obtained by first applying a ____ transformation to convert the function to a linear relationship.
semilogarithmic
double-logarithmic
reciprocal
polynomial
cubic
Question 25
The constant or intercept term in a statistical demand study represents the quantity demanded when all independent variables are equal to:
1.0
their minimum values
their average values
0.0
Question 1
The forecasting technique which attempts to forecast short-run changes and makes use of economic indicators known as leading, coincident or lagging indicators is known as:
econometric technique
time-series forecasting
opinion polling
barometric technique
judgment forecasting
Question 2
If two alternative economic models are offered, other things equal, we would
tend to pick the one with the lowest R2.
select the model that is the most expensive to estimate.
pick the model that was the most complex.
select the model that gave the most accurate forecasts
Question 3
The variation in an economic time-series which is caused by major expansions or contractions usually of greater than a year in duration is known as:
secular trend
cyclical variation
seasonal effect
unpredictable random factor
Question 4
Consumer expenditure plans is an example of a forecasting method. Which of the general categories best described this example?
time-series forecasting techniques
barometric techniques
survey techniques and opinion polling
econometric techniques
input-output analysis
Question 5
The type of economic indicator that can best be used for business forecasting is the:
leading indicator
coincident indicator
lagging indicator
current business inventory indicator
optimism/pessimism indicator
Question 6
The use of quarterly data to develop the forecasting model Yt = a +bYt?1 is an example of which forecasting technique?
Barometric forecasting
Time-series forecasting
Survey and opinion
Econometric methods based on an understanding of the underlying economic variables involved
Input-output analysis
Question 7
Purchasing power parity or PPP says the ratios composed of:
interest rates explain the direction of exchange rates.
growth rates explain the direction of exchange rates.
inflation rates explain the direction of exchange rates.
services explain the direction exchange rates.
public opinion polls explain the direction of exchange rates.
Question 8
If Ben Bernanke, Chair of the Federal Reserve Board, begins to tighten monetary policy by raising US interest rates next year, what is the likely impact on the value of the dollar?
The value of the dollar falls when US interest rates rise.
The value of the dollar rises when US interest rates rise.
The value of the dollar is not related to US interest rates.
This is known as Purchasing Power Parity or PPP.
Question 9
If the British pound (?) appreciates by 10% against the dollar:
both the US importers from Britain and US exporters to Britain will be helped by the appreciating pound.
the US exporters will find it harder to sell to foreign customers in Britain.
the US importer of British goods will tend to find that their cost of goods rises, hurting its bottom line.
both US importers of British goods and exporters to Britain will be unaffected by changes in foreign exchange rates.
Question 10
Trading partners should specialize in producing goods in accordance with comparative advantage, then trade and diversify in consumption because
out-of-pocket costs of production decline
free trade areas protect infant industries
economies of scale are present
manufacturers face diminishing returns
more goods are available for consumption
Question 11
Using demand and supply curves for the Japanese yen based on the $/¥ price for yen, an increase in US INFLATION RATES would
Decrease the demand for yen and decrease the supply of the yen.
Increase the demand for yen and decrease the supply of the yen.
Increase the demand and increase the supply of yen.
Decrease both the supply and the demand of yen.
Have no impact on the demand or supply of the yen.
Question 12
An increase in the exchange rate of the U.S. dollar relative to a trading partner can result from
higher anticipated costs of production in the U.S.
higher interest rates and higher inflation in the U.S.
higher growth rates in the trading partners economy
a change in the terms of trade
lower export industry productivity
Question 13
The purchasing power parity hypothesis implies that an increase in inflation in one country relative to another will over a long period of time
increase exports
reduce the competitive pressure on prices
lower the value of the currency in the country with the higher inflation rate
increase foreign aid
increase the speculative demand for the currency
Question 14
The isoquants for inputs that are perfect substitutes for one another consist of a series of:
right angles
parallel lines
concentric circles
right triangles
Question 15
Marginal factor cost is defined as the amount that an additional unit of the variable input adds to ____.
marginal cost
variable cost
marginal rate of technical substitution
total cost
Question 16
The combinations of inputs costing a constant C dollars is called:
an isocost line
an isoquant curve
the MRTS
an isorevenue line
Question 17
Given a Cobb-Douglas production function estimate of .72K.18 for a given industry, this industry would have:
increasing returns to scale
constant returns to scale
decreasing returns to scale
negative returns to scale
Question 18
Which of the following is never negative?
marginal product
average product
production elasticity
marginal rate of technical substitution
slope of the isocost lines
Question 19
The primary purpose of the Cobb-Douglas power function is to:
allow one to make estimates of cost-output relationships
allow one to make predictions about a resulting increase in output for a given increase in the inputs
aid one in gaining accurate empirical values for economic variables
calculate a short-run linear total cost function
Question 20
According to the theory of cost, specialization in the use of variable resources in the short-run results initially in:
decreasing returns and declining average and marginal costs
increasing returns and declining average and marginal costs
increasing returns and increasing average and marginal costs
decreasing returns and increasing average and marginal costs
Question 21
What method of inventory valuation should be used for economic decision-making problems?
book value
original cost
current replacement cost
cost or market, whichever is lower
historical cost
Question 22
For a short-run cost function which of the following statements is (are) not true?
The average fixed cost function is monotonically decreasing.
The marginal cost function intersects the average fixed cost function where the average variable cost function is a minimum.
The marginal cost function intersects the average variable cost function where the average variable cost function is a minimum.
The marginal cost function intersects the average total cost function where the average total cost function is a minimum.
Question 23
The existence of diseconomies of scale (size) for the firm is hypothesized to result from:
transportation costs
imperfections in the labor market
imperfections in the capital markets
problems of coordination and control encountered by management
Question 24
Economies of Scope refers to situations where per unit costs are:
Unaffected when two or more products are produced
Reduced when two or more products are produced
Increased when two or more products are produced
Demonstrating constant returns to scale
Demonstrating decreasing returns to scale
Question 25
The cost function is:
a means for expressing output as a function of cost
a schedule or mathematical relationship showing the total cost of producing various quantities of output
similar to a profit and loss statement
incapable in being developed from statistical regression analysis