ECONOMICS EXAM 2
An income statement starts with the firm's revenue and subtracts its operating expenses and taxes paid. What is the remainder called?
- Net income
Economic profit is equal to a firm's revenues minus its costs, ▼ --both explicit and implicit --only implicit --only explicit . Accounting profit is ▼ --the same as --larger than --smaller than economic profit
--both explicit and implicit --larger than Accounting profit provides information on a firm's current net income measured according to accepted accounting standards. Accounting profit is not, however, the ideal measure of a firm's profits because it neglects some of the firm's costs. By taking into account all costs, economic profit provides a better indication than accounting profit of how successful a firm is. The opportunity cost of any activity is the highest valued alternative that must be given up to engage in that activity. Costs are either explicit or implicit. When a firm spends money an explicit cost results. If a firm incurs an opportunity cost but does not spend money, an implicit cost results. Economic costs include both explicit costs and implicit costs. Economic profit is equal to a firm's revenues minus all of its costs, implicit and explicit. Because accounting profit excludes some implicit costs, it is larger than economic profit.
A firm may opt to pay millions of dollars for celebrity endorsements in order to: --comply with government regulations mandating endorsements --provide information about the product's characteristics and price --signal to consumers that the advertised product is appealing and likely to be popular
--signal to consumers that the advertised product is appealing and likely to be popular
If a 20 percent increase in the price of Red Bull energy drinks results in a decrease in the quantity demanded of 25 percent, the price elasticity of demand is: ANSWER -1.25 -0.80 -20.00
-1.25 ---25/20 = -1.25 Red Bull is considered elastic since the absolute value of the coefficient exceeds one.
The current price of wheat is $1.00 per bushel, and the price elasticity of demand for wheat is known to be 0.50. A bad harvest causes the supply of wheat to decrease and as a result the price of wheat rises by 20%. What will be the percentage change in quantity demanded for wheat and will farm revenues rise or fall? 20%, rise 10%, fall 10%, rise
10%, rise
Your friend asks you to join him in the new Internet business he is setting up as a corporation. If you invest $10,000 in the business, what is the limit to your liability?
10,000
If Motorola sells a bond with a face value of $5,000 and an interest rate of 5 percent, what is the coupon payment on the bond?
250
Prior to the 1997 federal tobacco settlement a pack of cigarettes sold for $2.48. The terms of the settlement required a decrease in teenage smoking of 60 percent. If the elasticity of cigarette demand for teenagers is about 1.3 then the price of cigarettes should rise to __________ in order to achieve the target reduction of 60 percent. $4.08 $3.97 $3.62
3.62 --Given the required percentage change is 60% and an elasticity of 1.3 you can determine the required percentage change in price needed to be 0.60/1.3 = .4615 or 46.15%. So $2.48(1 + .4615) = $3.62.
indirect finance
A flow of funds from savers to borrowers through financial intermediaries such as banks is
What explanations have economists offered for why firms don't raise prices when doing so would seem to increase profits? Part 2 Firms might not raise prices when doing so might increase profits because Part 3 A. consumers find it unfair for firms to increase prices after an increase in demand. Your answer is correct. B. consumers find it unfair for firms to increase prices after an increase in costs. C. the amount consumers wish to buy is unrelated to how much of the product other people are consuming. D. firms are not concerned about profit in the long run. E. both a and b.
A. consumers find it unfair for firms to increase prices after an increase in demand. Your answer is correct.
Changes in the value of a firm's stocks and bonds offer important information for a firm's managers. If the price is decreasingdecreasing investors are _______ and are providing information that indicates the firm's managers might want to _________ the business. Part 2 A. more pessimistic, contract B. more optimistic, contract C. more optimistic, expand D. more pessimistic, expand
A. more pessimistic, contract The original purchasers of stocks and bonds may resell them to other investors. In fact, most of the buying and selling of stocks and bonds that takes place each day is investors reselling existing stocks and bonds to each other rather than corporations selling new stocks and bonds to investors. The buyers and sellers of stocks and bonds together make up the stock and bond markets. Changes in the value of a firm's stocks and bonds offer important information for a firm's managers, as well as for investors. An increase in the stock price means that investors are more optimistic about the firm's profit prospects, and the firm's managers may wish to expand the firm's operations as a result. By contrast, a decrease in the firm's stock price indicates that investors are less optimistic about the firms' profit prospects, so management may want to shrink the firm's operations. Likewise, changes in the value of the firm's bonds imply changes in the cost of external funds to finance the firm's investment in research and development or in new factories.
Which of the following reasons do economists use to explain why people are overweight? A. People's preferences are not consistent over time. B. People overvalue the utility from current choices. C. People undervalue the utility to be received in the future. D. All of the above explain why people are overweight.
All of the above explain why people are overweight.
The substitution effect is the change in the quantity demanded of a good that results from ______________, holding constant the effect of the price change on consumer purchasing power. A. an increase in the usefulness of a product as the number of consumers who use it increases B. a change in price making the good more or less expensive relative to other goods C. a change in the price of a substitute for the good D. the tendency of people to be unwilling to sell something they own
B a change in price making the good more or less expensive relative to other goods
Question content area Part 1 Behavioral economists attribute some consumer behavior to the endowment effect. Which of the following is an example of the endowment effect? An example of the endowment effect is Part 4 A. taking into account nonmonetary opportunity costs such as the value of your time. B. being unwilling to sell a househouse for a price that is greater than the price you would be willing to pay to buy the househouse if you didn't already own it. C. being unwilling to sell a vasevase that you already own. D. buying lottery tickets with an expected value that is less than their price. E. being willing to will your descendents a paintingpainting upon your death that you otherwise could have sold for a substantial price.
B being unwilling to sell a house for a price that is greater than the price you would be willing to pay to buy the house if you didn't already own it.
The optimal combination of pizza and coke you should consume is the one a where your marginal utility of pizza equals your marginal utility of coke. B. where your marginal utility per dollar spent on pizza equals your marginal utility per dollar spent on coke. C. where your marginal utility of pizza equals your total utility of pizza, and your marginal utility of coke equals your total utility of coke. D. where your total utility of pizza equals your total utility of coke.
B where your marginal utility per dollar spent on pizza equals your marginal utility per dollar spent on coke.
What happens when consumption of a product is path dependent? A. The consumption path that a product follows depends on the firm that uses the best technology to produce it. B. The cost of switching to a product with a better technology gives the product with the initial technology an advantage. C. The product can sell for a higher price when it is new and there are no similar products consumers can buy than when it is older and consumers can choose to buy substitutes for the product. D. The technology used to produce the product has a specific growth path.
B. The cost of switching to a product with a better technology gives the product with the initial technology an advantage.
Question content area Part 1 Subtracting the value of a firm's liabilities from the value of its assets leaves its Part 2 A. gross income. B. net worth. C. net income. D. total worth.
B. net worth. A firm's balance sheet sums up its financial position on a particular day, usually the end of a quarter or year. Recall that an asset is anything of value that a firm owns, and a liability is a debt or obligation owed by a firm. Subtracting the value of a firm's liabilities from the value of its assets leaves its net worth. We can think of the net worth as what the firm's owners would be left with if the firm was closed, its assets were sold, and its liabilities were paid off. Investors can determine a firm's net worth by inspecting its balance sheet.
The graph shows your weekly demand for pizza. How was this demand curveconstructed?
By computing your optimal consumption of pizza at the various prices shown, all other variables that affect your demand for pizza held constant.
What role does utilityLOADING... play in the economic model of consumer behavior? Part 2 When modeling consumer behavior, utility Part 3 A. provides an objective measure of enjoyment from consuming a particular set of goods and services in units called "utils." B. identifies the combination of goods and services that is the least expensive. C. reflects the satisfaction a consumer receives from consuming a particular set of goods and services. D. identifies the consumer who receives the most satisfaction from consuming a particular set of goods and services. E. identifies the combination of goods and services that can be produced most efficiently.
C. reflects the satisfaction a consumer receives from consuming a particular set of goods and services.
A(n) _____ is a financial security that represents partial ownership of a firm, while a _____ is a financial security that represents a promise to repay a fixed amount of funds. Part 2 A. stock, dividend B. interest payment, stock C. stock, bond D. bond, stock
C. stock, bond Bonds are financial securities that represent promises to repay a fixed amount of funds. When a firm sells a bond to raise funds, it promises to pay the purchaser of the bond an interest payment each year for the term of the bond, as well as a final payment of the amount of the loan, or the principal, at the end of the term. The interest payments on a bond are referred to as coupon payments.
Suppose ham is a normal good. How will consumers adjust their buying decisions if the price of ham changes? If the price of ham increases, then consumers will demand A. more ham due to the income effect because the opportunity cost of consuming ham is lower and less ham due to the substitution effect because their purchasing power decreases. B. less ham due to the income effect because the opportunity cost of consuming ham is higher and less ham due to the substitution effect because their purchasing power decreases. C. less ham due to the income effect because their purchasing power decreases and less ham due to the substitution effect because the opportunity cost of consuming ham is higher. D. more ham due to the income effect because their purchasing power decreases and less ham due to the substitution effect because the opportunity cost of consuming ham is higher.
C. less ham due to the income effect because their purchasing power decreases and less ham due to the substitution effect because the opportunity cost of consuming ham is higher.
__________ is the set of rules, guidelines and regulations that monitor and determine appropriate actions for the firm.
Corporate governance
Which of the following types of firms have limited liability?
Corporations -Corporations have limited liability. Corporations are a form of business organization that creates a separate legal entity that can enter into contracts in the same manner as an individual.
Absent government regulations to guard against fraud, why might top managers deceive investors about the true financial condition of their firms? Top managers might want to deceive investors about the true financial condition of their firms _____ Part 2 A. to hide liabilities that should be listed on balance sheets to hide liabilities that should be listed on balance sheets to keep the firm's stock price high to keep the firm's stock price high. B. to inflate profits to inflate profits to enhance compensation tied to firm profitability to enhance compensation tied to firm profitability. C. to reduce the cost of expensive external audits. D. Both a and b. E. All of the above
D. Both a and b.
According to the endowment effect, people appear to be behaving irrationally when they are unwilling to sell a good they already own in which of the following situations? A. If they are offered a price lower than the price they would have to pay to replace the good. B. If the good was a gift that had great sentimental value. C. If they can't replace the good. D. If they are offered a price greater than the price they would pay if they did not already own the good.
D. If they are offered a price greater than the price they would pay if they did not already own the good.
What explanation might an economist provide as to why some people overeat when such behavior can lead to health consequences? Part 2 Some people likely overeat because Part 3 A. their preferences are consistent over time their preferences are consistent over time. B. they overvalue the utility to be received in the future from being thin and thin. C. they undervalue the utility of current choices. D. they underestimate the future costs of current choices they underestimate the future costs of current choices. E. they accurately estimate the utility from current choices they accurately estimate the utility from current choices.
D. they underestimate the future costs of current choices they underestimate the future costs of current choices.
Question content area Part 1 The landmark legislation that helps guard against inflated profits and hidden liabilities on balance sheets to protect against financial scandals is the Part 2 A. Foreign Investment and National Security Act of 2007. B. Private Securities Litigation Reform Act of 1995. C. Fraud Enforcement and Recovery Act of 2009. D. Sarbanes-Oxley Act of 2002.
D. Sarbanes-Oxley Act of 2002.
The principal-agent problem occurs when Part 2 A. an agent pursues his principal's interests rather than his own interests. B. a firm's shareholders fulfill their own interest rather than the interests of top management. C. the principal gives an agent conflicting objectives which the agent is unable to fulfill. D. an agent pursues his own interests rather than the interests of the principal who hired him.
D. an agent pursues his own interests rather than the interests of the principal who hired him.
Which of the following is true of the management structure of corporations in the United States? Part 2 A. Members of management who are inside directors serve on the board of directorsMembers of management who are inside directors serve on the board of directors. B. Large corporations are legally owned by shareholders who do usually not directly manage the firm. C. The chief executive officer runs the day-to-day operations of the corporation but does not sit on the board of directors. D. Large corporations are legally owned by a board of directors that directly managesa board of directors that directly manages the firm. E. Both a and b.
E. Both a and b.
Question content area Part 1 What affects the desirability of a product? Part 2 Products become more desirable when Part 3 A. professional athletesprofessional athletes use a product because consumers who use the same product may feel closer to famous people. B. celebritiescelebrities use a product because consumers who use the same product may feel more fashionable. C. movie starsmovie stars use a product because consumers perceive them to be particularly knowledgeable about it. D. both a and b. E. all of the above.
E. all of the above.
Rules of thumb are guides to decision making that always produce optimal choices. A. True B. False
FALSE
Utility refers to how much consumers utilize a product or service.
False
In which of the following industries do investors require a higher rate of return?
In more risky industries.
What is a budget constraint?
It is the limited amount of income available to consumers to spend on goods and services.
What do you obtain when you subtract the value of the firm's liabilities from the book value of the firm's assets?
Net worth
What term do economists use to refer to the minimum amount that investors must earn on the funds they invest in a firm, expressed as a percentage of the amount invested?
Normal rate of return
Sole proprietorships or partnerships
Sole proprietorships or partnerships do not have this protection and have unlimited liability. Firms organized in this manner find it difficult to raise capital since it exposes investors to unlimited liability.
If people are uncertain whether the price of a product is high or low, they often compare the price to the previous price of the product. A. True B. False
TRUE
primary benefit of incorporating is to limit the liability of the owners
The primary benefit of incorporating is to limit the liability of the owners. The owners of a corporation (stockholders or shareholders) can only lose the amount they have invested in the company. If the corporation goes bankrupt, the creditors cannot go after the personal wealth of the owners.
In many cases, the popularity of people who use a product can make the product desirable. true or false
True
The economic model of consumer behavior predicts that consumers will choose to buy the combination of goods and services that makes them as well off as possible from among all the combinations that their budgets allow them to buy.
True
The marginal utility per dollar you are spending on iTunes music downloads is less than the marginal utility per dollar you are spending on Red Bull. According to the rule of equal marginal utility per dollar spent, what can you do to increase your total utility from consumption of music downloads and Red Bull?
You can increase your consumption of Red Bull.
What happens when network externalities are present? A. The usefulness of a product decreases as the number of firms selling the product increases. B. The usefulness of a product increases with the number of consumers who use it. C. The usefulness of telecommunications equipment rises. D. The usefulness of networks diminishes with the number of consumers who enter them.
b. The usefulness of a product increases with the number of consumers who use it.
A summary of a firm's financial position on a particular day is known as a(n):
balance sheet
What effect does a network externality have on the market for a product? Part 2 If a network externality is present for a product, then Part 3 A. consumersconsumers may be moremore likely to buybuy the product to avoid market failure. B. producersproducers may be less likely to supplysupply the product to avoid switching costs. C. producers may be less likely to supply the product because it is less unique. D. consumers may be more likely to buy the product because it is more useful. E. consumersconsumers may be more likely to buybuy the product to create path dependence.
c consumers may be more likely to buy the product because it is more useful.
The income effect causes quantity demanded to ________ when the price of a normal good decreases, and causes quantity demanded to ________ when the price of an inferior good decreases. a. decrease; decrease B. increase; increase C. increase; decrease D. decrease; increase
c. increase; decrease
Suppose a consumer is trying to decide how much to spend on transportation transportation and how much to spend on all other (non-transportation transportation) consumption. The economic model of consumer behavior predicts that the consumer will A. consume as much transportation and as much non-transportation consumption as she wants. B. consume any combination of transportation and non-transportation consumption from among the combinations of transportation and non-transportation items she can afford. C. consume an infinite amount of transportation transportation and non-transportation consumption. D. choose the combination of transportation and non-transportation consumption that makes her as well off as possible from among the combinations of transportation and non-transportation items she can afford. E. consume as much transportation as she can afford without any non-transportation cons
choose the combination of transportation and non-transportation transportation consumption that makes her as well off as possible from among the combinations of transportation transportation and non-transportation items she can afford.
Which of the following mistakes do consumers commonly commit when making decisions? A. They are unrealistic about their future behavior. B. They fail to ignore sunk costs. C. They take into account monetary costs but ignore nonmonetary opportunity costs. D. All of the above are mistakes consumers commonly commit when making decisions.
d All of the above are mistakes consumers commonly commit when making decisions.
An income statement shows a firm's Part 2 A. revenues. B. profits. C. costs. D. all of the above.
d. all of the above
If a 20 percent increase in the price of Red Bull energy drinks results in a decrease in quantity demanded of 25 percent, we say the demand for Red Bull is __________ in this range. inelastic unit elastic elastic
elastic
If the supply of Good B is perfectly elastic and price falls the quantity supplied will: rise remain unchanged fall to zero
fall to zero
The more time that passes, the more inelastic the demand for a product becomes. TRUE OR FALSE
false
The more substitutes that exist for a particular product, the __________ the price elasticity of demand. greater steeper smaller
greater
The primary cause of the Financial Crisis of 2007-2009 was:
house mortgages
If investors become more optimistic about a firm's prospects and the managers want to expand operations as a result, it would likely cause the stock price to __________.
increase
If the price elasticity of supply is 0.4, then a 20% increase in price will __________ the quantity supplied by __________ %. increase, 50.0 increase, 8.0 decrease, 8.0
increase, 8.0
A perfectly inelastic supply curve: -- indicates the quantity supplied does not respond to a change in price --shows that quantity supplied is very responsive to a change in price --is horizontal at a given price
indicates the quantity supplied does not respond to a change in price --A perfectly inelastic supply curve indicates the quantity supplied does not respond to a change in price. If the supply is inelastic a price change results in no change in quantity supplied. Inelastic supply curves are vertical and not horizontal. Inelastic supply is typically due to some constraint that does not allow suppliers to react to the price change. Over time the suppliers will likely react and the supply will move from the perfectly inelastic range.
At current prices of a highly addictive drug the demand for the drug is highly price: inelastic elastic unit elastic
inelastic
The disappearance of the family farm can be partially attributed to the fact that the elasticity of demand for wheat is __________, while at the same time, the income elasticity for wheat is __________. inelastic, high elastic, low inelastic, low
inelastic, low
Along a linear demand curve, the slope __________ while the price elasticity of demand __________. changes from one point to another, is constant is constant, is constant is constant, changes from one point to another
is constant, changes from one point to another
Accounting profits will always be __________ economic profit.
larger than -Accounting profit excludes some implicit costs such as the opportunity cost associated with using a facility instead of renting it to someone else. Since generally accepted accounting practices do not allow the firm to expense these types of costs the firm's accounting profits will be larger than the economic profit where these costs are considered.
According to the law of diminishing marginal utility, as the consumption of a particular good increases,
marginal utility decreases.
When you compute a price elasticity of demand the answer is always: ANSWER greater than 1 negative positive
negative
Question content area Part 1 Suppose you have a monthly entertainment budget that you use to rent movies and purchase CDs. You currently use your income to rent 5 movies per month at a cost of $5.00 per movie and to purchase 5 CDs per month at a cost of $10.00 per CD. Your marginal utilityLOADING... from the fifth movie is 3030 and your marginal utility from the fifth CD is 6464. Part 2 Are you maximizing utility? Part 3 You are Part 4 A. maximizing utility because you are spending all of your entertainment budget. B. not maximizing utility because the marginal utility of movies is not equal to the marginal utility of CDs. C. maximizing utility because you are consuming an equal number of movies and CDs. D. not maximizing utility because the marginal utility per dollar spent on movies is not equal to the marginal utility per dollar spent on CDs. E. not maximizing utility because the price of movies is not eq
not maximizing utility because the marginal utility per dollar spent on movies is not equal to the marginal utility per dollar spent on CDs.
Economists avoid confusion over units in the computation of elasticity by using: percentage changes simple differences aggregate values
percentage changes
The price elasticity of supply always has a: negative value zero value positive value
positive value
The value of the firm should be equal to the:
present value of the firm's expected cash flows
The value of the firm should be equal to the:
present value of the firm's expected cash flows The value of the firm should be equal to the present value of the firm's expected cash flows. The other values are merely accounting values and do not reflect the value of the assets in terms of the cash flows they can generate. Investors always focus on future cash flows.
The __________ is a measure of responsiveness of the change in quantity demanded of a good to the change in its price. ANSWER unit-elasticity of demand price elasticity of demand price elasticity of supply
price elasticity of demand
If prices rise the quantity supplied will be greater: the longer the time that elapses if there are more substitutes the higher the consumer income
the longer the time that elapses
direct finance
while a flow of funds from savers to firms through financial markets, such as the New York Stock Exchange is
