MBA 7220 Midterm

The Principal Agent Problem Arises When

The Principal finds it too costly to monitor the agent

The consumer chooses the bundle of goods that maximizes his utility and spends all his income.

The addition to utility of the last unit of the good per dollar is equal across all goods.

The rate at which a consumer is willing to substitute one good for another is measured by the

slope of the line tangent to the indifference curve.

If average product is decreasing, then marginal product

must be less than average product.

If the p-value is 10%, then the

null hypothesis should not be rejected if the level of significance is 5%

If the p-value is 0.01 for the parameter estimate for b, the

probability of finding statistical significance when the true value of b is zero is exactly 1%.

The rate at which a consumer is ABLE to substitute one good for another is determined by the

ratio of the prices of the goods

If the t-statistic exceeds the critical value of t , then one can

reject the hypothesis that the true value of the parameter equals zero.

A utility function

shows the relation between the amount of goods consumed and a consumer's utility.

Marginal Rate of Substitution (MRS)

the rate at which a consumer is willing to trade one good for another

The rate at which a consumer is WILLING to substitute one good for another is measured by

the slope of the tangent to the indifference curve.

The optimal level of pollution reduction is that level at which

the total benefit of pollution reduction exceeds the total cost of pollution reduction by the greatest amount.

The optimal level of pollution reduction is that level at which

the total benefits of pollution reduction exceeds the total cost of pollution reduction by the largest amount AND the additional benefit of the last unit of pollution reduction equals the additional cost of the last unit of pollution reduction

Manager Mistake

Increasing the rate of production in order to reduce unit costs of production

The Value Of A Firm

Is Larger the Lower is the risk premium used to compute value or Smaller the Higher is the risk premium

Moral Hazard

Is the cause of principal-agent problems

If a supply curve goes through the point P = $10 and Qs = 320, then

$10 is the lowest price that will induce firms to supply 320 units.

quasi-fixed input

A fixed input that need not be paid when output is zero.

When marginal revenue is positive,

demand is elastic.

This causes a change in quantity supplied

A change in the market price of a good

In the Long Run

All outputs are variable

Fixed Costs

Are sunk costs

consumer behavior theory

Consumers can rank all bundles of goods. AND Consumers have complete information.

To test whether the overall regression equation is statistically significant, one uses the

F-statistic.

If input prices increase

Supply will Decrease

Implicit Costs

The opportunity cost of the owner's resources

Equity Ownership by Managers

Thought to be one of the most effective corporate control mechanisms

Economic Profit is the Difference Between

Total revenue and the opportunity cost of all the resources used in production

When considering two goods, a corner solution exists if

a consumer spends his or her entire budget and chooses to purchase zero units of one good.

multiple regression model

an equation used to explain the results of multiple regression analysis___one explanatory variable explains the variation in the dependent variable

With a given supply curve, a decrease in demand leads to

a decrease in equilibrium price and a decrease in equilibrium quantity.

The method of least squares

can be used to estimate the slope parameters of a linear equation.

random error term

captures the effects of factors that might influence the dependent variable but aren't used as explanatory variables.

marginal utility

change in total utility that results from increasing the amount of a good consumed by one unit.

Along an indifference curve

consumer utility is constant

Monopolistic Competition

entry into the market is relatively easy so that profit in the long run is zero

For the equation Y = a + bX, the objective of regression analysis is to

estimate the parameters a and b AND to fit a straight line through the data scatter in such a way that the sum of the squared errors is minimized.

An estimator is unbiased if it produces

estimates of a parameter that are, on average, equal to the true parameter.

Marginal Cost

is less than average cost when average cost is decreasing.

marginal product of labor

is less than the average product of labor when the average product of labor is decreasing AND is negative when adding another unit of labor decreases output.

In order to minimize the NET costs associated with something,

it should be reduced to the level at which the marginal cost from one thing equals the marginal cost of the prevention.

If the level of significance for testing is specified to be 5%, then the parameter estimate for b is statistically significant if its p-value is

less than .05

Owners of a firm want the managers to

maximize the value of the firm and maximize expected profit in each period of operation.when revenue and cost conditions in one time period are independent of revenues and costs in future time periods

In a multiple regression model, the coefficients on the independent variables measure

the change in the dependent variable from a one-unit change in that independent variable, all other influences held constant.

For an unconstrained maximization problem

the decision maker seeks to maximize net benefits.

In the nonlinear function Y = aXbZc, the parameter c measures

the elasticity of Y with respect to Z.

A price-taking firm can exert no control over price because

the firm's individual production is insignificant relative to total production in the industry.

If profits depend on both how much is produced (output) and on the level of advertising, then a profit-maximizing firm should choose the levels of output and advertising at which

the marginal revenue of output equals the marginal cost of output AND the addition to total revenue of the last unit of advertising equals the addition to total cost of the last unit of advertising

Which of the following would tend to INCREASE the elasticity of demand for good X?

the percentage of a consumer's income spent on good X increases.

The ratio of the prices of two goods measures

the rate at which a consumer is able to substitute one good for another in the market.

A manager who does not see his or her goal as the maximization of profit

this is a principle-agent problem and will likely be replaced either by shareholders or by a takeover of the firm

If a firm is producing a given level of output in an economically efficient manner, then it must be the case that

this is the lowest cost method of producing that output AND this output level is the most that can be produced with the given level of inputs.

If a firm is producing a given level of output in a technically-efficient manner, then it must be the case that...

this output level is the most that can be produced with the given levels of inputs.

A firm will maximize profit by producing that level of output at which...

total revenue exceeds total cost by the largest amount AND the additional revenue from the last unit sold exceeds the additional cost of the last unit by the largest amount.

When economic profit is positive,

total revenue exceeds total economic cost.

economic profit

total revenue minus total cost, including both explicit and implicit costs. Total Revenue - Total Cost

A parameter estimate is said to be statistically significant if there is sufficient evidence that the

true value of the parameter does not equal zero.

A parameter is said to be statistically significant if there is sufficient evidence that the

true value of the parameter does not equal zero.