BA 511 Final
If the interest rate is 10 percent and cash flows are $1,000 at the end of year one and $2,000 at the end of year two, then the present value of these cash flows is:
$2,562
Calculate the markup price if MC = $10.00 and price elasticity equals 1.7. hint: Optimal price is P=MC/[1-1/ (elasticity)]
$24.27
Concerning the maximization of output subject to a cost constraint, which of the following statements (if any) are true?
-At the optimal input combination, the slope of the isoquant must equal the slope of the isocost line. -The optimal solution occurs at the boundary of the feasible region of input combinations. -The optimal solution occurs at the point where the isoquant is tangent to the isocost lines.
Why business forecasting is so important ?
-Both public and private enterprises operate under conditions of uncertainty. -Management wishes to limit this uncertainty by predicting changes in cost, price, sales, and interest rates. -Accurate forecasting can help develop strategies to promote profitable trends and to avoid unprofitable ones. -Good forecasting will reduce, but not eliminate, the uncertainty that all managers feel.
Ralph, the Amcott manager was fired because
-He did not recognize the time value of money and was not properly processing information given to him -He took a project with a negative net present value
What's true about both the short-run and long-run in terms of production and cost analysis?
-In the short-run, one or more of the resources are fixed -In the long-run, all the factors are variable -The time horizon determines whether or not an input variable is fixed or not -The law of diminishing returns is based in part on some factors of production being fixed, as they are in the short run.
Select the correct statement.
-Surveys are a form of qualitative forecasting -Qualitative forecasts give the direction of change. -Quantitative forecasts give the exact amount or exact percentage change. -Diffusion forecasts use the proportion of the forecasts that are positive to forecast up or down.
Factors Affecting the Elasticity of Demand
-The availability and the closeness of substitutes (more substitutes, more elastic) -The percentage of the consumer's budge (larger proportion of the budget, more elastic) -Positioning as income superior (Products that are viewed as superior goods with large income elasticities, tend to be more elastic.) -Time period of adjustment (more time, generally, more elastic)
Susan Hansen, Ursinus College's admissions director suggested increasing enrollments by increasing tuition and reducing financial aid to students. What could we learn from this case study ?
-The law of demand states that demand curves slopes downward. If managers assume that their demand curves slope upward , they are likely to be making a big mistakes. -It is theoretically possible for demand curves to slope upward but in actuality this event is rare. -High tuition could convey information about quality of education. This factor will however become less important after the students are more informed about the school. -Susan confused correlation with causation. The positive correlation between high tuition and high enrollment does not necessarily indicate high tuition causes high enrollment.
Which of the following statements concerning the shareholder wealth maximization model is (are) true?
-The timing of future profits is explicitly considered. -The model provides a conceptual basis for evaluating differential levels of risk
Which of the following is a source of market power for a monopolist?
-a firm may have a patent or copyright -a firm may control critical resources -a firm may have a government-authorized franchise -a firm may enjoy economies of scale
Identify the reasons why the quantity demanded of a product increases as the price of that product decreases.
-as the price declines, the real income of the consumer increases -as the price of product A declines, it makes it more attractive than product B
Regulatory agencies engage in all of the following activities _______.
-controlling entry into the regulated industries -overseeing the quality of service provided by the firms -setting prices that consumers will pay
In the case of pure monopoly:
-one firm is the sole producer of a good or service which has no close substitutes -the firm's profit is maximized at the price and output combination where marginal cost equals marginal revenue
In pure competition:
-the optimal price-output solution occurs at the point where marginal revenue is equal to price -a firm's demand curve is represented by a horizontal line -a firm is a price-taker since the products of every producer are perfect substitutes for the products of every other producer
Holding the total output constant, the rate at which one input X may be substituted for another input Y in a production process is:
-the slope of the isoquant curve -the marginal rate of technical substitution (MRTS) -equal to M P subscript x divided by M P subscript y
The common factors that give rise to all principal-agent problems include the
-unobservability of some manager-agent action -presence of random disturbances in team production
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.
1,500
Mr. Geppetto uses exponential smoothing to predict revenue in his wood carving business. He uses a weight of ω = .4 for the naïve forecast and (1-ω) = .6 for the past forecast. What revenue did he predict for March using the data below? Select closet answer. month revenue table Hint: use the equation [5.15] in the textbook: Y^t+1 = w Yt + (1-w) Y^t
106.2
Brewing Company experienced the following monthly sales (in thousands of barrels) during 2010: Jan. 97 Feb. 92 Mar. 110 Apr. 110 May 113 June 116 Develop forecasts for February through July using the exponential smoothing method (with w = .7). Begin by assuming. Yt+1= Yt. What is the forecast of July?
114.7
The approximate probability of a value occurring that is greater than one standard deviation from the mean is approximately (assuming a normal distribution)
15.87%
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 the cold and dreary first quarter, and zero otherwise, because the months of January, February, and March generate few sales at the Garden Center. Use this model to estimate sales in a store for the first quarter of 2010 in the 17th month; that is: {2010 I}. Emma's forecast should be:
2,800 + 200 x (17) - 350 x (1)= 6,200-350= 5850
If price elasticity in region 1 is -2 and in region 2 is -3. In order to maximize profit in both region 1 and region 2, what relationship could be between optimal price P1 in region 1 and optimal price P2 in region 2? Hints: read Differential pricing and the price elasticity of demand on page 517 or Lecture slides 29.
3P1 = 4P2
An investment advisor plans a portfolio for your 85 year old risk-averse grandmother. Her portfolio currently consists of 60% bonds and 40% blue chip stocks. This portfolio is estimated to have an expected return of 6% and with a standard deviation 12%. What is the probability that she makes more than 0% in a year? [A portion of Appendix C is given below, where z = (x - μ)/σ , with μ as the mean and σ as the standard deviation.] Hint: Read the pages 54-55; P(X>0%) = P( (X-μ)/σ >(0%-6%)/12%) = P(Z>-.5)=1-P(Z<-.5) Table B1 for Z Z Prob. -3 .0013 -2.5 .0062 -2. .0228 -1.5 .0668 -1 .1587 -.5 .3085 0 .5000
69.15% 30.85% 50% Response Feedback: =1-P(<-.5) = 1-.3085 = 69.15%
What is the marginal revenue of producing the third unit?
70
14. If transactions costs can be reduced in a marketplace, then total producer and consumer surplus will: A. increase. B. stay the same. C. decrease. D. first increase and then decrease.
A
17. Dell Computer attempts to collect information about customers before purchase and assemble customized product for the customer. This process tries to: A. reduce transactions costs for both Dell and the customer. B. reduce transactions costs for the customer only. C. increase transactions costs for Dell so that it can reduce taxable profits. D. increase transactions costs for customers so that IBM can sell send PCs also.
A
23. Putting together two goods - shaving cream and razors - to increase value is using the power of: A. complementary goods. B. substitute goods. C. unrelated goods. D. technologically advanced goods.
A
30. In a corporation, one important source of value is that 'whole organization' is worth more than the sum of its parts. This is called: A. team production capabilities. B. collective cost analysis benefits. C. complementary goods value creation. D. substitute goods value creation.
A
Finding a way to create and capture value is part of: A. business strategy. B. cost control systems. C. management control, but not general management. D. allowing the market to run a company's future plans.
A
Have an agreement to restrict output
A cartel is a situation where firms in the industry
Marginal costs
A change in the level of an economic activity is desirable and should be undertaken as long as the marginal benefits exceed the ______
Two-part tariff
A customer pays an admission fee to get into the local YMCA, and also a monthly membership fee. This is called:
Price is less than average variable cost
A firm in pure competition would shut down when:
False
A monopoly will always produce less than a purely competitive industry, ceteris paribus
The following statements are correct , EXCEPT
A smoothing forecast method is often used when data series tends to change fast between periods
False
According to the innovation theory or profit, above-normal profits are necessary to compensate the owners of the firm for the risk they assume when making their investments
True
According to the managerial efficiency theory of profit, above-normal profits can arise because of high-quality managerial skills.
False
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.
Increasing returns and declining average and marginal costs
According to the theory of cost, specialization in the use of variable resources in the short-run results initially in:
True
Agency problems and costs are incurred whenever the owners of a firm delegate decision-making authority to management
P = MC
All of the following are true for both competition and monopolistic competition in the long run, except one of them. Which is it?
Empirical estimates of the price elasticity of demand in the following table suggest that the demand for household consumption of bedroom funiture is:
All others remain unchanged, price increases will decrease both sales in unit and revenue.
Criteria used to select a particular forecasting method EXCEPT
Always use the most sophisticated model to have the most forecasting accuracy
One percent; quantity demanded; two percent An income elasticity (Ey) of 2.0 indicates that for a _____ increase in income, ____ will increase by _____
An income elasticity (Ey) of 2.0 indicates that for a _____ increase in income, ____ will increase by _____
Level of competitor advertising
An increase in each of the following factors would normally provide a subsequent increase in quantity demanded, except:
Increase in the price of substitute goods, a decrease in the price of complementary goods, an increase in consumer income levels
An increase in the quantity demanded could be caused by:
A Real Option Value is:
An opportunity to implement cost savings or revenue expansion in a flexible business plan
18. The fast food industry from Back Yard Burgers to KFC promises good food delivered quickly. The value of the consumer's time: A. is less important than productions costs. B. is a key component in creating value for the firm and the consumer. C. is usually so low that fast food is unimportant in the marketplace. D. must be discounted to make sure it is negative.
B
28. Paul Romer argues that "what underlies this process [economic success] are instructions, formulas, recipes, and methods of doing things." He is referring to the: A. hardware or tangible assets. B. software or intangible assets. C. wetware or soup recipes. D. hardware or human resources.
B
31. In a competitive market, the firm has a difficult time capturing value due to the large number of rivals. But it can be successful at capturing value if the: A. firm's cost curves are higher than rivals. B. firm's superior productivity is based on value of the whole organization. C. firm's superior productivity is based on selected components of superiority within the firm. D. demand for the firm's product is inelastic.
B
True
Barbers give a price discount to kids. According to price discrimination, if barbers use price discrimination, this implies demand for hair cuts by kids is more elastic.
one firm in the industry initiates a price change and the others follow it as a signal of changes in cost or demand in the industry.
Barometric price leadership exists when
Common stock
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?
Novo Nordisk A/S, a Danish firm, sells insulin and other drugs worldwide. Activella, an estrogen and progestin hormone replacement therapy sold by Novo-Nordisk, is examined using 33 quarters of data Y = -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 chief competitor. The parentheses contain t-values. Addition information is: Durbin-Watson = 1.9 and R2 = .89. According to t distribution table, t.05,31=1,6955 Using the data for Novo-Nordisk, which is correct?
Both X1 and X2 are statistically significant.
In the short run, there is no distinction between variable and fixed costs.
Break-even analysis usually assumes all of the following except:
A manufacturer produces two types of computer software, Word processing (W) and Spreadsheet (S), which is offered to two different retail outlets (#1 and #2). The following table shows the maximum price each retail outlet is willing to pay for each individual software product. Product W Product S Retail #1 $170 $105 Retail #2 $95 $135 What is the optimal pricing strategy that will maximize revenue for the manufacturer, given the maximum the retail outlets are willing to pay?
Bundle both products (W and S) and sell them at $230
15. If consumers find that there are substantial transactions costs to purchasing a product, then: A. overall consumer demand is greater at each price. B. overall consumer demand is the same at each price. C. overall consumer demand is less at each price. D. equilibrium price and quantity both fall.
C
16. In terms of business strategy, managers will attempt to adopt business strategies that attempt to: A. maximize transactions costs. B. stabilize transactions costs. C. Minimize transactions costs. D. Invert transactions costs.
C
21. Ready-to-eat products like Kraft Lunchables: A. decrease producer transactions costs. B. increase producer transactions costs. C. decrease consumer transactions costs. D. increase consumer transactions costs.
C
22. Since September 11, 2001, longer lines, longer airport waits, and limits on carry-on luggage have all contributed to: A. an increase vacation air travel. B. an increase in business air travel. C. a decline in value of air travel. D. an increase in value of air travel.
C
24. Bundling of complements to create value strategically usually leads to lower prices for the consumer: A. greater volume sold, and lower profits. B. less sold, and lower profits. C. greater volume sold, and greater profits. D. less sold, and greater profits.
C
25. Successful invention and innovation in the marketplace: A. can create value and is easy to capture. B. cannot create value and is difficult to capture. C. can create value but is often difficult to capture. D. is not important to most company's strategy.
C
26. A company can translate its assets into value if it effectively uses them in the marketplace. The three types of assets are tangible assets, intangible assets and: A. fungible assets. B. liability assets. C. human assets. D. machinery and tools.
C
27. Human resources as a source of creating value in a modern company are also referred to as: A. hardware. B. software. C. wetware. D. dryware.
C
29. A firm can capture value through market power or through superior factors of production. The latter are also called: A. housing rents. B. monopoly rents. C. Ricardian rents. D. Bushian rents.
C
34. Setting up of outlet malls in rural highways is an example of: A. increased consumer transactions cost. B. increased producer transactions cost. C. reduced consumer transactions cost. D. reduced producer transactions cost.
C
The following statements regarding Deterministic Trend-forecasting models are correct ,EXCEPT
Can help to Identify major future changes in the direction of an economic data series
U.S. government treasury bills
Closest example of a risk-free security
The following statement regarding collusion is correct, EXCEPT
Collusion is more successful when percentage of external suppliers is small.
12. Strategy refers to the general policies that managers adopt to increase: A. costs. B. the number of customers at the same price. C. the rate of technological change. D. the generation of profits.
D
13. As opposed to corporate strategy, business strategy is focused on: A. cost control of fixed costs. B. demand management. C. the choice of industries in which to produce. D. the choice of how to compete with other firms in the industry.
D
19. The learning effect is one form of: A. diversification. B. creating value through increasing transactions costs. C. creating value through stabilizing transactions costs. D. creating value through decreasing transactions costs.
D
20. Wal-Mart, like many companies in the new economy, uses a hub-and-spoke distribution system to: A. increase costs of stocking and inventory . B. change consumer attitudes toward warehouse shopping. C. shift consumer demand to the left. D. decrease costs of stocking and inventory.
D
32. With creating value we have: A. a shift in both the demand and supply curves to the right. B. a shift in both the demand and supply curves to the left. C. demand shift to the right and supply to the left. D. demand shift to the left and supply to the right.
D
33. Setting up a hub-and-spoke distribution towards inventory and retail delivery is an example of: A. increased consumer transactions cost. B. increased producer transactions cost. C. reduced consumer transactions cost. D. reduced producer transactions cost.
D
35. Manufacturers of printers and computers set prices independently. This means that they: A. do not consider the positive effect that their lower prices have on the other's profit. B. do not consider the negative effect that their lower prices have on the other's profit. C. do not consider the positive effect that their higher prices have on the other's profit. D. do not consider the negative effect that their higher prices have on the other's profit.
D
36. Hardware, software and wetware refer to: A. fixed costs, variable costs and liabilities. B. financial resources, buildings and overhead. C. buildings, computers and financial resources. D. physical assets, "soft" assets such as its advertising strategies and human resources.
D
37. Profits will be: A. high regardless of the degree of rivalry. B. high when the degree of rivalry is high. C. low when the degree of rivalry is low. D. low when the degree of rivalry is high.
D
38. Degree of rivalry is: A. high when excess capacity of existing firms is low. B. low when fixed costs of existing firms are high. C. high when fixed costs of existing firms are low. D. high when fixed costs of existing firms are high.
D
39. Economies of scope are said to exist when: A. one firm produces many products rather than separate firms for each. B. many firms produce many products rather than one firm producing all. C. many firms produce a single product rather than one firm. D. one firm produces multiple products rather than separate firms producing all.
D
40. Diversifying to reduce volatility is a: A. good idea only if shareholders can hold a diversified portfolio. B. good idea only if managers cannot hold a diversified portfolio. C. good idea only if managers can hold a diversified portfolio. D. good idea only if shareholders cannot hold a diversified portfolio.
D
41. Related diversification occurs when: A. a business serves itself first before serving others. B. a business serves others first before serving itself. C. a business serves itself and allows other to serve it. D. a business serves itself and many other common businesses.
D
Which of the following will increase (V0), the shareholder wealth maximization model of the firm: V0∙(shares outstanding) = Σ∞t=1 (π t ) / (1+ke)t + Real Option Value.
Decrease the required rate of return (ke).
Marginal impact of a unit change in an individual variable is constant
Demand functions in the multiplicative form are most common for all of the following reasons except:
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) ∂Q/∂P = -2]
EP = -2.0
Total economic cost
Economic profit is defined as the difference between revenue and ______
Reduced when two or more products are produced
Economies of Scope refers to situations where per unit costs are:
Decrease as output is increased
Economies of scale exist whenever long-run average costs:
True
Effective collusion generally is more difficult as the number of oligopolistic firms involved increases.
Dynamic pricing
Electricity pricing that varies in its billing expense throughout the day is called
Price inelastic
Empirical estimates of the price elasticity of demand suggest that the demand for household consumption of alcoholic beverages is:
number and size distribution of sellers, size and frequency of orders, product heterogeneity
Factors that affect the ability of oligopolistic firms to successfully engage in cooperation include ____
The marginal cost function intersects the average fixed cost function where the average variable cost function is a minimum
For a short-run cost function which of the following statements is (are) not true?
Knowing how to avoid a price war has become a critial success factor in tight oligopolistic groups. What strategies could be used to avoid price wars?
Growing total Market Differential pricing Use reference prices and framing effects Product Innovation
as the price declines, the real income of the consumer increases as the price of product A declines, it makes it more attractive than product B
Identify the reasons why the quantity demanded of a product increases as the price of that product decreases.
Marginal cost
If a cartel seeks to maximize profits, the market share (or quota) for each firm should be set at a level such that the ____ of all firms is identical.
More; increase; down
If price exceeds average costs under pure competition, ____ firms will enter the industry, supply will ____, and price will be driven ____.
Which is NOT true about the coefficient of determination?
If the R-square is above 50%, the regression is considered significant.
Substitutes
If the cross price elasticity measured between items a and b is positive, the two products are referred to as:
Raise the price
If the demand were inelastic, then we should immediately:
Other firms will automatically follow
In a kinked demand market, whenever one firm decides to lower its price,
All inputs are considered variable
In a long-run cost function,
Stage 3
In a production process, an excessive amount of the variable input relative to the fixed input is being used to produce the desired output. This statement is not true for:
MP = 0
In a relationship among total, average and marginal products, where TP is maximized
Survivorship analysis
In a study of banking by asset size over time, we can find which asset sizes are tending to become more prominent. The size that is becoming more predominant is presumed to be least cost. This is called:
If the amount of labor input (L) is increased by 1 percent, the output will increase by β1 percent
In the Cobb-Douglas production function
One minus the variable cost ratio
In the linear breakeven model, the breakeven sales volume (in dollars) is equal to fixed costs divided by:
Contribution margin per unit
In the linear breakeven model, the difference between selling price per unit and variable cost per unit is referred to as:
Tend to just cover costs, including normal profits
In the long-run, firms in a monopolistically competitive industry will
Profits (Cash flows)
In the shareholder wealth maximization model, the value of a firm's stock is equal to the PV of all expected future )))) discounted at the stockholders' required rate of return
The contribution to fixed costs is zero or less
In the short-run for a purely competitive market, a manufacturer will stop production when:
In a cross section regression of 48 states, the following linear demand for per-capita cans of soda was found: Cans = 159.17 - 102.56 Price + 1.00 Income + 3.94Temp From the linear regression results in the cans case above, we know that: Hint: 1) critical T value = 2.02 at the .05 significance level; 2) if | t Stat| >critical T value, we reject the null hypothesis. In other words, we say that variable is significant at 95% confidence
Income is insignificant at a significance level of 95%
In a relationship among total, average and marginal products, where TP is maximized:
MP is equal to zero
Suppose the equilibrium price in the market is $60 and the marginal revenue associated with the linear (inverse) demand function is $20. Then we know that the own price elasticity of demand is:
MR = P ( 1 + 1/ED ) 20= 60(1+ 1/ED ) 1/ED = -2/3 ED = -1.5
Complete the following table when output =2:
Marginal Profit 18 ; Average Profit -4
Which of the following statements is (are) true concerning a pure competition situation?
Marginal revenue is equal to price.
A conflict between tactically best interest and one's duty
Moral hazard in team production arises from:
The law of diminishing marginal returns:
NONE: states that each and every increase in the amount of the variable factor employed in the production process will yield diminishing marginal returns is a mathematical theorem that can be logically proved or disproved is the rate at which one input may be substituted for another input in the production process
Constant cost industry
Of the following, which is not an economic rationale for public utility regulation?
A price elasticity (ED) of -1.50 indicates that for a _____ increase in price, quantity demanded will ____ by ______
One percent; decreases; 1.50 percent
Land's End estimates a demand curve for turtleneck sweaters to be: Log Q = .41 + 2.3 Log Y - 3 Log P where Q is quantity, P is price, and Y is a measure on national income. If the marginal cost of imported turtleneck sweaters is $9.00. (HINT: P (1 +1/E) = MC). The optimal monopoly price would be:
P = $13.50
Unique Creations has a monopoly position in magnometers. If the marginal cost for a mag-nometer is $50 and the price elasticity for magnometers is -4, what is the profit-maximizing markup? Hint: P (1 +1/E) = MC.
P= [E/ (E+1)] * MC P = [-4/(-4+1)] * 50 P = 4/3 * 50 or 1.33 * 50 P = $66.67
Specialization in the use of capital and labor
Possible sources of economies of scale (size) within a production plant include:
Maximize shareholder wealth
Primary objective of a for-profit firm
Two investments have the following expected returns (net present values) and standard deviations: PROJECT Expected Value Standard Deviation Q $100,000 $20,000 X $50,000 $16,000 Based on the Coefficient of Variation, where the C.V. is the standard deviation dividend by the expected value.
Project X is riskier than Project Q
Which of the statements about price discrimination is (are) false?
Public utilities practice first-degree price discrimination.
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 maximizing QUANTITY for this monopoly? Hint: MR is twice as steep as the inverse demand curve: MR = 62 - 6 Q. (Pick closest answer)
Q= 10
Opportunity to implement cost savings or revenue expansion in a flexible business plan
Real option value
False
Receiving $100 each at the end of the next three years is worth more to me than receiving $260 right now, when m
Short-run cost function
Relevant to decisions in which one or more inputs to the production process are fixed
The Saturn Corporation (once a division of GM) was permanently closed in 2009. What went wrong with Saturn?
Saturn sold cars below the prices of Honda or Toyota, earning a low 3% rate of return.
Teammates face a dilemma posed by a dominant strategy to shirk
Shirking of one's duties is often encountered in team production settings because
Buyer preferences for established brand names, economics of large-scale production and distribution, patent control of superior product designers or production techniques
Sources of positive net present value projects include:
Law of diminishing marginal returns
States that increases in one factor of production, holding one or other factors fixed, after some point, results in the decline of marginal product.
In a cross section regression of 48 states, the following linear demand for per-capita cans of soda was found: Cans = 159.17 - 102.56 Price + 1.00 Income + 3.94Temp
Temp is significant
coefficient of variation; standard deviation; expected value
The ____ is the ratio of ____ to the ____.
15.87%
The appropriate probability of a value occurring that is greater than one standard deviation from the mean is approximately (assuming a normal distribution)
Unobservability of some manager-agent action, presence of random disturbances in team production
The common factors that give rise to all principal-agent problems include:
The main difference between perfect competition and monopolistic competition is:
The degree of product differentiation
Pure monopoly
The demand curve facing the firm in ____ is the same as the industry demand curve
True
The distinctive characteristic of an oligopolistic market structure is that there are recognizable interdependencies among the decisions of the firms.
Problems of coordination and control encountered by management
The existence of diseconomies of scale (size) for the firm is hypothesized to result from:
If the marginal product of labor is 100 and the price of labor is 10, while the marginal product of capital is 200 and the price of capital is $30, then what should the firm?
The firm should use relatively more labor
Innovation theory of profit
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?
a product sells at a higher price at location A than at location B, because transportation costs are higher from the factory to A.
The following are possible examples of price discrimination, EXCEPT:
Microeconomics
The form of economics most relevant to managerial decision-making within the firm
Rigidities observed in prices in oligopolistic industries
The kinked demand curve model was developed to help explain:
Degree or product differentiation
The main difference between perfect competition and monopolistic competition is:
The expected contribution of that investment to the goal of shareholder wealth maximization
The net present value of an investment represents:
Pure competition
The optimal price-output solution occurs at the point where marginal revenue is equal to price, a firm's demand curve is represented by a horizontal line, a firm is a price-taker since the products of every producer are perfect substitutes for the products of every other producer
What is the profit maximization point for a firm in a purely competitive environment?
The output where P = MC
Demand is given by Qd = 620 - 10·P and supply is given by Qs = 100 + 3·P. What is the price and quantity when the market is in equilibrium?
The price will be $40 and the quantity will be 220 units.
The coefficient of variation is a measure of relative risk whereas the standard deviation is a measure of absolute risk
The primary difference between the standard deviation and the coefficient of variation as measures of risk are:
False
The primary disadvantage of engineering methods for measuring cost functions is that they deal with the managerial and entrepreneurial aspects of the production process or plant.
Third-degree price discrimination
The segmenting of customers into several small groups such as household, institutional, commercial, and industrial users, and establishing a different rate schedule for each group is known as:
True
The shape of the firm's long-run cost function is important in decisions to expand the scale of operations
Standard error of the estimate
The standard deviation of the error terms in an estimated regression equation is known as
Marginal revenue
To maximize profits, a monopolist that engages in price discrimination must allocate output in such a way as to make identical the __________ in all markets.
Barometric indicators are designed to forecast changes in the direction of a data series but are poorly suited for forecasting the magnitude of the change.
True
In the first-order exponential smoothing model, the new forecast is equal to a weighted average of the old forecast and the actual value in the most recent period.
True
A customer pays an admission fee to get into the local YMCA, and also a monthly membership fee. This is called:
Two-part tariff
The measure of the importance of fixed cost. The operating profit elasticity. The measure of business risk. D.O.L.
What is another term meaning the degree of operating leverage?
The output where P = MC
What is the profit maximization point for a firm in a purely competitive environment?
Current replacement cost
What method of inventory valuation should be used for economic decision-making problems?
unit elastic; price; quantity
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.
Monopoly
When the cross elasticity of demand between one product and all other products is low, one is generally referring to a(n) ____ situation.
If the R-square if above 50%, the regression is considered significant
Which is not true about the coefficient of determination?
Air transport industry
Which of the following is an example of an oligopolistic market structure?
Firms must sell at or below market price, Marginal revenue is equal to price.
Which of the following statements is (are) true concerning a pure competition situation?
Public utilities practice first-degree price discrimination.
Which of the statements about price discrimination is (are) false?
Assume Janet is risk-averse. Which of the following bets is she more likely to accept, depending on the degree of risk aversion?
Win $20, ¼ of the times; win $10, ½ of the times; and lose $20, ¼ of the times.
Skimming
___________ is a new product pricing strategy which results in high initial product price. This price is reduced over time as demand at the higher price is satisfied.
Related diversification occurs when:
a business serves itself and many other common businesses.
The moral hazard in team production arises from
a conflict between tactically best interest and one's duty
The following are possible examples of price discrimination, EXCEPT:
a product sells at a higher price at location A than at location B, because transportation costs are higher from the factory to A.
Cost function
a schedule or mathematical relationship showing the total cost of producing various quantities of output
Which of the following is an example of an oligopolistic market structure?
air transport industry
An increase in the quantity demanded could be caused by:
an increase in the price of substitute goods, a decrease in the price of complementary goods, an increase in consumer income levels
Which of the following is never negative?
average product
Empirical estimates of the price elasticity of demand in the following table suggest that the demand for household consumption of alcoholic beverages is: (see table 3.4)
both b and c
Finding a way to create and capture value is part of:
business strategy
Sources of positive net present value projects include
buyer preferences for established brand names economies of large-scale production and distribution patent control of superior product designs or production techniques
Successful invention and innovation in the marketplace:
can create value but is often difficult to capture
In a cross section regression of 48 states, the following linear demand for per-capita cans of soda was found: Cans = 159.17 - 102.56 Price + 1.00 Income + 3.94Temp From the linear regression results in the cans case above, What is the point price elasticity for cans of soda when P =1, Income =10 and Temp =10. hint: Point price elasticity = coefficient * (P/Q)
cans= 106.01 -102.56/106.01= -0.967
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?
common stock
Putting together two goods - shaving cream and razors - to increase value is using the power of:
complementary goods.
Of the following, which is not an economic rationale for public utility regulation?
constant cost industry
For studying demand relationships for a proposed new product that no one has ever used before, what would be the best method to use?
consumer surveys, where potential customers hear about the product and are asked their opinions
If the cross price elasticity measured between items A and B is negative, the two products are referred to as:
could be either substitutes or complements
To reduce Agency Problems, executive compensation should be designed to:
create incentives so that managers act like owners of the firm.
The learning effect is one form of:
creating value through decreasing transactions costs.
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:
cyclical variation
Variations in a time-series forecast can be caused by:
cyclical variations secular trends seasonal effects
An example of a time series data set is one for which the:
data would be collected for a given firm for several consecutive periods (e.g., months).
Ready-to-eat products like Kraft Lunchables:
decrease consumer transactions costs
The factor(s) which cause(s) a movement along the demand curve include(s):
decrease in price of the good demanded
As the interest rate decreases, the opportunity cost of waiting to receive a future amount:
decreases
Given a Cobb-Douglas production function estimate of Q equals 1.19 L to the power of.72 end exponent K to the power of.18 end exponent for a given industry, this industry would have:
decreasing returns to scale
Manufacturers of printers and computers set prices independently. This means that they:
do not consider the negative effect that their higher prices have on the other's profit.
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:
equals the marginal cost of the test
In a competitive market, the firm has a difficult time capturing value due to the large number of rivals. But it can be successful at capturing value if the:
firm's superior productivity is based on value of the whole organization.
Consider the following multiplicative demand function where QD = quantity demanded, P = selling price, and Y = disposable income: QD =1.6 P-1.6 Y .2 The coefficient of Y (i.e., .2) indicates that (all other things being held constant):
for a one percent increase in disposable income, quantity demanded would increase by .2 percent
Consider the following linear demand function where QD = quantity demanded, P = selling price, and Y = disposable income: QD = −36 −2.1P + .24Y The coefficient of P (i.e., −2.1) indicates that (all other things being held constant):
for a one unit increase in price, quantity demanded would decline by 2.1 units
Which of the following is an implicit cost of going to college?
foregone wages
A cartel is a situation where firms in the industry
have an agreement to restrict output.
All of the following are mechanisms which reduce the adverse selection problem except ____.
high interest rates
In the Cobb-Douglas production function left parenthesis Q equals alpha L to the power of beta 1 end exponent K to the power of beta 2 end exponent right parenthesis :
if the amount of labor input (L) is increased by 1 percent, the output will increase by β1 percent
As the interest rate increases, the opportunity cost of waiting to receive a future amount:
increases
Those goods having a calculated income elasticity that is negative are called:
inferior goods
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?
innovation theory of profit
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:
it increases revenue more than costs or reduces costs more than revenue it decreases some costs more than it increases others (assuming revenues remain constant) it increases some revenues more than it decreases others (assuming costs remain constant)
Which of the following barometric indicators would be the most helpful for forecasting future sales for an industry?
leading economic indicators.
The type of economic indicator that can best be used for business forecasting is the:
leading indicator
An increase in each of the following factors would normally provide a subsequent increase in quantity demanded, except:
level of competitor advertising
Profits will be:
low when the degree of rivalry is high.
A change in the level of an economic activity is desirable and should be undertaken as long as the marginal benefits exceed the ____.
marginal costs
Linear total cost function
marginal costs are constant as output increases, average total costs are continually decreasing as output increases
Demand functions in the multiplicative form are most common for all of the following reasons except:
marginal impact of a unit change in an individual variable is constant
If a cartel seeks to maximize profits, the market share (or quota) for each firm should be set at a level such that the ____ of all firms is identical.
marginal profit
To maximize profits, a monopolist that engages in price discrimination must allocate output in such a way as to make identical the __________ in all markets.
marginal revenue
The primary objective of a for-profit firm is to ___________.
maximize shareholder value
The form of economics most relevant to managerial decision-making within the firm is:
microeconomics
When the cross elasticity of demand between one product and all other products is low, one is generally referring to a(n) ____ situation
monopoly
If price exceeds average costs under pure competition, ____ firms will enter the industry, supply will ____, and price will be driven ____.
more; increase; down
Factors that affect the ability of oligopolistic firms to successfully engage in cooperation include ____.
number and size distribution of sellers size and frequency of orders product heterogeneity
Barometric price leadership exists when
one firm in the industry initiates a price change and the others follow it as a signal of chang-es in cost or demand in the industry.
pure monopoly
one firm is the sole producer of a good or service which has no close substitutes, the firm's profit is maximized at the price and output combination where marginal cost equals marginal revenue
A price elasticity (ED) of -1.50 indicates that for a ____ increase in price, quantity demanded will ____ by ____.
one percent; decrease; 1.50 percent
Assume risk-free interest rate is 10%, you are given the following four investment options: Option 1) Receiving $100 each at the end of the next three years Option 2) Receiving $250 right now Option 3) Receiving $150 each at the end of the next two years Option 4) Receiving $75 each at the end of the next four years
option 3 = $260.3
In a kinked demand market, whenever one firm decides to lower its price,
other firms will automatically follow.
If consumers find that there are substantial transactions costs to purchasing a product, then:
overall consumer demand is less at each price
An investment advisor plans a portfolio for your 85 year old risk-averse grandmother. Her portfolio currently consists of 60% bonds and 40% blue chip stocks. This portfolio is estimated to have an expected return of 6% and with a standard deviation 12%. What is the probability that she makes more than 6% in a year? [A portion of Appendix C is given below, where z = (x - μ)/σ , with μ as the mean and σ as the standard deviation. Table B1 for Z Z Prob. -3 .0013 -2.5 .0062 -2. .0228 -1.5 .0668 -1 .1587 -.5 .3085 0 .5000
p ( x> 6%) = p (X- mean/ std deviation 6%-6%/ 12% = p(z=0) = 1-p(z=0) 1-.50 = 50% 50%
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
price elasticity of supply in autos is smaller than the absolute value of price elasticity of demand but the reverse is true for restaurants
A firm in pure competition would shut down when:
price is less than average variable cost
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.
profits (cash flows)
The demand curve facing the firm in ____ is the same as the industry demand curve.
pure monopoly
If demand were inelastic, what could managers do to increase revenue:
raise the price
Seasonal variations can be incorporated into a time-series model in a number of different ways, including:
ratio-to-trend method use of dummy variables
Dell Computer attempts to collect information about customers before purchase and assemble customized product for the customer. This process tries to:
reduce transactions costs for both Dell and the customer.
Setting up a hub-and-spoke distribution towards inventory and retail delivery is an example of:
reduced producer transactions cost.
The kinked demand curve model was developed to help explain:
rigidities observed in prices in oligopolistic industries
___________ is a new product pricing strategy which results in high initial product price. This price is reduced over time as demand at the higher price is satisfied.
skimming
In a production process, an excessive amount of the variable input relative to the fixed input is being used to produce the desired output. This statement is true for:
stage III
The standard deviation of the error terms in an estimated regression equation is known as:
standard error of the estimate
If the cross price elasticity measured between items A and B is positive, the two products are referred to as:
substitutes
In testing whether each individual independent variables (Xs) in a multiple regression equation is statistically significant in explaining the dependent variable (Y), one uses the:
t-test
An income elasticity (Ey) of .2 indicates that for a ____ increase in income, ____ will increase by ____.
ten percent; quantity demanded; two percent
In the long-run, firms in a monopolistically competitive industry will
tend to just cover costs, including normal profits
A study of expenditures on food in cities resulting in the following equation: Log E = 0.693 Log Y + 0.224 Log N where E is Food Expenditures; Y is total expenditures on goods and services; and N is the size of the family. This evidence implies:
that a one-percent increase in family size increases food expenditures .224%.
A study of expenditures on food in cities resulting in the following equation: Log E = 0.693 Log Y + 1.2 Log N where E is Food Expenditures; Y is total expenditures on goods and services; and N is the size of the family. This evidence implies:
that a ten-percent increase in family size increases food expenditures 12%.
All of the following are reasons why an association relationship may not imply a causal relationship except:
the association may be hypothetical
The primary difference(s) between the standard deviation and the coefficient of variation as measures of risk are:
the coefficient of variation is a measure of relative risk whereas the standard deviation is a measure of absolute risk
In the short-run for a purely competitive market, a manufacturer will stop production when:
the contribution to fixed costs is zero or less
The segmenting of customers into several small groups such as household, institutional, commercial, and industrial users, and establishing a different rate schedule for each group is known as:
third-degree price discrimination
Economic profit is defined as the difference between revenue and ____.
total economic cost
Agency problems and costs are incurred whenever the owners of a firm delegate decision-making authority to management.
true
Consider an investment with the following payoffs and probabilities: State of the Economy Probability Return GDP grows slowly .70 1,000 GDP grow fast .30 2,000 Let the expected value in this example be 1,300. How do we find the standard deviation of the investment?
σ = √ { (.7)(1000-1300)2 + (.3)(2000-1300)2 }
