Econ 4325 - Final
Marginal product (MP) intersects average product (AP) at...
AP's maximum
Thing that happens in stage III
Adding more workers causes TP to fall and this is not optimal
Which of the following is never negative?**
. average product
A linear total cost function implies that:
c. a and b
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?
c. innovation theory of profit
Which of the following type of indifference curve DOES NOT violate what we believe to be true about tastes and preferences of consumers?
d. A downward-sloping indifference curve
The linear breakeven model excludes ____ from the analysis.
d. a and b only
Managers should concentrate on maximizing shareholder value alone if which of the following conditions are met?
d. all of the above
In addition to prediction, one purpose of regression analysis is:
d. b and c
The law of diminishing marginal returns:
d. none of the above
Select the correct statement.
e. all of the above are correct.
In Chinese coastal provinces, brick housing for a fast expanding middle class is very comparable in size to housing in the U.S. for a family with median income of $51,000 because
e. bricks, trade skill workers and construction labor are very cheap in China
The primary objective of a for-profit firm is to ___________.
e. maximize shareholder value
Trading partners should specialize in producing goods in accordance with comparative advantage, then trade and diversify in consumption because
e. more goods are available for consumption
In regression analysis, the existence of a high degree of intercorrelation among some or all of the explanatory variables in the regression equation constitutes:
e. multicollinearity
If demand were inelastic, then we should immediately: a. cut the price.
e. raise the price.
For the purposes of this question, assume you spend all income. Suppose you are a frequent customer of The Huddle Mart. For the last candy bar you purchased and consumed, you received 20 units of utility. For the last piece of fresh fruit you purchased and consumed, you received 15 units of utility. If the price of a candy bar is $1 and the price of a piece of fresh fruit is also $1, you should
eat more candy bars
The level of an economic activity should be increased to the point where the difference between marginal benefit and marginal cost
is zero.
An own-price elasticity of demand of -1.5 indicates that for a __________ increase in price, quantity demanded will __________ by __________.
one percent; decrease; 1.5%
In the shareholder wealth calculation, the value of a firm's stock is equal to the present value of all expected future __________, discounted by the shareholder's __________.
profits; required rate of return This question refers to the definition of shareholder wealth. The fact that shareholder wealth takes into account future profits (rather than just current profit) and risk (through the required rate of return) makes it a more "comprehensive" objective for the firm.
Most important step in regression analysis
Analyze output from the regression equation in order to examine the economic issues that are of interest to the manager and forecast
Isocost line is represented by...
C
At some point, an increase in the variable input yields progressively less output because of _________________ effects.
Crowding-out
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.
False
Output is maximized by...
Finding the input combination within the feasible region/opportunity set that lies on the highest isoquant (tangency)
The own-price elasticity of demand for cigarettes has been estimated to be -0.50. To reduce smoking by 50%, by how much must a $1 pack change in price?
Increase by $1.00
When total product (TP) is maximized, MP...
Is equal to zero
In the short run, the optimal quantity of labor is employed within...
Stage II
Stage I
Start of production to AP max
Marginal revenue product of labor (MRPL)
The additional revenue (TR) earned from adding an extra unit of labor
When both inputs are variable in the long run, increases in both L and K yield increases in output, but...
The amount by which output increases depends on the production function
Marginal factor cost of labor
The change in cost (TC) incurred from adding an extra unit of labor
A dataset that depicts the production function can be translated into a...
Total product curve
Marginal product (MP) is maximized at....
Total product's (TP) inflection point, where output starts to increase at a decreasing rate
According to the managerial efficiency theory of profit, above normal profits can arise because of high quality managerial skills
True
The demand for durable goods tends to be more price elastic than the demand for non-durables.
True
The marginal product is the incremental change in total output that can be obtained from the use of one more unit of an input in the production process, while holding constant all other inputs.
True
If a substitution of more of one input for less of another is made while maintaining the same production level...
We remain on the same isoquant but move along it
What are the reasons why the quantity demanded of a product increases as the price of that product decreases?
a. As price decreases, consumers can buy more with their income b. As the price of product A declines, product A becomes more attractive than its substitute, product B c. As price decreases, consumer purchasing power increases
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. Using the data for Novo-Nordisk, which is correct?
a. Both X1 and X2 are statistically significant.
The combinations of inputs costing a constant C dollars is called:
a. an isocost line
To reduce Agency Problems, executive compensation should be designed to:
a. create incentives so that managers act like owners of the firm.
Consider the following multiplicative demand function where QD = quantity demanded, P = selling price, and Y = disposable income: QD=1.6P^-13Y^2 The coefficient of Y (i.e., .2) indicates that (all other things being held constant):
a. for a one percent increase in disposable income, quantity demanded would increase by .2 percent
Break-even analysis usually assumes all of the following except:
a. in the short run, there is no distinction between variable
The type of economic indicator that can best be used for business forecasting is the:
a. leading indicator
Possible goals of Not-For-Profit (NFP) enterprises include all of the following EXCEPT:
a. maximize total costs
The estimated slope coefficient (b) of the regression equation (Ln Y = a + b Ln X) measures the ____ change in Y for a one ____ change in X.
a. percentage, unit
Agency problems and costs are incurred whenever the owners of a firm delegate decision-making authority to management.
a. true
In production and cost analysis, the short run is the period of time in which one (or more) of the resources employed in the production process is fixed or incapable of being varied.
a. 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.
a. true
In the linear breakeven model, a firm incurs operating losses whenever output is less than the breakeven level.
a. true
In the linear breakeven model, the relevant range of output is that range where the linearity assumptions of the model are assumed to hold.
a. true
The coefficient of determination ranges in value between 0.0 and 1.0.
a. true
The demand for durable goods tends to be more price elastic than the demand for non-durables.
a. true
Using the graphical method to demonstrate the break-even point, which of the following statements is NOT true?
a. constant selling price per unit are represented by TR
Regarding costs, which of the following statements is true?
a. costs can be measured in different ways
The three concepts of optimal capacity utilization are:
a. optimal plant size for a given output rate
MP becomes negative when...
adding more labor decreases output
The rent a business owner forgoes by using his building for his current production process, rather than closing his business and renting out the building to someone else, is considered
an implicit cost of production The forgone rent is the cost of the next best alternative to using the building for this owner's business, making it an opportunity or implicit cost.
Regarding demand and supply, which of the following statements is NOT correct?
b. Demand expresses intentions, but supply does not
Suppose the demand for a butcher's beef is given by: QD = 45P-0.5I-0.6PP 0.75PM-0.5, where QD is the quantity of beef demanded (pounds), P is the price of beef, I is average household income in the United States, PP is the price of pork, and PM is the price of mashed potatoes. Upon analyzing the demand function above, an economist draws the following conclusions: I) II) III) IV) The demand for beef is inelastic. Beef would be considered a luxury good. Mashed potatoes is an inferior good. Beef and pork are substitutes. Which of the economist's conclusions are correct?
b. IandIV
As we discussed, there are certain shapes of indifference curves that we would never expect to see under the assumptions that we outlined in class. However, what types of goods might an upward-sloping indifference curve describe for the typical consumer?
b. Illness and wealth
The Saturn Corp (once a division of GM) was permanently closed in 2009. What went wrong with saturn?
b. Saturn sold cars below the prices of Honda or Toyota, earning a low 3% rate of return
The Saturn Corporation (once a division of GM) was permanently closed in 2009. What went wrong with Saturn?
b. Saturn sold cars below the prices of Honda or Toyota, earning a low 3% rate of return.
If the domestic prices for traded goods rises 5% in Japan and rises 7% the US over the same period, what would happened to the Yen/US dollar exchange rate? HINT: S1/S0 = (1+πh) / (1+ πf) where S0 is the direct quote of the yen at time 0, the current period.
b. The direct quote of the yen ($/¥) falls, and the value of the dollar rises.
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?
b. The firm should use relatively more labor
The marginal product is defined as:
b. The incremental change in total output that can be produced by the use of one more unit of the variable input in the production process
For a short-run cost function which of the following statements is (are) not true?
b. The marginal cost function intersects the average fixed cost function where the average variable cost function is a minimum.
If Janet Yellen, 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?
b. The value of the dollar rises when US interest rates rise.
Which of the following types of firms should expect a higher rate of return?
b. a biotech pharmaceutical firm
In which of the following econometric problems do we find Durbin-Watson statistic being far away from 2.0?
b. autocorrelation
The marginal decision rule will be replaced with the net present value rule when:
b. costs are incurred immediately
To reduce Agency problems, executive compensation should be designed to
b. create incentives so that managers act like owners of the firm
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:
b. cyclical variation
The coefficient of determination measures the proportion of the variation in the independent variable that is "explained" by the regression line.
b. false
The correlation coefficient ranges in value between 0.0 and 1.0.
b. 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.
b. false
Companies that reduce their margins on export products in the face of appreciation of their home currency may be motivated by a desire to
b. increase production volume to realize learning curve advantages
According to the theory of cost, specialization in the use of variable resources in the short-run results initially in:
b. increasing returns and declining average and marginal costs
The Cobb-Douglas production function has which of the following properties?
b. it provides a good fit to the traditional S-shaped production function
Which of the following barometric indicators would be the most helpful for forecasting future sales for an industry?
b. leading economic indicators.
When two or more "independent" variables are highly correlated, then we have:
b. multicollinearity
The original Cobb-Douglas function was given as. It was subsequently rewritten as. What benefit was derived in the revision?
b. returns to scale can be shown in the revision
If the cross price elasticity measured between items A and B is positive, the two products are referred to as:
b. substitutes
The net present value of an investment represents
b. the expected contribution of that investment to the goal of shareholder wealth maximization
All of the following are criteria used to select a forecasting technique EXCEPT:
b. the time required to complete the model
Caution must be exercised in using regression models for prediction when:
b. the value of the independent variable lies outside the range of observations from which the model was estimated
Regarding operating risk exposure, which of the following statements is NOT true?
b. they are easier to forecast than translation risk exposures
Economic profit is defined as the difference between revenue and:
b. total economic cos
Economic profit is defined as the difference between revenue and ____.
b. total economic cost
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.
b. unit elastic; price; quantity
5 things that happen in stage II
- More of the variable input is used, relative to the amount of fixed input used - Total product (TP) rises throughout the entire stage and is maximized at the end of the stage, which is the optimal level of production because of maximum efficiency - Average product (AP) declines throughout the entire stage - Marginal product (MP) declines throughout the entire stage and is equal to zero at the end of the stage - MP < AP throughout the entire stage
5 things that happen in stage I
- The amount of variable input used is small, relative to the amount of fixed input used, and therefore the variable input can specialize - Total product (TP) rises throughout the entire stage and is not yet maximized at the end of the stage - Average product (AP) rises throughout the entire stage and is maximized at the end of the stage - Marginal product (MP) rises, reaches its maximum (diminishing marginal returns), and starts to decline well before the end of the stage - MP > AP throughout the entire stage, but MP=AP at the end of the stage - Continues past diminishing returns
What are the 3 implications of the long run?
- The firm must use more of both variable inputs to increase output - All possible output combinations are available to the firm, as long as more inputs are available - Diminishing marginal returns are avoidable
What are three implications of the short run?
- When at least one input is fixed, only a subset of the total possible output combinations is available to the firm - The firm incurs a fixed cost, which is present regardless of how much output is produced - Output varies in a predictable way
3 characteristics of a good data set
1. Accurately reflects the determinants of demand that we include in our regression, even if the data serve only as a proxy 2. Is large, over 30 observations 3. Comes from reliable sources
3 step predictable pattern in output with the law of diminishing marginal returns
1. At low quantities of labor, the firm's output increases at an increasing rate. 2. After the inflection point, the firm's output begins to increase at a decreasing rate. 3. Finally, output reaches a maximum and begins to fall.
Production isoquant
A curve showing all possible (efficient) combinations of inputs that are capable of producing a certain quantity of output
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:
ANSWER: e (2,800 + 200 x (17) - 350 x (1)= 6,200-350= 5850)
Labor specialization
Allows each extra worker to bring a greater increase in output
What is the network effect?
An exception to the law of diminishing marginal returns that occurs when the installed base of a network product makes the efforts to acquire new customers increasingly more productive
Which property regarding consumer preferences is consistent with the following statement: "Bundle A yields more utility to me than bundle B."
Completeness
Optimality condition
Continue adding labor until the additional revenue earned from adding an extra worker is just equal to the additional cost incurred from adding that extra worker
Stage II
End of stage I to TP max
Stage III
End of stage II to end of production
Long run variable production function
Expresses the relationship between inputs and maximum output, when all inputs are assumed to be variable
Short run production function
Expresses the relationship between inputs and maximum output, when at least one input is assumed to be fixed
The slope of the isocost line indicates...
How much capital the firm must forgo according to the cost of its inputs, to increase use of labor by one unit
Cost restraint is represented using...
Isocost lines
Maximizing output is represented using...
Isoquants
In the long run, we solve for the optimal input bundle using...
Isoquants and isocost lines
How does production theory contribute to maximization of profit?
It guides the firm to efficiency, which lowers the firm's cost of production.
Short run optimal input bundle when...
MRP=MFC
In addition to using a production function (TP) to calculate how much total output a firm can produce, we measure a firm's productivity using...
Marginal and average product
Marginal revenue product of labor (MRPL) is equal to...
Marginal factor cost of labor (MFCL)
MRPL at each unit of L is equal to...
Marginal revenue * marginal product of labor
How do you achieve efficient production?
Maximize output, subject to a cost restraint
What is the equivalent to maximizing output, subject to a cost restraint?
Minimizing cost, subject to an output constraint
What is an exception to the law of diminishing marginal returns?
Network effect
Regression analysis
Offers managers a way of estimating the mathematical functions they need for economic decision making and forecasting
Time series data
Provide information about variables over time
Cross sectional data
Provides information on variables for a given period of time
Marginal rate of technical substitution (MRTS)
Refers to the rate at which one input can be substituted for another input, while output remains constant. The amount of capital the firm must forgo according to its production function
Production function
Relates the maximum quantity of output that can be produced from given amounts of various inputs, holding technology constant. Output is some function of production inputs, such as labor and capital.
Generally speaking, a specific output level can be maintained by...
Substituting more of one input for less of another
Recall efficiency
The optimal combination of inputs must be consistent with maximizing output subject to a cost restraint
If hog is an input to pork production, then a change in the price of hog influences the equilibrium price of pork (all else equal). Suppose the price of hog increases. Suppose the relationship between the price of pork, pp, and the price of hog, ph, is given by the function pp=1.8+3ph. If the price of hog increases by $0.01, what happens to the price of pork?
The price if pork increases by $0.03.
Is efficient production sufficient for profit maximization?
While necessary, it is not sufficient.
If your objective is to maximize your score on this test, you can imagine an optimization problem where your objective function is your score, which is a function of the number of practice problems you have solved and the number of review sessions you have attended, and your constraint is time (measured in minutes). If you solve your maximization problem and determine that λ* is 0.2, how would you interpret this calculation?
Your test score will increase by an estimated 12 points if you study 60 more minutes. Since λ*=0.2, a one-minute increase in time leads to a 0.2 point increase in your test score. As an estimate, we predict that a 60 minute increase in time will increase your test score by 60λ* = 12 points.
If we observe how the quantity of good X that we optimally consume changes with the price of good X using indifference curves and budget constraints, we would construct
a demand curve for good X for one consumer, which we could then sum horizontally for all consumers and derive the market demand curve for good X.
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 FORECAST Nov 100 100 Dec 90 100 Jan 115 ---- Feb 110 ---- MARCH ? ?
a. 106.2
Fill in the missing data to solve this problem. Variable Total Average Marginal Input Product Product Product 4 ? 70 ---- 5 ? ? 40 6 350 ? ? What is the total product for 5 units of input, and what is the marginal product for 6 units of input?]
a. 320 and 30
US and Canada can both grow wheat and can do mining. Use the following table to look for which country has a comparative advantage in mining. (HINT: Find the cost of mining in terms of wheat in each country.) Absolute Cost in US Absolute Cost in Canada Wheat $5 C$8 Mining $10 C$12
a. Canada has a comparative advantage in mining.
Using demand and supply curves for the Japanese yen based on the $/¥ price for yen, an increase in US INFLATION RATES would
a. Decrease the demand for yen and decrease the supply of the yen.
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.
a. Decrease the required rate of return (ke).
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.
a. Decrease the required rate of return (ke).
Suppose we estimate that the demand elasticity for fine leather jackets is -.7 at their current prices. Then we know that:
a. a 1% increase in price reduces quantity sold by .7%.
An example of a time series data set is one for which the:
a. data would be collected for a given firm for several consecutive periods (e.g., months).
Marginal revenue product is:
a. defined as the amount that an additional unit of the variable input adds to the total revenue
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):
a. for a one percent increase in disposable income, quantity demanded would increase by .2 perce
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.
a. profits (cash flows)
In an open economy with few capital restrictions and substantial import-export trade, a rise in interest rates and a decline in the producer price index of inflation will
a. raise the value of the currency
The isoquants for inputs that are perfect complements for one another consist of a series of:
a. right angles
Possible sources of economies of scale (size) within a production plant include:
a. specialization in the use of capital and labor
Even though insignificant explanatory variables can raise the adjusted R2 of a demand function, one should not interpret their effects on the regression when
a. testing marketing hypotheses about the determinants of demand
The standard deviation is appropriate to compare the risk between two investments only if
a. the expected returns from the investments are approximately equal
According to the managerial efficiency theory of profit, above-normal profits can arise because of high-quality managerial skills.
a. true
The relevant cost in economic decision-making is the opportunity cost of the resources rather than the outlay of funds required to obtain the resources.
a. true
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.
b. 1,500
The number of standard deviations z that a particular value of r is from the mean ? can be computed as z = (r - ?)/ σ. Suppose that you work as a commission-only insurance agent earning $1,000 per week on average. Suppose that your standard deviation of weekly earnings is $500. What is the probability that you earn zero in a week? Use the following brief z-table to help with this problem. Z value Probability -3 .0013 -2 .0228 -1 .1587 0 .5000
b. 2.28% chance of earning nothing in a week
The number of standard deviations z that a particular value of r is from the mean ȓ can be computed as z = (r - ȓ)/ σ. Suppose that you work as a commission-only insurance agent earning $1,000 per week on average. Suppose that your standard deviation of weekly earnings is $500. What is the probability that you zero in a week? Use the following brief z-table to help with this problem. Z value Probability -3 .0013 -2 .0228 -1 .1587 0 .5000
b. 2.28% chance of earning nothing in a week
A cottage industry exists in the home-manufacture of 'country crafts'. Especially treasured are handmade quilts. If the fourth completed quilt took 30 hours to make, and the eighth quilt took 28 hours. What is the percentage learning? Hint: Percentage learning = 100% - (c2/c1)•100%.
b. 6.7%
One commonly used test in checking for the presence of autocorrelation when working with time series data is the ____.
b. Durbin-Watson test
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)]
b. EP = -2.0
Receiving $100 at the end of the next three years is worth more to me than receiving $260 right now, when my required interest rate is 10%.
b. False
The marginal product is the incremental change in total output that can be obtained from the use of one more unit of an input in the production process, while varying all other inputs.
b. False
The use of quarterly data to develop the forecasting model Yt = a +bYt−1 is an example of which forecasting technique?
b. Time-series forecasting
The cost function is:
b. a schedule or mathematical relationship showing the total cost of producing various quantities of output
Theoretically, in a long-run cost function:
b. all inputs are considered variable
The primary purpose of the Cobb-Douglas power function is to:
b. allow one to make predictions about a resulting increase in output for a given increase in the inputs
In regression analysis, the existence of a significant pattern in successive values of the error term constitutes:
b. autocorrelation
Which of the following is not an assumption of the linear breakeven model:
b. decreasing variable cost per unit
When using a multiplicative power function (Y = a X1b1X2b2X3b3) to represent an economic relationship, estimates of the parameters (a, and the b's) using linear regression analysis can be obtained by first applying a ____ transformation to convert the function to a linear relationship.
b. double-logarithmic
According to the innovation theory of profit, above-normal profits are necessary to compensate the owners of the firm for the risk they assume when making their investments.
b. 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.
b. false
Simplified trend models are generally appropriate for predicting the turning points in an economic time series.
b. false
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):
b. for a one unit increase in price, quantity demanded would decline by 2.1 units
Generally, investors expect that projects with high expected net present values also will be projects with
b. high risk
An increase in each of the following factors would normally provide a subsequent increase in quantity demanded, except:
b. level of competitor advertising
The isoquants for inputs that are perfect substitutes for one another consist of a series of:
b. parallel lines
The estimated slope coefficient (b) of the regression equation (Ln Y = a + b Ln X) measures the ____ change in Y for a one ____ change in X.
b. percentage, percent
Empirical estimates of the price elasticity of demand [in Table 3.4] suggest that the demand for household consumption of alcoholic beverages is:
b. price inelastic
A ____ total cost function implies that marginal costs ____ as output is increased.
b. quadratic; increase linearly
The short-run cost function is:
b. relevant to decisions in which one or more inputs to the
Which of the following is not a limitation of the survivor technique for measuring the optimum size of firms within an industry?
b. the managerial and entrepreneurial aspects of the production process are not included in the analysis
When there is multicollinearity in an estimated regression equation,
b. the t-statistics are likely to be small even though the R2 is large
The Cobb-Douglas production function is: Q = 1.4*L0.6*K0.5. What would be the percentage change in output (%?Q) if labor grows by 3.0% and capital is cut by 5.0%? [HINT: %?Q = (EL * %?L) + (EK * %?K)]
c. %?Q = - 0.70%
George Webb Restaurant collects on the average $5 per customer at its breakfast & lunch diner. Its variable cost per customer averages $3, and its annual fixed cost is $40,000. If George Webb wants to make a profit of $20,000 per year at the diner, it will have to serve__________ customers per year.
c. 30,000 customers
If TC = 321 + 55Q - 5Q2, then average total cost at Q = 10 is:
c. 37.1
A Real Option Value is:
c. An opportunity to implement cost savings or revenue expansion in a flexible business plan.
Economies of scale exist whenever long-run average costs:
c. Decrease as output is increased
Which is NOT true about the coefficient of determination?
c. If the R-square is above 50%, the regression is considered significant.
Which of the following statements concerning the short-run average cost curve of economic theory is true?
c. It is ∪-shaped
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 How would you choose?
c. Option 3)
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.
c. Project X is riskier than Project Q
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?
c. The price will be $40 and the quantity will be 220 units.
Briana has the choice of starting either an accounting firm or a bakery. She can run her accounting firm from her home office and only needs paper, pencil, calculator, and labor to provide her accounting services. To run her bakery, she will need expensive machinery, a building with plenty of space, and labor. How will the slopes of the production isoquants differ between her two business choices? (Assume L is plotted on the x-axis and K is plotted on the y-axis)
c. The production isoquant of the bakery will become flatter faster
Which of the following will likely increase the equilibrium price of CDs?
c. The release of a medical report, indicating that listening to music recorded on CDs has health benefits
Which of the following statements about cost functions is true?
c. The shape of the firm's long-run cost function is important in decisions to expand the scale of operations.
An closest example of a risk-free security is
c. U.S. Government Treasury bills
Assume Janet is risk-averse. Which of the following bets is she more likely to accept, depending on the degree of risk aversion?
c. Win $20, ¼ of the times; win $10, ½ of the times; and lose $20, ¼ of the times.
Examine the plot of data. Sales Time It is likely that the best forecasting method for this plot would be:
c. a seasonal pattern that can be modeled using dummy variables or seasonal adjustments
Time-series forecasting models:
c. are based solely on historical observations of the values of the variable being forecasted
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?
c. common stock
For studying demand relationships for a proposed new product that no one has ever used before, what would be the best method to use?
c. consumer surveys, where potential customers hear about the product and are asked their opinions
In the linear breakeven model, the difference between selling price per unit and variable cost per unit is referred to as:
c. contribution margin per unit
What method of inventory valuation should be used for economic decision-making problems?
c. current replacement cost
Given a Cobb-Douglas production function estimate of Q = 1.19L.72K.18 for a given industry, this industry would have:
c. decreasing returns to scale
In a recession, the trade balance often improves because
c. fewer households can afford luxury imports
An increase in the exchange rate of the U.S. dollar relative to a trading partner can result from
c. higher growth rates in the trading partner's economy
In the Cobb-Douglas production function ():
c. if the amount of labor input (L) is increased by 1 percent, the output will increase by β1 percent
Those goods having a calculated income elasticity that is negative are called:
c. inferior goods
Purchasing power parity or PPP says the ratios composed of:
c. inflation rates explain the direction of exchange rates.
The purchasing power parity hypothesis implies that an increase in inflation in one country relative to another will over a long period of time
c. lower the value of the currency in the country with the higher inflation rate
A change in the level of an economic activity is desirable and should be undertaken as long as the marginal benefits exceed the ____.
c. marginal costs
In the linear breakeven model, the breakeven sales volume (in dollars) is equal to fixed costs divided by:
c. one minus the variable cost ratio
A price elasticity (ED) of −1.50 indicates that for a ____ increase in price, quantity demanded will ____ by ____.
c. one percent; decrease; 1.50 percent
An income elasticity (Ey) of 2.0 indicates that for a ____ increase in income, ____ will increase by ____.
c. one percent; quantity demanded; two percent
The degree of operating leverage is equal to the ____ change in ____ divided by the ____ change in ____.
c. percentage; EBIT; percentage; sales
Factors affecting the price elasticity of demand include all of these EXCEPT:
c. positioning as income inferior
Various executive compensation plans have been employed to motivate managers to make decisions that maximize shareholder wealth. These include:
c. requiring officers to own stock in the company
In the linear breakeven model, the breakeven sales volume (in dollars) can be found by multiplying the breakeven sales volume (in units) by:
c. selling price per unit
Songwriters and composers press music companies to lower the price for music downloads because
c. songwriter royalties are a percentage of sales revenue
Consumer expenditure plans is an example of a forecasting method. Which of the general categories best described this example?
c. survey techniques and opinion polling
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:
c. survivorship analysis
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:
c. t-test
Managerial economics seeks to accomplish all of these goals EXCEPT:
c. take into account the opportunities
Shirking of one's duties is often encountered in team production settings because
c. teammates face a dilemma posed by a dominant strategy to shirk
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:
c. 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:
c. that a one-percent increase in family size increases food expenditures 1.2%.
If the British pound (£) appreciates by 10% against the dollar:
c. the US importer of British goods will tend to find that their cost of goods rises, hurting its bottom line.
The primary difference(s) between the standard deviation and the coefficient of variation as measures of risk are:
c. the coefficient of variation is a measure of relative risk whereas the standard deviation is a measure of absolute risk
The marginal rate of technical substitution may be defined as all of the following except:
c. the rate at which all combinations of inputs have equal total costs
Marginal revenue product is defined as the amount that an additional unit of the variable input adds to ____.
c. total revenue
Regarding short-range exchange rate movements, which of the following statements is NOT true?
c. are similar to those of the transaction demand determinants of long-term trends in exchange rates
Suppose you are a single wheat farmer operating in a perfectly competitive market and the market demand function is given by: QD = 3 - 1/5P What is the own-price elasticity of demand for your product at P*=5 and Q*=2?
d. -Infinity
The constant or intercept term in a statistical demand study represents the quantity demanded when all independent variables are equal to:
d. 0.0
The approximate probability of a value occurring that is greater than one standard deviation from the mean is approximately (assuming a normal distribution)
d. 15.87%
An investment advisor plans a portfolio 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 less than 0% in a year? [A portion of Appendix B1 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
d. 30.85%
Suppose a plot of sales data over time appears to follow an S-shape as illustrated below. Sales Time Which of the following is likely that the best forecasting functional form to use for sales data above?
d. A cubic shape in T, using T-squared and T-cubed as variables, Sales = a + b T + cT2 + d T3.
If the value of the U.S. dollar rises from 1.0 per dollar to 1.3 per dollar,
d. American exports to Germany will decrease
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 Coefficients Standard t Stat Error Intercept 159.17 94.16 1.69 Price -102.56 33.25 -3.08 Income 1.00 1.77 0.57 Temperature 3.94 0.82 4.83 R-Sq = 54.1% R-Sq(adj) = 51.0% From the linear regression results in the cans case above, we know that:
d. As price rises for soda, people tend to drink less of it
Which of the following statements concerning shareholder wealth maximization is (are) true?
d. Both a. and b.
Which of the following best represents a manager's objectives(s) in utilizing demand elasticity?
d. Both a. and c.
If Knute is willing to give up 0.75 q2 for an extra q1, but the market requires him to give up 1 q2 for an extra q1, you can conclude that
d. Both b and c
Property taxes are the product of the tax rate (T) and the assessed value (V). The total property tax collected in your city (P) is: P = T•V. If the value of properties rise 4% and if Mayor and City Council reduces the property the tax rate by 2%, what happens to the total amount of property tax collected? [HINT: the percentage rate of change of a product is approximately the sum of the percentage rates of change.}
d. It rises 2 %
The optimal currency area involves a trade-off of reducing transaction costs but the inability to use changes in exchange rates to help ailing regions. If the US, Canada, and Mexico had one single currency (the Peso-Dollar) we would tend to see all of the following EXCEPT:
d. Less migration of workers across the three countries.
In a relationship among total, average and marginal products, where TP is maximized:
d. MP is equal to zero
Regarding forecasting, which of the following statements is NOT true?
d. Public administrators and managers of NFP corporations need not forecast, since they need not make a profit.
____ are defined as costs which are incurred regardless of the alternative action chosen in a decision-making problem.
d. Sunk costs
The following is a Cobb-Douglas production function: Q = 1.75K0.5·L0.5. What is correct here?
d. This production function displays constant returns to scale
Identify the reasons why the quantity demanded of a product increases as the price of that product decreases.
d. a and b
Which of the following statements concerning the shareholder wealth maximization model is (are) true?
d. a and b
A ____ total cost function yields a U-shaped average total cost function.
d. a and b only
Seasonal variations can be incorporated into a time-series model in a number of different ways, including:
d. a and b only
The common factors that give rise to all principal-agent problems include the
d. a and b only
In the case of a monopoly,
d. a and b only.
The moral hazard in team production arises from
d. a conflict between tactically best interest and one's duty
An increase in the quantity demanded could be caused by:
d. all of the above
Concerning the maximization of output subject to a cost constraint, which of the following statements (if any) are true?
d. all of the above
Holding the total output constant, the rate at which one input X may be substituted for another input Y in a production process is:
d. all of the above
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:
d. all of the above
In the last twenty-five years, the Yen and German mark and now the Euro have
d. all of the above
The import of Apple iPads assembled in Shanghai at a $295 wholesale price ($213 cost and $82 profit margin) adds more than it should to the U.S. trade deficit with China because
d. as with foreign-assembled minivans, most of the subassembly components come from the U.S.
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:
d. barometric technique
The ____ is the ratio of ____ to the ____.
d. coefficient of variation; standard deviation; expected value
The factor(s) which cause(s) a movement along the demand curve include(s):
d. decrease in price of the good demanded
An appreciation of the U.S. dollar has what impact on Harley-Davidson (HD), a U.S. manufacturer of motorcycles?
d. domestic sales of HD motorcycles decrease and foreign sales of HD motorcycles decrease
Marginal revenue (MR) is ____ when total revenue is maximized.
d. equal to zero
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:
d. equals the marginal cost of the test
Goods having a negative calculated income elasticity are...
d. inferior goods
When demand elasticity is ____ in absolute value (or ____), an increase in price will result in a(n) ____ in total revenues.
d. less than 1; inelastic; increase
A ____ total cost function implies that marginal costs ____ as output is increased.
d. linear; are constant
Demand functions in the multiplicative form are most common for all of the following reasons except:
d. marginal impact of a unit change in an individual variable is constant
The form of economics most relevant to managerial decision-making within the firm is:
d. microeconomics
The level of an economic activity should be increased to the point where the ____ is zero.
d. net marginal benefit
The existence of diseconomies of scale (size) for the firm is hypothesized to result from:
d. problems of coordination and control encountered by
If two alternative economic models are offered, other things equal, we would
d. select the model that gave the most accurate forecasts
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:
d. stage III
The standard deviation of the error terms in an estimated regression equation is known as:
d. standard error of the estimate
European Union labor costs exceed U.S. and British labor costs primarily because
d. the amount of paid time off is higher in the EU
Which of the following would tend to make demand INELASTIC?
d. the proportion of the budget spent on the item is very small
The Identification Problem in the development of a demand function is a result of:
d. the simultaneous relationship between the demand and supply functions
Durable goods are
d. those that may be stored and repaired
Smoothing techniques are a form of ____ techniques which assume that there is an underlying pattern to be found in the historical values of a variable that is being forecast.
d. time-series forecasting
Marginal factor cost is defined as the amount that an additional unit of the variable input adds to ____.
d. total cost
Evidence from empirical studies of long-run cost-output relationships lends support to the:
d.hypothesis that total costs increase linearly over some considerable range of output examined
If hog is an input to pork production, then a change in the price of hog influences the equilibrium price of pork (all else equal). Suppose the price of hog increases. An increase in the price of hog will
decrease the supply of pork, causing a shift inward of the supply curve for pork.
Suppose you have a Cobb-Douglas function with a capital elasticity of output (á) of 0.28 and a labor elasticity of output (â) of 0.84. What statement is correct?
e. All of the above
What's true about both the short-run and long-run in terms of production and cost analysis?
e. All of the above
Which of the following factors are considered determinants of the required rate of return, which is used in calculating shareholder wealth?
e. All of the above
Which of the following is true with regards to a long-run cost function?
e. All of the above
Suppose that total cost is given by TC = 200 + 5Q - 0.4Q2 + 0.001Q3
e. All of the above are correct
What is another term meaning the degree of operating leverage?
e. All of the above.
Using a sample of 100 consumers, a double-log regression model was used to estimate demand for gasoline. Standard errors of the coefficients appear in the parentheses below the coefficients. Ln Q = 2.45 -0.67 Ln P + . 45 Ln Y - .34 Ln Pcars (.20) (.10) (.25) Where Q is gallons demanded, P is price per gallon, Y is disposable income, and Pcars is a price index for cars. Based on this information, which is NOT correct?
e. All of the coefficients are insignificant.
In a regression equation, one may measure the accuracy of the estimation by:
e. a and b only
Which of the following best represents management's objective(s) in utilizing demand analysis?
e. a and c
The assumptions underlying the simple linear regression model are:
e. a through c
Sources of positive net present value projects include
e. a, b, and c
The presence of association between two variables does not necessarily imply causation for the following reason(s):
e. a, b, and c
Variations in a time-series forecast can be caused by:
e. a, b, and c
Which of the following demand factors are under the control of management?
e. all except c
When a manufacturer's home currency appreciates substantially,
e. all of the above
Which of the following (if any) is not a factor affecting the profit performance of firms:
e. all of the above are factors
The principal econometric techniques used in measuring demand relationships are:
e. both b and c
The difference between economies of scale and economies of scope is:
e. both b and d
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
e. price elasticity of supply in autos is smaller than the absolute value of price elasticity of demand but the reverse is true for restaurants
In this problem, demonstrate your knowledge of percentage rates of change of an entire demand function (HINT: %ΔQ = EP•%ΔP + EY•%ΔY). You have found that the price elasticity of motor control devices at Allen-Bradley Corporation is -2, and that the income elasticity is a +1.5. You have been asked to predict sales of these devices for one year into the future. Economists from the Conference Board predict that income will be rising 3% over the next year, and AB's management is planning to raise prices 2%. You expect that the number of AB motor control devices sold in one year will:
e. rise .5%.
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?
e. σ = √ { (.7)(1000-1300)2 + (.3)(2000-1300)2 }
Regarding costs, accountants _____; economists _____.
e. both b and c
Economic profit is defined as the difference between total revenue and
explicit and implicit costs
Accounting profit is defined as the difference between total revenue and
explicit costs
Economic profits may result from
innovation, risk or uncertainty, and monopoly power
The form of economics most relevant to managerial decision making within the firm is
microeconomics
If the cross-price elasticity of demand measured for goods A and B is positive, the two products are referred to as
substitutes
Consider point A, a point corresponding to an output level on the manager's total profit function. If point A is located to the left of the function's maximum, then
the firm should increase output and MR>MC.
Our supply and demand model suggests that
the greater the excess quantity demanded, the greater the tendency for prices to rise.
MRTS diminishes as...
the isoquant becomes flatter
What is the own-price elasticity of demand for the non-linear demand function QD=Apε?
ε
