A proposed project should be accepted if the net present value is
A) positive.
B) negative.
C) larger than the internal rate of return.
D) smaller than the internal rate of return.
An isoquant indicates different combinations of
A) two inputs that can be purchased for the same amount of money.
B) two inputs that can produce the same amount of output.
C) output that can be produced with the same amount of input.
D) output that cost the same amount to produce.
The internal rate of return equals the cost of capital when
A) NPV = 0.
B) NPV > 0.
C) NPV < 0.
D) None of the above
Which of the following indicates when Stage I ends and Stage II begins in the short-run
production?
A) when AP = 0
B) when MP = 0
C) when MP = AP
D) when MP starts to diminish
In the short run, which of the following would indicate that a perfectly competitive firm
is producing an output for which it is receiving a normal profit?
A) P > AC
B) AVC < P < AC
C) P = AC
D) P = AVC
In a zero-sum game
A) the gains of one player are less than the gains of the other player.
B) the gains of one player are greater than the gains of the other player.
C) the gains of one player directly reflect the losses of another player.
D) the gains and losses of players are all expressed in zeros.
In the short run, a change in the equilibrium price will
A) always lead to inflation.
B) cause a shift in the demand curve.
C) cause a shift in the supply curve.
D) cause a change in the quantity demanded or supplied.
If the demand elasticity for a product is -2, and a profit-maximizing firm sells the
product for $10, its marginal cost must be
A) $5.
B) $10.
C) $15.
D) $8.
If a multinational is controlling funds, it will expect a subsidiary to remit a ________
portion of their earnings if this subsidiary has the opportunity to reinvest its earnings
profitably.
A) significant
B) substantial
C) smaller
D) larger
The demand curve is: QD = 500 – 1/2 P.
a. Calculate the (point) price elasticity of demand when price is $100. Is demand elastic
or inelastic?
b. Calculate the (point) price elasticity of demand when price is $700. Is demand elastic
or inelastic?
c. Find the point at which point elasticity is equal to -1.
Which of the following would not be considered a synergistic benefit from a merger?
A) an improvement in distribution systems
B) economies of scale in production
C) decreased cost of capital
D) None of the above
If the price of a good is increased and total revenue received from the sale of this good
increases, then the price elasticity of demand for the good is
A) elastic.
B) inelastic.
C) unitary.
D) None of the above
An advantage of the decision tree is that
A) it eliminates the need for calculating the cost of capital.
B) it eliminates the need for calculating probabilities.
C) it causes the analyst to consider important events that may occur in the course of the
project, and decisions and actions that may have to be undertaken.
D) All of the above
The economic concept of “opportunity cost” is most closely associated with which of
the following management considerations?
A) market structure
B) resource scarcity
C) product demand
D) technology
A cartel is defined to be
A) any oligopolistic industry with fewer than 4 firms.
B) a form of oligopoly in which firms agree to sell at different prices like in
monopolistic competition.
C) a form of oligopoly in which firms formally agree to establish a common strategy,
often a common price, in effect acting like a monopoly.
D) a form of oligopoly in which firms agree to compete with each other on an equal
basis.
One of the weaknesses in pursuing the objective of profit maximization is that it ignores
A) the timing of cash flows.
B) the time-value of money concept.
C) the riskiness of cash flows.
D) All of the above
The government unit that wants to achieve “revenue enhancement” will find it
considerably more favorable to enact an excise tax on goods whose demand is
A) highly elastic.
B) relatively elastic.
C) highly inelastic.
D) unitary elastic.
Market signaling
A) is a way of conveying information to other parties in a transaction where asymmetric
information exists.
B) represents a dominant strategy in a multi-player game.
C) results in an optimum solution to a beach kiosk scenario.
D) None of the above
The internal rate of return of a project can be found by
A) discounting all cash flows at the cost of capital.
B) averaging all cash inflows, and calculating the interest rate, which will make them
equal to the average investment.
C) calculating the interest rate, which will equate the present value of all cash inflows
to the present value of all cash outflows.
D) None of the above
For each of the following functions, describe returns to scale.
a. Q = K + L
b. Q = K1/2L3/4
c. Q = K2L
The delay between when a policy action is taken and when they affect the economy is
referred to as the
A) impact lag.
B) action lag.
C) recognition lag.
D) policy lag.
When a firm increased its output by one unit, its AC rose from $45 to $50. This implies
that its MC is
A) $5.
B) between $45 and $50.
C) greater than $50.
D) Cannot be determined from the above information
A firm that seeks to maximize its revenue is most likely to adhere to which of the
following?
A) MR = MC
B) MR = 0
C) MR = P
D) MR < MC
Economies of scale are indicated by
A) declining long-run AVC.
B) declining long-run AFC.
C) declining long-run AC.
D) declining long-run TC.
The table above shows the weekly relationship between output and number of workers for
a factory with a fixed size of plant.
a. Calculate the marginal product of labor.
b. At what point does diminishing returns set in?
c. Calculate the average product of labor.
d. Find the three stages of production.
Regression analysis can best be described as
A) a statistical technique for estimating the best relationship between one variable and a
set of other selected variables.
B) a statistical technique for determining the true values of variables.
C) a statistical technique for creating functional relationships among variables.
D) None of the above
A real option can present management with the opportunity to
A) vary output.
B) abandon a project.
C) postpone a project.
D) All of the above
Which of the following characteristics is most important in differentiating between
perfect competition and all other types of markets?
A) whether or not the product is standardized
B) whether or not there is complete market information about price
C) whether or not firms are price takers
D) All of the above are equally important.
An explanatory forecasting technique in which the analyst must select independent
variables that help determine the dependent variable is called
A) exponential smoothing.
B) regression analysis.
C) trend analysis.
D) moving average method.
Answer the questions based on the following information.
Number of Workers Units of Output
0 0
1 40
2 90
3 126
4 150
Output (Total Product) is maximized when
A) average productivity is at its maximum.
B) the “law of diminishing returns” sets in.
C) marginal productivity is zero.
D) marginal productivity is at its maximum.
Describe the difference between the Economic Value Added (EVA) and the Market
Value Added (MVA) approach to determining stockholder wealth.
A perfectly elastic demand curve
A) can be represented by a line parallel to the vertical axis.
B) is a 45-degree line.
C) can be represented by a line parallel to the horizontal axis.
D) cannot be represented on a two-dimensional graph.
When would you use a one-tailed rather than a two-tailed t-test when checking
significance levels?
The following questions refer to this regression equation, (standard errors in
parentheses.)
Q = 8,400 – 10 P + 5 A + 4 Px + 0.05 I, (1,732) (2.29) (1.36) (1.75) 0.15)
R2 = 0.65
N = 120
F = 35.25
Standard error of estimate = 34.3
Q = Quantity demanded
P = Price = 1,000
A = Advertising expenditures, in thousands = 40
PX = price of competitor’s good = 800
I = average monthly income = 4,000
Calculate the elasticity for each variable and briefly comment on what information this
gives you in each case.
If the interest rate is 7% and the tax rate is 15%, what is the after -tax cost of capital for
the firm?
The following table shows the relationship between output and number of workers in
the short run. If the wage is $50/day, find marginal cost of production.
If a company’s stock is perceived to be more risky than average, what will happen to
their equity cost of capital? Explain using the capital asset pricing model.
Suppose that the price elasticity of demand for wheat is known to be -0.75. Will a good
wheat crop (which increases the supply of wheat) be likely to increase or decrease the
revenues of farmers? Carefully explain.
If a stock is expected to pay a dividend of $40 for the current year, what is the
approximate present value of this stock, given at discount rate of 5% and a dividend
growth rate of 3%?
If a stock is expected to pay a dividend of $40 for the current year, what is the
approximate present value of this stock, given at discount rate of 5% and a dividend
growth rate of 3%?
Describe the factors in Michael Porter’s “Five Forces Model” that affect the ability of
any firm in an industry to earn a profit.
You are given the following straight-line trend equation: Sales = 1,275 + 89.3t, where
1990 represents t = 1. Project sales for 2000.
If the price of capital is $24, the price of labor is $15, and the marginal product of
capital is 16, the least costly combination of capital and labor requires that the marginal
product of labor be ________.
The following questions refer to this regression equation, (standard errors in
parentheses.)
Q = 8,400 – 10 P + 5 A + 4 Px + 0.05 I, (1,732) (2.29) (1.36) (1.75) 0.15)
R2 = 0.65
N = 120
F = 35.25
Standard error of estimate = 34.3
Q = Quantity demanded
P = Price = 1,000
A = Advertising expenditures, in thousands = 40
PX = price of competitor’s good = 800
I = average monthly income = 4,000
The firm is considering changing its price to $900. Predict the quantity demanded at
that price, all other things equal and provide a 95% confidence interval on your
estimate. (In doing this, explain the value of t-critical you will use in developing your
95% confidence interval.)
Suppose that the price elasticity of demand for wheat is known to be -0.75. Will a good
wheat crop (which increases the supply of wheat) be likely to increase or decrease the
revenues of farmers? Carefully explain.
Explain the difference between the Moving Average and Exponential Smoothing
approaches to forecasting.
A firm’s most recent annual dividend was $2 per share; its shares sell for $40 in the
stock market, and the company expects its dividend to grow at a constant rate of 5% in
the foreseeable future. Using the dividend growth (Gordon) model, what would you
estimate its equity cost of capital to be?
Governments impose excise taxes on goods that have inelastic demand, such as
cigarettes, more often than in other cases. Why?
If a company’s stock is perceived to be more risky than average, what will happen to
their equity cost of capital? Explain using the capital asset pricing model.
Firms that make game systems like Playstation and Nintendo typically charge a price
close to average cost on the game system itself, and do not change that price even when
the systems are scarce or demand increases. Why might this be a profit-maximizing
strategy?