The certainty equivalent approach to accounting for risk in capital budgeting involves
A) adjusting the discount rate used to calculate net present values.
B) adjusting the expected cash flows.
C) estimating the coefficient of variation.
D) estimating the standard deviation of the net present values.
If a risky cash flow of $10,000 is equivalent to a riskless cash flow of $9,300, the
certainty equivalent factor is
A) 0.93.
B) 0.07.
C) 1.07.
D) 1.93.
Risks faced by multinational corporations include
A) changes in exchange rates.
B) restrictions on ownership.
C) repatriation of funds.
D) cultural and religious philosophies.
E) All of the above
Table 1
The following information is provided for Tony Romo’s income and expenditures.
Quantity Purchased per Month
Monthly Income Steaks Pizzas
$2,000 2 8
$3,000 4 6
In Table 1, pizzas are classified as a(n)
A) normal good.
B) positive good.
C) inferior goods.
D) marginal good.
Domestic demand for a good is QD = 3000 – 25P. The domestic supply of the good is
QS = 20P. Foreign producers can supply any quantity at a price (P) of $30.
a. What is the domestic equilibrium price and quantity?
b. At this domestic equilibrium price, how much of the good will be supplied by
domestic producers and how much by foreign producers?
The Delphi method is a
A) smoothing technique in forecasting.
B) consensual forecast based on expert opinions.
C) compound growth approach to forecasting.
D) nave forecasting approach.
An advantage of using the cross-sectional regression method in estimating production is
that
A) the problem of technological change over time is overcome.
B) there is no need to adjust data, which are in monetary terms for geographical
differences.
C) we can assume that all plants operate at their most efficient input combinations.
D) All of the above
Assume a firm employs 10 workers and pays each $15 per hour. Further assume that the
MP of the 10th worker is 5 units of output and that the price of the output is $4.
According to economic theory, in the short run
A) the firm should hire additional workers.
B) the firm should reduce the number of workers employed.
C) the firm should continue to employ 10 workers.
D) More information is required to answer this question.
Which of the following would lead to a short-run market surplus for tomatoes?
A) The price of tomatoes increases.
B) A new government study shows that tomatoes have a greater risk of contamination
from salmonella.
C) An increase in the price of potatoes.
D) A decrease in the number of tomato growers.
When a regression coefficient is significant at the .05 level, it means that
A) there is only a five percent chance that there will be an error in a forecast.
B) there is 95 percent chance that the regression coefficient is the true population
coefficient.
C) there is a five percent chance or less that the estimated coefficient is zero.
D) there is a five percent chance or less that the regression coefficient is not the true
population coefficient.
A drawback in using the payback approach to capital budgeting decisions is
A) it doesn’t account for the time value of money.
B) it ignores cash flows beyond the payback period.
C) it doesn’t adjust for differences in the stream of cash flows.
D) All of the above
If the price of a good is decreased and total revenue received from the sale of this good
does not change, then the price elasticity of demand for the good is
A) elastic.
B) inelastic.
C) unitary.
D) None of the above
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
Which of the following is not an example of a cost externality?
A) the dumping of industrial waste into a lake
B) unsightly billboards
C) a neighbor that blasts his stereo system
D) the building of a new type of jet fighter bomber
E) All of the above
In the short run a firm should shut down if it cannot
A) make normal profits.
B) make economic profits.
C) cover its variable costs.
D) cover its fixed costs.
When purchases of tennis socks decline following an increase in the price of tennis
sneakers (other things remaining equal), the relationship between these two items can
be described as
A) substitutable.
B) complementary.
C) unique.
D) ordinary.
Which of the following is a relevant cost?
A) replacement cost
B) sunk cost
C) historical cost
D) fixed cost
E) All of the above are relevant.
Another name for stockholder wealth maximization is
A) profit maximization.
B) maximization of earnings per share.
C) maximization of the value of the common stock.
D) maximization of cash flows.
When purchases of tennis socks decline following an increase in the price of tennis
sneakers (other things remaining equal), the relationship between these two items can
be described as
A) substitutable.
B) complementary.
C) unique.
D) ordinary.
Which of the following is the best example of economies of scope?
A) Coca-Cola expands its global operations to sub-Sahara Africa.
B) Alcohol for car fuel is produced from corn.
C) Amazon.com decides to rent out its Web site to independent e-commerce companies.
D) A company reduces its cost by getting bigger discounts for bulk purchases.
When using regression analysis for forecasting, the confidence interval indicates
A) the degree of confidence that one has in the equation’s R2.
B) the range in which the value of the dependent variable is expected to lie with a given
degree of probability.
C) the degree of confidence that one has in the regression coefficients.
D) the range in which the actual outcome of a forecast is going to lie.
Economies of scale are created by greater efficiency of capital and by
A) longer chains of command in management.
B) better wages for labor.
C) smaller plant sizes.
D) increased specialization of labor.
Which of the following would cause a leftward shift in the demand curve for a good?
A) an increase in income
B) an increase in the price of a complementary good
C) an increase in the price of a substitute
D) the expectation that there will be a shortage in the availability of the good
When the law of diminishing returns takes effect
A) firms must add increasingly more input if they are to maintain the same extra
amount of output.
B) firms must add decreasingly more input if they are to maintain the same extra
amount of output.
C) more input must be added in order to increase its output.
D) a firm must always try to add the same amount of input to the production process.
The use of the same cost of capital (risk adjusted discount rate) for all capital projects in
a corporation
A) is usually the correct procedure.
B) is incorrect since different divisions of the corporation may be faced with different
levels of risk.
C) is incorrect since different capital projects, even in the same division, may be faced
with different levels of risk.
D) Both B and C
A perfectly competitive firm has total revenue and total cost curves given by:
TR = 100Q
TC = 5,000 + 2Q + 0.2 Q2
a. Find the profit-maximizing output for this firm.
b. What profit does the firm make?
For each of the following sets of supply and demand curves, calculate equilibrium price
and quantity.
a. QD = 2000 – 2P; QS = 2P
b. QD = 500 – P; QS = 50 + P
c. QD = 5000 – 10P; QS = -1000 + 5P
Revenue maximization occurs when a firm sells at a price
A) that is equal to its minimum average variable cost.
B) where its marginal revenue is equal to its marginal cost.
C) where its marginal revenue is zero.
D) None of the above
The problem of autocorrelation refers to
A) independent variables in a regression equation whose values are closely related to
each other.
B) insufficient data to estimate regression coefficient values.
C) regression coefficient values which are not significantly different from zero.
D) regression equation variables which exhibit a similar pattern in their values over a
number of time periods.
Which of the following is an example of risk in capital budgeting on a global basis?
A) exchange rate changes
B) tariff changes
C) expropriation
D) All of the above
Which of the following refers to a shift in the demand curve?
A) “This new advertising campaign should really increase our demand.”
B) “Let’s drop our price to increase our demand.”
C) “We dare not raise our price because our demand will drop.”
D) “If new sellers enter the market, the demand for the product is bound to increase.”
Which of the following best applies to the distinction between the “long run” and the
“short run”?
A) The short run is a period of approximately 1-6 months while the long run is any time
frame which is longer.
B) In the short run, only new firms may enter, while in the long-run firms may either
enter or exit the market.
C) The rationing function of price is a short-run phenomenon whereas the guiding
function is a long-run phenomenon.
D) All of the above statements are correct.