The calculation of stockholder wealth involves

Multiple-choice questions
1. Which of the statements below best illustrates the use of the market process in determining the allocation of scarce resources?

a. “Let’s make this product because this is what we know how to do best.”

b. “Although we’re currently making a profit on the products we make, we should consider shifting to products where we can earn even more money.”

c. “Everyone is opening video stores, why don’t we?”

d. “We can’t stop making this product. This product gave our company its start.”

2. Which of the following is the best example of opportunity cost?

a. a company’s expenditures on a training program for its employees

b. the rate of return on company’s investment

c. the amount of money that a company can earn by depositing excess funds in a money market fund

d. the amount of profit that a company foregoes when it decides to drop a particular product line in favor of another one

3. A critical element of entrepreneurship (as opposed to managerial skills) is

a. leadership skills

b. risk taking

c. technology

d. political skills

4. The accounting costs are:

a. implicit cots

b. replacement costs

c. historical costs

d. all of the above

5. The calculation of stockholder wealth involves

a. the time value of money concept

b. the cash flow stream

c. business and financial risk

d. all of the above

6. As an objective, the maximization of profits ignores

a. the timing of cash flows

b. the time value of money concepts

c. the riskiness of cash flows

d. all of the above

7. Which of the following will cause a decrease in the demand for fish (shifts the demand curve)?

a. The price of red meat (a substitute product) increases.

b. The price of fish increases.

c. The price of chicken (a substitute product) decreases.

d. The number of fishing boats decreases.

8. Which of the following would indicate that price is temporarily below its market equilibrium?

a. There are a number of producers who are left with unwanted inventories.

b. There are a number of consumers who must be placed on waiting lists for the product.

c. Firms decide to leave the market.

d. The government must step in and subsidize the product.

9. 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 our product is bound to increase.”

10. A decrease in the price of personal computers can result from

a. a decrease in the price of chips

b. improvements in methods of assembling computers

c. an increase in the gross domestic product

d. all of the above

e. both a. and b.

11. Which of the following is a key determinant of both supply and demand?

a. Income

b. Future expectations about prices

c. Tastes and preferences

d. Sales tax

12. The sensitivity of the change in quantity consumed of one product to a change in the price of a related product is called

a. cross-price elasticity of demand

b. substitute elasticity

c. complementary elasticity

d. price elasticity of demand

13. The government unit that wants to achieve “revenue enhancement” will find it considerably more favorable to enact an excise tax on products whose demand is

a. highly elastic

b. relatively elastic

c. highly inelastic

d. unitary elastic

14. When total revenue increase from $18,000 to $26,000 when quantity increases from 8 to 10, marginal revenue is equal to

a. $3,000

b. $4,000

c. $8,000

d. $2,600

15. In general, if there are many good substitutes for a given product, the demand elasticity will be

a. high

b. low

c. indeterminate

d. zero

16. If the consumption of sugar does not change at all following a price increase from 49 cents to 58 cents per pound, the demand for sugar is considered to be

a. relatively inelastic

b. perfectly elastic

c. perfectly inelastic

d. unitary elastic

17. If the income elasticity of a particular product is –0.2, it would be considered

a. a superior good

b. a normal good

c. an inferior good

d. an elastic good

18. If a firm decreases the price of a product and total revenue decreases, then

a. the demand for this product is price elastic

b. the demand for this product is price inelastic

c. the cross elasticity is negative

d. the income elasticity is less than 1

19. The owner of a produce store found that when the price of a head of lettuce was raised from 50 cents to $1, the quantity sold per hour fell from 18 to 8. The arc elasticity of demand for lettuce is

a. –0.56

b. –1.15

c. –0.8

d. –1.57

20. If a regression coefficient passes the t-test, it means that

a. the regression equation is valid.

b. the regression coefficient is significantly different from zero.

c. the regression coefficient cannot be used for forecasting.

d. None of the above.

21. Which of the following is a test of the statistical significance of the entire regression equation?

a. t-test

b. R2 test

c. F-test

d. Durbin-Watson test

22. When R2 of a regression is very high, it indicates that

a. all the coefficients are statistically significant.

b. the intercept term has no economic meaning.

c. a high proportion of the variation in the dependent variable can be accounted for by the variation in the independent variables.

d. there is a good chance of serial correlation and so the equation must be changed.

23. The forecasting method that involves using and average of past observations to predict the future (if the forecaster feels that the future is a reflection of some average of past results) is the

a. moving average method

b. econometric forecasting method

c. exponential smoothing method

d. both a. and b.

e. both a. and c.

24. When the more recent observations are more relevant to the estimate of the next period than previous observations, the naïve forecasting method employed is

a. exponential smoothing

b. compound growth rate

c. trend analysis

d. moving averages

Short-answer questions

Please answer FOUR of the short-answer questions. Credit will not be given for answering more than 4 short-answer questions

25. What costs do economists consider irrelevant? Give examples.

26. What main factor explains the difference between accounting and economic cost? Explain.

27. “Should we continue developing a new software application that we began last year?” How the distinction between sunk and incremental costs is helpful in answering this question? Explain.

28. Explain the difference between diseconomies of scale and diminishing returns.

29. The demand for salt is relatively price inelastic, while the demand for pretzels is relatively price elastic. How can you best explain why?

30. Governments impose excise taxes on goods that have inelastic demand, such as cigarettes, more often than in other cases. Explain why?

31. Suppose that macroeconomic forecasters predict that the economy will be expanding in the near future. How might managers use this information?

Hint: Consider the income elasticity of demand for normal and inferior goods.

32. What is the major problem in projecting with a trend line?

Extra-Credit Question

33. This problem is worth a maximum of 3 extra points.

The Johnson Robot Company’s marketing officials report to the company’s CEO that the demand curve for the company’s robots in 2001 is

P = 3,000 – 40Q,

where P is the price of a robot, and Q is the number sold per month.

a. What is the marginal revenue equation for the firm?

b. At what prices is demand for the firm’s product price elastic?

c. If the firm wants to maximize its dollar sales volume, what price should it charge?

BUSN6120

MIDTERM EXAMINATION

ANSWER SHEET FOR MULTIPLE-CHOICE QUESTIONS

1 _________