PART 1 1. Economic profit is defined as the difference between revenue and ____.

1. Economic profit is defined as the difference between revenue and ____.
explicit cost
total economic cost
implicit cost
shareholder wealth
2. 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)
3. The Saturn Corporation (once a division of GM) was permanently closed in 2009.  What went wrong with Saturn?
Saturn’s cars sold at prices higher than rivals Honda or Toyota, so they could not sell many cars.
Saturn sold cars below the prices of Honda or Toyota, earning a low 3% rate of return.
Saturn found that young buyers of Saturn automobiles were very loyal to Saturn and GM.
Saturn implemented a change management view that helped make first time Saturn purchasers trade up to Buick or Cadillac.
4. 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?
risk-bearing theory of profit
dynamic equilibrium theory of profit
innovation theory of profit
managerial efficiency theory of profit
stochastic optimization theory of profit
5. A Real Option Value is:
An option that been deflated by the cost of living index makes it a “real” option.
An opportunity cost of capital.
An opportunity to implement a new cost savings or revenue expansion activity that arises from business plans that the managers adopt.
An objective function and a decision rule that comes from it.
Both a and b.
6. The form of economics most relevant to managerial decision-making within the firm is:
welfare economics
free-enterprise economics
none of the above
7.An closest example of a risk-free security is
General Motors bonds
AT&T commercial paper
U.S. Government Treasury bills
San Francisco municipal bonds
an I.O.U. that your cousin promises to pay you $100 in 3 months
8. The approximate probability of a value occurring that is greater than one standard deviation from the mean is approximately (assuming a normal distribution)
9. The level of an economic activity should be increased to the point where the ____ is zero.
marginal cost
average cost
net marginal cost
net marginal benefit
10. Generally, investors expect that projects with high expected net present values also will be projects with
low risk
high risk
certain cash flows
short lives
none of the above
11. The ____ is the ratio of ____ to the ____.
standard deviation; covariance; expected value
coefficient of variation; expected value; standard deviation
correlation coefficient; standard deviation; expected value
coefficient of variation; standard deviation; expected value
12. The primary difference(s) between the standard deviation and the coefficient of variation as measures of risk are:
a. the coefficient of variation is easier to compute.
b. the standard deviation is a measure of relative risk whereas the coefficient of variation is a measure of absolute risk.
c. the coefficient of variation is a measure of relative risk whereas the standard deviation is a measure of absolute risk.
d. the standard deviation is rarely used in practice whereas the coefficient of variation is widely used
13. Iron ore is an example of a:
durable good
producers’ good
nondurable good
consumer good
none of the above
14. An income elasticity (Ey) of 2.0 indicates that for a ____ increase in income, ____ will increase by ____.
one percent; quantity supplied; two units
one unit; quantity supplied; two units
one percent; quantity demanded; two percent
one unit; quantity demanded; two units
ten percent; quantity supplied; two percent
15. Those goods having a calculated income elasticity that is negative are called:
producers’ goods
durable goods
inferior goods
nondurable goods
16. 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.
elastic; price; quantity
unit elastic; price; quantity
inelastic; quantity; price
inelastic; price; quantity
none of the above
17. The factor(s) which cause(s) a movement along the demand curve include(s):
increase in level of advertising
decrease in price of complementary goods
increase in consumer disposable income
decrease in price of the good demanded
18. Marginal revenue (MR) is ____ when total revenue is maximized.
greater than one
equal to one
less than zero
equal to zero
equal to minus one
19. A price elasticity (ED) of -1.50 indicates that for a ____ increase in price, quantity demanded will ____ by ____.
one percent; increase; 1.50 units
one unit; increase; 1.50 units
one percent; decrease; 1.50 percent
one unit; decrease; 1.50 percent
ten percent; increase; fifteen percent
20. The standard deviation of the error terms in an estimated regression equation is known as:
coefficient of determination
correlation coefficient
Durbin-Watson statistic
standard error of the estimate
none of the above
21. The constant or intercept term in a statistical demand study represents the quantity demanded when all independent variables are equal to:
their minimum values
their average values
none of the above
22. All of the following are reasons why an association relationship may not imply a causal relationship except:
the association may be due to pure chance
the association may be the result of the influence of a third common factor
both variables may be the cause and the effect at the same time
the association may be hypothetical
both c and d
23. Demand functions in the multiplicative form are most common for all of the following reasons except:
elasticities are constant over a range of data
ease of estimation of elasticities
exponents of parameters are the elasticities of those variables
marginal impact of a unit change in an individual variable is constant
c and d
24. In which of the following econometric problems do we find Durbin-Watson statistic being far away from 2.0?
the identification problem
agency problems
25. The method which can give some information in estimating demand of a product that hasn’t yet come to market is.
the consumer survey
market experimentation
a statistical demand analysis
plotting the data
the barometric method
Part 2
1. When there is an Equilibrium (or a Nash Equilibrium), we expect that:
once the firm’s get there, no one will change their strategy.
firms will tend to select a randomized strategy.
neither firm will care what it does.
this is always a dominated strategy.
2. In adopting mixed Nash equilibrium strategy, a player is attempting to
randomize his or her own behavior
make the opponent favor a course of action preferred by the first player
randomize the outcome of actions
make the opponent indifferent between one action and another
none of the above
3. Credible promises and hostage mechanisms can support a continuous stream of cooperative exchanges except when
the promisor is better off fulfilling than ignoring his promise
neither party has a prior dominant strategy
the hostage can be revoked for just causes
the hostage is more valuable than any given exchange
the hostage is difficult to replace
4. A dominant strategy differs from a Nash equilibrium strategy in that
Nash equilibrium strategy does not assume best reply responses
dominant strategy assumes best reply responses
only Nash strategy applies to simultaneous games
one dominant strategy is sufficient to predict behavior in a multi-person game
Nash strategy is often unique
5. Cooperation in repeated prisoner’s dilemma situations seems to be enhanced by all of the following except.
limited punishment schemes
clarity of conditional rewards
grim trigger strategy
provocabilityi.e., credible threats of punishment
tit for tat strategy
6. Electricity pricing that varies in its billing expense throughout the day is called
full pricing
marginal cost pricing
dynamic pricing
variable pricing
full cost pricing 
7. Vacation tours to Europe invariably package visits to disparate regions:  cities, mountains, and the seaside.  Bundling, a type of second degree price discrimination, is most profitable when:
The preference rankings of vacationers travelling together are negatively correlated 
A preference of cities is always higher than preferences for mountain vistas. 
preference rankings of vacationers travelling together are positively correlated.
preference for the seaside is always higher than preferences for city excursions.
no one wants to take a European vacation package to cities, mountains, and the seaside.
8. Which of the following pricing policies best identifies when a product should be expanded, maintained, or discontinued?
full-cost pricing policy
target-pricing policy
marginal-pricing policy
market-share pricing policy
markup pricing policy
9. 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.
Ratio of price to marginal cost
Ratio of marginal cost to marginal utility
Ratio of price to elasticity
Marginal revenue
None of the above 
10.    ____ is the price at which an intermediate good or service is transferred from the selling to the buying division within the same firm.
Incremental price
Marginal price
Full-cost price
Transfer price
None of the above
11. When retail bicycle dealers advertise and perform warranty repairs but do not deliver the personal selling message that Schwinn has designed as part of the marketing plan but cannot observe at less than prohibitive cost, the manufacturer has encountered a problem of ____.
Reliance relationship
Moral hazard
Creative ingenuity
Insurance reliance 
12. When borrowers who do not intend to repay are able to hide their bad credit histories, a lender’s well-intentioned borrowers should
Complain to regulatory authorities
Withdraw their loan applications
Offer more collateral in exchange for lower interest charges
Divulge still more information on their loan applications
Hope for a pooling equilibrium 
13. To accomplish its purpose a linear profit-sharing contract must
Induce the employee to moonlight
Communicate a  code of conduct that will be monitored and enforced
Meet either the participation or the incentive compatibility constraint
Establish a separation equilibrium
Not realign incentives 
14. To accomplish its purpose a linear profit-sharing contract must
15. When someone contracts to do a task but fails to put full effort into the performance of an agreement, yet the lack of effort is not independently verifiable, this lack of effort constitutes a
Breach of contractual obligations
Denial of good guarantee
Loss of reputation
Moral hazard 
16. The Herfindahl-Hirschman index (also shortened to just the Herfindahl index) is a measure of ____.
Market concentration
Income distribution
Technological progressiveness 
Price discrimination
None of the above 
17. The antitrust laws regulate all of the following business decisions except ____.
Monopolistic practices
Price discrimination
Wage levels
18. The lower the barriers to entry and exit, the more nearly a market structure fits the ____ market model.
Monopolistic competition
Perfectly contestable 
None of the above
19. ____ yields the same results as the theory of perfect competition, but requires substantially fewer assumptions than the perfectly competitive model.
Baumol’s sales maximization hypothesis
The Pareto optimality condition
The Cournot model
The theory of contestable markets
None of the above 
20. ____ occurs whenever a third party receives or bears costs arising from an economic transaction in which the individual (or group) is not a direct participant.
Pecuniary benefits and costs
Monopoly costs and benefits
None of the above 
21. Cost-benefit analysis is the public sector counterpart to ____ used in private, profit-oriented firms.
ratio analysis 
break-even analysis 
capital budgeting techniques 
economic forecasting 
none of the above 
22. The weights used in calculating the firm’s weighted-average cost of capital are equal to the proportion of debt and equity ____.
used to finance the project 
used to finance the projects undertaken last year 
in the industry average capital structure 
in the firm’s target capital structure 
none of the above
23. In order to help assure that all relevant factors will be considered, the capital-expenditure selection process should include the following steps except:
generating alternative capital-investment project proposals
estimating cash flows for the project proposals
reviewing the investment projects after they have been implemented
allocate manpower to the various divisions within the firm
a and d
24. The social rate of discount is best approximated by:
the cost of government borrowing 
the opportunity cost of resources taken from the private sector 
3 percent 
30 percent 
none of the above
25.    In the constant-growth dividend valuation model, the required rate of return on common stock (i.e., cost of equity capital) can be shown to be equal to the sum of the dividend yield plus the ____.
present value yield 
risk-free rate 
dividend growth rate 
none of the above 


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