Fundamental Economic Concepts
15. A change in the level of an economic activity is desirable and should be undertaken as long as the marginal benefits exceed the _____________.
a. marginal returns
b. total costs
c. marginal costs
d. average costs
- average benefits
16. The level of an economic activity should be increased to the point where the __________ is zero.
a. marginal cost
b. average cost
c. net marginal cost
d. net marginal benefit
17. The net present value of an investment represents
a. an index of the desirability of the investment
b. the expected contribution of that investment to the goal of shareholder wealth maximization
c. the rate of return expected from the investment
d. a and b only
e. a and c only
18. Generally, investors expect that projects with high expected net present values also will be projects with
a. low risk
b. high risk
c. certain cash flows
d. short lives
19. An excellent example of a risk-free security is
a. General Motors bonds
b. AT&T commercial paper
c. U.S. Government Treasury bills
d. San Francisco municipal bonds
e. a certificate of deposit for $150,000 held in a commercial bank
20. The standard deviation is appropriate to compare the risk between two investments only if
a. the expected returns from the investments are approximately equal
b. the investments have similar life spans
c. objective estimates of each possible outcome is available
d. the coefficient of variation is equal to 1.0
e. none of the above
21. The approximate probability of a value occurring that is greater than one standard deviation from the mean is approximately (assuming a normal distribution)
a. 68.26%
b. 2.28%
c. 34%
d. 15.87%
22. 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?
a. U.S. Government bonds
b. municipal bonds
c. common stock
d. commercial paper
23. 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
e. c and d
24. The __________ is the ratio of __________ to the _____________.
a. standard deviation; covariance; expected value
b. coefficient of variation; expected value; standard deviation
c. correlation coefficient; standard deviation; expected value
d. coefficient of variation; standard deviation; expected value
25. Sources of positive net present value projects include
a. buyer preferences for established brand names
b. economies of large-scale production and distribution
c. patent control of superior product designs or production techniques
d. a and b only
- a, b, and c
26. The Saturn Corporation (once a division of GM) was permanently closed in 2009. What went wrong with Saturn?
a. Saturn's cars sold at prices higher than rivals Honda or Toyota, so they could not sell many cars.
b. Saturn sold cars below the prices of Honda or Toyota, earning a low 3% rate of return.
c. Saturn found that young buyers of Saturn automobiles were very loyal to Saturn and GM.
d. Saturn implemented a change management view that helped make first time Saturn purchasers trade up to Buick or Cadillac.
27. A Real Option Value is:
a. An option that been deflated by the cost of living index makes it a "real" option.
b. An opportunity cost of capital.
c. An opportunity to implement a new cost savings or revenue expansion activity that arises from business plans that the managers adopt.
d. An objective function and a decision rule that comes from it.
28. Which of the following will increase (V0), the shareholder wealth maximization model of the firm: V0·(shares outstanding) = ?¥t=1 (? t ) / (1+ke)t + Real Option Value. P. 8
Decrease the required rate of return (ke).
Decrease the stream of profits (?t).
Decrease the number of periods from ¥ to 10 periods.
Decrease the real option value.
29.The primary objective of a for-profit firm is to ___________.
a. maximize agency costs
b. minimize average cost
c. maximize total revenue
d. set output where total revenue equals total cost
e maximize shareholder value
30. Possible goals of Not-For-Profit (NFP) enterprises include all of the following EXCEPT:
a. maximize total costs
b. maximize output, subject to a breakeven constraint
c. maximize the happiness of the administrators of the NFP enterprise
d. maximize the utility of the contributors
31. 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
32. To reduce Agency Problems, executive compensation should be designed to:
a. create incentives so that managers act like owners of the firm.
b. avoid making the executives own shares in the company.
c. be an increasing function of the firm's expenses.
d. be an increasing function of the sales revenue received by the firm.
33. 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:
equals zero.
is greater than the marginal cost of the test
is lower than the marginal cost of an additional test
equals the marginal cost of the test