ECO 550

ECO 550 MIDTERM
1.ÿIncome tax payments are an example
of

a.

implicit costs

b.

explicit costs

c.

normal return on investment

d.

shareholder wealth

e.

none of the above

ÿ
2.ÿThe 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.
e. all of the above
ÿ
3.ÿRecently, 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
a. equals zero.
b. is greater than the marginal cost of the test
c. is lower than the marginal cost of an additional test
d. equals the marginal cost of the test
e. both a and b.
4.Which of the following will increase (V0), the
shareholder wealth maximization model of the firm:
V0_(shares outstanding) =
__t=1ÿ(_ÿtÿ) /
(1+ke)tÿ+ Real Option Value
a. Decrease the required rate of return (ke).
b. Decrease the stream of profits (pt).
c. Decrease the number of periods from ¾ to 10 periods.
d. Decrease the real option value.
e. All of the above
5.ÿThe 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
ÿ
6.ÿThe standard deviation is appropriate to compare
the risk between two investments only if

the expected returns from the investments are approximately
equal
the investments have similar life spans
objective estimates of each possible outcome is available
the coefficient of variation is equal to 1.0
none of the above

7.ÿThe ____ 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
e.ÿnone of the above

8.ÿBased 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?

U.S. Government bonds
municipal bonds
common stock
commercial paper
e.ÿnone of the above

9.If demand were inelastic, then we should
immediately:
a. cut the price.
b. keep the price where it is.
c. go to the Nobel Prize Committee to show we were the first to
find an upward sloping demand curve.
d. stop selling it since it is inelastic.
e. raise the price
10.ÿAn increase in each of the following factors
would normally provide a subsequent increase in quantity
demanded,ÿexcept

price of substitute goods
level of competitor advertising
consumer income level
consumer desires for goods and services
a and b

ÿ

ÿ

ÿ

ÿ

11.ÿThose goods having a calculated income
elasticity that is negative are called
a. producers’ goods
b. durable goods
c. inferior goods
d. nondurable goods
e. none of the above
12.ÿWhich of the following would tend to make
demand INELASTIC
a. the amount of time analyzed is quite long
b. there are lots of substitutes available
c. the product is highly durable
d. the proportion of the budget spent on the item is very
small
e. no one really wants the product at all
13.ÿWhen using a multiplicative power function (Y =
a X1b1 X2b2 X3b3) to represent an economic relationship, estimates
of the parameters (a, and the b’s) using linear regression analysis
can be obtained by first applying a ____ transformation to convert
the function to a linear relationship
a. semilogarithmic
b. double-logarithmic
c. reciprocal
d. polynomial
e. cubic
14.ÿIn which of the following econometric problems
do we find Durbin-Watson statistic being far away from
2.0
a. the identification problem
b. autocorrelation
c. multicollinearity
d. heteroscedasticity
e. agency problems
15.ÿAll of the following are reasons why an
association relationship may not imply a causal relationship
except
a. the association may be due to pure chance
b. the association may be the result of the influence of a third
common factor
c. both variables may be the cause and the effect at the same
time
d. the association may be hypothetical
e. both c and d
16.ÿDemand functions in the multiplicative form are
most common for all of the following reasons except
a. elasticities are constant over a range of data
b. ease of estimation of elasticities
c. exponents of parameters are the elasticities of those
variables
d. marginal impact of a unit change in an individual variable is
constant
e. c and d
17.ÿConsumer expenditure plans is an example of a
forecasting method. Which of the general categories best described
this example
a. time-series forecasting techniques
b. barometric techniques
c. survey techniques and opinion polling
d. econometric techniques
e. input-output analysis
18.ÿThe use of quarterly data to develop the
forecasting model Yt = a +bYt_1 is an example of which forecasting
technique?
a. Barometric forecasting
b. Time-series forecasting
c. Survey and opinion
d. Econometric methods based on an understanding of the
underlying economic variables involved
e. Input-output analysis
19.ÿAn example of aÿtime
seriesÿdata set is one for which the
a. data would be collected for a given firm for several
consecutive periods (e.g., months).
b. data would be collected for several different firms at a
single point in time.
c. regression analysis comes from data randomly taken from
different points in time.
d. data is created from a random number generation program.
d. use of regression analysis would impossible in time
series
20.ÿThe variation in an economic time-series which
is caused by major expansions or contractions usually of greater
than a year in duration is known as

secular trend
cyclical variation
seasonal effect
unpredictable random factor
none of the above

21.ÿCompanies that reduce their margins on export
products in the face of appreciation of their home currency may be
motivated by a desire to

sacrifice market share abroad but build market share at
home
increase production volume to realize learning curve
advantages
sell foreign plants and equipment to lower their debt
reduce the costs of transportation
all of the above

22.ÿEuropean Union labor costs exceed U.S. and
British labor costs primarily because

worker productivity is lower in the EU
union wages are higher in the EU
layoffs and plant closings are more restrictive in the U.S. and
Britain
the amount of paid time off is higher in the EU
labor-management relations are better in the EU

23.ÿIf Ben Bernanke, Chair of the Federal Reserve
Board, begins to tighten monetary policy by raising US interest
rates next year, what is the likely impact on the value of the
dollar
a. The value of the dollar falls when US interest rates
rise.
b. The value of the dollar rises when US interest rates
rise.
c. The value of the dollar is not related to US interest
rates.
d. This is known as Purchasing Power Parity or PPP.
e. The Federal Reserve has no impact at all on interest
rates.
24.ÿIn a recession, the trade balance often
improves because

service exports exceed manufactured good exports
banks sell depressed assets
fewer households can afford luxury imports
direct investment abroad declines

the capital account exceeds the current account
25.ÿThe isoquants for inputs that are perfect
substitutes for one another consist of a series of

right angles
parallel lines
concentric circles
right triangles
none of the above

26.ÿIn a production process, an excessive amount of
the variable input relative to the fixed input is being used to
produce the desired output. This statement is true for
a. stage II
b. stages I and II
c. when Ep = 1
d. stage III
e. none of the above
27.ÿThe marginal product is defined as
a. The ratio of total output to the amount of the variable input
used in producing the output
b. The incremental change in total output that can be produced
by the use of one more unit of the variable input in the production
process
c. The percentage change in output resulting from a given
percentage change in the amount
d. The amount of fixed cost involved.
e. None of the above
28.ÿThe marginal rate of technical substitution may
be defined as all of the following except:
a. the rate at which one input may be substituted for another
input in the production process, while total output remains
constant
b. equal to the negative slope of the isoquant at any point on
the isoquant
c. the rate at which all combinations of inputs have equal total
costs
d. equal to the ratio of the marginal products of X and Y
e.b and c
29. For a short-run cost function which of the following
statements is (are) not true?

The average fixed cost function is monotonically
decreasing.
The marginal cost function intersects the average fixed cost
function where the average variable cost function is a
minimum.
The marginal cost function intersects the average variable cost
function where the average variable cost function is a
minimum.
The marginal cost function intersects the average total cost
function where the average total cost function is a minimum.
b and c

30.ÿIf TC = 321 + 55Q – 5Q2, then average total
cost at Q = 10 is
a. 10.2
b. 102
c. 37.1
d. 371
e. 321
31. ____ÿare defined as costs which are incurred
regardless of the alternative action chosen in a decision-making
problem

Opportunity costs
Marginal costs
Relevant costs
Sunk costs
None of the above

32.ÿWhat method of inventory valuation should be
used for economic decision-making problems?

book value
original cost
current replacement cost
cost or market, whichever is lower
historical cost

1 . Three $1,000 face value bonds that mature in 10 years have the same level of risk, hence their YTMs are equal.

1 . Three $1,000 face value bonds that mature in 10 years have
the same level of risk, hence their YTMs are equal. Bond A has an
8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a
12% annual coupon. Bond B sells at par. Assuming interest rates
remain constant for the next 10 years, which of the following
statements is CORRECT?
a. Bond A’s current yield will increase each year.
b. Since the bonds have the same YTM, they should all have the
same price, and since interest rates are not expected to change,
their prices should all remain at their current levels until
maturity.
c. Bond C sells at a premium (its price is greater than par),
and its price is expected to increase over the next year.
d. Bond A sells at a discount (its price is less than par), and
its price is expected to increase over the next year.
e. Over the next year, Bond A’s price is expected to decrease,
Bond B’s price is expected to stay the same, and Bond C’s price is
expected to increase.
2. Which of the following statements is CORRECT?
a. Two bonds have the same maturity and the same coupon rate.
However, one is callable and the other is not. The difference in
prices between the bonds will be greater if the current market
interest rate is below the coupon rate than if it is above the
coupon rate.
b. A callable 10-year, 10% bond should sell at a higher price
than an otherwise similar noncallable bond.
c. Corporate treasurers dislike issuing callable bonds because
these bonds may require the company to raise additional funds
earlier than would be true if noncallable bonds with the same
maturity were used.
d. Two bonds have the same maturity and the same coupon rate.
However, one is callable and the other is not. The difference in
prices between the bonds will be greater if the current market
interest rate is above the coupon rate than if it is below the
coupon rate.
e. The actual life of a callable bond will always be equal to or
less than the actual life of a noncallable bond with the same
maturity. Therefore, if the yield curve is upward sloping, the
required rate of return will be lower on the callable bond.
3. Which of the following statements is CORRECT?
a. Assume that two bonds have equal maturities and are of equal
risk, but one bond sells at par while the other sells at a premium
above par. The premium bond must have a lower current yield and a
higher capital gains yield than the par bond.
b. A bond’s current yield must always be either equal to its
yield to maturity or between its yield to maturity and its coupon
rate.
c. If a bond sells at par, then its current yield will be less
than its yield to maturity.
d. If a bond sells for less than par, then its yield to maturity
is less than its coupon rate.
e. A discount bond’s price declines each year until it matures,
when its value equals its par value.
4. Suppose a new company decides to raise a total of $200
million, with $100 million as common equity and $100 million as
long-term debt. The debt can be mortgage bonds or debentures, but
by an iron-clad provision in its charter, the company can never
raise any additional debt beyond the original $100 million. Given
these conditions, which of the following statements is CORRECT?
a. The higher the percentage of debt represented by mortgage
bonds, the riskier both types of bonds will be and, consequently,
the higher the firm’s total dollar interest charges will be.
b. If the debt were raised by issuing $50 million of debentures
and $50 million of first mortgage bonds, we could be certain that
the firm’s total interest expense would be lower than if the debt
were raised by issuing $100 million of debentures.
c. In this situation, we cannot tell for sure how, or whether,
the firm’s total interest expense on the $100 million of debt would
be affected by the mix of debentures versus first mortgage bonds.
The interest rate on each of the two types of bonds would increase
as the percentage of mortgage bonds used was increased, but the
result might well be such that the firm’s total interest charges
would not be affected materially by the mix between the two.
d. The higher the percentage of debentures, the greater the risk
borne by each debenture, and thus the higher the required rate of
return on the debentures.
e. If the debt were raised by issuing $50 million of debentures
and $50 million of first mortgage bonds, we could be certain that
the firm’s total interest expense would be lower than if the debt
were raised by issuing $100 million of first mortgage bonds.
5. Cosmic Communications Inc. is planning two new issues of
25-year bonds. Bond Par will be sold at its $1,000 par value, and
it will have a 10% semiannual coupon. Bond OID will be an Original
Issue Discount bond, and it will also have a 25-year maturity and a
$1,000 par value, but its semiannual coupon will be only 6.25%. If
both bonds are to provide investors with the same effective yield,
how many of the OID bonds must Cosmic issue to raise $3,000,000?
Disregard flotation costs, and round your final answer up to a
whole number of bonds.
a. 4,228
b. 4,337
c. 4,448
d. 4,562
e. 4,676

Your company has developed a drug called Matrox that is an effective treatment for migraine headaches.

Your company manufactures controllers used in the
production of commercial air conditioning units and currently
selling them at $50 each. Marginal costs are $30 for production up
to 10,000 units per month. Production cannot be pushed beyond
10,000 units per month. Is your company selling at the optimal
price at which the company can maximize profits, if the price
elasticity of demand is estimated to be -2 for prices between $45
and $65 per controller?

Your company has developed a drug called Matrox that
is an effective treatment for migraine headaches. You have just
discovered that it can also be used for organ transplant patients
to reduce the risk of organ rejection. The demand for migraine
medications is considerably more elastic than the demand for drugs
to reduce the risk of organ rejections. A study has indicated that
the elasticity of demand for Matrox as a migraine medication is
-4.0 but as a transplant drug it is -1.5. The marginal
cost
is $5 per dose. Assuming you can price differently
for the two different types of customers of the same basic drug,
what would be the prices in the two markets?

Describe the term economies of scale. Give a real
life example of a business where you can see an application of this
term

Describe the term economies of scope. Give a real
life example of a business where you can see an application of this
term

ECO 365 Final Question and Answers 29/30 Correct!!

1) An economist who is studying the relationship between
the money supply, interest rates, and the rate of inflation is
engaged in?
ÿ2) A basic difference between microeconomics
and macroeconomics is that microeconomics?
ÿ3) The distinction between supply and the
quantity supplied is best made by saying that?
****All questions with answers 29 out of 30
CORRECT****