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MAT 540 MidTerm Exam Solutions
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MAT 540 Week 5 Mid Term Quiz
- Question 1
Deterministic techniques assume that no uncertainty exists in model parameters.
- Question 2
An inspector correctly identifies defective products 90% of the time. For the next 10 products, the probability that he makes fewer than 2 incorrect inspections is 0.736.
- Question 3
A continuous random variable may assume only integer values within a given interval.
- Question 4
A decision tree is a diagram consisting of circles decision nodes, square probability nodes, and branches.
- Question 5
Starting conditions have no impact on the validity of a simulation model.
- Question 6
Excel can only be used to simulate systems that can be represented by continuous random variables.
- Question 7
The Delphi develops a consensus forecast about what will occur in the future.
- Question 8
Qualitative methods are the least common type of forecasting method for the long-term strategic planning process.
- Question 9
__________ is a measure of dispersion of random variable values about the expected value.
- Question 10
In Bayesian analysis, additional information is used to alter the __________ probability of the occurrence of an event.
- Question 11
The __________ is the maximum amount a decision maker would pay for additional information.
- Question 12
Two hundred simulation runs were completed using the probability of a machine breakdown from the table below. The average number of breakdowns from the simulation trials was 1.93 with a standard deviation of 0.20.
No. of breakdowns per week Probability Cumulative probability
0 .10 .10
1 .25 .35
2 .36 .71
3 .22 .93
4 .07 1.00
What is the probability of 2 or fewer breakdowns?
- Question 13
Pseudorandom numbers exhibit __________ in order to be considered truly random.
Answer
Selected Answer:
a uniform distribution
Correct Answer:
a uniform distribution
- Question 14
A seed value is a(n)
- Question 15
Random numbers generated by a __________ process instead of a __________ process are pseudorandom numbers.
- Question 16
Consider the following demand and forecast.
PeriodDemand Forecast
1 7 10
2 12 15
3 18 20
4 22
If MAD = 2, what is the forecast for period 4?
- Question 17
Given the following data on the number of pints of ice cream sold at a local ice cream store for a 6-period time frame:
If the forecast for period 5 is equal to 275, use exponential smoothing with α = .40 to compute a forecast for period 7.
- Question 18
Which of the following possible values of alpha would cause exponential smoothing to respond the most slowly to sudden changes in forecast errors?
- Question 19
Coefficient of determination is the percentage of the variation in the __________ variable that results from the __________ variable.
- Question 20
Consider the following graph of sales.
Which of the following characteristics is exhibited by the data?
- Question 21
__________ is a measure of the strength of the relationship between independent and dependent variables.
- Question 22
Consider the following graph of sales.
Which of the following characteristics is exhibited by the data?
- Question 23
__________ is a category of statistical techniques that uses historical data to predict future behavior.
- Question 24
rob
14, and 15)estion worth 2 points, 1 hour time limit (chapters 1,ue units EXCEPT:The U.S. Department of Agriculture estimates that the yearly yield of limes per acre is distributed as follows:
Yield, bushels per acre Probability
350 .10
400 .18
450 .50
500 .22
The estimated average price per bushel is $16.80.
What is the expected yield of the crop?
- Question 25
The drying rate in an industrial process is dependent on many factors and varies according to the following distribution.
Compute the mean drying time. Use two places after the decimal.
- Question 26
A loaf of bread is normally distributed with a mean of 22 oz and a standard deviation of 0.5 oz. What is the probability that a loaf is larger than 21 oz? Round your answer to four places after the decimal.
- Question 27
A fair die is rolled 8 times. What is the probability that an even number (2,4, 6) will occur between 2 and 4 times? Round your answer to four places after the decimal.
- Question 28
An automotive center keeps tracks of customer complaints received each week. The probability distribution for complaints can be represented as a table or a graph, both shown below. The random variable xi represents the number of complaints, and p(xi) is the probability of receiving xi complaints.
xi 0 1 2 3 4 5 6
p(xi) .10 .15 .18 .20 .20 .10 .07
What is the average number of complaints received per week? Round your answer to two places after the decimal.
- Question 29
An investor is considering 4 different opportunities, A, B, C, or D. The payoff for each opportunity will depend on the economic conditions, represented in the payoff table below.
Economic Condition
Poor Average Good Excellent
Investment (S1) (S2) (S3) (S4)
A 50 75 20 30
B 80 15 40 50
C -100 300 -50 10
D 25 25 25 25
If the probabilities of each economic condition are 0.5, 0.1, 0.35, and 0.05 respectively, what is the highest expected payoff?
- Question 30
The local operations manager for the IRS must decide whether to hire 1, 2, or 3 temporary workers. He estimates that net revenues will vary with how well taxpayers comply with the new tax code. The following payoff table is given in thousands of dollars (e.g. 50 = $50,000).
If he thinks the chances of low, medium, and high compliance are 20%, 30%, and 50% respectively, what is the expected value of perfect information? Note: Please express your answer as a whole number in thousands of dollars (e.g. 50 = $50,000). Round to the nearest whole number, if necessary.
- Question 31
Given the following random number ranges and the following random number sequence: 62, 13, 25, 40, 86, 93, determine the average demand for the following distribution of demand.
Demand Random
Number Ranges
5 00-14
6 15-44
7 45-69
8 70-84
9 85-99
- Question 32
Consider the following annual sales data for 2001-2008.
Year Sales
2001 2
2002 4
2003 10
2004 8
2005 14
2006 18
2007 17
2008 20
Calculate the correlation coefficient . Use four significant digits after the decimal.
- Question 33
Given the following data on the number of pints of ice cream sold at a local ice cream store for a 6-period time frame:
Compute a 3-period moving average for period 6. Use two places after the decimal.
- Question 34
The following data summarizes the historical demand for a product.
MonthActual Demand
March20
April 25
May 40
June 35
July 30
August 45
Use exponential smoothing with α = .2 and the smoothed forecast for July is 32. Determine the smoothed forecast for August.
- Question 35
The following sales data are available for 2003-2008 :
Year Sales Forecast
2003 7 9
2004 12 10
2005 14 15
2006 20 22
2007 16 18
2008 25 21
Calculate the absolute value of the average error. Use three significant digits after the decimal.
- Question 36
Daily highs in Sacramento for the past week (from least to most recent) were: 95, 102, 101, 96, 95, 90 and 92. Develop a forecast for today using a 2 day moving average.
Answer
Selected Answer: 91
Correct Answer: 91
- Question 37
The following sales data are available for 2003-2008.
Determine a 4-year weighted moving average forecast for 2009, where weights are W1 = 0.1, W2 = 0.2, W3 = 0.2 and W4 = 0.5.
- Question 38
Given the following data, compute the MAD for the forecast.
Year Demand Forecast
2001 16 18
2002 20 19
2003 18 24
- Question 39
Daily highs in Sacramento for the past week (from least to most recent) were: 95, 102, 101, 96, 95, 90 and 92. Develop a forecast for today using a weighted moving average, with weights of .6, .3 and .1, where the highest weights are applied to the most recent data.
- Question 40
The following data summarizes the historical demand for a product
MonthActual Demand
March20
April 25
May 40
June 35
July 30
August 45
If the forecasted demand for June, July and August is 32, 38 and 42, respectively, what is MAPD? Write your answer in decimal form and not in percentages. For example, 15% should be written as 0.15. Use three significant digits after the decimal.
MAT 540 Midterm Exam Version 2
MAT 540 Midterm Quiz
- Question 1
Deterministic techniques assume that no uncertainty exists in model parameters.
- Question 2
An inspector correctly identifies defective products 90% of the time. For the next 10 products, the probability that he makes fewer than 2 incorrect inspections is 0.736.
- Question 3
A continuous random variable may assume only integer values within a given interval.
- Question 4
A decision tree is a diagram consisting of circles decision nodes, square probability nodes, and branches.
- Question 5
Starting conditions have no impact on the validity of a simulation model.
- Question 6
Excel can only be used to simulate systems that can be represented by continuous random variables.
- Question 7
The Delphi develops a consensus forecast about what will occur in the future.
- Question 8
Data cannot exhibit both trend and cyclical patterns.
- Question 9
Assume that it takes a college student an average of 5 minutes to find a parking spot in the main parking lot. Assume also that this time is normally distributed with a standard deviation of 2 minutes. What time is exceeded by approximately 75% of the college students when trying to find a parking spot in the main parking lot?
- Question 10
A company markets educational software products, and is ready to place three new products on the market. Past experience has shown that for this particular software, the chance of “success” is 80%. Assume that the probability of success is independent for each product. What is the probability that exactly 1 of the 3 products is successful?
- Question 11
The __________ is the expected value of the regret for each decision.
- Question 12
Random numbers generated by a __________ process instead of a __________ process are pseudorandom numbers.
- Question 13
A seed value is a(n)
- Question 14
Pseudorandom numbers exhibit __________ in order to be considered truly random.
- Question 15
In the Monte Carlo process, values for a random variable are generated by __________ a probability distribution.
- Question 16
__________ is a category of statistical techniques that uses historical data to predict future behavior.
- Question 17
__________ methods are the most common type of forecasting method for the long-term strategic planning process.
- Question 18
Consider the following demand and forecast.
PeriodDemand Forecast
1 7 10
2 12 15
3 18 20
4 22
If MAD = 2, what is the forecast for period 4?
- Question 19
Consider the following graph of sales.
Which of the following characteristics is exhibited by the data?
- Question 20
Consider the following graph of sales.
Which of the following characteristics is exhibited by the data?
- Question 21
Which of the following possible values of alpha would cause exponential smoothing to respond the most slowly to sudden changes in forecast errors?
- Question 22
In exponential smoothing, the closer alpha is to __________, the greater the reaction to the most recent demand.
- Question 23
Given the following data on the number of pints of ice cream sold at a local ice cream store for a 6-period time frame:
If the forecast for period 5 is equal to 275, use exponential smoothing with α = .40 to compute a forecast for period 7.
- Question 24
__________ is a linear regression model relating demand to time.
- Question 25
The drying rate in an industrial process is dependent on many factors and varies according to the following distribution.
Compute the mean drying time. Use two places after the decimal.
- Question 26
An automotive center keeps tracks of customer complaints received each week. The probability distribution for complaints can be represented as a table or a graph, both shown below. The random variable xi represents the number of complaints, and p(xi) is the probability of receiving xi complaints.
xi 0 1 2 3 4 5 6
p(xi) .10 .15 .18 .20 .20 .10 .07
What is the average number of complaints received per week? Round your answer to two places after the decimal.
- Question 27
A life insurance company wants to estimate their annual payouts. Assume that the probability distribution of the lifetimes of the participants is approximately a normal distribution with a mean of 68 years and a standard deviation of 4 years. What proportion of the plan recipients would receive payments beyond age 75? Round your answer to four places after the decimal.
- Question 28
A fair die is rolled 8 times. What is the probability that an even number (2,4, 6) will occur between 2 and 4 times? Round your answer to four places after the decimal.
- Question 29
The local operations manager for the IRS must decide whether to hire 1, 2, or 3 temporary workers. He estimates that net revenues will vary with how well taxpayers comply with the new tax code. The following payoff table is given in thousands of dollars (e.g. 50 = $50,000).
If he thinks the chances of low, medium, and high compliance are 20%, 30%, and 50% respectively, what is the expected value of perfect information? Note: Please express your answer as a whole number in thousands of dollars (e.g. 50 = $50,000). Round to the nearest whole number, if necessary.
- Question 30
An investor is considering 4 different opportunities, A, B, C, or D. The payoff for each opportunity will depend on the economic conditions, represented in the payoff table below.
Economic Condition
Poor Average Good Excellent
Investment (S1) (S2) (S3) (S4)
A 50 75 20 30
B 80 15 40 50
C -100 300 -50 10
D 25 25 25 25
If the probabilities of each economic condition are 0.5, 0.1, 0.35, and 0.05 respectively, what is the highest expected payoff?
- Question 31
Consider the following distribution and random numbers:
If a simulation begins with the first random number, what would the first simulation value would be __________.
- Question 32
The following data summarizes the historical demand for a product
MonthActual Demand
March20
April 25
May 40
June 35
July 30
August 45
If the forecasted demand for June, July and August is 32, 38 and 42, respectively, what is MAPD? Write your answer in decimal form and not in percentages. For example, 15% should be written as 0.15. Use three significant digits after the decimal.
- Question 33
Given the following data, compute the MAD for the forecast.
Year Demand Forecast
2001 16 18
2002 20 19
2003 18 24
- Question 34
The following sales data are available for 2003-2008 :
Year Sales Forecast
2003 7 9
2004 12 10
2005 14 15
2006 20 22
2007 16 18
2008 25 21
Calculate the absolute value of the average error. Use three significant digits after the decimal.
- Question 35
The following sales data are available for 2003-2008.
Determine a 4-year weighted moving average forecast for 2009, where weights are W1 = 0.1, W2 = 0.2, W3 = 0.2 and W4 = 0.5.
- Question 36
This is the data from the last 4 weeks:
Use the equation of the regression line to forecast the increased sales for when the number of ads is 10.
- Question 37
Daily highs in Sacramento for the past week (from least to most recent) were: 95, 102, 101, 96, 95, 90 and 92. Develop a forecast for today using a weighted moving average, with weights of .6, .3 and .1, where the highest weights are applied to the most recent data.
- Question 38
The following data summarizes the historical demand for a product.
MonthActual Demand
March20
April 25
May 40
June 35
July 30
August 45
Use exponential smoothing with α = .2 and the smoothed forecast for July is 32. Determine the smoothed forecast for August.
- Question 39
Robert wants to know if there is a relation between money spent on gambling and winnings.
What is the coefficient of determination? Note: please report your answer with 2 places after the decimal point.
- Question 40
Consider the following annual sales data for 2001-2008.
Year Sales
2001 2
2002 4
2003 10
2004 8
2005 14
2006 18
2007 17
2008 20
Calculate the correlation coefficient . Use four significant digits after the decimal.
ECO 550 MidTerm Exam Solutions – Strayer
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Chapter 1—Introduction and Goals of the Firm
MULTIPLE CHOICE
1. The form of economics most relevant to managerial decision-making within the firm is:
macroeconomics | |
welfare economics | |
free-enterprise economics | |
microeconomics | |
none of the above |
ANS: PTS: 1
2. If one defines incremental cost as the change in total cost resulting from a decision, and incremental revenue as the change in total revenue resulting from a decision, any business decision is profitable if:
it increases revenue more than costs or reduces costs more than revenue | |
it decreases some costs more than it increases others (assuming revenues remain constant) | |
it increases some revenues more than it decreases others (assuming costs remain constant) | |
all of the above | |
b and c only |
ANS: PTS: 1
3. 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) | |
revenues | |
outlays | |
costs | |
investments |
ANS: PTS: 1
4. Which of the following statements concerning the shareholder wealth maximization model is (are) true?
The timing of future profits is explicitly considered. | |
The model provides a conceptual basis for evaluating differential levels of risk. | |
The model is only valid for dividend-paying firms. | |
a and b | |
a, b, and c |
ANS: PTS: 1
5. According to the profit-maximization goal, the firm should attempt to maximize short-run profits since there is too much uncertainty associated with long-run profits.
true | |
false |
ANS: PTS: 1
6. According to the innovation theory of profit, above-normal profits are necessary to compensate the owners of the firm for the risk they assume when making their investments.
true | |
false |
ANS: PTS: 1
7. According to the managerial efficiency theory of profit, above-normal profits can arise because of high-quality managerial skills.
true | |
false |
ANS: PTS: 1
8. Which of the following (if any) is not a factor affecting the profit performance of firms:
differential risk | |
innovation | |
managerial skills | |
existence of monopoly power | |
all of the above are factors |
ANS: PTS: 1
9. Agency problems and costs are incurred whenever the owners of a firm delegate decision-making authority to management.
true | |
false |
ANS: PTS: 1
10. Economic profit is defined as the difference between revenue and ____.
explicit cost | |
total economic cost | |
implicit cost | |
shareholder wealth | |
none of the above |
ANS: PTS: 1
11. Income tax payments are an example of ____.
implicit costs | |
explicit costs | |
normal return on investment | |
shareholder wealth | |
none of the above |
ANS: PTS: 1
12. Various executive compensation plans have been employed to motivate managers to make decisions that maximize shareholder wealth. These include:
cash bonuses based on length of service with the firm | |
bonuses for resisting hostile takeovers | |
requiring officers to own stock in the company | |
large corporate staffs | |
a, b, and c only |
ANS: PTS: 1
13. The common factors that give rise to all principal-agent problems include the
unobservability of some manager-agent action | |
presence of random disturbances in team production | |
the greater number of agents relative to the number of principals | |
a and b only | |
none of the above |
ANS: PTS: 1
- 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.
- all of the above
ANS: PTS: 1
- 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.
e. Both a and b.
ANS: PTS: 1
- Which of the following will increase (V_{0}), the shareholder wealth maximization model of the firm:
V_{0}∙(shares outstanding) = Ó_{t=1} (π_{t }) / (1+k_{e})^{t }+ Real Option Value.
- a. Decrease the required rate of return (k_{e}).
- b. Decrease the stream of profits (π_{t}).
- c. Decrease the number of periods from to 10 periods.
- d. Decrease the real option value.
- e. All of the above.
ANS: PTS: 1
- 17. The primary objective of a for-profit firm is to ___________.
- maximize agency costs
- minimize average cost
- maximize total revenue
- set output where total revenue equals total cost
e maximize shareholder value
ANS: PTS: 1
- 18.Possible goals of Not-For-Profit (NFP) enterprises include all of the following EXCEPT:
- maximize total costs
- maximize output, subject to a breakeven constraint
- maximize the happiness of the administrators of the NFP enterprise
- maximize the utility of the contributors
- a. and c.
ANS: PTS: 1
- 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?
- a. risk-bearing theory of profit
- b. dynamic equilibrium theory of profit
- c. innovation theory of profit
- d. managerial efficiency theory of profit
- e. stochastic optimization theory of profit
ANS: PTS: 1
- 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.
e. all of the above
ANS: PTS: 1
- 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:
- 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.
ANS: PTS: 1
Chapter 2—Fundamental Economic Concepts
MULTIPLE CHOICE
- A change in the level of an economic activity is desirable and should be undertaken as long as the marginal benefits exceed the ____.
marginal returns | |
total costs | |
marginal costs | |
average costs | |
average benefits |
ANS: PTS: 1
2. 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 | |
none of the above |
ANS: PTS: 1
3. The net present value of an investment represents
an index of the desirability of the investment | |
the expected contribution of that investment to the goal of shareholder wealth maximization | |
the rate of return expected from the investment | |
a and b only | |
a and c only |
ANS: PTS: 1
4. 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 |
ANS: PTS: 1
5. 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 |
ANS: PTS: 1
6. The 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 |
ANS: PTS: 1
7. The approximate probability of a value occurring that is greater than one standard deviation from the mean is approximately (assuming a normal distribution)
68.26% | |
2.28% | |
34% | |
15.87% | |
none of the above |
ANS: PTS: 1
8. 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?
U.S. Government bonds | |
municipal bonds | |
common stock | |
commercial paper | |
none of the above |
ANS: PTS: 1
9. The primary difference(s) between the standard deviation and the coefficient of variation as measures of risk are:
the coefficient of variation is easier to compute | |
the standard deviation is a measure of relative risk whereas the coefficient of variation is a measure of absolute risk | |
the coefficient of variation is a measure of relative risk whereas the standard deviation is a measure of absolute risk | |
the standard deviation is rarely used in practice whereas the coefficient of variation is widely used | |
c and d |
ANS: PTS: 1
10. 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 | |
none of the above |
ANS: PTS: 1
11. Sources of positive net present value projects include
buyer preferences for established brand names | |
economies of large-scale production and distribution | |
patent control of superior product designs or production techniques | |
a and b only | |
a, b, and c |
ANS: PTS: 1
- Receiving $100 at the end of the next three years is worth more to me than receiving $260 right now, when my required interest rate is 10%.
a. True
b. False
ANS: PTS: 1
13. The number of standard deviations z that a particular value of r is from the mean ȓ can be computed as z = (r – ȓ)/ ó. Suppose that you work as a commission-only insurance agent earning $1,000 per week on average. Suppose that your standard deviation of weekly earnings is $500. What is the probability that you zero in a week? Use the following brief z-table to help with this problem.
Z value Probability
-3 .0013
-2 .0228
-1 .1587
0 .5000
- a. 1.3% chance of earning nothing in a week
- b. 2.28% chance of earning nothing in a week
- c. 15.87% chance of earning nothing in a week
- d. 50% chance of earning nothing in a week
- e. none of the above
ANS: PTS: 1
t
T
- Consider an investment with the following payoffs and probabilities:
State of the Economy Probability Return
Stability .50 1,000
Good Growth .50 2,000
Determine the expected return for this investment.
a. 1,300
b. 1,500
c. 1,700
d. 2,000
e. 3,000
ANS: PTS: 1
- Consider an investment with the following payoffs and probabilities:
State of the Economy Probability Return
GDP grows slowly .70 1,000
GDP grow fast .30 2,000
Let the expected value in this example be 1,300. How do we find thestandard deviationof the investment?
á. ó = { (1000-1300)^{2} + (2000-1300)^{2} }
â. ó = { (1000-1300) + (2000-1300) }
÷. ó = { (.5)(1000-1300)^{2} + (.5)(2000-1300)^{2} }
ä. ó = { (.7)(1000-1300) + (.3)(2000-1300) }
å. ó = { (.7)(1000-1300)^{2} + (.3)(2000-1300)^{2} }
ANS: PTS: 1
- An investment advisor plans a portfolio your 85 year old risk-averse grandmother. Her portfolio currently consists of 60% bonds and 40% blue chip stocks. This portfolio is estimated to have an expected return of 6% and with a standard deviation 12%. What is the probability that she makes less than 0% in a year? [A portion of Appendix B1 is given below, where z = (x – ì)/ó , with ì as the mean and ó as the standard deviation.]
2.28%
6.68%
15.87%
30.85%
50%
Table B1 for Z
Z Prob.
-3 .0013
-2.5 .0062
-2. .0228
-1.5 .0668
-1 .1587
-.5 ..3085
0 .5000
ANS: PTS: 1
- Two investments have the following expected returns (net present values) and standard deviations:
PROJECT Expected Value Standard Deviation
Q $100,000 $20,000
X $50,000 $16,000
Based on the Coefficient of Variation, where the C.V. is the standard deviation dividend by the expected value.
All coefficients of variation are always the same.
Project Q is riskier than Project X
Project X is riskier than Project Q
Both projects have the same relative risk profile
There is not enough information to find the coefficient of variation.
PTS: 1
PROBLEMS
1. Suppose that the firm’s cost function is given in the following schedule (where Q is the level of output):
Output | Total |
Q (units) | Cost |
7 | |
1 | 25 |
2 | 37 |
3 | 45 |
4 | 50 |
5 | 53 |
6 | 58 |
7 | 66 |
8 | 78 |
9 | 96 |
10 | 124 |
Determine the (a) marginal cost and (b) average total cost schedules
- Complete the following table.
Total | Marginal | Average | |
Output | Profit | Profit | Profit |
−48 | ______ | ||
1 | −26 | ______ | ______ |
2 | −8 | ______ | ______ |
3 | 6 | ______ | ______ |
4 | 16 | ______ | ______ |
5 | 22 | ______ | ______ |
6 | 24 | ______ | ______ |
7 | 22 | ______ | ______ |
8 | 16 | ______ | ______ |
9 | 6 | ______ | ______ |
10 | −8 | ______ | ______ |
3. A firm has decided to invest in a piece of land. Management has estimated that the land can be sold in 5 years for the following possible prices:
Price | Probability |
10,000 | .20 |
15,000 | .30 |
20,000 | .40 |
25,000 | .10 |
(a) | Determine the expected selling price for the land. |
(b) | Determine the standard deviation of the possible sales prices. |
(c) | Determine the coefficient of variation. |
Chapter 3—Demand Analysis
MULTIPLE CHOICE
- Suppose we estimate that the demand elasticity for fine leather jackets is ‑.7 at their current prices. Then we know that:
a. a 1% increase in price reduces quantity sold by .7%.
b. no one wants to buy leather jackets.
c. demand for leather jackets is elastic.
d. a cut in the prices will increase total revenue.
e. leather jackets are luxury items.
ANS: PTS: 1
- If demand were inelastic, then we should immediately:
- cut the price.
- 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.
- stop selling it since it is inelastic.
- raise the price.
ANS: PTS: 1
- In this problem, demonstrate your knowledge of percentage rates of change of an entire demand function (Hint: %ÄQ = E_{P}•%ÄP + E_{Y}•%ÄY). You have found that the price elasticity of motor control devices at Allen-Bradley Corporation is -2, and that the income elasticity is a +1.5. You have been asked to predict sales of these devices for one year into the future. Economists from the Conference Board predict that income will be rising 3% over the next year, and AB’s management is planning to raise prices 2%. You expect that the number of AB motor control devices sold in one year will:
fall .5%.
not change.
rise 1%r.
rise 2%.
rise .5%.
ANS: PTS: 1
4 A linear demand for lake front cabins on a nearby lake is estimated to be: Q_{D} = 900,000 – 2P. What is the pointprice elasticity for lake front cabins at a price of P = $300,000? [Hint: E_{p }= (Q/P)(P/Q)]
E_{P} = -3.0
E_{P} = -2.0
E_{P} = -1.0
E_{P} = -0.5
E_{P} = 0
ANS: PTS: 1
- Property taxes are the product of the tax rate (T) and the assessed value (V). The total property tax collected in your city (P) is: P = T•V. If the value of properties rise 4% and if Mayor and City Council reduces the property the tax rate by 2%, what happens to the total amount of property tax collected? [hint: the percentage rate of change of a product is approximately the sum of the percentage rates of change.}
- It rises 6 %.
- It rises 4 %.
- It rises 3 %.
- It rises 2 %
- If falls 2%.
ANS: PTS: 1
- Demand is given by Q_{D} = 620 ‑ 10·P and supply is given by Q_{S} = 100 + 3·P. What is the price and quantity when the market is in equilibrium?
a. The price will be $30 and the quantity will be 132 units.
b. The price will be $11 and the quantity will be 122 units.
c. The price will be $40 and the quantity will be 220 units.
d. The price will be $35 and the quantity will be 137 units
e. The price will be $10 and the quantity will be 420 units.
ANS: PTS: 1
- Which 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
ANS: PTS: 1
- Which of the following best represents management’s objective(s) in utilizing demand analysis?
it provides insights necessary for the effective manipulation of demand | |
it helps to measure the efficiency of the use of company resources | |
it aids in the forecasting of sales and revenues | |
a and b | |
a and c |
ANS: PTS: 1
9. Identify the reasons why the quantity demanded of a product increases as the price of that product decreases.
as the price declines, the real income of the consumer increases | |
as the price of product A declines, it makes it more attractive than product B | |
as the price declines, the consumer will always demand more on each successive price reduction | |
a and b | |
a and c |
ANS: PTS: 1
10. An increase in the quantity demanded could be caused by:
an increase in the price of substitute goods | |
a decrease in the price of complementary goods | |
an increase in consumer income levels | |
all of the above | |
none of the above |
ANS: PTS: 1
- Iron ore is an example of a:
durable good | |
producers’ good | |
nondurable good | |
consumer good | |
none of the above |
ANS: PTS: 1
12. If the cross price elasticity measured between items A and B is positive, the two products are referred to as:
complements | |
substitutes | |
inelastic as compared to each other | |
both b and c | |
a, b, and c |
ANS: PTS: 1
- 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 |
ANS: PTS: 1
14. 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 |
ANS: PTS: 1
15. 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 | |
all of the above |
ANS: PTS: 1
16. An increase in each of the following factors would normally provide a subsequent increase in quantity demanded, except:
price of substitute goods | |
level of competitor advertising | |
consumer income level | |
consumer desires for goods and services | |
a and b |
ANS: PTS: 1
17. Producers’ goods are:
consumers’ goods | |
raw materials combined to produce consumer goods | |
durable goods used by consumers | |
always more expensive when used by corporations | |
none of the above |
ANS: PTS: 1
18. The demand for durable goods tends to be more price elastic than the demand for non-durables.
true | |
false |
ANS: PTS: 1
19. A price elasticity (E_{D}) 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 |
ANS: PTS: 1
20. Those goods having a calculated income elasticity that is negative are called:
producers’ goods | |
durable goods | |
inferior goods | |
nondurable goods | |
none of the above |
ANS: PTS: 1
21. An income elasticity (E_{y}) 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 |
ANS: PTS: 1
22. When demand elasticity is ____ in absolute value (or ____), an increase in price will result in a(n) ____ in total revenues.
less than 1; elastic; increase | |
more than 1; inelastic; decrease | |
less than 1; elastic; decrease | |
less than 1; inelastic; increase | |
none of the above |
ANS: PTS: 1
23. Empirical estimates of the price elasticity of demand [in Table 3.4] suggest that the demand for household consumption of alcoholic beverages is:
highly price elastic | |
price inelastic | |
unitarily elastic | |
an inferior good | |
none of the above |
ANS: PTS: 1
PROBLEM
1. The manager of the Sell-Rite drug store accidentally mismarked a shipment of 20-pound bags of charcoal at $4.38 instead of the regular price of $5.18. At the end of a week, the store’s inventory of 200 bags of charcoal was completely sold out. The store normally sells an average of 150 bags per week.
(a) | What is the store’s arc elasticity of demand for charcoal? |
(b) | Give an economic interpretation of the numerical value obtained in part (a) |
PTS: 1
2. The Future Flight Corporation manufactures a variety of Frisbees selling for $2.98 each. Sales have averaged 10,000 units per month during the last year. Recently Future Flight’s closest competitor, Soaring Free Company, cut its prices on similar Frisbees from $3.49 to $2.59. Future Flight noticed that its sales declined to 8,000 units per month after the price cut.
(a) | What is the arc cross elasticity of demand between Future Flight’s and Soaring Free’s Frisbees? |
(b) | If Future Flight knows the arc price elasticity of demand for its Frisbees is −2.2, what price would they have to charge in order to obtain the same level of sales as before Soaring Free’s price cut? |
PTS: 1
3. The British Automobile Company is introducing a brand new model called the “London Special.” Using the latest forecasting techniques, BAC economists have developed the following demand function for the “London Special”:
Q_{D} = 1,200,000 − 40P
What is the point price elasticity of demand at prices of (a) $8,000 and (b) $10,000?
PTS: 1
4. Hanna Corporation markets a compact microwave oven. In 2010 they sold 23,000 units at $375 each. Per capita disposable income in 2010 was $6,750. Hanna economists have determined that the arc price elasticity for this microwave oven is −1.2.
(a) | In 2011 Hanna is planning to lower the price of the microwave oven to $325. Forecast sales volume for 2011 assuming that all other things remain equal. |
(b) | However, in checking with government economists, Hanna finds that per capita disposable income is expected to rise to $7,000 in 2011. In the past the company has observed an arc income elasticity of +2.5 for microwave ovens. Forecast 2011 sales given that the price is reduces to $325 and that per capita disposable income increases to $7,000. Assume that the price and income effects are independent and additive. |
ANS:
Chapter 4—Estimating Demand
MULTIPLE CHOICE
- 1. Using a sample of 100 consumers, a double-log regression model was used to estimate demand for gasoline. Standard errors of the coefficients appear in the parentheses below the coefficients.
Ln Q = 2.45 -0.67 Ln P + . 45 Ln Y – .34 Ln P_{cars}
(.20) (.10) (.25)
Where Q is gallons demanded, P is price per gallon, Y is disposable income, and P_{cars} is a price index for cars. Based on this information, which is NOT correct?
- Gasoline is inelastic.
- Gasoline is a normal good.
- Cars and gasoline appear to be mild complements.
- The coefficient on the price of cars (P_{cars}) is insignificant.
- All of the coefficients are insignificant.
ANS: PTS: 1
- 2. In a cross section regression of 48 states, the following linear demand for per-capita cans of soda was found: Cans = 159.17 – 102.56 Price + 1.00 Income + 3.94Temp
Coefficients | Standard Error | t Stat | |
Intercept | 159.17 | 94.16 | 1.69 |
Price | -102.56 | 33.25 | -3.08 |
Income | 1.00 | 1.77 | 0.57 |
Temperature | 3.94 | 0.82 | 4.83 |
R-Sq = 54.1% R-Sq(adj) = 51.0%
From the linear regression results in the cans case above, we know that:
- Price is insignificant
- Income is significant
- Temp is significant
- As price rises for soda, people tend to drink less of it
- All of the coefficients are significant
ANS: PTS: 1
- A study of expenditures on food in cities resulting in the following equation:
Log E = 0.693 Log Y + 0.224 Log N
where E is Food Expenditures; Y is total expenditures on goods and services; and N is the size of the family. This evidence implies:
- that as total expenditures on goods and services rises, food expenditures falls.
- that a one-percent increase in family size increases food expenditures .693%.
- that a one-percent increase in family size increases food expenditures .224%.
- that a one-percent increase in total expenditures increases food expenditures 1%.
- that as family size increases, food expenditures go down.
ANS: PTS: 1
4. 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 |
ANS: PTS: 1
- In regression analysis, the existence of a significant pattern in successive values of the error term constitutes:
heteroscedasticity | |
autocorrelation | |
multicollinearity | |
nonlinearities | |
a simultaneous equation relationship |
ANS: PTS: 1
6. In regression analysis, the existence of a high degree of intercorrelation among some or all of the explanatory variables in the regression equation constitutes:
autocorrelation | |
a simultaneous equation relationship | |
nonlinearities | |
heteroscedasticity | |
multicollinearity |
ANS: PTS: 1
7. When using a multiplicative power function (Y = a X_{1}^{b1} X_{2}^{b2} X_{3}^{b3}) 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.
semilogarithmic | |
double-logarithmic | |
reciprocal | |
polynomial | |
cubic |
ANS: PTS: 1
8. The correlation coefficient ranges in value between 0.0 and 1.0.
true | |
false |
ANS: PTS: 1
9. The coefficient of determination ranges in value between 0.0 and 1.0.
true | |
false |
ANS: PTS: 1
10. The coefficient of determination measures the proportion of the variation in the independent variable that is “explained” by the regression line.
true | |
false |
ANS: PTS: 1
- The presence of association between two variables does not necessarily imply causation for the following reason(s):
the association between two variables may result simply from pure chance | |
the association between two variables 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 | |
a and b | |
a, b, and c |
ANS: PTS: 1
- The estimated slope coefficient (b) of the regression equation (Ln Y = a + b Ln X) measures the ____ change in Y for a one ____ change in X.
percentage, unit | |
percentage, percent | |
unit, unit | |
unit, percent | |
none of the above |
ANS: PTS: 1
- 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 |
ANS: PTS: 1
- In testing whether each individual independent variables (Xs) in a multiple regression equation is statistically significant in explaining the dependent variable (Y), one uses the:
F-test | |
Durbin-Watson test | |
t-test | |
z-test | |
none of the above |
ANS: PTS: 1
15. One commonly used test in checking for the presence of autocorrelation when working with time series data is the ____.
F-test | |
Durbin-Watson test | |
t-test | |
z-test | |
none of the above |
ANS: PTS: 1
16. 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 |
ANS: PTS: 1
17. 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 |
ANS: PTS: 1
18. The Identification Problem in the development of a demand function is a result of:
the variance of the demand elasticity | |
the consistency of quantity demanded at any given point | |
the negative slope of the demand function | |
the simultaneous relationship between the demand and supply functions | |
none of the above |
ANS: PTS: 1
19. Consider the following linear demand function where Q_{D} = quantity demanded, P = selling price, and Y = disposable income:
Q_{D} = −36 −2.1P + .24Y
The coefficient of P (i.e., −2.1) indicates that (all other things being held constant):
for a one percent increase in price, quantity demanded would decline by 2.1 percent | |
for a one unit increase in price, quantity demanded would decline by 2.1 units | |
for a one percent increase in price, quantity demanded would decline by 2.1 units | |
for a one unit increase in price, quantity demanded would decline by 2.1 percent | |
none of the above |
ANS: PTS: 1
- Consider the following multiplicative demand function where Q_{D} = quantity demanded, P = selling price, and Y = disposable income:
The coefficient of Y (i.e., .2) indicates that (all other things being held constant):
for a one percent increase in disposable income, quantity demanded would increase by .2 percent | |
for a one unit increase in disposable income, quantity demanded would increase by .2 units | |
for a one percent increase in disposable income quantity demanded would increase by .2 units | |
for a one unit increase in disposable income, quantity demanded would increase by .2 percent | |
none of the above |
ANS: PTS: 1
- One shortcoming of the use of ____ in demand analysis is that the participants are generally aware that their actions are being observed and hence they may seek to act in a manner somewhat different than normal.
market experiments | |
consumer clinics | |
statistical (econometric) methods | |
a and b | |
none of the above |
ANS: PTS: 1
- The constant or intercept term in a statistical demand study represents the quantity demanded when all independent variables are equal to:
1.0 | |
their minimum values | |
their average values | |
0.0 | |
none of the above |
ANS: PTS: 1
- Novo Nordisk A/S, a Danish firm, sells insulin and other drugs worldwide. Activella, an estrogen and progestin hormone replacement therapy sold by Novo-Nordisk, is examined using 33 quarters of data
Y = -204 + . 34X_{1} – .17X_{2}
(17.0) (-1.71)
Where Y is quarterly sales of Activella, X_{1} is the Novo’s advertising of the hormone therapy, and X_{2} is advertising of a similar product by Eli Lilly and Company, Novo-Nordisk’s chief competitor. The parentheses contain t-values. Addition information is: Durbin-Watson = 1.9 and R^{2 }= .89.
Using the data for Novo-Nordisk, which is correct?
- Both X_{1} and X_{2 }are statistically significant.
- Neither X_{1} nor X_{2 }are statistically significant.
- X_{1} is statistically significant but X_{2 }is not statistically significant.
- X_{1} is not statistically significant but X_{2 }is statistically significant.
- The Durbin-Watson statistic shows significant problems with autocorrelation
ANS: PTS: 1
- In which of the following econometric problems do we find Durbin-Watson statistic being far away from 2.0?
- the identification problem
- autocorrelation
- multicollinearity
- heteroscedasticity
- agency problems
ANS: PTS: 1
- When there is multicollinearity in an estimated regression equation,
a. the coefficients are likely to be small.
b. the t‑statistics are likely to be small even though the R^{2} is large.
c. the coefficient of determination is likely to be small.
d. the problem of omitted variables is likely.
e. the error terms will tend to have a cyclical pattern.
- When two or more “independent” variables are highly correlated, then we have:
- a. the identification problem
- b. multicollinearity
- c. autocorrelation
- d. heteroscedasticity
- e. complementary products
ANS: PTS: 1
- Which is NOT true about the coefficient of determination?
- As you add more variables, the R-square generally rises.
- As you add more variables, the adjusted R-square can fall.
c. If the R-square is above 50%, the regression is considered significant.
- The R-square gives the percent of the variation in the dependent variable that is explained by the independent variables.
- The higher is the R-square, the better is the fit.
ANS: PTS: 1
PROBLEMS
1. Phoenix Lumber Company uses the number of construction permits issued to help estimate demand (sales). The firm collected the following data on annual sales and number of construction permits issued in its market area:
No. of Construction | Sales | |
Year | Permits Issued (000) | (1,000,000) |
2003 | 6.50 | 10.30 |
2004 | 6.20 | 10.10 |
2005 | 6.60 | 10.50 |
2006 | 7.30 | 10.80 |
2007 | 7.80 | 11.20 |
2008 | 8.20 | 11.40 |
2009 | 8.30 | 11.30 |
(a) | Which variable is the dependent variable and which is the independent variable? |
(b) | Determine the estimated regression line. |
(c) | Test the hypothesis (at the .05 significance level) that there is no relationship between the variables. |
(d) | Calculate the coefficient of determination. Give an economic interpretation to the value obtained. |
(e) | Perform an analysis of variance on the regression including an F-test (at the .05 significance level) of the overall significance of the results. |
(f) | Suppose that 8,000 construction permits are expected to be issued in 2010. What would be the point estimate of Phoenix Lumber Company’s sales for 2010? |
Questions:
(a) | Give the regression equation for predicting restaurant sales. |
(b) | Give an interpretation of each of the estimated regression coefficients. |
(c) | Which of the independent variables (if any) are statistically significant at the .05 level in “explaining” restaurant sales? |
(d) | What proportion of the variation in restaurant sales is “explained” by the regression equation? |
(e) | Perform an F-test (at the .05 significance level) of the overall explanatory power of the regression model. |
ANS:
PTS: 1 NOTE: This problem requires the use of statistical tables.
3. The following demand function has been estimated for Fantasy pinball machines:
Q_{D} = 3,500 − 40P + 17.5P_{x} + 670U + .0090A + 6,500N
where | P = monthly rental price of Fantasy pinball machines |
P_{x} = monthly rental price of Old Chicago pinball machines (their largest competitor) | |
U = current unemployment rate in the 10 largest metropolitan areas | |
A = advertising expenditures for Fantasy pinball machines | |
N = fraction of the U.S. population between ages 10 and 30 |
(a) | What is the point price elasticity of demand for Fantasy pinball machines when P = $150, P_{x} = $100, U = .12, A = $200,000 and N = .35? |
(b) | What is the point cross elasticity of demand with respect to Old Chicago pinball machines for the values of the independent variables given in part (a)? |
PTS: 1
4. Given the following demand function:
Q = 2.0 P^{−}^{1.33} Y^{2.0} A^{.50}
where | Q = quantity demanded (thousands of units) |
P = price ($/unit) | |
Y = disposable income per capita ($ thousands) | |
A = advertising expenditures ($ thousands) |
determine the following when P = $2/unit, Y = $8 (i.e., $8000), and A = $25 (i.e., $25,000)
(a) | Price elasticity of demand |
(b) | The approximate percentage increase in demand if disposable income percentage increases by 3%. |
(c) | The approximate percentage increase in demand if advertising expenditures are increased by 5 percent. |
ANS:
Chapter 5—Business and Economic Forecasting
MULTIPLE CHOICE
1. Time-series forecasting models:
are useful whenever changes occur rapidly and wildly | |
are more effective in making long-run forecasts than short-run forecasts | |
are based solely on historical observations of the values of the variable being forecasted | |
attempt to explain the underlying causal relationships which produce the observed outcome | |
none of the above |
ANS: PTS: 1
2. The forecasting technique which attempts to forecast short-run changes and makes use of economic indicators known as leading, coincident or lagging indicators is known as:
econometric technique | |
time-series forecasting | |
opinion polling | |
barometric technique | |
judgment forecasting |
ANS: PTS: 1
3. The use of quarterly data to develop the forecasting model Y_{t} = a +bY_{t}_{−}_{1} is an example of which forecasting technique?
Barometric forecasting | |
Time-series forecasting | |
Survey and opinion | |
Econometric methods based on an understanding of the underlying economic variables involved | |
Input-output analysis |
ANS: PTS: 1
4. Variations in a time-series forecast can be caused by:
cyclical variations | |
secular trends | |
seasonal effects | |
a and b only | |
a, b, and c |
ANS: PTS: 1
- The 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 |
ANS: PTS: 1
6. The type of economic indicator that can best be used for business forecasting is the:
leading indicator | |
coincident indicator | |
lagging indicator | |
current business inventory indicator | |
optimism/pessimism indicator |
ANS: PTS: 1
7. Consumer expenditure plans is an example of a forecasting method. Which of the general categories best described this example?
time-series forecasting techniques | |
barometric techniques | |
survey techniques and opinion polling | |
econometric techniques | |
input-output analysis |
ANS: PTS: 1
8. In the first-order exponential smoothing model, the new forecast is equal to a weighted average of the old forecast and the actual value in the most recent period.
true | |
false |
ANS: PTS: 1
9. Simplified trend models are generally appropriate for predicting the turning points in an economic time series.
true | |
false |
ANS: PTS: 1
10. Smoothing techniques are a form of ____ techniques which assume that there is an underlying pattern to be found in the historical values of a variable that is being forecast.
opinion polling | |
barometric forecasting | |
econometric forecasting | |
time-series forecasting | |
none of the above |
ANS: PTS: 1
11. Seasonal variations can be incorporated into a time-series model in a number of different ways, including:
ratio-to-trend method | |
use of dummy variables | |
root mean squared error method | |
a and b only | |
a, b, and c |
ANS: PTS: 1
- For studying demand relationships for a proposed new product that no one has ever used before, what would be the best method to use?
- ordinary least squares regression on historical data
- market experiments, where the price is set differently in two markets
- consumer surveys, where potential customers hear about the product and are asked their opinions
- double log functional form regression model
- all of the above are equally useful in this case
ANS: PTS: 1
- Which of the following barometric indicators would be the most helpful for forecasting future sales for an industry?
a. lagging economic indicators.
b. leading economic indicators.
c. coincident economic indicators.
d. wishful thinking
e. none of the above
ANS: PTS: 1
- An example of a time series data 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.
ANS: PTS: 1
- Examine the plot of data.
Sales
Time
It is likely that the best forecasting method for this plot would be:
- a two-period moving average
- a secular trend upward
- a seasonal pattern that can be modeled using dummy variables or seasonal adjustments
- a semi-log regression model
- a cubic functional form
ANS: PTS: 1
16. Emma uses a linear model to forecast quarterly same-store sales at the local Garden Center. The results of her multiple regression is:
Sales = 2,800 + 200•T – 350•D
where T goes from 1 to 16 for each quarter of the year from the first quarter of 2006 (‘06I) through the fourth quarter of 2009 (‘09 IV). D is a dummy variable which is 1 if sales are in the cold and dreary first quarter, and zero otherwise, because the months of January, February, and March generate few sales at the Garden Center. Use this model to estimate sales in a store for the first quarter of 2010 in the 17^{th }month; that is: {2010 I}. Emma’s forecast should be:
- a. 5,950
- b. 6,200
- c. 6,350
- d. 6,000
- e. 5,850
ANS: PTS: 1
17. Select the correctstatement.
a. Qualitative forecasts give the direction of change.
b. Quantitative forecasts give the exact amount or exact percentage change.
c. Diffusion forecasts use the proportion of the forecasts that are positive to forecast up or down.
d. Surveys are a form of qualitative forecasting.
e. all of the above are correct.
ANS: PTS: 1
- If two alternative economic models are offered, other things equal, we would
a. tend to pick the one with the lowest R^{2.}
b. select the model that is the most expensive to estimate.
c. pick the model that was the most complex.
d. select the model that gave the most accurate forecasts
e. all of the above
ANS: PTS: 1
- Mr. Geppettouses exponential smoothing to predict revenue in his wood carving business. He uses a weight of ù = .4 for the naïve forecast and (1-ù) = .6 for the past forecast. What revenue did he predict for March using the data below? Select closet answer.
MONTH REVENUE FORECAST
Nov 100 100
Dec 90 100
Jan 115 —-
Feb 110 —-
MARCH ? ?
- 106.2
- 104.7
- 103.2
- 102.1
- 101.7
ANS: PTS: 1
- Suppose a plot of sales data over time appears to follow an S-shape as illustrated below.
Sales
Time
Which of the following is likely that the best forecasting functional form to use for sales data above?
- A linear trend, Sales = a + b T
- A quadratic shape in T, using T-squared as another variable, Sales = a + b T + cT^{2}.
- A semi-log form as sales appear to be growing at a constant percentage rate, Ln Sales = a + bT
- A cubic shape in T, using T-squared and T-cubed as variables, Sales = a + b T + cT^{2} + d T^{3}.
- A quadratic shape in T and T-squared as variables, Sales = a + b T + cT^{2}
ANS: PTS: 1
PROBLEM
1. The Accuweather Corporation manufactures barometers and thermometers for weather forecasters. In an attempt to forecast its future needs for mercury, Accuweather’s chief economist estimated average monthly mercury needs as:
N = 500 + 10X
where N = monthly mercury needs (units) and X = time period in months (January 2008= 0). The following monthly seasonal adjustment factors have been estimated using data from the past five years:
Month | Adjustment Factor |
January | 15% |
April | 10% |
July | −20% |
September | 5% |
December | −10% |
(a) | Forecast Accuweather’s mercury needs for January, April, July, September, and December of 2010. | |||
(b) | The following actual and forecast values of mercury needs in the month of November have been recorded: | |||
Year | Actual | Forecast | ||
2008 | 456 | 480 | ||
2009 | 324 | 360 | ||
2007 | 240 | 240 |
What seasonal adjustment factor should the firm use for November?
ANS:
2. Milner Brewing Company experienced the following monthly sales (in thousands of barrels) during 2010:
May | June | ||||
100 | 92 | 112 | 108 | 116 | 116 |
(a) | Develop 2-month moving average forecasts for March through July. |
(b) | Develop 4-month moving average forecasts for May through July. |
(c) | Develop forecasts for February through July using the exponential smoothing method (with w = .5). Begin by assuming . |
ANS:
Chapter 6—Managing Exports
MULTIPLE CHOICE
- Using demand and supply curves for the Japanese yen based on the $/¥ price for yen, an increase in US INFLATION RATES would
- Decrease the demand for yen and decrease the supply of the yen.
- Increase the demand for yen and decrease the supply of the yen.
- Increase the demand and increase the supply of yen.
- Decrease both the supply and the demand of yen.
- Have no impact on the demand or supply of the yen.
ANS: PTS: 1
- If the British pound (₤) appreciates by 10% against the dollar:
- both the US importers from Britain and US exporters to Britain will be helped by the appreciating pound.
- the US exporters will find it harder to sell to foreign customers in Britain.
- the US importer of British goods will tend to find that their cost of goods rises, hurting its bottom line.
- both US importers of British goods and exporters to Britain will be unaffected by changes in foreign exchange rates.
- all of the above.
ANS: PTS: 1
- Purchasing power parity or PPP says the ratios composed of:
a. interest rates explain the direction of exchange rates.
b. growth rates explain the direction of exchange rates.
c. inflation rates explain the direction of exchange rates.
d. services explain the direction exchange rates.
e. public opinion polls explain the direction of exchange rates.
ANS: PTS: 1
- If 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.
ANS: PTS: 1
- If the domestic prices for traded goods rises 5% in Japan and rises 7% the US over the same period, what would happened to the Yen/US dollar exchange rate? Hint: S_{1}/S_{0} = (1+π_{h}) / (1+ π_{f}) where S_{0} is the direct quote of the yen at time 0, the current period.
- The direct quote of the yen ($/¥) rises, and the value of the dollar falls.
- The direct quote of the yen ($/¥) falls, and the value of the dollar rises.
- The direct quote of the yen would remain the same.
- Purchasing power parity does not apply to inflation rates.
- Both a and d.
ANS: PTS: 1
6. US and Canada can both grow wheat and can do mining. Use the following table to look for which country has a comparative advantage in mining. (Hint: Find the cost of mining in terms of wheat in each country.)
Absolute Cost in US Absolute Cost in Canada
Wheat $5 C$8
Mining $10 C$12
- Canada has a comparative advantage in mining.
- The US has a comparative advantage in mining.
- No comparative advantage in mining exists for either nation.
- We must first know the exchange rate to be able to answer this question.
- Both a and b.
ANS: PTS: 1
- The optimal currency area involves a trade-off of reducing transaction costs but the inability to use changes in exchange rates to help ailing regions. If the US, Canada, and Mexico had one single currency (the Peso-Dollar) we would tend to see all of the following EXCEPT:
- Even more intraregional trade of goods across the three countries.
- Lower transaction costs of trading within North America.
- A greater difficulty in helping Mexico as you can no longer deflate the Mexican peso.
- Less migration of workers across the three countries.
- An elimination of correlated macroeconomic shocks across the countries.
ANS: PTS: 1
8. If the value of the U.S. dollar rises from 1.0 per dollar to 1.3 per dollar,
imports of automobiles from Germany will decline | |
American inflation will increase | |
German exports of all traded goods will decline | |
American exports to Germany will decrease | |
sales by American manufacturers for the export markets will increase. |
ANS: PTS: 1
9. An appreciation of the U.S. dollar has what impact on Harley-Davidson (HD), a U.S. manufacturer of motorcycles?
domestic sales of HD motorcycles increase and foreign sales of HD motorcycles increase | |
domestic sales of HD motorcycles decrease and foreign sales of HD motorcycles increase | |
domestic sales of HD motorcycles increase and foreign sales of HD motorcycles decrease | |
domestic sales of HD motorcycles decrease and foreign sales of HD motorcycles decrease | |
only manufacturers who produce traded goods are affected |
ANS: PTS: 1
10. In the last twenty-five years, the Yen and German mark and now the Euro have
fluctuated widely against the dollar | |
appreciated against the dollar and then depreciated against the dollar | |
exchanged without restrictions | |
all of the above | |
none of the above |
ANS: PTS: 1
- In an open economy with few capital restrictions and substantial import-export trade, a rise in interest rates and a decline in the producer price index of inflation will
raise the value of the currency | |
lower the nominal interest rate | |
increase the volume of trading in the foreign exchange market | |
lower the trade-weighted exchange rate | |
increase consumer inflation. |
ANS: PTS: 1
12. When a manufacturer’s home currency appreciates substantially,
domestic sales decline | |
foreign sales decline | |
company-owned foreign plant and equipment will increase | |
margins often decline | |
all of the above |
ANS: PTS: 1
13. An increase in the exchange rate of the U.S. dollar relative to a trading partner can result from
higher anticipated costs of production in the U.S. | |
higher interest rates and higher inflation in the U.S. | |
higher growth rates in the trading partner’s economy | |
a change in the terms of trade | |
lower export industry productivity |
ANS: PTS: 1
- The purchasing power parity hypothesis implies that an increase in inflation in one country relative to another will over a long period of time
increase exports | |
reduce the competitive pressure on prices | |
lower the value of the currency in the country with the higher inflation rate | |
increase foreign aid | |
increase the speculative demand for the currency |
ANS: PTS: 1
15. Trading partners should specialize in producing goods in accordance with comparative advantage, then trade and diversify in consumption because
out-of-pocket costs of production decline | |
free trade areas protect infant industries | |
economies of scale are present | |
manufacturers face diminishing returns | |
more goods are available for consumption |
ANS: PTS: 1
16. European 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 |
ANS: PTS: 1
17. Companies 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 |
ANS: PTS: 1
18. In 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 |
ANS: PTS: 1
PROBLEM
1. Suppose nominal interest rates in the U.S. rise from 4.6% to 5% and decline in Britain from 6% to 5.5%, while U.S. consumer inflation remains unchanged at 1.9% and British inflation declines from 4% to 3%. In addition suppose, real growth in the U.S. is forecasted for next year at 4% and in Britain real growth is forecasted at 5%. Finally, suppose producer price inflation in the U.S. is declining from 2% to 1% while in Britain producer price inflation is rising from 2% to 3.2%. Explain what effect each of these factors would have on the long-term trend exchange rate ( per $) and why?
ANS:
Chapter 7—Production Economics
MULTIPLE CHOICE
- 1. What’s true about both the short-run and long-run in terms of production and cost analysis?
- a. In the short-run, one or more of the resources are fixed
- b. In the long-run, all the factors are variable
- c. The time horizon determines whether or not an input variable is fixed or not
- d. The law of diminishing returns is based in part on some factors of production being fixed, as they are in the short run.
- e. All of the above
ANS: PTS: 1
- 2. The marginal product is defined as:
- The ratio of total output to the amount of the variable input used in producing the output
- 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
- The percentage change in output resulting from a given percentage change in the amount
- The amount of fixed cost involved.
- None of the above
ANS: PTS: 1
3. Fill in the missing data to solve this problem.
Variable Total Average Marginal
Input Product Product Product
4 ? 70 —-
5 ? ? 40
6 350 ? ?
What is the total product for 5 units of input, and what is the marginal product for 6 units of input?
a. 320 and 30
b. 350 and 20
c. 360 and 15
d. 400 and 10
e. 430 and 8
ANS: PTS: 1
- 4. The following is a Cobb-Douglas production function: Q = 1.75K^{0.5}∙L^{0.5}. What is correct here?
- a. A one-percent change in L will cause Q to change by one percent
- b. A one-percent change in K will cause Q to change by two percent
- c. This production function displays increasing returns to scale
- d. This production function displays constant returns to scale
- e. This production function displays decreasing returns to scale
ANS: PTS: 1
5. Suppose you have a Cobb-Douglas function with a capital elasticity of output (α) of 0.28 and a labor elasticity of output (β) of 0.84. What statement is correct?
a. There are increasing returns to scale
b. If the amount of labor input (L) is increased by 1%, the output will increase by 0.84%
c. If the amount of capital input (K) is decreased by 1%, the output will decrease by 0.28%
d. The sum of the exponents in the Cobb-Douglas function is 1.12.
e. All of the above
ANS: PTS: 1
- 6. The Cobb-Douglas production function is: Q = 1.4*L^{0.6}*K^{0.5}. What would be the percentage change in output (%∆Q) if labor grows by 3.0% and capital is cut by 5.0%?
[Hint: %∆Q = (E_{L} * %∆L) + (E_{K} * %∆K)]
- a. %∆Q = + 3.0%
- b. %∆Q = + 5.0%
- c. %∆Q = – 0.70%
- d. %∆Q = – 2.50%
- e. %∆Q = – 5.0%
ANS: PTS: 1
- 7. If the marginal product of labor is 100 and the price of labor is 10, while the marginal product of capital is 200 and the price of capital is $30, then what should the firm?
- a. The firm should use relatively more capital
- b. The firm should use relatively more labor
- c. The firm should not make any changes – they are currently efficient
- d. Using the Equimarginal Criterion, we can’t determine the firm’s efficiency level
- e. Both c and d
ANS: PTS: 1
8. The marginal rate of technical substitution may be defined as all of the following except:
the rate at which one input may be substituted for another input in the production process, while total output remains constant | |
equal to the negative slope of the isoquant at any point on the isoquant | |
the rate at which all combinations of inputs have equal total costs | |
equal to the ratio of the marginal products of X and Y | |
b and c |
ANS: PTS: 1
9. The law of diminishing marginal returns:
states that each and every increase in the amount of the variable factor employed in the production process will yield diminishing marginal returns | |
is a mathematical theorem that can be logically proved or disproved | |
is the rate at which one input may be substituted for another input in the production process | |
none of the above |
ANS: PTS: 1
10. The combinations of inputs costing a constant C dollars is called:
an isocost line | |
an isoquant curve | |
the MRTS | |
an isorevenue line | |
none of the above |
ANS: PTS: 1
11. In a relationship among total, average and marginal products, where TP is maximized:
AP is maximized | |
AP is equal to zero | |
MP is maximized | |
MP is equal to zero | |
none of the above |
ANS: PTS: 1
12. Holding the total output constant, the rate at which one input X may be substituted for another input Y in a production process is:
the slope of the isoquant curve | |
the marginal rate of technical substitution (MRTS) | |
equal to MP_{x}/MP_{y} | |
all of the above | |
none of the above |
ANS: PTS: 1
13. Which of the following is never negative?
marginal product | |
average product | |
production elasticity | |
marginal rate of technical substitution | |
slope of the isocost lines |
ANS: PTS: 1
14. Concerning the maximization of output subject to a cost constraint, which of the following statements (if any) are true?
At the optimal input combination, the slope of the isoquant must equal the slope of the isocost line. | |
The optimal solution occurs at the boundary of the feasible region of input combinations. | |
The optimal solution occurs at the point where the isoquant is tangent to the isocost lines. | |
all of the above | |
none of the above |
ANS: PTS: 1
15. In 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:
stage II | |
stages I and II | |
when Ep = 1 | |
stage III | |
none of the above |
ANS: PTS: 1
16. Marginal revenue product is:
defined as the amount that an additional unit of the variable input adds to the total revenue | |
equal to the marginal factor cost of the variable factor times the marginal revenue resulting from the increase in output obtained | |
equal to the marginal product of the variable factor times the marginal product resulting from the increase in output obtained | |
a and b | |
a and c |
ANS: PTS: 1
17. The 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 |
ANS: PTS: 1
- In production and cost analysis, the short run is the period of time in which one (or more) of the resources employed in the production process is fixed or incapable of being varied.
true | |
false |
ANS: PTS: 1
19. Marginal revenue product is defined as the amount that an additional unit of the variable input adds to ____.
marginal revenue | |
total output | |
total revenue | |
marginal product | |
none of the above |
ANS: PTS: 1
20. Marginal factor cost is defined as the amount that an additional unit of the variable input adds to ____.
marginal cost | |
variable cost | |
marginal rate of technical substitution | |
total cost | |
none of the above |
ANS: PTS: 1
21. The isoquants for inputs that are perfect complements for one another consist of a series of:
right angles | |
parallel lines | |
concentric circles | |
right triangles | |
none of the above |
ANS: PTS: 1
22. Given a Cobb-Douglas production function estimate of Q = 1.19L^{.72}K^{.18} for a given industry, this industry would have:
increasing returns to scale | |
constant returns to scale | |
decreasing returns to scale | |
negative returns to scale | |
none of the above |
ANS: PTS: 1
23. The primary purpose of the Cobb-Douglas power function is to:
allow one to make estimates of cost-output relationships | |
allow one to make predictions about a resulting increase in output for a given increase in the inputs | |
aid one in gaining accurate empirical values for economic variables | |
calculate a short-run linear total cost function | |
a and b |
ANS: PTS: 1
24. The original Cobb-Douglas function was given as. It was subsequently rewritten as. What benefit was derived in the revision?
the function becomes a non-linear relationship so it would fit to production curves having an “S” shape | |
returns to scale can be shown in the revision | |
returns to scale become constant | |
a and b only | |
a, b, and c |
ANS: PTS: 1
25. The Cobb-Douglas production function has which of the following properties?
output is a linear increasing function of each of the inputs | |
it provides a good fit to the traditional S-shaped production function | |
the elasticity of production is constant and equal to 1 minus the exponent of the appropriate variable | |
all of the above | |
none of the above |
ANS: PTS: 1
26. In the Cobb-Douglas production function ():
the marginal product of labor (L) is equal to â1 | |
the average product of labor (L) is equal to â2 | |
if the amount of labor input (L) is increased by 1 percent, the output will increase by â1 percent | |
a and b | |
a and c |
ANS: PTS: 1
PROBLEMS
1. Emco Company has an assembly line of fixed size A. Total output is a function of the number of workers (crew size) as shown in the following schedule:
Crew Size | Total Output |
(No. of Workers) | (No. of Units) |
1 | 10 |
2 | 35 |
3 | 50 |
4 | 56 |
5 | 59 |
6 | 60 |
7 | 60 |
8 | 58 |
Determine the following schedules:
(a) | marginal productivity of labor |
(b) | average productivity of labor |
(c) | elasticity of production with respect to labor |
2. A certain production process employs two inputs–labor (L) and raw materials (R). Output (Q) is a function of these two inputs and is given by the following relationship:
Q = 6L^{2} R^{2} − .10L^{3} R^{3}
Assume that raw materials (input R) are fixed at 10 units.
(a) | Determine the total product function (TP_{L}) for input L. |
(b) | Determine the marginal product function for input L. |
(c) | Determine the average product function for input L. |
(d) | Find the number of units of input L that maximizes the total product function. |
(e) | Find the number of units of input L that maximizes the marginal product function. |
(f) | Find the number of units of input L that maximizes the average product function. |
(g) | Determine the boundaries for the three stages of production. |
3. An industry can be characterized by the following production function:
Q = 2.5L^{.60} C^{.40}
(a) | What is the algebraic expression for the marginal productivity of labor? |
(b) | What is the algebraic expression for the average productivity of labor? |
(c) | How would you characterize the returns-to-scale in the industry? |
Chapter 8—Cost Analysis
MULTIPLE CHOICE
- 1. Economies of Scope refers to situations where per unit costs are:
- Unaffected when two or more products are produced
- Reduced when two or more products are produced
- Increased when two or more products are produced
- Demonstrating constant returns to scale
- Demonstrating decreasing returns to scale
ANS: PTS: 1
2. Economies of scale exist whenever long-run average costs:
a. Increase as output is increased
b. Remain constant as output is increased
c. Decrease as output is increased
d. Decline and then rise as output is increased
e. None of the above
ANS: PTS: 1
3. Which of the following is true with regards to a long-run cost function?
a. The shape of the firm’s long-run cost function is important in decisions to expand the scale of operations
b. The long-run average cost curve is U-shaped
c. The long-run average cost curve is flatter than the short-run average cost curve.
d. The curve consists of the lower boundary of all the short-run cost curves
e. All of the above
ANS: PTS: 1
4. If TC = 321 + 55Q – 5Q^{2}, then average total cost at Q = 10 is:
a. 10.2
b. 102
c. 37.1
d. 371
e. 321
ANS: PTS: 1
- 5. Suppose that total cost is cubic: TC = 200 + 5Q – 0.4Q^{2} + 0.001Q^{3}
- a. Fixed cost (FC) is $200
- b. Variable cost (VC) is 5Q – 0.4Q^{2} + 0.001Q^{3}
- c. Average variable cost (AVC) is 5 – 0.4Q + 0.001Q^{2}
- d. Marginal cost (MC) is 5 – 0.8Q +.003Q^{2}
- e. All of the above are correct
ANS: PTS: 1
6. What 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 |
ANS: PTS: 1
7. According to the theory of cost, specialization in the use of variable resources in the short-run results initially in:
decreasing returns and declining average and marginal costs | |
increasing returns and declining average and marginal costs | |
increasing returns and increasing average and marginal costs | |
decreasing returns and increasing average and marginal costs | |
none of the above |
ANS: PTS: 1
8. 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 |
ANS: PTS: 1
9. The cost function is:
a means for expressing output as a function of cost | |
a schedule or mathematical relationship showing the total cost of producing various quantities of output | |
similar to a profit and loss statement | |
incapable in being developed from statistical regression analysis | |
none of the above |
ANS: PTS: 1
10. Which of the following statements about cost functions is true?
Variable costs will always increase in direct proportion to the quantity of output produced. | |
The less capital equipment employed in the production process relative to labor and other inputs, the longer will be the period of time required to increase significantly the scale of operation. | |
The shape of the firm’s long-run cost function is important in decisions to expand the scale of operations. | |
none of the above |
ANS: PTS: 1
11. Which of the following statements concerning the long-run average cost curve of economic theory is true?
It is L-shaped | ||
It is -shaped | ||
It is -shaped | ||
It is -shaped | ||
It is M-shaped |
ANS: PTS: 1
12. Possible sources of economies of scale (size) within a production plant include:
specialization in the use of capital and labor | |
imperfections in the labor market | |
transportation costs | |
a and b | |
a and c |
ANS: PTS: 1
13. The existence of diseconomies of scale (size) for the firm is hypothesized to result from:
transportation costs | |
imperfections in the labor market | |
imperfections in the capital markets | |
problems of coordination and control encountered by management | |
All of the above |
ANS: PTS: 1
14. The relevant cost in economic decision-making is the opportunity cost of the resources rather than the outlay of funds required to obtain the resources.
true | |
false |
ANS: PTS: 1
15. ____ are 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 |
ANS: PTS: 1
16. ____ include the opportunity costs of time and capital that the entrepreneur has invested in the firm.
Implicit costs | |
Explicit costs | |
a and b | |
None of the above |
ANS: PTS: 1
17. A cottage industry exists in the home-manufacture of ‘country crafts’. Especially treasured are handmade quilts. If the fourth completed quilt took 30 hours to make, and the eighth quilt took 28 hours. What is the percentage learning? Hint: Percentage learning = 100% – (c_{2}/c_{1})•100%.
- 5%
- 6.7%
- 10%
- 100%
- 122%
ANS: PTS: 1
PROBLEMS
1. During the last few days the Superior Company has been running into problems with its computer system. The last run of the production cost schedule resulted in the incomplete listing shown below. From your knowledge of cost theory, fill in the blanks.
Q | TC | TFC | TVC | ATC | AFC | AVC | MC |
40 | _____ | _____ | x | x | x | x | |
1 | _____ | _____ | _____ | 52 | _____ | _____ | _____ |
2 | _____ | _____ | 20 | _____ | _____ | _____ | _____ |
3 | _____ | _____ | _____ | 21.33 | _____ | _____ | _____ |
4 | _____ | _____ | _____ | _____ | _____ | _____ | 4 |
5 | _____ | _____ | 40 | _____ | _____ | _____ | _____ |
6 | _____ | _____ | _____ | 15.67 | _____ | _____ | _____ |
7 | _____ | _____ | _____ | _____ | _____ | 10 | _____ |
8 | _____ | _____ | 96 | _____ | _____ | _____ | _____ |
9 | _____ | _____ | _____ | _____ | _____ | 15 | _____ |
10 | _____ | _____ | _____ | _____ | _____ | _____ | 45 |
2. The Jones Company has the following cost schedule:
Output | Total Cost |
(Units) | ($) |
3000 | |
50 | 3750 |
100 | 4275 |
150 | 4675 |
200 | 5000 |
250 | 5300 |
300 | 5700 |
350 | 6250 |
400 | 7050 |
450 | 8225 |
Prepare (a) average total cost and (b) marginal cost schedules for the firm.
3. A firm has determined that its variable costs are given by the following relationship:
VC = .05Q^{3} − 5Q^{2} + 500Q
where Q is the quantity of output produced.
(a) | Determine the output level where average variable costs are minimized. |
(b) | Determine the output level where marginal costs are minimized. |
Question 1
Validation of a simulation model occurs when the true steady state average results have been reached.
AnswerTrue
False
Question 2
Adjusted exponential smoothing is an exponential smoothing forecast adjusted for seasonality.
AnswerTrue
False
Question 3
In an unbalanced transportation model, supply does not equal demand and one set of constraints uses ≤ signs.
AnswerTrue
False
Question 4
Fractional relationships between variables are not permitted in the standard form of a linear program.
AnswerTrue
False
Question 5
In a 0-1 integer programming problem involving a capital budgeting application (where xj= 1, if project j is selected, xj= 0, otherwise) the constraint x1– x2≤ 0 implies that if project 2 is selected, project 1 cannot be selected.
AnswerTrue
False
Question 6
Excel can be used to simulate systems that can be represented by both discrete and continuous random variables.
AnswerTrue
False
In a break-even model, if all of the costs are held constant, how does an increase in price affect the model?
Answer
Breakeven point decreases |
Breakeven point increases |
Breakeven point does not change |
The revenue per unit goes down |
Question 8
In linear programming problems, multiple optimal solutions occur
Answer
when constraint lines are parallel to each other. |
when the objective function is parallel to a constraint line |
every possible solution point violates at least one constraint |
when the dual price for a particular resource is very small |
Question 9
Events that cannot occur at the same time in any trial of an experiment are:
Answer
exhaustive |
dependent |
independent |
mutually exclusive |
Question 10
A business owner is trying to decide whether to buy, rent, or lease office space and has constructed the following payoff table based on whether business is brisk or slow.
If the probability of brisk business is .40 and for slow business is .60, the expected value of perfect information is:
Answer
12 |
55 |
57 |
69 |
Question 11
A business owner is trying to decide whether to buy, rent, or lease office space and has constructed the following payoff table based on whether business is brisk or slow.
The conservative (maximin) strategy is:
Answer
Buy |
Rent |
Lease |
Brisk. |
Question 12
Steinmetz furniture buys 2 products for resale: big shelves (B) and medium shelves (M). Each big shelf costs $100 and requires 100 cubic feet of storage space, and each medium shelf costs $50 and requires 80 cubic feet of storage space. The company has $25000 to invest in shelves this week, and the warehouse has 18000 cubic feet available for storage. Profit for each big shelf is $85 and for each medium shelf is $75.In order to maximize profit, how many big shelves (B) and how many medium shelves (M) should be purchased?
Answer
B = 225, M = 0 |
B = 0, M = 225 |
B = 150, M = 75 |
B = 75, M = 150 |
Question 13
Steinmetz furniture buys 2 products for resale: big shelves (B) and medium shelves (M). Each big shelf costs $100 and requires 100 cubic feet of storage space, and each medium shelf costs $50 and requires 80 cubic feet of storage space. The company has $25000 to invest in shelves this week, and the warehouse has 18000 cubic feet available for storage. Profit for each big shelf is $85 and for each medium shelf is $75. What is the objective function?
Answer
Max Z = 75B + 85M |
Max Z = 85B + 75M |
100B + 50M ≤ 25000 |
100B + 50M ≥ 25000 |
100B + 80M ≤ 18000 |
100B + 80M ≥ 18000 |
Question 14
The following is an Excel “Answer” and “Sensitivity” reports of a linear programming problem:
The Answer Report:
The Sensitivity Report:
Which additional resources would you recommend to be increased?
Answer
mix/mold |
kiln |
paint and seal |
Cannot tell from the information provided |
Question 15
The production manager for Beer etc. produces 2 kinds of beer: light (L) and dark (D). Two resources used to produce beer are malt and wheat. He can obtain at most 4800 oz of malt per week and at most 3200 oz of wheat per week respectively. Each bottle of light beer requires 12 oz of malt and 4 oz of wheat, while a bottle of dark beer uses 8 oz of malt and 8 oz of wheat. Profits for light beer are $2 per bottle, and profits for dark beer are $1 per bottle. What is the optimal weekly profit?
Answer
$1000 |
$900 |
$800 |
$700 |
Question 16
The owner of Black Angus Ranch is trying to determine the correct mix of two types of beef feed, A and B which cost 50 cents and 75 cents per pound, respectively. Five essential ingredients are contained in the feed, shown in the table below. The table also shows the minimum daily requirements of each ingredient.
Ingredient | Percent per pound in Feed A | Percent per pound in Feed B | Minimum daily requirement (pounds) |
1 | 20 | 24 | 30 |
2 | 30 | 10 | 50 |
3 | 30 | 20 | |
4 | 24 | 15 | 60 |
5 | 10 | 20 | 40 |
The constraint for ingredient 3 is:
Answer
.5A + .75B = 20 |
.3B = 20 |
.3 B≤ 20 |
.3B ≥ 20 |
Question 17
Let xij = gallons of component i used in gasoline j. Assume that we have two components and two types of gasoline. There are 8,000 gallons of component 1 available, and the demands for gasoline types 1 and 2 are 11,000 and 14,000 gallons respectively. Write the supply constraint for component 1.
Answer
x11+ x21≤ 8000 |
x12+ x21≥ 8000 |
x11+ x12≤ 8000 |
x11+ x12≥ 8000 |
Question 18
The Kirschner Company has a contract to produce garden hoses for a customer. Kirschner has 5 different machines that can produce this kind of hose. Write a constraint to ensure that if machine 4 is used, machine 1 will not be used.
Answer
Y_{1}+ Y_{4}≤0 |
Y_{1}+ Y_{4}= 0 |
Y_{1}+ Y_{4}≤1 |
Y_{1}+ Y_{4}≥ 1 |
Question 19
If we are solving a 0-1 integer programming problem, the constraintx1=x2is a __________ constraint.
Answer
multiple choice |
mutually exclusive |
conditional |
corequisite |
Question 20
A professor needs help from 3 student helpers to complete 4 tasks. The first task is grading; the second is scanning; the third is copying, and the fourth is organizing student portfolios. The estimated time for each student to do each task is given in the matrix below.
Which of the following constraints represents the assignment for student A?
Answer
XA1 +XA2+ XA3 + XA4 = 0 |
XA1 +XA2+ XA3 + XA4 = 1 |
XA1 +XA2+ XA3 + XA4 ≥ 1 |
XA1 +XA2+ XA3 + XA4 ≥ 0 |
Question 21
The following table represents the cost to ship from Distribution Center 1, 2, or 3 to Customer A, B, or C.
The constraint that represents the quantity demanded by Customer B is:
Answer
6X1B + 2X2B+ 8X3B≤ 350 |
6X1B + 2X2B+ 8X3B= 350 |
X1B + X2B+ X3B≤ 350 |
X1B + X2B+ X3B= 350 |
Question 22
Professor Dewey would like to assign grades such that 15% of students receive As. If the exam average is 62 with a standard deviation of 13, what grade should be the cutoff for an A? (Round your answer.)
Answer
75 |
79 |
84 |
88 |
Question 23
The metropolitan airport commission is considering the establishment of limitations on noise pollution around a local airport. At the present time, the noise level per jet takeoff in one neighborhood near the airport is approximately normally distributed with a mean of 100 decibels and a standard deviation of 3 decibels. What is the probability that a randomly selected jet will generate a noise level of more than 105 decibels?Note: please provide your answer to 2 places past the decimal point, rounding as appropriate.
Answer
0.03 |
0.05 |
0.07 |
0.09 |
Question 24
A bakery is considering hiring another clerk to better serve customers. To help with this decision, records were kept to determine how many customers arrived in 10-minute intervals. Based on 100 ten-minute intervals, the following probability distribution and random number assignments developed.
Number of Arrivals | Probability | Random numbers |
6 | .1 | .01 – .10 |
7 | .3 | .11 – .40 |
8 | .3 | .41 – .70 |
9 | .2 | .71 – .90 |
10 | .1 | .91 – .00 |
Suppose the next three random numbers were .18, .89 and .67. How many customers would have arrived during this 30-minute period?
Answer
23 |
24 |
22 |
25 |
Question 25
__________ moving averages react more slowly to recent demand changes than do __________ moving averages.
Answer
Longer-period, shorter-period |
Shorter-period, longer-period |
Longer-period, longer-period |
Shorter-period, shorter-period |
Question 26
For the following frequency distribution of demand, the random number 0.8177 would be interpreted as a demand of:
Answer
1 |
2 |
3 |
Question 27
Given an actual demand of 59, a previous forecast of 64, and an alpha of .3, what would the forecast for the next period be using simple exponential smoothing?
Answer
36.9 |
57.5 |
60.5 |
62.5 |
Question 28
Suppose that a production process requires a fixed cost of $50,000. The variable cost per unit is $10 and the revenue per unit is projected to be $50. Find the break-even point.
Question 29
Nixon’s Bed and Breakfast has a fixed cost of $5000 per month and the revenue they receive from each booked room is $200. The variable cost per room is $75. How many rooms do they have to sell each month to break even?(Note: The answer is a whole number. Give the answer as a whole number, omitting the decimal point. For instance, use 12 for twelve rooms).
Answer: 40
Question 30
Students are organizing a “Battle of the Bands” contest. They know that at least 100 people will attend. The rental fee for the hall is $200 and the winning band will receive $500. In order to guarantee that they break even, how much should they charge for each ticket?(Note: Write your answer with two significant places after the decimal and do not include the dollar “$” sign. For instance, for five dollars, write your answer as 5.00).
Question 31
Consider the following linear program, which maximizes profit for two products, regular (R), and super (S):
MAX
50R + 75S
s.t.
1.2R + 1.6 S ≤ 600 assembly (hours)
0.8R + 0.5 S ≤ 300 paint (hours)
.16R + 0.4 S ≤ 100 inspection (hours)
Sensitivity Report:
Final | Reduced | Objective | Allowable | Allowable | ||
Cell | Name | Value | Cost | Coefficient | Increase | Decrease |
$B$7 | Regular = | 291.67 | 0.00 | 50 | 70 | 20 |
$C$7 | Super = | 133.33 | 0.00 | 75 | 50 | 43.75 |
Final | Shadow | Constraint | Allowable | Allowable | ||
Cell | Name | Value | Price | R.H. Side | Increase | Decrease |
$E$3 | Assembly (hr/unit) | 563.33 | 0.00 | 600 | 1E+30 | 36.67 |
$E$4 | Paint (hr/unit) | 300.00 | 33.33 | 300 | 39.29 | 175 |
$E$5 | Inspect (hr/unit) | 100.00 | 145.83 | 100 | 12.94 | 40 |
A change in the market has increased the profit on the super product by $5. Total profit will increase by __________. Write your answers with two significant places after the decimal and do not include the dollar “$” sign.
Question 32
Consider the following linear program, which maximizes profit for two products, regular (R), and super (S):
MAX
50R + 75S
s.t.
1.2R + 1.6 S ≤ 600 assembly (hours)
0.8R + 0.5 S ≤ 300 paint (hours)
.16R + 0.4 S ≤ 100 inspection (hours)
Sensitivity Report:
Final | Reduced | Objective | Allowable | Allowable | ||
Cell | Name | Value | Cost | Coefficient | Increase | Decrease |
$B$7 | Regular = | 291.67 | 0.00 | 50 | 70 | 20 |
$C$7 | Super = | 133.33 | 0.00 | 75 | 50 | 43.75 |
Final | Shadow | Constraint | Allowable | Allowable | ||
Cell | Name | Value | Price | R.H. Side | Increase | Decrease |
$E$3 | Assembly (hr/unit) | 563.33 | 0.00 | 600 | 1E+30 | 36.67 |
$E$4 | Paint (hr/unit) | 300.00 | 33.33 | 300 | 39.29 | 175 |
$E$5 | Inspect (hr/unit) | 100.00 | 145.83 | 100 | 12.94 | 40 |
If downtime reduced the available capacity for painting by 40 hours (from 300 to 260 hours), profits would be reduced by __________. Write your answers with two significant places after the decimal and do not include the dollar “$” sign.
Question 33
Kalamazoo Kennels provides overnight lodging for a variety of pets. An attractive feature is the quality of care the pets receive, including well balanced nutrition. The kennel’s cat food is made by mixing two types of cat food to obtain the “nutritionally balanced cat diet.” The data for the two cat foods are as follows:
Cat Food | Cost/oz | protien (%) | fat (%) |
Pet’s Choice | 0.35 | 40 | 15 |
Feline Chow | 0.32 | 20 | 30 |
Kalamazoo Kennels wants to be sure that the cats receive at least 5 ounces of protein and at least 3 ounces of fat per day. What is the optimal cost of this plan?Note: Please write your answers with two significant places after the decimal and do not include the dollar “$” sign. For instance, $9.45 (nine dollars and fortyfive cents) should be written as 9.45
Question 34
Find the optimal Z value for the following problem. Do not include the dollar “$” sign with your answer.
Max Z = x1+ 6×2
Subject to: 17×1+ 8×2≤ 136
3×1+ 4×2≤ 36
x1, x2≥ 0 and integer
Question 35
Let’s say that a life insurance company wants to update its actuarial tables. Assume that the probability distribution of the lifetimes of the participants is approximately a normal distribution with a mean of 72 years and a standard deviation of 5 years. What proportion of the plan participants are expected to survive to see their 75^{th}
birthday?Note: Round your answer, if necessary, to two places after the decimal. Please express your answer with two places after the decimal.
Question 36
Ms. James is considering four different opportunities, A, B, C, or D. The payoff for each opportunity will depend on the economic conditions, represented in the payoff table below.
Investment | Economic Conditions | |||
Poor (S1) | Average (S2) | Good (S3) | Excellent (S4) | |
A | 18 | 25 | 50 | 80 |
B | 19 | 100 | 50 | 75 |
C | 100 | 26 | 120 | 60 |
D | 20 | 27 | 50 | 240 |
Suppose all states of the world are equally likely (each state has a probability of 0.25). What is the expected value of perfect information?Note: Report your answer as an integer, rounding to the nearest integer, if applicable
Question 37
The local operations manager for the IRS must decide whether to hire 1, 2, or 3 temporary workers. He estimates that net revenues will vary with how well taxpayers comply with the new tax code. The probabilities of low, medium, and high compliance are 0.20, 0.30, and 0.50 respectively. What are the expected net revenues for the number of workers he will decide to hire? The following payoff table is given in thousands of dollars (e.g. 50 = $50,000).Note: Please express your answer as a whole number in thousands of dollars (e.g. 50 = $50,000). Round to the nearest whole number, if necessary.
Question 38
The local operations manager for the IRS must decide whether to hire 1, 2, or 3 temporary workers. He estimates that net revenues will vary with how well taxpayers comply with the new tax code. The probabilities of low, medium, and high compliance are 0.20, 0.30, and 0.50 respectively. What is the expected value of perfect information? Do not include the dollar “$” sign with your answer. The following payoff table is given in thousands of dollars (e.g. 50 = $50,000).Note: Please express your answer as a whole number in thousands of dollars (e.g. 50 = $50,000). Round to the nearest whole number, if necessary.
Question 39
Recent past demand for product ABC is given in the following table.
Month | Actual Demand |
May | 33 |
June | 32 |
July | 39 |
August | 37 |
The forecasted demand for May, June, July and August were 25, 30, 33, and 38 respectively. Determine the value of MAD.Note: Please express the result as a number with 2 decimal places. If necessary, round your result accordingly. For instance, 9.146, should be expressed as 9.15
Question 40
Consider the following decision tree. The objective is to choose the best decision among the two available decisions A and B. Find the expected value of the best decision. Do not include the dollar “$” sign with your answer.