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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:

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:

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.

ANS: PTS: 1

4. Which of the following statements concerning the shareholder wealth maximization model is (are) true?

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.

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.

ANS: PTS: 1

7. According to the managerial efficiency theory of profit, above-normal profits can arise because of high-quality managerial skills.

ANS: PTS: 1

8. Which of the following (if any) is not a factor affecting the profit performance of firms:

ANS: PTS: 1

9. Agency problems and costs are incurred whenever the owners of a firm delegate decision-making authority to management.

ANS: PTS: 1

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

ANS: PTS: 1

11. Income tax payments are an example of ____.

ANS: PTS: 1

12. Various executive compensation plans have been employed to motivate managers to make decisions that maximize shareholder wealth. These include:

ANS: PTS: 1

13. The common factors that give rise to all principal-agent problems include the

ANS: PTS: 1

4. The Saturn Corporation (once a division of GM) was permanently closed in 2009. What went wrong with Saturn?
5. Saturn’s cars sold at prices higher than rivals Honda or Toyota, so they could not sell many cars.
6. Saturn sold cars below the prices of Honda or Toyota, earning a low 3% rate of return.
7. Saturn found that young buyers of Saturn automobiles were very loyal to Saturn and GM.
8. Saturn implemented a change management view that helped make first time Saturn purchasers trade up to Buick or Cadillac.
9. all of the above

ANS: PTS: 1

5. 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

6. Which of the following will increase (V₀), the shareholder wealth maximization model of the firm:

V₀∙(shares outstanding) = Ó_t=1 (π_t ) / (1+k_e)^t + Real Option Value.

1. a. Decrease the required rate of return (k_e).
2. b. Decrease the stream of profits (π_t).
3. c. Decrease the number of periods from to 10 periods.
4. d. Decrease the real option value.
5. e. All of the above.

ANS: PTS: 1

7. 17. The primary objective of a for-profit firm is to ___________.
8. maximize agency costs
9. minimize average cost
10. maximize total revenue
11. set output where total revenue equals total cost

e maximize shareholder value

ANS: PTS: 1

7. 18.Possible goals of Not-For-Profit (NFP) enterprises include all of the following EXCEPT:
8. maximize total costs
9. maximize output, subject to a breakeven constraint
10. maximize the happiness of the administrators of the NFP enterprise
11. maximize the utility of the contributors
12. a. and c.

ANS: PTS: 1

9. 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?
10. a. risk-bearing theory of profit
11. b. dynamic equilibrium theory of profit
12. c. innovation theory of profit
13. d. managerial efficiency theory of profit
14. e. stochastic optimization theory of profit

ANS: PTS: 1

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

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:
   1. a. equals zero.
   2. b. is greater than the marginal cost of the test
   3. c. is lower than the marginal cost of an additional test
   4. d. equals the marginal cost of the test
   5. e. both a and b.

ANS: PTS: 1

Chapter 2—Fundamental Economic Concepts

MULTIPLE CHOICE

1. A change in the level of an economic activity is desirable and should be undertaken as long as the marginal benefits exceed the ____.

ANS: PTS: 1

2. The level of an economic activity should be increased to the point where the ____ is zero.

ANS: PTS: 1

3. The net present value of an investment represents

ANS: PTS: 1

4. Generally, investors expect that projects with high expected net present values also will be projects with

ANS: PTS: 1

5. An closest example of a risk-free security is

ANS: PTS: 1

6. The standard deviation is appropriate to compare the risk between two investments only if

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)

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?

ANS: PTS: 1

9. The primary difference(s) between the standard deviation and the coefficient of variation as measures of risk are:

ANS: PTS: 1

10. The ____ is the ratio of ____ to the ____.

ANS: PTS: 1

11. Sources of positive net present value projects include

ANS: PTS: 1

2. 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

1. a. 1.3% chance of earning nothing in a week
2. b. 2.28% chance of earning nothing in a week
3. c. 15.87% chance of earning nothing in a week
4. d. 50% chance of earning nothing in a week
5. e. none of the above

ANS: PTS: 1

t

T

4. 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

5. 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

6. 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

7. 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):

Determine the (a) marginal cost and (b) average total cost schedules

2. Complete the following table.

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:

Chapter 3—Demand Analysis

MULTIPLE CHOICE

1. 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

2. If demand were inelastic, then we should immediately:
3. cut the price.
4. 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.

1. stop selling it since it is inelastic.
2. raise the price.

ANS: PTS: 1

3. 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

5. 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.}
6. It rises 6 %.
7. It rises 4 %.
8. It rises 3 %.
9. It rises 2 %
10. If falls 2%.

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6. 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.

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7. 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

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8. Which of the following best represents management’s objective(s) in utilizing demand analysis?

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9. Identify the reasons why the quantity demanded of a product increases as the price of that product decreases.

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10. An increase in the quantity demanded could be caused by:

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1. Iron ore is an example of a:

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12. If the cross price elasticity measured between items A and B is positive, the two products are referred to as:

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3. 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.

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14. Marginal revenue (MR) is ____ when total revenue is maximized.

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15. The factor(s) which cause(s) a movement along the demand curve include(s):

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16. An increase in each of the following factors would normally provide a subsequent increase in quantity demanded, except:

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17. Producers’ goods are:

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18. The demand for durable goods tends to be more price elastic than the demand for non-durables.

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19. A price elasticity (E_D) of −1.50 indicates that for a ____ increase in price, quantity demanded will ____ by ____.

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20. Those goods having a calculated income elasticity that is negative are called:

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21. An income elasticity (E_y) of 2.0 indicates that for a ____ increase in income, ____ will increase by ____.

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22. When demand elasticity is ____ in absolute value (or ____), an increase in price will result in a(n) ____ in total revenues.

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23. Empirical estimates of the price elasticity of demand [in Table 3.4] suggest that the demand for household consumption of alcoholic beverages is:

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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.

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.

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.

ANS:

Chapter 4—Estimating Demand

MULTIPLE CHOICE

1. 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?

8. Gasoline is inelastic.
9. Gasoline is a normal good.
10. Cars and gasoline appear to be mild complements.
11. The coefficient on the price of cars (P_cars) is insignificant.
12. All of the coefficients are insignificant.

ANS: PTS: 1

8. 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

R-Sq = 54.1% R-Sq(adj) = 51.0%

From the linear regression results in the cans case above, we know that:

1. Price is insignificant
2. Income is significant
3. Temp is significant
4. As price rises for soda, people tend to drink less of it
5. All of the coefficients are significant

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3. 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:

1. that as total expenditures on goods and services rises, food expenditures falls.
2. that a one-percent increase in family size increases food expenditures .693%.
3. that a one-percent increase in family size increases food expenditures .224%.
4. that a one-percent increase in total expenditures increases food expenditures 1%.
5. that as family size increases, food expenditures go down.

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4. All of the following are reasons why an association relationship may not imply a causal relationship except:

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5. In regression analysis, the existence of a significant pattern in successive values of the error term constitutes:

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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:

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7. When using a multiplicative power function (Y = a X₁^b1 X₂^b2 X₃^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.

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8. The correlation coefficient ranges in value between 0.0 and 1.0.

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9. The coefficient of determination ranges in value between 0.0 and 1.0.

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10. The coefficient of determination measures the proportion of the variation in the independent variable that is “explained” by the regression line.

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1. The presence of association between two variables does not necessarily imply causation for the following reason(s):

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2. 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.

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3. The standard deviation of the error terms in an estimated regression equation is known as:

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4. 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:

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15. One commonly used test in checking for the presence of autocorrelation when working with time series data is the ____.

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16. The method which can give some information in estimating demand of a product that hasn’t yet come to market is:

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17. Demand functions in the multiplicative form are most common for all of the following reasons except:

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18. The Identification Problem in the development of a demand function is a result of:

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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):

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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):

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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.

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2. The constant or intercept term in a statistical demand study represents the quantity demanded when all independent variables are equal to:

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3. 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 + . 34X₁ – .17X₂

(17.0) (-1.71)

Where Y is quarterly sales of Activella, X₁ is the Novo’s advertising of the hormone therapy, and X₂ 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 R² = .89.

Using the data for Novo-Nordisk, which is correct?

1. Both X₁ and X₂ are statistically significant.
2. Neither X₁ nor X₂ are statistically significant.
3. X₁ is statistically significant but X₂ is not statistically significant.
4. X₁ is not statistically significant but X₂ is statistically significant.
5. The Durbin-Watson statistic shows significant problems with autocorrelation

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4. In which of the following econometric problems do we find Durbin-Watson statistic being far away from 2.0?
5. the identification problem
6. autocorrelation
7. multicollinearity
8. heteroscedasticity
9. agency problems

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5. 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 R² 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.

6. When two or more “independent” variables are highly correlated, then we have:
7. a. the identification problem
8. b. multicollinearity
9. c. autocorrelation
10. d. heteroscedasticity
11. e. complementary products

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7. Which is NOT true about the coefficient of determination?
8. As you add more variables, the R-square generally rises.
9. As you add more variables, the adjusted R-square can fall.

c. If the R-square is above 50%, the regression is considered significant.

1. The R-square gives the percent of the variation in the dependent variable that is explained by the independent variables.
2. The higher is the R-square, the better is the fit.

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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:

Questions:

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

PTS: 1

4. Given the following demand function:

Q = 2.0 P^−1.33 Y^2.0 A^.50

determine the following when P = $2/unit, Y = $8 (i.e., $8000), and A = $25 (i.e., $25,000)

ANS:

Chapter 5—Business and Economic Forecasting

MULTIPLE CHOICE

1. Time-series forecasting models:

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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:

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3. The use of quarterly data to develop the forecasting model Y_t = a +bY_t−1 is an example of which forecasting technique?

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4. Variations in a time-series forecast can be caused by:

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5. 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:

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6. The type of economic indicator that can best be used for business forecasting is the:

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7. Consumer expenditure plans is an example of a forecasting method. Which of the general categories best described this example?

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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.

ANS: PTS: 1

9. Simplified trend models are generally appropriate for predicting the turning points in an economic time series.

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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.

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11. Seasonal variations can be incorporated into a time-series model in a number of different ways, including:

ANS: PTS: 1

2. For studying demand relationships for a proposed new product that no one has ever used before, what would be the best method to use?
3. ordinary least squares regression on historical data
4. market experiments, where the price is set differently in two markets
5. consumer surveys, where potential customers hear about the product and are asked their opinions
6. double log functional form regression model
7. all of the above are equally useful in this case

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3. 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

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4. 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.

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5. Examine the plot of data.

Sales

Time

It is likely that the best forecasting method for this plot would be:

1. a two-period moving average
2. a secular trend upward
3. a seasonal pattern that can be modeled using dummy variables or seasonal adjustments
4. a semi-log regression model
5. a cubic functional form

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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:

3. a. 5,950
4. b. 6,200
5. c. 6,350
6. d. 6,000
7. e. 5,850

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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.

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8. 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

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9. 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 ? ?

1. 106.2
2. 104.7
3. 103.2
4. 102.1
5. 101.7

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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?

1. A linear trend, Sales = a + b T
2. A quadratic shape in T, using T-squared as another variable, Sales = a + b T + cT².
3. A semi-log form as sales appear to be growing at a constant percentage rate, Ln Sales = a + bT
4. A cubic shape in T, using T-squared and T-cubed as variables, Sales = a + b T + cT² + d T³.
5. A quadratic shape in T and T-squared as variables, Sales = a + b T + cT²

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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:

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:

ANS:

Chapter 6—Managing Exports

MULTIPLE CHOICE

1. Using demand and supply curves for the Japanese yen based on the $/¥ price for yen, an increase in US INFLATION RATES would
   1. Decrease the demand for yen and decrease the supply of the yen.
   2. Increase the demand for yen and decrease the supply of the yen.
   3. Increase the demand and increase the supply of yen.
   4. Decrease both the supply and the demand of yen.
   5. Have no impact on the demand or supply of the yen.

ANS: PTS: 1

2. If the British pound (₤) appreciates by 10% against the dollar:
3. both the US importers from Britain and US exporters to Britain will be helped by the appreciating pound.
4. the US exporters will find it harder to sell to foreign customers in Britain.
5. the US importer of British goods will tend to find that their cost of goods rises, hurting its bottom line.
6. both US importers of British goods and exporters to Britain will be unaffected by changes in foreign exchange rates.
7. all of the above.

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3. 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.

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4. 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.

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5. 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: S₁/S₀ = (1+π_h) / (1+ π_f) where S₀ is the direct quote of the yen at time 0, the current period.
6. The direct quote of the yen ($/¥) rises, and the value of the dollar falls.
7. The direct quote of the yen ($/¥) falls, and the value of the dollar rises.
8. The direct quote of the yen would remain the same.
9. Purchasing power parity does not apply to inflation rates.
10. Both a and d.

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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

1. Canada has a comparative advantage in mining.
2. The US has a comparative advantage in mining.
3. No comparative advantage in mining exists for either nation.
4. We must first know the exchange rate to be able to answer this question.
5. Both a and b.

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7. 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:
8. Even more intraregional trade of goods across the three countries.
9. Lower transaction costs of trading within North America.
10. A greater difficulty in helping Mexico as you can no longer deflate the Mexican peso.
11. Less migration of workers across the three countries.
12. An elimination of correlated macroeconomic shocks across the countries.

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8. If the value of the U.S. dollar rises from 1.0 per dollar to 1.3 per dollar,

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9. An appreciation of the U.S. dollar has what impact on Harley-Davidson (HD), a U.S. manufacturer of motorcycles?

ANS: PTS: 1

10. In the last twenty-five years, the Yen and German mark and now the Euro have

ANS: PTS: 1

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

ANS: PTS: 1

12. When a manufacturer’s home currency appreciates substantially,

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13. An increase in the exchange rate of the U.S. dollar relative to a trading partner can result from

ANS: PTS: 1

4. The purchasing power parity hypothesis implies that an increase in inflation in one country relative to another will over a long period of time

ANS: PTS: 1

15. Trading partners should specialize in producing goods in accordance with comparative advantage, then trade and diversify in consumption because

ANS: PTS: 1

16. European Union labor costs exceed U.S. and British labor costs primarily because

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

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18. In a recession, the trade balance often improves because

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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. 1. What’s true about both the short-run and long-run in terms of production and cost analysis?
2. a. In the short-run, one or more of the resources are fixed
3. b. In the long-run, all the factors are variable
4. c. The time horizon determines whether or not an input variable is fixed or not
5. d. The law of diminishing returns is based in part on some factors of production being fixed, as they are in the short run.
6. e. All of the above

ANS: PTS: 1

9. 2. The marginal product is defined as:
   1. The ratio of total output to the amount of the variable input used in producing the output
   2. 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
   3. The percentage change in output resulting from a given percentage change in the amount
   4. The amount of fixed cost involved.
   5. 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

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1. 4. The following is a Cobb-Douglas production function: Q = 1.75K^0.5∙L^0.5. What is correct here?
2. a. A one-percent change in L will cause Q to change by one percent
3. b. A one-percent change in K will cause Q to change by two percent
4. c. This production function displays increasing returns to scale
5. d. This production function displays constant returns to scale
6. e. This production function displays decreasing returns to scale

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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

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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)]

1. a. %∆Q = + 3.0%
2. b. %∆Q = + 5.0%
3. c. %∆Q = – 0.70%
4. d. %∆Q = – 2.50%
5. e. %∆Q = – 5.0%

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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?
2. a. The firm should use relatively more capital
3. b. The firm should use relatively more labor
4. c. The firm should not make any changes – they are currently efficient
5. d. Using the Equimarginal Criterion, we can’t determine the firm’s efficiency level
6. e. Both c and d

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8. The marginal rate of technical substitution may be defined as all of the following except:

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9. The law of diminishing marginal returns:

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10. The combinations of inputs costing a constant C dollars is called:

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11. In a relationship among total, average and marginal products, where TP is maximized:

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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:

ANS: PTS: 1

13. Which of the following is never negative?

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14. Concerning the maximization of output subject to a cost constraint, which of the following statements (if any) are true?

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:

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16. Marginal revenue product is:

ANS: PTS: 1

17. The isoquants for inputs that are perfect substitutes for one another consist of a series of:

ANS: PTS: 1

8. 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.

ANS: PTS: 1

19. Marginal revenue product is defined as the amount that an additional unit of the variable input adds to ____.

ANS: PTS: 1

20. Marginal factor cost is defined as the amount that an additional unit of the variable input adds to ____.

ANS: PTS: 1

21. The isoquants for inputs that are perfect complements for one another consist of a series of:

ANS: PTS: 1

22. Given a Cobb-Douglas production function estimate of Q = 1.19L^.72K^.18 for a given industry, this industry would have:

ANS: PTS: 1

23. The primary purpose of the Cobb-Douglas power function is to:

ANS: PTS: 1

24. The original Cobb-Douglas function was given as. It was subsequently rewritten as. What benefit was derived in the revision?

ANS: PTS: 1

25. The Cobb-Douglas production function has which of the following properties?

ANS: PTS: 1

26. In the Cobb-Douglas production function ():

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:

Determine the following schedules:

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 = 6L² R² − .10L³ R³

Assume that raw materials (input R) are fixed at 10 units.

3. An industry can be characterized by the following production function:

Q = 2.5L^.60 C^.40

Chapter 8—Cost Analysis

MULTIPLE CHOICE

1. 1. Economies of Scope refers to situations where per unit costs are:
   1. Unaffected when two or more products are produced
   2. Reduced when two or more products are produced
   3. Increased when two or more products are produced
   4. Demonstrating constant returns to scale
   5. 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 – 5Q², then average total cost at Q = 10 is:

a. 10.2

b. 102

c. 37.1

d. 371

e. 321

ANS: PTS: 1

1. 5. Suppose that total cost is cubic: TC = 200 + 5Q – 0.4Q² + 0.001Q³
2. a. Fixed cost (FC) is $200
3. b. Variable cost (VC) is 5Q – 0.4Q² + 0.001Q³
4. c. Average variable cost (AVC) is 5 – 0.4Q + 0.001Q²
5. d. Marginal cost (MC) is 5 – 0.8Q +.003Q²
6. e. All of the above are correct

ANS: PTS: 1

6. What method of inventory valuation should be used for economic decision-making problems?

ANS: PTS: 1

7. According to the theory of cost, specialization in the use of variable resources in the short-run results initially in:

ANS: PTS: 1

8. For a short-run cost function which of the following statements is (are) not true?

ANS: PTS: 1

9. The cost function is:

ANS: PTS: 1

10. Which of the following statements about cost functions is true?

ANS: PTS: 1

11. Which of the following statements concerning the long-run average cost curve of economic theory is true?

ANS: PTS: 1

12. Possible sources of economies of scale (size) within a production plant include:

ANS: PTS: 1

13. The existence of diseconomies of scale (size) for the firm is hypothesized to result from:

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.

ANS: PTS: 1

15. ____ are defined as costs which are incurred regardless of the alternative action chosen in a decision-making problem.

ANS: PTS: 1

16. ____ include the opportunity costs of time and capital that the entrepreneur has invested in the firm.

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% – (c₂/c₁)•100%.

1. 5%
2. 6.7%
3. 10%
4. 100%
5. 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.

2. The Jones Company has the following cost schedule:

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 = .05Q³ − 5Q² + 500Q

where Q is the quantity of output produced.

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

Question 8

In linear programming problems, multiple optimal solutions occur

Answer

Question 9

Events that cannot occur at the same time in any trial of an experiment are:

Answer

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

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

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

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

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

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

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.

The constraint for ingredient 3 is:

Answer

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

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

Question 19

If we are solving a 0-1 integer programming problem, the constraintx1=x2is a __________ constraint.

Answer

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

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

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

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

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.

Suppose the next three random numbers were .18, .89 and .67. How many customers would have arrived during this 30-minute period?

Answer

Question 25

__________ moving averages react more slowly to recent demand changes than do __________ moving averages.

Answer

Question 26

For the following frequency distribution of demand, the random number 0.8177 would be interpreted as a demand of:

Answer

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

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:

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:

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:

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.

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.

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.