Economics of Managerial Decisions Roger Blair Mark RushTest Bank.pdf (22)

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MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

94) I f a manufacturer and retailers have a resale price maintenance agreement, typically the manufacturer permits retailers to charge a resale price ________ the specified ________ price.

A) a bove; minimum B) a bove; maximum C) b elow; maximum D) b elow; minimum

94) ______

95) P roduct-specific services are valuable to complex ________ goods that consumers purchase ________.

A) i nspection; infrequently B) e xperience; frequently C) i nspection; frequently D) e xperience; infrequently

95) ______

96) P roduct-specific services are most likely to be valuable for which of the following goods?

A) a box of 50 legal notepads B) a n office copying machine C) a stapler D) a box of paper clips

96) ______

97) P roduct-specific services are most likely to be valuable for which of the following goods?

A) a professional camera B) a picture frame C) p hoto printing paper D) a calendar

97) ______

98) P roduct-specific services are most likely to be valuable for which of the following goods?

A) a shovel B) a broom C) a lawn tractor D) a lawn rake

98) ______

99) A ll of the following are examples of product-specific services except which one?

A) d isplaying a product B) p roviding information about the product C) o ffering the lowest price for the product D) d emonstrating a product

99) ______

100) P roduct-specific services are often ________, but if they create value for the consumer, they ________ the retail demand.

A) c ostly; increase B) i nexpensive; increase C) i nexpensive; decrease D) c ostly; decrease

100) _____

101) F ree-riding by online retailers results in a(n) ________ amount of product-specific services, which ________ harm the manufacturer.

A) o ptimal; does not B) s ub-optimal; does C) o ptimal; does D) s ub-optimal; does not

101) _____

102) I f retailers have a resale price maintenance agreement with a manufacturer to sell the product at

102) _____

a minimum price of $100, this means that brick and mortar stores ________ charge a price below $100 and online retailers ________ charge a price below $100.

A) c annot; cannot B) c an; cannot C) c annot; can D) c an; can 103) O ffering product-specific services ________ consumer demand, shifting the market demand curve to the ________.

A) d ecreases; left B) d ecreases; right C) i ncreases; left D) i ncreases; right

103) _____

104) O ffering product-specific services ________ consumer demand and ________ the retailers' cost of 104) _____ selling the product.

A) i ncreases; increases B) d ecreases; decreases C) d ecreases; increases D) i ncreases; decreases 105) O ffering product-specific services shifts the market demand for the product to the ________ and

the marke

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t supply 105) to the ________ .

A) r ight; right

B) l eft; left

C) l eft; right

____ _

D) r ight; left

106) I n order for resale price maintenance to increase the quantity of good sold, the shift in the market demand curve must be ________ the shift in the market supply curve.

A) l ess than B) e xactly one-half C) e qual to D) m ore than

106) _____

107) I f resale price maintenance leads to a shift in the market demand that exceeds the shift in the market supply, the quantity of the good sold will ________ and the manufacturer's profit will ________.

A) i ncrease; decrease B) i ncrease; increase C) d ecrease; increase D) d ecrease; decrease

107) _____

108) I f resale price maintenance leads to a shift in the market demand that equals the shift in the market supply, the quantity of the good sold will ________ and the manufacturer's profit will ________.

A) d ecrease; decrease B) i ncrease; not change C) n ot change; decrease D) n ot change; not change

108) _____

109) I f resale price maintenance leads to a shift in the market supply that exceeds the shift in the market demand, the quantity of the good sold will ________ and the manufacturer's profit will ________.

A) d ecrease; decrease B) i ncrease; decrease C) i ncrease; increase D) d ecrease; increase

109) _____

110) T o maximize profit, manufacturers should set the ________ resale price that ________ the retailers' cost of providing product-specific services.

A) m aximum; covers B) m inimum; does not cover C) m aximum; does not cover D) m inimum; covers

110) _____

111) C urrently in the United States, resale price maintenance agreements ________ illegal per se and ________ judged using the rule of reason approach.

A) a re not; are B) a re not; are not C) a re; are D) a re; are not

111) _____

112) C urrently in the European Union, resale price maintenance agreements are ________.

A) a hardcore restriction on competition and are judged by the rule of reason approach B) a hardcore restriction on competition and are presumed to be illegal C) i llegal per se and are judged by the rule of reason approach.

D) l egal

112) _____

113) C urrently in the United States, the ________ must examine the facts of each resale maintenance case using the ________.

A) l ower courts; rule of reason approach B) S upreme Court; rule of reason approach C) l ower courts; hardcore restriction approach D) S upreme Court; hardcore restriction approach

113) _____

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

114) I f retailers have a resale price maintenance agreement with a manufacturer, typically if the

retailers

charge a 114) price above the specified minimu m price, this will lower their profit.

____ _

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115) I t is not possible for an online retailer with no physical locations to free ride on other retailers' in-store product-specific services.

115) _____

116) A manufacturer's ultimate objective in specifying a minimum resale price is promotional.

116) _____

117) I f retailers have a resale price maintenance agreement with a manufacturer, competition forces successful retailers to provide product-specific services.

117) _____

118) T he treatment of resale price maintenance in the European Union is the same as in the United States.

118) _____

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

119) A ll of the following represent advantages or disadvantages of independent entry into a foreign market except which one?

A) M anagers immediately gain familiarity with the foreign markets, laws, and traditions.

B) A ll profit (or losses) is (are) reserved for the firm.

C) M anagers retain total control over operations.

D) T he managers do not risk divided interests; the managers will make decisions based on the interest of the firm.

119) _____

120) Y oung Faces Forever is a skin care company based in the United States that wants to enter the Japanese market. Suppose the managers of Young Faces are aware that there are significant social customs in Japan regarding skin products and these customs are unknown to the managers of Young Faces. All else equal, which of the following entry methods is the least likely to be successful for Young Faces?

120) _____

A) i ndependent entry C) p artnership

B) j oint venture D) m erger

121) A ll of the following represent advantages or disadvantages of partnership with a foreign firm except which one?

A) a lack of control over operations B) r elatively low financial commitment C) c omplete control over operations D) i mmediate access to experienced agents

121) _____

122) A manager of a firm based in the United States is interested in entering the Italian market. The

122) _____

manager is most concerned about maintaining total control over operations. Which of the following entry methods will best address the manager's concerns?

A) m aster franchising B) j oint venture C) p artnership D) i ndependent entry 123) A ll of the following entry methods provide firms with familiarity with a foreign market, expect which one?

123) _____

A) m erger C) i ndependent entry

B) p artnership D) j oint venture

124) W hich of the following entry methods has the most direct effect on the firm's reputation?

A) m aster franchising B) d irect franchising C) a merger with a foreign firm D) j oint venture

124) _____

125) T he foreign entry methods of ________ and ________ tend to be associated with smaller financial 125) _____ commitments.

A) m ergers; joint ventures B) p artnerships; mergers C) m ergers; franchising D) p artnerships; franchising 126) G ood Patties is a chain fast-food hamburger restaurant that wants to expand into a foreign market. The managers of Good Patties are most concerned about the financial commitment and desire to keep the potential cost as low as possible. Which of the following entry methods is most likely to address the managers' financial concerns?

A) e stablishing a local office/restaurants managed by one of Good Patties' managers B) a cquiring a foreign firm through a merger C) i ndependent entry D) f ranchising

126) _____

127) W hich entry strategy involves the least commitment with foreign firms?

A) a merger with foreign firm B) m aster franchising C) a joint venture with foreign firm D) e stablishing a partnership with a foreign agent or distributor

127) _____

128) D irect franchising ________ firms to retain close control over their foreign franchises, but ________ give firms familiarity with foreign markets, laws, traditions, and social customs.

A) a llows; does B) d oes not allow; does C) a llows; does not D) d oes not allow; does not

128) _____

129) _ _______ passed the world's first anti-corruption law.

A) B razil B) T he European Union C) T he United States D) C anada

129) _____

130) A ll of the following are true regarding the Foreign Corrupt Practices Act (FCPA) except which one?

A) T he FCPA applies to any company that is organized under the laws of the United States.

B) I t is a United States anti-corruption law prohibiting bribery of foreign officials.

C) N early all aspects of the FCPA are harsher than the U.K. Bribery Act. D) T he FCPA applies to any company whose stock is publically traded in the United States.

130) _____

131) T he Foreign Corrupt Practice Act (FCPA) is a ________ anti-corruption law that prohibits the bribery of ________.

A) U nited Kingdom; foreign officials and private citizens B) U nited Kingdom; foreign officials C) U nited States; foreign officials and private citizens D) U nited States; foreign officials

131) _____

132) W hich part of the Foreign Corrupt Practice Act (FCPA) prohibits employees and representatives of U.S. firms from bribing foreign officials?

132) _____

A) P art II

B) P art III

C) P art I

D) P art VI

133) A foreign customs employee who inspects a U.S. firm's import shipment ________ a government official and bribing this employee ________ illegal under the Foreign Corrupt Practice Act (FCPA).

A) i s not; is not B) i s; is C) i s not; is D) i s; is not

133) _____

134) A medical doctor who works for a state-owned hospital in Greece ________ a government official and a U.S. firm bribing the doctor ________ illegal under the Foreign Corrupt Practice Act (FCPA).

A) i s not; is B) i s; is C) i s not; is not D) i s; is not

134) _____

135) T he Foreign Corrupt Practice Act (FCPA) ________ facilitating payments that are ________ payments to government officials to expedite their work.

A) p rohibits; small B) a llows; large C) a llows; small D) d oes not allow; small

135) _____

136) I f a U.S. firm invites foreign officials to an industry conference and pays for foreign officials to have a modest lunch at the conference, the Foreign Corrupt Practice Act (FCPA) would ________ consider the lunch to be a facilitating payment and would ________ consider the act to be illegal.

A) l ikely; likely B) l ikely not; likely C) l ikely not; not likely D) l ikely; not likely

136) _____

137) A ccording to the Foreign Corrupt Practice Act (FCPA), a bribe ________ have to be paid to be illegal, and a bribed official ________ need to carry through on the promised action in order for the bribe to be illegal.

A) d oes not; does not B) d oes; does not C) d oes; does D) d oes not; does

137) _____

138) W hich part of the Foreign Corrupt Practice Act (FCPA) requires companies to keep books and record that accurately and fairly reflect the transactions of the corporation?

A) P art I B) P art III C) P art VI D) P art II

138) _____

139) I f a U.S. firm purchases a foreign firm that violated the Foreign Corrupt Practice Act (FCPA), the U.S. firm ________ responsible for the foreign firm's actions under Part ________ of the FCPA. A) i s; II B) i s not; II C) i s not; III D) i s; III

139) _____

140) T he U.K. Bribery Act prohibits bribery of ________ and any company doing business in the United Kingdom is subject to prosecution ________ the location of the infraction.

A) g overnment officials only; regardless of B) f oreign citizens and government officials; regardless of C) f oreign citizens and government officials; depending on D) f oreign citizens only; depending on

140) _____

141) T he U.K Bribery Act is ________ harsh than the U.S. Foreign Corrupt Practice Act (FCPA) as all facilitating payments ________ illegal.

A) m ore; are not B) l ess; are C) l ess; are not D) m ore; are

141) _____

142) U nder the U.K. Bribery Act, bribery ________ virtually illegal per se and individuals convicted under this act can face up to ________ years in prison.

A) i s; 10 B) i s not; 10 C) i s; 20 D) i s not; 20

142) _____

143) U nder the U.K. Bribery Act, facilitating payments ________ illegal and receipt of bribes ________ illegal.

A) i s not; is not B) i s not; is C) i s; is D) i s; is not

143) _____

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

144) A ll methods of entry into a foreign market require managers to conduct due diligence.

144) _____

145) I n joint venture, it is not possible for one firm to purchase the other partner's share at any point.

145) _____

146) M aster franchising allows firms to maintain control over local operations.

146) _____

147) B ribes, payoffs, and extortion are common and accepted ways of everyday life in some countries.

147) _____

148) A German company whose stock is publicly traded in the United States is not subject to the Foreign Corrupt Practices Act.

148) _____

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

149) B ecause industrywide advertising is a ________ good, optimal industrywide advertising is ________ to achieve.

A) p rivate; difficult B) p rivate; easy C) p ublic; easy D) p ublic; difficult

149) _____

150) I n industrywide advertising, managers have an incentive to ________ and ________ for the advertising.

A) f ranchise; not pay B) f ree-ride; not pay C) f ranchise; pay D) f ree-ride; pay

150) _____

151) M anagers of franchises ________ face the problem of free-riding with their system-wide advertising because franchises ________ contractually bound to pay for the advertising.

A) d o not; are B) d o; are not C) d o; are D) d o not; are not

151) _____

152) I n reference to industrywide advertising, managers of non-agricultural and non-franchised industry associations face which of the following problems?

A) T he participating firms can neither free-ride nor protest the amount they are asked to pay for the advertising.

B) T he participating firms can free-ride, but they cannot protest the amount they are asked to pay for the advertising.

C) T he participating firms can both free-ride and protest the amount they are asked to pay for the advertising.

D) T he participating firms can protest the amount they are asked to pay for the advertising, but they cannot free-ride.

152) _____

153) A s a manager of an industrywide trade organization, your decisions regarding industrywide advertising are ________ if the participating firms' marginal benefits are similar as there will be ________ disagreement among the firms regarding the amount of the industrywide advertising.

A) h arder; more B) e asier; less C) e asier; more D) h arder; less

153) _____

154) I f every participating firm has the same marginal benefit from industrywide advertising, then ________.

A) r equiring every firm to pay different amounts for advertising is not likely to create dissatisfaction amount the firms B) r equiring every firm to pay the same amount for advertising is not likely to create dissatisfaction amount the firms

154) _____

C) r equiring every firm to pay the same amount for advertising is likely to create dissatisfaction amount the firms D) e very firm should be required to pay nothing for the advertising 155) S uppose you are the manager of a large cardboard box industry. In the industry, there are 10 very large firms and 15 small firms. You are aware that the very large firms have a greater marginal benefit from industrywide advertising compared to the small firms. Which of the following payment plans is least likely to create discord across the participating firms?

A) H ave each firm pay the average marginal benefit of industrywide advertising across all firms.

B) H ave each firm pay the exact same fee.

C) P lace the very large firms into Group 1 and the small firms into Group 2 and require the firms in each respective group to pay the same amount with the firms in Group 1 paying a fee that is greater than the fee paid by Group 2 firms.

D) P lace the very large firms into Group 1 and the small firms into Group 2 and require the firms in each respective group to pay the same amount with the firms in Group 1 paying a fee that is smaller than the fee paid by Group 2 firms.

155) _____

156) S uppose you are the manager of a plastic recycle industry. In the industry, there are 5 large recycling firms and 20 small firms. You are aware that the large firms have a marginal benefit curve from industrywide advertising that lies above the small firms' marginal benefit curve.

Which of the following payment plans is least likely to create discord across the participating firms?

A) P lace the large firms into Group 1 and the small firms into Group 2 and require the firms in each respective group to pay the same amount with the firms in Group 1 paying a fee that is greater than the fee paid by Group 2 firms.

B) H ave each firm pay the exact same fee.

C) P lace the large firms into Group 1 and the small firms into Group 2 and require the firms in each respective group to pay the same amount with the firms in Group 1 paying a fee that is smaller than the fee paid by Group 2 firms.

D) H ave each firm pay the average marginal benefit of industrywide advertising across all firms.

156) _____

157) F or a ________, increasing the equilibrium ________ in the retail market is the key to successful use of resale price maintenance.

A) m anufacturer; quantity sold B) d istributor; quantity sold C) m anufacturer; price D) r etailer; quantity sold

157) _____

158) F or resale price maintenance to be successful for the manufacturer, as a result of the product-specific services, the shift in the market demand must ________ the shift in the market supply.

A) b e less than B) b e greater than C) b e exactly one-half D) b e equal to

158) _____

159) I f consumers value the product-specific services for a new smartphone at $25, if retailers offer the product-specific services for the smartphone, the market ________ will ________.

A) s upply; shift to the right B) d emand; not shift C) d emand; shift to the right D) d emand; shift to the left

159) _____

160) I f consumers value the product-specific services for a new smartphone at $25, if retailers offer the product-specific services for the smartphone, the market ________ will ________.

A) d emand; parallel shift to the right by $25

160) _____

B) s upply; parallel shift to the right by $25 C) d emand; parallel shift to the left by $25 D) d emand; parallel shift to the right by less than $25 161) I f retailers' marginal cost from providing product-specific services for a new smart television is $50, if retailers offer the product-specific services for the television, the market ________ will ________.

A) s upply, not shift B) s upply; shift to the left C) d emand; shift to the left D) s upply; shift to the right

161) _____

162) I f retailers' marginal cost from providing product-specific services for a new smart television is $50, if retailers offer the product-specific services for the television, the market ________ will ________.

A) s upply; parallel shift to the right by $50 B) s upply; parallel shift to the left by $50 C) d emand; not shift D) d emand; parallel shift to the left by $50

162) _____

163) C onsumers value the product-specific services for a new smartphone at $25 and the marginal cost to the retailers for providing the product-specific services is $20. If the retailers provide the product-specific services, which of the following is true?

A) T he shift in the market supply will be exactly double the shift in the market demand.

B) T he shift in the market supply will exceed the shift in the market demand.

C) T he shift in the market demand will exceed the shift in the market supply.

D) T he shift in the market demand will equal the shift in the market supply.

163) _____

164) C onsumers value the product-specific services for a new smartphone at $30 and the marginal cost to the retailers for providing the product-specific services is $40. If the retailers provide the product-specific services, which of the following is true?

A) T he shift in the market demand will be exactly double the shift in the market supply.

B) T he shift in the market demand will equal the shift in the market supply.

C) T he shift in the market supply will exceed the shift in the market demand.

D) T he shift in the market demand will exceed the shift in the market supply.

164) _____

165) C onsumers value the product-specific services for a new smartphone at $20 and the marginal cost to the retailers for providing the product-specific services is $20. If the retailers provide the product-specific services, which of the following is true?

A) T he shift in the market demand will exceed the shift in the market supply.

B) T he shift in the market supply will exceed the shift in the market demand.

C) T he shift in the market demand will be exactly double the shift in the market supply.

D) T he shift in the market demand will equal the shift in the market supply.

165) _____

166) C onsumers value the product-specific services for a new smartphone at $25 and the marginal 166) _____ cost to the retailers for providing the product-specific services is $20. From the manufacturer's perspective, a resale price maintenance agreement ________ be successful as it will ________ the equilibrium quantity sold.

A) w ill not; decrease B) w ill; increase C) w ill not; increase D) w ill; decrease 167) C onsumers value the product-specific services for a new smartphone at $30 and the marginal 167) _____ cost to the retailers for providing the product-specific services is $40. From the manufacturer's perspective, a resale price maintenance agreement ________ be successful as it will ________ the equilibrium quantity sold.

A) w ill; increase B) w ill; decrease

C) w ill not; decrease

D) w ill not; increase

168) C onsumers value the product-specific services for a new smartphone at $20 and the marginal 168) _____ cost to the retailers for providing the product-specific services is $20. From the manufacturer's perspective, a resale price maintenance agreement ________ be successful as it will ________ the equilibrium quantity sold.

A) w ill not; change B) w ill; increase C) w ill not; not change D) w ill not; decrease 169) I f at the current level of product-specific service, consumers' value at $15 and the cost of retailers to provide the services is $10, which of the following is true?

A) t he profit-maximizing level of profit-maximizing services is exactly one-half of the current level B) t he profit-maximizing level of profit-maximizing services is less than the current level C) t he profit-maximizing level of profit-maximizing services is greater than the current level D) t he profit-maximizing amount of product-specific services is being offered.

169) _____

170) I f at the current level of product-specific service, consumers' value at $5 and the cost of retailers to provide the services is $10, which of the following is true?

A) t he profit-maximizing amount of product-specific services is being offered.

B) t he profit-maximizing level of profit-maximizing services is exactly double the current level C) t he profit-maximizing level of profit-maximizing services is less than the current level D) t he profit-maximizing level of profit-maximizing services is greater than the current level

170) _____

171) I f at the current level of product-specific service, consumers' value at $12 and the cost of retailers to provide the services is $12, which of the following is true?

A) t he profit-maximizing level of profit-maximizing services is less than the current level B) t he profit-maximizing amount of product-specific services is being offered.

C) t he profit-maximizing level of profit-maximizing services is greater than the current level D) t he profit-maximizing level of profit-maximizing services is exactly double the current level

171) _____

172) I f at the current level of product-specific service, consumers' value at $50 and the cost of retailers to provide the services is $55, which of the following is true?

A) t he profit-maximizing amount of product-specific services is being offered.

B) t he profit-maximizing level of profit-maximizing services is less than the current level C) t he profit-maximizing level of profit-maximizing services is exactly double the current level D) t he profit-maximizing level of profit-maximizing services is greater than the current level

172) _____

173) I f at the current level of product-specific service, consumers' value at $60 and the cost of retailers to provide the services is $60, which of the following is true?

A) t he profit-maximizing amount of product-specific services is being offered.

B) t he profit-maximizing level of profit-maximizing services is greater than the current level C) t he profit-maximizing level of profit-maximizing services is less than the current level D) t he profit-maximizing level of profit-maximizing services is exactly double the current level

173) _____

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

174) M anagers of the dairy farmers association can eliminate the industrywide free-rider problem using the law that makes checkoff payments mandatory.

174) _____

175) I n regard to industrywide advertising, creating small groups of participating firms increases the opportunity for free-riding.

175) _____

176) R esale price maintenance is only profitable if consumers' valuation of the product-specific

service

exceeds 176) the retailer's marginal cost of providin g it.

____ _

177) A s a manager, if you are aware that your competitors are bribing officials, your firm does not face negative legal outcomes if you report the bribery.

177) _____

178) A s a manager of a firm operating a foreign market, the FCPA does not allow you to make small facilitating payments, but the U.K. Bribery Act does.

178) _____

1) A 2) D 3) A 4) A 5) C 6) C 7) C 8) A 9) D 10) D 11) A 12) B 13) A 14) B 15) B 16) D 17) D 18) C 19) D 20) D 21) D 22) A 23) C 24) D 25) B 26) C 27) C 28) T RUE 29) T RUE 30) F ALSE 31) F ALSE 32) T RUE 33) A 34) B 35) B 36) D 37) C 38) D 39) B 40) B 41) A 42) D 43) C 44) B 45) C 46) D 47) D 48) C 49) A 50) C 51) B

52) D 53) B 54) B 55) A 56) C 57) C 58) B 59) F ALSE 60) T RUE 61) F ALSE 62) T RUE 63) F ALSE 64) C 65) A 66) C 67) B 68) C 69) B 70) C 71) B 72) D 73) D 74) D 75) D 76) A 77) D 78) A 79) A 80) D 81) B 82) A 83) C 84) A 85) B 86) C 87) C 88) A 89) T RUE 90) F ALSE 91) T RUE 92) F ALSE 93) T RUE 94) A 95) D 96) B 97) A 98) C 99) C 100) A 101) B 102) A 103) D

104) A 105) D 106) D 107) B 108) D 109) A 110) D 111) A 112) B 113) A 114) T RUE 115) F ALSE 116) T RUE 117) T RUE 118) F ALSE 119) A 120) A 121) C 122) D 123) C 124) C 125) D 126) D 127) D 128) C 129) C 130) C 131) D 132) C 133) B 134) B 135) C 136) D 137) A 138) D 139) D 140) B 141) D 142) A 143) C 144) T RUE 145) F ALSE 146) T RUE 147) T RUE 148) F ALSE 149) D 150) B 151) A 152) C 153) B 154) B 155) C

156) A 157) A 158) B 159) C 160) A 161) B 162) B 163) C 164) C 165) D 166) B 167) C 168) C 169) C 170) C 171) B 172) B 173) A 174) T RUE 175) F ALSE 176) T RUE 177) T RUE 178) F ALSE

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) U ncertainty is the result of ________ information that is often associated with ________ events.

A) i ncomplete; random B) i ncomplete; known C) c omplete; random D) c omplete; known

1) _______

2) I f a six-sided die is rolled 90,000 times and a number one appears 15,000 times, the relative frequency of the number one appearing is ________.

A) 0 .167 B) 1 5,000 C) 9 0,000 D) 0 .667

2) _______

3) I f a six-sided die is rolled 90,000 times and a number five appears 15,000 times, the relative frequency of the number five appearing is ________.

A) 1 5,000 B) 0 .167 C) 5 D) 9 0,000

3) _______

4) I f a coin is flipped two times, what is the probability of a tail appearing on both tosses?

A) 0 .25 B) 0 .75 C) 1 .0 D) 0 .50

4) _______

5) I f a coin is flipped two times, what is the probability of a tail appearing on the first toss and then a head appearing on the second toss?

A) 0 .75 B) 0 .50 C) 0 .25 D) 1 .0

5) _______

6) A standard deck of playing cards has 52 cards with 13 cards in each of the four suits; hearts,

6) _______

diamonds, spades, and clubs. If a single card is drawn from a standard deck, what is the probability that the card will be a spade?

A) 0 .13 B) 0 .52 C) 0 .75 D) 0 .25 7) A standard deck of playing cards has 52 cards with 13 cards in each of the four suits; hearts, diamonds, spades, and clubs. Each of the four suits has a king card. If a single card is drawn from a standard deck, what is the probability that the card will be a king?

A) 0 .077 B) 0 .019 C) 0 .25 D) 0 .33

7) _______

8) A standard deck of playing cards has 52 cards with 13 cards in each of the four suits; hearts, diamonds, spades, and clubs. Each of the four suits has a king card. If a single card is drawn from a standard deck, what is the probability that the card will be the king of spades?

A) 0 .05 B) 0 .25 C) 0 .077 D) 0 .019

8) _______

9) I f an event has two possible outcomes, A and B, and the probability of event A occurring is 0.30, the probability of event B occurring is ________.

A) 1 .00 B) 0 .70 C) 0 .30 D) 0 .20

9) _______

10) I f an event has three possible outcomes, A, B, and C, and the probability of event A occurring is 0.20, the probability of event B occurring is 0.20, the probability of event C occurring is ________.

A) 0 .30 B) 0 .20 C) 1 .00 D) 0 .60

10) ______

11) T he price of a bushel of corn next year is a ________ variable because the price ________ known with certainty.

A) k nown; is B) k nown; is not C) r andom; is D) r andom; is not

11) ______

Price of a Bushel Probability of of Corn Occurrence $2.25

0.25

$2.5 0.30 0 A $3.2 5 table provides the possible prices for a bushel of corn next year along with the associated probabilities (in The above percent).

12) R efer to the table above. If these are the only three price options for a bushel of corn, what is the value of A? A) 0 .30 B) 0 .25 C) 0 .45 D) 0 .55

12) ______

13) R efer to the table above. If these are the only three price options for a bushel of corn, what is the expected value of the price of a bushel of corn?

A) $ 3.00 B) $ 2.78 C) $ 2.50 D) $ 2.25

13) ______

Price of a Pound of Sugar

Probability of Occurrence

$1.2 0.45 0 0.30 $1.2 0.15 5 A $1.3 5 table provides the possible prices for a pound of sugar next year along with the associated probabilities (in The above $1.5 percent).

0 14) R efer to the table above. If these are the only four price options for a pound of sugar, what is 14) ______ the value of A? A) 0 .45

B) 0 .25

C) 0 .10

D) 1 .00

15) R efer to the table above. If these are the only four price options for a pound of sugar, what is the expected value the price of a pound of sugar?

A) $ 1.27 B) $ 1.25 C) $ 1.32 D) $ 1.30

15) ______

Probability of Occurrence (percent) 50 50

Price in Price in Country A Country B $49 $1 9 $999 $50 1 the probability distribution of price of an input next year in Country A and Country B. The above table provides 16) R efer to the table above. What is the expected price of the input in Country A? A) $ 501 B) $ 499 C) $ 500 D) $ 999

16) ______

17) R efer to the table above. What is the expected price of the input in Country B? A) $ 1 B) $ 501 C) $ 999 D) $ 500

17) ______

18) R efer to the table above. The expected value of the price of the input in Country A is ________ the expected value of the input in Country B. A) l ess than B) t he same as C) t wice D) g reater than

18) ______

19) R efer to the table above. The expected value of the price of the input in Country A is ________ the expected value of the input in Country B and the extent of the variation in price in Country A

is _____ ___than

the 19) extent of variation in price in Country B. A) g reater than; greater C) t he same as; less

___ ___

B) l ess than; less D) t he same as; greater

20) R efer to the table above. Because the extent of variation in the price of the input is ________ in Country B compared to Country A, it is less risky to plan to purchase the input in Country ________.

A) g reater; B B) l ower; B C) l ower; A D) g reater; A

20) ______

21) O bjective probabilities are based on ________ and ________ frequencies.

A) d ata; relative B) d ata; popular C) e ducated guesses; popular D) e ducated guesses; relative

21) ______

22) S ubjective probabilities are based on ________ and ________ data.

A) r elative frequencies; not on B) b est estimates; not on C) b est estimates; on D) r elative frequencies; on

22) ______

23) M anagers will use ________ probabilities to estimate the likelihood of a successful launch of a new brand of peanut butter.

A) o bjective B) s ubjective C) k nown D) r elative

23) ______

24) M anagers will use ________ probabilities to estimate the likelihood of a profitable entry into a foreign market.

A) r elative B) o bjective C) k nown D) s ubjective

24) ______

25) S uppose the local government will determine if a contracting firm will be given a job based on rolling a fair die. If a four or above appears after the die has been rolled, the contracting firm will be given the job. The managers of the contracting firm will use ________ probabilities to estimate the likelihood that their firm will be given the job.

A) o bjective B) r elative C) s ubjective D) u nknown

25) ______

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

26) U ncertainty is the result of incomplete information.

26) ______

27) P robability is the chance that an event occurs.

27) ______

28) I t is possible for the probability of an event to be 1.50.

28) ______

29) A probability distribution of a random variable is a listing of all of the possible outcomes of the random variable and the associated probabilities.

29) ______

30) T he larger the extent of variation, the smaller the risk.

30) ______

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

31) A perfectly competitive firm with a random demand has a ________ demand curve and ________ marginal revenue curve.

A) h orizontal; horizontal B) h orizontal; vertical

31) ______

C) v ertical; horizontal

D) v ertical; vertical

32) A perfectly competitive firm with a random demand has a ________ expected demand curve and ________ expected marginal revenue curve.

A) v ertical; horizontal B) v ertical; vertical C) h orizontal; horizontal D) h orizontal; vertical

32) ______

33) A perfectly competitive firm with a random demand has an expected demand curve that is ________ its expected marginal revenue curve.

A) e qual to B) g reater than C) e xactly double D) l ess than

33) ______

34) A perfectly competitive firm with a random demand has an expected demand curve that is ________ its expected price.

A) g reater than B) e qual to C) e xactly double D) l ess than

34) ______

35) A perfectly competitive firm with a random demand has an expected marginal revenue that is ________ its expected price.

A) e xactly double B) l ess than C) g reater than D) e qual to

35) ______

36) A perfectly competitive firm has a random demand with a 30 percent chance of being $15 and a 70 percent chance of being $20. What is the firm's expected marginal revenue?

A) $ 15.00 B) $ 18.50 C) $ 19.00 D) $ 20.00

36) ______

37) A perfectly competitive firm has a random demand with a 20 percent chance of being $18 and an 80 percent chance of being $26. What is the firm's expected marginal revenue?

A) $ 18.50 B) $ 26.00 C) $ 24.40 D) $ 25.60

37) ______

38) A perfectly competitive firm has a random demand with a 20 percent chance of being $10, a 20 percent chance of $16, and a 60 percent chance of being $20. What is the firm's expected marginal revenue?

A) $ 16.00 B) $ 16.40 C) $ 15.20 D) $ 17.20

38) ______

39) A perfectly competitive firm has a random demand with a 90 percent chance of being $100, a 5 percent chance of $90, and a 5 percent chance of being $80. What is the firm's expected marginal revenue?

A) $ 98.50 B) $ 90.50 C) $ 96.40 D) $ 92.75

39) ______

40) W hen a random demand and marginal cost are linear, producing the quantity at which the marginal cost equals the ________ maximizes ________.

A) m arginal revenue; profit B) e xpected marginal revenue; expected profit C) e xpected marginal revenue; profit D) m arginal revenue; expected profit

40) ______

Quantity

Marginal Cost

100 110 120 130 140

$5 $6 $7 $8 $9

The above table summarizes the marginal cost of production at various quantity levels for a perfectly competitive firm.

41) R efer to the table above. The perfectly competitive firm has a random demand with a 50 percent chance of being $6 and a 50 percent chance of being $8. What quantity should the firm produce to maximize its expected profit?

A) 1 10 B) 1 20 C) 1 30 D) 1 40

41) ______

42) R efer to the table above. The perfectly competitive firm has a random demand with a 50 percent chance of being $7 and a 50 percent chance of being $9. What quantity should the firm produce to maximize its expected profit?

A) 1 20 B) 1 30 C) 1 10 D) 1 40

42) ______

43) R efer to the table above. The perfectly competitive firm has a random demand with a 50 percent chance of being $5 and a 50 percent chance of being $7. What quantity should the firm produce to maximize its expected profit?

A) 1 00 B) 1 10 C) 1 30 D) 1 20

43) ______

44) R efer to the table above. The perfectly competitive firm has a random demand with a 25 percent chance of being $5 and a 75 percent chance of being $9. What quantity should the firm produce to maximize its expected profit?

A) 1 20 B) 1 00 C) 1 10 D) 1 30

44) ______

45) R efer to the table above. The perfectly competitive firm has a random demand with a 75 percent chance of being $5 and a 25 percent chance of being $9. What quantity should the firm produce to maximize its expected profit?

A) 1 10 B) 1 20 C) 1 00 D) 1 30

45) ______

46) A perfectly competitive firm has a random marginal cost with a 60 percent chance of a high marginal cost of $100 and a 40 percent chance of a low marginal cost of $90. What is the firm's expected marginal cost?

A) $ 96 B) $ 92 C) $ 98 D) $ 94

46) ______

47) A perfectly competitive firm has a random marginal cost with a 30 percent chance of a high marginal cost of $50 and a 70 percent chance of a low marginal cost of $40. What is the firm's expected marginal cost?

A) $ 48 B) $ 45 C) $ 43 D) $ 46

47) ______

48) A perfectly competitive firm has a random marginal cost with a 20 percent chance of a high marginal cost of $20 and an 80 percent chance of a low marginal cost of $5. What is the firm's expected marginal cost?

A) $ 10 B) $ 12 C) $ 8 D) $ 7

48) ______

49) A perfectly competitive firm has a random marginal cost with a 50 percent chance of a high marginal cost of $10, a 30 percent chance of a marginal cost of $8, and a 20 percent chance of a low marginal cost of $5. What is the firm's expected marginal cost?

A) $ 9.20 B) $ 8.00 C) $ 8.40 D) $ 7.80

49) ______

50) T o maximize expected profit, a perfectly competitive firm with a random marginal cost and known demand should produce at the level that sets ________ equal to ________.

A) e xpected marginal cost; expected marginal revenue B) m arginal cost; expected marginal revenue C) e xpected marginal cost; marginal revenue D) m arginal cost; marginal revenue

50) ______

51) I f a perfectly competitive firm with a known demand and random marginal cost is producing at a level in which the marginal cost is less than the expected marginal cost and the marginal revenue, which of the following is true?

A) T he firm is maximizing expected profit.

B) T o maximize expected profit, the firm should increase production.

C) T o maximize expected profit, the firm should decrease production by one-half.

D) T o maximize expected profit, the firm should decrease production.

51) ______

52) F or a perfectly competitive firm with a known marginal cost and random demand, as the expected marginal revenue increases, the profit-maximizing quantity ________.

A) d ecreases B) i ncreases C) a pproaches zero D) d oes not change

52) ______

53) F or a perfectly competitive firm with a known marginal cost and random demand, as the expected marginal revenue decreases, the profit-maximizing quantity ________.

A) d ecreases B) i ncreases C) i ncreases exponentially D) d oes not change

53) ______

54) T o maximize expected profit, a perfectly competitive firm with a random marginal cost and random demand should produce at the level that sets ________ equal to ________.

A) e xpected marginal revenue; marginal cost B) m arginal revenue; expected marginal cost C) m arginal revenue; marginal cost D) e xpected marginal revenue; expected marginal cost

54) ______

55) T o maximize expected profit, a perfectly competitive firm with a random marginal cost and random demand should produce at the level that sets ________ equal to ________.

A) p rice; expected marginal cost B) p rice; marginal cost C) e xpected price; marginal cost D) e xpected price; expected marginal cost

55) ______

56) Y ou are an analyst with a perfectly competitive firm that makes DRAM memory chips. You must

ma nufactu

___ ___

re the56) chips before you know what the demand will be.

Based on the above figure, if the demand is high with an 80% probabili ty and low with a 20% probabili ty, the expected marginal revenue for a chip is ________ .

A) $ 2.60

B) $ 2.40

C) $ 1.40

D) $ 2.00

57) Y ou are an analyst with a perfectly competitive firm that makes DRAM memory chips. You must manufacture the chips before you know what the demand will be. Based on the above figure, if the demand is high with an 40% probability and low with a 60% probability, the expected marginal revenue for a chip is A) $ 1.80.

B) $ 2.00.

C) $ 1.00.

D) N one of the above answers is correct.

57) ______

58) Y ou are an analyst with a perfectly competitive firm that makes DRAM memory chips. You must

58) ______

manufacture the chips before you know what the demand will be. Based on the above figure, suppose you think demand will be high and manufacture the profit-maximizing quantity of chips. Demand, however, turns out to be low. Because you thought demand would be high, your profit will be ________ than if you knew demand was going to be low.

A) $ 200 million less B) $ 200 million more C) $ 800 million less D) $ 400 million less 59)

MC rather than where MRH = MC lowers your profit by an amount equal to ________.

You are an analyst with a perfectly compet iti ve firm that makes DRAM memory chips.

You must manufact ure the chips before you know what the demand will be. If demand turns out to be high, then producin g where E[MR] =

59) ______

A) a rea A B) a rea A plus the trapazoidal area marked by E and E C) a rea B + area C D) t he trapezoidal area marked by E and E TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

60) I f your firm has a random demand, producing at the level that maximizes your expected profit

60) ______

will earn the same profit as the profit-maximizing production level with a known demand.

61) I f a firm's demand is random, the firm's price and profit are also random.

61) ______

62) I f a perfectly competitive firm has a random demand and known marginal cost, producing at a level that sets expected price equal to marginal cost minimizes the reduction in expected profit.

62) ______

63) I f a firm's demand is known, but has random costs, it cannot maximize its actual profit.

63) ______

64) W hen both demand and cost are random, firms cannot maximize expected profit.

64) ______

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

65) W hen a firm's demand fluctuates randomly, A) t he optimal inventory maximizes the profit of the inventory.

B) m anagers cannot use marginal analysis to determine the optimal inventory.

C) t he profit-maximizing inventory is found where the expected marginal benefit exceeds the expected marginal cost.

D) n o profit can be earned on the inventory.

65) ______

66) T he optimal inventory to hold maximizes the profit of the inventory, which is the profit from the units sold ________ the ________ from the units that remain unsold.

A) p lus; profit B) p lus; loss C) m inus; profit D) m inus; loss

66) ______

Quantity of Cakes

Probability This Quantity Is Demanded

19 20 21 22 23 24 25

0.10 0.10 0.20 0.20 0.30 0.10 0.00

The above table shows the probability distribution of cake sales at Busy Betty's Bakery.

67) R efer to the table above. What is the probability of selling exactly 23 cakes?

A) 0 .00 B) 0 .30 C) 0 .10 68) R efer to the table above. What is the probability of selling exactly 24 cakes?

A) 0 .00 B) 0 .90 C) 0 .10 69) R efer to the table above. What is the probability of selling 22 or more cakes?

A) 0 .40 B) 0 .10 C) 0 .60

67) ______ D) 0 .20 68) ______ D) 0 .20 69) ______ D) 0 .20

70) R efer to the table above. What is the probability of selling 23 or more cakes?

A) 0 .60 B) 0 .40 C) 0 .70

D) 0 .30

70) ______

71) R efer to the table above. What is the probability of selling less than 22 cakes?

A) 0 .40 B) 0 .20 C) 0 .60 D) 0 .10

71) ______

72) R efer to the table above. What is the probability of selling less than 24 cakes?

A) 0 .10 B) 0 .00 C) 0 .90 D) 0 .80

72) ______

73) I f the price of a firm's product is $10 and the firm faces a constant marginal cost of $4 that is equal to its (constant) average total cost, the profit from selling a unit of the firm's product from its inventory is equal to ________.

A) $ 6 B) $ 14 C) $ 4 D) $ 10

73) ______

74) I f the price of a firm's product is $12 and the firm faces a constant marginal cost of $5 that is equal to its (constant) average total cost, the profit from selling a unit of the firm's product from its inventory is equal to ________.

A) $ 8 B) $ 15 C) $ 7 D) $ 5

74) ______

75) T he price of a firm's product is $6 and the firm faces a constant marginal cost of $4 that is equal to its (constant) average total cost. If the firm does not sell a unit of its product on the day it was produced, it is sold in a secondary market for a price of $3. If the firm does not sell a unit of its product on the day it was produced, there is a ________ of ________ per unit not sold.

A) l oss; $1 B) p rofit; $1 C) p rofit; $2 D) l oss; $2

75) ______

76) T he price of a firm's product is $8 and the firm faces a constant marginal cost of $5 that is equal to its (constant) average total cost. If the firm does not sell a unit of its product on the day it was produced, it is sold in a secondary market for a price of $2. If the firm does not sell a unit of its product on the day it was produced, there is a ________ of ________ per unit not sold.

A) p rofit; $3 B) l oss; $2 C) l oss; $3 D) p rofit; $5

76) ______

Quantity of Cakes

Probability This Quantity Is Demanded

19 20 21 22 23 24 25

0.10 0.10 0.20 0.20 0.30 0.10 0.00

The above table shows the probability distribution of cake sales at Busy Betty's Bakery.

77) R efer to the table above. Busy Betty sells her cakes for $20 each and her constant marginal cost

77) ______

to produce each cake is $12, which is equal to her (constant) average total cost. What is her expected marginal benefit from holding the 20th cake in inventory?

A) $ 8.00 B) $ 7.20 C) $ 12.80 D) $ 7.80 78) R efer to the table above. Busy Betty sells her cakes for $20 each and her constant marginal cost to produce each cake is $12, which is equal to her (constant) average total cost. What is her expected marginal benefit from holding the 23rd cake in inventory?

78) ______

A) $ 8.00

B) $ 8.20

C) $ 4.80

D) $ 3.20

79) R efer to the table above. Busy Betty sells her cakes for $20 each and her constant marginal cost

79) ______

to produce each cake is $12, which is equal to her (constant) average total cost. What is her expected marginal benefit from holding the 21st cake in inventory?

A) $ 6.10 B) $ 6.40 C) $ 7.20 D) $ 8.00 80) R efer to the table above. Busy Betty sells her cakes for $20 each and her constant marginal cost to produce each cake is $12, which is equal to her (constant) average total cost. If she does not sell a cake the day she makes it, she sells it as day-old cake for $10. What is her expected marginal cost of holding the 20th cake in inventory?

A) $ 0.40 B) $ 0.20 C) $ 2.00 D) $ 10.00

80) ______

81) R efer to the table above. Busy Betty sells her cakes for $20 each and her constant marginal cost to produce each cake is $12, which is equal to her (constant) average total cost. If she does not sell a cake the day she makes it, she sells it as day-old cake for $10. What is her expected marginal cost of holding the 23rd cake in inventory?

A) $ 1.20 B) $ 0.40 C) $ 2.00 D) $ 6.60

81) ______

82) R efer to the table above. Busy Betty sells her cakes for $20 each and her constant marginal cost to produce each cake is $12, which is equal to her (constant) average total cost. If she does not sell a cake the day she makes it, she sells it as day-old cake for $10. What is her expected marginal cost of holding the 22nd cake in inventory?

A) $ 1.20 B) $ 2.00 C) $ 0.40 D) $ 0.80

82) ______

83) H appy Bagels sells its bagels for $6 each and the firm has a constant marginal cost of $4 per bagel, which is equal to its (constant) average total cost. If Happy Bagels does not sell a bagel the day it is produced, the bagel is sold as day-old for $2. If Happy Bagels is currently holding 50 bagels in inventory and the probability that Happy Bagels will sell 50 bagels or more is 0.50, which of the following statements is true?

A) H appy Bagels is holding the profit-maximizing, optimal level of inventory.

B) T o obtain the profit-maximizing, optimal level of inventory, Happy Bagels needs to decrease its inventory.

C) T o obtain the profit-maximizing, optimal level of inventory, Happy Bagels needs to increase its inventory.

D) T o obtain the profit-maximizing, optimal level of inventory, Happy Bagels needs to double its inventory.

83) ______

84) H appy Bagels sells its bagels for $6 each and the firm has a constant marginal cost of $4 per bagel, which is equal to its (constant) average total cost. If Happy Bagels does not sell a bagel the day it is produced, the bagel is sold as day-old for $2. If Happy Bagels is currently holding 50 bagels in inventory and the probability that Happy Bagels will sell 50 bagels or more is 0.60, which of the following statements is true?

A) T o obtain the profit-maximizing, optimal level of inventory, Happy Bagels needs to decrease its inventory by exactly one-half.

B) H appy Bagels is holding the profit-maximizing, optimal level of inventory.

C) T o obtain the profit-maximizing, optimal level of inventory, Happy Bagels needs to decrease its inventory.

D) T o obtain the profit-maximizing, optimal level of inventory, Happy Bagels needs to increase its inventory.

84) ______

85) H appy Bagels sells its bagels for $6 each and the firm has a constant marginal cost of $4 per

bagel,

which is 85) equal to its (constant ) average total cost.

___ ___

If Happy Bagels does not sell a bagel the day it is produce d, the bagel is sold as day-old for $2.

If Happy Bagels is currently holding 50 bagels in inventor y and the probabili ty that Happy Bagels will sell 50 bagels or more is 0.40, which of the followin g statemen ts is true?

A) T o obtain the profit-maximizing, optimal level of inventory, Happy Bagels needs to decrease its inventory.

B) H appy Bagels is holding the profit-maximizing, optimal level of inventory.

C) T o obtain the profit-maximizing, optimal level of inventory, Happy Bagels needs to double its inventory.

D) T o obtain the profit-maximizing, optimal level of inventory, Happy Bagels needs to increase its inventory.

86) S weet Treats sells its extra-large cupcakes for $14 each and the firm has a constant marginal cost of $6 per cupcake, which is equal to its (constant) average total cost. If Sweet Treats does not

sell cupcak a e the

___ ___

day it is 86) produce d, it is sold as day-old for $4.

Sweet Treats should hold the number of cupcakes in inventor y that makes the probabili ty of selling that quantity of cupcakes or more equal to ________ .

A) 0 .40

B) 0 .80

C) 0 .20

D) 0 .60

87) S weet Treats sells its extra-large cupcakes for $12 each and the firm has a constant marginal cost of $8 per cupcake, which is equal to its (constant) average total cost. If Sweet Treats does not sell a cupcake the day it is produced, it is sold as day-old for $4. Sweet Treats should hold the number of cupcakes in inventory that makes the probability of selling that quantity of cupcakes or more equal to ________.

A) 0 .60 B) 0 .50 C) 1 .00 D) 0 .40

87) ______

88) S weet Treats sells its extra-large cupcakes for $10 each and the firm has a constant marginal cost of $6 per cupcake, which is equal to its (constant) average total cost. If Sweet Treats does not sell a cupcake the day it is produced, it is sold as day-old for $4. Sweet Treats should hold the number of cupcakes in inventory that makes the probability of selling that quantity of cupcakes or more equal to ________.

A) 0 .75 B) 0 .33 C) 0 .50 D) 0 .66

88) ______

89) A s long as the expected marginal benefit of keeping a unit in inventory ________ the ________, the unit should be added to the inventory.

A) e xceeds; expected marginal cost B) e xceeds; expected average total cost C) i s less than; expected marginal cost D) i s less than; expected average total cost

89) ______

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

90) T o determine the optimal quantity to hold in inventory, a profit-maximizing manager uses marginal analysis.

90) ______

91) A s the quantity held in inventory increases, the probability of selling an additional unit increases.

91) ______

92) T he expected marginal benefit falls as the quantity held in inventory increases.

92) ______

93) A s the quantity held in inventory increases, the probability of selling less than that quantity increases.

93) ______

94) T he expected marginal cost decreases as the quantity held in inventory increases.

94) ______

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

95) A random adverse event is an event that has a(n) ________ probability and is associated with a ________ outcome.

A) k nown; negative B) u nknown; positive C) u nknown; negative D) k nown; positive

95) ______

96) A n unintended bad outcome is referred to as a(n) ________ and ________ cause harm to an individual firm.

A) m istake; cannot B) m istake; can C) a ccident; can D) a ccident; cannot

96) ______

97) C oldest Ice produces ice packs for use in lunch boxes. All of the following could be accidents for Coldest Ice except which one?

A) t he ice packs failing to meet safe food temperatures B) t he ice packs infringe on another firm's patent C) a successful audit D) t he ice packs leak

97) ______

98) T oddler Treats produces soft cereal bars for toddlers and Toddler Treats states on its packaging and in its advertising that its cereal bars are nut-free. All of the following could be accidents for Toddler Treats except which one?

A) a n audit failure B) f ailing to earn economic profit C) i nfringing on other company's patent on toddler cereal bars D) s elling cereal bars that have been cross-contaminated with peanuts

98) ______

99) F or most firms, any of the following could be considered an accident except which one?

A) a udit failure B) p atent infringement C) p roduct failing safety standards D) f ailing to earn an economic profit

99) ______

100) T he total cost of an accident is equal to the ________ plus the ________.

A) e xpected marginal cost of the bad outcome; the cost of actions taken to increase the expected cost of the bad outcome B) e xpected cost of the bad outcome; the cost of actions taken to increase the expected cost of the bad outcome C) e xpected marginal cost of the bad outcome; the fixed cost of actions taken to decrease the expected cost of the bad outcome D) e xpected cost of the bad outcome; the cost of actions taken to decrease the expected cost of the bad outcome

100) _____

101) A ctions to lower the probability of a bad outcome ________ its expected cost and these actions are ________.

101) _____

A) i ncrease; inexpensive C) d ecrease; inexpensive

B) d ecrease; costly D) i ncrease; costly

102) T he optimal amount to spend on actions that decrease the probability of bad outcomes is the

102) _____

amount that sets the ________ of reducing the probability of a bad outcome equal to the ________ of the action(s) that reduce(s) the probability.

A) m arginal benefit; expected marginal cost B) e xpected marginal benefit; marginal cost C) m arginal benefit; marginal cost D) e xpected marginal benefit; expected marginal cost Quantity of Patents Reviewed (with No Infringements Found) 50 51 52 53 54

Probability of Infringement 0.88 0.80 0.74 0.70 0.68

The above table shows the quantity of patents reviewed by a firm's attorney and the corresponding probability that the firm will infringe on another firm's patent. The cost of infringement is $50,000.

103) R efer to the table above. If the attorney reviews 51 patents, what is the expected marginal benefit of reviewing the 51st patent?

A) - $4,000 B) $ 4,000 C) $ 40,000 D) - $40,000

103) _____

104) R efer to the table above. If the attorney reviews 51 patents, what is the expected cost of infringement?

A) $ 4,000 B) $ 50,000 C) - $4,000 D) $ 40,000

104) _____

105) R efer to the table above. If the attorney reviews 53 patents, what is the expected marginal benefit of reviewing the 53rd patent?

A) - $20,000 B) - $2,000 C) $ 2,000 D) $ 20,000

105) _____

106) R efer to the table above. If the attorney reviews 53 patents, what is the expected cost of infringement?

A) $ 35,000 B) - $35,000 C) $ 50,000 D) $ 2,000

106) _____

107) A s the quantity of actions taken to reduce the probability of an accident increases, the expected marginal benefit curve ________.

A) i ncreases B) d ecreases C) r emains constant D) b ecomes vertical

107) _____

108) I f actions to reduce the expected cost of an accident are equally effective and managers authorize the least expensive actions first, the marginal cost of additional actions ________.

A) i ncreases B) i s zero C) i s constant D) d ecreases

108) _____

109) I n general, the marginal cost of avoiding an accident ________ as more actions are taken and the associated marginal cost curve is ________ sloping.

A) f alls; upward B) f alls; downward C) r ises; upward D) r ises; downward

109) _____

110) W hen marginal analysis is used to determine the optimal quantity of accident avoidance, all of the following are true except which one?

A) T he total cost of the accident is minimized.

B) T he expected marginal benefit of accident avoidance exceeds the marginal cost.

C) T he expected marginal benefit of accident avoidance equals the marginal cost.

D) T he sum of the expected cost of an accident and the cost of avoiding accidents is minimized.

110) _____

111) A firm is concerned about the possibility of patent infringement and has hired an attorney to review patents. If the attorney is reviewing 100 patents and the marginal cost of reviewing the 100th patent is $40 and the expected marginal benefit of reviewing the 100th patent is $45, which of the following is true?

A) T he firm's total cost of infringement will decrease if the number of patents reviewed decreases.

B) T he firm is minimizing the total cost of infringement.

C) T he firm's total cost of infringement will increase if the number of patents reviewed increases.

D) T he firm's total cost of infringement will decrease if the number of patents reviewed increases.

111) _____

112) A firm is concerned about the possibility of patent infringement and has hired an attorney to review patents. If the attorney is reviewing 100 patents and the marginal cost of reviewing the 100th patent is $30 and the expected marginal benefit of reviewing the 100th patent is $25, which of the following is true?

A) T he firm's total cost of infringement will decrease if the number of patents reviewed decreases.

B) T he firm's total cost of infringement will decrease if the number of patents reviewed increases.

C) T he firm is minimizing the total cost of infringement.

D) T he firm's total cost of infringement will increase if the number of patents reviewed decreases.

112) _____

113) A firm is concerned about the possibility of patent infringement and has hired an attorney to review patents. If the attorney is reviewing 100 patents and the marginal cost of reviewing the 100th patent is $50 and the expected marginal benefit of reviewing the 100th patent is $50, which of the following is true?

A) T he firm is maximizing the total cost of infringement.

B) T he firm's total cost of infringement will decrease if the number of patents reviewed decreases.

C) T he firm's total cost of infringement will decrease if the number of patents reviewed increases.

D) T he firm is minimizing the total cost of infringement.

113) _____

114) A udit failure is the failure of an audit to uncover a ________ and the expected cost of an audit failure is the ________.

A) t heft; expected cost of the theft B) m istake; cost of the mistake C) t heft; cost of the theft D) m istake; expected cost of the mistake

114) _____

115) I f the probability a firm is being embezzled is 2 percent and the estimated potential cost to the firm from embezzlement is $100,000, what is the expected cost of the embezzlement?

A) - $200 B) $ 2,000 C) - $2,000 D) $ 200

115) _____

116) I f the probability a firm is being embezzled is 5 percent and the estimated potential cost to the firm from embezzlement is $250,000, what is the expected cost of an audit failure?

A) - $15,000 B) $ 15,250 C) $ 25,000 D) $ 12,500

116) _____

117) W hich of the following accidents has an optimal probability of zero?

A) a udit failure B) p atent infringements C) I t is not optimal for any of the accidents, patent infringements, audit failure, or product failure to have a probability of zero.

D) p roduct failure

117) _____

118) M anagers can reduce the probability of product failure through ________, which ________ the firm's costs.

A) t esting; decreases B) a udits; decreases C) t esting; increases D) a udits; increases

118) _____

119) I f managers ensure zero percent product failure, all of the following are true except which one?

A) O btaining zero percent product failure is likely to make the product very expensive.

B) O btaining 100 percent product perfection is likely to be possible.

C) T he product would never fail.

D) O btaining zero percent product failure is not likely to be possible.

119) _____

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

120) E ffective managers use marginal analysis to determine how much to spend on actions to lower the probability of bad outcomes.

120) _____

121) T he expected marginal benefit of reducing the probability of an accident is equal to the decrease in the expected cost of the accident.

121) _____

122)

122) _____

Quantity of Patents Reviewed (with No Infringements Found)

Probability of Infringement

50 51 52 53 54

0.88 0.80 0.74 0.70 0.68

The above table shows the quantity of patents reviewed by a firm's attorney and the corresponding probability that the firm will infringe on another firm's patent. The cost of infringement is $50,000.

The expected marginal benefit of reviewing additional patents increases as the number of patents reviewed increases.

123) I f actions to reduce the expected cost of an accident are equally effective, managers should authorize the most expensive actions first.

123) _____

124) I t is not optimal to drive the probability of a patent infringement to zero.

124) _____

125) I n some situations, managers cannot make incremental actions to prevent product failure and

must either

____ _

decide to 125) take preventa tive action or not.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

126) T he expected value of litigation is the expected value of the ________ from litigation for the plaintiff and the expected value of the ________ from the litigation for the defendant.

A) l oss; loss B) g ain; gain C) l oss; gain D) g ain; loss

126) _____

127) T he expected value of litigation is the expected value of the gain from litigation for the ________ and the expected value of the loss from the litigation for the ________.

A) d efendant; plaintiff B) p laintiff; plaintiff C) d efendant; defendant D) p laintiff; defendant

127) _____

128) L itigation costs include all of the following expect which one?

A) b ad publicity B) f iling fees C) m arketing fees

128) _____ D) l egal fees

129) I f a plaintiff believes there is a 50 percent chance they will win $250,000 and a 50 percent chance they will win nothing (zero), and the litigation cost is $50,000, what is the expected value of the litigation for the plaintiff?

A) $ 175,000 B) $ 75,000 C) $ 50,000 D) $ 125,000

129) _____

130) I f a plaintiff believes there is a 30 percent chance they will win $200,000, a 40 percent chance they 130) _____ will win 100,000, and a 30 percent chance they will win nothing (zero), and the litigation cost is $50,000, what is the expected value of the litigation for the plaintiff?

A) $ 50,000 B) $ 60,000 C) $ 100,000 D) $ 125,000 131) I f a defendant believes there is a 60 percent chance that the plaintiff will win $400,000 and a 40 percent chance the plaintiff will lose and receive nothing (zero) and the defendant's litigation cost is $150,000, what is the defendant's expected loss from the litigation?

A) $ 390,000 B) $ 120,000 C) $ 90,000 D) $ 360,000

131) _____

132) A defendant believes there is a 70 percent chance that the plaintiff will win $200,000, a 10 percent 132) _____ chance the plaintiff will win $150,000 and a 20 percent chance the plaintiff will lose and receive nothing (zero). If the defendant's litigation cost is $100,000, what is the defendant's expected loss from the litigation?

A) $ 300,000 B) $ 155,000 C) $ 255,000 D) $ 150,000 133) B oth a defendant and plaintiff believe there is an 80 percent chance that the plaintiff will win $500,000 and a 20 percent chance that the plaintiff will lose and be awarded nothing (zero). If the plaintiff's litigation cost is $150,000 and the defendant's litigation cost is $200,000, the defendant would be willing to pay any amount up to ________ to settle.

A) $ 200,000 B) $ 550,000 C) $ 250,000 D) $ 600,000

133) _____

134) B oth a defendant and plaintiff believe there is an 80 percent chance that the plaintiff will win 134) _____ $500,000 and a 20 percent chance that the plaintiff will lose and be awarded nothing (zero). If the plaintiff's litigation cost is $150,000 and the defendant's litigation cost is $200,000, the plaintiff would be willing to accept any amount greater than ________ to settle.

A) $ 250,000 B) $ 150,000 C) $ 600,000 D) $ 200,000

135) _____ 135) B oth a defendant and plaintiff believe there is a 30 percent chance that the plaintiff will win $150,000 and a 70 percent chance that the plaintiff will lose and be awarded nothing (zero). If the plaintiff's litigation cost is $30,000 and the defendant's litigation cost is $40,000, the defendant would be willing to pay any amount up to ________ to settle and the plaintiff would be willing to accept any amount greater than ________ to settle.

A) $ 85,000; B) $ 80,000; $20,000 $15,000 C) $ D) $ 15,000; $85,000 20,000; $80,000 136) A defendant believes there is a 70 percent chance that the plaintiff will win $800,000 and a 30 136) _____ percent chance that the plaintiff will lose and be awarded nothing (zero). The plaintiff believes that there is a 90 percent chance that they will win $800,000 and a 10 percent chance that they will be awarded nothing (zero). The plaintiff's litigation cost is $300,000 and the defendant's litigation cost is $200,000. What is the plaintiff's expected value from the litigation?

A) $ 375,000 B) $ 520,000 C) $ 420,000 D) $ 760,000 137) A defendant believes there is a 70 percent chance that the plaintiff will win $800,000 and a 30 percent chance that the plaintiff will lose and be awarded nothing (zero). The plaintiff believes that there is a 90 percent chance that they will win $800,000 and a 10 percent chance that they will be awarded nothing (zero). The plaintiff's litigation cost is $300,000 and the defendant's litigation cost is $200,000. What is the defendant's expected loss from the litigation?

A) $ 420,000 B) $ 760,000 C) $ 550,000 D) $ 660,000

137) _____

138) A defendant believes there is a 70 percent chance that the plaintiff will win $800,000 and a 30 percent chance that the plaintiff will lose and be awarded nothing (zero). The plaintiff believes that there is a 90 percent chance that they will win $800,000 and a 10 percent chance that they will be awarded nothing (zero). The plaintiff's litigation cost is $300,000 and the defendant's litigation cost is $200,000. The defendant would be willing to pay any amount up to ________ to settle.

138) _____

A) $ 420,000

B) $ 700,000

C) $ 500,000

D) $ 760,000

139) A defendant believes there is a 70 percent chance that the plaintiff will win $800,000 and a 30 percent chance that the plaintiff will lose and be awarded nothing (zero). The plaintiff believes that there is a 90 percent chance that they will win $800,000 and a 10 percent chance that they will be awarded nothing (zero). The plaintiff's litigation cost is $300,000 and the defendant's litigation cost is $200,000. The plaintiff would be willing to accept any amount greater than ________ to settle.

A) $ 550,000 B) $ 420,000 C) $ 250,000 D) $ 760,000

139) _____

140) A defendant believes there is an 80 percent chance that the plaintiff will win $1,000,000 and a 20

140) _____

percent chance that the plaintiff will lose and be awarded nothing (zero). The plaintiff believes that there is a 90 percent chance that they will win $1,000,000 and a 10 percent chance that they will be awarded nothing (zero). The plaintiff's litigation cost is $500,000 and the defendant's litigation cost is $400,000. The plaintiff would be willing to accept any amount greater than ________ to settle.

A) $ 500,000 B) $ 400,000 C) $ 1,000,000 D) $ 1,200,000 141) A defendant believes there is an 80 percent chance that the plaintiff will win $1,000,000 and a 20 percent chance that the plaintiff will lose and be awarded nothing (zero). The plaintiff believes that there is a 90 percent chance that they will win $1,000,000 and a 10 percent chance that they will be awarded nothing (zero). The plaintiff's litigation cost is $500,000 and the defendant's litigation cost is $400,000. The defendant would be willing to pay any amount up to ________ to settle.

141) _____

A) $ 900,000

B) $ 800,000

C) $ 1,000,000

D) $ 1,200,000

142) A defendant believes there is a 50 percent chance that the plaintiff will win $1,000,000 and a 50 percent chance that the plaintiff will lose and be awarded nothing (zero). The plaintiff believes that there is a 40 percent chance that they will win $1,000,000 and a 60 percent chance that they will be awarded nothing (zero). The plaintiff's litigation cost is $200,000 and the defendant's litigation cost is $300,000. The defendant would be willing to pay any amount up to ________ to settle and the plaintiff would be willing to accept any amount greater than ________ to settle.

A) $ 700,000; $100,000 B) $ 600,000; $400,000 C) $ 800,000; $200,000 D) $ 200,000; $800,000

142) _____

143) A defendant believes there is a 40 percent chance that the plaintiff will win $1,000,000 and a 60 percent chance that the plaintiff will lose and be awarded nothing (zero). The plaintiff believes that there is a 60 percent chance that they will win $1,000,000 and a 40 percent chance that they will be awarded nothing (zero). The plaintiff's litigation cost is $300,000 and the defendant's litigation cost is $300,000. Which of the following statements is true?

143) _____

A) T he plaintiff would be will to accept any amount greater than $200,000 to settle.

B) T he plaintiff would be will to accept any amount greater than $300,000 to settle.

C) T he defendant would be willing to pay up to $800,000 to settle.

D) T here is no economic incentive for either party to settle.

144) A defendant believes there is a 40 percent chance that the plaintiff will win $1,000,000 and a 60 percent chance that the plaintiff will lose and be awarded nothing (zero). The plaintiff believes that there is a 60 percent chance that they will win $1,000,000 and a 40 percent chance that they will be awarded nothing (zero). The plaintiff's litigation cost is $100,000 and the defendant's litigation cost is $400,000. Which of the following statements is true?

144) _____

A) T he plaintiff would be will to accept any amount greater than $450,000 to settle.

B) T he defendant would be willing to pay up to $800,000 to settle.

C) T here is no economic incentive for either party to settle.

D) T he defendant would be willing to pay up to $900,000 to settle.

145) I n general, a plaintiff and defendant should be expected to settle if the expected ________ from the litigation is ________ the expected ________.

A) l oss; greater than; gain B) g ain; greater than; loss C) l oss; exactly one half of; gain D) l oss; less than; gain

145) _____

146) T he ________ the defendant's assessment of the expected payment to the ________, the ________146) _____ likely the case will be settled.

A) s maller; judge; more B) l arger; plaintiff; more C) s maller; judge; less D) l arger; plaintiff; less 147) T he ________ the total cost of litigation, the ________ likely the parties will ________.

A) l arger; more; litigate B) s maller; more; settle C) l arger; more; settle D) l arger; less; settle

147) _____

148) A ll else equal, it is more likely for a case to be settled the ________ the defendant's assessment of 148) _____ the expected payment to the plaintiff and the ________ the plaintiff's assessment of the expected (received) payment.

A) l arger; smaller B) s maller; smaller C) s maller; larger D) l arger; larger 149) A ll else equal, it is more likely for a case to be settled the ________ the defendant's assessment of the expect

____ _

ed 149) payment to the plaintiff and the ________ the total cost of litigation .

A) s maller; smaller C) l arger; smaller

B) l arger; larger D) s maller; larger

150) A ll else equal, it is more likely for a case to be settled the ________ the plaintiff's assessment of the expected (received) payment and the ________ the total cost of litigation.

A) s maller; smaller B) l arger; larger C) l arger; smaller D) s maller; larger

150) _____

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

151) T he American Rule states that the plaintiff must pay their legal fees only the court rules in favor of the defendant.

151) _____

152) T he actual amount a plaintiff will win in a lawsuit is a random variable.

152) _____

153) F rom an economic perspective, the decision to settle or litigate depends on actual guilt or innocence.

153) _____

154) I f the expected loss from litigation exceeds the expected gain, the defendant has an economic incentive to settle.

154) _____

155) T he larger a defendant's expected payment to a plaintiff, the more likely the case will be settled regardless if the expected payment is high due to the plaintiff's probability of winning, or if there is a large potential damage payment.

155) _____

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

156) A manager believes there is a 5 percent chance their firm will have to pay $1,000,000 and a 95 percent chance they will be found innocent and pay nothing except the legal fees of $100,000. If the manager chooses to not enter into the litigation and to settle for $150,000 (pay the plaintiff), which of the following is true?

A) T he manager is a risk lover.

B) T he manager is risk neutral.

C) T he manager is risk averse.

D) T he manager is risk intolerant.

156) _____

157) A manager believes there is a 10 percent chance their firm will have to pay $500,000, a 20 percent chance that they will have to pay $400,000 and a 70 percent chance they will be found innocent and pay nothing except the legal fees of $100,000. If the manager chooses to not enter into the litigation and to settle for $230,000 (pay the plaintiff), which of the following is true?

A) T he manager is risk intolerant.

B) T he manager is risk averse.

C) T he manager is risk neutral.

D) T he manager is a risk lover.

157) _____

158) A manager believes there is a 10 percent chance their firm will have to pay $500,000, a 20 percent chance that they will have to pay $400,000 and a 70 percent chance they will be found innocent and pay nothing except the legal fees of $100,000. If the manager chooses to not settle for $230,000 (pay the plaintiff) and to enter the litigation instead, which of the following is true?

158) _____

A) T he manager is risk averse.

C) T he manager is risk intolerant.

B) T he manager is risk neutral.

D) T he manager is a risk lover.

159) A manager believes there is a 10 percent chance their firm will have to pay $500,000, a 20 percent chance that they will have to pay $400,000 and a 70 percent chance they will be found innocent and pay nothing except the legal fees of $100,000. The manager has been offered a settlement deal of $230,000, which the manager's firm would have to pay the plaintiff. If the manager flips a coin to decide to enter litigation or to settle, the manager is ________.

A) r isk intolerant B) r isk averse C) a risk lover D) r isk neutral

159) _____

160) A manager believes there is a 10 percent chance their firm will have to pay $1,000,000 and a 90 percent chance they will be found innocent and pay nothing except the legal fees of $200,000. If the manager chooses to not settle for $300,000 and to enter the litigation instead, which of the following is true?

A) T he manager is risk intolerant.

B) T he manager is risk averse.

C) T he manager is risk neutral.

D) T he manager is a risk lover.

160) _____

161) A manager believes there is a 10 percent chance their firm will have to pay $1,000,000 and a 90 percent chance they will be found innocent and pay nothing except the legal fees of $200,000. If the manager is offered a settlement deal of $300,000 (the manager's firm would pay the plaintiff $300,000), and the manager flips a coin to decide if they should settle or not, which of the following statements is true?

A) T he manager is risk intolerant.

B) T he manager is risk neutral.

C) T he manager is a risk lover.

D) T he manager is risk averse.

161) _____

162) A ll of the following can be used to reduce risk except which one?

A) d iversifying your stock portfolio B) s ettling a law suit C) p urchasing insurance D) e ntering into litigation

162) _____

163) T he more risk averse people are, the ________ likely they will purchase insurance, and the ________ money they are willing to pay for the insurance.

A) l ess; more B) m ore; less C) m ore; more D) l ess; less

163) _____

164) T he greater the risk associated with a particular outcome, the ________ likely they will purchase insurance, and the ________ money they are willing to pay for the insurance.

A) m ore; more B) l ess; less C) l ess; more D) m ore; less

164) _____

165) B ig Mowers is a firm selling large farm equipment. To attract new customers they are running a promotion in which customers are asked to guess the number of raw corn kernels in a gallon bucket. It is free for a customer to guess and if they get the exact number of kernels correct, they win a $200,000 lawn tractor. Big Mowers is running the promotion for a week and the probability a customer gets the exact number of kernels correct during that one week is 0.001.

What is the expected cost of the promotion?

A) $ 2 B) $ 20 C) $ 200 D) $ 2,000

165) _____

166) C ruise with Us is running a promotion to attract new customers and is offering a free around the world cruise to any customer who can sink a hole in one on a professional golf course located near Cruise with Us' corporate headquarters. The cost of the around the world cruise is $50,000 and Cruise with Us is running the promotion for a month. The probability that a customer can sink a hole in one during the one month period is 5 percent. What is the expected cost of the promotion?

A) $ 50 B) $ 2,500 C) $ 250 D) $ 500

166) _____

167) D iversification reduces the risk that ________ face with ________ cost.

A) f irms; little to no B) s hareholders; high C) f irms; zero D) s hareholders; little to no

167) _____

168) A ll of the following are true regarding a shareholder's diversified stock portfolio except which one?

A) T he shareholder has balanced the risk of bad outcomes with positive outcomes.

B) T he diversified portfolio reduces the risk faced by the shareholders.

C) T he portfolio will contain the stock of just one company.

D) T he portfolio will contain stocks from a variety of companies.

168) _____

169) I n general, the more risk averse a defendant is, the ________ willing the defendant is to settle, and the ________ the amount the defendant will pay as a settlement.

C) l ess; smaller A) l ess; larger B) m ore; larger D) m ore; smaller

169) _____

170) I n general, the more risk averse a plaintiff is, the ________ willing the plaintiff is to settle, and the ________ the amount the plaintiff will accept to settle.

A) m ore; lower B) l ess; lower C) l ess; higher D) m ore; higher

170) _____

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

171) T he expected value of an outcome takes into consideration the associated risk.

171) _____

172) T he greater the risk associated with an outcome and the more risk averse the decision maker, the more likely a high insurance premium will be paid.

172) _____

173) B ecause increased costs reduce the return on investment, shareholders may prefer managers make decisions based on the risk and not on the expected profit.

173) _____

174) P lacing all of your investment funds into one stock is an example of diversification.

174) _____

175) P laintiffs can be risk averse.

175) _____

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

176) M aking decisions with outcomes are uncertain is ________ and ________.

A) u ncommon; difficult B) c ommon; easy C) c ommon; difficult D) u ncommon; easy

176) _____

177) I n reality, a manger ________ be able to maximize the firm's profit period to period due to ________ changes to a firm's demand and/or cost.

A) w ill not; known B) w ill; random C) w ill; known D) w ill not; random

177) _____

178) I n reality, the profit-maximization rule to set marginal revenue equal to marginal cost, is a(n) ________ rather than a(n) ________.

A) o perational rule; goal B) t arget; operational rule C) o btainable goal; operational rule D) o perational rule; target

178) _____

179) T he expected-profit-maximization rule sets ________ equal to ________ and is an ________.

A) e xpected marginal revenue; expected marginal cost; operational guideline B) m arginal revenue; expected marginal cost; operational guideline C) e xpected marginal revenue; marginal cost; operational guideline D) m arginal revenue; marginal cost; easily obtainable goal

179) _____

180) I f a manager's expected marginal revenue exceeds their expected marginal cost, which of the following is true?

A) T o maximize expected profit, the manager should increase production.

B) T he manager is maximizing expected profit.

C) T he expected profit from producing another unit is negative.

D) T o maximize expected profit, the manager should decrease production.

180) _____

181) I f a manager's expected marginal cost exceeds their expected marginal revenue, which of the following is true?

A) T o maximize expected profit, the manager should increase production.

B) T he expected profit from producing another unit is positive.

C) T he expected profit from producing another unit is negative.

D) T he manager is maximizing expected profit.

181) _____

182) S weet Husks is a perfectly competitive corn farm. Currently, the expected price of an ear of corn is $0.40 and, at its current production level, Sweet Husks has a marginal cost of $.30 per ear.

Which of the following is true regarding Sweet Husks?

A) T o maximize expected profit, Sweet Husks should increase production.

B) S weet Husks is maximizing expected profit.

C) T he expected profit from producing another ear of corn is negative.

D) T o maximize expected profit, Sweet Husks should decrease production.

182) _____

183) S weet Husks is a perfectly competitive corn farm. Currently, the expected price of an ear of corn is $0.20 and, at its current production level, Sweet Husks has a marginal cost of $.20 per ear.

Which of the following is true regarding Sweet Husks?

A) T o maximize expected profit, Sweet Husks should double production.

B) T o maximize expected profit, Sweet Husks should decrease production.

C) S weet Husks is maximizing expected profit.

D) T o maximize expected profit, Sweet Husks should increase production.

183) _____

184) I n general, if a firm is producing at a level at which its expected marginal revenue is ________ its expected marginal cost, it should ________ production to maximize ________.

A) m ore than; increase; actual profit B) l ess than; increase; expected profit C) m ore than; decrease; expected profit D) l ess than; decrease; expected profit

184) _____

185) S weet Husks is a perfectly competitive corn farm. Currently, the expected price of an ear of corn is $0.40 and, at its current production level, Sweet Husks has a marginal cost of $.30 per ear.

The expected profit from producing an additional ear of corn is ________.

A) $ 0.40 B) $ 0.20 C) $ 0.10 D) $ 0.70

185) _____

186) S weet Husks is a perfectly competitive corn farm. Currently, the expected price of an ear of corn is $0.30 and, at its current production level, Sweet Husks has a marginal cost of $.40 per ear.

Which of the following statements is true?

A) B ecause the expected profit from an additional ear of corn is -$0.10, Sweet Husks should decrease production to maximize its expected profit.

B) B ecause the expected profit from an additional ear of corn is $0.10, Sweet Husks should increase production to maximize its expected profit.

C) B ecause the expected profit from an additional ear of corn is $0.70, Sweet Husks should increase production to maximize its expected profit.

D) B ecause the expected profit from an additional ear of corn is $0.10, Sweet Husks should decrease production to maximize its expected profit.

186) _____

187) D rive with Us is an automobile retailer and pays floor plan financing to finance the cars they hold in inventory. If the interest rate on their floor plan financing is 5 percent, how much do they pay in interest per day on a car with a wholesale price of $40,000?

A) $ 5.48 B) $ 4.52 C) $ 6.75 D) $ 5.98

187) _____

188) D rive with Us is an automobile retailer and pays floor plan financing to finance the cars they hold in inventory. If the interest rate on their floor plan financing is 6 percent, how much do they pay in interest per day on a car with a wholesale price of $50,000?

A) $ 7.57 B) $ 9.50 C) $ 5.75 D) $ 8.22

188) _____

189) A change that increases the expected profit from holding a unit of product in inventory, ________ the expected marginal revenue curve and shifts it to the ________.

A) i ncreases; right B) d ecreases; right C) d ecreases; left D) i ncreases; left

189) _____

190) A change that increases the expected profit from holding a unit of product in inventory, ________ the expected marginal revenue curve and ________ the profit-maximizing quantity to hold in inventory.

A) i ncreases; decreases B) d ecreases; decreases C) d ecreases; increases D) i ncreases; increases

190) _____

191) A change that decreases the expected profit from holding a unit of product in inventory, ________ the expected marginal revenue curve and ________ the profit-maximizing quantity to hold in inventory.

A) i ncreases; decreases B) d ecreases; decreases C) d ecreases; increases D) i ncreases; increases

191) _____

192) B etty's Bagels makes and sells bagels from their local bakery. If Betty's Bagels become more

192) _____

popular with local residents and the probability of selling additional bagels increases, Betty's expected marginal benefit curve from holding additional bagels in inventory will shift to the ________ and the profit-maximizing number of bagels to hold in inventory will ________.

A) r ight; increase B) l eft; increase C) l eft; decrease D) r ight; decrease 193) D rive with Us is an automobile retailer and pays floor plan financing to finance the cars they hold in inventory. If the interest rate on their floor plan financing increases from 4 to 5 percent, Drive with Us's expected marginal cost from holding additional cars in inventory will shift ________ and the profit-maximizing number of cars to hold in inventory will ________.

A) u pward; increase B) d ownward; increase C) u pward; decrease D) d ownward; decrease

193) _____

194) D rive with Us is an automobile retailer and pays floor plan financing to finance the cars they hold in inventory. If the interest rate on their floor plan financing decreases from 5 to 3 percent, Drive with Us's expected marginal cost from holding additional cars in inventory will shift ________ and the profit-maximizing number of cars to hold in inventory will ________.

A) u pward; decrease B) d ownward; increase C) u pward; increase D) d ownward; decrease

194) _____

195) S weet Husks is a perfectly competitive corn farm. If the expected price of an ear of corn changes from $0.30 to $0.33, Sweet Husks' expected marginal benefit from holding additional ears of corn in inventory will shift ________ and the profit-maximizing number of ears of corn to hold in inventory will ________.

A) d ownward; decrease B) d ownward; increase

195) _____

C) u pward; increase

D) u pward; decrease

196) S weet Husks is a perfectly competitive corn farm. If the expected price of an ear of corn changes from $0.25 to $0.23, Sweet Husks' expected marginal benefit from holding additional ears of corn in inventory will shift ________ and the profit-maximizing number of ears of corn to hold in inventory will ________.

A) d ownward; increase B) u pward; increase C) d ownward; decrease D) u pward; decrease

196) _____

197) T he goal of the plaintiff is to ________ their ________.

A) m aximize; loss B) m inimize; loss C) m inimize; gain

197) _____

198) T he goal of the defendant is to ________ their ________.

A) m aximize; gain B) m inimize; gain C) m inimize; loss

D) m aximize; gain 198) _____ D) m aximize; loss

199) A s a plaintiff, all of the following will help you negotiate a larger settlement except which one?

A) r aising the defendant's subjective probability that you will win B) d ecreasing the defendant's estimate of damages C) i ncreasing the defendant's estimate of damages D) i ncreasing the defendant's cost of litigation

199) _____

200) A n increase in the plaintiff's cost of litigation will make the plaintiff ________ likely to settle and pay a ________ amount.

A) l ess; higher B) l ess; lower C) m ore; lower D) m ore; higher

200) _____

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

201) I n reality, the expected-profit-maximization rule is an operational guideline.

201) _____

202) R egression analysis can be used to help managers maximize their expected profit.

202) _____

203) M anagers do not face the risk of their product becoming obsolete as long as they hold their product in inventory.

203) _____

204) A ny action that increases the defendant's expected loss from litigation decreases the maximum amount they are willing to pay to settle.

204) _____

205) O ne way to decrease a plaintiff's expected value of litigation is to countersue.

205) _____

1) A 2) A 3) B 4) A 5) C 6) D 7) A 8) D 9) B 10) D 11) D 12) C 13) B 14) C 15) A 16) C 17) D 18) B 19) C 20) D 21) A 22) B 23) B 24) D 25) A 26) T RUE 27) T RUE 28) F ALSE 29) T RUE 30) F ALSE 31) A 32) C 33) A 34) B 35) D 36) B 37) C 38) D 39) A 40) B 41) B 42) B 43) B 44) D 45) A 46) A 47) C 48) C 49) C 50) C 51) B

52) B 53) A 54) D 55) D 56) A 57) A 58) D 59) A 60) F ALSE 61) T RUE 62) T RUE 63) T RUE 64) F ALSE 65) A 66) D 67) B 68) C 69) C 70) B 71) A 72) C 73) A 74) C 75) A 76) C 77) B 78) D 79) B 80) B 81) A 82) D 83) A 84) D 85) A 86) C 87) B 88) B 89) A 90) T RUE 91) F ALSE 92) T RUE 93) T RUE 94) F ALSE 95) C 96) C 97) C 98) B 99) D 100) D 101) B 102) B 103) B

104) D 105) C 106) A 107) B 108) A 109) D 110) B 111) D 112) A 113) D 114) A 115) B 116) D 117) C 118) C 119) B 120) T RUE 121) T RUE 122) F ALSE 123) F ALSE 124) T RUE 125) T RUE 126) D 127) D 128) C 129) B 130) A 131) A 132) C 133) D 134) A 135) A 136) C 137) B 138) D 139) B 140) B 141) D 142) C 143) B 144) B 145) A 146) B 147) C 148) A 149) B 150) D 151) F ALSE 152) T RUE 153) F ALSE 154) T RUE 155) T RUE

156) C 157) B 158) D 159) D 160) D 161) B 162) D 163) C 164) A 165) C 166) B 167) D 168) C 169) B 170) A 171) F ALSE 172) T RUE 173) F ALSE 174) F ALSE 175) T RUE 176) C 177) D 178) B 179) A 180) A 181) C 182) A 183) C 184) D 185) C 186) A 187) A 188) D 189) A 190) D 191) B 192) A 193) C 194) B 195) C 196) C 197) D 198) C 199) B 200) D 201) T RUE 202) T RUE 203) F ALSE 204) F ALSE 205) T RUE

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) F rom an economist's perspective, information is a product, but differs from other goods and services in all of the following ways except which one?

A) O ne firm's use of information does not prevent other firms from simultaneously using the exact same information.

B) I t is expensive to produce, but cheap to communicate.

C) I t is expensive to produce, but cheap to copy.

D) I nformation created by firms cannot be protected through government laws.

1) _______

2) I ntellectual property refers to the ________ creations of ________ intelligence.

A) t angible; technical B) t angible; human C) i ntangible; technical D) i ntangible; human

2) _______

3) F irms can protect information in the form of inventions and other industrial know-how under which two types of laws?

A) p atents and copyrights B) t rade secrets and copyrights C) p atents and trade secrets D) t rade secrets and trademarks

3) _______

4) I n the United States, a patent gives the patent holder exclusive rights to an invention for typically how many years?

A) l ifetime of patent holder B) 2 0 C) 5 D) 1 5

4) _______

5) T o qualify for patent protection, an invention must meet all of the following statutory criteria except which one?

A) n ovelty B) u sefulness C) i nterest D) n onobviousness

5) _______

6) I n order for a patent to be considered useful, it must meet which of the two criteria?

A) I t works as intended and has downward sloping demand curve.

B) I t minimally works as intended.

C) I t serves some minimal human need and has a downward sloping demand curve.

D) I t works as intended and serves some minimal human need.

6) _______

7) I n the absence of property rights, inventors have ________ incentive to invest in innovations and ________ incentive to disclose how to use and make their innovations.

A) m ore; more B) m ore; less C) l ess; more D) l ess; less

7) _______

8) P atents ________ permit investors to have a monopoly on their innovation and ________ permit them to earn economic profit.

A) d o not; do B) d o not; do not C) d o; do not D) d o; do

8) _______

9) T he ________ nature of patents attempts to balance the social gain from the product against the ________.

A) t emporary; competitive firm's economic profit from the product B) p ermanent; deadweight loss to society C) p ermanent; competitive firm's economic profit from the product D) t emporary; deadweight loss to society

9) _______

10) A ll of the following are considered trade secrets except which one?

10) ______

A) t he creation of a new product C) p lans for future expansion

B) c ustomer lists D) p roduct recipes

11) T rade secret law ________ the owner from making any public disclosure about the trade secret and trade secret protection has a(n) ________ definition.

A) d iscourages; definite B) d iscourages; indefinite C) e ncourages; indefinite D) e ncourages; definite

11) ______

12) S uppose a trade secret's owner has successfully proven in court that an infringer has illegally used the trade secret. If the trade secret's owner has lost $10 million in profits because of the infringement and the infringer has earned $6 million in profit as a result of illegally using the trade secret, the trade secret's owner will be awarded ________.

A) $ 4 million B) $ 10 million C) $ 16 million D) $ 6 million

12) ______

13) A copyright is a legal grant to the holder of exclusive rights for a(n) ________ period of time for a(n) ________.

A) s pecified; work of authorship B) u nspecified; work of authorship C) s pecified; innovation D) u nspecified; innovation

13) ______

14) A copyright for works created by individuals are in effect for the life of the creator plus ________ years.

A) 1 20 B) 7 0 C) 1 00 D) 9 5

14) ______

15) A copyright for works created by corporations run for ________ years from first publication or ________ years from the creation, whichever is ________.

A) 7 0; 120; shorter B) 9 5; 70; longer C) 9 5; 120; shorter D) 9 5; 120; longer

15) ______

16) A creator of a sculptural work who wants to protect their intellectual property would apply for which of the following?

A) a patent B) a trade secret C) a trademark D) a copyright

16) ______

17) A copyright gives the owner all of the following exclusive rights except which one?

A) a daptation rights B) d istribution rights C) t rade secret rights D) p ublic performance rights

17) ______

18) S uppose a copyright's owner has successfully proven in court that an infringer has illegally reproduced the copyrighted material. If the copyright's owner has lost $8 million in profits because of the infringement and the infringer has earned $5 million in profit as a result of illegally reproducing the copyrighted material, the copyright's owner will be awarded ________.

A) $ 8 million B) $ 13 million C) $ 3 million D) $ 5 million

18) ______

19) A ll of the following can be considered a trademark except which one?

A) a word B) a symbol C) a device

19) ______ D) a secret recipe

20) S uppose a trademark's owner has successfully proven in court that an infringer has illegally infringed on the trademark. If the infringer has earned $9 million in profit as a result of illegally infringing on the trademark and the trademark's owner has suffered $2 million in damages, the trademark's owner will be awarded ________.

A) $ 7 million B) $ 2 million C) $ 9 million D) $ 11 million

20) ______

21) I f a company is associated with a green lizard and the company wants to protect the green lizard symbol, the company would consider the green lizard to be which of the following?

21) ______

A) a patent

B) a trade secret

C) a trademark

D) a copyright

22) A creator of an action movie who wants to protect their intellectual property would apply for which of the following?

A) a trade secret B) a trademark C) a patent D) a copyright

22) ______

23) I f a firm has developed a very popular chocolate bar recipe, the firm would consider the chocolate bar recipe to be which of the following?

A) a copyright B) a patent C) a trade secret D) a trademark

23) ______

24) I f a firm has invented a new cancer drug, the firm would seek which of the following to protect their intellectual property?

A) a trademark B) a patent C) a copyright D) a trade secret

24) ______

25) I f a firm has a developed a list of clients who consistently purchase the firm's product, the firm would consider the list of clients to be which of the following?

A) a trade secret B) a copyright C) a patent D) a trademark

25) ______

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

26) T rade secrets confer more robust protection that patents.

26) ______

27) A patent request will meet the nonobviousness condition if it is not obvious to a person with ordinary skill working in the area.

27) ______

28) I n the absence of patent rights, society can still achieve the optimal amount of innovation.

28) ______

29) T rade secrets do not need governmental approval to protect it.

29) ______

30) A n important difference between a patent and a trade secret is that a patent holder must disclose the workings of the patent and the trade secret owner is not required to disclose the trade secret.

30) ______

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

31) I f a firm's demand is subject to random fluctuations, the firm's ________ will also be random.

A) a verage total cost B) m arginal revenue C) m arginal cost D) a verage variable cost

31) ______

32) A n expected value is the ________ average of ________ outcomes.

A) u nweighted; the most likely B) w eighted; the most likely C) u nweighted; all possible D) w eighted; all possible

32) ______

33) I f a perfectly competitive firm has a 70 percent probability of a high demand of $5 and a 30 percent chance of a low demand of $4, what is the firm's expected marginal revenue?

A) $ 4.70 B) $ 1.20 C) $ 4.50 D) $ 3.50

33) ______

34) A perfectly competitive firm has an 80 percent probability of a high demand of $10 and a 20 percent chance of a low demand of $8. To maximize expected profit, the firm should produce the quantity that sets the marginal cost equal to ________.

A) $ 10.00 B) $ 9.60 C) $ 9.20 D) $ 8.00

34) ______

35) I f the ________ of a forecast outweighs its ________, the forecast can ________ a firm's profit.

A) c ost; benefit; double B) b enefit; cost; increase C) c ost; benefit; increase D) b enefit; cost; decrease

35) ______

36) E ach of the following factors determine the value of a forecast except which one?

A) t he slope of the average fixed cost curve B) t he variability of the firm's demand C) t he slope of the marginal cost curve D) t he accuracy of the forecast

36) ______

37) T he greater the accuracy of a forecast, the ________ its value as the firm faces a ________ increase 37) ______ in expected profit.

A) g reater; larger B) s maller; smaller C) g reater; smaller D) s maller; larger 38)

38) ______

2 The R of a regression ranges from ________ to ________.

A) 0 ; 1 B) - 2; 2 C) 0 ; 2

D) - 1; 1

39) S uppose a firm can estimate its demand with 100 percent accuracy. In this case, the value of the forecast is equal to ________.

A) i nfinity B) t he amount of profit the firm would lose from not having the forecast C) t he actual profit the firm earns from having the forecast D) z ero

39) ______

40)

40) ______

2 The closer the R of a regression is to ________, the ________ accurate and ________ valuable the forecast.

A) 1 ; more; more B) 0 ; less; more C) 1 ; less; less D) 0 ; more; more

41)

41) ______

2 All else equal, a forecast regression with a R of ________ is more valuable than a forecast 2 regression with a R of ________.

A) 0 .50; 0.80 B) 0 .80; 0.50

C) 0 .85; 0.95

D) 0 .75; 0.90

42) T he more variable a firm's demand, the ________ the loss from uncertainty, which means the firm has ________ to gain from a forecast.

B) l arger; less A) s maller; less C) l arger; more D) s maller; more

42) ______

43) A perfect forecast of demand allows a profit-maximizing manager to produce where ________ marginal revenue is ________ the marginal cost.

A) a ctual; greater than B) a ctual; equal to C) e xpected; equal to D) e xpected; greater than

43) ______

44)

44) ______

2 If a profit-maximizing manager is provided a forecast regression with a R equal to 1.00, this allows the manager to produce where ________ marginal revenue is ________ the marginal cost.

A) a ctual; greater than B) a ctual; equal to C) e xpected; equal to D) e xpected; greater than

45) H appy Cows is a perfectly competitive dairy farm with a 50 percent chance of a high demand of $5 and a 50 percent chance of a low demand of $4. Free Cows is a perfectly competitive dairy farm with a 50 percent chance of a high demand of $6 and a 50 percent chance of a low demand of $3. Which of the following statements is true?

A) A ll else equal, an accurate forecast is more valuable to Free Cows than Happy Cows.

B) A ll else equal, an accurate forecast is more valuable to Happy Cows than Free Cows.

45) ______

C) A ll else equal, neither Free Cows nor Happy Cows can benefit from an accurate forecast.

D) A ll else equal, an accurate forecast has the same value to both Free Cows and Happy Cows.

46) H appy Cows is a perfectly competitive dairy farm that has consistently faced a 50 percent chance of a high demand of $5 and a 50 percent chance of a low demand of $4. The managers of Happy Cows learn that there is now a 50 percent chance of a high demand of $8 and a 50 percent chance of a low demand of $2. All else equal, the change in the high and low demand values makes an accurate forecast ________ valuable to Happy Cows as the firm stands to gain ________ profit from an accurate forecast.

A) l ess; more

B) m ore; more

C) m ore; less

46) ______

D) l ess; less

47) A ll else equal, the flatter the marginal cost curve, the ________ sensitive quantity produced is to changes in demand and, thus the ________ valuable an accurate forecast is to the firm.

A) m ore; more B) l ess; more C) m ore; less D) l ess; less

47) ______

48) I f a small change in output results in a large change in marginal cost, the marginal cost curve is ________, which makes accurate forecasts ________ valuable.

A) s teep; less B) s teep; more C) f lat; more D) f lat; less

48) ______

49) S uppose Happy Cows has a marginal cost equal to 0.5Q and Free Cows has a marginal cost equal to 2Q. A) A ll else equal, an accurate forecast has the same value to both Free Cows and Happy Cows.

B) A ll else equal, an accurate forecast is more valuable to Happy Cows than Free Cows.

C) A ll else equal, an accurate forecast is more valuable to Free Cows than Happy Cows.

D) A ll else equal, neither Free Cows nor Happy Cows can benefit from an accurate forecast.

49) ______

Quantity 100 120 140 160 180 200

Happy Cows Free Cows Marginal Cost Marginal Cost 2.00 2.00 2.20 2.40 2.40 2.80 2.60 3.20 2.80 3.60 3.00 4.00

Happy Cows and Free Cows are two separate perfectly competitive dairy farms. The table above shows the respective firms' marginal cost at various production levels.

50) R efer to the table above. The perfectly competitive market for dairy products has a 40 percent chance of a high price of $3.00 and a 60 percent chance of a low price of $2.00. To maximize expected profit, Happy Cows should produce ________ units and Free Cows should produce ________ units.

A) 1 20; 120 B) 1 40; 140 C) 1 40; 120 D) 1 20; 140

50) ______

51) R efer to the table above. Suppose the perfectly competitive market for dairy products had a 40 percent chance of a high price of $3.00 and a 60 percent chance of a low price of $2.00.

However, both Happy Cows and Free Cows have revised their probabilities and now believe that the probability of a high price of $3.00 is 80 percent and the probability of a low price of $2.00 is 20 percent. If the managers of Happy Cows want to maximize expected profit based on the new probabilities by how much will they change the quantity produced?

A) H appy Cows will decrease their production by 40 units.

B) H appy Cows will increase their production by 40 units.

51) ______

C) H appy Cows will decrease their production by 20 units.

D) H appy Cows will increase their production by 20 units.

52) R efer to the table above. Suppose the perfectly competitive market for dairy products had a 40 percent chance of a high price of $3.00 and a 60 percent chance of a low price of $2.00.

However, both Happy Cows and Free Cows have revised their probabilities and now believe that the probability of a high price of $3.00 is 80 percent and the probability of a low price of $2.00 is 20 percent. If the managers of Free Cows want to maximize expected profit based on the new probabilities by how much will they change the quantity produced?

52) ______

A) F ree Cows will increase their production by 20 units.

B) F ree Cows will decrease their production by 20 units.

C) F ree Cows will decrease their production by 40 units D) F ree Cows will increase their production by 40 units.

53) R efer to the table above. Relative to Free Cows, Happy Cows' marginal cost curve is ________, which makes its quantity produced ________ sensitive to changes in demand.

A) s teeper; less B) f latter; less C) f latter; more D) s teeper; more

53) ______

54) R efer to the table above. Relative to Free Cows, Happy Cows' marginal cost curve is ________, which makes an accurate forecast ________ valuable to the managers of Happy Cows.

A) s teeper; more B) s teeper; less C) f latter; more D) f latter; less

54) ______

55) R efer to the table above. Relative to Free Cows, the quantity that maximizes the expected profit

55) ______

for Happy Cows is ________ sensitive to demand changes, which makes an accurate forecast ________ valuable to the managers of Happy Cows.

A) m ore; less B) l ess; less C) l ess; more D) m ore; more 56)

Twnd and o have perfthe ectlsame y expecte comd petimargin tive al fir revenu ms, e, as Fir illustrat m ed in A the and figure Fir above. m For B, which botfirm h would face a ranforecast do of m deman de d be ma more

valuable 56) ?

A) F irm A B) F irm B C) A forecast is more valuable for Firm A if the demand will be high and more valuable for Firm B if the demand will be low.

D) T he value for each firm is the same because the high demand, low demand, and expected marginal revenue are the same.

___ ___

57) ______

57)

Two perfectly competitive firms, Firm A and Firm B, both face random demand and have the same expected marginal revenue, as illustrated in the figure above. For which firm would a forecast of demand be more valuable?

A) F irm A B) F irm B C) A forecast is more valuable for Firm A if the demand will be high and more valuable for Firm B if the demand will be low.

D) T he value for each firm is the same because the expected marginal revenue and marginal cost are the same.

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

58) I f a firm maximizes its expected profit, it will never produce the quantity that maximizes actual profit.

58) ______

59)

59) ______

2 The R of a regression measures how closely the predicted values match the actual values.

60)

In reality,

obtainin 60) ga forecast regressio n with a

___ ___

2 R equal to 1 is possible.

61) T he more variable a firm's demand, the smaller the difference between the quantity produced with no information about demand and quantity produced with a perfect forecast of the demand.

61) ______

62) T he flatter a firm's marginal cost curve, the more sensitive the quantity produced is to changes in the firm's demand.

62) ______

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

63) W hich of the following goods is likely to be sold through an auction?

A) A classic 1991 Buick Roadster B) a n apple automobile C) a pple juice D) A brand new Ford Mustang automobile

63) ______

64) W hich of the following goods is likely to be sold through an auction?

A) t he rights to drill for oil on a specified 200 acres in Texas B) a loaf of bread from a local bakery C) a n ear of corn D) a bag of flour

64) ______

65) A n English auction is a(n) ________-bid auction in which participants ________ observe other participants' bids.

A) d escending; do not B) d escending; do C) a scending; do not D) a scending; do

65) ______

66) I n an English auction, the ________ bidder wins the auction and pays ________.

A) s econd-highest; the amount of the second-highest bidder B) s econd-highest; the amount of the bid C) h ighest; the amount of the second-highest bidder D) h ighest; the amount of the bid

66) ______

67) A ll of the following are true regarding an English auction except which one?

A) B idders usually know the price that causes other participants to drop out of the auction.

B) B idders have a substantial amount of information regarding how other participants value the item.

C) I t is the most common type of auction in business settings.

D) B idders typically know who is participating in the auction.

67) ______

68) A Dutch auction is a(n) ________-bid auction in which participants ________ observe each participant's bids.

A) d escending; do B) a scending; do not C) a scending; do D) d escending; do not

68) ______

69) A sealed-bid first-price auction ________ common in business settings, and participants in this kind of auction ________ observe other participants' bids.

A) i s not; do not B) i s; do not C) i s; do D) i s not; do

69) ______

70) T he winner of a sealed-bid first-price auction is the participant who bid the ________ and pays the amount of the ________.

A) h ighest; bid B) h ighest; second-highest bid C) s econd-highest; second-highest bid D) s econd-highest; bid

70) ______

71) A ll of the following are true regarding a sealed-bid second-price auction except which one?

A) P articipants submit sealed bids.

B) T his kind of auction is common.

C) T he participant with the highest bid wins.

D) T he winner of the auction pays what the second-highest participant bid.

71) ______

72) I n which of the following auction types do participants have substantial information about competitors' bids?

A) s ealed-bid second-price auction B) s ealed-bid first-price auction C) D utch auction D) E nglish auction

72) ______

73) H appy Cows is bidding on a large piece of farm equipment to process their dairy products. The managers of Happy Cows have estimated the additional profit Happy Cows will earn from the piece of equipment and have valued the equipment at $125,000. Happy Cows' value of the farm equipment is ________.

A) a public value B) a n independent private value C) a common value D) a correlated value

73) ______

74) S uppose the U.S. government is auctioning the rights to mine for gold in a government-owned region on the West coast. Gold has been found in areas close to the region to be auctioned and gold has a fixed market price. The value of the rights to mine for gold in this region is an example of ________.

A) a correlated value B) a public value C) a common value D) a n independent private value

74) ______

75) A manager bidding in an auction with independent private values for a large piece of industrial equipment has estimated that the expected profit from the equipment is $10 million. If the manager is indifferent about the uncertainty surrounding the expected profit of the equipment, the manager is ________ and the manager's value of the truck is ________.

A) r isk neutral; less than $10 million B) r isk averse; less than $10 million C) r isk averse; $10 million D) r isk neutral; $10 million

75) ______

Independent Participants Private Values Bidder $9 Million #1 $8 Million Bidder $10 Million #2 $7 Million Bidder $9.5 Million #3 TheBidder table above lists the independent private values of five participants in an auction. #4 their own value and does not know the private values of the other participants.

Bidder #5

Each of the bidders only knows

76) R efer to the table above. Recall that the bidders only know their own private value of the item and they do not know the other participants' private values. Further, assume each participant will submit bids using their optimal strategy. If the participants are bidding in an English auction and the auctioneer sets the opening bid $6 million and increases the bids by $0.25 million until no one submits a higher bid, Bidder ________ wins the auction and pays ________.

A) # 3; $10 million B) # 3; $9.75 million C) # 5; $9.5 million D) # 5; $9.25 million

76) ______

77) R efer to the table above. Recall that the bidders only know their own private value of the item and they do not know the other participants' private values. Further, assume each participant will submit bids using their optimal strategy. If the participants are bidding in a sealed-bid second-price auction, Bidder ________ wins the auction and pays ________.

A) # 3; $9 million B) # 3; $10 million C) # 3; $9.5 million D) # 5; $9.5 million

77) ______

78) R efer to the table above. Recall that the bidders only know their own private value of the item and they do not know the other participants' private values. Further, assume each participant will submit bids using their optimal strategy. If the participants are bidding in a sealed-bid first-price auction, Bidder ________ wins the auction and pays ________.

A) # 5; a value less than $10 million and greater than $9.5 million B) # 5; 9.5 million C) # 3; $10 million D) # 3; a value less than $10 million and greater than $9.5 million

78) ______

79) R efer to the table above. Recall that the bidders only know their own private value of the item and they do not know the other participants' private values. Further, assume each participant will submit bids using their optimal strategy. If the participants are bidding in a Dutch auction, Bidder ________ wins the auction and pays ________.

A) # 3; $10 million B) # 3; a value less than $10 million and greater than $9.5 million C) # 5; a value less than $10 million and greater than $9.5 million D) # 5; 9.5 million

79) ______

80) R efer to the table above. Recall that the bidders only know their own private value of the item and they do not know the other participants' private values. Further, the participants are bidding in a sealed-bid second-price auction and each participant will submit bids using their optimal strategy, except Bidder #5 who submits a bid of $10.25 million. If the rest of the participants submit bids according to their optimal strategy, Bidder ________ wins the auction and pays ________.

A) # 5; $10 million B) # 5; $10.25 million C) $ 3; $10.25 million D) $ 3; $10 million

80) ______

81) I n an independent private values sealed-bid second-price auction, if a participant bids more than their valuation this ________ an inferior strategy because the high bid ________.

A) i s; can only lower the amount paid B) i s; cannot affect the amount paid or raise the amount paid C) i s not; cannot affect the amount paid or raise the amount paid D) i s not; can only lower the amount paid

81) ______

82) I n an independent private values Dutch auction, the more bidders there are in the auction, the ________ the next-highest valuation and the ________ each participant should reduce their bid.

A) c loser; less B) f arther away; more C) f arther away; less D) c loser; more

82) ______

83) I n an auction where values or common or correlated, it is best for firms to participate in auction that have ________ bidders and be ________ aggressive in their bidding strategy when the true value of the item is highly uncertain.

A) m ore; more B) m ore; less C) f ew; more D) f ew; less

83) ______

84) A manager is participating in an auction where values or common or correlated and is not 100 percent certain of the value of the item. The manager ________ reduce their bid below their estimated value to ________ the winner's curse.

A) s hould not; enjoy B) s hould; enjoy C) s hould; avoid D) s hould not; avoid

84) ______

85) B ig Roads Construction is participating in an auction for a government contract to build a large highway. If Big Roads wins the auction, they will build the highway for the bid they submitted.

Big Roads will face the winner's curse if their winning bid is too ________, making Big Roads earn ________ economic profit.

A) l ow; more B) l ow; less C) h igh; less D) h igh; more

85) ______

86) R evenue equivalence ________ hold when the item being auctioned has independent private values and ________ hold when the item being auctioned has a common value.

A) d oes; does not B) d oes not; does C) d oes not; does not D) d oes; does

86) ______

87) W hen an item being auctioned has correlated values and bidders use their optimal strategies, a(n) ________ auction has the highest expected revenue as it has the ________ reduction in bidders' valuations.

A) D utch; smallest B) D utch; largest C) E nglish; greatest D) E nglish; smallest

87) ______

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

88) I n a Dutch auction, participants only observe a single bid.

88) ______

89) A participant's optimal bidding strategy is dependent on how the product is valued.

89) ______

90) I n a correlated-value auction, the unknown, true value of the auction item is the same for all bidders.

90) ______

91) I f, in an auction with independent private values, a manager values an item at a price that is lower than the item's expected profit, the manager is risk neutral.

91) ______

92) I f an item being auctioned has independent private values, the expected revenue is the same for all auction types.

92) ______

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

93) A symmetric information is a situation in which ________ parties to a transaction have relevant private information that is ________ to the other parties.

A) s ome; known B) s ome; unknown C) a ll; unknown D) a ll; known

93) ______

94) S uppose the government is auctioning the right for a company to mine for gold in a government-owned region of the country. Further suppose that the government has information regarding the amount of gold that is likely to be found in the region, but the companies bidding for the rights do not have this information. This is an example of ________.

94) ______

A) t he lemons problem C) t he principal-agent problem

B) a symmetric information D) s creening

95) S uppose a home owner is selling their home and they are aware that the basement has a severe drainage problem and the potential buyers do not have this information. This is an example of ________.

A) s elf-revelation B) t he principal-agent problem C) s creening D) a symmetric information

95) ______

96) A symmetric information can lead to the ________-informed parties to try to take advantage of the ________-informed parties, which can cause ________.

A) l ess; better; moral hazard, but not adverse selection B) l ess; better; adverse selection, but not moral hazard C) b etter; less; moral hazard and adverse selection D) b etter; less; moral hazard, but not adverse selection

96) ______

97) B eing a very careful apartment renter (always locking the door, making sure the stove and iron are off when leaving, etc.) is an example of ________.

A) a hidden characteristic B) s creening C) m oral hazard D) c ertification

97) ______

98) I f an insurance company underestimates the number of high-cost customers, it is likely to face ________.

A) a dverse selection B) m oral hazard C) t he bad apple problem D) t he principal-agent problem

98) ______

99) S uppose an insurance company has estimated that 20 percent of all of its potential policy owners are high-cost and sets a price for their insurance policy with the understanding that 20 percent of its policy owners will be high-cost. If the true percentage of high-cost potential policy owners is 40 percent, the insurance company is likely to face ________.

A) a dverse selection B) t he bad apple problem C) t he principal-agent problem D) m oral hazard

99) ______

100) S uppose an insurance company has estimated that 20 percent of all of its potential policy owners

100) _____

are high-cost and sets a price for their insurance policy with the understanding that 20 percent of its policy owners will be high-cost. If the true percentage of high-cost potential policy owners is 40 percent, the insurance company has set its price too ________ and will have ________ high-cost policy owners than expected.

A) h igh; more B) h igh; less C) l ow; more D) l ow; less 101) T he lemons problem is associated with ________ and results in a market for items with only ________ characteristics.

A) a dverse selection; undesirable B) m oral hazard; desirable C) m oral hazard; undesirable D) a dverse selection; desirable

101) _____

102) A ll of the following are ways for market participants to overcome adverse selection except for which one?

A) s creening B) p rofit-sharing C) c ertification D) s ignaling

102) _____

103) I f a landlord checks a renter's credit history before renting the apartment, this is an example of ________.

A) s creening B) c ertification

103) _____

C) s elf-revelation

D) t he lemons market

104) I f an employer calls an applicant's prior employer to inquire about their work ethic, this is an example of ________.

A) s elf-revelation B) t he principal-agent problem C) c ertification D) s creening

104) _____

105) B ig Health is a large health care insurance provider and offers two types of policies. Policy A has an annual price of $1,000 and a co-pay of $20 (the fee that the policy owner pays when seen by a doctor) and Policy B has an annual price of $500 and a co-pay of $50. Individuals will ________ when they choose a policy and Policy ________ will appeal to healthy individuals who do not plan on needing extensive health care.

105) _____

A) s elf-reveal; B

B) s ignal; A

C) s ignal; B

D) s elf-reveal; A

106) A very high grade point average (GPA) is an example of ________.

A) a credible trademark B) a credible signal C) a symmetric information D) a dverse selection

106) _____

107) I f a roofer offers a one-year warranty on their work, this is an example of ________.

A) c ertification B) a trademark C) p rofit sharing D) a signal

107) _____

108) F or third-party certification to overcome the problem of ________, consumers must believe that it is ________.

A) m oral hazard; biased B) m oral hazard; unbiased C) a dverse selection; biased D) a dverse selection; unbiased

108) _____

109) I f a drug company creates a new drug designed to treat common seasonal allergies is approved by the U.S. Food and Drug Association (FDA), which means the drug can be marketed and sold in the U.S., the approval by the FDA is an example of ________.

A) a trademark B) a certification C) s creening D) s elf-revelation

109) _____

110) I n order for an individual to receive a black belt in karate, they must pass a series of tests designed by a third party. An announcement listing those individuals who received their black belt in karate is an example of ________.

A) a certification B) m oral hazard C) s creening D) a trademark

110) _____

111) I f certification decreases supply and serves as a barrier to entry, it ________ the price and ________ market power of the suppliers already in the market.

A) d ecreases; increases B) d ecreases; decreases C) i ncreases; decreases D) i ncreases; increases

111) _____

112) A ll of the following are true regarding moral hazard except which one?

A) I t arises when parties to a transaction have conflicting objectives and the supervising parties cannot monitor the other parties.

B) I t typically occurs after participants have already entered into a contract or agreement.

C) S ituations of moral hazard tend to be rare occurrences.

D) I t is a situation in which individuals make hidden actions that benefit them at the expense of the other parties.

112) _____

113) S uppose parents hire a baby sitter to take care for their young child while they go out to dinner.

The parents want the baby sitter to play and read stories to their child while they are away, but the baby sitter would prefer to put the child to bed and watch television. Once the parents

leavebaby , if sitter the puts

____ _

the child 113) to bed and watches televisio n, this is an example of ________ .

A) t he lemons problem C) m oral hazard

B) s creening D) a dverse selection

114) A restaurant owner hires a waiter to serve food to customers and clear the tables. The owner wants the waiter to be prompt in bringing out the food and clearing the table once the guests are finished with their meal. The waiter is paid a salary and cannot accept tips. The waiter would prefer to check their Facebook account and take their time waiting the tables. If the waiter does spend considerable time checking their Facebook while the owner is not at the restaurant, which of the following is true?

A) T his is an example of the principal-agent problem and the waiter is the principal and the owner is the agent.

B) T his is an example of adverse selection and the waiter is the agent and the owner is the principal.

C) T his is an example of the principal-agent problem and the waiter is the agent and the owner is the principal.

D) T his is an example of the lemons problem and the waiter is the agent and the owner is the principal.

114) _____

115) A restaurant owner hires a waiter to serve food to customers and clear the tables. The owner wants the waiter to be prompt in bringing out the food and clearing the table once the guests are finished with their meal. The waiter is paid a salary and cannot accept tips. The waiter would prefer to check their Facebook account and take their time waiting the tables. If the waiter does spend considerable time checking their Facebook while the owner is not at the restaurant, the owner can motivate the waiter to be prompt waiting tables (and stop checking Facebook) in each of the following ways except which one?

115) _____

A) L ower the waiter's salary, but allow the waiter to earn a percentage of the restaurant's profit.

B) L ower the waiter's salary, but pay the waiter a bonus based on the number of tables served in an evening.

C) O ffer the waiter a higher salary.

D) L ower the waiter's salary, but allow the waiter to collect tips from customers.

116) A ll of the following methods can be used to motivate agents to advance the principal's agenda rather than their own except for which one?

A) o ffering stock options B) o ffering sales commission C) o ffering certification D) o ffering profit sharing

116) _____

117) S tock options do not eliminate the principal-agent problem entirely for each of the following reasons except which one?

A) A company's executive does not have unlimited control over all employees and their actions.

117) _____

B) A company's stock price rarely changes.

C) A company's stock prices fluctuate for reasons not directly related to a company's profit.

D) A company's profit depends on the actions of all employees.

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

118) E ach time a manager changes the conditions of a sale, they must consider the problem of adverse selection.

118) _____

119) T he lemons problem is an extreme case of moral hazard.

119) _____

120) A well-known company's trademark is an example of a signal.

120) _____

121) I n general, moral hazard occurs at the time of the transaction and adverse selection occurs after the participants have already entered into the contract or agreement.

121) _____

122) T he incentive for a cost-plus-award-fee contract are less specific than a cost-plus-incentive-fee contract.

122) _____

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

123) A ll else equal, forecasting your firm's demand is likely to be less profitable if any of the following are true except for which one?

A) A change in your output level leads to a small change in the firm's marginal cost.

B) I t is difficult to obtain an accurate forecast of your firm's demand.

C) Y our firm experiences small fluctuations in demand.

D) A change in your output level leads to a large change in the firm's marginal cost.

123) _____

124) A large timber farm supplies large building contractors with plywood and stick lumber. The 124) _____ managers of the timber farm have noticed that the demand for their timber tends to fluctuate with long-term business cycles and short-term changes in their timber production lead to sharp increases in their marginal cost. With this information, it is likely that ________-term forecasts are more valuable to the managers of the timber farm and the cost of ________-term forecasts are likely to exceed their benefit.

A) l ong; extended B) s hort; long C) l ong; short D) s hort; extended 125) _ _______-term forecasts are more valuable if a firm's demand changes very frequently and changes in the firm's output level have a ________ effect on its marginal cost.

A) S hort; small B) S hort; large C) L ong; small D) L ong; large

125) _____

126) I f a firm's marginal cost curve is very steep in the short-term, but much flatter in the long-term, all else equal a ________-term forecast is likely to be more valuable than a ________-term forecast.

A) l ong; short B) s hort; long C) s hort; extended D) l ong; extended

126) _____

127) W hen bidders values of an item in an auction are correlated, buyers of an item will ________ their bids and sellers will ________ their bids to avoid the winner's curse.

A) l ower; lower B) l ower; raise C) r aise; lower D) r aise; raise

127) _____

128) A s a manager holding an auction with correlated or common values, you want buyers to place bids that are ________ their estimated valuations and sellers to place bids that are ________ their estimated costs.

A) c lose to; close to B) f ar from; far from C) c lose to; far from D) f ar from; close to

128) _____

129) A s a manager holding an auction with correlated or common values, you want buyers to place bids that are ________ their estimated ________ and sellers to place bids that are close to their estimated ________.

A) c lose to; costs; valuations B) c lose to; valuations; costs C) f ar from; valuations; costs D) f ar from; costs; valuations

129) _____

130) T he local government is holding an auction for a contract to build a new multi-deck parking lot downtown. If the government has a policy to release its own cost estimates of the work to the auction participants, the participants will have ________ confidence in their own cost estimates and will submit ________ bids.

A) m ore; higher B) l ess; more C) l ess; lower D) m ore; lower

130) _____

131) S uppose managers of an art auction house are going to auction a painting that is believed to be painted by a famous artist. If the managers of the auction are able to provide evidence that the painting was created by the famous artist, the participants in the auction will have ________ confidence in their own valuation of the painting and will submit ________ bids.

A) l ess; more B) m ore; lower C) l ess; lower D) m ore; higher

131) _____

132) F resh Air is a large company that repairs residential air conditioners in many homes spread across a state. The company has 50 employees who each have their own repair van. Because the managers of Fresh Air cannot monitor every employee on every repair job, the company sends a satisfaction score card to each customer asking them how pleased they are with the service. If an employee receives a high satisfaction score, the employee receives a bonus. The bonus policy incentives the employees to do all of the following to earn a high satisfaction score except which one?

132) _____

A) O ffer the customers free services or free up-grades on the repairs.

B) S top and take a lunch break on the way to the repair job.

C) P erform a good repair.

D) B e courteous to the customers.

133) W e Deliver for You is a local company that has several couriers who pick up small packages from local offices and hand deliver them to other local office buildings in same day. The managers of We Deliver for You want the couriers to make as many prompt and speedy deliveries a day as possible, and to incentivize the couriers, the managers do not pay the couriers a salary, rather a flat fee per delivery.

This payment policy will incentivize the couriers to do all of the following except which one?

A) m ake prompt deliveries B) a rrive to pick up packages promptly C) d rive fast and take driving risks D) m inimize their daily number of deliveries

133) _____

134) S uppose a heath care provider wants to ensure that its family doctors are offering patients referrals to specialists when appropriate. Offering referrals makes the doctors' work longer as they need to complete considerable paper work. Because the managers of the health care provider cannot monitor doctors during patient visits, the managers require that each doctor refers at least 40 percent of their patients to a specialist each month or face a fine. If less than 40 percent of the patients actually need a referral to a specialist, this policy will result in all of the following occurring except which one?

134) _____

A) P atients who need to see a specialist and might not have otherwise received a referral are now likely to receive a referral.

B) T he doctor turnover rate at this health care provider should decrease.

C) P atients who do not need to see a specialist will be referred to one.

D) D octors' time will be wasted completing unnecessary paper work.

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

135) I f managers holding an auction release more information about the value of the item, they will reduce their profit.

135) _____

136) R egardless of whether an auction's purpose is to sell a product or buy one, providing more information about the value of the auctioned item can benefit the auction's managers because bidders will have more confidence in their valuations.

136) _____

137) R egardless of what policies a manager creates, it is unlikely that the manager can completely solve the principal-agent problem.

137) _____

138) I f restaurant managers have a policy that servers' tips are to be combined and then shared equally at the end of the day, this will incentivize all servers to to take the best care of their customers.

138) _____

139) I n general, if managers are able to make a job more appealing to an employee, this helps managers as it reduces labor turnover.

139) _____

1) D 2) D 3) C 4) B 5) C 6) D 7) D 8) D 9) D 10) A 11) B 12) B 13) A 14) B 15) C 16) D 17) C 18) A 19) D 20) D 21) C 22) D 23) C 24) B 25) A 26) F ALSE 27) T RUE 28) F ALSE 29) T RUE 30) T RUE 31) B 32) D 33) A 34) B 35) B 36) A 37) A 38) A 39) B 40) A 41) B 42) C 43) B 44) B 45) A 46) B 47) A 48) A 49) B 50) C 51) B

52) A 53) C 54) C 55) D 56) A 57) A 58) T RUE 59) T RUE 60) F ALSE 61) F ALSE 62) T RUE 63) A 64) A 65) D 66) D 67) C 68) D 69) B 70) A 71) B 72) D 73) B 74) C 75) D 76) B 77) C 78) D 79) B 80) A 81) B 82) A 83) D 84) C 85) B 86) A 87) D 88) T RUE 89) T RUE 90) F ALSE 91) F ALSE 92) T RUE 93) B 94) B 95) D 96) C 97) A 98) A 99) A 100) C 101) A 102) B 103) A

104) D 105) A 106) B 107) D 108) D 109) B 110) A 111) D 112) C 113) C 114) C 115) C 116) C 117) B 118) T RUE 119) F ALSE 120) T RUE 121) F ALSE 122) T RUE 123) A 124) C 125) A 126) A 127) B 128) A 129) B 130) D 131) D 132) B 133) D 134) B 135) F ALSE 136) T RUE 137) T RUE 138) F ALSE 139) T RUE

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) U sing capital budgeting, managers seek to answer which of the following questions?

A) D oes the anticipated future profit cover the cost incurred in the current period?

B) W hat is the expected future profit?

C) W hat is the expected future cost?

D) D oes the anticipated future cost exceed the profit enjoyed in the current period?

1) _______

2) I n order to analyze costs and benefits that are paid and received at different times, they must be valued at ________ in time as funds received or paid in the future are worth ________ than the same amount received or paid today.

A) d ifferent points; more B) a single point; more C) d ifferent points; less D) a single point; less

2) _______

3) I nterest earned on funds compounds because in future years, interest is earned on ________.

A) f uture values B) t he principal and interest received in previous years only C) i nterest received in previous years only D) p rincipal only

3) _______

4) W hat is the future value of $100 in 2 years that earns an annual interest rate of 5 percent?

A) $ 110.25 B) $ 102.25 C) $ 105.50 D) $ 110.41

4) _______

5) W hat is the future value of $500 in 4 years that earns an annual interest rate of 3 percent?

A) $ 560.25 B) $ 559.12 C) $ 568.67 D) $ 562.75

5) _______

6) I f the present value of an individual's savings account is $100,000, what is its future value in 5 years if the account earns an annual interest rate of 2 percent?

A) $ 110,250.00 B) $ 110,408.08 C) $ 112,125.40 D) $ 109,582.03

6) _______

7) I f the present value of an individual's savings account is $52,354, what is its future value in 3 years if the account earns an annual interest rate of 8 percent?

A) $ 65,950.96 B) $ 64,589.13 C) $ 66,580.89 D) $ 66,320.48

7) _______

8) G iven an annual interest rate of 5 percent, what is the present value of receiving $2,000 in one year?

A) $ 1950.25 B) $ 1980.19 C) $ 1,904.76 D) $ 1934.89

8) _______

9) G iven an annual interest rate of 4 percent, what is the present value of receiving $5,000 in 2 years?

A) $ 4,585.45 B) $ 4,622.78 C) $ 4,535.25 D) $ 4,619.23

9) _______

10) G iven an annual interest rate of 12 percent, what is the present value of receiving $1,000 in 20 years?

A) $ 890.45 B) $ 850.23 C) $ 112.16 D) $ 103.67

10) ______

11) S uppose a supplier has an agreement with a firm to be paid $3,500 in 2 years. If the annual interest rate is 4 percent, the supplier would be indifferent between receiving ________ now and waiting 2 years to receive the $3,500.

A) $ 3,235.95 B) $ 3,233.46 C) $ 3,451.32 D) $ 3,450.45

11) ______

12) S uppose a supplier has an agreement with a firm to be paid $50,000 in 4 years. If the annual interest rate is 1 percent, the supplier would be indifferent between receiving ________ now and waiting 4 years to receive the $50,000.

A) 4 9,557.89 B) $ 48,049.02 C) $ 48,076.92 D) $ 49,550.22

12) ______

13) T he discount factor ________ the ________ value to convert it to the ________ value.

A) r educes; present; future B) i ncreases; future; present C) r educes; future; present D) i ncreases; present; future

13) ______

14) T he greater the interest rate, the ________ the present value and the ________ the discount factor. 14) ______ A) l arger; smaller B) s maller; smaller C) s maller; larger D) l arger; larger 15) A ll of the following will lead to a smaller discount factor except which one?

A) t he longer the period of time until the future sum of money is received B) t he more interest that can be earned C) a larger discount rate D) a smaller discount rate

15) ______

16) W hat is the present value of a payment of $5,000 at the end of one year and a second payment of $7,000 at the end of two years if the interest rate is 5 percent?

A) $ 11,201.84 B) $ 11,111.11 C) $ 12,250.32 D) $ 10,985.14

16) ______

Year 1 2 3 4 5

Present Value of Payment A B C D E

Payment $1,00 0 $1,50 0 $2,00 0 $2,50 The above table shows a 5 year payment plan. Each payment is made at the end of the year, so after one year, a payment 0 of $1,000 is made, after two years another payment of $1,500 is made and so on. The interest rate is 3 percent. $4,00 17) ______ 0 table above. What is the value of A plus B (A + B) or the present value of the first 17) R efer to the two payments?

A) $ 2,384.77

B) $ 970.87

C) $ 2,256.98

D) $ 1,956.12

18) R efer to the table above. What is the value of A plus B plus C (A + B + C) or the present value of the first three payments?

A) $ 4,215.05 B) $ 4,426.89

C) $ 3,998.12

D) $ 4,100.50

19) R efer to the table above. What is the value of A plus B plus C plus D (A + B + C + D) or the present value of the first four payments?

A) $ 6,200.50 B) $ 6,436.27

C) $ 6,225.32

18) ______

19) ______

D) $ 6,589.23

20) R efer to the table above. What is the present value of the entire stream of payments?

A) $ 10,500.56 B) $ 9,886.70 C) $ 9,500.23 D) $ 9,800.14

20) ______

21) R efer to the table above. What sum of money should be deposited today in an account that earns 3 percent interest to make each of the five payments above and, when the last payment is made, there will be no money left in the account?

21) ______

A) $ 9,912.56

B) $ 11,000.00

C) $ 9,723.45

D) $ 9,886.70

22) T he annuity factor ________ by the amount of the annual payment equals the ________ value of payments for the specified number of years at the specified discount rate.

A) m ultiplied; future B) d ivided; future C) m ultiplied; present D) d ivided; present

22) ______

23) W hat is the present value of four payments of $5,000 at the end of each of the next four years if the interest rate is 2 percent?

A) $ 9,430.50 B) $ 19,038.64 C) $ 18,358.12 D) $ 20,000.00

23) ______

24) W hat is the present value of ten payments of $200 at the end of each of the next ten years if the interest rate is 7 percent?

A) $ 1,396.78 B) $ 890.00 C) $ 1,404.71 D) $ 1,825.36

24) ______

25) T he profit-maximizing manager of Big Farms wants to purchase a large piece of farm equipment. The manager has two financing options from two different banks. Big Bank will allow the manager to make five equal payments of $22,000 at the end of each of the next five years. Best Bank will allow the manager to make a payment of $10,000 at the end of the next four years and then make a balloon payment of $72,000 at the end of the fifth year. If the interest rate is 4 percent, which of the following statements is true?

25) ______

A) T he present value of the two payment plans is exactly the same, so the manager of Big Farms is indifferent between the two payment plans.

B) T he manager of Big Farms should select Big Bank's offer because the total repayment is less than the total repayment at Best Bank.

C) T he manager of Big Farms should select Big Bank's offer as the present value of the payment plan is $97,939.60, which is lower than the payment plan offered by Best Bank.

D) T he manager of Big Farms should select Best Bank's offer as the present value of the payment plan is $95,477.75, which is lower than the payment plan offered by Big Bank.

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

26) T he annual interest rate that is used to calculate the discount factor is called the discount rate.

26) ______

27) T he longer the period of time until receiving a future amount of money, the more interest that can be earned, so the larger the discount factor.

27) ______

28) A ll else equal, the present value of a sum of money will be smaller the larger the interest rate.

28) ______

29) A n annuity factor can be used when payments change each year.

29) ______

30) A ll else equal, when a manager is choosing between two payment plans, a profit-maximizing manager should chose the plan with the lowest present value.

30) ______

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

31) T he net present value (NPV) is ________.

A) f uture operating profits from an investment minus the cost of the investment B) p resent value of the future operating profits from an investment plus the present value of the cost of the investment C) p resent value of the future operating profits from an investment minus the present value of the cost of the investment D) f uture operating profits from an investment plus the cost of the investment

31) ______

32) I f the net present value is positive, the present value of the investment's stream of future

operating

___ ___

profits is 32) ________ than the present value of its cost and profit-m aximizin g manager s ________ make the investme nt.

A) l ess; should not C) l ess; should

B) g reater; should D) g reater; should not

33) I f the net present value is exactly equal to zero, the present value of the investment's stream of future operating profits is ________ the present value of its cost.

A) e qual to B) e xactly double C) g reater than D) l ess than

33) ______

34) A s long as the discount rate is ________ the interest rate on a loan, the present value of the cost of an investment equals the initial cost of the investment.

A) g reater than B) e qual to C) l ess than D) e xactly double

34) ______

Year 1 2 3

Future Operating Profits

$10,00 0 $18,00 0 $22,00 The above table shows the future operating profits from an investment. The future operating profits are earned at the 0 end of each of the respective years.

35) R efer to the table above. If the discount rate is 5 percent and the cost of the investment is $42,000, what is the net present value of the investment?

A) $ 3,599.22 B) $ 42,464.22 C) $ 2,854.77 D) $ 44,854.77

35) ______

36) R efer to the table above. If the discount rate is 4 percent and the cost of the investment is $40,000, what is the net present value of the investment?

A) $ 45,815.32 B) $ 6,221.77 C) $ 44,469.77 D) $ 5,815.32

36) ______

37) R efer to the table above. If the discount rate is 6 percent and the cost of the investment is $45,000, what is the net present value of the investment?

A) - $1,074.48 B) - $44,852.36 C) $ 1,100.56 D) $ 43,925.52

37) ______

38) R efer to the table above. If the discount rate is 5 percent and the cost of the investment is $43,000, 38) ______ which of the following is true regarding a profit-maximizing manager?

A) T he manager should not make the investment because the net present value is positive.

B) T he manager should not make the investment because the net present value is negative.

C) T he manager should make the investment because the net present value is negative.

D) T he manager should make the investment because the net present value is positive.

39) R efer to the table above. If the discount rate is 5 percent and the cost of the investment is $45,000, 39) ______ which of the following is true regarding a profit-maximizing manager?

A) T he manager should not make the investment because the net present value is positive.

B) T he manager should not make the investment because the net present value is negative.

C) T he manager should make the investment because the net present value is positive.

D) T he manager should make the investment because the net present value is negative.

40) I f the salvage value is positive the net present value of an investment ________ and this ________ 40) ______ the likelihood that managers will undertake the project.

A) d ecreases; decreases B) i ncreases; decreases C) d ecreases; increases D) i ncreases; increases 41) S uper Haulers is a hauling company and delivers large and heavy materials to construction job sites. Super Haulers is considering purchasing a new dump truck that costs $200,000 and the managers of Super Haulers have estimated that the new dump truck will generate $50,000 a year in future operating profit for the next four years. At the end of four years, Super Haulers can sell the dump truck at a salvage price of $26,000. If the discount rate is 6 percent, what is the net present value of the dump truck?

A) $ 3,583 B) $ 5,228 C) - $744 D) - $6,150

41) ______

42) S uper Haulers is a hauling company and delivers large and heavy materials to construction job sites. Super Haulers is considering purchasing a new dump truck that costs $185,000 and the managers of Super Haulers have estimated that the new dump truck will generate $50,000 a year in future operating profit for the next four years. At the end of four years, Super Haulers can sell the dump truck at a salvage price of $20,000. If the discount rate is 5 percent, which of the following is true if the managers of Super Haulers are profit-maximizing?

42) ______

A) T he manager should not make the investment because the net present value is negative.

B) T he manager should make the investment because the net present value is positive.

C) T he manager should make the investment because the net present value is negative.

D) T he manager should not make the investment because the net present value is positive.

43) T he lower the tax rate, the ________ the after-tax profits and the ________ the after-tax net present value of an investment.

A) l ower; higher B) h igher; higher C) h igher; lower D) l ower; lower

43) ______

44) S uppose a manager of a firm is considering investing in a piece of equipment that will generate $20,000 in future operating profit each year for the next three years. The discount rate is 5 percent and the salvage value of zero. The equipment's current cost is $50,000 and this cost will be financed by the firm. If the tax rate on the firm's profit is 4 percent each year, what is the net present value of the equipment?

A) - $2,581 B) $ 3,569 C) $ 2,286 D) $ 4,464

44) ______

45) F inancing an investment with debt ________ the net present value of the investment because interest payments ________ tax deductible and the full amount of the principal is due in ________.

A) i ncreases; are; the future B) i ncreases; are; present time C) i ncreases; are not; the future D) d ecreases; are; the present time

45) ______

46) A manager is considering investing in a new piece of equipment. The equipment cost $50,000 and the manager will finance the full amount of the cost over three years at an interest rate of 4 percent. In the third year, the manager will repay the entire principal of the loan plus the year's annual interest, after making interest-only payments for the first two years. The equipment will generate $30,000 in future operating profit each of the three years and has a salvage value of zero at the end of the three years. The tax rate on the firm's profit is 8 percent each year. What is the firm's interest-only payment in each of the three years?

A) $ 4,000

B) $ 2,000

C) $ 1,200

D) $ 2,400

47) A manager is considering investing in a new piece of equipment. The equipment cost $50,000 and the manager will finance the full amount of the cost over three years at an interest rate of 4 percent. In the third year, the manager will repay the entire principal of the loan plus the year's annual interest, after making interest-only payments for the first two years. The equipment will generate $30,000 in future operating profit each of the three years and has a salvage value of zero at the end of the three years. The tax rate on the firm's profit is 8 percent each year. What is the net present value of the investment?

A) $ 20,589

B) $ 27,036

C) $ 32,598

46) ______

47) ______

D) $ 35,852

48) E conomists consider economic depreciation to be the ________ in market value from the use of the capital and measure this use in terms of ________ cost.

A) i ncrease; marginal B) d ecrease; marginal C) i ncrease; opportunity D) d ecrease; opportunity

48) ______

49) A ccountants consider depreciation allowance as ________ and ________ it from the firm's operating profit before calculating the tax.

A) a cost; subtract B) p rofit; add C) a cost; add D) p rofit; subtract

49) ______

50) I f the life span of a piece of equipment is 10 years and its current cost is $400,000, what is the straight-line depreciation allowance each year?

A) $ 400 B) $ 40,000 C) $ 400,000 D) $ 4,000

50) ______

51) D epreciation allowance ________ the profit subject to taxation, which ________ the amount of tax 51) ______ the firm pays.

A) d ecreases; decreases B) i ncreases; decreases C) d ecreases; increases D) i ncreases; increases 52) A ll of the following are tax shields except which one?

A) a principal payment on a loan B) s traight-line depreciation C) d epreciation allowances D) a n interest-only payment of a loan

52) ______

53) A firm is considering using its own funds to finance an investment, but needs an estimate of the discount rate. Currently the firm is earning 4 percent on funds held in a bank account and 6 percent on funds held in stocks. If the firm has 20 percent of its funds in the bank account and the remaining 80 percent in stocks, what is the firm's weighted average cost of capital?

A) 5 .8 percent B) 4 .4 percent C) 4 .2 percent D) 5 .6 percent

53) ______

54) I f a project involves risk, managers can account for the risk by ________ the discount rate, which ________ the present value of the future profits.

A) i ncreasing; decreases B) i ncreasing; increases C) d ecreasing; increases D) d ecreasing; decreases

54) ______

55) I n a sensitivity analysis, managers should change ________ variable(s) at a time to determine

how

___ ___

sensitive 55) the ________ value of the investme nt is to the different variables used in the calculati ons.

A) a ll; present

B) a ll; future

C) o ne; future

D) o ne; present

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

56) O perating profits omit interest payments.

56) ______

57) W hen the maximum amount of interest is paid on a loan, the present value of the cost of the investment exceeds the initial cost of the investment.

57) ______

58) S alvage values are strictly positive.

58) ______

59) W hen a firm uses its own funds to self-finance an investment, the operating profit exceeds the taxable profit.

59) ______

60) F inancing an investment with debt increases the net present value of the investment.

60) ______

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

61) A make-or-buy decision examines whether a manager should incur ________-period costs in order to produce ________ in the ________ period(s).

A) p resent; inputs; future B) f uture; outputs; present C) f uture; inputs; present D) p resent; outputs; future

61) ______

62) P roduction of a small quantity of an input is often ________ as firms typically ________ able to enjoy economies of scale.

A) p rofitable; are not B) u nprofitable; are C) p rofitable; are D) u nprofitable; are not

62) ______

63) E conomies of scale are achieved is the long-run average cost curve ________ when output ________.

A) r ises; remains constant B) r ises; rises C) f alls; falls D) f alls; rises

63) ______

64) I f a firm makes its own inputs rather than buying them, it ________ need to be concerned about the hold-up problem and ________ need to be concerned with contract compliance.

A) d oes not; does B) d oes; does C) d oes; does not D) d oes not; does not

64) ______

65) A firm is more likely to produce its own input if all of the following are true except which one?

A) T he firm is concerned about quality control.

B) T he transportation cost of the input is inexpensive.

65) ______

C) T he firm has trade secrets.

D) T he firm experiences economies of scale when producing the input.

66) A firm is more likely to produce its own input if all of the following are true except which one?

A) T he transportation cost of the input is expensive.

B) T he firm has trade secrets.

C) T he firm is concerned about the hold-up problem.

D) T he firm experiences diseconomies of scale when producing the input.

66) ______

67) H ealth Bars markets their snack bars as gluten and nut allergy free. If consumers with gluten or nut allergies become sick due to consuming gluten or nuts in Health Bars snacks, the managers of Health Bars face heavy legal fees. As a result, managers of Health Bars are more likely to produce all of their inputs rather than buy them due to issues with ________.

A) e conomies of scale B) q uality control C) t ransportation costs D) t rade secrets

67) ______

68) A ngelo's Pizza is famous for its secret tomato sauce. The managers of Angelo's Pizza are more likely to produce all of their inputs rather than buy them due to ________.

A) t ransportation costs B) c ommunication costs C) t rade secrets D) e conomies of scale

68) ______

69) S mooth Concrete is a local firm specializing in concrete driveways. Considering that concrete is very heavy, Smooth Concrete is more likely to ________ its own concrete to ________ transportation costs.

A) m ake; reduce B) b uy; increase C) b uy; reduce D) m ake; increase

69) ______

70) I f a firm has a long-run average cost of $2 when it produces 4,000 units of an input and has a long-run average cost of $1 when it produces $10,000 units and the firm needs 10,000 units of the input, the firm ________ experience economies of scale, which makes the firm ________ likely to make the input rather than buy it.

A) d oes not; more B) d oes; less C) d oes not; less D) d oes; more

70) ______

71) M anagers need all of the following information to determine if the firm should make or buy an input except which one?

A) t he quantity of the input the firm needs each year B) t he firm's discount rate C) t he salvage rate of the equipment to make the input D) t he present value of the firm's current profit

71) ______

72) F resh Flour makes baking flour and sells its flour in 4 pound sacks or bags. The managers of Fresh Flour are considering whether the firm should make or buy the flour sacks. To make the sacks, Fresh Flour needs a $500,000 piece of equipment. Using this equipment, Fresh Flour can make a flour sack for $0.01 and, for simplicity, ignore taxes and assume that the $0.01 cost includes depreciation and all other costs. Fresh Flour would finance the $500,000 investment using its own funds and, if it purchased the flour sacks from another firm, it would pay $0.19 a flour sack. The life span of the equipment is 10 years and it has no salvage value at the end of the ten years. If the discount rate is 6 percent and the firm needs 400,000 flour sacks a year, what is the present value of the equipment?

72) ______

A) $ 500,962

B) $ 529,926

C) $ 459,250

D) $ 623,850

73) F resh Flour makes baking flour and sells its flour in 4 pound sacks or bags. The managers of Fresh Flour are considering whether the firm should make or buy the flour sacks. To make the

sacFresh ks, Flour

needs a equipment is 10 years and it has no salvage value at the end of the ten years. If the discount 73) ______ $500,000 rate is 6 percent and the firm needs 400,000 flour sacks a year, what is the net present value of the piece of equipment? equipme nt.

Using this equipme nt, Fresh Flour can make a flour sack for $0.01 and, for simplicit y, ignore taxes and assume that the $0.01 cost includes depreciat ion and all other costs.

Fresh Flour would finance the $500,000 investme nt using its own funds and, if it purchase d the flour sacks from another firm, it would pay $0.19 a flour sack.

The life span of the

A) $ 29,926

B) $ 31,520

C) - $28,126

D) - $45,852

74) F resh Flour makes baking flour and sells its flour in 4 pound sacks or bags. The managers of Fresh Flour are considering whether the firm should make or buy the flour sacks. To make the sacks, Fresh Flour needs a $500,000 piece of equipment. Using this equipment, Fresh Flour can make a flour sack for $0.01 and, for simplicity, ignore taxes and assume that the $0.01 cost includes depreciation and all other costs. Fresh Flour would finance the $500,000 investment using its own funds and, if it purchased the flour sacks from another firm, it would pay $0.19 a flour sack. The life span of the equipment is 10 years and it has no salvage value at the end of the ten years. If the discount rate is 6 percent and the firm needs 400,000 flour sacks a year.

Which of the following statements is true?

74) ______

A) F resh Flour should not invest in the equipment because the net present value is positive.

B) F resh Flour should invest in the equipment because the net present value is positive.

C) F resh Flour should not invest in the equipment because the net present value is negative.

D) F resh Flour should invest in the equipment because the net present value is negative.

75) F resh Flour makes baking flour and sells its flour in 4 pound sacks or bags. The managers of Fresh Flour are considering whether the firm should make or buy the flour sacks. To make the sacks, Fresh Flour needs a $500,000 piece of equipment. Using this equipment, Fresh Flour can make a flour sack for $0.01 and, for simplicity, ignore taxes and assume that the $0.01 cost includes depreciation and all other costs. Fresh Flour would finance the $500,000 investment using its own funds and, if it purchased the flour sacks from another firm, it would pay $0.19 a flour sack. The life span of the equipment is 10 years and it has no salvage value at the end of the ten years. The discount rate is 6 percent. How many flour sacks does Fresh Flour need each year in order for the net present value to be positive?

A) 3 77,416

B) 3 52,589

C) 2 59,666

75) ______

D) 4 12,369

76) S uppose a manager is deciding whether or not to purchase a piece of equipment to make an

76) ______

input internally and has completed the majority of the net present value (NPV) calculations.

The manager has correctly calculated the NPV to be equal to: NPV = ($1.052 × Q) - $250,000, where Q is the annual quantity of the input the firm needs. In order for the NPV to be positive, the firm needs at least ________ units of the input each year.

A) 2 37,643 B) 2 59,600 C) 2 20,890 D) 1 15,960 77) S uppose a manager is deciding whether or not to purchase a piece of equipment to make an

77) ______

input internally and has completed the majority of the net present value (NPV) calculations.

The manager has correctly calculated the NPV to be equal to: NPV = ($1.082 × Q) - $200,000, where Q is the annual quantity of the input the firm needs. If the firm needs 175,000 units of the input each year, the manager ________ buy the equipment because the NPV is ________.

A) s hould; negative B) s hould; positive C) s hould not; positive D) s hould not; negative 78) S uppose a manager is deciding whether or not to purchase a piece of equipment to make an

78) ______

input internally and has completed the majority of the net present value (NPV) calculations.

The manager has correctly calculated the NPV to be equal to: NPV = ($1.023 × Q) - $350,000, where Q is the annual quantity of the input the firm needs. In order for the NPV to be positive, the firm needs at least ________ units of the input each year.

A) 2 89,526 B) 3 42,131 C) 3 50,369 D) 1 53,985 79) S uppose a manager is deciding whether or not to purchase a piece of equipment to make an input internally and has completed the majority of the net present value (NPV) calculations.

The manager has correctly calculated the NPV to be equal to: NPV = ($1.023 × Q) - $350,000,

whthe ere annual Q is quantit

y of the 79) input the firm needs. If the firm needs 355,000 units of the input each year, the manager ________ buy the equipme nt because the NPV is ________ .

A) s hould; positive C) s hould not; negative

___ ___

B) s hould; negative D) s hould not; positive

80) S uppose a manager is deciding whether or not to purchase a piece of equipment to make an

80) ______

input internally and has completed the majority of the net present value (NPV) calculations.

The manager has correctly calculated the NPV to be equal to: NPV = ($1.19 × Q) - $1,000,000, where Q is the annual quantity of the input the firm needs. In order for the NPV to be positive, the firm needs at least ________ units of the input each year.

A) 8 90,562 B) 9 52,260 C) 3 69,566 D) 8 40,337 TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

81) A ll else equal, if a firm has complex input specifications, it is likely cost saving for the firm to buy the input for another firm.

81) ______

82) A ll else equal, if a firm's long-run average cost curve increases as more of an input is produced and the firm requires a large quantity of the input, it is likely cost saving for the firm to buy the input from another firm.

82) ______

83) A ll else equal, if a firm needs a small quantity of an input, it is likely to be cost saving for the firm to make the input.

83) ______

84) I f a firm has a long-run average cost of $4 when it produces 5,000 units of an input and has a long-run average cost of $2 when it produces $12,000 units, the firm is experiences economies of scale.

84) ______

85) A ll else equal, the more of an input a firm needs per year, the more likely that the net present value from making the input internally is positive.

85) ______

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

86) T he issuer of a bond promises to make ________ payments at specified times and repay the ________ at some point in the future and the bond's price in the market ________ fluctuate over the life of the bond.

86) ______

A) p rincipal; interest; cannot C) i nterest; principal; can

B) p rincipal; interest; can D) i nterest; principal; cannot

87) A n increase in the discount rate ________ the present value of a bond and ________ the price of the bond.

A) i ncreases; increases B) d ecreases; increases C) d ecreases; decreases D) i ncreases; decreases

87) ______

88) T he riskier the bond, the ________ the discount rate and the ________ the price of the bond.

A) h igher; higher B) l ower; higher C) l ower; lower D) h igher; lower

88) ______

89) I f a bond offers $1,000 in interest payments at the end of each of next 5 years and a repayment of $10,000 also at the end of the 5 years and the current discount rate is 3 percent, what is the present value of the bond?

A) $ 4,580 B) $ 10,857 C) $ 12,569 D) $ 13,205

89) ______

90) I f a bond offers $2,000 in interest payments at the end of each of next 5 years and a repayment of $10,000 also at the end of the 5 years and the current discount rate is 3 percent, what is the market price for the bond?

A) $ 7,593 B) $ 17,786 C) $ 12,874 D) $ 18,256

90) ______

91) I f a bond offers $400 in interest payments at the end of each of next 3 years and a repayment of $2,000 also at the end of the 3 years and the current discount rate is 5 percent, what is the market price for the bond?

A) $ 2,817 B) $ 2,593 C) $ 3,589 D) $ 2,256

91) ______

92) W hen profits and costs occur in the future, the ________ the profit occurs and the ________ the cost occurs, the ________ likely the net present value will be ________.

A) l ater; sooner; more; positive B) s ooner; later; more; negative C) s ooner; later; more; positive D) s ooner; later; less; positive

92) ______

93) W hen profits occur in the future, the ________ the profit occurs, the ________ it is discounted and the ________ positive effect it has on the net present value.

A) s ooner; less; smaller B) l ater; more; larger C) s ooner; less; larger D) s ooner; more; larger

93) ______

94) W hen costs occur in the future, the ________ the costs occurs, the ________ it is discounted and the ________ negative effect it has on the net present value.

A) s ooner; less; larger B) l ater; more; larger C) l ater; more; smaller D) s ooner; more; smaller

94) ______

95) H ealth Bars is considering a two-year advertising campaign. The campaign will cost $50,000 at

95) ______

the end of the first year and $60,000 at the end of two years. The managers of Health Bars have estimated that the campaign will generate $40,000 a year in additional profit for the next three years. If the discount rate is 5 percent, what is the net present value of the advertising campaign?

A) $ 5,200 B) $ 6,889 C) $ 12,582 D) $ 2,542 96) H ealth Bars is considering a two-year advertising campaign. The campaign will cost $60,000 at the end of each of the two years. The managers of Health Bars have estimated that the campaign will generate $42,000 a year in additional profit for the next three years. If the discount rate is 4 percent, what is the net present value of the advertising campaign?

96) ______

A) $ 2,896

B) $ 5,125

C) $ 3,388

D) $ 3,952

97) S ail with Us is considering a three-year advertising campaign. The campaign will cost $100,000 at the end of each of the three years. The managers of Sail with Us have estimated that the campaign will generate $80,000 a year in additional profit for the next five years. If the discount rate is 2 percent, what is the net present value of the advertising campaign?

A) $ 88,688 B) $ 90,213 C) $ 78,569 D) $ 95,228

97) ______

98) U nder current U.S. tax laws, the interest paid on any debt-financed investment ________ tax deductible and the interest expense ________ the net present value of an investment.

A) i s not; lowers B) i s not; raises C) i s; lowers D) i s; raises

98) ______

99) D epreciation allowance ________ the taxes a firm must pay and ________ the net present value of an investment.

A) d ecreases; increases B) i ncreases; increases C) d ecreases; decreases D) i ncreases; decreases

99) ______

100) A ll else equal, ________ is likely to have a greater ________ effect on the net present value than ________.

A) s traight-line deprecation; positive; immediate depreciation B) e xpensing the investment; negative; straight-line deprecation C) e xpensing the investment; positive; straight-line deprecation D) s traight-line deprecation; positive; expensing the investment

100) _____

101) A ll else equal, the sooner a depreciation allowance is taken, ________.

A) t he less likely the net present value of the investment will be positive B) t he more likely the net present value of the investment will be negative C) t he less likely the net present value of the investment will be affected D) t he more likely the net present value of the investment will be positive

101) _____

102) A n immediate depreciation allowance is referred to as ________ and it ________ the tax shield.

A) s traight-line depreciation; increases B) s traight-line depreciation; decreases C) e xpensing the investment; decreases D) e xpensing the investment; increases

102) _____

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

103) T he present value of a bond is the only price that buyers are willing to spend on the bond and the only price sellers are willing to accept for the bond.

103) _____

104) J unk bonds sell for higher prices than non-junk bonds.

104) _____

105) A profit-maximizing manager should always calculate the net present value and use the net present value rule to evaluate any business decision that involves the payment or receipt of money at different times in the future.

105) _____

106) P rofit-maximizing managers should make efforts to receive profits in future and incur costs in the present.

106) _____

107) I nterest paid of debt-financed investments is referred to as a tax shield.

107) _____

1) A 2) D 3) B 4) A 5) D 6) B 7) A 8) C 9) B 10) D 11) A 12) B 13) C 14) B 15) D 16) B 17) A 18) A 19) B 20) B 21) D 22) C 23) B 24) C 25) D 26) T RUE 27) F ALSE 28) T RUE 29) F ALSE 30) T RUE 31) C 32) B 33) A 34) B 35) C 36) D 37) A 38) D 39) B 40) D 41) D 42) B 43) B 44) C 45) A 46) B 47) B 48) D 49) A 50) B 51) A

52) A 53) D 54) A 55) D 56) T RUE 57) F ALSE 58) F ALSE 59) F ALSE 60) T RUE 61) A 62) D 63) D 64) D 65) B 66) D 67) B 68) C 69) A 70) D 71) D 72) B 73) A 74) B 75) A 76) A 77) D 78) B 79) A 80) D 81) F ALSE 82) T RUE 83) F ALSE 84) T RUE 85) T RUE 86) C 87) C 88) D 89) D 90) B 91) A 92) C 93) C 94) C 95) B 96) C 97) A 98) D 99) A 100) C 101) D 102) D 103) T RUE

104) F ALSE 105) T RUE 106) F ALSE 107) T RUE