Financial Management and Economics Midterm Exam - 693 Verified Questions

Financial Management and Economics

Midterm Exam

Course Introduction

This course provides a comprehensive introduction to the essential principles of financial management and economics, blending core theoretical concepts with real-world application. Students will explore the fundamentals of financial decision-making in organizations, including budgeting, capital structure, investment analysis, and risk management. The economic aspect of the course covers microeconomic and macroeconomic theories that impact financial markets, resource allocation, and business strategy. By integrating both disciplines, the course equips students with the analytical tools and practical knowledge needed to understand how financial and economic factors drive business success in a global context.

Recommended Textbook

Managerial Economics Theory Applications and Cases 8th Edition by W. Bruce Allen

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Chapter 1: Introduction

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Q1) California imposes strict new regulations on the blending of gasoline that increase production costs.As a result,the:

A) demand for gasoline will increase.

B) demand for gasoline will decrease.

C) supply of gasoline will increase.

D) supply of gasoline will decrease.

E) demand for and supply of gasoline will not change.

Answer: D

Q2) Managers make decisions that contribute to the profitability of a firm by:

A) exploiting market efficiencies.

B) taking on risks.

C) engaging in illegal behavior.

D) maximizing sales.

E) manipulating the share price of the firm's stock.

Answer: B

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Chapter 2: Demand Theory

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Sample Questions

Q1) The formula for the cross-price elasticity of demand can be written as:

A) \(\eta\)_XY = (\(\Delta\)Q_X / \(\Delta\)P_Y)(P_Y / Q_X)

B) \(\eta\)_XY = (\(\Delta\)P_Y / \(\Delta\)Q_X)(P_Y / Q_X).

C) \(\eta\)_XY = (\(\Delta\)P_Y / \(\Delta\)Q_X)(P_Y / Q_X)

D) \(\eta\)_XY = (\(\Delta\)P_Y / \(\Delta\)Q_X)(Q_X / P_Y).

E) none of the above.

Answer: A

Q2) Marginal revenue can be defined as the:

A) percent increase in total revenue resulting from a 1% increase in output.

B) increase in total revenue resulting from a 1-unit increase in output.

C) total revenue divided by output.

D) average revenue multiplied by output.

E) average revenue multiplied by output divided by 4.

Answer: B

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Chapter 3: Consumer Behavior and Rational Choice

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Sample Questions

Q1) The marginal rate of substitution of X for Y is defined as:

A) P_X/P_Y.

B) P_XP_Y.

C) MU_X MU_Y.

D) MU_X/MU_Y.

E) MU_X/P_X.

Answer: D

Q2) Suppose Al is currently consuming five movies and two concerts per month.If his utility function is given by U = 15MC,where M represents the number of movies seen and C represents the number of concerts attended,Al's total utility is equal to: A) 10.

B) 15.

C) 30.

D) 75.

E) 150.

Answer: E

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Chapter 4: Estimating Demand Functions

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Q1) The coefficient of determination from a regression represents the:

A) proportion of variation in the dependent variable explained by variation in the independent variables.

B) proportion of variation in the independent variables explained by variation in the dependent variable.

C) variation in the dependent variable.

D) proportion of the variation in the dependent variable.

E) proportion of the variation in the independent variable.

Q2) The difference between the observed value of a dependent variable and the value we estimate using regression analysis is known as a(n):

A) aberration.

B) correlation.

C) dependent variable.

D) mistake.

E) residual.

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6

Chapter 5: Production Theory

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Sample Questions

Q1) Increasing returns to scale:

A) occur only where marginal returns are increasing.

B) cannot occur if all inputs have diminishing returns.

C) imply imperfect capital market returns.

D) result from just-in-time production.

E) are consistent with diminishing marginal returns by all inputs.

Q2) An isoquant represents combinations of inputs that:

A) produce the same level of output.

B) produce increasing amounts of output.

C) minimize costs.

D) maximize output.

E) create wealth.

Q3) Hedge Fun is a landscaping firm that specializes in topiary.Last year,the firm had 60 employees and served 120 customers.This year,it had 70 employees and served 140 customers.What is the marginal product of labor?

A) 2.

B) 3.

C) 4.

D) 5.

E) None of the above.

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Chapter 6: The Analysis of Costs

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Sample Questions

Q1) If Hilltop Turf Farm's total cost of producing acres of sod is TC = 0.2Q² + 120Q + 5,000,the marginal cost of producing the 50th acre of sod is:

A) $110.

B) $120.

C) $130.

D) $140.

E) $150.

Q2) Where long-run average cost equals short-run average cost:

A) short-run average cost is minimized.

B) long-run average variable cost equals short-run average variable cost.

C) long-run average cost equals long-run marginal cost.

D) long-run average cost is minimized.

E) long-run marginal cost equals short-run marginal cost.

Q3) The opportunity cost doctrine says that opportunity costs:

A) and economic costs differ by the amount of implicit costs.

B) should always be greater than explicit costs.

C) should usually be greater than explicit costs.

D) and the firm's production costs determine the firm's economic cost of production.

E) can never be properly figured by accountants.

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Page 8

Chapter 7: Perfect Competition

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Sample Questions

Q1) If the demand increases for the product of a decreasing-cost industry:

A) short-run price goes up, but long-run price falls.

B) long-run output goes up, but long-run price may go up or down.

C) short-run output goes up, but long-run output may go up or down.

D) long-run output goes up, but short-run price remains constant.

E) long-run price goes up, but short-run price may go up or down.

Q2) If the perfectly competitive market supply of pork bellies shifts from Q_S_,93 = 250 + 50P to Q_S_,94 = 400 + 40P,and the market demand is given by Q_D = +10,000 - 200P,then the change in equilibrium quantity will be:

A) 200 units.

B) 100 units.

C) 0 units.

D) -100 units.

E) -200 units.

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Chapter 8: Monopoly and Monopolistic Competition

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Sample Questions

Q1) If the profit-maximizing markup price is marginal cost times 2,the elasticity of demand must be:

A) -0.

B) -1/2.

C) -1.

D) -4/3.

E) -2.

Q2) Harriet Quarterly wants a 25% return on the $100 of assets she has in her company.Her average variable costs are $50 per unit,and she has no fixed costs.If she sells 10 units,what price should she charge?

A) $52.50.

B) $62.50.

C) $75.00.

D) $87.50.

E) $125.00.

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10

Chapter 9: Managerial Use of Price Discrimination

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Sample Questions

Q1) A firm with production located in a poor Georgia town sells toys locally for $10 each and ships the same toys to sell in a wealthy North Carolina town for $15 each.They are not price discriminating if:

A) laws in Georgia allow it.

B) laws in North Carolina allow it.

C) total advertising costs are $5 per unit.

D) total transportation costs are $5 per unit.

E) consumers in North Carolina would pay more than $15 for the toys.

Q2) The demand for health club services is Q = 100 - 2P,and the marginal cost of providing these services is MC = -110 + 2Q.If a two-part tariff pricing system is used,what is the optimal price and quantity combination?

A) P = 18 and Q = 64.

B) P = 199 and Q = 52.

C) P = 26 and Q = 162.

D) P = 162 and Q = 26.

E) None of the above.

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Chapter 10: Bundling and Intrafirm Pricing

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Sample Questions

Q1) A firm has a division that produces X,whose total costs are TC = 10 + Q² (where Q is the quantity of X).The marketing division adds its own total costs of 5 + 3Q.In the competitive external market for X,the wholesale price is $10.The transfer price of X should be:

A) $2.

B) $5.

C) $10.

D) $12.

E) $15.

Q2) When consumers can purchase a set of goods as a bundle or separately,then the seller is engaging in:

A) simple bundling.

B) complex bundling.

C) performance bundling.

D) mixed bundling.

E) engaged bundling.

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Chapter 11: Oligopoly

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Sample Questions

Q1) In the United States most cartels were declared illegal by the:

A) Sherman Antitrust Act.

B) Interstate Commerce Commission.

C) Supreme Court.

D) Constitution.

E) Declaration of Independence.

Q2) Suppose duopolists in the market for spring water share a market demand curve given by P = 50 - 0.02Q,where P is the price per gallon and Q is thousands of gallons of water per day.The marginal cost of producing water is near zero for both firms.If one firm acts as a first mover,the second firm will produce:

A) 0 gallons of water per day per firm.

B) 625 gallons of water per day.

C) 833 gallons of water per day.

D) 1,250 gallons of water per day.

E) 2,500 gallons of water per day.

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13

Chapter 12: Game Theory

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Sample Questions

Q1) A most-favored-customer clause:

A) is a commitment but not a threat.

B) is a threat but not a commitment.

C) is both a threat and a commitment.

D) is neither a threat nor a commitment.

E) could be either a threat or a commitment depending on the terms.

Q2) By definition,a Nash equilibrium in a duopoly is the situation in which each player:

A) plays a dominant strategy.

B) plays the best strategy given the other's strategies.

C) gets the highest possible payoff.

D) gets the highest payoff possible without lowering the opponent's payoff.

E) is happy with the outcome.

Q3) A player in a game theoretic model is:

A) anyone working for a firm that is operating strategically.

B) a decision-making entity at a firm involved in a strategic game.

C) a firm that is operating as a perfect competitor.

D) a monopolist who produces a unique product with no close substitutes.

E) a stockholder at a firm involved in a strategic game.

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Chapter 13: Auctions

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Sample Questions

Q1) Betty has bid $2,000 on a painting that she is buying for investment purposes.If she has a 40% chance of winning the auction and the price paid by the auction winner is $1,500,the expected profit of the auction is:

A) $0.

B) $200.

C) $500.

D) $800.

E) $2,000.

Q2) The winner's curse is an issue only when:

A) an auction is conducted by sealed bid.

B) an auction is an increasing value auction.

C) an auction is a decreasing bid auction.

D) the true value of the good or service being auctioned is unknown.

E) bidders are able to collude.

Q3) Regardless of the rules of an auction,the winner will pay:

A) his or her reservation price for the good at auction.

B) the true value of the good at auction.

C) the expected value of the good at auction.

D) the maximum amount that he or she is willing to pay for the good at auction.

E) the reservation price of the second highest bidder for the good at auction.

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Chapter 14: Risk Analysis

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Sample Questions

Q1) For constants a and b,0 < b,b \(\neq\) 1,and expected profit E(\(\pi\)),the expected utility function of a person who is risk-neutral can be written as E(U)= :

A) a + bE(\(\pi\)).

B) a - bE(\(\pi\)).

C) a + b^\(\pi\).

D) a + [E(\(\pi\))]^b.

E) a + [E(\(\pi\))]^-^b.

Q2) George is indifferent between $100 and a bet with a 0.6 chance of $50 and a 0.4 chance of $200.If U(50)= a and U(200)= b,then U(100)= :

A) 0.4a + 0.6b.

B) 0.6a + 0.4b.

C) (a + b) / 2.

D) a + b.

E) 6a + 4b.

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Page 16

Chapter 15: Principalagent Issues and Managerial Compensation

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Sample Questions

Q1) Firms can avoid or limit the asset substitution problem by:

A) funding with equity.

B) establishing a reputation for protecting creditors.

C) insuring bondholders against risk.

D) applying to the government for insurance for bondholders.

E) a, b, and c.

Q2) The moral-hazard problem occurs when:

A) a consumer of insurance changes his or her behavior in such a way as to decrease the probability of a payoff.

B) a consumer of insurance changes his or her behavior in such a way as to increase the probability of a payoff.

C) insurance companies change their behaviors in such a way as to increase the probabilities of a payoff.

D) insurance companies change their behaviors in such a way as to decrease the probabilities of a payoff.

E) none of the above.

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Chapter 16: Adverse Selection

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Sample Questions

Q1) Requiring applicants for life insurance to undergo a physical examination is an effective way to:

A) reduce moral hazard.

B) increase information asymmetry.

C) reduce adverse selection.

D) increase sales.

E) none of the above.

Q2) Which of the following is the best example of adverse selection?

A) Smokers are more likely to obtain health insurance.

B) Safe drivers tend to get auto insurance.

C) All drivers are required to have auto insurance if they are to register their cars legally in Connecticut.

D) Both healthy and unhealthy people tend to buy life insurance.

E) Given the existence of government-funded flood insurance, people continue to build homes in floodplains.

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Chapter 17: Government and Business

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Sample Questions

Q1) The first federal antitrust law was the:

A) Sherman Act.

B) Clayton Act.

C) Federal Trade Commission Act.

D) Robinson-Patman Act.

E) Celler-Kefauver Act.

Q2) The Supreme Court case that reestablished sheer size as a violation per se of the antitrust laws was the:

A) Alcoa case.

B) Standard Oil case.

C) Von's Grocery case.

D) Brown Shoe case.

E) IBM case.

Q3) Transferable emissions permits establish property rights to:

A) generate a certain amount of pollution.

B) generate more business for the Chicago Board of Trade.

C) reduce the regulatory burden of the FTC.

D) allocate the costs of pollution control equitably.

E) generate unlimited amounts of specified pollutions.

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Page 19

Chapter 18: Optimization Techniques

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Q1) If Y = 3X / (3X + X ²),then dY/dX is:

A) [(3 + 2X)3X + 3(3X + X ²)] / (3X + X ²)².

B) (3 + 2X)3X / (3X + X²)².

C) -3 / (3 + X)².

D) [(3 + 2X) - 3(3X + X ²)] / (3X + X ²)².

E) (3 + 2X)3X / (3X + X²).

Q2) The chain rule of differentiation is:

A) Y = U(W(X)) \(\rarr\)dY/dX = dY/dX dW/dX.

B) Y = U(W(X))\(\rarr\) dY/dX = dU/dW dW/dX.

C) Y = U(W(X))\(\rarr\) dY/dX = dU/dX dW/dX.

D) Y = U(W(X)) \(\rarr\) dY/dX = dW/dU dU/dX.

E) Y = U(W(X)) \(\rarr\) dY/dX = dU/dU dU/dX.

Q3) A function of one argument is minimized when the first derivative is:

A) zero and the second derivative is positive.

B) positive and the second derivative is negative.

C) zero and the second derivative is negative.

D) negative and the second derivative is positive.

E) zero and the second derivative is zero.

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Chapter 19: Appendix Problems

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Sample Questions

Q1) If the annual interest rate is i,the present value of $X to be received at the end of each of the next n years is:

A) $X/i.

B) $X/(1 + i)ⁿ.

C) \( \$ X \sum_{t=1}^{n} 1 /(1+i)^{t} \)

D) $X[(1 + i)ⁿ] / [ i(1 + i)ⁿ - 1].

E) $X / [i(1 + i)ⁿ - 1].

Q2) If the annual interest rate is 25%,the present discounted value of $100 to be received in one year is:

A) $75.

B) $80.

C) $100.

D) $120.

E) $125.

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