Financial Management Review
Questions
Course Introduction
Financial Management is a core course that introduces the fundamental principles and techniques used in managing a firm's finances. The course covers topics such as financial analysis, budgeting, capital structure, working capital management, risk assessment, and investment decision-making. Students will learn to interpret financial statements, evaluate financial performance, and apply various tools to make sound financial decisions that maximize shareholder value. Emphasis is placed on understanding the role of the financial manager in both short-term and long-term planning, as well as ethical considerations in financial practices.
Recommended Textbook
Managerial Economics and Business Strategy 8th Edition by Michael Baye
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14 Chapters
1968 Verified Questions
1968 Flashcards
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Page 2
Chapter 1: The Fundamentals of Managerial Economics
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143 Verified Questions
143 Flashcards
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Sample Questions
Q1) New firms have incentive to enter an industry when there is(are):
A) new production technologies.
B) positive economic profits.
C) an abundance of labor.
D) high capital costs.
Answer: B
Q2) Consumer-consumer rivalry:
A) increases the negotiating power of consumers in the marketplace.
B) reduces the negotiating power of producers in the marketplace.
C) reduces the negotiating power of consumers in the marketplace.
D) increases the likelihood of government intervention in the marketplace.
Answer: C
Q3) Scarce resources are ultimately allocated toward the production of goods most wanted by society because:
A) firms attempt to maximize profits.
B) they are most efficiently utilized in these areas.
C) consumers demand inexpensive goods and services.
D) managers are benevolent.
Answer: A
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Page 3
Chapter 2: Market Forces: Demand and Supply
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150 Verified Questions
150 Flashcards
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Sample Questions
Q1) Graphically, a decrease in advertising will cause the demand curve to: A) become steeper.
B) shift rightward.
C) become flatter.
D) shift leftward.
Answer: D
Q2) Suppose the demand for X is given by Q<sub>x</sub><sup>d</sup> = 1002P<sub>X</sub> + 4P<sub>Y</sub> + 10M + 2A, where P<sub>X</sub> represents the price of good X, P<sub>Y</sub> is the price of good Y, M is income and A is the amount of advertising on good X. Good X is A) an inferior good.
B) a normal good.
C) a Giffen good.
D) a complement.
Answer: B
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4
Chapter 3: Quantitative Demand Analysis
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170 Verified Questions
170 Flashcards
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Sample Questions
Q1) If the own price elasticity of demand is infinite in absolute value, then:
A) demand is perfectly elastic.
B) the demand curve is vertical.
C) consumers do not respond at all to changes in price.
D) the demand curve is vertical and consumers do not respond at all to changes in price.
Answer: A
Q2) If the absolute value of the own price elasticity of demand is greater than 1, then demand is said to be:
A) elastic.
B) inelastic.
C) unitary elastic.
D) neither elastic, inelastic, nor unitary elastic.
Answer: A
Q3) Demand tends to be:
A) more elastic in the short term than in the long term.
B) more inelastic in the short term than in the long term.
C) equally elastic in the short term and in the long term.
D) None of the statements is correct.
Answer: B
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Chapter 4: The Theory of Individual Behavior
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179 Flashcards
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Sample Questions
Q1) A decrease in the price of good Y will have what effect on the budget line on a normal X-Y graph?
A) Increase the vertical intercept
B) Decrease the horizontal intercept
C) Parallel outward shift of the line
D) Parallel inward shift of the line
Q2) Some individuals choose to undertake risky prospects while others choose safer ones because they have different:
A) degrees of transitivity.
B) marginal rates of substitution between risk and reward.
C) income elasticities.
D) marginal utilities.
Q3) Given that income is $200 and the price of good Y is $40, what is the vertical intercept of the budget line?
A) 8,000
B) 20
C) 1/5
D) 5
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6
Chapter 5: The Production Process and Costs
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Sample Questions
Q1) For the multiproduct cost function C(Q<sub>1</sub>, Q<sub>2</sub>) = 100 + 2Q<sub>1</sub>Q<sub>2</sub> + 4Q<sub>1</sub><sup>2</sup>, what is the marginal cost function for good one?
A) MC<sub>1</sub> = 2Q<sub>2</sub> + 4Q<sub>1</sub>Q<sub>2</sub><sup>2</sup>.
B) MC<sub>1</sub> = 2Q<sub>2</sub> + 8Q<sub>1</sub>.
C) MC<sub>1</sub> = 100 + 2Q<sub>1</sub>Q<sub>2</sub> + 4Q<sub>1</sub><sup>2</sup>.
D) MC<sub>1</sub> = 4Q<sub>1</sub><sup>2</sup> - 2Q<sub>2</sub><sup>2</sup>.
Q2) Constant returns to scale exist when long-run average costs:
A) increase as output is increased.
B) decrease as output is increased.
C) remain constant as output is increased.
D) None of the statements is correct.
Q3) An isoquant defines the combination of inputs that yield the producer:
A) higher levels of output than the desired level of output.
B) lower levels of output than the desired level of output.
C) the same level of output.
D) None of the statements is correct.
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Page 7
Chapter 6: The Organization of the Firm
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157 Flashcards
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Sample Questions
Q1) A relationship-specific exchange occurs when:
A) a partnership is dissolved.
B) specialized investments are important.
C) a partnership is initiated.
D) shareholders receive dividends.
Q2) Time clocks are typically a solution to the:
A) manager-consumer, principal-agent problem.
B) manager-owner, principal-agent problem.
C) consumer-worker, principal-agent problem.
D) None of the statements is correct.
Q3) To ensure quality, piece-rate plans must usually be accompanied by:
A) quality control mechanisms.
B) time clocks.
C) spot checks.
D) profit-sharing plans.
Q4) Which of the following is NOT a means of avoiding opportunism?
A) Contracts
B) Spot exchange
C) Vertical integration
D) Long-term contracts
Page 8
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Chapter 7: The Nature of Industry
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Sample Questions
Q1) Which of the following measures market structure?
A) Four-firm concentration ratio
B) Lerner index
C) Herfindahl-Hirschman index
D) All of the choices may be used to make inferences about market structure.
Q2) Alpha Industries operates in a highly competitive market. While there are few other firms in the industry due to the high fixed costs of building plants, rival firms are very aggressive in their pricing strategies. Of the products sold in the industry, over 80 percent have 10 years of patent protection remaining. Does this industry meet an economist's definition of a perfectly competitive industry?
Q3) Having worked for many of the firms in the petroleum industry, you know that the price elasticity of demand for a representative firm is about -1.25. Moreover, a recent report from an economist in your office revealed that the price elasticity of demand for the petroleum products sold by your firm is -1.5. Based on this information, you know that the Rothschild index is:
A) 0.833.
B) 1.20.
C) -1.20.
D) -0.833.
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Page 9
Chapter 8: Managing in Competitive, Monopolistic, and
Monopolistically Competitive Markets
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130 Verified Questions
130 Flashcards
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Sample Questions
Q1) There is no market supply curve in:
A) a perfectly competitive market.
B) a monopolistically competitive market.
C) a monopolistic market.
D) monopolistically competitive and monopolistic markets.
Q2) You are a monopolist with the following cost and demand conditions: P = 100 - 2Q and C(Q) = 50 + Q<sup>2</sup>.
a. Determine the profit-maximizing output and price.
b. Graph this solution.
c. Show your profits and the deadweight loss to society in your graph.
d. Determine the actual amount of deadweight loss.
Q3) A monopoly has two production plants with cost functions C<sub>1</sub> = 50 + 0.1Q<sub>1</sub><sup>2</sup> and C<sub>2</sub> = 30 + 0.05Q<sub>2</sub><sup>2</sup>. The demand it faces is Q = 500 - 10P. What is the profit-maximizing price?
A) $12.5 per unit
B) $6.25 per unit
C) $31.25 per unit
D) $18.75 per unit
Page 10
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Chapter 9: Basic Oligopoly Models
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Sample Questions
Q1) Which of the following is true?
A) In Bertrand oligopoly markets, each firm believes that its rivals will hold their output constant if it changes its output.
B) In Cournot oligopoly markets, firms produce an identical product at a constant marginal cost and engage in price competition.
C) In Sweezy oligopoly markets, each firm believes rivals will cut their prices in response to a price reduction, but will not raise prices in response to price increases.
D) In oligopoly markets, a change in marginal cost never has an effect on output or price.
Q2) Consider a market consisting of two firms where the inverse demand curve is given by P = 500 - 2(Q<sub>1</sub> + Q<sub>2</sub>). If the Stackelberg leader's and follower's marginal costs are zero, the leader's marginal revenue is:
A) MR(Q<sub>L</sub>, Q<sub>F</sub>) = 125 - Q<sub>L</sub> + 0.5Q<sub>F</sub>.
B) MR(Q<sub>L</sub>) = 250 - 2Q<sub>L</sub>.
C) MR(Q<sub>F</sub>) = 250 - 2Q<sub>F</sub>.
D) MR(Q<sub>L</sub>, Q<sub>F</sub>) = 125 - 0.5Q<sub>L</sub> + Q<sub>F</sub>.
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11
Chapter 10: Game Theory: Inside Oligopoly
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Sample Questions
Q1) There are two existing firms in the market for computer chips. Firm A knows how to reduce the production costs for the chip and is considering whether to adopt the innovation or not. Innovation incurs a fixed setup cost of C, while increasing the revenue. However, once the new technology is adopted, another firm, B, can adopt it with a smaller setup cost of C/2. If A innovates and B does not, A earns $20 in revenue while B earns $0. If A innovates and B does likewise, both firms earn $15 in revenue. If neither firm innovates, both earn $5. Under what condition will firm B have an incentive to adopt if firm A adopts the innovation?
A) C > 30
B) C < 30
C) 10 > C > 0
D) 35 > C > 25
Q2) Collusion is:
A) legal in the United States.
B) not possible when firms interact repeatedly forever.
C) more likely in industries with a large number of firms.
D) None of the answers is correct.
Q3) According to various trade publications, over 200,000 changes are made in airfares each day. Why do you think this is the case?
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Page 12
Chapter 11: Pricing Strategies for Firms With Market Power
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140 Verified Questions
140 Flashcards
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Sample Questions
Q1) You are a truck farmer and bring produce to a farmer's market every Wednesday. You have found that on a typical day, five other farmers bring their produce to market. Years of experience have taught you that you make the most money by pricing your produce at 1.15 times your marginal cost. What is your elasticity of demand in this Cournot oligopoly? What is the market elasticity of demand?
Q2) The special cost structure that is necessary for a firm to adopt a peak-load pricing policy is:
A) economies of scale.
B) economies of scope.
C) constant marginal cost.
D) limited capacity.
Q3) During the 1990s, several airlines were on the brink of bankruptcy. These same airlines were giving away millions of dollars in free airline travel through their frequent-flyer programs. Do you think it would have been a good idea for these airlines to eliminate their frequent-flyer programs in order to earn higher profits? Explain.
Q4) Many restaurants have found that it is advantageous to offer free appetizers with a two-drink minimum during a limited number of hours. Is this profit-maximizing behavior? Why or why not?
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Chapter 12: The Economics of Information
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128 Flashcards
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Sample Questions
Q1) Suppose a consumer has determined that her reservation price, R, is $75. The expected benefit of an additional search at this reservation price is $25. Based on this information we can conclude that:
A) search costs are $25 per search.
B) this consumer will reject any price above $25.
C) this consumer will accept any price below $75.
D) search costs are $25 per search, and this consumer will accept any price below $75.
Q2) The optimal bid for an individual participating in a first-price, sealed-bid auction with independent private values is to bid:
A) more than the individual's valuation of the item.
B) less than the individual's valuation of the item.
C) exactly the individual's valuation of the item.
D) There is not an optimal bid strategy for all individuals when independent private values exist.
Q3) Why do life insurance policies have clauses stipulating that the company will not pay benefits for suicide within one year from the policy date?
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Page 14
Chapter 13: Advanced Topics in Business Strategy
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89 Flashcards
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Sample Questions
Q1) A two-way network that links users and in which the per-unit value of the service increases as the size of the network increases is a:
A) positive externality known as an indirect network externality.
B) negative externality known as an indirect network externality.
C) positive externality known as a direct network externality.
D) negative externality known as a direct network externality.
Q2) Sanford Inc. currently competes in a duopoly. The market price is $10, and Sanford's annual profit is $10 million. If Sanford were the only firm in the market, it could charge the monopoly price of $25 per unit and earn $35 million annually for an indefinite period of time. By charging $5 per unit for one year, Sanford could drive its rival out of the market and maintain a monopoly position indefinitely. However, this strategy will result in a $20 million loss since its marginal cost is $8 per unit.
a. What pricing strategy is the manager considering?
b. Ignoring legal considerations, is this pricing strategy profitable? Assume the interest rate is 5 percent and, for simplicity, that any current period profits or losses occur immediately (at the beginning of the year).
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Chapter 14: A Managers Guide to Government in the Marketplace
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Sample Questions
Q1) The Clean Air Act aids new entrants in a regulated industry when demand increases and provides an incentive for existing firms to invest in new antipollution technology by:
A) restricting pollution permits from being traded.
B) allowing pollution permits to be traded within the industry.
C) allowing pollution permits to be traded across industries.
D) allowing pollution permits to be traded within the industry and allowing pollution permits to be traded across industries.
Q2) If a firm has been proven liable for a false ad, it has to:
A) terminate the false ad.
B) recall any product with the false claim on it.
C) compensate more than the damage it has caused.
D) All of the statements associated with this question are correct.
Q3) The gadget industry is comprised of 10 firms, each with a 10 percent market share. What is the Herfindahl-Hirschman index for the industry? Based on the U.S. Department of Justice Merger Guidelines described in the text, do you think the Justice Department would be likely to block a merger between two of the firms?
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Page 16