Chapter 1—Introduction and Goals of the FirmChapter 1—Introduction and Goals of the FirmIf one defines incremental cost as the change in total cost
... [Show More] resulting from a decision, and incremental revenue as the change in total revenue resulting from a decision, any business decision is profitable if:3. In the shareholder wealth maximization model, the value of a firm's stock is equal to the present value of all expected future ____ discounted at the stockholders' required rate of return.Which of the following statements concerning the shareholder wealth maximization model is (are) true?According to the profit-maximization goal, the firm should attempt to maximize short-run profits since there is too much uncertainty associated with long-run profits. a. true b. falseAccording to the innovation theory of profit, above-normal profits are necessary to compensate the owners of the firm for the risk they assume when making their investments.According to the managerial efficiency theory of profit, above-normal profits can arise because of high-quality managerial skills. a. true b. falseWhich of the following (if any) is not a factor affecting the profit performance of firms: a. differential risk b. innovation c. managerial skills d. existence of monopoly power e. all of the above are factorsAgency problems and costs are incurred whenever the owners of a firm delegate decision-making authority to managementEconomic profit is defined as the difference between revenue and ____. a. explicit cost b. total economic cost c. implicit cost d. shareholder wealth e. none of the aboveIncome tax payments are an example of ____. a. implicit costs b. explicit costs c. normal return on investment d. shareholder wealth e. none of the aboveVarious executive compensation plans have been employed to motivate managers to make decisions that maximize shareholder wealth. These include:The common factors that give rise to all principal-agent problems include the a. unobservability of some manager-agent action b. presence of random disturbances in team production c. the greater number of agents relative to the number of principals d. a and b only e. none of the aboveThe Saturn Corporation (once a division of GM) was permanently closed in 2009. What went wrong with Saturn?A Real Option Value is: a. An option that been deflated by the cost of living index makes it a “real” option. b. An opportunity cost of capital. c. An opportunity to implement a new cost savings or revenue expansion activity that arises from business plans that the managers adopt. d. An objective function and a decision rule that comes from it. e. Both a and bWhich of the following will increase (V0), the shareholder wealth maximization model of the firm: V0∙(shares outstanding) = t=1 ( t ) / (1+ke) t + Real Option ValueThe primary objective of a for-profit firm is to ___________. a. maximize agency costs b. minimize average cost c. maximize total revenue d. set output where total revenue equals total cost e maximize shareholder valuePossible goals of Not-For-Profit (NFP) enterprises include all of the following EXCEPT: a. maximize total costs b. maximize output, subject to a breakeven constraint c. maximize the happiness of the administrators of the NFP enterprise d. maximize the utility of the contributors e. a. and c.The flat-screen plasma TVs are selling extremely well. The originators of this technology are earning higher profits. What theory of profit best reflects the performance of the plasma screen makers?To reduce Agency Problems, executive compensation should be designed to: a. create incentives so that managers act like owners of the firm. b. avoid making the executives own shares in the company. c. be an increasing function of the firm's expenses. d. be an increasing function of the sales revenue received by the firm. e. all of the aboveRecently, the American Medical Association changed its recommendations on the frequency of papsmear exams for women. The new frequency recommendation was designed to address the family histories of the patients. The optimal frequency should be where the marginal benefit of an additional pap-testA change in the level of an economic activity is desirable and should be undertaken as long as the marginal benefits exceed the ____.The level of an economic activity should be increased to the point where the ____ is zeroThe net present value of an investment representsGenerally, investors expect that projects with high expected net present values also will be projects withThe approximate probability of a value occurring that is greater than one standard deviation from the mean is approximately (assuming a normal distribution)Based on risk-return tradeoffs observable in the financial marketplace, which of the following securities would you expect to offer higher expected returns than corporate bonds?The primary difference(s) between the standard deviation and the coefficient of variation as measures of risk are:The ____ is the ratio of ____ to the ____. a. standard deviation; covariance; expected value b. coefficient of variation; expected value; standard deviation c. correlation coefficient; standard deviation; expected value d. coefficient of variation; standard deviation; expected value e. none of the aboveSources of positive net present value projects include a. buyer preferences for established brand names b. economies of large-scale production and distribution c. patent control of superior product designs or production techniques d. a and b only e. a, b, and cReceiving $100 at the end of the next three years is worth more to me than receiving $260 right now, when my required interest rate is 10%.The number of standard deviations z that a particular value of r is from the mean ȓ can be computed as z = (r - ȓ)/ Suppose that you work as a commission-only insurance agent earning $1,000 per week on average. Suppose that your standard deviation of weekly earnings is $500. What is the probability that you zero in a week? Use the following brief z-table to help with this problem.onsider an investment with the following payoffs and probabilities: State of the Economy Probability Return Stability .50 1,000 Good Growth .50 2,000 Determine the expected return for this investment.Consider an investment with the following payoffs and probabilities: State of the Economy Probability Return GDP grows slowly .70 1,000 GDP grow fast .30 2,000 Let the expected value in this example be 1,300. How do we find the standard deviation of the investment?An investment advisor plans a portfolio your 85 year old risk-averse grandmother. Her portfolio currently consists of 60% bonds and 40% blue chip stocks. This portfolio is estimated to have an expected return of 6% and with a standard deviation 12%. What is the probability that she makes less than 0% in a year? [A portion of Appendix B1 is given below, where z = (x - with as the mean and as the standard deviation.]Two investments have the following expected returns (net present values) and standard deviations: PROJECT Expected Value Standard Deviation Q $100,000 $20,000 X $50,000 $16,000 Based on the Coefficient of Variation, where the C.V. is the standard deviation dividend by the expected value.Suppose that the firm's cost function is given in the following schedule (where Q is the level of output): Output Total Q (units) Cost 0 7 1 25 2 37 3 45 4 50 5 53 6 58 7 66.Complete the following table. Total Marginal Average Output Profit Profit Profit 0 48 0 ______ 1 26 ______ ______ 2 8 ______ ______ 3 6 ______ ______ 4 16 ______ ______ 5 22 ______ ______ 6 24 ______ ______ 7 22 ______ ______ 8 16 ______ ______ 9 6 ______ ______ 10 8 ______ ____A firm has decided to invest in a piece of land. Management has estimated that the land can be sold in 5 years for the following possible prices: Price Probability 10,000 .20 15,000 .30 20,000 .40 25,000 .10 (a) Determine the expected selling price for the land. (b) Determine the standard deviation of the possible sales prices. (c) Determine the coefficient of variation1. Suppose we estimate that the demand elasticity for fine leather jackets is -.7 at their current prices. Then we know that: a. a 1% increase in price reduces quantity sold by .7%. b. no one wants to buy leather jackets. c. demand for leather jackets is elastic. d. a cut in the prices will increase total revenue. e. leather jackets are luxury items.If demand were inelastic, then we should immediately: a. cut the price. b. keep the price where it is. c. go to the Nobel Prize Committee to show we were the first to find an upward sloping demand curve. d. stop selling it since it is inelastic. e. raise the priceIn this problem, demonstrate your knowledge of percentage rates of change of an entire demand function (HINT: %Q = EP•%P + EY•%Y). You have found that the price elasticity of motor control devices at Allen-Bradley Corporation is -2, and that the income elasticity is a +1.5. You have been asked to predict sales of these devices for one year into the future. Economists from the Conference Board predict that income will be rising 3% over the next year, and AB’s management is planning to raise prices 2%. You expect that the number of AB motor control devices sold in one year will:A linear demand for lake front cabins on a nearby lake is estimated to be: QD = 900,000 - 2P. What is the point price elasticity for lake front cabins at a price of P = $300,000? [HINT: Ep = (Q/P)(P/Q)]Property taxes are the product of the tax rate (T) and the assessed value (V). The total property tax collected in your city (P) is: P = T•V. If the value of properties rise 4% and if Mayor and City Council reduces the property the tax rate by 2%, what happens to the total amount of property tax collected? [HINT: the percentage rate of change of a product is approximately the sum of the percentage rates of change.}Demand is given by QD = 620 - 10∙P and supply is given by QS = 100 + 3∙P. What is the price and quantity when the market is in equilibrium? a. The price will be $30 and the quantity wilWhich of the following would tend to make demand INELASTIC? a. the amount of time analyzed is quite long b. there are lots of substitutes available c. the product is highly durable d. the proportion of the budget spent on the item is very smallWhich of the following best represents management's objective(s) in utilizing demand analysis? a. it provides insights necessary for the effective manipulation of demand b. it helps to measure the efficiency of the use of company resources c. it aids in the forecasting of sales and revenues d. a and b e. a and cIdentify the reasons why the quantity demanded of a product increases as the price of that product decreases. a. as the price declines, the real income of the consumer increases b. as the price of product A declines, it makes it more attractive than product B c. as the price declines, the consumer will always demand more on each successive price reduction d. a and b e. a and cAn increase in the quantity demanded could be caused by: a. an increase in the price of substitute goods b. a decrease in the price of complementary goods c. an increase in consumer income levels d. all of the above e. none of the above.Iron ore is an example of a: a. durable good b. producers' good c. nondurable good d. consumer good e. none of the aboveIf the cross price elasticity measured between items A and B is positive, the two products are referred to as: a. complements b. substitutes c. inelastic as compared to each other d. both b and c e. a, b, and c [Show Less]