Deck 2: Fundamental Economic Concepts

Question 1

Sources of $\underline{\text{ positive }}$ 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 c

Answer 1

a,b,and c

Question 2

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

A)the expected returns from the investments are approximately equal
B)the investments have similar life spans
C)objective estimates of each possible outcome is available
D)the coefficient of variation is equal to 1.0
E)none of the above

Answer 2

A

Question 3

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

A)marginal returns
B)total costs
C)marginal costs
D)average costs
E)average benefits

Answer 3

C

Question 4

Complete the following table.

Question 5

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:
(a) Determine the expected selling price for the land.
(b) Determine the standard deviation of the possible sales prices.
(c) Determine the coefficient of variation.

Question 6

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?

A)U.S.Government bonds
B)municipal bonds
C)common stock
D)commercial paper
E)none of the above

Question 7

Two investments have the following expected returns (net present values)and standard deviations:
Based on the $\underline{\text{ Coefficient of Variation, }}$ where the C.V.is the standard deviation dividend by the expected value.

A)All coefficients of variation are always the same.
B)Project Q is riskier than Project X
C)Project X is riskier than Project Q
D)Both projects have the same relative risk profile
E)There is not enough information to find the coefficient of variation.

Question 8

Suppose that the firm's cost function is given in the following schedule (where Q is the level of output):
Determine the (a)marginal cost and (b)average total cost schedules

Question 9

The approximate probability of a value occurring that is greater than one standard deviation from the mean is approximately (assuming a normal distribution)

A)68.26%
B)2.28%
C)34%
D)15.87%
E)none of the above

Question 10

An closest example of a risk-free security is

A)General Motors bonds
B)AT&T commercial paper
C)U.S.Government Treasury bills
D)San Francisco municipal bonds
E)an I.O.U.that your cousin promises to pay you $100 in 3 months

Question 11

Receiving $100 at the end of the next three years is worth more to me than receiving $260 right now,when my required interest rate is 10%.

Question 12

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

A)low risk
B)high risk
C)certain cash flows
D)short lives
E)none of the above

Question 13

The net present value of an investment represents

A)an index of the desirability of the investment
B)the expected contribution of that investment to the goal of shareholder wealth maximization
C)the rate of return expected from the investment
D)a and b only
E)a and c only

Question 14

Consider an investment with the following payoffs and probabilities:
Let the expected value in this example be 1,300.How do we find the standard deviation of the investment?

A) $\sigma$ = $\surd$ { (1000-1300)² + (2000-1300)² }
B) $\sigma$ = $\surd$ { (1000-1300)+ (2000-1300)}
C) $\sigma$ = $\surd$ { (.5)(1000-1300)² + (.5)(2000-1300)² }
D) $\sigma$ = $\surd$ { (.7)(1000-1300)+ (.3)(2000-1300)}
E) $\sigma$ = $\surd$ { (.7)(1000-1300)² + (.3)(2000-1300)² }

Question 15

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 above

Question 16

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

A)marginal cost
B)average cost
C)net marginal cost
D)net marginal benefit
E)none of the above

Question 17

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

A)the coefficient of variation is easier to compute
B)the standard deviation is a measure of relative risk whereas the coefficient of variation is a measure of absolute risk
C)the coefficient of variation is a measure of relative risk whereas the standard deviation is a measure of absolute risk
D)the standard deviation is rarely used in practice whereas the coefficient of variation is widely used
E)c and d