CHAPTER 1

Indicate the answer choice that best completes the statement or answers the question.

1. 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 above

2. 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. false

3. Which of the following will increase (V0), the shareholder wealth maximization model of the firm:
V0·(shares outstanding) = Σ∞t=1 (π t ) / (1+ke)t + Real Option Value.
a. Decrease the required rate of return (ke).
b. Decrease the stream of profits (πt).
c. Decrease the number of periods from ∞ to 10 periods.
d. Decrease the real option value.
e. All of the above.

4. Which 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 factors

5. Which of the following types of firms should expect a higher rate of return?
a. an auto dealership
b. a biotech pharmaceutical firm
c. a manufacturer of screws and bolts
d. a paper products firm
e. all of the above

6. Recently, the American Medical Association changed its recommendations on the frequency of pap-smear 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-test:
a. equals zero.
b. is greater than the marginal cost of the test
c. is lower than the marginal cost of an additional test
d. equals the marginal cost of the test
e. both a and b.

7. 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.
a. profits (cash flows)
b. revenues
c. outlays
d. costs
e. investments

8. If one defines incremental cost as the change in total cost resulting from a decision, and incremental revenue as the
change in total revenue resulting from a decision, any business decision is profitable if:
a. it increases revenue more than costs or reduces costs more than revenue
 b. it decreases some costs more than it increases others (assuming revenues remain constant)
c. it increases some revenues more than it decreases others (assuming costs remain constant)
d. all of the above
e. b and c only

9. Which of the following statements concerning the shareholder wealth maximization model is (are) true?
a. The timing of future profits is explicitly considered.
b. The model provides a conceptual basis for evaluating differential levels of risk.
c. The model is only valid for dividend-paying firms.
d. a and b
e. a, b, and c

10. According 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.
a. true
b. false

11. Shirking of one’s duties is often encountered in team production settings because
a. few individuals are well-intentioned
b. teamwork is recognized as less significant than individual performance
c. teammates face a dilemma posed by a dominant strategy to shirk
d. reputation effects dominate in long-term teams
e. teamwork can be less than the sum of the individual parts

12. To reduce Agency problems, executive compensation should be designed to

a. be paid baased on quarterly sales
b. create incentives so that managers act like owners of the firm
c. avoid making the executives own shares in the company
d. be an increasing function of the firm's expenses
e. all of the above

13. 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 cost savings or revenue expansion in a flexible business plan.
d. An objective function and a decision rule that comes from it.
e. Both a and b.

14. According to the managerial efficiency theory of profit, above-normal profits can arise because of high-quality
managerial skills.
a. true
b. false

15. The 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 value

16. The Saturn Corporation (once a division of GM) was permanently closed in 2009. What went wrong with Saturn?
a. Saturn’s cars sold at prices higher than rivals Honda or Toyota, so they could not sell many cars.
b. Saturn sold cars below the prices of Honda or Toyota, earning a low 3% rate of return.
c. Saturn found that young buyers of Saturn automobiles were very loyal to Saturn and GM.
d. Saturn implemented a change management view that helped make first time Saturn purchasers trade up to
Buick or Cadillac.
e. all of the above
17. Economic 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 above

18. Various executive compensation plans have been employed to motivate managers to make decisions that maximize
shareholder wealth. These include:
a. cash bonuses based on length of service with the firm
b. bonuses for resisting hostile takeovers
c. requiring officers to own stock in the company
d. large corporate staffs
e. a, b, and c only

19. Agency problems and costs are incurred whenever the owners of a firm delegate decision-making authority to
management.
a. true
b. false

20. 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?
a. risk-bearing theory of profit
b. dynamic equilibrium theory of profit
c. innovation theory of profit
d. managerial efficiency theory of profit
e. stochastic optimization theory of profit

21. Managers should concentrate on maximizing shareholder value alone if which of the following conditions are met?
a. complete markets
b. no significant asymmetric information
c. known recontracting costs
d. all of the above
e. none of the above

22. Managerial economics seeks to accomplish all of these goals EXCEPT:

a. identify the alternatives
b. select the choice that accomplishes the objective most efficiently
c. take into account the opportunities
d. take into account the likely actions & reactions of rival decision makers
e. all of the above

23. The form of economics most relevant to managerial decision-making within the firm is:
a. macroeconomics
b. welfare economics
c. free-enterprise economics
d. microeconomics
e. none of the above

24. Possible 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

25. The moral hazard in team production arises from

a. poorly designed team
membership
b. lack of proper
assignment of
individual tasks
c. disorganization in
groups
d. a conflict between
tactically best interest
and one’s duty
e. insufficient
experience

CHAPTER 2
1. 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

2. 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?
a. σ = √ { (1000-1300)2 + (2000-1300)2 }
b. σ = √ { (1000-1300) + (2000-1300) }
c. σ = √ { (.5)(1000-1300)2 + (.5)(2000-1300)2 }
d. σ = √ { (.7)(1000-1300) + (.3)(2000-1300) }
e. σ = √ { (.7)(1000-1300)2 + (.3)(2000-1300)2 }

3. Regarding demand and supply, which of the following statements is NOT correct?
a. Demand and supply simultaneously determine equilibrium market price
b. Demand expresses intentions, but supply does not
c. Demand is a potential concept distinguished from the transactional even
of "units sold"
d. Supply is more like scenario planning for operations than for actual
production
e. all of the above statements are correct

4. 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 - μ)/σ , with μ as the
mean and σ as the standard deviation.]
a. 2.28%
b. 6.68%
c. 15.87%
d. 30.85%
e. 50%
Table B1 for Z
Z Prob.
-3 .0013
-2.5 .0062
-2. .0228
-1.5 .0668
 -1 .1587
-.5 ..3085
0 .5000

5. Consider 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.
a. 1,300
b. 1,500
c. 1,700
d. 2,000
e. 3,000

6. 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

7. Sources 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 c

8. 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%.
a. True
b. False

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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.
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.

17. 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

18. The marginal decision rule will be replaced with the net present value rule when:
a. costs and benefits occur at approximately the same time
b. costs are incurred immediately
c. benefits are incurred immediately
d. the marginal decision rule is never replaced
19. The number of standard deviations z that a particular value of r is from the mean
? can be computed as z = (r - ?)/ σ. 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 earn zero in a
week? Use the following brief z-table to help with this problem.
Z value Probability
-3 .0013
-2 .0228
-1 .1587
0 .5000
a. 1.3% chance of earning nothing in a week
b. 2.28% chance of earning nothing in a week
c. 15.87% chance of earning nothing in a week
d. 50% chance of earning nothing in a week
e. none of the above

20. 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
8 78
9 96
10 124
Determine the (a) marginal cost and (b) average total cost schedules

21. 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 ______ ______

22. 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.
Determine the coefficient of variation.
(c)

CHAPTER 3

Indicate the answer choice that best completes the statement or answers the
question.

1. Which 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 c

2. Which of the following demand factors are under the control of management?
a. price of product
b. advertising
c. price of competitors' products
d. customer service
e. all except c

3. An income elasticity (Ey) of 2.0 indicates that for a ____ increase in income, ____
will increase by ____.
a. one percent; quantity supplied; two units
b. one unit; quantity supplied; two units
c. one percent; quantity demanded; two percent
d. one unit; quantity demanded; two units
e. ten percent; quantity supplied; two percent

4. If 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

5. Marginal revenue (MR) is ____ when total revenue is maximized.

a. greater than one
b. equal to one
c. less than zero
d. equal to zero
e. equal to minus one

6. Identify 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 c
7. Auto dealers slash prices at the end of the model year in response to deficient
demand/excess inventory but restaurants facing the same problem slash production
because
a. auto customers are less price sensitive than restaurant customers
b. price elasticity of demand (in absolute values) is higher for auto than
restaurant customers
c. price elasticity of supply is lower in auto than in restaurants
d. restaurant food spoils quickly and is much more perishable
e. price elasticity of supply in autos is smaller than the absolute value of
price elasticity of demand but the reverse is true for restaurants

8. Songwriters and composers press music companies to lower the price for music
downloads because
a. demand for on-line music is inelastic
b. profits are maximized where price elasticity of demand is -1.0
c. songwriter royalties are a percentage of sales revenue
d. profits and total revenue are maximized at different quantities
e. profits are maximized at the same prices as sales revenue

9. In this problem, demonstrate your knowledge of percentage rates of change of an

entire demand function (HINT: %ΔQ = EP•%ΔP + EY•%ΔY). 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. fall .5%.
b. not change.
c. rise 1%r.
d. rise 2%.
e. rise .5%.

10. A price elasticity (ED) of −1.50 indicates that for a ____ increase in price,
quantity demanded will ____ by ____.
a. one percent; increase; 1.50 units
b. one unit; increase; 1.50 units
c. one percent; decrease; 1.50 percent
d. one unit; decrease; 1.50 percent
e. ten percent; increase; fifteen percent

11. Factors affecting the price elasticity of demand include all of these EXCEPT:
a. percentage of the consumer's budget
b. the availability and closeness of substitutes
c. positioning as income inferior
d. time period of adjustment
e. all of the above affect the price elasticity of demand

12. 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 will be 132 units.
b. The price will be $11 and the quantity will be 122 units.
c. The price will be $40 and the quantity will be 220 units.
d. The price will be $35 and the quantity will be 137 units
e. The price will be $10 and the quantity will be 420 units.

13. 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 price.

14. When demand elasticity is ____ in absolute value (or ____), an increase in price
will result in a(n) ____ in total revenues.
a. less than 1; elastic; increase
b. more than 1; inelastic; decrease
c. less than 1; elastic; decrease
d. less than 1; inelastic; increase
e. none of the above

15. 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.}
a. It rises 6 %.
b. It rises 4 %.
c. It rises 3 %.
d. It rises 2 %
e. If falls 2%.

16. When demand is ____ a percentage change in ____ is exactly offset by the same
percentage change in ____ demanded, the net result being a constant total consumer
expenditure.
a. elastic; price; quantity
b. unit elastic; price; quantity
c. inelastic; quantity; price
d. inelastic; price; quantity
e. none of the above

17. An increase in each of the following factors would normally provide a subsequent
increase in quantity demanded, except:
a. price of substitute goods
b. level of competitor advertising
c. consumer income level
d. consumer desires for goods and services
e. a and b

18. 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)]
a. EP = -3.0
b. EP = -2.0
c. EP = -1.0
d. EP = -0.5
e. EP = 0

19. 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.

20. Which 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 small
e. no one really wants the product at all

21. An 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

22. Durable goods are:

a. consumers' goods
b. raw materials combined to produce consumer goods
c. those that must be replaced after each use
d. those that may be stored and repaired
e. none of the above

23. Goods having a negative calculated income elasticity are...

a. superior goods
b. producers' goods
c. nondurable goods
d. inferior goods
e. none of the above

24. Those goods having a calculated income elasticity that is negative are called:
a. producers' goods
b. durable goods
c. inferior goods
d. nondurable goods
e. none of the above

25. The factor(s) which cause(s) a movement along the demand curve include(s):
a. increase in level of advertising
b. decrease in price of complementary goods
c. increase in consumer disposable income
d. decrease in price of the good demanded
e. all of the above

26. The demand for durable goods tends to be more price elastic than the demand for
non-durables.
a. true
b. false

27. Empirical estimates of the price elasticity of demand [in Table 3.4] suggest that
the demand for household consumption of alcoholic beverages is:
a. highly price elastic
b. price inelastic
c. unitarily elastic
d. an inferior good
e. none of the above
 28. The British Automobile Company is introducing a brand new model called the
"London Special." Using the latest forecasting techniques, BAC economists have
developed the following demand function for the "London Special":

QD = 1,200,000 − 40P

What is the point price elasticity of demand at prices of (a) $8,000 and (b) $10,000?

29. The Future Flight Corporation manufactures a variety of Frisbees selling for
$2.98 each. Sales have averaged 10,000 units per month during the last year. Recently
Future Flight's closest competitor, Soaring Free Company, cut its prices on similar
Frisbees from $3.49 to $2.59. Future Flight noticed that its sales declined to 8,000
units per month after the price cut.
What is the arc cross elasticity of demand between Future Flight's and Soaring
(a)
Free's Frisbees?
If Future Flight knows the arc price elasticity of demand for its Frisbees is −2.2,
(b) what price would they have to charge in order to obtain the same level of sales
as before Soaring Free's price cut?

30. The manager of the Sell-Rite drug store accidentally mismarked a shipment of 20-
pound bags of charcoal at $4.38 instead of the regular price of $5.18. At the end of a
week, the store's inventory of 200 bags of charcoal was completely sold out. The
store normally sells an average of 150 bags per week.
(a) What is the store's arc elasticity of demand for charcoal?
(b) Give an economic interpretation of the numerical value obtained in part (a)

31. Hanna Corporation markets a compact microwave oven. In 2010 they sold 23,000
units at $375 each. Per capita disposable income in 2010 was $6,750. Hanna
economists have determined that the arc price elasticity for this microwave oven is
−1.2.
In 2011 Hanna is planning to lower the price of the microwave oven to $325.
(a)
Forecast sales volume for 2011 assuming that all other things remain equal.
However, in checking with government economists, Hanna finds that per capita
disposable income is expected to rise to $7,000 in 2011. In the past the
company has observed an arc income elasticity of +2.5 for microwave ovens.
(b)
Forecast 2011 sales given that the price is reduces to $325 and that per capita
disposable income increases to $7,000. Assume that the price and income
effects are independent and additive.

CHAPTER 4

Indicate the answer choice that best completes the statement or answers the question.

1. In testing whether each individual independent variables (Xs) in a multiple regression equation is statistically significant
in explaining the dependent variable (Y), one uses the:
a. F-test
b. Durbin-Watson test
c. t-test
d. z-test
e. none of the above

2. In a regression equation, one may measure the accuracy of the estimation by:
a. calculating the standard deviation of the errors of prediction
b. calculating the standard error of the estimate
c. estimating the standard deviation of the errors of prediction
d. all of the above
e. a and b only

3. Appendix:
When two or more "independent" variables are highly correlated, then we have:
a. the identification problem
b. multicollinearity
c. autocorrelation
d. heteroscedasticity
e. complementary products

4. Even though insignificant explanatory variables can raise the adjusted R2 of a demand function, one should not interpret
their effects on the regression when
a. testing marketing hypotheses about the determinants of demand
b. analyzing inventory relative to capacity requirements
c. forecasting unit sales for operations planning
d. sales revenue reaches its peak
e. planning for capital budgets

5. A study of expenditures on food in cities resulting in the following equation:

Log E = 0.693 Log Y + 0.224 Log N
where E is Food Expenditures; Y is total expenditures on goods and services; and N is the size of the family. This evidence
implies:
a. that as total expenditures on goods and services rises, food expenditures falls.
b. that a one-percent increase in family size increases food expenditures .693%.
c. that a one-percent increase in family size increases food expenditures .224%.
d. that a one-percent increase in total expenditures increases food expenditures 1%.
e. that as family size increases, food expenditures go down.

6. In a cross section regression of 48 states, the following linear demand for per-capita cans of soda was found: Cans =
159.17 – 102.56 Price + 1.00 Income + 3.94Temp

Coefficients Standard Error t Stat

Intercept 159.17 94.16 1.69
Price -102.56 33.25 -3.08
Income 1.00 1.77 0.57
Temperature 3.94 0.82 4.83

R-Sq = 54.1% R-Sq(adj) = 51.0%

From the linear regression results in the cans case above, we know that:
a. Price is insignificant
b. Income is significant
c. Temp is significant
d. As price rises for soda, people tend to drink less of it
e. All of the coefficients are significant

7. Demand functions in the multiplicative form are most common for all of the following reasons except:
a. elasticities are constant over a range of data
b. ease of estimation of elasticities
c. exponents of parameters are the elasticities of those variables
d. marginal impact of a unit change in an individual variable is constant
e. c and d

8. Appendix:
When using a multiplicative power function (Y = a X1b1X2b2X3b3) to represent an economic relationship, estimates of the
parameters (a, and the b's) using linear regression analysis can be obtained by first applying a ____ transformation to
convert the function to a linear relationship.
a. semilogarithmic
b. double-logarithmic
c. reciprocal
d. polynomial
e. cubic
9. Consider the following multiplicative demand function where QD = quantity demanded, P = selling price, and Y =
disposable income:

The coefficient of Y (i.e., .2) indicates that (all other things being held constant):
a. for a one percent increase in disposable income, quantity demanded would increase by .2 percent
b. for a one unit increase in disposable income, quantity demanded would increase by .2 units
c. for a one percent increase in disposable income quantity demanded would increase by .2 units
d. for a one unit increase in disposable income, quantity demanded would increase by .2 percent
e. none of the above

10. Caution must be exercised in using regression models for prediction when:
a. the value of the independent variable lies inside the range of observations from which the model was estimated
b. the value of the independent variable lies outside the range of observations from which the model was
estimated
c. diminishing returns are present
d. the existence of saturation levels are present
e. none of the above

11. Appendix:
In regression analysis, the existence of a high degree of intercorrelation among some or all of the explanatory variables in
the regression equation constitutes:
a. autocorrelation
b. a simultaneous equation relationship
c. nonlinearities
d. heteroscedasticity
e. multicollinearity

12. In addition to prediction, one purpose of regression analysis is:

a. to measure the overall "fit" of the model to the sample observations
b. to test whether the slope parameter β is equal to some particular value
c. to test whether the slope parameter β is equal to zero
d. b and c
e. none of the above

13. One commonly used test in checking for the presence of autocorrelation when working with time series data is the
____.
a. F-test
b. Durbin-Watson test
c. t-test
d. z-test
e. none of the above

14. Using a sample of 100 consumers, a double-log regression model was used to estimate demand for gasoline. Standard
errors of the coefficients appear in the parentheses below the coefficients.

Ln Q = 2.45 -0.67 Ln P + . 45 Ln Y - .34 Ln Pcars

(.20) (.10) (.25)

Where Q is gallons demanded, P is price per gallon, Y is disposable income, and Pcars is a price index for cars. Based on
this information, which is NOT correct?
a. Gasoline is inelastic.
b. Gasoline is a normal good.
c. Cars and gasoline appear to be mild complements.
d. The coefficient on the price of cars (Pcars) is insignificant.
e. All of the coefficients are insignificant.

15. The standard deviation of the error terms in an estimated regression equation is known as:
 a. coefficient of determination
b. correlation coefficient
c. Durbin-Watson statistic
d. standard error of the estimate
e. none of the above

16. The principal econometric techniques used in measuring demand relationships are:
a. the standard deviation
b. regression
c. correlation analysis
d. the coefficient of determination
e. both b and c

17. Novo Nordisk A/S, a Danish firm, sells insulin and other drugs worldwide. Activella, an estrogen and progestin
hormone replacement therapy sold by Novo-Nordisk, is examined using 33 quarters of data
Y = -204 + . 34X1 - .17X2
(17.0) (-1.71)
Where Y is quarterly sales of Activella, X1 is the Novo’s advertising of the hormone therapy, and X2 is advertising of a
similar product by Eli Lilly and Company, Novo-Nordisk’s chief competitor. The parentheses contain t-values. Addition
information is: Durbin-Watson = 1.9 and R2 = .89.

Using the data for Novo-Nordisk, which is correct?

a. Both X1 and X2 are statistically significant.
b. Neither X1 nor X2 are statistically significant.
c. X1 is statistically significant but X2 is not statistically significant.
d. X1 is not statistically significant but X2 is statistically significant.
e. The Durbin-Watson statistic shows significant problems with autocorrelation

18. The correlation coefficient ranges in value between 0.0 and 1.0.
a. true b. false

19. The assumptions underlying the simple linear regression model are:
a. the value of the dependent variable Y is postulated to be a random variable
b. a theoretical straight-line relationship exists between X and the expected value of Y
c. associated with each value of X is a probability distribution
d. the disturbance term is assumed to be an independent random variable
e. a through c
f. b through d

20. In which of the following econometric problems do we find Durbin-Watson statistic being far away from 2.0?
a. the identification problem
b. autocorrelation
c. multicollinearity
d. heteroscedasticity
e. agency problems

21. Appendix:
In regression analysis, the existence of a significant pattern in successive values of the error term constitutes:
a. heteroscedasticity
b. autocorrelation
c. multicollinearity
d. nonlinearities
e. a simultaneous equation relationship

22. The coefficient of determination ranges in value between 0.0 and 1.0.
a. true b. false
23. The coefficient of determination measures the proportion of the variation in the independent variable that is "explained"
by the regression line.
a. true b. false

24. Consider the following linear demand function where QD = quantity demanded, P = selling price, and Y = disposable
income:

QD = −36 −2.1P + .24Y

The coefficient of P (i.e., −2.1) indicates that (all other things being held constant):
a. for a one percent increase in price, quantity demanded would decline by 2.1 percent
b. for a one unit increase in price, quantity demanded would decline by 2.1 units
c. for a one percent increase in price, quantity demanded would decline by 2.1 units
d. for a one unit increase in price, quantity demanded would decline by 2.1 percent
e. none of the above

25. The presence of association between two variables does not necessarily imply causation for the following reason(s):
a. the association between two variables may result simply from pure chance
b. the association between two variables may be the result of the influence of a third common factor
c. both variables may be the cause and the effect at the same time
d. a and b
e. a, b, and c

26. The estimated slope coefficient (b) of the regression equation (Ln Y = a + b Ln X) measures the ____ change in Y for a
one ____ change in X.
a. percentage, unit
b. percentage, percent
c. unit, unit
d. unit, percent
e. none of the above

27. Appendix:
The Identification Problem in the development of a demand function is a result of:
a. the variance of the demand elasticity
b. the consistency of quantity demanded at any given point
c. the negative slope of the demand function
d. the simultaneous relationship between the demand and supply functions
e. none of the above

28. Which is NOT true about the coefficient of determination?

a. As you add more variables, the R-square generally rises.
b. As you add more variables, the adjusted R-square can fall.
c. If the R-square is above 50%, the regression is considered significant.
d. The R-square gives the percent of the variation in the dependent variable that is explained by the independent
variables.
e. The higher is the R-square, the better is the fit.

29. When there is multicollinearity in an estimated regression equation,

a. the coefficients are likely to be small.
b. the t-statistics are likely to be small even though the R2 is large.
c. the coefficient of determination is likely to be small.
d. the problem of omitted variables is likely.
e. the error terms will tend to have a cyclical pattern.

30. The constant or intercept term in a statistical demand study represents the quantity demanded when all independent
variables are equal to:
a. 1.0
b. their minimum values
 c. their average values
d. 0.0
e. none of the above

31. The following demand function has been estimated for Fantasy pinball machines:

QD = 3,500 − 40P + 17.5Px + 670U + .0090A + 6,500N

where P = monthly rental price of Fantasy pinball machines

Px = monthly rental price of Old Chicago pinball machines (their largest competitor)
U = current unemployment rate in the 10 largest metropolitan areas
A = advertising expenditures for Fantasy pinball machines
N = fraction of the U.S. population between ages 10 and 30
What is the point price elasticity of demand for Fantasy pinball machines when P = $150,
(a)
Px = $100, U = .12, A = $200,000 and N = .35?
What is the point cross elasticity of demand with respect to Old Chicago pinball machines
(b)
for the values of the independent variables given in part (a)?

32. Lenny's, a national restaurant chain, conducted a study of the factors affecting demand (sales). The following variables
were defined and measured for a random sample of 30 of its restaurants:
Y = Annual restaurant sales ($000)
X1 = Disposable personal income (per capita) of residents within 5 mile radius
X2 = License to sell beer/wine (0 = No, 1 = Yes)
X3 = Location (within one-half mile of interstate highway--0 = No, 1 = Yes)
X4 = Population (within 5 mile radius)
X5 = Number of competing restaurants within 2 mile radius

The data were entered into a computerized regression program and the following results were obtained:

MULTIPLE R .889
R-SQUARE .79
STD. ERROR OF EST. .40
ANALYSIS OF VARIANCE

DF Sum Squares Mean Sqr. F-Stat

Regression 5 326.13 65.226 18.17
Error 24 86.17 3.590
Total 29 412.30
Variable Coefficient Std. Error T-Value

Constant .363 .196 1.852

X-1 .00275 .00104 2.644
X-2 76.65 93.70 .818
X-3 164.3 235.4 .698
X-4 .00331 .00126 2.627
X-5 46.2 12.1 −3.818
Questions:
(a) Give the regression equation for predicting restaurant sales.
(b) Give an interpretation of each of the estimated regression coefficients.
Which of the independent variables (if any) are statistically significant at the .05 level in
(c)
"explaining" restaurant sales?
What proportion of the variation in restaurant sales is "explained" by the regression
(d)
equation?
Perform an F-test (at the .05 significance level) of the overall explanatory power of the
(e)
regression model.
33. Phoenix Lumber Company uses the number of construction permits issued to help estimate demand (sales). The firm
collected the following data on annual sales and number of construction permits issued in its market area:
No. of Construction Sales
Year Permits Issued (000) (1,000,000)

2003 6.50 10.30

2004 6.20 10.10
2005 6.60 10.50
2006 7.30 10.80
2007 7.80 11.20
2008 8.20 11.40
2009 8.30 11.30
(a) Which variable is the dependent variable and which is the independent variable?
(b) Determine the estimated regression line.
Test the hypothesis (at the .05 significance level) that there is no relationship between the
(c)
variables.
Calculate the coefficient of determination. Give an economic interpretation to the value
(d)
obtained.
Perform an analysis of variance on the regression including an F-test (at the .05
(e)
significance level) of the overall significance of the results.
Suppose that 8,000 construction permits are expected to be issued in 2010. What would be
(f)
the point estimate of Phoenix Lumber Company's sales for 2010?

34. Given the following demand function:

Q = 2.0 P−1.33 Y2.0 A.50

where Q = quantity demanded (thousands of units)

P = price ($/unit)
Y = disposable income per capita ($ thousands)
A = advertising expenditures ($ thousands)
determine the following when P = $2/unit, Y = $8 (i.e., $8000), and A = $25 (i.e., $25,000)
(a) Price elasticity of demand
The approximate percentage increase in demand if disposable income percentage increases
(b)
by 3%.
The approximate percentage increase in demand if advertising expenditures are increased
(c)
by 5 percent.