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Mid Term Exam Eco 500 Managerial Economics (2022)

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Economics 500 Midterm Exam Dr. Padilla May 15, 2016 Choose the Best Answer 1 Economic theory is a valuable tool for business decision making because it a. identifies for managers the essential information for making a decision. b. assumes away the problem. c. creates a realistic, complex model of the business firm. d. provides an easy solution to complex business problems. 2 Economic profit a. is a theoretical measure of a firm’s performance and has little value in real world decision making. b. can be calculated by subtracting implicit costs of using owner-supplied resources from the firm’s total revenue. c. is negative when total costs exceed total revenues. d. is generally larger than accounting profit. 3 Economic profit is the difference between a. total revenue and the opportunity cost of all of the resources used in production. b. total revenue and the implicit costs of using owner-supplied resources. c. accounting profit and the opportunity cost of the market-supplied resources used by the firm. d. accounting profit and explicit costs. 4 When economic profit is positive, a. total revenue exceeds total economic cost. b. the firm’s owners have successfully solved the principle-agent problem. c. the firm’s owners experience a decrease in their wealth. d. foreign companies experience loss of market share 5 Consider a firm that employs some resources that are owned by the firm. When accounting profit is zero, economic profit a. must also equal zero. b. is sure to be positive. c. must be negative and shareholder wealth is reduced. d. cannot be computed accurately, but the firm is breaking even nonetheless. 6 Which of the following statements is false? a. Explicit costs of using market-supplied resources entail an opportunity cost equal to the dollar cost of obtaining the resources in the market. b. When economic profit is zero, the firm’s owners could not have done better putting their resources in some other industry of comparable risk. c. If economic profit is positive, accounting profit must also be positive. d. If economic profit is negative, accounting profit must also be negative. e. None of the above statements is false. This study source was downloaded by 100000847458768 from CourseHero.com on 11-05-2022 10:59:41 GMT -05:00 https://www.coursehero.com/file/18397809/Mid-Term-Exam-Eco-500-Managerial-Economics-05-08-2016-1/ 7 The value of a firm is a. smaller the higher is the risk premium used to compute the firm’s value. b. larger the higher is the risk premium used to compute the firm’s value. c. the price for which the firm can be sold minus the present value of the expected future profits. d. both b and c 8 At the beginning of 2015, market analysts expect Atlantis Company, holder of a valuable patent, to earn the following stream of economic profits over the next five years. At the end of five years, Atlantis will lose its patent protection, and analysts expect economic profit to be zero after five years. Year Expected Economic Profit 20154 $ 225,000 2016 $ 325,000 2017 $ 425,000 2018 $ 200,000 2019 $ 100,000 9 If investors apply an annual risk-adjusted discount rate of 15%, the value of Atlantis Company in 2015 is $______________________, which is also the maximum price investors would be willing to pay for Atlantis Company. a. $726,916 b. $884,912 c. $1,275,000 d. $2,215,000 e. $3,824,318 10 An annual income statement from Quest Realty, Inc. is shown below:

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