İKT236 Managerial Economics
Midterm Exam

Dr. Onur Ozsoy

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

____	1.	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	

____	2.	In the competitive strategy framework developed by Porter, the five competitive forces that affect stock prices include:
a.	threat of new entrants	
b.	rivalry among current competitors	
c.	bargaining power of buyers	
d.	a and b only	
e.	a, b, and c	

____	3.	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	

____	4.	The long-run survival of the firm:
a.	is a normative goal	
b.	conflicts with the desired interests of management	
c.	is more oriented to the minimization of risk than the maximization of profits	
d.	does not involve social responsibility	
e.	none of the above	

____	5.	Which of the following represents reasons why the efficiency objective in public agencies may not be achieved?
a.	lack of an unambiguous measure of performance	
b.	management's preoccupation with guaranteeing the long-run survival of the organization	
c.	the objective of maximizing the size of the organization	
d.	b and c	
e.	a, b, and c	

____	6.	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	

____	7.	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	

____	8.	In the shareholder wealth maximization model, the discount rate (ke) which investors use to value the stream of returns generated by the firm is determined by:
a.	conditions in the financial markets	
b.	the perceived risk of the firm	
c.	the level of expected inflation	
d.	a, b, and c	
e.	none of the above	

____	9.	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	

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

____	12.	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	

____	13.	Agency problems and costs are incurred whenever the owners of a firm delegate decision-making authority to management.
a.	true	
b.	false	

____	14.	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	

____	15.	Income tax payments are an example of __________.
a.	implicit costs	
b.	explicit costs	
c.	normal return on investment	
d.	shareholder wealth	
e.	none of the above	

____	16.	Which of the following factors does not have a direct impact on the required returns of investors in the stock of a company?
a.	interest rate levels	
b.	the capital structure of the firm	
c.	the marketing channels selected by the firm	
d.	anticipated levels of inflation	
e.	the investments made by the firm	

____	17.	The factors most directly responsible for the turnaround in the performance of O.M. Scott & Sons after 1986 include all of the following except
a.	the discipline of a highly leveraged capital structure	
b.	a closer alignment of manager and owner interests	
c.	more efficient use of resources	
d.	an increase in interest rates that permitted Scott to earn greater returns on its liquid assets	

____	18.	With the passage of the decade of restructuring (the 1980s), the major disciplining force on managers of U.S. firms is likely to be
a.	banker oversight	
b.	international competition	
c.	shareholder activism	
d.	institutional investor activism	
e.	a new round of leveraged buyouts	

____	19.	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.	payment of greenmail	
c.	requiring officers to own stock in the company	
d.	large corporate staffs	
e.	a, b, and c only	

____	20.	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	

onur
Answer Section

MULTIPLE CHOICE

	1.	D

	2.	E

	3.	D

	4.	C

	5.	E

	6.	A

	7.	D

	8.	D

	9.	B

	10.	B

	11.	A

	12.	E

	13.	A

	14.	B

	15.	B

	16.	C

	17.	D

	18.	B

	19.	C

	20.	D