BUSS 230 Midterm, Fall 2001

AMERICAN UNIVERSITY of BEIRUT %, 7, - SCHOOL of BUSINESS Ka % BUSS 230 0 MID-TERM EXAM - November 28, 020010 NAME: -.. ID: SECTION: ___ INSTRUCTOR: ANSWER ALL QUESTIONS — TIME ALLOWED: 1 % hours I. Multiple choice - (30 points). Circle the correct answer 1. Consider a firm that employs some resources that are provided by its owners. When economic profit is zero, accounting profit is: . Positive and normal profit is zero. . Zero and normal profit is zero also. . Negative and normal profit is negative. . Positive and normal profit is positive. _ Indeterminate. More information is required. . The management of a basketball team is considering a plan in which fans who donate blood can attend a series of games for the discounted price of L.L. 15,000 a game instead of the usual price of L.L. 20,000 a game. If both ticket revenues and blood donations rise after the plan is put in effect, then the following is true: a. The demand for the team’s tickets is price elastic. . The demand for the team’s tickets is price inelastic. . The demand for blood donations is price elastic. _ The demand for blood donations is price inelastic. . None of the above. _ To test whether an overall regression equation is statistically significant, one uses: . The t-statistic. . The R-statistic. . The F-statistic. . The standard error statistic. . All ofthe above. . Ina SIMULTANEITY situation, a demand function is said to be identified if: a. The supply function contains at least one endogenous variable that is not contained in the demand function. b. The supply function contains at least one exogenous variable that is not contained in the demand function. —|— The demand function contains at least one endogenous variable that is not contained in the supply function. . The demand function contains at least one exogenous variable that is not contained in the supply function. e. The reduced form function of both demand and supply contains only identified variables. . Which of the following events would lead to a DECREASE in the demand for tennis balls? a. An increase in the price of tennis balls. b. A decrease in the price of tennis rackets. c. An increase in the cost of producing tennis balls. d . An increase in average income (assuming tennis balls are a normal good). e. None of the above. . Ina regression equation, the captures the effects of factors that influence the dependent (Y) variable but that are not used as explanatory variables. Intercept. Slope coefficient. . R-square. . Random error term. Both “a” and “b”. . Fora constrained minimization problem, the decision maker Is constrained by the level of total benefits. . Is constrained by the values established for the activities. -. Seeks to minimize the cost of achieving a specific goal. . Is guided by all of the above (a, b, and c). Is not guided by any of a, b, orc. . A price-taking firm can exert no control over price because: a. It does not control the demand for its product. b. Substitutes are lacking for the firm’s product. c. The firm’s individual production is insignificant relative to production in its industry. d. Many other firms produce a product that is nearly identical to the firm’s product. e. - Of conditions indicated in choices “c” and “d”. .. Which of the following will NOT affect the elasticity of demand for a product? : The number of substitutes. . How long consumers have to adapt to price changes. . The cost of producing the product. . The percentage of the consumer’s budget spent on the product. All of the above factors will affect the elasticity of demand -4- 10, In order to minimize the net loss to society from air pollution, the level of pollution should be: Zero. b. The level at which the marginal benefit from pollution equals the marginal cost of pollution. c. The level at which the total benefit from pollution equals the total cost of pollution. d. The level at which the marginal benefit from pollution equals the marginal cost of pollution reduction. e. The level at which the total benefit from pollution equals the total cost of pollution reduction. 11. The method of two-stage least squares (2SLS) is used in preference to ordinary Jeast squares (OLS): a. When none of the functions to be estimated is identified. b. When the demand and supply functions do not change. c. When the exogenous variables are common to the demand and supply functions. d. Allof the above (a, b, and c). e. None of the above (a, b, or c). 12. Assume that scientists have developed bacteria that will lower the freezing point of agricultural products. This invention could save farmers billions a year in crops now lost to frost damage. If this invention becomes widely used, what would happen to equilibrium price and quantity in, for example, the potato market? Price will decrease and quantity will decrease. Price will decrease but quantity will increase. Price will increase but quantity will decrease. Price will increase as will quantity. The change in equilibrium price and quantity is indeterminate. ene se 13. When Marginal Revenue is positive, a. Demand is elastic. b. Marginal revenue is greater than price. c. Lowering price will lower total revenue. d. Raising price will raise total revenue. e. The demand curve is a linear function. 14, When the choice variable changes in discrcte amounts, the decision rule for an unconstrained maximization situation is: a. IfMB> MC, increase the activity. b. IfMB < MC, decrease the activity. c, Choose the activity so that the net benefit is zero. d. All ofthe above. e. None of a, b, orc. 15. If the analyst believes that more than one explanatory variable explains the variation in the dependent variable (Y), then he should use the following method of estimation: Simple linear regression model. Multiple regression model. Model with more than one independent variable. . Multi-stage estimation model. Both b and c. True/False — 20 points. On your blue book, label each of the following statements as either T (true) or F (false) and briefly justify the answer. 1. Ifthe own price elasticity of demand for women’s luxury handbags is found to be “— 0.8” at the current selling price, then the MR at that price is negative. . The decline in interest rates throughout the world during this year — 2001- has raised the value of business firms. . The principal-agent problem occurs whenever the owner of a firm has difficulty recruiting a principal agent. . Economic profit is the difference between explicit revenues and implicit costs. . Multicollinearity in a regression estimate refers to the situation where — all the error terms in a regression are linearly related. . A manager could reasonably expect to use price of inputs, prices of substitutes, and consumer income in a single equation demand model. . Inacost function that relates total cost to total output, the average cost may be calculated by taking the first derivative of the function with respect to output. . A linear functional form for a demand relation assumes that price elasticities are constant for that relation. 9. Ifthe first order condition is satisfied, then the solution to an optimization problem is a maximum. 10. For a nonlinear demand function of the form Q = a.P M. Pr , the estimated cross-price elasticity of demand is b. (20 points) Following are some estimates of a linear regression of Sales on Prices and Income that was estimated from 25 observations: Dependent Variable (Y): SALES Coefficient Standard error t-ratio Intercept 1.105 2.205 Independent variables (Xs) Own price -0.3750 - 1.570 Income 0.140 2.780 Price of substitute 6.2500 1.950 Source of Sum of Mean Variation DoF Squares Squares -~ A- Regression 187.343 Residual Total R-Square F-Ratio a. For 10 points. In your blue book, indicate the values of all the missing information (11 blank lines shown above) b. For 5 points. Determine which of the variables (if any) are statistically significant at the 5 percent level of significance. c. For 5 points. Determine whether the independent variables explain a significant proportion (at the 5 % level) of the variation in the dependent variable. (15 points). Using the generalized linear demand function with the form Qd = 680 — 9P + 0.006M — 4Pr a. For 6 points. Calculate: the price, income, and cross elasticities at the market clearing price when M = 15000; Pr = 20 and the supply function is Qs = 30 + 3P. b. For3 points. What is the Marginal Revenue at the market clearing price. Explain how you calculated your answer. c. For3 points. Is the good normal or inferior? Is it a substitute or complement for the related good? Justify your answer. d. For3 points. With M = 15000, Pr = 20, and the assumed supply function Qs = 30 + 3P, what would occur in the market if a price ceiling of P = 40 were to be imposed by the government? Justify your answer. For 15 points. An industry is characterized by the following demand and supply functions: Qa =212-20P Qs = 20 + 4P a. For 3 points. What are the equilibrium price and quantity? b. For 3 points. If the government establishes a price ceiling of $6 per unit, what quantity will be demanded and supplied? Draw a graph- representing this market situation. ... For 3 points. If the government establishes a floor price of $9 per unit, what quantity will be demanded and supplied? Draw a graph representing this market situation. . For3 points. If supply shifts and the new function is Qs: = 20 + 12P what will be the new equilibrium price and quantity. Draw a graph representing the changed market situation. . For3 points. If demand changes to Qai = 260 —18P and the supply is as given in the previous part of this problem ( part d), what will be the new equilibrium price and quantity? Draw a graph representing the changed market situation. -~-S- - Critical #Values Significance level Degrees of freedom . 0.05 0.02. 12.706 31.82} 4.303 6.965 3.182 454) 2.776 3.747 2.571 3.365 2.447 3.143 2.365 2.998 2.306 2.896 2.262 2.82) 2.228 2.764 2.201 2.718 2.179 2.681 2.160 2.650 2.145 2.624 2.131 2.602 2.120 2.583 2.110 2.567 2.101 2.552 2.093 2.539 2.086 2.528 2.080 2.518 2.074 2.508 2.069 2.500 2.064 2.492 2.060 2.485 2.056 2.479 2.052 2.473 2.048 2.467 2.045 2.462 2.042 2.457 2.021 2.423 ~ 2.000 2.390 4.980 2.358 1.960 2.326 Source: Adopted with permission from J. Wonnacott and T. H. Wonnacott, Econometrics, 2nd ed. (New York: John Wiley & Sons, 1979) ~6-