UBC
Managerial Economics: Commerce/ FRE 295
Midterm of October 24, 2019
ANSWERS
PART I
Multiple Choice Questi0ns
Instructions: Please choose the correct answer for each question. There are 20 multiple choice
questions worth 2 pts each, for a total of 40 pts. For the print version of this exam, please circle
the correct letter in each question.
1. Which one of the following is a normative statement?
A. Higher advertising expenses lead to higher sales revenue.
B. You should study Commerce rather than Arts. (one’s opinion that something
is good/bad or that one should (not) do something is a normative statement)
C. Commerce graduates earn higher incomes than Arts graduates.
D. High-risk actions taken by many financial institutions caused the “great
recession” of 2007-2009.
2. From the time Apple launched iTunes in mid-2003 through 2009, it charged $0.99 for
each song. Suppose Apple increases its price to $1.29 and as a result its revenue
decreases by 20% (note revenue, not quantity).
A. The price elasticity of demand for songs must be elastic in this price range.
(When P increases, Q decreases. R will decrease as a result only if %Q decrease
is higher than %P increase.)
B. The price elasticity of demand for songs must be inelastic in this price range.
C. The price elasticity of demand is indeterminate.
D. The price elasticity of demand for songs is unit elastic in this price range.
3. Consider the following demand function for Oranges: Qd = 100 - 2P + 0.5Y + 3PA, where
PA is the price of a related good and Y is income.
A. When PA increases, the demand curve shifts to the left.
B. Oranges and this related good are complements.
C. When PA increases, there is a movement up along the demand curve.
D. When PA increases, the demand curve shifts to the right. (Increase in Pa
increases Qd, that is reflected by a shift of D to the right)
4. A firm purchased copper pipes last year at $12 per pipe and stored them, using them as
needed. If the firm could sell the remaining pipes at the current market price of $15,
1
, A. The opportunity cost of each pipe is $15 and sunk cost is $12.
B. The opportunity cost of each pipe is $12 and sunk cost is $0.
C. The opportunity cost of each pipe is $15 and sunk cost is $0.
(You can sell it for $15 means you can recover more than what you
invested/spent. Sunk cost = 0. Note that sunk cost is non-recoverable portion of
what you have already spent)
D. The opportunity cost of each pipe is $0 and sunk cost is $12.
5. The following table shows the multivariate linear regression results for CEO
compensation (in thousands). The R2 value is equal to 0.85.
Explanatory Variables Coefficient Standard Error
Constant 7,050 220
Assets ($billions), A 12.2 0.80
No of Employees (000s), L 8.14 5.40
Shareholder Return, S 7.26 1.91
Experience (years), E 63.70 18.68
A. The number of employees L does not have a statistically significant effect
on CEO compensation. (absolute t-stat = coefficient/SE. If t-stat >2, then
significant)
B. We know that no factor other than A, L, S and E has an effect on CEO
compensation.
C. All four variables have statistically significant effects on CEO’s compensation (at
the 95% confidence level).
D. Shareholder return S does not have a statistically significant effect on CEO
compensation.
6. A recent start-up decides to make an initial public offering. This implies that the start-
up will become:
A. A limited liability partnership, or LLP.
B. Part of the public sector.
C. A publicly traded corporation with limited liability.
D. A closely held private firm.
7. Anthony and Juliette are musicians. Each has the same downward-sloping demand
function for their latest songs, given by Q = 10 – 5P, where Q is the number of
downloads in thousands and P is the price of a download in dollars. Anthony spent 10
thousand dollars to record his song, while Juliette spent 5 thousand dollars to record
her song. The marginal cost of a download is zero for both musicians but they must
make a one-time payment of 2 thousand dollars to make their song available for
download. Both musicians are profit-maximizers.
2
Managerial Economics: Commerce/ FRE 295
Midterm of October 24, 2019
ANSWERS
PART I
Multiple Choice Questi0ns
Instructions: Please choose the correct answer for each question. There are 20 multiple choice
questions worth 2 pts each, for a total of 40 pts. For the print version of this exam, please circle
the correct letter in each question.
1. Which one of the following is a normative statement?
A. Higher advertising expenses lead to higher sales revenue.
B. You should study Commerce rather than Arts. (one’s opinion that something
is good/bad or that one should (not) do something is a normative statement)
C. Commerce graduates earn higher incomes than Arts graduates.
D. High-risk actions taken by many financial institutions caused the “great
recession” of 2007-2009.
2. From the time Apple launched iTunes in mid-2003 through 2009, it charged $0.99 for
each song. Suppose Apple increases its price to $1.29 and as a result its revenue
decreases by 20% (note revenue, not quantity).
A. The price elasticity of demand for songs must be elastic in this price range.
(When P increases, Q decreases. R will decrease as a result only if %Q decrease
is higher than %P increase.)
B. The price elasticity of demand for songs must be inelastic in this price range.
C. The price elasticity of demand is indeterminate.
D. The price elasticity of demand for songs is unit elastic in this price range.
3. Consider the following demand function for Oranges: Qd = 100 - 2P + 0.5Y + 3PA, where
PA is the price of a related good and Y is income.
A. When PA increases, the demand curve shifts to the left.
B. Oranges and this related good are complements.
C. When PA increases, there is a movement up along the demand curve.
D. When PA increases, the demand curve shifts to the right. (Increase in Pa
increases Qd, that is reflected by a shift of D to the right)
4. A firm purchased copper pipes last year at $12 per pipe and stored them, using them as
needed. If the firm could sell the remaining pipes at the current market price of $15,
1
, A. The opportunity cost of each pipe is $15 and sunk cost is $12.
B. The opportunity cost of each pipe is $12 and sunk cost is $0.
C. The opportunity cost of each pipe is $15 and sunk cost is $0.
(You can sell it for $15 means you can recover more than what you
invested/spent. Sunk cost = 0. Note that sunk cost is non-recoverable portion of
what you have already spent)
D. The opportunity cost of each pipe is $0 and sunk cost is $12.
5. The following table shows the multivariate linear regression results for CEO
compensation (in thousands). The R2 value is equal to 0.85.
Explanatory Variables Coefficient Standard Error
Constant 7,050 220
Assets ($billions), A 12.2 0.80
No of Employees (000s), L 8.14 5.40
Shareholder Return, S 7.26 1.91
Experience (years), E 63.70 18.68
A. The number of employees L does not have a statistically significant effect
on CEO compensation. (absolute t-stat = coefficient/SE. If t-stat >2, then
significant)
B. We know that no factor other than A, L, S and E has an effect on CEO
compensation.
C. All four variables have statistically significant effects on CEO’s compensation (at
the 95% confidence level).
D. Shareholder return S does not have a statistically significant effect on CEO
compensation.
6. A recent start-up decides to make an initial public offering. This implies that the start-
up will become:
A. A limited liability partnership, or LLP.
B. Part of the public sector.
C. A publicly traded corporation with limited liability.
D. A closely held private firm.
7. Anthony and Juliette are musicians. Each has the same downward-sloping demand
function for their latest songs, given by Q = 10 – 5P, where Q is the number of
downloads in thousands and P is the price of a download in dollars. Anthony spent 10
thousand dollars to record his song, while Juliette spent 5 thousand dollars to record
her song. The marginal cost of a download is zero for both musicians but they must
make a one-time payment of 2 thousand dollars to make their song available for
download. Both musicians are profit-maximizers.
2
