, Test Bank Chapter 2
Chapter 2—Fundamental Economic Concepts
MULTIPLE CHOICE
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
ANS: C PTS: 1
2. 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
ANS: D PTS: 1
3. 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
ANS: B PTS: 1
4. 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
ANS: B PTS: 1
5. An closest example of a risk-free security is
a. General Motors bonds
1 © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated,
or posted to a publicly accessible website, in whole or in part.
, Test Bank Chapter 2
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
ANS: C PTS: 1
6. 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
ANS: A PTS: 1
7. 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
ANS: D PTS: 1
8. 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
ANS: C PTS: 1
9. 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
2 © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated,
or posted to a publicly accessible website, in whole or in part.
, Test Bank Chapter 2
ANS: C PTS: 1
10. 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
ANS: D PTS: 1
11. 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
ANS: E PTS: 1
12. 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
ANS: B PTS: 1
13. The number of standard deviations z that a particular value of r is from the mean ȓ can be computed as
z = (r - ȓ)/ 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 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
3 © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated,
or posted to a publicly accessible website, in whole or in part.
Chapter 2—Fundamental Economic Concepts
MULTIPLE CHOICE
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
ANS: C PTS: 1
2. 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
ANS: D PTS: 1
3. 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
ANS: B PTS: 1
4. 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
ANS: B PTS: 1
5. An closest example of a risk-free security is
a. General Motors bonds
1 © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated,
or posted to a publicly accessible website, in whole or in part.
, Test Bank Chapter 2
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
ANS: C PTS: 1
6. 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
ANS: A PTS: 1
7. 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
ANS: D PTS: 1
8. 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
ANS: C PTS: 1
9. 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
2 © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated,
or posted to a publicly accessible website, in whole or in part.
, Test Bank Chapter 2
ANS: C PTS: 1
10. 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
ANS: D PTS: 1
11. 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
ANS: E PTS: 1
12. 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
ANS: B PTS: 1
13. The number of standard deviations z that a particular value of r is from the mean ȓ can be computed as
z = (r - ȓ)/ 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 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
3 © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated,
or posted to a publicly accessible website, in whole or in part.
