Economic Concepts Missed MCQ's 6.15.23 Flashcards
Sago Co. uses regression analysis to develop a model for predicting overhead costs. Two different cost drivers (machine hours and direct materials weight) are under consideration as the independent variable. Relevant data were run on a computer using one of the standard regression programs, with the following results:
Which regression equation should be used?
A. y = 4,600 + 1.3x
B. y = 2,500 + 5.0x
C. y = 2,500 + 3.5x
D. y = 4,600 + 2.6x
B. y = 2,500 + 5.0x
The simple regression equation is y = a + bx, given that y is the dependent variable, a is the y-axis intercept, b is the slope of the regression line, and x is the independent variable. The coefficient of determination (r²) is the appropriate tool for determining which cost driver to use because the value of r² indicates the proportion of the total variation in y that is explained by the regression equation. Since machine hours has a higher r² than direct materials weight, the coefficients for machine hours are the better choice to predict costs. Consequently, the regression equation is y = 2,500 + 5.0x.
A measure that describes the risk of an investment project relative to other investments in general is the
A. Coefficient of variation.
B. Beta coefficient.
C. Expected return.
D. Standard deviation.
B. Beta coefficient.
The required rate of return on equity capital in the capital asset pricing model is the risk-free rate (determined by government securities), plus the product of the market risk premium times the beta coefficient (beta measures the firm’s risk). The market risk premium is the amount above the risk-free rate that will induce investment in the market. The beta coefficient of an individual stock is the correlation between the volatility (price variation) of the stock market and that of the price of the individual stock.
A normal profit is
A. The same as an economic profit.
B. An explicit or out-of-pocket cost.
C. A cost of resources from an economic perspective.
D. The same as the accountant’s bottom line.
C. A cost of resources from an economic perspective.
Normal profit is the level of profit necessary to induce entrepreneurs to enter and remain in the market. Economists view this profit as an implicit cost of economic activity.
What is the amount needed to close the recessionary gap if the economy’s full-employment real gross domestic product (GDP) is $1.2 trillion and its equilibrium real GDP is $1.0 trillion?
A. $200 billion divided by the multiplier.
B. $200 billion times the reciprocal of the marginal propensity to consume (MPC).
C. $200 billion multiplied by the multiplier.
D. $200 billion.
A. $200 billion divided by the multiplier.
The $200 billion difference between full-employment GDP and equilibrium GDP can be eliminated by additional consumption, government spending, or exports. Because of the multiplier effect, the amount of the increase can be less than $200 billion. The amount of additional activity necessary to close the gap is ($200 billion ÷ Multiplier).
The monopoly firm has a patent that is about to expire. A new start-up firm has entered the market with a new method and has applied for patent protection. Which of the strategies below make the most economic sense for the monopoly firm?
A. I only.
B. II only.
C. III only.
D. I and II only.
D. I and II only.
Given adequate demand and sufficiently low costs, a monopoly firm earns a profit in the long-run and will continue production. A monopoly that succeeds in preventing the entry of new firms capable of producing its product will sooner or later find its barriers circumvented by innovations, which is why it is important that a monopoly firm shifts its business model to keep up with changes in the industry. Therefore, it would make economic sense for the monopoly firm to acquire the start-up firm.
The Waymand family typically ate hamburger as a staple in their diet. In the last few years, the family’s income has doubled, and they have now replaced hamburger with steak as a staple in their diet. This is an example in which the demand for hamburger
A. Responds as an inferior good.
B. Is relatively inelastic.
C. Is relatively elastic.
D. Is perfectly elastic.
A. Responds as an inferior good.
Consumers purchase more (less) of a normal good (such as steak) at every price when income levels increase (decrease). The opposite is true of inferior goods (such as hamburger). These effects result because normal goods have a positive income elasticity of demand and inferior goods have a negative income elasticity. Income elasticity of demand equals the percentage change in quantity demanded divided by the percentage change in income.
The coefficient of determination, r squared, in a multiple regression equation is the
A. Coefficient of the independent variable divided by the standard error of the regression coefficient.
B. Percentage of variation in the dependent variable explained by the variation in the independent variables.
C. Measure of the proximity of actual data points to the estimated data points.
D. Percentage of variation in the independent variables explained by the variation in the dependent variable.
B. Percentage of variation in the dependent variable explained by the variation in the independent variables.
The coefficient of determination, or the coefficient of correlation squared, measures the fit between the independent and dependent variables. In a multiple regression equation, it is the proportion of the total variation in one dependent variable that is accounted for by two or more independent variables.
As the price for a particular product changes, the quantity of the product demanded changes according to the following schedule.
Using the arc method, the price elasticity of demand for this product when the price decreases from $50 to $45 is
A. 10.00
B. 0.20
C. 0.10
D. 3.80
D. 3.80
A product’s price elasticity of demand is measured as the percentage change in quantity demanded divided by the percentage change in price. When price falls from $50 to $45, the coefficient is 3.8, calculated as follows:
Many assumptions and factors may be considered to determine the fair value except
A. Market value.
B. Historical cost.
C. Net realizable value.
D. Expected costs.
B. Historical cost.
Fair value is generally current market value which is independent of historical costs.
If Wilkens Company uses the high-low method of analysis, the equation for the relationship between hours of activity and maintenance cost would be
A. y = 570 + 7.5x
B. y = 570 + 9.0x
C. y = 3,600 + 400x
D. y = 400 + 9.0x
A. y = 570 + 7.5x
First, determine the months with the highest (520 hours in August) and lowest (300 hours in April) levels of activity.
As the hours increased by 220, cost increased by $1,650, which is $7.50 ($1,650 ÷ 220) per hour. Thus, at 300 hours of activity, the total variable costs are $2,250 ($7.50 × 300 hours). Since the total cost was $2,820, the $570 ($2,820 – $2,250) above the variable costs must be fixed costs. Substituting into the standard regression equation of y = a + bx gives y = $570 + $7.50x.
When risk is evaluated, which of the following risk responses is generally considered a sharing response?
A. Diversifying product offerings.
B. Entering into syndication agreements.
C. Reallocating capital among operating units.
D. Rebalancing the asset portfolio to reduce exposure to certain types of losses.
B. Entering into syndication agreements.
Risk sharing is action taken to reduce the severity of the risk by transferring a portion of the risk to another party. Examples include insurance, hedging, joint ventures, and outsourcing. A syndication agreement is a contract between the arranger and the other participants that shares risk among all parties.
Which of the following describes the most effective preventive control to ensure proper handling of cash receipt transactions?
A. Use predetermined totals (hash totals) of cash receipts to control posting routines.
B. The employee who receives customer mail receipts prepares the daily bank deposit, which is then deposited by another employee.
C. One employee issues a prenumbered receipt for all cash collections; another employee reconciles the daily total of prenumbered receipts to the bank deposits.
D. Have bank reconciliations prepared by an employee not involved with cash collections and then have them reviewed by a supervisor.
C. One employee issues a prenumbered receipt for all cash collections; another employee reconciles the daily total of prenumbered receipts to the bank deposits.
Sequentially numbered receipts should be issued to maintain accountability for cash collected. Such accountability should be established as soon as possible because cash has a high inherent risk. Daily cash receipts should be deposited intact so that receipts and bank deposits can be reconciled. The reconciliation should be performed by someone independent of the cash custody function.
An issuer’s audit committee has established procedures on submissions by employees of questionable accounting and auditing matters. Those procedures require the following:
Which of the above procedures will likely result in a violation of the Sarbanes-Oxley Act of 2002?
A. I and II only.
B. I only.
C. II only.
D. I, II and III.
A. I and II only.
The procedure requiring employees to identify themselves will likely violate the Sarbanes-Oxley Act because submissions should be made anonymously. Additionally, the procedure requiring that all submissions be presented to senior management will likely violate the Sarbanes-Oxley Act because submission should be confidential.
Which of the following risk responses is not effective in managing cyber risks?
A. Risk avoidance.
B. Risk acceptance.
C. Risk reduction.
D. Risk sharing.
A. Risk avoidance.
Since the business context of an organization and cyber risks are constantly evolving, responses that aim to avoid cyber risks are ineffective or nearly impossible to implement.
Which of the following is not a principle related to the information, communication, and reporting component of the COSO ERM framework?
A. The organization reports on risk, culture, and performance at multiple levels and across the entity.
B. The organization uses communication channels to support ERM.
C. The organization identifies risks that disrupt operations of the ERM.
D. The organization leverages its information systems to support ERM.
C. The organization identifies risks that disrupt operations of the ERM.
“The organization identifies risks that disrupt operations and affect the reasonable expectation of achieving strategy and business objectives” is one of the five principles related to the performance component of the COSO ERM framework. The three principles related to the information, communication, and reporting component of the COSO ERM framework are 1) the organization leverages its information systems to support ERM, 2) the organization uses communication channels to support ERM, and 3) the organization reports on risk, culture, and performance at multiple levels and across the entity.
