Baye Test

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Chapter 01
The Fundamentals of Managerial Economics

Multiple Choice Questions

1. The higher the interest rate:
A. the greater the present value of a future amount.
B. the smaller the present value of a future amount.
C. the greater the level of inflation.
D. none of the statements associated with this question are correct.

2. If the interest rate is 10% and cash flows are $1,000 at the end of year one and $2,000 at the end of year two, then the present value of these cash flows is
A. $2,562.
B. $3,200.
C. $439.
D. $3,000.

3. Accounting profits are:
A. total revenue minus total cost.
B. total cost minus total revenue.
C. marginal revenue minus total cost.
D. total revenue minus marginal cost.

4. Economic
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The tractor costs $9,000 today, while the above cost savings will be realized at the end of each year. If the interest rate is seven percent, what is the net present value of purchasing the tractor?
A. $6,764.
B. $9,362.
C. $18,362.
D. none of the statements associated with this question are correct.

17. A firm will have constant profits of $100,000 per year for the next four years and the interest rate is six percent. Assuming these profits are realized at the end of each year, what is the present value these future profits?
A. $325,816.
B. $376,741.
C. $400,000.
D. $346,511.

18. A firm will maximize the present value of future profits by maximizing current profits when the:
A. growth rate in profits is constant.
B. growth rate in profits is larger than the interest rate.
C. interest rate is larger than the growth rate in profits and both are constant.
D. growth rate and interest rate are constant and equal.

19. Suppose the interest rate is five percent, the expected growth rate of the firm is two percent, and the firm is expected to continue forever. If current profits are $1,000, what is the value of the firm?
A. $31,000.
B. $30,000.
C. $26,500.
D. $35,000.

20. To maximize profits, a firm should continue to increase production of a good until:
A. total revenue equals total cost.
B. profits are zero.
C. marginal revenue equals marginal cost.
D. average cost equals average
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