1
Econ 101: Managerial Economics
Midterm Exam 1
a
Winter, 2010
Professor: Huibin Yan
Instructions:
1. Show your work whenever applicable.
2. Please, write clearly.
Part A: Multiple Choice
(choose one best answer, 4 points each)
1. 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.
2. 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.
3. Suppose both supply and demand decrease. What effect will this have on price?
A. It will fall.
B. It will rise.
C. It may rise or fall.
D. It will remain the same.
4. If the crossprice elasticity between good A & B is negative, we know the goods are:
A. inferior goods.
B. complements.
C. inelastic.
D. substitutes.
5. The substitution effect isolates the change in the consumption of a good caused by:
A. the lower "real" income.
B. the change in consumer preferences.
C. the change in the market rate of substitution.
D. none of the statements associated with this question are correct.
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