Question: Why will a reduction in the real

> In an effort to speed up the collection of receivables, Hill Publishing Company is considering increasing the size of its cash discount by changing its credit terms from “1/10, net 30” to “2/10, net 30.” Currently, the company’s collection period average

> Explain the difference between the economic and financial definitions of business failure.

> Epstein Company, a wholesale distributor of jewelry, sells to retail jewelry stores on terms of “net 120.” Its average collection period is 150 days. The company is considering the introduction of a 4 percent cash discount if customers pay within 30 days

> Once again, consider the Bassett Furniture Industries example (Tables 18.1 and 18.2). Assume that rising labor and interest costs have increased Bassett’s variable cost ratio from 0.75 to 0.80 and its required pretax rate of return on r

> Looking back at Tables 18.1 and 18.2, evaluate the impact on Bassett’s pretax profits of extending full credit to the customers in Credit Risk Group 5. Assume that Bassett’s pretax required rate of return on inventory

> Drake Paper Company sells on terms of “net 30.” The firm’s variable cost ratio is 0.80. a. If annual credit sales are $20 million and its accounts receivable average 15 days overdue, what is Drake’s investment in receivables? b. Suppose that, as the re

> Miranda Tool Company sells to retail hardware stores on credit terms of “net 30.” Annual credit sales are $18 million and are spread evenly throughout the year. The company’s variable cost ratio is 0.70, and its accounts receivable average $1.9 million.

> Define the following terms: a. Stockout b. Deterministic inventory control models c. Probabilistic inventory control models d. Safety stock e. Lead time

> What are just-in-time inventory models?

> How does the firm’s required rate of return on investment enter into inventory decisions?

> In general terms, describe how to deal with each of the following conditions when determining the optimal inventory level: a. Constant (nonzero) replenishment lead time known with certainty b. Demand and replenishment lead time subject to uncertainty

> Describe the assumptions underlying the basic EOQ model.

> What is a tax-free merger?

> What is ABC inventory classification? How can this method be useful to a business?

> Describe the nature of stockout costs associated with a stockout in the following: a. Raw materials inventories b. Work-in-process inventories c. Finished goods inventories

> How do ordering costs for items purchased externally differ from ordering costs for items manufactured internally within the firm?

> Describe the components of carrying costs.

> Describe the benefits of holding the following: a. Raw materials inventories b. Work-in-process inventories c. Finished goods inventories

> Discuss how each of the following factors would tend to affect a firm’s credit extension policies: a. A shortage of working capital b. An increase in output to the point where the firm is operating at full production capacity c. An increase in the firm

> “The objective of the firm’s credit and collection policies should be to minimize its bad-debt losses.” Do you agree or disagree with this statement? Explain.

> A firm is currently selling on credit terms of “net 30,” and its accounts receivable average 30 days past due (that is, the firm’s average collection period is 60 days). What credit policy variables might the firm consider changing to reduce its average

> How does a firm’s required rate of return on investment enter into the analysis of changes in its credit and collection policies?

> Describe the five Cs of credit used in evaluating the creditworthiness of a credit applicant.

> What is a leveraged buyout? What is mezzanine financing? (Use Google in getting your answer.)

> Define the following terms: a. Merger b. Consolidation c. Holding company

> There is a growing public support for marijuana law reform, with polls showing more than half the country is in favor of some form of marijuana legalization. However, opinions on marijuana are divided starkly along political party lines. The results of t

> Explain how hyperinflation might lead to a severe decline in total output.

> Explain how an increase in your nominal income and a decrease in your real income might occur simultaneously. Who loses from inflation? Who gains?

> Distinguish between demand-pull inflation and cost-push inflation. Which of the two types is most likely to be associated with a negative GDP gap? Which with a positive GDP gap, in which actual GDP exceeds potential GDP? What is core inflation? Why it is

> What is the Consumer Price Index (CPI) and how is it determined each month? How does the Bureau of Labor Statistics calculate the rate of inflation from one year to the next? What effect does inflation have on the purchasing power of a dollar? How does i

> Since the United States has an unemployment compensation program that provides income for those out of work, why should we worry about unemployment?

> What is the central economic idea humorously illustrated in Art Buchwald’s piece, “Squaring the Economic Circle”? How does the central idea relate to economic recessions, on the one hand, and vigorous economic expansions, on the other?

> Why is the actual multiplier in the U.S. economy less than the multiplier in this chapter’s example?

> Is the relationship between changes in spending and changes in real GDP in the multiplier effect a direct (positive) relationship or is it an inverse (negative) relationship? How does the size of the multiplier relate to the size of the MPC? The MPS? Wha

> Why is investment spending unstable?

> How is it possible for investment spending to increase even in a period in which the real interest rate rises?

> In long-run equilibrium, P = minimum ATC = MC. Of what significance for economic efficiency is the equality of P and minimum ATC? The equality of P and MC? Distinguish between productive efficiency and allocative efficiency in your answer.

> In what direction will each of the following occurrences shift the investment demand curve, other things equal? a. An increase in unused production capacity occurs. b. Business taxes decline. c. The costs of acquiring equipment fall. d. Widespread pessi

> If the Fed increases interest rates, the SML will shift _________ and asset prices will ________. a. Down; rise. b. Down; fall. c. Up; rise. d. Up; fall.

> Suppose that an SML indicates that assets with a beta = 1.15 should have an average expected rate of return of 12 percent per year. If a particular stock with a beta = 1.15 currently has an average expected rate of return of 15 percent, what should we ex

> The interest rate on short-term U.S. government bonds is 4 percent. The risk premium for any asset with a beta = 1.0 is 6 percent. What is the average expected rate of return on the market portfolio? a. 0 percent. b. 4 percent. c. 6 percent. d. 10 perce

> If an investment has 35 percent more nondiversifiable risk than the market portfolio, its beta will be: a. 35. b. 1.35. c. 0.35.

> An investment has a 50 percent chance of generating a 10 percent return and a 50 percent chance of generating a 16 percent return. What is the investment’s average expected rate of return? a. 10 percent. b. 11 percent. c. 12 percent. d. 13 percent. e. 1

> Sammy buys stock in a suntan-lotion maker and also stock in an umbrella maker. One stock does well when the weather is good; the other does well when the weather is bad. Sammy’s portfolio indicates that “weather risk” is a _________ risk. a. Diversifiab

> Tammy can buy an asset this year for $1,000. She is expecting to sell it next year for $1,050. What is the asset’s anticipated percentage rate of return? a. 0 percent. b. 5 percent. c. 10 percent. d. 15 percent.

> Asset X is expected to deliver 3 future payments. They have present values of, respectively, $1,000, $2,000, and $7,000. Asset Y is expected to deliver 10 future payments, each having a present value of $1,000. Which of the following statements correctly

> Demand curves slope downward because, other things held equal, LO3 a. An increase in a product’s price lowers MU. b. A decrease in a product’s price lowers MU. c. A decrease in a product’s price raises MU per dollar and makes consumers wish to purchase

> It is a fact that (1 + 0.12)3 = 1.40. Knowing that to be true, what is the present value of $140 received in three years if the annual interest rate is 12 percent? a. $1.40. b. $12. c. $100. d. $112.

> Identify each of the following investments as either an economic investment or a financial investment. a. A company builds a new factory. b. A pension plan buys some Google stock. c. A mining company sets up a new gold mine. d. A woman buys a 100-year-o

> Why does a downshift of the consumption schedule typically involve an equal upshift of the saving schedule? What is the exception to this relationship?

> Precisely how do the MPC and the APC differ? How does the MPC differ from the MPS? Why must the sum of MPC and the MPS equal 1?

> Why is it difficult to distinguish between frictional, structural, and cyclical unemployment? Why is unemployment an economic problem? What are the consequences of a negative GDP gap? What are the noneconomic effects of unemployment?

> How, in general, do unemployment rates vary by race and ethnicity, gender, occupation, and education? Why does the average length of time people are unemployed rise during a recession?

> How is the labor force defined and who measures it? How is the unemployment rate calculated? Does an increase in the unemployment rate necessarily mean a decline in the size of the labor force? Why is a positive unemployment rate—one more than zero perce

> How, in general, can a financial crisis lead to a recession? How, in general, can a major new invention lead to an expansion?

> What are the four phases of the business cycle? How long do business cycles last? Why does the business cycle affect output and employment in capital goods industries and consumer durable goods industries more severely than in industries producing consum

> How do the Minsky and Austrian explanations for the causes of the Great Recession differ? Explain how the proponents of government stimulus believe that it will affect aggregate demand and employment (be specific!). How might government stimulus possibl

> Frank spends $75 on 10 magazines and 25 newspapers. The magazines cost $5 each and the newspapers cost $2.50 each. Suppose that his MU from the final magazine is 10 utils while his MU from the final newspaper is also 10 utils. According to the utility

> Do prices tend to become more or less flexible as time passes? If there is a trend, how does it affect macroeconomists’ choice of models?

> Why do many firms strive to maintain stable prices?

> Are all prices in the economy equally inflexible? Which ones show large amounts of short-run flexibility? Which ones show a great deal of inflexibility even over months and years?

> Catalogue companies are committed to selling at the prices printed in their catalogues. If a catalogue company finds its inventory of sweaters rising, what does that tell you about the demand for sweaters? Was it unexpectedly high, unexpectedly low, or a

> Why, in general, do shocks force people to make changes? Give at least two examples from your own experience.

> How does investment as defined by economists differ from investment as defined by the general public? What would happen to the amount of economic investment made today if firms expected the future returns to such investment to be very low? What if firms

> Why is there a trade-off between the amount of consumption that people can enjoy today and the amount of consumption that they can enjoy in the future? Why can’t people enjoy more of both? How does saving relate to investment and thus to economic growth?

> Did economic output start growing faster than population from the beginning of the human inhabitation of the earth? When did modern economic growth begin? Have all of the world’s nations experienced the same extent of modern economic growth?

> Consider a nation in which the volume of goods and services is growing by 5 percent per year. What is the likely impact of this high rate of growth on the power and influence of its government relative to other countries experiencing slower rates of grow

> Why do you think macroeconomists focus on just a few key statistics when trying to understand the health and trajectory of an economy? Would it be better to try to make examine all possible data?

> Identify following arguments about economic growth as being either anti-growth or pro-growth. a. Growth means worker burnout and frantic schedules. b. Rising incomes allow people to buy more education, medical care, and recreation. c. The Earth has only

> Assume that the total value of the following items is $600 billion in a specific year for Upper Mongoose: net exports = $50 billion; value of new goods and services produced in the underground economy = $75 billion; personal consumption expenditures = $3

> The following table shows nominal GDP and an appropriate price index for a group of selected years. Compute real GDP. Indicate in each calculation whether you are inflating or deflating the nominal GDP data. Nominal GDP, Price Index Real GDP, Year B

> Suppose that in 1984 the total output in a single-good economy was 7,000 buckets of chicken. Also suppose that in 1984 each bucket of chicken was priced at $10. Finally, assume that in 2005 the price per bucket of chicken was $16 and that 22,000 buckets

> Using the following national income accounting data, compute (a) GDP, (b) NDP, and (c) NI. All figures are in billions. Compensation of employees U.S. exports of goods and services $194.2 17.8 Consumption of fixed capital 11.8 Government purchases 5

> Below is a list of domestic output and national income figures for a certain year. All figures are in billions. The questions that follow ask you to determine the major national income measures by both the expenditures and the income approaches. The resu

> Why might citizens interested in maximizing economic efficiency be happy to invest their government with the right to coerce them in at least some situations?

> Cite three examples of recent decisions that you made in which you, at least implicitly, weighed marginal cost and marginal benefit.

> What is the purpose of charging different groups of customers different prices? Supplement the three broad examples in the Last Word with two additional examples of your own. Hint: Think of price discounts based on group characteristics or time of purcha

> Research has found that an increase in the price of beer would reduce the amount of marijuana consumed. Is cross elasticity of demand between the two products positive or negative? Are these products substitutes or complements? What might be the logic be

> The income elasticities of demand for movies, dental services, and clothing have been estimated to be +3.4, +1, and +.5, respectively. Interpret these coefficients. What does it mean if an income elasticity coefficient is negative?

> What effect would a rule stating that university students must live in university dormitories have on the price elasticity of demand for dormitory space? What impact might this in turn have on room rates?

> If in some country personal consumption expenditures in a specific year are $50 billion, purchases of stocks and bonds are $30 billion, net exports are -$10 billion, government purchases are $20 billion, sales of second-hand items are $8 billion, and gro

> Explain why the choice between 1, 2, 3, 4, 5, 6, 7, and 8 “units,” or 1,000, 2,000, 3,000, 4,000, 5,000, 6,000, 7,000 and 8,000 movie tickets, makes no difference in determining elasticity in Table 6.1.

> Erin grows pecans. The number of bushels (B) that she can produce depends on the number of inches of rainfall (R) that her orchards get. The relationship is given algebraically as follows: B = 3,000 + 800R. Match each part of this equation with the corr

> True or False. The median voter model explains why politicians so often stake out fringe positions that appeal only to a small segment of the electorate. Why?

> Suppose there are only five people in a society and each favors one of the five highway construction options listed in Table 4.4 (“No new construction” is one of the five options). Explain which of these highway option

> Explain the paradox of voting through reference to the accompanying table, which shows the ranking of three public goods by voters Jay, Dave, and Conan: Rankings Public Good Jay Dave Conan Courthouse 2nd choice 1st choice 3d choice School 3d choice 2

> Political advertising is often directed at winning over so-called swing voters, whose votes might go either way. Suppose that two political parties-the Freedom Party and the Liberty Party-disagree on whether to build a new road. Polling shows that of 1

> Look back at Figures 1a and 1b, which show the costs and benefits to voters Adams, Benson, and Conrad of two different public goods that the government will produce if a majority of Adams, Benson, and Conrad support them. Suppose that Adams, Benson, and

> Consider a corrupt provincial government in which each housing inspector examines two newly built structures each week. All the builders in the province are unethical and want to increase their profits by using substandard construction materials, but th

> Lorena likes to play golf. The number of times per year that she plays depends on both the price of playing a round of golf as well as Lorena’s income and the cost of other types of entertainment—in particular, how mu

> Currently, at a price of $1 each, 100 popsicles are sold per day in the perpetually hot town of Rostin. Consider the elasticity of supply. In the short run, a price increase from $1 to $2 is unit elastic (Es = 1.0). So how many popsicles will be sold ea

> Assume that a grower of flower bulbs sells its annual output of bulbs to an Internet retailer for $70,000. The retailer, in turn, brings in $160,000 from selling the bulbs directly to final customers. What amount would these two transactions add to perso

> What is the formula for measuring the price elasticity of supply? Suppose the price of apples goes up from $20 to $22 a box. In direct response, Goldsboro Farms supplies 1,200 boxes of apples instead of 1,000 boxes. Compute the coefficient of price elast

> Danny “Dimes” Donahue is a neighborhood’s 9-year-old entrepreneur. His most recent venture is selling homemade brownies that he bakes himself. At a price of $1.50 each, he sells 100. At a price of $1.00 each, he sells 300. Is demand elastic or inelastic

> Suppose that the total revenue received by a company selling basketballs is $600 when the price is set at $30 per basketball and $600 when the price is set at $20 per basketball. Without using the midpoint formula, can you tell whether demand is elastic

> Investigate how demand elasticities are affected by increases in demand. Shift each of the demand curves in Figures 6.2a, 6.2b, and 6.2c to the right by 10 units. For example, point a in Figure 6.2a would shift rightward from location (10 units, $2) to (

> Look at the demand curve in Figure 6.2a. Use the midpoint formula and points a and b to calculate the elasticity of demand for that range of the demand curve. Do the same for the demand curves in Figures 6.2b and 6.2c using, respectively, points c and d

> Select all of the following that are true. To an economist, a coercive government can be useful in order to: a. Reallocate resources in order to improve efficiency. b. Fight negative externalities. c. Ensure low gasoline prices. d. Provide a low-risk e

> Consider a specific example of the special-interest effect and the collective-action problem. In 2012, it was estimated that the total value of all corn‐production subsidies in the United States totaled about $3 billion. The population of the United Sta

> Suppose that there are 1 million federal workers at the lowest level of the federal bureaucracy and that above them there are multiple layers of supervisors and supervisors-of-supervisors. Assume that each higher level is one-tenth the size of the one b