ECO 550 week 11 final exams

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ECO 550 Sample Final Exam (500 Questions and Answers)

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Final Exam 1

Question 1

4 out of 4 points

   
  The degree of operating leverage is equal to the ____ change in ____ divided by the ____ change in ____.Answer      
  Selected Answer:  percentage; EBIT; percentage; salesCorrect Answer:  percentage; EBIT; percentage; sales      

Question 2

4 out of 4 points

   
  The short-run cost function is:Answer      
  Selected Answer:  relevant to decisions in which one or more inputs to the production process are fixedCorrect Answer:  relevant to decisions in which one or more inputs to the production process are fixed      

Question 3

4 out of 4 points

   
  Theoretically, in a long-run cost function:Answer      
  Selected Answer:  all inputs are considered variableCorrect Answer:  all inputs are considered variable      

Question 4

4 out of 4 points

   
  Evidence from empirical studies of long-run cost-output relationships lends support to the:Answer      
  Selected Answer:  hypothesis that total costs increase linearly over some considerable range of output examinedCorrect Answer:  hypothesis that total costs increase linearly over some considerable range of output examined      

Question 5

4 out of 4 points

   
  In the linear breakeven model, the breakeven sales volume (in dollars) can be found by multiplying the breakeven sales volume (in units) by:Answer      
  Selected Answer:  selling price per unitCorrect Answer:  selling price per unit      

Question 6

4 out of 4 points

   
  In a study of banking by asset size over time, we can find which asset sizes are tending to become more prominent.  The size that is becoming more predominant is presumed to be least cost. This is called:Answer      
  Selected Answer:  survivorship analysis.Correct Answer:  survivorship analysis.      

Question 7

4 out of 4 points

   
  Buyers anticipate that the temporary warehouse seller of unbranded computer equipment willAnswer      
  Selected Answer:  produce only one qualityCorrect Answer:  produce only one quality      

Question 8

4 out of 4 points

   
  In the long-run, firms in a monopolistically competitive industry willAnswer      
  Selected Answer:  tend to just cover costs, including normal profitsCorrect Answer:  tend to just cover costs, including normal profits      

Question 9

4 out of 4 points

   
  In the short-run for a purely competitive market, a manufacturer will stop production when:Answer      
  Selected Answer:  the contribution to fixed costs is zero or lessCorrect Answer:  the contribution to fixed costs is zero or less      

Question 10

4 out of 4 points

   
  A firm in pure competition would shut down when:Answer      
  Selected Answer:  price is less than average variable costCorrect Answer:  price is less than average variable cost      

Question 11

4 out of 4 points

   
  Asset specificity is largest whenAnswer      
  Selected Answer:  very valuable assets are non-redeployableCorrect Answer:  very valuable assets are non-redeployable      

Question 12

4 out of 4 points

   
  Uncertainty includes all of the following except ____.Answer      
  Selected Answer:  unverifiable claimsCorrect Answer:  unverifiable claims      

Question 13

4 out of 4 points

   
  Experience goods are products or servicesAnswer      
  Selected Answer:  whose quality is undetectable when purchasedCorrect Answer:  whose quality is undetectable when purchased      

Question 14

4 out of 4 points

   
  Declining cost industriesAnswer      
  Selected Answer:  have marginal cost curves below their average cost curve.Correct Answer:  have marginal cost curves below their average cost curve.      

Question 15

4 out of 4 points

   
  Of the following, which is not an economic rationale for public utility regulation?Answer      
  Selected Answer:  constant cost industryCorrect Answer:  constant cost industry      

Question 16

4 out of 4 points

   
  ____ as practiced by public utilities is designed to encourage greater usage and therefore spread the fixed costs of the utility’s plant over a larger number of units of output.Answer      
  Selected Answer:  Block pricingCorrect Answer:  Block pricing      

Question 17

4 out of 4 points

   
  The practice by telephone companies of charging lower long-distance rates at night than during the day is an example of:Answer      
  Selected Answer:  peak-load pricingCorrect Answer:  peak-load pricing      

Question 18

4 out of 4 points

   
  When the cross elasticity of demand between one product and all other products is low, one is generally referring to a(n) ____ situation.Answer      
  Selected Answer:  monopolyCorrect Answer:  monopoly      

Question 19

4 out of 4 points

   
  In natural monopoly, AC continuously declines due to economies in distribution or in production, which tends to found in industries which face increasing returns to scale.  If price were set equal to marginal cost, then:Answer      
  Selected Answer:  price would be below average cost.Correct Answer:  price would be below average cost.      

Question 20

4 out of 4 points

   
  A cartel is a situation where firms in the industryAnswer      
  Selected Answer:  have an agreement to restrict output.Correct Answer:  have an agreement to restrict output.      

Question 21

4 out of 4 points

   
  The existence of a kinked demand curve under oligopoly conditions may result inAnswer      
  Selected Answer:  price rigidityCorrect Answer:  price rigidity      

Question 22

4 out of 4 points

   
  Which of the following is an example of an oligopolistic market structure?Answer      
  Selected Answer:  air transport industryCorrect Answer:  air transport industry      

Question 23

4 out of 4 points

   
  Even ideal cartels tend to be unstable becauseAnswer      
  Selected Answer:  firms can benefit by secretly selling more than they promised the other firmsCorrect Answer:  firms can benefit by secretly selling more than they promised the other firms      

Question 24

4 out of 4 points

   
  In a kinked demand market, whenever one firm decides to lower its price,Answer      
  Selected Answer:  other firms will automatically follow.Correct Answer:  other firms will automatically follow.      

Question 25

4 out of 4 points

   
  Some industries that have rigid prices.  In those industries, we tend toAnswer      
  Selected Answer:  find that output varies greatly over the business cycleCorrect Answer:  find that output varies greatly over the business cycle      

Tuesday, June 17, 2014 2:50:57 PM EDT

FINAL EXAM 2

Question 1

4 out of 4 points

   
  In making promises that are not guaranteed by third parties and in imposing penalties that are not enforced by third parties, all of the following are credibility-enhancing mechanisms exceptAnswer      
  Selected Answer:  offering a warrantyCorrect Answer:  offering a warranty      

Question 2

4 out of 4 points

   
  Essential components of a game include all of the following except:Answer      
  Selected Answer:  cooperationCorrect Answer:  cooperation      

Question 3

4 out of 4 points

   
  A key to analyzing subgame perfect equilibrium strategy in sequential games isAnswer      
  Selected Answer:  an explicit order of play for at least some participantsCorrect Answer:  an explicit order of play for at least some participants      

Question 4

4 out of 4 points

   
  When airlines post prices on an electronic bulletin board at 8:00 a.m. each morning, the decision-makers are engaged inAnswer      
  Selected Answer:  a simultaneous gameCorrect Answer:  a simultaneous game      

Question 5

4 out of 4 points

   
  Credible promises and hostage mechanisms can support a continuous stream of cooperative exchanges except whenAnswer      
  Selected Answer:  the hostage can be revoked for just causesCorrect Answer:  the hostage can be revoked for just causes      

Question 6

4 out of 4 points

   
  Firms that have a cover charge for their customers and charge for each item they purchase as well are exhibitingAnswer      
  Selected Answer:  two-part price discrimination.Correct Answer:  two-part price discrimination.      

Question 7

4 out of 4 points

   
  The segmenting of customers into several small groups such as household, institutional, commercial, and industrial users, and establishing a different rate schedule for each group is known as:Answer      
  Selected Answer:  third-degree price discriminationCorrect Answer:  third-degree price discrimination      

Question 8

4 out of 4 points

   
  Vacation tours to Europe invariably package visits to disparate regions:  cities, mountains, and the seaside.  Bundling, a type of second degree price discrimination, is most profitable when:Answer      
  Selected Answer:  the preference rankings of vacationers travelling together are negatively correlated.Correct Answer:  the preference rankings of vacationers travelling together are negatively correlated.      

Question 9

4 out of 4 points

   
  Which of the following pricing policies best identifies when a product should be expanded, maintained, or discontinued?Answer      
  Selected Answer:  marginal-pricing policyCorrect Answer:  marginal-pricing policy      

Question 10

4 out of 4 points

   
  ____ is a new product pricing strategy which results in a high initial product price. This price is reduced over time as demand at the higher price is satisfied.Answer      
  Selected Answer:  SkimmingCorrect Answer:  Skimming      

Question 11

4 out of 4 points

   
  Which of the following is not among the functions of contract?Answer      
  Selected Answer:  to discourage the development of asymmetric informationCorrect Answer:  to discourage the development of asymmetric information      

Question 12

4 out of 4 points

   
  Mac trucks and their dealers would likely have an organizational form ofAnswer      
  Selected Answer:  fixed profit sharing franchise contractsCorrect Answer:  fixed profit sharing franchise contracts      

Question 13

4 out of 4 points

   
  Contracts are distinguished from tactical alliances by which of the following characteristics:Answer      
  Selected Answer:  require third-party enforcementCorrect Answer:  require third-party enforcement      

Question 14

4 out of 4 points

   
  Which of the following are not approaches to resolving the principal-agent problem?Answer      
  Selected Answer:  straight salary contractsCorrect Answer:  straight salary contracts      

Question 15

4 out of 4 points

   
  When retail bicycle dealers advertise and perform warranty repairs but do not deliver the personal selling message that Schwinn has designed as part of the marketing plan but cannot observe at less than prohibitive cost, the manufacturer has encountered a problem of ____.Answer      
  Selected Answer:  moral hazardCorrect Answer:  moral hazard      

Question 16

4 out of 4 points

   
  ____ occurs whenever a third party receives or bears costs arising from an economic transaction in which the individual (or group) is not a direct participant.Answer      
  Selected Answer:  ExternalitiesCorrect Answer:  Externalities      

Question 17

4 out of 4 points

   
  The antitrust laws regulate all of the following business decisions except ____.Answer      
  Selected Answer:  wage levelsCorrect Answer:  wage levels      

Question 18

4 out of 4 points

   
  The sentiment for increased deregulation in the late 1970’s and early 1980’s has been felt most significantly in the price regulation ofAnswer      
  Selected Answer:  transportationCorrect Answer:  transportation      

Question 19

4 out of 4 points

   
  The Herfindahl-Hirschman index (also shortened to just the Herfindahl index) is a measure of ____.Answer      
  Selected Answer:  market concentrationCorrect Answer:  market concentration      

Question 20

4 out of 4 points

   
  The lower the barriers to entry and exit, the more nearly a market structure fits the ____ market model.Answer      
  Selected Answer:  perfectly contestableCorrect Answer:  perfectly contestable      

Question 21

4 out of 4 points

   
  If the acceptance of Project A makes it impossible to accept Project B, these projects are:Answer      
  Selected Answer:  mutually exclusive projectsCorrect Answer:  mutually exclusive projects      

Question 22

4 out of 4 points

   
  Cost-benefit analysis is the public sector counterpart to ____ used in private, profit-oriented firms.Answer      
  Selected Answer:  capital budgeting techniquesCorrect Answer:  capital budgeting techniques      

Question 23

4 out of 4 points

   
  The weights used in calculating the firm’s weighted-average cost of capital are equal to the proportion of debt and equity ____.Answer      
  Selected Answer:  in the firm’s target capital structureCorrect Answer:  in the firm’s target capital structure      

Question 24

4 out of 4 points

   
  In order to help assure that all relevant factors will be considered, the capital-expenditure selection process should include the following steps except:Answer      
  Selected Answer:  allocate manpower to the various divisions within the firmCorrect Answer:  allocate manpower to the various divisions within the firm      

Question 25

4 out of 4 points

   
  The social rate of discount is best approximated by:Answer      
  Selected Answer:  the opportunity cost of resources taken from the private sectorCorrect Answer:  the opportunity cost of resources taken from the private sector      

Wednesday, June 18, 2014 4:34:46 AM EDT

Question 1

4 out of 4 points

   
  Theoretically, in a long-run cost function:Answer      
  Selected Answer:  all inputs are considered variableCorrect Answer:  all inputs are considered variable      

Question 2

4 out of 4 points

   
  The degree of operating leverage is equal to the ____ change in ____ divided by the ____ change in ____.Answer      
  Selected Answer:  percentage; EBIT; percentage; salesCorrect Answer:  percentage; EBIT; percentage; sales      

Question 3

4 out of 4 points

   
  Which of the following is not an assumption of the linear breakeven model:Answer      
  Selected Answer:  decreasing variable cost per unitCorrect Answer:  decreasing variable cost per unit      

Question 4

4 out of 4 points

   
  In the linear breakeven model, the breakeven sales volume (in dollars) can be found by multiplying the breakeven sales volume (in units) by:Answer      
  Selected Answer:  selling price per unitCorrect Answer:  selling price per unit      

Question 5

4 out of 4 points

   
  In the linear breakeven model, the difference between selling price per unit and variable cost per unit is referred to as:Answer      
  Selected Answer:  contribution margin per unitCorrect Answer:  contribution margin per unit      

Question 6

4 out of 4 points

   
  The short-run cost function is:Answer      
  Selected Answer:  relevant to decisions in which one or more inputs to the production process are fixedCorrect Answer:  relevant to decisions in which one or more inputs to the production process are fixed      

Question 7

4 out of 4 points

   
  The problems of asymmetric information exchange arise ultimately becauseAnswer      
  Selected Answer:  one party cannot independently verify the information of anotherCorrect Answer:  one party cannot independently verify the information of another      

Question 8

4 out of 4 points

   
  A firm in pure competition would shut down when:Answer      
  Selected Answer:  price is less than average variable costCorrect Answer:  price is less than average variable cost      

Question 9

4 out of 4 points

   
  An “experience good” is one that:Answer      
  Selected Answer:  Has undetectable quality when purchasedCorrect Answer:  Has undetectable quality when purchased      

Question 10

4 out of 4 points

   
  In the purely competitive case, marginal revenue (MR) is equal to:Answer      
  Selected Answer:  priceCorrect Answer:  price      

Question 11

4 out of 4 points

   
  If price exceeds average costs under pure competition, ____ firms will enter the industry, supply will ____, and price will be driven ____.Answer      
  Selected Answer:  more; increase; downCorrect Answer:  more; increase; down      

Question 12

4 out of 4 points

   
  Buyers anticipate that the temporary warehouse seller of unbranded computer equipment willAnswer      
  Selected Answer:  produce only one qualityCorrect Answer:  produce only one quality      

Question 13

4 out of 4 points

   
  What is the profit maximization point for a firm in a purely competitive environment?Answer      
  Selected Answer:  The output where P = MCCorrect Answer:  The output where P = MC      

Question 14

4 out of 4 points

   
  The practice by telephone companies of charging lower long-distance rates at night than during the day is an example of:Answer      
  Selected Answer:  peak-load pricingCorrect Answer:  peak-load pricing      

Question 15

4 out of 4 points

   
  The demand curve facing the firm in ____ is the same as the industry demand curve.Answer      
  Selected Answer:  pure monopolyCorrect Answer:  pure monopoly      

Question 16

4 out of 4 points

   
  Declining cost industriesAnswer      
  Selected Answer:  have marginal cost curves below their average cost curve.Correct Answer:  have marginal cost curves below their average cost curve.      

Question 17

4 out of 4 points

   
  Of the following, which is not an economic rationale for public utility regulation?Answer      
  Selected Answer:  constant cost industryCorrect Answer:  constant cost industry      

Question 18

4 out of 4 points

   
  When the cross elasticity of demand between one product and all other products is low, one is generally referring to a(n) ____ situation.Answer      
  Selected Answer:  monopolyCorrect Answer:  monopoly      

Question 19

4 out of 4 points

   
  Regulatory agencies engage in all of the following activities except _______.Answer      
  Selected Answer:  setting federal and state income tax rates on regulated firmsCorrect Answer:  setting federal and state income tax rates on regulated firms      

Question 20

4 out of 4 points

   
  Barometric price leadership exists whenAnswer      
  Selected Answer:  one firm in the industry initiates a price change and the others follow it as a signal of changes in cost or demand in the industry.Correct Answer:  one firm in the industry initiates a price change and the others follow it as a signal of changes in cost or demand in the industry.      

Question 21

4 out of 4 points

   
  A cartel is a situation where firms in the industryAnswer      
  Selected Answer:  have an agreement to restrict output.Correct Answer:  have an agreement to restrict output.      

Question 22

4 out of 4 points

   
  The existence of a kinked demand curve under oligopoly conditions may result inAnswer      
  Selected Answer:  price rigidityCorrect Answer:  price rigidity      

Question 23

4 out of 4 points

   
  Some industries that have rigid prices.  In those industries, we tend toAnswer      
  Selected Answer:  find that output varies greatly over the business cycleCorrect Answer:  find that output varies greatly over the business cycle      

Question 24

4 out of 4 points

   
  If a cartel seeks to maximize profits, the market share (or quota) for each firm should be set at a level such that the ____ of all firms is identical.Answer      
  Selected Answer:  marginal costCorrect Answer:  marginal cost      

Question 25

4 out of 4 points

   
  A(n) ____ is characterized by a relatively small number of firms producing a product.Answer      
  Selected Answer:  oligopolyCorrect Answer:  oligopoly      

Wednesday, June 18, 2014 12:16:53 PM EDT

Question 1

4 out of 4 points

   
  The Prisoner’s Dilemma involves two spies who are held in separate soundproof rooms.  But even if the two spies could communicate, what makes it difficult for them to achieve the cooperative solution (both not confessing)?Answer      
  Selected Answer:  The problem is that both spies have incentives to double cross each other.Correct Answer:  The problem is that both spies have incentives to double cross each other.      

Question 2

4 out of 4 points

   
  A key to analyzing subgame perfect equilibrium strategy in sequential games isAnswer      
  Selected Answer:  an explicit order of play for at least some participantsCorrect Answer:  an explicit order of play for at least some participants      

Question 3

4 out of 4 points

   
  In making promises that are not guaranteed by third parties and in imposing penalties that are not enforced by third parties, all of the following are credibility-enhancing mechanisms exceptAnswer      
  Selected Answer:  offering a warrantyCorrect Answer:  offering a warranty      

Question 4

4 out of 4 points

   
  The starting point of many methods for predicting equilibrium strategy in sequential games isAnswer      
  Selected Answer:  endgame analysisCorrect Answer:  endgame analysis      

Question 5

4 out of 4 points

   
  Credible promises and hostage mechanisms can support a continuous stream of cooperative exchanges except whenAnswer      
  Selected Answer:  the hostage can be revoked for just causesCorrect Answer:  the hostage can be revoked for just causes      

Question 6

4 out of 4 points

   
  Firms that have a cover charge for their customers and charge for each item they purchase as well are exhibitingAnswer      
  Selected Answer:  two-part price discrimination.Correct Answer:  two-part price discrimination.      

Question 7

4 out of 4 points

   
  Third-degree price discrimination exists whenever:Answer      
  Selected Answer:  the seller can separate markets by geography, income, age, etc., and charge different prices to these different groups.Correct Answer:  the seller can separate markets by geography, income, age, etc., and charge different prices to these different groups.      

Question 8

4 out of 4 points

   
  To maximize profits, a monopolist that engages in price discrimination must allocate output in such a way as to make identical the ____ in all markets.Answer      
  Selected Answer:  marginal revenueCorrect Answer:  marginal revenue      

Question 9

4 out of 4 points

   
  Vacation tours to Europe invariably package visits to disparate regions:  cities, mountains, and the seaside.  Bundling, a type of second degree price discrimination, is most profitable when:Answer      
  Selected Answer:  the preference rankings of vacationers travelling together are negatively correlated.Correct Answer:  the preference rankings of vacationers travelling together are negatively correlated.      

Question 10

4 out of 4 points

   
  ____ is a new product pricing strategy which results in a high initial product price. This price is reduced over time as demand at the higher price is satisfied.Answer      
  Selected Answer:  SkimmingCorrect Answer:  Skimming      

Question 11

4 out of 4 points

   
  Contracts are distinguished from tactical alliances by which of the following characteristics:Answer      
  Selected Answer:  require third-party enforcementCorrect Answer:  require third-party enforcement      

Question 12

4 out of 4 points

   
  When someone contracts to do a task but fails to put full effort into the performance of an agreement, yet the lack of effort is not independently verifiable, this lack of effort constitutes aAnswer      
  Selected Answer:  moral hazardCorrect Answer:  moral hazard      

Question 13

4 out of 4 points

   
  When borrowers who do not intend to repay are able to hide their bad credit histories, a lender’s well-intentioned borrowers shouldAnswer      
  Selected Answer:  offer more collateral in exchange for lower interest chargesCorrect Answer:  offer more collateral in exchange for lower interest charges      

Question 14

4 out of 4 points

   
  To accomplish its purpose a linear profit-sharing contract mustAnswer      
  Selected Answer:  establish a separating equilibriumCorrect Answer:  establish a separating equilibrium      

Question 15

4 out of 4 points

   
  When retail bicycle dealers advertise and perform warranty repairs but do not deliver the personal selling message that Schwinn has designed as part of the marketing plan but cannot observe at less than prohibitive cost, the manufacturer has encountered a problem of ____.Answer      
  Selected Answer:  moral hazardCorrect Answer:  moral hazard      

Question 16

4 out of 4 points

   
  The lower the barriers to entry and exit, the more nearly a market structure fits the ____ market model.Answer      
  Selected Answer:  perfectly contestableCorrect Answer:  perfectly contestable      

Question 17

4 out of 4 points

   
  ____ yields the same results as the theory of perfect competition, but requires substantially fewer assumptions than the perfectly competitive model.Answer      
  Selected Answer:  The theory of contestable marketsCorrect Answer:  The theory of contestable markets      

Question 18

4 out of 4 points

   
  ____ occurs whenever a third party receives or bears costs arising from an economic transaction in which the individual (or group) is not a direct participant.Answer      
  Selected Answer:  ExternalitiesCorrect Answer:  Externalities      

Question 19

4 out of 4 points

   
  The antitrust laws regulate all of the following business decisions except ____.Answer      
  Selected Answer:  wage levelsCorrect Answer:  wage levels      

Question 20

4 out of 4 points

   
  The sentiment for increased deregulation in the late 1970’s and early 1980’s has been felt most significantly in the price regulation ofAnswer      
  Selected Answer:  transportationCorrect Answer:  transportation      

Question 21

4 out of 4 points

   
  The ____ depicts the risk-return relationship in the market for all securities:Answer      
  Selected Answer:  security market lineCorrect Answer:  security market line      

Question 22

4 out of 4 points

   
  If the acceptance of Project A makes it impossible to accept Project B, these projects are:Answer      
  Selected Answer:  mutually exclusive projectsCorrect Answer:  mutually exclusive projects      

Question 23

4 out of 4 points

   
  Capital expenditures:Answer      
  Selected Answer:  Affect long-run future profitabilityCorrect Answer:  Affect long-run future profitability      

Question 24

4 out of 4 points

   
  The decision by the Municipal Transit Authority to either refurbish existing buses, buy new large buses, or to supplement the existing fleet with mini-buses is an example of:Answer      
  Selected Answer:  mutually exclusive projectsCorrect Answer:  mutually exclusive projects      

Question 25

4 out of 4 points

   
  Which of the following items is (are) not considered as part of the net investment calculation?Answer      
  Selected Answer:  first year’s net cash flowCorrect Answer:  first year’s net cash flow      

Wednesday, June 18, 2014 2:03:47 PM EDT

Question 1

4 out of 4 points

   
  In the linear breakeven model, the difference between selling price per unit and variable cost per unit is referred to as:Answer      
  Selected Answer:  contribution margin per unitCorrect Answer:  contribution margin per unit      

Question 2

4 out of 4 points

   
  Evidence from empirical studies of long-run cost-output relationships lends support to the:Answer      
  Selected Answer:  hypothesis that total costs increase linearly over some considerable range of output examinedCorrect Answer:  hypothesis that total costs increase linearly over some considerable range of output examined      

Question 3

4 out of 4 points

   
  Theoretically, in a long-run cost function:Answer      
  Selected Answer:  all inputs are considered variableCorrect Answer:  all inputs are considered variable      

Question 4

4 out of 4 points

   
  In a study of banking by asset size over time, we can find which asset sizes are tending to become more prominent.  The size that is becoming more predominant is presumed to be least cost. This is called:Answer      
  Selected Answer:  survivorship analysis.Correct Answer:  survivorship analysis.      

Question 5

4 out of 4 points

   
  A ____ total cost function implies that marginal costs ____ as output is increased.Answer      
  Selected Answer:  linear; are constantCorrect Answer:  linear; are constant      

Question 6

4 out of 4 points

   
  In the linear breakeven model, the breakeven sales volume (in dollars) can be found by multiplying the breakeven sales volume (in units) by:Answer      
  Selected Answer:  selling price per unitCorrect Answer:  selling price per unit      

Question 7

4 out of 4 points

   
  Long distance telephone service has become a competitive market. The average cost per call is $0.05 a minute, and it’s declining.  The likely reason for the declining price for long distance service is:Answer      
  Selected Answer:  Entry into this industry pushes prices downCorrect Answer:  Entry into this industry pushes prices down      

Question 8

4 out of 4 points

   
  All of the following are mechanisms which reduce the adverse selection problem except ____.Answer      
  Selected Answer:  high interest ratesCorrect Answer:  high interest rates      

Question 9

4 out of 4 points

   
  In the long-run, firms in a monopolistically competitive industry willAnswer      
  Selected Answer:  tend to just cover costs, including normal profitsCorrect Answer:  tend to just cover costs, including normal profits      

Question 10

4 out of 4 points

   
  An “experience good” is one that:Answer      
  Selected Answer:  Has undetectable quality when purchasedCorrect Answer:  Has undetectable quality when purchased      

Question 11

4 out of 4 points

   
  The price for used cars is well below the price of new cars of the same general quality.  This is an example of:Answer      
  Selected Answer:  A Lemon’s MarketCorrect Answer:  A Lemon’s Market      

Question 12

4 out of 4 points

   
  In the short-run for a purely competitive market, a manufacturer will stop production when:Answer      
  Selected Answer:  the contribution to fixed costs is zero or lessCorrect Answer:  the contribution to fixed costs is zero or less      

Question 13

4 out of 4 points

   
  Experience goods are products or servicesAnswer      
  Selected Answer:  whose quality is undetectable when purchasedCorrect Answer:  whose quality is undetectable when purchased      

Question 14

4 out of 4 points

   
  Declining cost industriesAnswer      
  Selected Answer:  have marginal cost curves below their average cost curve.Correct Answer:  have marginal cost curves below their average cost curve.      

Question 15

4 out of 4 points

   
  In natural monopoly, AC continuously declines due to economies in distribution or in production, which tends to found in industries which face increasing returns to scale.  If price were set equal to marginal cost, then:Answer      
  Selected Answer:  price would be below average cost.Correct Answer:  price would be below average cost.      

Question 16

4 out of 4 points

   
  When the cross elasticity of demand between one product and all other products is low, one is generally referring to a(n) ____ situation.Answer      
  Selected Answer:  monopolyCorrect Answer:  monopoly      

Question 17

4 out of 4 points

   
  Regulatory agencies engage in all of the following activities except _______.Answer      
  Selected Answer:  setting federal and state income tax rates on regulated firmsCorrect Answer:  setting federal and state income tax rates on regulated firms      

Question 18

4 out of 4 points

   
  ____ as practiced by public utilities is designed to encourage greater usage and therefore spread the fixed costs of the utility’s plant over a larger number of units of output.Answer      
  Selected Answer:  Block pricingCorrect Answer:  Block pricing      

Question 19

4 out of 4 points

   
  The practice by telephone companies of charging lower long-distance rates at night than during the day is an example of:Answer      
  Selected Answer:  peak-load pricingCorrect Answer:  peak-load pricing      

Question 20

4 out of 4 points

   
  Some industries that have rigid prices.  In those industries, we tend toAnswer      
  Selected Answer:  find that output varies greatly over the business cycleCorrect Answer:  find that output varies greatly over the business cycle      

Question 21

4 out of 4 points

   
  The existence of a kinked demand curve under oligopoly conditions may result inAnswer      
  Selected Answer:  price rigidityCorrect Answer:  price rigidity      

Question 22

4 out of 4 points

   
  Barometric price leadership exists whenAnswer      
  Selected Answer:  one firm in the industry initiates a price change and the others follow it as a signal of changes in cost or demand in the industry.Correct Answer:  one firm in the industry initiates a price change and the others follow it as a signal of changes in cost or demand in the industry.      

Question 23

4 out of 4 points

   
  A cartel is a situation where firms in the industryAnswer      
  Selected Answer:  have an agreement to restrict output.Correct Answer:  have an agreement to restrict output.      

Question 24

4 out of 4 points

   
  Even ideal cartels tend to be unstable becauseAnswer      
  Selected Answer:  firms can benefit by secretly selling more than they promised the other firmsCorrect Answer:  firms can benefit by secretly selling more than they promised the other firms      

Question 25

4 out of 4 points

   
  Some market conditions make cartels MORE likely to succeed in collusion.  Which of the following will make collusion more successful?Answer      
  Selected Answer:  The orders are small and frequentCorrect Answer:  The orders are small and frequent      

Wednesday, June 18, 2014 2:09:20 PM EDT

1.Evidence from empirical studies of long-run cost-output relationships lends support to the:

a. existence of a non-linear cubic total cost function
b. hypothesis that marginal costs first decrease, then gradually increase over the normal operating range of the firm
c. hypothesis that total costs increase quadratically over the ranges of output examined
d. hypothesis that total costs increase linearly over some considerable range of output examined
e. none of the above

2.The short-run cost function is:

a. where all inputs to the production process are variable
b. relevant to decisions in which one or more inputs to the production process are fixed
c. not relevant to optimal pricing and production output decisions
d. crucial in making optimal investment decisions in new production facilities
e. none of the above

3.Theoretically, in a long-run cost function:

a. all inputs are fixed
b. all inputs are considered variable
c. some inputs are always fixed
d. capital and labor are always combined in fixed proportions
e. b and d

4.Break-even analysis usually assumes all of the following except:

a.in the short run, there is no distinction between variable and fixed costs.

b.revenue and cost curves are straight-lines throughout the analysis.

c.there appears to be perfect competition since the price is considered to remain the same regardless of quantity.

d.the straight-line cost curve implies that marginal cost is constant.

e.both c and d

5.What is another term meaning the degree of operating leverage?

a.The measure of the importance of fixed cost.

b.The operating profit elasticity.

c.The measure of business risk.

d.D.O.L.

e.All of the above.

6.In a study of banking by asset size over time, we can find which asset sizes are tending to become more prominent. The size that is becoming more predominant is presumed to be least cost. This is called:

a.regression to the mean analysis.

b.breakeven analysis.

c.survivorship analysis.

d.engineering cost analysis.

e.a Willie Sutton analysis.

7.George Webb Restaurant collects on the average $5 per customer at its breakfast & lunch diner. Its variable cost per customer averages $3, and its annual fixed cost is $40,000. If George Webb wants to make a profit of $20,000 per year at the diner, it will have to serve__________ customers per year.

a.10,000 customers

b.20,000 customers

c.30,000 customers

d.40,000 customers

e.50,000 customers

8.Which of the following is not a limitation of the survivor technique for measuring the optimum size of firms within an industry?

a.since the technique does not employ actual cost data in the analysis, there is no way to assess the magnitude of the cost differentials between firms of varying size and efficiency.

b.the managerial and entrepreneurial aspects of the production process are not included in the analysis

c.because of legal factors, the long-run cost curve derived by this technique may be distorted and may not measure the cost curve postulated in economic theory

d.a and b

e.b and c

9.The primary disadvantage of engineering methods for measuring cost functions is that they deal with the managerial and entrepreneurial aspects of the production process or plant.

a.True

b.False

10.A linear total cost function implies that:

a.marginal costs are constant as output increases

b.average total costs are continually decreasing as output increases

c.a and b

d.none of the above

11.A ____ total cost function implies that marginal costs ____ as output is increased.

a.linear; increase linearly

b.quadratic; increase linearly

c.cubic; increase linearly

d.a and b

e.none of the above

12.A ____ total cost function implies that marginal costs ____ as output is increased.

a.linear; increase linearly

b.quadratic; are constant

c.cubic; increase linearly

d.linear; are constant

e.none of the above

13.A ____ total cost function yields a U-shaped average total cost function.

a.Cubic

b.Quadratic

c.Linear

d.a and b only

e.a, b, and c

14.In the linear breakeven model, the difference between selling price per unit and variable cost per unit is referred to as:

a.variable margin per unit

b.variable cost ratio

c.contribution margin per unit

d.target margin per unit

e.none of the above

15.Which of the following is not an assumption of the linear breakeven model:

a.constant selling price per unit

b.decreasing variable cost per unit

c.fixed costs are independent of the output level

d.a single product (or a constant mix of products) is being produced and sold

e.all costs can be classified as fixed or variable

16.In the linear breakeven model, the breakeven sales volume (in dollars) is equal to fixed costs divided by:

a.unit selling price less unit variable cost

b.contribution margin per unit

c.one minus the variable cost ratio

d.a and b only

e.a, b, and c

17. The degree of operating leverage is equal to the ____ change in ____ divided by the ____ change in ____.

a.percentage; sales; percentage; EBIT

b.unit; sales; unit; EBIT

c.percentage; EBIT; percentage; sales

d.unit; EBIT; unit; sales

e.none of the above

18. The linear breakeven model excludes ____ from the analysis.

a.financing costs

b.Taxes

c.contribution margin

d.a and b only

e.a, b, and c

19.In the linear breakeven model, the relevant range of output is that range where the linearity assumptions of the model are assumed to hold.

a.True

b.False

20.In the linear breakeven model, the breakeven sales volume (in dollars) can be found by multiplying the breakeven sales volume (in units) by:

a.one minus the variable cost ratio

b.contribution margin per unit

c.selling price per unit

d.standard deviation of unit sales

e.none of the above

21.In the linear breakeven model, a firm incurs operating losses whenever output is less than the breakeven level.

a.True

b.False

1.The main difference between perfect competition and monopolistic competition is:

a.The number of sellers in the market

b.The ease of entry and exit in the industry

c.The degree of information about market price

d.The degree of product differentiation

e.Whether it is the short run or the long run

2.Long distance telephone service has become a competitive market. The average cost per call is $0.05 a minute, and it’s declining. The likely reason for the declining price for long distance service is:

a.Governmental pressure to lower the price

b.Reduced demand for long distance service

c.Entry into this industry pushes prices down

d.Lower price for a barrel of crude oil

e.Increased cost of providing long distance service

3. What is the profit maximization point for a firm in a purely competitive environment?

a.The output where P = MC

b.The output where P < MC

c.The output where P > MC

d.The output where MR = MC

e.The output where AVC < P

4. All of the following are true for both competition and monopolistic competition in the long run, except one of them. Which is it?

a.P = MC

b.P = AC

c.Economic profits become zero in the long-run

d.The barriers to entry and exit are relatively easy

e.None of the above is an exception

5.Which of the following statements is (are) true concerning a pure competition situation?

a.Its demand curve is represented by a vertical line.

b.Firms must sell at or below market price.

c.Marginal revenue is equal to price.

d.both b and c

e.both a and b

6.In pure competition:

a.the optimal price-output solution occurs at the point where marginal revenue is equal to price

b.a firm’s demand curve is represented by a horizontal line

c.a firm is a price-taker since the products of every producer are perfect substitutes for the products of every other producer

d.a and b only

e.a, b, and c

7.In the short-run for a purely competitive market, a manufacturer will stop production when:

a.the total revenue is less than total costs

b.the contribution to fixed costs is zero or less

c.the price is greater than AVC

d.operating at a loss

e.a and b

8.In the purely competitive case, marginal revenue (MR) is equal to:

a.cost

b.profit

c.price

d.total revenue

e.none of the above

9.In long-run equilibrium, all firms in a pure competition market situation operating under a condition of certainty will have identical costs even though they may use different production and operation techniques.

a.true

b.false

10.If price exceeds average costs under pure competition, ____ firms will enter the industry, supply will ____, and price will be driven ____.

a.more; decrease; down

b.more; decrease; up

c.more; increase; down

d.more; increase; up

e.none of the above

11.A firm in pure competition would shut down when:

a.price is less than average total cost

b.price is less than average fixed cost

c.price is less than marginal cost

d.price is less than average variable cost

12.In the long-run, firms in a monopolistically competitive industry will

a.earn substantial economic profits

b.tend to just cover costs, including normal profits

c.seek to increase the scale of operations

d.seek to reduce the scale of operations

13.Uncertainty includes all of the following except ____.

a.unknown effects of deliberate actions

b.incomplete information as to the type of competitor

c.random disturbances

d.unverifiable claims

e.accidents due to weather hazards

14.Experience goods are products or services

a.that the customer already knows

b.whose performance is highly unusual

c.whose quality is undetectable when purchased

d.not likely to cause repeat purchases

e.all of the above

15.Buyers anticipate that the temporary warehouse seller of unbranded computer equipment will

a.deliver high quality products consistent with expectations

b.not attempt to establish any warranty enforcement mechanisms

c.offer several prices and qualities

d.produce only one quality

e.none of the above

16.All of the following are mechanisms which reduce the adverse selection problem except ____.

a.warranties from established enterprises with non-redeployable assets

b.high interest rates

c.large collateral requirements

d.brand names and product-specific promotions and retail displays

e.higher prices in repeat customer transactions

17.Asset specificity is largest when

a.value in first best use is large

b.value in second best use is large

c.customers choose their supplier at random

d.very valuable assets are non-redeployable

e.customers are loyal to a particular seller

18.Under asymmetric information,

a.you never get what you pay for

b.you sometimes get cheated

c.you always get cheated

d.at best you get what you pay for

e.sellers make profits in excess of competitive returns

19.To escape adverse selection and elicit high quality experience goods buyers can

a.offer price premiums to new firms in the market

b.seek out unbranded goods

c.buy from generic storefronts that have leased temporary space

d.secure warranties from warehouse retailers

e.none of the above

20.The problems of asymmetric information exchange arise ultimately because

a.one party to the exchange possesses different information than another

b.one party has more information than another

c.one party knows nothing

d.one party cannot independently verify the information of another

e.information is scarce

21.The market for “lemons” is one in which

a.the rational buyer discounts

b.the seller’s product claims are unverifiable at the point of purchase

c.”the bad apples drive out the good”

d.the problem of adverse selection is rampant

e.all of the above

22.The fraudulent delivery of low quality experience goods at high prices is more likely if

a.interest rates decline

b.information about notorious firms is speedily disseminated

c.price premiums for allegedly high quality increase

d.sellers invest in non-transferable reputation

e.none of the above

23.An “experience good” is one that:

a.Only an expert can use

b.Has undetectable quality when purchased

c.Can be readily experienced simply by touching or tasting

d.Improves with age, like a fine wine

e.All of the above

24.A “search good” is:

a.One that depends on how the product behaves over time

b.A product whose quality is only found out over time by finding how durable it is

c.Like a peach that can be examined for flaws

d.Like a used car, since it is easy to determine its inherent quality

e.None of the above

25.The price for used cars is well below the price of new cars of the same general quality. This is an example of:

a.The Degree of Operating Leverage

b.A Lemon’s Market

c.Redeployment Assets

d.Cyclical Competition

e.The Unemployment Rate

Hint: P (1 +1/E) = MC.

  • Unique Creations has a monopoly position in magnometers. If the marginal cost for a magnometer is $50 and the price elasticity for magnometers is -4, what is the optimal monopoly price?

a.$37.50

b.$41.25

c.$66.67

d.$75.00

e.$82.50

2.Land’s End estimates a demand curve for turtleneck sweaters to be:

Log Q = .41 + 2.3 Log Y – 3 Log P

where Q is quantity, P is price, and Y is a measure on national income. If the marginal cost of imported turtleneck sweaters is $9.00. (HINT: P (1 +1/E) = MC). The optimal monopoly price would be:

a.P = $13.50

b.P = $26.50

c.P = $27.50

d.P = $34.50

e.P = $56.22

3.Declining cost industries

a.have upward rising AC curves.

b.have upward rising demand curves.

c.have-shaped total costs.

d.have diseconomies of scale.

e.have marginal cost curves below their average cost curve.

4.A monopolist seller of Irish ceramics faces the following demand function for its product: P = 62 – 3Q. The fixed cost is $10 and the variable cost per unit is $2. What is the maximizing QUANTITY for this monopoly? Hint: MR is twice as steep as the inverse demand curve: MR = 62 – 6 Q. (Pick closest answer)

a.Q = 10

b.Q = 15

c.Q = 22

d.Q = 37

e.Q = 41

5.Globo Public Supply has $1,000,000 in assets. Its demand curve is: P = 206 – .20•Q and its total cost function is: TC = 20,000 + 6•Q where TC excludes the cost of capital. If Globo Public Supply is UNREGULATED, find Globo’s optimal price.

a.$206

b.$106

c.$56

d.$6

e.$3

6.A monopolist faces the following demand curve: P = 12 – .3Q with marginal costs of $3. What is the monopolistic PRICE?

a.P = $5.50

b.P = $6.50

c.P = $7.50

d.P = $8.50

e.P = $9.50

7.In natural monopoly, AC continuously declines due to economies in distribution or in production, which tends to found in industries which face increasing returns to scale. If price were set equal to marginal cost, then:

a.price would equal average cost.

b.price would exceed average cost.

c.price would be below average cost.

d.price would be at the profit maximizing level for natural monopoly

e.all of the above

8.The profit-maximizing monopolist, faced with a negative-sloping demand curve, will always produce:

a.at an output greater than the output where average costs are minimized

b.at an output short of that output where average costs are minimized

c.at an output equal to industry output under pure competition

d.a and c

e.none of the above

9.In the case of pure monopoly:

a.one firm is the sole producer of a good or service which has no close substitutes

b.the firm’s profit is maximized at the price and output combination where marginal cost equals marginal revenue

c.the demand curve is always elastic

d.a and b only

e.a, b, and c

10.A monopoly will always produce less than a purely competitive industry, ceteris paribus.

a.true

b.false

11.The demand curve facing the firm in ____ is the same as the industry demand curve.

a.pure competition

b.monopolistic competition

c.oligopoly

d.pure monopoly

e.none of the above

12.When the cross elasticity of demand between one product and all other products is low, one is generally referring to a(n) ____ situation.

a.oligopoly

b.monopoly

c.pure competition

d.substitution

e.monopolistic competition

14.Of the following, which is not an economic rationale for public utility regulation?

a.production process exhibiting increasing returns to scale

b.constant cost industry

c.avoidance of duplication of facilities

d.protection of consumers from price discrimination

e.none of the above

15.The practice by telephone companies of charging lower long-distance rates at night than during the day is an example of:

a.inverted block pricing

b.second-degree price discrimination

c.peak-load pricing

d.first-degree price discrimination

e.none of the above

16.In the electric power industry, residential customers have relatively ____ demand for electricity compared with large industrial users. But contrary to price discrimination, large industrial users generally are charged ____ rates.

a.similar, similar

b.elastic, lower

c.elastic, higher

d.inelastic, lower

e.inelastic, higher

17.____ as practiced by public utilities is designed to encourage greater usage and therefore spread the fixed costs of the utility’s plant over a larger number of units of output.

a.Peak load pricing

b.Inverted block pricing

c.Block pricing

d.First degree price discrimination

e.none of the above

18.Regulatory agencies engage in all of the following activities except _______.

a.controlling entry into the regulated industries

b.overseeing the quality of service provided by the firms

c.setting federal and state income tax rates on regulated firms

d.setting prices that consumers will pay

e.none of the above

1.”Conscious parallelism of action” among oligopolistic firms is an example of ____.

1.In ____ 2-person, nonzero-sum games there is no communication between the participants and no way to enforce agreements.

  • a.intense rivalry
  • b.a formal collusive agreement
  • c.informal, or tacit, cooperation
  • d.a cartel
  • e.none of the above
  • 2.The kinked demand curve model was developed to help explain:
  • a.fluctuations of prices in pure competition
  • b.rigidities observed in prices in oligopolistic industries
  • c.fluctuations observed in prices in oligopolistic industries
  • d.all of the above
  • e.none of the above
  • 3.An oligopoly is characterized by:
  • a.a relatively small number of firms
  • b.either differentiated or undifferentiated products
  • c.actions of any individual firm will affect sales of other firms in the industry
  • d.a and b
  • e.a, b, and c
  • 4.Which of the following is an example of an oligopolistic market structure?
  • a.public utilities
  • b.air transport industry
  • c.liquor retailers
  • d.wheat farmers
  • e.none of the above
  • 5.In the Cournot duopoly model, each of the two firms, in determining its profit-maximizing price-output level, assumes that the other firm’s ____ will not change.
  • a.price
  • b.output
  • c.marketing strategy
  • d.inventory
  • e.none of the above
  • 6.If a cartel seeks to maximize profits, the market share (or quota) for each firm should be set at a level such that the ____ of all firms is identical.
  • a.average total cost
  • b.average profit
  • c.marginal profit
  • d.marginal cost
  • e.marginal revenue
  • 7.In the absence of any legally binding enforcement mechanism, individual cartel producers may find it advantageous to cheat on the agreements and engage in secret price concessions.
  • a.true
  • b.false
  • 8.A(n) ____ is characterized by a relatively small number of firms producing a product.
  • a.monopoly
  • b.syndicate
  • c.cooperative
  • d.oligopoly
  • e.none of the above
  • 9.The distinctive characteristic of an oligopolistic market structure is that there are recognizable interdependencies among the decisions of the firms.
  • a.true
  • b.false
  • 10.Factors that affect the ability of oligopolistic firms to successfully engage in cooperation include ____.
  • a.number and size distribution of sellers
  • b.size and frequency of orders
  • c.product heterogeneity
  • d.a and b only
  • e.a, b, and c
  • 11.Effective oligopolistic collusion is more likely to occur when customer orders are small, frequent, and received on a regular basis as compared with large orders that are received infrequently at irregular intervals.
  • a.true
  • b.false
  • 12.Effective collusion generally is more difficult as the number of oligopolistic firms involved increases.
  • a.true
  • b.false
  • 13.The largest problem faced in cartel pricing agreements such as OPEC is:
  • a.detecting violations of quota barriers by cartel participants
  • b.arriving at a profit maximizing price
  • c.attracting participants in the cartel
  • d.none of the above
  • 14.Some market conditions make cartels MORE likely to succeed in collusion. Which of the following will make collusion more successful?
  • a.The products are heterogeneous
  • b.The orders are small and frequent
  • c.The firms are all about the same size
  • d.Costs differ across the firms
  • e.Firms are geographically widely scattered
  • 15.Even ideal cartels tend to be unstable because
  • a.firms typically prefer competition to collusion as competition, because it leads to more profits.
  • b.collusion leads to lowest possible overall profits in the industry.
  • c.oligopolistic managers are extremely risk loving.
  • d.firms can benefit by secretly selling more than they promised the other firms
  • e.all of the above
  • 16.Suppose that in a perfectly competitive industry the equilibrium industry quantity is 10,000 units. Suppose that the monopoly output is 5,000. For a2-firm Cournot Oligopoly (N =2) known as a duopoly, what is a likely Cournot QUANTITY for the industry?
  • a.3,000 units
  • b.5,000 units
  • c.6,667 units
  • d.10,000 units
  • e.15,000 units
  • 17.A cartel is a situation where firms in the industry
  • a.have an agreement to restrict output.
  • b.agree to produce identical products.
  • c.obey the rules of dominant firm price leadership.
  • d.experience the pain of a kinked demand curve.
  • e.have a barometric price leader
  • 18.In a kinked demand market, whenever one firm decides to lower its price,
  • a.other firms will automatically follow.
  • b.none of the other firms will follow.
  • c.one half of the firms follow and one half of the firms don’t follow the price cut.
  • d.other firms all decide to exit the industry
  • e.all of the other firms raise their prices.
  • 19.The existence of a kinked demand curve under oligopoly conditions may result in
  • a.volatile prices
  • b.competitive pricing.
  • c.prices above the monopoly price.
  • d.an increase in the coefficient of variation of prices.
  • e.price rigidity
  • 20.Barometric price leadership exists when
  • a.one firm in the industry initiates a price change and the others follow it as a signal of changes in cost or demand in the industry.
  • b.one firm imposes its best price on the rest of the industry.
  • c.all firms agree to change prices simultaneously.
  • d.one company forms a price umbrella for all others.
  • e.the firms are all colluding.
  • 21.Some industries that have rigid prices. In those industries, we tend to
  • a.find that output is also rigid over the business cycle
  • b.find that output varies greatly over the business cycle
  • c.find the employment in these industries is quite stable over the business cycle
  • d.find that the rate of return is negative in boom times
  • e.all of the above.

a.noncooperative

b.cooperative

c.a and b

d.none of the above

2.A strategy game is

a.any pricing competition among firms

b.a situation arising from independent decision making among economic participants

c.interpendent choice behavior by individuals or groups who share a common goal

d.none of the above

3.Essential components of a game include all of the following except:

a.players

b.payoffs

c.actions

d.an information set

e.cooperation

4.In a zero-sum game

a.all players receive a $0 payoff

b.all players can simultaneously win

c.the gains to the winners equal the losses of the losers

d.none of the above

5.When airlines post prices on an electronic bulletin board at 8:00 a.m. each morning, the decision-makers are engaged in

a.a single play game

b.a sequential game

c.an entry decision

d.a simultaneous game

e.an infinite repetition game

6.The starting point of many methods for predicting equilibrium strategy in sequential games is

a.designing proactive reactions to rival actions

b.information sets

c.uncertain outcomes

d.backwards induction based on an explicit order of play

e.endgame analysis

7.Consider the game known as the Prisoner’s Dilemma. What’s the dilemma?

a.By both not confessing, both get to the cooperative solution and minimize time in prison.

b.By both confessing, both get to the noncooperative solution and both serve significant time in prison.

c.As a group, they are better off cooperating by not confessing, but each player has an incentive to be first to confess in a double cross.

d.The problem is that the spies should never have been caught; they should move to Rio.

8.When there is an Equilibrium (or a Nash Equilibrium), we expect that:

a.once the firm’s get there, no one will change their strategy.

b.firms will tend to select a randomized strategy.

c.neither firm will care what it does.

d.this is always a dominated strategy.

9.The Prisoner’s Dilemma involves two spies who are held in separate soundproof rooms. But even if the two spies could communicate, what makes it difficult for them to achieve the cooperative solution (both not confessing)?

a.The problem is their lack of information.

b.The problem is that it is a nonzero sum game.

c.The problem is that both spies have incentives to double cross each other.

d.The problem is that all the outcomes are not particularly good for either player.

10.When there is no Equilibrium (or no Nash Equilibrium), we expect that:

a.the firms end up in the cooperative strategy.

b.a firm will follow a randomized strategy.

c.a firm will not care what it does.

d.a firm will very likely have a dominant strategy.

11.In a game, a dominated strategy is one where:

a.It is always the best strategy

b.It is always the worst strategy

c.It is the strategy that is the best among the group of worst possible strategies.

d.Is sometimes the best and sometimes the worst strategy

12.If two firms operate in a market that is characterized as being a Prisoner’s Dilemma, and the two strategies given them are to restrict output or expand output, which of the following strategy pairs would represent the cooperative solution in a duopoly for firm 1 and firm 2, and firm 1 given first in each pair?

a.{expand output, restrict output}

b.{restrict output, expand output}

c.{restrict output, restrict output}

d.{expand output, expand output}

13.A key to analyzing subgame perfect equilibrium strategy in sequential games is

a.predictable behavior

b.an explicit order of play for at least some participants

c.information sets that are known with certainty

d.credible threats clearly communicated

e.randomness

14.Credibility in threats and commitments in sequential games is based on

a.randomizing one’s actions so they are unpredictable

b.explicit communications with competitors

c.effective scenario planning

d.analyzing best reply responses

e.none of the above

15.In making promises that are not guaranteed by third parties and in imposing penalties that are not enforced by third parties, all of the following are credibility-enhancing mechanisms except

a.establishing a bond forfeited by violating the commitment

b.investing in a non-redeployable reputational asset tied to the promise or threat

c.interrupting the communication of negotiated compromises

d.offering a warranty

e.delivering a hostage (e.g., a patent license triggered by violating the promise)

16.The difference between cooperative and non-cooperative games is

a.cooperative games allow side payments to support collusion

b.non-cooperative games encourage communication of sensitive information between arms-length competitors

c.cooperative games involve randomized behavior

d.cooperative games necessitate an explicit order of play

e.inconsequential except when players have contractual relationships

17.An illustration of a non-credible commitment is the promise

a.to not increase capacity in a declining industry

b.to match a new entrant’s discount price

c.to enter a profitable industry

d.to restrain output to the quota assigned by a cartel

e.to exit in the face of projected losses.

18.A dominant strategy differs from a Nash equilibrium strategy in that

a.Nash equilibrium strategy does not assume best reply responses

b.dominant strategy assumes best reply responses

c.only Nash strategy applies to simultaneous games

d.one dominant strategy is sufficient to predict behavior in a multi-person game

e.Nash strategy is often unique

19.In adopting mixed Nash equilibrium strategy, a player is attempting to

a.randomize his or her own behavior

b.make the opponent favor a course of action preferred by the first player

c.randomize the outcome of actions

d.make the opponent indifferent between one action and another

e.none of the above

20.To trust a potential cooperator until the first defection and then never cooperate thereafter is

a.a dominant strategy

b.an irrational strategy

c.a grim trigger strategy

d.a non-cooperative finite game strategy

e.a subgame imperfect strategy

21.Non-cooperative sequential games can incorporate all the following features except

a.a single decision-maker in the endgame

b.no communication

c.finite or infinite time periods

d.third-party enforceable agreements

e.an explicit order of play

22.If one-time gains from defection are always less than the discounted present value of an infinite time stream of cooperative payoffs at some given discount rate, the decision-makers have escaped

a.the Folk Theorem

b.the law of large numbers

c.the Prisoner’s dilemma

d.the paradox of large numbers

e.the strategy of recusal

23.The chain store paradox of an incumbent who accommodates a finite stream of potential entrants threatening to enter sequentially numerous markets illustrates

a.backwards induction

b.the unraveling problem

c.subgame perfect equilibrium

d.best reply responses

e.all of the above

24.Cooperation in repeated prisoner’s dilemma situations seems to be enhanced by all of the following except

a.limited punishment schemes

b.clarity of conditional rewards

c.grim trigger strategy

d.provocability–i.e., credible threats of punishment

e.tit for tat strategy

25.Credible promises and hostage mechanisms can support a continuous stream of cooperative exchanges except when

a.the promisor is better off fulfilling than ignoring his promise

b.neither party has a prior dominant strategy

c.the hostage can be revoked for just causes

d.the hostage is more valuable than any given exchange

e.the hostage is difficult to replace

1.In deciding whether to invest in excess capacity in order to deter entry, incumbents should consider all of the following except

a.the order of play in pricing and capacity choice decisions

b.the customer sorting pattern

c.the sunk cost required to achieve excess capacity

d.the joint-profit-maximizing cartel output

e.the potential entrant’s projected profitability

2.An inverse intensity customer sorting rule is one in which

a.customers with high willingness to pay secure the discounted goods

b.customers are rationed randomly between the discounted and full price goods

c.no customers purchase below their willingness to pay

d.customers with the lowest willingness to pay secure the discounted goods

e.brand loyalty allows the incumbent to retain its regular customers

3.An efficient customer sorting rule is one in which

a.customers with high willingness to pay secure the discounted goods

b.customers are rationed randomly between the discounted and full price goods

c.no customer purchase below her willingness to pay

d.customers with the lowest willingness to pay secure the discount goods

e.brand loyalty allows the incumbent to retain its regular customers

4.All of the following are sunk cost investments that precommit an incumbent to aggressively defend market share and the cash flow prior to threatened entry except

a.reputational investments in company logos (e.g., Beatrice)

b.automobile showrooms

c.retail displays which hold only L’eggs egg-shaped hosiery packages

d.neon signage for an independently owned Krispy Kreme store

e.excess capacity in a declining industry

MULTIPLE CHOICE

1.The segmenting of customers into several small groups such as household, institutional, commercial, and industrial users, and establishing a different rate schedule for each group is known as:

a.first-degree price discrimination

b.market penetration

c.third-degree price discrimination

d.second-degree price discrimination

e.none of the above

2.Which of the statements about price discrimination is (are) false?

a.It must be possible to segment the market.

b.It must be difficult to transfer the seller’s product from one market segment to another.

c.Public utilities practice first-degree price discrimination.

d.There must be differences in the elasticity of demand from one segment to another.

e.c and d

3.Which of the following pricing policies best identifies when a product should be expanded, maintained, or discontinued?

a.full-cost pricing policy

b.target-pricing policy

c.marginal-pricing policy

d.market-share pricing policy

e.markup pricing policy

4.Second-degree price discrimination:

a.is also known as block rate setting

b.is imperfect in the eyes of a monopolist

c.is regularly practiced by public utilities

d.is effective only in the case of services or products which are sold in easily metered units

e.all of the above

5.Electricity pricing that varies in its billing expense throughout the day is called

a.full pricing

b. marginal cost pricing

c. dynamic pricing

d. variable pricing

e. full cost pricing pricing

6.In ____ price discrimination, the monopolist charges each consumer the highest price that purchaser is willing to pay for each unit purchased (provided that this price exceeds the marginal cost of production).

a.first-degree

b.second-degree

c.third-degree

d.a and b

e.none of the above

7.____ is a new product pricing strategy which results in a high initial product price. This price is reduced over time as demand at the higher price is satisfied.

a.Prestige pricing

b.Price lining

c.Skimming

d.Incremental pricing

e.None of the above

8.____ is the price at which an intermediate good or service is transferred from the selling to the buying division within the same firm.

a.Incremental price

b.Marginal price

c.Full-cost price

d.Transfer price

e.none of the above

9.For a monopolist that engages in price discrimination, when the price elasticity in market 1 is less (in absolute value) than in market 2, the optimal price in market 1 will exceed the optimal price in market 2.

a.true

b.false

10.To maximize profits, a monopolist that engages in price discrimination must allocate output in such a way as to make identical the ____ in all markets.

a.ratio of price to marginal cost

b.ratio of marginal cost to marginal utility

c.ratio of price to elasticity

d.marginal revenue

e.none of the above

11.Barbers give a price discount to kids. According to price discrimination, if barbers use price discrimination, this implies demand for hair cuts by kids is more elastic.

a.True

b.False

12.Third-degree price discrimination exists whenever:

a.the seller knows exactly how much each potential customer is willing to pay and will charge accordingly.

b.different prices are charged by blocks of services.

c.the seller can separate markets by geography, income, age, etc., and charge different prices to these different groups.

d.the seller will bargain with buyers in each of the markets to obtain the best possible price.

13.The following are possible examples of price discrimination, EXCEPT:

a.prices in export markets are lower than for identical products in the domestic market.

b.senior citizens pay lower fares on public transportation than younger people at the same time.

c.a product sells at a higher price at location A than at location B, because transportation costs are higher from the factory to A.

d.subscription prices for a professional journal are higher when bought by a library than when bought by an individual.

14.Firms that have a cover charge for their customers and charge for each item they purchase as well are exhibiting

a.universal access price discrimination

b.declining block price discrimination.

c.mixed bundling price discrimination.

d.two-part price discrimination.

e.uniform pricing

15.A manufacturer produces two types of computer software, Word processing (W) and Spreadsheet (S), which is offered to two different retail outlets (#1 and #2). The following table shows the maximum price each retail outlet is willing to pay for each individual software product.

Product WProduct S

Retail #1 $170 $105

Retail #2 $95 $135

What is the optimal pricing strategy that will maximize revenue for the manufacturer, given the maximum the retail outlets are willing to pay?

a.Bundle both products (W and S) and sell them at $230.

b.Price product W at $170 and Product S at $135.

c.Price product W at $170 and Product S at $170.

d.Price product W at $95 and Product S at $105.

e.Bundle both products (W and S) and sell them at $275.

16.Vacation tours to Europe invariably package visits to disparate regions: cities, mountains, and the seaside. Bundling, a type of second degree price discrimination, is most profitable when:

a.the preference rankings of vacationers travelling together are negatively correlated.

b.a preference for cities is always higher than preferences for mountain vistas.

c.preference rankings of vacationers travelling together are positively correlated.

d.preference for the seaside is always higher than preferences for city excursions.

e.no one wants to take a European vacation package to cities, mountains, and the seaside.

17.The optimal mark-up is: m = -1/ (E+1). When the mark-up on cookware equals 50%, then demand elasticity (E) for cookware is:

a.-1

b.-1.5

c. -2

d. -3

18.[Advanced Material] Cross functional revenue management examines capacity, pricing, and customer account management in order to maximize revenue.

Capacity Planning

orderacceptance

Pricing Customer Account Management

If the MegaPlex Movie Theater finds that too often they have to turn customers away from their theaters at peak movie times for blockbusters creating too much slippage, cross functional revenue management suggests:

a.They could consider increasing the capacity of each theater to be able to seat more customers.

b.They could lower the price at the peak times to reduce the problem of spoilage.

c.They could stop showing blockbuster movies and select more critically acclaimed art films to decrease spoilage.

d.They could stop showing movies at night.

19.Restaurants try to buy just enough fish to match the expected walk-ins and reservations. If they buy a lot more fish, in the language of revenue management:

a.Spoilage increases

b.Spillage increases

c.Overbooking increases

20.If an airline company decides to buy smaller jets with fewer seats, then the problem of:

a. spillage and spoilage both increase.

b. spillage decreases, but spoilage increases.

c. spillage and spoilage both decrease.

d. spoilage decreases, but spillage increases.

21.If airlines found that the number of no-shows starts to increase, then its policy for optimal overbooking would tend to:

a.make them reduce the amount of overbooking.

b.cause them to increase the amount of overbooking.

c.let them keep the same amount of overbooking.

1.Non-redeployable durable assets that are dependent upon unique complementary and perfectly redeployable assets to achieve substantial value-added will typically be organized as

a.an export trading company

b.a spot market contract

c.a vertically integrated firm

d.an on-going relational contract

e.a joint stock company.

2.Vertical integration may be motivated by all of the following except:

a.Upstream market power

b.Economies of ever wider spans of managerial control

c.Technological interdependencies

d.Reduced search and bargaining cost

e.The hold-up problem.

3.Contracts are distinguished from tactical alliances by which of the following characteristics:

a.involve sequential responses

b.require third-party enforcement

c.raise shareholder value

d.elicit diminished reactions from competitors

4.When manufacturers and distributors establish credible commitments to one another, they often employ

a.vertical requirements contracts

b.third-party monitoring

c.credible threat mechanisms

d.non-price tactics

5.Which of the following is not among the functions of contract?

a.to provide incentives for efficient reliance

b.to reduce transaction costs

c.to discourage the development of asymmetric information

d.to provide risk allocation mechanisms

6.Buying electricity off the freewheeling grid at one quarter ’til the hour for delivery on the hour illustrates:

a.relational contracts with distributors

b.vertical requirements contracts

c.spot market transactions

d.variable price agreements

7.When someone contracts to do a task but fails to put full effort into the performance of an agreement, yet the lack of effort is not independently verifiable, this lack of effort constitutes a

a.breach of contractual obligations

b.denial of good guarantee

c.loss of reputation

d.moral hazard

8.When retail bicycle dealers advertise and perform warranty repairs but do not deliver the personal selling message that Schwinn has designed as part of the marketing plan but cannot observe at less than prohibitive cost, the manufacturer has encountered a problem of ____.

a.reliance relationships

b.uncertainty

c.moral hazard

d.creative ingenuity

e.insurance reliance

9.Which of the following are not approaches to resolving the principal-agent problem?

a.ex ante incentive alignment

b.deferred stock options

c.ex post governance mechanism

d.straight salary contracts

e.monitoring by independent outside directors

10.To accomplish its purpose a linear profit-sharing contract must

a.induce the employee to moonlight

b.communicate a code of conduct that will be monitored and enforced

c.meet either the participation or the incentive compatibility constraint

d.establish a separating equilibrium

e.not realign incentives

11.Mac trucks and their dealers would likely have an organizational form of

a.fixed profit sharing franchise contracts

b.spot market recontracting

c.alliances

d.vertical integration

12.Reliant assets are always all of the following except:

a.durable

b.have substantially less value in second best use

c.dependent on unique complementary inputs

d.pivotal in designing strategy

13.Governance mechanisms are designed

a.to increase contracting costs

b.to resolve post-contractual opportunism

c.to enhance the flexibility of restrictive covenants

d.to replace insurance

e.none of the above

14.When borrowers who do not intend to repay are able to hide their bad credit histories, a lender’s well-intentioned borrowers should

a.complain to regulatory authorities

b.withdraw their loan applications

c.offer more collateral in exchange for lower interest charges

d.divulge still more information on their loan applications

e.hope for a pooling equilibrium

15. Each of the following is an example of moral hazard in which people modify their behavior in an opportunistic way, often frustrating the intent of governmental or management policies. Which is NOT an example of moral hazard?

a.After a firm gets a loan from a bank to purchase inventory, the borrower instead decides to use it to invest in call options on stocks.

b.Based on motorcycle accident data, a state passes a law requiring motorcyclists to wear helmet, but then the motorcyclist wearing helmets start to drive faster and more recklessly.

c.Bank and nonbank mortgage lenders make money granting loans. But the Government through Freddie Mac and Fannie Mae decides to purchase these loans. The mortgage lenders find that they earn a fee for each mortgage that they grant and then sell to Freddie Mac or Fannie Mae. Since they never intended on holding on to the mortgage, the mortgage granters are not too particular on whether the customer can really pay it back. The lowest quality loans are sold to the Government.

d.A fellow buys a $1 million life insurance policy and then travels to Nepal to climb Mount Everest.

e.A student learns that if he or she reads the chapter and studies lecture notes, the student does better on the next test.

16.Agency problems appear in many settings within a firm. All of the following are examples, except which is NOT a good example of this problem?

a.Diversified stockholders are more enthusiastic on accepting business risks than are firm managers.

b.Firm managers receive cash bonuses based on the performance of the firm.

c.Employees sometime take items from the store in which they work.

d.Lenders to firms want the managers to invest in safe projects to protect their collateral in the project but managers want to invest in projects that will make a name for them and warrant promotion.

e.Firm managers sometime want to relax on the job.

1.Common value auctions with open bidding necessarily entail

a.asymmetric information

b.ascending prices

c.more than two bidders

d.amendment of bids

e.sealed final offers.

2.An incentive-compatible mechanism for revealing true willingness to pay in a private value auction is

a.impossible

b.a Dutch auction

c.a second-highest sealed bid auction

d.a sequential auction with open bidding

e.a discriminatory price all-or-nothing auction.

3.In comparing rules for serving a queue, last-come first-served has all of the following effects except

a.reduces the waiting time

b.causes few customers to arrive and depart more than once

c.increases the side payments among those yet to be served

d.hastens the adoption of a lottery system for deciding who should get the tickets

4.The principal advantage of an open bidding system for allocating telecommunications spectrum licenses was

a.the pooling of asymmetric information by the bidders

b.the reconfiguring of cell phone license areas

c.the substitute value of adjacent service areas

d.reduced cost

5.A Dutch auction implies all of the following except

a.more than one unit sale available

b.higher prices later in the auction

c.identical expected seller revenue for common value items

d.greater expected seller revenue in estate sales with risk-averse bidders

6.Each partner in a simple profit-sharing contract that splits the independently verifiable sales revenue minus unobservable cost has an incentive

a.to reject an automatic renewal of the contract

b.to understate fixed cost

c.to overstate avoidable cost

d.to understate customer loyalty for repeat purchases

e.to renew the partnership contract

7.An optimal incentives contract can induce the revelation of true costs in a partnership by

a.imposing penalties when costs are overstated

b.offering bonus payments when costs are verified

c.renewing the reliance relationship

d.linking revealed cost to the partner’s foregone expected profits

e.enlisting third-party enforcement

8.An incentive-compatible revelation mechanism is

a.self-enforcing

b.always multi-period

c.too complicated to influence decisions

d.prevalent in vertically integrated businesses

e.not adopted by franchise businesses

9.Incentive-compatible revelation mechanisms attempt to

a.induce an employee to reject the next best alternative employment opportunity

b.elicit privately-held information

c.secure enforcement primarily by third parties

d.reject voluntary contracting with third parties

e.impose similar risk premiums on all employees

10.Revenue equivalence theorem refers to equal seller revenue in which of the following pairs:

a.sealed bid auctions and English auctions

b.second highest wins and pays auctions and Dutch auctions

c.English highest wins and pays auctions and sealed bid Dutch auctions

d.highest wins and pays auctions and second highest wins and pay auctions

11.In Dutch auctions, the bidding

a.starts low and rises until the highest bidder wins.

b.is done in secret “sealed bids” which are opened at a specified time.

c.begins with a very high price, and is reduced until the first person takes it.

d.is accomplished by giving the price of the second highest bid to the highest bidder.

13. Suppose that a private firm wants to go public to give the owners a chance to retire. It follows the lead of the Google IPO by using a modified Vickrey (or uniform price) auction. The owners of the firm plans to sell 1 million shares and hope to raise at least $10 million from the auction. The following bids were submitted.

Bob250,000 shares at $12

Sam350,000 shares at $13

Mary300,000 shares at $9

Sue100,000 shares at $10

Ravi450,000 shares at $11

a.The market clearing price is $13, and the sellers of the firm get $13 million.

b.The market clearing price is $12, and the sellers of the firm get $13 million.

c.The market clearing price is $11, and the sellers of the firm get $11 million.

d.The market clearing price is $10, and the sellers of the firm get $10 million.

e.The market clearing price is $9, and the sellers of the firm get$9 million

14.Auctions are used in place of markets when the items traded are unique (e.g., a Ming vase or a right to drill for oil). Which of the following examples are typically sold using Vickrey auction methods?

a.For-sale-by-owner houses

b.Household furnishings

c.Items sold in Filene’s Basement, with the price discounted after a certain date

d.Vintage postage stamps

15.Sealed bids can be used in multiple rounds. How is this done?

a.The winner of the first round automatically wins all future rounds.

b.The winner’s price in the first round is the reservation price in the next round. If higher prices come in the next round, the highest price is the new reservation price for round three, and so forth.

c.The second best price in the first round is the winner.

d.Bidding continues in more and more rounds until someone yells “uncle.”

16. Research suggests that an auction for a private value item will yield the HIGHEST payout if:

a.we use a Dutch auction

b.we use an English auction

c.we use only cash, and not allow credit cards

d.use a fixed price

1.Patents have been defended by some on the grounds that they stimulate inventive activity. Others have argued for changes in current patent laws because:

a.resources are misallocated by the grant of a patent monopoly

b.patents may not be necessary to encourage inventive activity

c.the current patent monopoly period (17 years) is too short to encourage any inventive activity.

d.a and b only

e.all of the above

2.The Sherman Act prohibits:

a.contracts in restraint of commerce

b.monopolization of an industry

c.price discrimination

d.a and b

e.a, b, and c

3.The sentiment for increased deregulation in the late 1970’s and early 1980’s has been felt most significantly in the price regulation of

a.Coal

b.Grain

c.transportation

d.automobiles

e.electric power generation

4.Which of the following public policies has (have) the effect of restricting competition?

a.licensing

b.patents

c.import quotas

d.a and b only

e.a, b, and c

5.The concept of market structure refers to three main characteristics of buyers and sellers in a particular market. These include ____.

a.the degree of seller and buyer concentration in the market

b.the degree of actual or imagined differentiation between the products or services of competing producers

c.the pricing behavior of the firms

d.a and b

e.a, b, and c

6.The concept of market conduct includes such things as ____.

a.pricing behavior of the firm or group of firms

b.product policy of the firm or group of firms

c.the degree of seller and buyer concentration in the market

d.a and b only

e.a, b, and c

7.____ yields the same results as the theory of perfect competition, but requires substantially fewer assumptions than the perfectly competitive model.

a.Baumol’s sales maximization hypothesis

b.The Pareto optimality condition

c.The Cournot model

d.The theory of contestable markets

e.none of the above

8.The lower the barriers to entry and exit, the more nearly a market structure fits the ____ market model.

a.monopolistic competition

b.perfectly contestable

c.oligopoly

d.monopoly

e.none of the above

9.The Herfindahl-Hirschman index (also shortened to just the Herfindahl index) is a measure of ____.

a.market concentration

b.income distribution

c.technological progressiveness

d.price discrimination

e.none of the above

10.The ____ is equal to the some of the squares of the market shares of all the firms in an industry.

a.market concentration ratio

b.Herfindahl-Hirschman index

c.correlation coefficient

d.standard deviation of concentration

e.none of the above

11.Industry A has market shares of 50, 30, and 20. Industry B has market shares of 45, 40, and 15. Hint: HHI = (si2), where si is the market shares of the i-th firm in the industry.

a.The Herfindahl index for A is 100.

b.The Herfindahl index for A is 3,800.

c.The Herfindahl index for B is 3,600

d.The Herfindahl index for A is greater than for B.

e.The Herfindahl index is for B is 4,000.

12.The antitrust laws regulate all of the following business decisions except ____.

a.collusion

b.mergers

c.monopolistic practices

d.price discrimination

e.wage levels

13.____ occurs whenever a third party receives or bears costs arising from an economic transaction in which the individual (or group) is not a direct participant.

a.Pecuniary benefits and costs

b.Externalities

c.Intangibles

d.Monopoly costs and benefits

e.none of the above

14.The Coase Theorem works best in places that transaction costs for contracts among people is low. Often in the world of torts and externalities both parties can claim that they have rights to impose on others. One case is that of a railroad that is noisy and scares the cattle and the rancher whose cattle sometimes wander in front of moving trains causing damage to them and the train. What does the Coase say would happen?

a.The train should have property right to be safe from wandering cattle, and the rancher should be liable for train damage of rampaging cattle.

b.The rancher should have the property right to be safe from noisy trains, and the railroad should be liable for weight loss of cattle from train whistles and rumbling noise.

c.If transaction costs are low, the efficient activity will occur, either the rancher or railroad installing fences to protect from rampaging cattle and/or sound insulation with trees, or if it is cheaper, fewer train trips per day. The cheapest or most efficient solution will happen, regardless of who is assigned the original property right.

MULTIPLE CHOICE

1.Capital expenditures:

a.are easily reversible

b.are forms of operating expenditures

c.Affect long-run future profitability

d.Involve only money, not machinery

e.none of the above

2.Any current outlay that is expected to yield a flow of benefits beyond one year in the future is:

a.a capital gain

b.a wealth maximizing factor

c.a capital expenditure

d.a cost of capital

e.a dividend reinvestment

3.If the acceptance of Project A makes it impossible to accept Project B, these projects are:

a.contingent projects

b.complementary projects

c.mutually inclusive projects

d.mutually exclusive projects

e.none of the above

4.Which of the following is (are) a guideline(s) to be used in the estimation of cash flows?

a.cash flows should be measured on an incremental basis

b.cash flows should be measured on an after-tax basis

c.all the indirect effects of the project should be included

d.all of the above

e.none of the above

5.In order to help assure that all relevant factors will be considered, the capital-expenditure selection process should include the following steps except:

a.generating alternative capital-investment project proposals

b.estimating cash flows for the project proposals

c.reviewing the investment projects after they have been implemented

d.allocate manpower to the various divisions within the firm

e.a and d

6.Which of the following would not be classified as a capital expenditure for decision-making purposes?

a.purchase of a building

b.investment in a new milling machine

c.purchase of 90-day Treasury Bills

d.investment in a management training program

e.all of the above are capital expenditures

7.The decision by the Municipal Transit Authority to either refurbish existing buses, buy new large buses, or to supplement the existing fleet with mini-buses is an example of:

a.independent projects

b.mutually exclusive projects

c.contingent projects

d.separable projects

e.none of the above

8.Which of the following is (are) a basic principle(s) when estimating a project’s cash flows?

a.cash flows should be measured on a pre-tax basis

b.cash flows should ignore depreciation since it is a non-cash charge

c.only direct effects of a project should be included in the cash flow calculations

d.cash flows should be measured on an incremental basis

e.all of the above

9.Which of the following items is (are) not considered as part of the net investment calculation?

a.installation and shipping charges

b.acquisition cost of new asset

c.salvage value of old equipment that is being replaced

d.first year’s net cash flow

e.c and d

10.The relationship between NPV and IRR is such that :

a.both approaches always provide the same ranking of alternatives

b.the IRR of a project is equal to the firm’s cost of capital when the NPV of a project is $0

c.if the NPV of a project is negative, then the IRR must be greater than the cost of capital

d.all of the above

e.none of the above

11.GE Appliance Division believes which of the following warrants shifting assembly of appliances back from Shanghai to Louisville, KY:.

a.The negotiation of a two-tiered wage structure for union labor,

b.Faster innovations when product design engineers and assembly line team leaders are located in the same place,

c. quicker delivery to retail dealers reduce inventory storage

d. none of the above,

e. all of the above.

12.The cost of capital can be thought of as the rate of return required by investors in the firm’s securities.

a.true

b.false

13.In cost of capital calculations, the flotation cost on new debt is usually ignored because the flotation cost percentage for large debt issues is relatively low.

a.true

b.false

14.The cost of internal equity (retained earnings) is ____ the cost of external equity (new common stock).

a.greater than

b.equal to

c.less than

15.The expected rate of return from a share of stock consists of:

a.a dividend return

b.capital appreciation (or depreciation)

c.interest

d.a and b only

e.a, b, and c

16.The weights used in calculating the firm’s weighted-average cost of capital are equal to the proportion of debt and equity ____.

a.used to finance the project

b.used to finance the projects undertaken last year

c.in the industry average capital structure

d.in the firm’s target capital structure

e.none of the above

17.In determining the optimal capital budget, one should choose those project’s whose ____ exceeds the firm’s ____ cost of capital.

a.internal rate of return, average

b.internal rate of return, marginal

c.internal rate of return, historic

d.average rate of return, marginal

e.none of the above

18.In the constant-growth dividend valuation model, the required rate of return on common stock (i.e., cost of equity capital) can be shown to be equal to the sum of the dividend yield plus the ____.

a.yield-to-maturity

b.present value yield

c.risk-free rate

d.dividend growth rate

e.none of the above

19.The ____ depicts the risk-return relationship in the market for all securities:

a.characteristic line

b.security market line

c.investment opportunity curve

d.marginal cost of capital schedule

e.none of the above

20.Beta in the CAPM is ____.

a.one measure of the systematic risk of a stock

b.estimated as the slope of a regression line between an individual security’s returns and returns for the market index.

c.useful in estimating the firm’s cost of debt capital

d.a and b only

e.a, b, and c

21.The effect of changes in the level of interest rates on security returns is an example of ____.

a.systematic risk

b.unsystematic risk

c.nondiversifiable risk

d.a and c only

e.b and c only

22.The ____ method assumes that the cash flows over the life of the project are reinvested at the ____.

a.net present value; computed internal rate of return

b.internal rate of return; firm’s cost of capital

c.net present value; firm’s cost of capital

d.net present value; risk-free rate of return

e.none of the above

23.All of the following except ____ are shortcomings of cost-benefit analysis.

a.difficulty in measuring third-party costs

b.difficulty in measuring third-party benefits

c.failure to consider the time value of benefits and costs

d.difficulty of accounting for program interactions

e.a and b

24.Which of the following should not be counted in a cost-benefit analysis?

a.direct benefits and costs

b.real secondary benefits

c.technological secondary costs

d.pecuniary benefits

e.intangibles

25.The social rate of discount is best approximated by:

a.the cost of government borrowing

b.the opportunity cost of resources taken from the private sector

c.3 percent

d.30 percent

e.none of the above

26.In cost-effectiveness analysis, constant cost studies:

a.are rarely used

b.attempt to specify the output which may be achieved from a number of alternative programs, assuming all are funded at the same level

c.are useless because they fail to adequately evaluate program benefits

d.try to find the least expensive way of achieving a certain objective

e.none of the above

27.Cost-benefit analysis is the public sector counterpart to ____ used in private, profit-oriented firms.

a.ratio analysis

b.break-even analysis

c.capital budgeting techniques

d.economic forecasting

e.none of the above

28.Direct costs of a public sector investment project are generally easier to measure than the direct benefits.

a.true

b.false

29.In calculating the benefit-cost ratio, social benefits and costs are discounted at the

a.internal rate of return

b.federal funds rate

c.Treasury Bill rate

d.long-term government bond rate

e.none of the above

30.The discount rate utilized in public sector budgeting performs the functions of:

a.allocating funds between the public and private sectors

b.allocating funds between present consumption and investment (i.e., future consumption)

c.allocating funds between debt and equity securities

d.a and b only

e.none of the above

31.In cost-benefit analysis, a low discount rate tends to favor projects with relatively ____ lives.

a.short

b.long

32.The social discount rate used in cost-benefit analysis is equal to a weighted average of the Treasury Bill rate and the long-term government borrowing rate.

a.true

b.false

33.Public sector investment projects are economically justifiable only when:

a.the discounted social benefits exceed the discounted social costs

b.the internal rate of return exceeds the social discount rate

c.the benefit-cost ratio exceeds zero

d.a and b only

e.a, b, and c

1.Differentiate the following TC function: TC = 150 + 200 Q – 4 Q2 + .6 Q3

a.dTC/dQ = 200 – 8Q + 1.8 Q2

b.dTC/dQ =-8 + 1.8 Q2

c.dTC/dQ = 200

d.dTC/dQ = 200 – 4Q + .6Q2

e.dTC/dQ = 1.8 Q2

2.The total revenue function (where Q = output), is: TR = 400 Q – 4 Q2

a.TR is maximized at Q = 20

b.TR is maximized at Q = 30

c.TR is maximized at Q = 40

d.TR is maximized at Q = 50

e.TR is maximized at Q = 60

3.The following is a cubic demand function in P. Find the derivative dQ/dP of: Q= 4+3P-.5P2 + .02P3.

a.dQ/dP = 4 + 3P – P + .06P2

b.dQ/dP = 3

c.dQ/dP = 3 – P + .06P2

d. dQ/dP = .06P2

e.dQ/dP = .06

4.If the first derivative of Y with respect to X is: dY/dX = -4•X2, then the second derivative is:

a.-4

b. -8•X

c.-4•X

d. -8•X2

e.-8

5.The second derivative of the function (d2Y/dX2 ) is negative at the optimal solution of X=22. Therefore, we know that the solution X=22, where the first derivative equals zero…

a.must be a minimum.

b.must be a maximum.

c.may be either a maximum or a minimum.

d.would be nothing, because the second derivative is negative.

6.Differentiate the following function with respect to Q: TC = 50 + 100Q -6Q2 +.5Q3

a.dTC/dQ = 50 + 100 -6Q + .5Q2

b.dTC/dQ = 100 -12Q + 1.5Q2

c.dTC/dQ = 50 + 100 -2Q + 3Q2

d.dTC/dQ = 100

Question 1

 

If two small perfectly competitive firms merge, the merged firm will be:

Answer

    a price-taker.
    a market leader.
    a price-discriminator.
    an oligopoly.

10 points   

Question 2

 

In a market characterized by many buyers and one seller, investment in informative advertising by a seller can ____ the price of a commodity to customers and lower their _____ cost of acquiring information.

Answer

    decrease; sunk cost
    increase; transaction cost
    increase; sunk cost
    decrease; transaction cost

10 points   

Question 3

 

Which of the following industries can create barriers to the entry of new firms due to size and specificity?

Answer

    A hydroelectric power plant
    A garment manufacturer exporting apparels
    An owner of a retail chain
    An automobile manufacturing company

10 points   

Question 4

 

Which of the following activities can create an external cost?

Answer

    Honking continuously while driving past a hospital.
    Reducing the use of plastic carry bags while shopping.
    Burying garbage under the soil and planting trees on it.
    Using smog controls on private cars.

10 points   

Question 5

 

Which of the following is an aim of a price-fixing agreement?

Answer

    Reducing entry barriers
    Increasing profit
    Reducing price
    Increasing demand

10 points   

Question 6

 

If the costs of negotiating and enforcing contracts are _____ relative to the benefits, buyers
and sellers have incentives to make economically efficient arrangements that _____ value.

Answer

    high; increase
    low; increase
    high, decrease
    low; decrease

10 points   

Question 7

 

   Refer to Table 10-1. What would be the combined gain of the two if both breach the unitization contract?
 
The matrix given below represents the payoffs to oil well owners Mike and Frasel if they enter into a unitization contract. Each of the owners know the exact amount of oil in the pool and the market price of oil.
Table 10-1

Answer

    $22
    $20
    $28
    $32

10 points   

Question 8

 

Which of the following exemplifies specific performance that a court might order from the party in breach of a contract?

Answer

    A seller ordered to pay back the price of the commodity to the customer having failed to deliver it on-time.
    A popular singer requested to forgo the fee for her performance at a social fund raising program.
    The owner of a polluting factory ordered to convert his private plot into a public garden.
    A movie director ordered to work with an actress he had previously contracted with, instead of one he later found was available for a lower price.

10 points   

Question 9

 

Parties to the contract prefer to keep the actual agreement incomplete when:

Answer

    they have conflicting terms and conditions.
    they are large in count.
    the economic value of the contract is low.
    the cost of negotiation is high.

10 points   

Question 10

 

Which of the following theories states that people who are highly risk-averse are less likely to engage in high-risk activities?

Answer

    The theory of moral hazard
    The theory of adverse selection
    The propitious selection theory
    The death spiral theory

10 points   

Question 11

 

Which of the following situations can lead to a winner’s curse?

Answer

    A bid which is won by multiple bidders but fails to cover the expectations of the seller.
    A win which makes a player over-enthusiastic about further gambles.
    An overoptimistic bid which helps the bidder to win but fails to cover his costs.
    A win which makes the player risk-averse toward future gambles.

10 points   

Question 12

 

An individual will be considered risk neutral if:

Answer

    he is indifferent between taking and not taking up the gamble.
    he pays someone to take away the gamble from him.
    he pays someone to allow him to take the gamble.
    he takes up the gamble under any situation.

10 points   

Question 13

 

Independent workers using specialized capital save the costs of contracting but risk:

Answer

    generalization.
    opportunism.
    inefficiency.
    over-utilization.

10 points   

Question 14

 

A corporation’s _____ can sometimes influence its decisions without making efforts to replace its management.

Answer

    hierarchy
    specialized workforce
    small shareholders
    block holders

10 points   

Question 15

 

Which of the following properties is common to a partnership business?

Answer

    Limited liability
    Centralized ownership and management
    Continuity and unlimited existence of the business
    Co-ownership of contributed assets

10 points   

Question 16

 

Which of the following is a disadvantage of the U-form structure?

Answer

    In case of multiple products sold in different markets, a U-form structure is difficult to maintain.
    A U-form structure requires a larger staff to evaluate top-level decision making than other organization structures.
    A U-form structure necessitates a multiple-level decision-making process.
    The amount of information that is considered for decision-making in a U-form structure is less than other structures.

10 points   

Question 17

 

_____ is the only type of firm where it is possible for a person to hold all of the information that matters for all types of decisions.

Answer

    Corporation
    A firm where decision-making is centralized
    Sole proprietorship
    A firm where there is separation of ownership and management

10 points   

Question 18

 

Identify the correct statement about relationships depicted in an organization chart.

Answer

    A line that links an individual/division with the same at a lower level depicts informal authority of the former over the latter.
    Equality on the chart for individuals A and B must mean they both have the same authority in practice.
    It shows all relations between employees of an organization.
    A line that links an individual/division with the same at a lower level depicts formal authority of the former over the latter.

10 points   

Question 19

 

During the peak season, when demand for pipeline transport of natural gas at the maximum legally allowable price exceeds the available capacity:

Answer

    buy-sell transactions take place.
    pipeline owners vertically integrate into gas production.
    price discrimination becomes prominent.
    pipeline owners use discretionary powers to ration capacity to shippers.

10 points   

Question 20

 

Which of the following changes can facilitate the transfer or outsourcing of formerly internal activities of a firm?

Answer

    Changes in technology and market structure
    Decline in domestic input prices
    Decline in net exports
    Rapid pace of industrialization

10 points   

Question 21

 

Successive monopolies face the problem of:

Answer

    double marginalization.
    volumetric interdependence.
    opportunism.
    predatory pricing.

10 points   

Question 22

 

A competitive firm hires workers as long as:

Answer

    marginal product of labor is positive.
    value of marginal product of labor is positive.
    marginal product of labor is greater than the wage rate.
    value of marginal product of labor is greater than the wage rate.

10 points   

Question 23

 

The _____ of using the market for corporate control make it important to build incentives into executive pay packages that can reduce _____ by better aligning the incentives of shareholders and managers.

Answer

    benefits; principal/agent problems
    costs and uncertainties; principal/agent problems
    benefits; influence costs
    costs and uncertainties; influence costs

10 points   

Question 24

 

Over the long run, migration by workers to higher-wage regions:

Answer

    allows wages to equalize across regions.
    explains why wage differentials may persist.
    causes disequilibrium in the labor market.
    increases wages further in those regions.

10 points   

Question 25

 

If A and B are two disjoint sets, and “Pr” represents the probability, then Pr[A and B] will be:

Answer

    negative.
    infinity.
    unity.
    zero.

10 points   

Question 26

 

   Two events A and B in a sample space are considered _____ if the probability that A will happen is the same regardless of whether or not B has happened.

Answer

    conditional
    correlated
    independent
    exclusive

10 points   

Question 27

 

If the writer of an option, holds shares of the stock or an actual quantity of the commodity when she writes the call option on it, her position is said to be:

Answer

    protected.
    exposed.
    covered.
    naked.

10 points   

Question 28

 

Alex’s production is worth $60, Harry’s is worth $40, Rob’s is worth $40, and Julia’s is worth $55. They decide to combine their resources and produce together. For this to be a superadditive game, which of the following conditions must hold?

Answer

    They should be able to produce more in groups of two than what they can produce together.
    Their combined production must exceed the total they can individually produce.
    Their resources must be perfect substitutes.
    Their resources must be perfect complements.

10 points   

Question 29

 

Elizabeth’s opportunity cost of selling a widget is $18, while Jess values it at $27. Identify the correct statement from the following.

Answer

    Jess can threaten to go to another seller if the transaction benefits Elizabeth more than her.
    The core is of the zone of agreement.
    The core consists of prices above $27, which benefits both parties.
    Elizabeth can threaten to go to another seller if the transaction benefits Jess more than her.

10 points   

Question 30

 

A characteristic function is:

Answer

    one that identifies negotiations which depend on the characteristics of the bargainers.
    one that gives the value each possible coalition of a group’s members can create by operating independently.
    one that identifies the most beneficial price for the buyer involved in a transaction.
    one that identifies the most beneficial price for the seller involved in a transaction.

ECO 550 FINAL Exam

Question 1

5 out of 5 points

   
  Evidence from empirical studies of short-run cost-output relationships lends support to the:Answer      
  Selected Answer:   hypothesis that total costs increase linearly over the range of output examinedCorrect Answer:   hypothesis that total costs increase linearly over the range of output examined      

Question 2

5 out of 5 points

   
  Break-even analysis usually assumes all of the following except:Answer      
  Selected Answer:   in the short run, there is no distinction between variable and fixed costs.Correct Answer:   in the short run, there is no distinction between variable and fixed costs.      

Question 3

5 out of 5 points

   
  In determining the shape of the cost-output relationship only ____ depreciation is relevant.Answer      
  Selected Answer:   usageCorrect Answer:   usage      

Question 4

5 out of 5 points

   
  In the linear breakeven model, the breakeven sales volume (in dollars) can be found by multiplying the breakeven sales volume (in units) by:Answer      
  Selected Answer:   selling price per unitCorrect Answer:   selling price per unit      

Question 5

5 out of 5 points

   
  A firm in pure competition would shut down when:Answer      
  Selected Answer:   price is less than average variable costCorrect Answer:   price is less than average variable cost      

Question 6

5 out of 5 points

   
  Buyers anticipate that the temporary warehouse seller of unbranded computer equipment willAnswer      
  Selected Answer:   produce only one qualityCorrect Answer:   produce only one quality      

Question 7

5 out of 5 points

   
  An “experience good” is one that:Answer      
  Selected Answer:   Has undetectable quality when purchasedCorrect Answer:   Has undetectable quality when purchased      

Question 8

5 out of 5 points

   
  Experience goods are products or servicesAnswer      
  Selected Answer:   whose quality is undetectable when purchasedCorrect Answer:   whose quality is undetectable when purchased      

Question 9

5 out of 5 points

   
  The demand curve facing the firm in ____ is the same as the industry demand curve.Answer      
  Selected Answer:   pure monopolyCorrect Answer:   pure monopoly      

Question 10

5 out of 5 points

   
  In the electric power industry, residential customers have relatively ____ demand for electricity compared with large industrial users.  But contrary to price discrimination, large industrial users generally are charged ____ rates.Answer      
  Selected Answer:   inelastic, higherCorrect Answer:   inelastic, higher      

Question 11

5 out of 5 points

   
  The practice by telephone companies of charging lower long-distance rates at night than during the day is an example of:Answer      
  Selected Answer:   peak-load pricingCorrect Answer:   peak-load pricing      

Question 12

5 out of 5 points

   
  Of the following, which is notan economic rationale for public utility regulation?Answer      
  Selected Answer:   constant cost industryCorrect Answer:   constant cost industry      

Question 13

5 out of 5 points

   
  If a cartel seeks to maximize profits, the market share (or quota) for each firm should be set at a level such that the ____ of all firms is identical.Answer      
  Selected Answer:   marginal costCorrect Answer:   marginal cost      

Question 14

5 out of 5 points

   
  Which of the following is an example of an oligopolistic market structure?Answer      
  Selected Answer:   air transport industryCorrect Answer:   air transport industry      

Question 15

5 out of 5 points

   
  Some market conditions make cartels MORE likely to succeed in collusion.  Which of the following will make collusion more successful?Answer      
  Selected Answer:   The orders are small and frequentCorrect Answer:   The orders are small and frequent      

Question 16

5 out of 5 points

   
  Even ideal cartels tend to be unstable becauseAnswer      
  Selected Answer:   firms can benefit by secretly selling more than they promised the other firmsCorrect Answer:   firms can benefit by secretly selling more than they promised the other firms      

Question 17

5 out of 5 points

   
  In making promises that are not guaranteed by third parties and in imposing penalties that are not enforced by third parties, all of the following are credibility-enhancing mechanisms exceptAnswer      
  Selected Answer:   offering a warrantyCorrect Answer:   offering a warranty      

Question 18

5 out of 5 points

   
  The Prisoner’s Dilemma involves two spies who are held in separate soundproof rooms.  But even if the two spies could communicate, what makes it difficult for them to achieve the cooperativesolution (both not confessing)?Answer      
  Selected Answer:   The problem is that both spies have incentives to double cross each other.Correct Answer:   The problem is that both spies have incentives to double cross each other.      

Question 19

5 out of 5 points

   
  When airlines post prices on an electronic bulletin board at 8:00 a.m. each morning, the decision-makers are engaged inAnswer      
  Selected Answer:   a simultaneous gameCorrect Answer:   a simultaneous game      

Question 20

5 out of 5 points

   
  To trust a potential cooperator until the first defection and then never cooperate thereafter isAnswer      
  Selected Answer:   a grim trigger strategyCorrect Answer:   a grim trigger strategy      

Question 21

5 out of 5 points

   
  Vacation tours to Europe invariably package visits to disparate regions:  cities, mountains, and the seaside.  Bundling, a type of second degree price discrimination, is most profitable when:Answer      
  Selected Answer:   the preference rankings of vacationers travelling together are negatively correlated.Correct Answer:   the preference rankings of vacationers travelling together are negatively correlated.      

Question 22

5 out of 5 points

   
  Firms that have a cover charge for their customers and charge for each item they purchase as well are exhibitingAnswer      
  Selected Answer:   two-part price discrimination.Correct Answer:   two-part price discrimination.      

Question 23

5 out of 5 points

   
  The optimal mark-up is:  m = -1/ (E+1).  When the mark-up on cookware equals 50%, then demand elasticity (E) for cookware is:Answer      
  Selected Answer:   -2Correct Answer:   -2      

Question 24

5 out of 5 points

   
  Third-degree price discrimination exists whenever:Answer      
  Selected Answer:   the seller can separate markets by geography, income, age, etc., and charge different prices to these different groups.Correct Answer:   the seller can separate markets by geography, income, age, etc., and charge different prices to these different groups.      

Question 25

5 out of 5 points

   
  Governance mechanisms are designedAnswer      
  Selected Answer:   to resolve post-contractual opportunismCorrect Answer:   to resolve post-contractual opportunism      

Question 26

5 out of 5 points

   
  Vertical integration may be motivated by all of the following except:Answer      
  Selected Answer:   Economies of ever wider spans of managerial controlCorrect Answer:   Economies of ever wider spans of managerial control      

Question 27

5 out of 5 points

   
  Agency problems appear in many settings within a firm. All of the following are examples, except which is NOT a good example of this problem? Answer      
  Selected Answer:   Firm managers receive cash bonuses based on the performance of the firm.Correct Answer:   Firm managers receive cash bonuses based on the performance of the firm.      

Question 28

5 out of 5 points

   
  Reliant assets are always all of the following except:Answer      
  Selected Answer:   dependent on unique complementary inputsCorrect Answer:   dependent on unique complementary inputs      

Question 29

5 out of 5 points

   
  ____ occurs whenever a third party receives or bears costs arising from an economic transaction in which the individual (or group) is not a direct participant.Answer      
  Selected Answer:   ExternalitiesCorrect Answer:   Externalities      

Question 30

5 out of 5 points

   
  The lower the barriers to entry and exit, the more nearly a market structure fits the ____ market model.Answer      
  Selected Answer:   perfectly contestableCorrect Answer:   perfectly contestable      

Question 31

5 out of 5 points

   
  The ____ is equal to the some of the squares of the market shares of all the firms in an industry.Answer      
  Selected Answer:   Herfindahl-Hirschman indexCorrect Answer:   Herfindahl-Hirschman index      

Question 32

5 out of 5 points

   
  ____ yields the same results as the theory of perfect competition, but requires substantially fewer assumptions than the perfectly competitive model.Answer      
  Selected Answer:   The theory of contestable marketsCorrect Answer:   The theory of contestable markets      

Question 33

5 out of 5 points

   
  In determining the optimal capital budget, one should choose those project’s whose ____ exceeds the firm’s ____ cost of capital.Answer      
  Selected Answer:   internal rate of return, marginalCorrect Answer:   internal rate of return, marginal      

Question 34

5 out of 5 points

   
  The ____ method assumes that the cash flows over the life of the project are reinvested at the ____.Answer      
  Selected Answer:   net present value; firm’s cost of capitalCorrect Answer:   net present value; firm’s cost of capital      

Question 35

5 out of 5 points

   
  Any current outlay that is expected to yield a flow of benefits beyond one year in the future is:Answer      
  Selected Answer:   a capital expenditureCorrect Answer:   a capital expenditure      

Question 36

5 out of 5 points

   
  Capital expenditures:Answer      
  Selected Answer:   Affect long-run future profitabilityCorrect Answer:   Affect long-run future profitability      

ECO 550 FINAL

1). In the absence of any legally binding enforcement mechanism, individual cartel producers may find it advantageous to cheat on the agreements and engage in secret price concessions.

    true
    false

2). When a promisor fails to put full effort into the performance of an agreement, yet the lack of effort is not independently verifiable, this lack of effort constitutes a

    breach of contractual obligations
    denial of good guarantee
    loss of reputation
    moral hazard

3). The Herfindahl-Hirschman index is a measure of ____.

    market concentration
    income distribution
    technological progressiveness
    price discrimination
    none of the above

4). In long-run equilibrium, all firms in a pure competition market situation operating under a condition of certainty will have identical costs even though they may use different production and operation techniques.

    true
    false

5). The distinctive characteristic of an oligopolistic market structure is that there are recognizable interdependencies among the decisions of the firms.

    true
    false

6). The Sherman Act prohibits:

    contracts in restraint of commerce
    monopolization of an industry
    price discrimination
    a and b
    a, b, and c

7). Buying electricity off the freewheeling grid at one quarter ’til the hour for delivery on the hour illustrates:

    relational contracts with distributors
    vertical requirements contracts
    spot market transactions
    variable price agreements

8). Effective collusion generally is more difficult as the number of oligopolistic firms involved increases.

    true
    false

9). In pure competition:

    the optimal price-output solution occurs at the point where marginal revenue is equal to price
    a firm’s demand curve is represented by a horizontal line
    a firm is a price-taker since the products of every producer are perfect substitutes for the products of every other producer
    a and b only
    a, b, and c

10). An oligopoly is characterized by:

    a relatively small number of firms
    either differentiated or undifferentiated products
    actions of any individual firm will affect sales of other firms in the industry
    a and b
    a, b, and c

11). The kinked demand curve model was developed to help explain:

    fluctuations of prices in pure competition
    rigidities observed in prices in oligopolistic industries
    fluctuations observed in prices in oligopolistic industries
    all of the above
    none of the above

12). The profit-maximizing monopolist, faced with a negative-sloping demand curve, will always produce:

    at an output greater than the output where average costs are minimized
    at an output short of that output where average costs are minimized
    at an output equal to industry output under pure competition
    a and c
    none of the above

13). Capital expenditures:

    are easily reversible
    are forms of operating expenditures
    affect future profitability
    should be evaluated on a before-tax basis
    none of the above

14). Which of the following public policies has (have) the effect of restricting competition:

    licensing
    patents
    import quotas
    a and b only
    a, b, and c

15). The cost of capital can be thought of as the rate of return required by investors in the firm’s securities.

Answer

    true
    false

16). ____ occur whenever a third party receives or bears costs arising from an economic transaction in which the individual (or group) is not a direct participant.

    Pecuniary benefits and costs
    Externalities
    Intangibles
    Monopoly costs and benefits
    none of the above

17). A firm in pure competition would shut down when:

    price is less than average total cost
    price is less than average fixed cost
    price is less than marginal cost
    price is less than average variable cost

18). The expected rate of return from a share of stock consists of:

    a dividend return
    capital appreciation (or depreciation)
    interest
    a and b only
    a, b, and c

19). In the purely competitive case, marginal revenue (MR) is equal to

    cost
    profit
    price
    total revenue
    none of the above

20). In the short-run for a purely competitive market, a manufacturer will stop production when:

    the total revenue is less than total costs
    the contribution to fixed costs is zero or less
    the price is greater than AVC
    operating at a loss
    a and b

21). Patents have been defended by some on the grounds that they stimulate inventive activity. Others have argued for changes in current patent laws because:

    resources are misallocated by the grant of a patent monopoly
    patents may not be necessary to encourage inventive activity
    the current patent monopoly period (17 years) is too short to encourage any inventive activity.
    a and b only
    all of the above

22). A monopoly will always produce less than a purely competitive industry, ceteris paribus.

    true
    false

23). The practice by telephone companies of charging lower long-distance rates at night than during the day is an example of:

    inverted block pricing
    second-degree price discrimination
    peak-load pricing
    first-degree price discrimination
    none of the above

24). When the cross elasticity of demand between one product and all other products is low, one is generally referring to a(n) ____ situation.

    oligopoly
    monopoly
    pure competition
    substitution
    monopolistic competition

25). The decision by the Municipal Transit Authority to either refurbish existing buses, buy new large buses, or to supplement the existing fleet with mini-buses is an example of:

    independent projects
    mutually exclusive projects
    contingent projects
    separable projects
    none of the above

26). Which of the following statements is (are) true concerning a pure competition situation?

    Its demand curve is represented by a vertical line.
    Firms must sell at or below market price.
    Marginal revenue is equal to price.
    both b and c
    both a and b

27). Which of the following are not approaches to resolving the principal-agent problem:

    ex ante incentive alignment
    deferred stock options
    ex post governance mechanism
    straight salary contracts
    monitoring by independent outside directors

28). If a cartel seeks to maximize profits, the market share (or quota) for each firm should be set at a level such that the ____ of all firms is identical.

    average total cost
    average profit
    marginal profit
    marginal cost
    marginal revenue

29). In the electric power industry, residential customers have relatively ____ demands for electricity compared with large industrial users and generally are charged ____ rates.

    similar, similar
    elastic, lower
    elastic, higher
    inelastic, lower
    inelastic, higher

30). The largest problem faced in cartel pricing agreements such as OPEC is:

    detecting violations of quota barriers by cartel participants
    arriving at a profit maximizing price
    attracting participants in the cartel
    none of the above

31). Non-redeployable durable assets that are dependent upon unique complementary and perfectly redeployable assets to achieve substantial value-added will typically be organized as

    an export trading company
    a spot market contract
    a vertically integrated firm
    an on-going relational contract
    a joint stock company.

32). Governance mechanisms are designed

    to increase contracting costs
    to resolve post-contractual opportunism
    to enhance the flexibility of restrictive covenants
    to replace insurance
    none of the above

33). A(n) ____ is characterized by a relatively small number of firms producing a product.

    monopoly
    syndicate
    cooperative
    oligopoly
    none of the above

34). The antitrust laws regulate all of the following business decisions except ____.

    collusion
    mergers
    monopolistic practices
    price discrimination
    wage levels

36). In the case of pure monopoly:

    one firm is the sole producer of a good or service which has no close substitutes
    the firm’s profit is maximized at the price and output combination where marginal cost equals marginal revenue
    the demand curve is always elastic
    a and b only
    a, b, and c



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