Question 1
 
The short-run cost function is:
Answer
  where all inputs to the production process are variable
  relevant to decisions in which one or more inputs to the production process are fixed
  not relevant to optimal pricing and production output decisions
  crucial in making optimal investment decisions in new production facilities

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
  regression to the mean analysis.
  breakeven analysis.
  survivorship analysis.
  engineering cost analysis.
  a Willie Sutton analysis.

Which of the following is not
an assumption of the linear breakeven model:
Answer
  constant selling price per unit
  decreasing variable cost per unit
  fixed costs are independent of the output level
  a single product (or a constant mix of products) is being produced and sold
  all costs can be classified as fixed or variable

Question 4
 
A ____ total cost function implies that marginal costs ____ as output is increased.
Answer
  linear; increase linearly
  quadratic; are constant
  cubic; increase linearly
  linear; are constant

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
  Governmental pressure to lower the price
  Reduced demand for long distance service
  Entry into this industry pushes prices down
  Lower price for a barrel of crude oil
  Increased cost of providing long distance service

What is the profit maximization point for a firm in a purely competitive environment?
Answer
  The output where P = MC
  The output where P < MC
  The output where P > MC
  The output where MR = MC
  The output where AVC < P

Question 7
 
The problems of asymmetric information exchange arise ultimately because
Answer
  one party to the exchange possesses different information than another
  one party has more information than another
  one party knows nothing
  one party cannot independently verify the information of another
  information is scarce

Question 8
 
An "experience good" is one that:
Answer
  Only an expert can use
  Has undetectable quality when purchased
  Can be readily experienced simply by touching or tasting
  Improves with age, like a fine wine

Of the following, which is not
an economic rationale for public utility regulation?
Answer
  production process exhibiting increasing returns to scale
  constant cost industry
  avoidance of duplication of facilities
  protection of consumers from price discrimination

____ 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
  Peak load pricing
  Inverted block pricing
  Block pricing
  First degree price discrimination

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
  price would equal average cost.
  price would exceed average cost.
  price would be below average cost.
  price would be at the profit maximizing level for natural monopoly

Question 12
 
Regulatory agencies engage in all of the following activities except _______.
Answer
  controlling entry into the regulated industries
  overseeing the quality of service provided by the firms
  setting federal and state income tax rates on regulated firms
  setting prices that consumers will pay

5 points  
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.
Answer
  price
  output
  marketing strategy
  inventory


Barometric price leadership exists when
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.
  one firm imposes its best price on the rest of the industry.
  all firms agree to change prices simultaneously.
  one company forms a price umbrella for all others.
  the firms are all colluding.

Question 15
 
A(n) ____ is characterized by a relatively small number of firms producing a product.
Answer
  monopoly
  syndicate
  cooperative
  oligopoly

 
Even ideal cartels tend to be unstable because
Answer
  firms typically prefer competition to collusion as competition, because it leads to more profits.
  collusion leads to lowest possible overall profits in the industry.
  oligopolistic managers are extremely risk loving.
  firms can benefit by secretly selling more than they promised the other firms

The starting point of many methods for predicting equilibrium strategy in sequential games is
Answer
  designing proactive reactions to rival actions
  information sets
  uncertain outcomes
  backwards induction based on an explicit order of play
  endgame analysis

Cooperation in repeated prisoner's dilemma situations seems to be enhanced by all of the following except
Answer
  limited punishment schemes
  clarity of conditional rewards
  grim trigger strategy
  provocability--i.e., credible threats of punishment
  tit for tat strategy

 
When there is no Equilibrium (or no Nash Equilibrium), we expect that:
Answer
  the firms end up in the cooperative strategy.
  a firm will follow a randomized strategy.
  a firm will not care what it does.
  a firm will very likely have a dominant strategy.

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
Answer
  establishing a bond forfeited by violating the commitment
  investing in a non-redeployable reputational asset tied to the promise or threat
  interrupting the communication of negotiated compromises
  offering a warranty
  delivering a hostage (e.g., a patent license triggered by violating the promise)

Question 21
 
____ 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
  Prestige pricing
  Price lining
  Skimming
  Incremental pricing

Third-degree price discrimination exists whenever:
Answer
  the seller knows exactly how much each potential customer is willing to pay and will charge accordingly.
  different prices are charged by blocks of services.
  the seller can separate markets by geography, income, age, etc., and charge different prices to these different groups.
  the seller will bargain with buyers in each of the markets to obtain the best possible price.


 
Which of the statements about price discrimination is (are) false?
Answer
  It must be possible to segment the market.
  It must be difficult to transfer the seller's product from one market segment to another.
  Public utilities practice first-degree price discrimination.
  There must be differences in the elasticity of demand from one segment to another.

The following are possible examples of price discrimination, EXCEPT:
Answer
  prices in export markets are lower than for identical products in the domestic market.
  senior citizens pay lower fares on public transportation than younger people at the same time.
  a product sells at a higher price at location A than at location B, because transportation costs are higher from the factory to A.
  subscription prices for a professional journal are higher when bought by a library than when bought by an individual


Which of the following is not among the functions of contract?
Answer
  to provide incentives for efficient reliance
  to reduce transaction costs
  to discourage the development of asymmetric information
  to provide risk allocation mechanisms


Question 26
 
When borrowers who do not intend to repay are able to hide their bad credit histories, a lender's well-intentioned borrowers should
Answer
  complain to regulatory authorities
  withdraw their loan applications
  offer more collateral in exchange for lower interest charges
  divulge still more information on their loan applications
  hope for a pooling equilibrium

Question 27
 
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
Answer
  breach of contractual obligations
  denial of good guarantee
  loss of reputation
  moral hazard

Which of the following are not approaches to resolving the principal-agent problem?
Answer
  ex ante incentive alignment
  deferred stock options
  ex post governance mechanism
  straight salary contracts
  monitoring by independent outside directors

The lower the barriers to entry and exit, the more nearly a market structure fits the ____ market model.
Answer
  monopolistic competition
  perfectly contestable
  oligopoly
  monopoly


Industry A has market shares of 50, 30, and 20.  Industry B has market shares of 45, 40, and 15. Hint:  HHI = Σ (si2), where si is the market shares of the i-th firm in the industry.
Answer
  The Herfindahl index for A is 100.
  The Herfindahl index for A is 3,800.
  The Herfindahl index for B is 3,600
  The Herfindahl index for A is greater than for B.
  The Herfindahl index is for B is 4,000.


____ 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
  Pecuniary benefits and costs
  Externalities
  Intangibles
  Monopoly costs and benefits


____ yields the same results as the theory of perfect competition, but requires substantially fewer assumptions than the perfectly competitive model.
Answer
  Baumol's sales maximization hypothesis
  The Pareto optimality condition
  The Cournot model
  The theory of contestable markets

 

Which of the following would not be classified as a capital expenditure for decision-making purposes?
Answer
  purchase of a building
  investment in a new milling machine
  purchase of 90-day Treasury Bills
  investment in a management training program

Capital expenditures:
Answer
  are easily reversible
  are forms of operating expenditures
  Affect long-run future profitability
  Involve only money, not machinery

The ____ method assumes that the cash flows over the life of the project are reinvested at the ____.
Answer
  net present value; computed internal rate of return
  internal rate of return; firm's cost of capital
  net present value; firm's cost of capital
  net present value; risk-free rate of return

The weights used in calculating the firm's weighted-average cost of capital are equal to the proportion of debt and equity ____.
Answer
  used to finance the project
  used to finance the projects undertaken last year
  in the industry average capital structure
  in the firm's target capital structure

 

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