ECO
550 Final Exam – 116 Questions With Answers 100% Correct
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Midterm And Final Exam Solution
ECO 550 Midterm And Final Exam
Solution Set 1
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:
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
The output where P < MC
The output where P > MC
The output where
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
Question 9
Of the following, which is not
an economic rationale for public utility regulation?
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
Question 10
____ 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
Question 11
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
Question 13
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
Question 14
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
Question 16
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
Question 17
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
Question 18
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
Question 19
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.
Question 20
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
Question 28
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
Question 29
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
Question 30
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.
Question 31
____ 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
Question 32
____ 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
Question 33
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
Question 34
Capital expenditures:
Answer
are easily reversible
are forms of operating expenditures
Affect long-run future profitability
Involve only money, not machinery
Question 35
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
Question 36
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
ECO 550 Final Exam set 2
(1) Which of the following factors affect vertical
integration of firms?
(2) In order to be successful as an innovator, a
firm may require:
(3) According to economists, an individual who
tries to derive utility from the consumption of a good without paying for it is
called:
(4) According to Coasian reasoning, if negotiation is
costless:
(5) Possible goals of Not-For-Profit (NFP)
enterprises include all of the following EXCEPT
(6) Which of the following is a legal remedy for a
breach of the contract between parties?
(7) Which of the following examples can be
associated with the task specificity aspect of an asset?
(8) Which of the following contracts is considered
self-enforcing?
(9) The primary objective of a for-profit firm is
to ___________.
(10)
Which of the following theories states that people who are highly risk-averse
are less likely to engage in high-risk activities?
(11)
Income tax payments are an example of ____.
(12)
Economic profit is defined as the difference between revenue and ____.
(13)
DTC contracts which prohibit buyers from inspecting diamonds in advance help to
minimize:
(14)
Which of the following situations can lead to a winner’s curse?
(15)
A person acting as a supervisor as well as a residual claimant:
(16)
_____ is a property which distinguishes corporations from proprietorships and
partnerships.
(17)
_____ are legal and contractual mechanism[s] for creating and operating a
business for profit, using capital from investors that will be managed on their
behalf by directors and officers.
(18)
The method of payment that a principal can use to elicit effort from an agent
is called:
(19)
An information is beneficial to the decision-maker only when:
(20)
General Motors was able to gain advantage over Ford in the 1920s primarily
because:
(21)
Coal producers cannot profit by acting opportunistically toward U.S. Steel
because:
(22)
_____, uncertainty, and risk of opportunism are the three major reasons due to
which U.S. Steel prefers to own its mines, enrichment facilities, and ore
carriers.
(23)
If there is a low degree of uncertainty combined with a low degree of asset
specificity, _____ will be efficient.
(24)
Options are less than perfect as instruments to induce better performance
because:
(25)
In long-term job attachments, a worker’s wage:
(26)
A written contract between an employer and an employee creates value as long
as:
(27)
Which of the following is a characteristic of a real option?
(28)
If events A and B are independent, then Pr[A and B] will be:
(29)
Which of the following strategies are adopted by a business tycoon when the
first new management of the purchased company fails?
(30)
A characteristic function is:
(31)
_____ is an online venue where businesses and individuals can hedge their
uncertainty about whether legislation that affects them will be enacted.
(32)
The assumption of rationality in economics implies that:
(33)
The net present value of an investment represents
(34)
Measuring important concepts in economics is difficult and some important
economic phenomena are still beyond the understanding of economists. Thus
economics is called
(35)
The shares of the economic value of a particular transaction that accrues to
the seller and the buyer depend on:
(36)
Megan, an analyst in Ronald’s team called in sick on a day when 4 projects were
due for completion. Ronald divided Megan’s work between the remaining six
team-members. Which form of governance is being used here?
(37)
If the transaction between you and the seller takes place at a price that
equals your valuation of the product, then
(38)
Starting from a pure exchange equilibrium, an increase in the demand for a
commodity will result in
(39)
In a “pure exchange” market:
(40)
If two commodities are complements then
(41)
The gap between average total cost and average variable cost
(42)
Let the marginal product of capital (MPK ) be 6; the marginal
product of labor (MPL) be 2; the price of labor is given by
$10. What will be the price of capital such that the isocost and the isoquant
are tangent to each other?
(43)
Which of the following cases exhibit increasing returns to scale?
(44)
Assume that the world price of Good A is $8 per unit while its domestic price
is $6, and the marginal cost incurred by domestic producers for producing one
unit of Good A is $5. If the government imposes a tax of $3 per unit on
domestic producers, which of the following situations will be observed?
(45)
If the cost of production incurred by two producers in a competitive industry
differs, the long-run supply curve:
(46)
Which of the following commodities have a high short-run own-price elasticity
of supply?
(47)
Refer to Figure 6-4. What price will the monopolist charge when its marginal
cost shifts from C to C’?
(48) The following figure depicts
the demand, marginal revenue (MR), and marginal cost (MC) for a monopolist.
Figure 6-4
Figure 6-4
(48)
In the small country of Talisman, the liquor industry is monopolized by a
single producer Best Drinks Inc. Best Drinks charges high end customers like
5-star hotels a much higher price than it charges local pubs. Identify the
correct statement from the following.
(49)
Which of the following statements is true regarding the difference between a
monopolist and a perfectly competitive firm?
(50)
Which of the following games will have a solution in mixed strategies?
(51)
Refer to Table 7-3. What will be the Nash equilibrium if there is no
interaction between the two students?
The following matrix represents the
payoffs to two students who have been caught cheating in a class.
Table 7-3
Table 7-3
(52)
n games without dominant strategies the Nash equilibrium can be found by using:
(53)
In a mixed strategy situation, like the “heads or tails” game, the players can
maximize their income by randomly choosing head or tail each with a probability
of:
(54)
In the Stackelberg leadership model
(55)
The principle of backward induction proves that in price-fixing oligopoly games
(56)
A change in the level of an economic activity is desirable and should be
undertaken as long as the marginal benefits exceed the ____.
(57)
The standard deviation is appropriate to compare the risk between two
investments only if
(58)
The level of an economic activity should be increased to the point where the
____ is zero.
(59)
An income elasticity (Ey) of 2.0 indicates that for a ____ increase
in income, ____ will increase by ____.
(60)
Marginal revenue (MR) is ____ when total revenue is maximized
(61)
An increase in each of the following factors would normally provide a
subsequent increase in quantity demanded, except:
(62)
When using a multiplicative power function (Y = a X1b1 X2b2 X3b3) to represent
an economic relationship, estimates of the parameters (a, and the b’s) using
linear regression analysis can be obtained by first applying a ____
transformation to convert the function to a linear relationship.
(63)
The method which can give some information in estimating demand of a product
that hasn’t yet come to market is:
(64)
When two or more “independent” variables are highly correlated, then we have:
(65)
One commonly used test in checking for the presence of autocorrelation when
working with time series data is the ____.
(66)
Consumer expenditure plans is an example of a forecasting method. Which of the
general categories best described this example?
(67)
Time-series forecasting models
(68)
The forecasting technique which attempts to forecast short-run changes and
makes use of economic indicators known as leading, coincident or lagging
indicators is known as:
(69)
Which of the following barometric indicators would be the most
helpful for forecasting future sales for an industry?
(70)
The purchasing power parity hypothesis implies that an increase in inflation in
one country relative to another will over a long period of time
(71)
If the British pound (₤) appreciates by 10% against the dollar:
(72)
Companies that reduce their margins on export products in the face of
appreciation of their home currency may be motivated by a desire to
(73)
Using demand and supply curves for the Japanese yen based on the $/¥ price for
yen, an increase in US INFLATION RATES would
(74)
Marginal factor cost is defined as the amount that an additional unit of the
variable input adds to ____.
(75)
Given a Cobb-Douglas production function estimate of Q = 1.19L.72K.18 for a
given industry, this industry would have:
(76)
In a production process, an excessive amount of the variable input relative to
the fixed input is being used to produce the desired output. This statement is
true for:
(77)
The primary purpose of the Cobb-Douglas power function is to:
(78)
What method of inventory valuation should be used for economic decision-making
problems?
(79)
According to the theory of cost, specialization in the use of variable
resources in the short-run results initially in:
(80)
Which of the following statements concerning the long-run average cost curve of
economic theory is true?
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