Eco 550 final exam

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ECO 550 Final Exam (36 Questions with Correct Answers) 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 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? 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 priceoutput 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 = ÎŁ (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

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