ECO 550 FINAL EXAM PART 1 & 2 (UPDATED)

PART 1

Question 1

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

existence of a non-linear cubic total cost function

hypothesis that marginal costs first decrease, then gradually increase over the normal operating range of the firm

hypothesis that total costs increase quadratically over the ranges of output examined

hypothesis that total costs increase linearly over some considerable range of output examined

Question 2

Theoretically, in a long-run cost function:

all inputs are fixed

all inputs are considered variable

some inputs are always fixed

capital and labor are always combined in fixed proportions

Question 3

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.

10,000 customers

20,000 customers

30,000 customers

40,000 customers

50,000 customers

Question 4

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

linear; increase linearly

quadratic; are constant

cubic; increase linearly

linear; are constant

Question 5

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

percentage; sales; percentage; EBIT

unit; sales; unit; EBIT

percentage; EBIT; percentage; sales

unit; EBIT; unit; sales

Question 6

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

one minus the variable cost ratio

contribution margin per unit

selling price per unit

standard deviation of unit sales

Question 7

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

Question 8

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

The Degree of Operating Leverage

A Lemon's Market

Redeployment Assets

Cyclical Competition

The Unemployment Rate

Question 9

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

warranties from established enterprises with non-redeployable assets

high interest rates

large collateral requirements

brand names and product-specific promotions and retail displays

higher prices in repeat customer transactions

Question 10

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

more; decrease; down

more; decrease; up

more; increase; down

more; increase; up

Question 11

Under asymmetric information,

you never get what you pay for

you sometimes get cheated

you always get cheated

at best you get what you pay for

sellers make profits in excess of competitive returns

Question 12

Asset specificity is largest when

value in first best use is large

value in second best use is large

customers choose their supplier at random

very valuable assets are non-redeployable

customers are loyal to a particular seller

Question 13

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:

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

Question 14

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

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 15

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

Question 16

___ 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.

Peak load pricing

Inverted block pricing

Block pricing

First degree price discrimination

Question 17

Declining cost industries

have upward rising AC curves.

have upward rising demand curves.

have-shaped total costs.

have diseconomies of scale.

have marginal cost curves below their average cost curve.

Qiestion 18

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.

similar, similar

elastic, lower

elastic, higher

inelastic, lower

inelastic, higher

Question 19

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

Question 20

Some market conditions make cartels MORE likely to succeed in collusion.  Which of the following will make collusion more successful?

The products are heterogeneous

The orders are small and frequent

The firms are all about the same size

Costs differ across the firms

Firms are geographically widely scattered

Question 21

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.

price

output

marketing strategy

inventory

Question 22

Even ideal cartels tend to be unstable because

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 23

The existence of a kinked demand curve under oligopoly conditions may result in

volatile prices

competitive pricing.

prices above the monopoly price.

an increase in the coefficient of variation of prices.

price rigidity

Question 24

In a kinked demand market, whenever one firm decides to lower its price,

other firms will automatically follow.

none of the other firms will follow.

one half of the firms follow and one half of the firms don't follow the price cut.

other firms all decide to exit the industry

all of the other firms raise their prices.

Question 25

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

intense rivalry

a formal collusive agreement

informal, or tacit, cooperation

a cartel

PART 2

Question 1

In a game, a dominated strategy is one where:

It is always the best strategy

It is always the worst strategy

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

Is sometimes the best and sometimes the worst strategy

Question 2

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

a dominant strategy

an irrational strategy

a grim trigger strategy

a non-cooperative finite game strategy

a subgame imperfect strategy

Question 3

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

predictable behavior

an explicit order of play for at least some participants

information sets that are known with certainty

credible threats clearly communicated

randomness

Question 4

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

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 5

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)?

The problem is their lack of information.

The problem is that it is a nonzero sum game.

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

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

Question 6

The following are possible examples of price discrimination, EXCEPT:

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.

Question 7

Third-degree price discrimination exists whenever:

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.

Question 8

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

full-cost pricing policy

target-pricing policy

marginal-pricing policy

market-share pricing policy

markup pricing policy

Question 9

____ 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.

Prestige pricing

Price lining

Skimming

Incremental pricing

Question 10

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

universal access price discrimination

declining block price discrimination.

mixed bundling price discrimination.

two-part price discrimination.

uniform pricing

Question 11

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

to provide incentives for efficient reliance

to reduce transaction costs

to discourage the development of asymmetric information

to provide risk allocation mechanisms

Question 12

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

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 13

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 ____.

reliance relationships

uncertainty

moral hazard

creative ingenuity

insurance reliance

Question. 14

Governance mechanisms are designed

to increase contracting costs

to resolve post-contractual opportunism

to enhance the flexibility of restrictive covenants

to replace insurance

Question 15

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

vertical requirements contracts

third-party monitoring

credible threat mechanisms

non-price tactics

Question 16

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

monopolistic competition

perfectly contestable

oligopoly

monopoly

Question 17

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

Baumol's sales maximization hypothesis

The Pareto optimality condition

The Cournot model

The theory of contestable markets

Question 18

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

collusion

mergers

monopolistic practices

price discrimination

wage levels

Question 19

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

coal

grain

transportation

automobiles

electric power generation

Question 20

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

market concentration

income distribution

technological progressiveness

price discrimination

Question 21

Capital expenditures:

are easily reversible

are forms of operating expenditures

Affect long-run future profitability

Involve only money, not machinery

Question 22

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

ratio analysis

break-even analysis

capital budgeting techniques

economic forecasting

Question 23

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

purchase of a building

investment in a new milling machine

purchase of 90-day Treasury Bills

investment in a management training program

Question 24

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

a capital gain

a wealth maximizing factor

a capital expenditure

a cost of capital

a dividend reinvestment

Question 25

The social rate of discount is best approximated by:

the cost of government borrowing

the opportunity cost of resources taken from the private sector

3 percent

30 percent