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.

ECO 550 Final Exam – 116 Questions With Answers 100% Correct

Midterm And Final Exam Solution

ECO 550 Midterm And Final Exam Solution Set 1

Question 1

The short-run cost function is:


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:


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:


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.


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:


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?


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


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:


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?


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.


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:


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 _______.


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.




marketing strategy


Question 14

Barometric price leadership exists when


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.






Question 16

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 17

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


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


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:


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


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.


Prestige pricing

Price lining


Incremental pricing

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.

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


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:


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?


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


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


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?


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.


monopolistic competition

perfectly contestable



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.


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.


Pecuniary benefits and costs



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.


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?


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:


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 ____.


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 ____.


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

(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

(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?