ECO 550 Final Exam 36 Questions with Correct Answers
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.
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
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
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
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
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
____ 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
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:
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
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
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.
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.
A(n) ____ is characterized by a relatively small number of firms producing a product.
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
The starting point of many methods for predicting equilibrium strategy in sequential games is
designing proactive reactions to rival actions
backwards induction based on an explicit order of play
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
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.
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)
____ 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.
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
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
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
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
The lower the barriers to entry and exit, the more nearly a market structure fits the ____ market model.
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.
____ 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
____ 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
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
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 ____.
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 ____.
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