1. 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.

2. 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:

3. 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

4. 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?

5. 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.

6. 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

7. 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

8. 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

9. 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

10. 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.

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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:

17. (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 ____.

18. (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. (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:

20. (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:

21. (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:

22. (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?

23. (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:

24. (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.

25. (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:

26. (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:

27. (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:

28. (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?