1. ECO 550 Final Exam 36 Questions with Correct Answers
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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.

2. 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

3. 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

4. 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

5. 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

6. 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
Question 14
Barometric price leadership exists when
Answer

7. 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.

8. 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

9. 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

10. ____ 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.

11. 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

12. 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.

13. 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
Pecuniary benefits and costs

14. 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

15. 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

16. 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