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Eco 550 Final Exam Answers
ECO 550 Final Exam Answers
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ECO 550 Final Exam Answers
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.
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 increas
ed.
Answer
linear; increase linearly
quadratic; are constant
cubic; increase linearly
linear; are constant
Long distance telephone service has become a competitive market. The average cos
t per call is $0.05 a minute, and its declining. The likely reason for the declin
ing price for long distance service is:
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 environ
ment?
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

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
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 utilitys plant over a larger number of u
nits 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 o
r in production, which tends to found in industries which face increasing return
s 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
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-m
aximizing price-output level, assumes that the other firms ____ will not change.
Answer
price
output
marketing strategy
inventory
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 pro

duct.
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.
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 sequen
tial 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 prisoners dilemma situations seems to be enhanced by all
of the following except
Answer
limited punishment schemes
clarity of conditional rewards
grim trigger strategy
provocabilityi.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 pena
lties that are not enforced by third parties, all of the following are credibili
ty-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
____ is a new product pricing strategy which results in a high initial product p
rice. 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 diff
erent prices to these different groups.

the seller will bargain with buyers in each of the markets to obtain the best po
ssible 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 sellers product from one market segment to a
nother.
Public utilities practice first-degree price discrimination.
There must be differences in the elasticity of demand from one segment to anothe
r.
The following are possible examples of price discrimination, EXCEPT:
Answer
prices in export markets are lower than for identical products in the domestic m
arket.
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 tran
sportation costs are higher from the factory to A.
subscription prices for a professional journal are higher when bought by a libra
ry 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 hist
ories, a lenders 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
When someone contracts to do a task but fails to put full effort into the perfor
mance of an agreement, yet the lack of effort is not independently verifiable, t
his 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 probl
em?
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 fit
s 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 = (si2), where si is the market shares of the i-th fir
m 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 econo
mic transaction in which the individual (or group) is not a direct participant.
Answer
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
Baumols 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 deci
sion-making purposes?
Answer
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:
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 rei
nvested at the ____.
Answer
net present value; computed internal rate of return
internal rate of return; firms cost of capital
net present value; firms cost of capital
net present value; risk-free rate of return
Question 36
The weights used in calculating the firms weighted-average cost of capital are eq
ual 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 firms target capital structure
Words: 1742
Pages: 7
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