Eco550 questions

Eco550 questions

Question
	1. 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:
a. Governmental pressure to lower the price
b. Reduced demand for long distance service
c. Entry into this industry pushes prices down
d. Lower price for a barrel of crude oil
e. Increased cost of providing long distance service
2. All of the following are true for both competition and monopolistic competition in the long run,
except
one of them. Which is it?
a. P = M C
b. P = A C
c. Economic profits become zero in the long-run
d. The barriers to entry and exit are relatively easy
e. None of the above is an exception
3. In pure competition:
a. the optimal price-output solution occurs at the point where marginal revenue is equal to
price
b. a firm's demand curve is represented by a horizontal line
c. a firm is a price-taker since the products of every producer are perfect substitutes for the
products of every other producer
d. a and b only
e. a, b, and c
A firm in pure competition would shut down when:
a. price is less than average total cost
b. price is less than average fixed cost
c. price is less than marginal cost
d. price is less than average variable cost
5. All of the following are mechanisms which reduce the adverse selection problem except
____.
a.
b.
c.
d.
e.
warranties from established enterprises with non-redeployable assets
high interest rates
large collateral requirements
brand names and product-specific promotions and retail displays
higher prices in repeat customer transactions
6. An "experience good" is one that:
a. Only an expert can use
b. Has undetectable quality when purchased

c. Can be readily experienced simply by touching or tasting
d. Improves with age, like a fine wine
e. All of the above
7. Unique Creations has a monopoly position in magnometers. If the marginal cost for a
magnometer is $50
and the price elasticity for magnometers is -4, what is the optimal monopoly price?
Hint: P (1 +1/E) = MC.
a. $37.50
b. $41.25
c. $66.67
d. $75.00
e. $82.50
8. Declining cost industries
a. have upward rising AC curves.
b. have upward rising demand curves.
c. have ?-shaped total costs.
d. have diseconomies of scale.
e. have marginal cost curves below their average cost curve.
9. In the case of pure monopoly:
a. one firm is the sole producer of a good or service which has no close substitutes
b. the firm's profit is maximized at the price and output combination where marginal cost
equals marginal revenue
c. the demand curve is always elastic
d. a and b only
e. a, b, and c
10. A monopoly will always produce less than a purely competitive industry, ceteris paribus.
a. true
b. false
11. When the cross elasticity of demand between one product and all other products is low, one
is generally
referring to a(n) ____ situation.
a.
b.
c.
d.
e.
oligopoly
monopoly
pure competition
substitution
monopolistic competition
12. Regulatory agencies engage in all of the following activities except _______.
a. controlling entry into the regulated industries

b. overseeing the quality of service provided by the firms
c. setting federal and state income tax rates on regulated firms
d. setting prices that consumers will pay
e. none of the above
13. The kinked demand curve model was developed to help explain:
a. fluctuations of prices in pure competition
b. rigidities observed in prices in oligopolistic industries
c. fluctuations observed in prices in oligopolistic industries
d. all of the above
e. none of the above
14. Which of the following is an example of an oligopolistic market structure?
a. public utilities
b. air transport industry
c. liquor retailers
d. wheat farmers
e. none of the above
15. If a cartel seeks to maximize profits, the market share (or quota) for each firm should be set
at a level
such that the ____ of all firms is identical.
a. average total cost
b. average profit
c. marginal profit
d. marginal cost
e. marginal revenue
16. A(n) ____ is characterized by a relatively small number of firms producing a product.
a. monopoly
b. syndicate
c. cooperative
d. oligopoly
e. none of the above
17. The largest problem faced in cartel pricing agreements such as OPEC is:
a. detecting violations of quota barriers by cartel participants
b. arriving at a profit maximizing price
c. attracting participants in the cartel
d. none of the above
18. Barometric price leadership exists when
a. 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.
b. one firm imposes its best price on the rest of the industry.
c. all firms agree to change prices simultaneously.
d. one company forms a price umbrella for all others.
e. the firms are all colluding.

19. Vertical integration may be motivated by all of the following except:
a. Upstream market power
b. Economies of ever wider spans of managerial control
c. Technological interdependencies
d. Reduced search and bargaining cost
e. The hold-up problem.
20. Which of the following is not among the functions of contract?
a. to provide incentives for efficient reliance
b. to reduce transaction costs
c. to discourage the development of asymmetric information
d. to provide risk allocation mechanisms
21. When retail bicycle dealers advertise and perform warranty repairs but do not deliver the
personal selling
message that Schwinn has designed as part of the marketing plan but cannot observe at less
than
prohibitive cost, the manufacturer has encountered a problem of ____.
a. reliance relationships
b. uncertainty
c. moral hazard
d. creative ingenuity
e. insurance reliance
22. Mac trucks and their dealers would likely have an organizational form of
a. fixed profit sharing franchise contracts
b. spot market recontracting
c. alliances
d. vertical integration
23. When borrowers who do not intend to repay are able to hide their bad credit histories, a
lender's wellintentioned borrowers should
a. complain to regulatory authorities
b.
c.
d.
e.
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
24. Governance mechanisms are designed
a. to increase contracting costs
b. to resolve post-contractual opportunism
c. to enhance the flexibility of restrictive covenants
d. to replace insurance
e. none of the above

25. Patents have been defended by some on the grounds that they stimulate inventive activity.
Others have
argued for changes in current patent laws because:
a. resources are misallocated by the grant of a patent monopoly
b. patents may not be necessary to encourage inventive activity
c. the current patent monopoly period (17 years) is too short to encourage any inventive
activity.
d. a and b only
e. all of the above
26. Which of the following public policies has (have) the effect of restricting competition?
a. licensing
b . p a te n ts
c. import quotas
d. a and b only
e. a, b, and c
27. ____ yields the same results as the theory of perfect competition, but requires substantially
fewer
assumptions than the perfectly competitive model.
a. Baumol's sales maximization hypothesis
b. The Pareto optimality condition
c. The Cournot model
d. The theory of contestable markets
e. none of the above
28. The ____ is equal to the some of the squares of the market shares of all the firms in an
industry.
a. market concentration ratio
b. Herfindahl-Hirschman index
c. correlation coefficient
d. standard deviation of concentration

e. none of the above
29. ____ 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.
a. Pecuniary benefits and costs
b. Externalities
c. Intangibles
d. Monopoly costs and benefits
e. none of the above
30. In order to help assure that all relevant factors will be considered, the capital-expenditure
selection
process should include the following steps except:
a. generating alternative capital-investment project proposals
b. estimating cash flows for the project proposals
c. reviewing the investment projects after they have been implemented

d. allocate manpower to the various divisions within the firm
e. a and d
31. Project post-audit reviews are rarely of practical value because capital investments are
sunk, irreversible
costs.
a. true
b. false
32. The cost of internal equity (retained earnings) is ____ the cost of external equity (new
common stock).
a. greater than
b. equal to
c. less than
33. The ____ depicts the risk-return relationship in the market for all securities:
a. characteristic line
b. security market line
c. investment opportunity curve
d. marginal cost of capital schedule
e. none of the above
34. The discount rate utilized in public sector budgeting performs the functions of:
a. allocating funds between the public and private sectors
b. allocating funds between present consumption and investment (i.e., future consumption)
c. allocating funds between debt and equity securities
d. a and b only
e. none of the above