ECO
550 Final Exam 36 Questions with Correct Answers
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ECO 550 Final Exam 36 Questions with
Correct 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:
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
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
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?
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 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
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
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.
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
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
____ 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.
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
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.
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
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
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
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
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