ECO550 Final Exam Complete Solution

Question: #1626

PART 1
Question 1
The degree of operating leverage is equal to the ____ change in ____ divided by the ____ change in ____.
Answer
percentage; sales; percentage; EBIT
unit; sales; unit; EBIT
percentage; EBIT; percentage; sales
unit; EBIT; unit; sales
Question 2
In the linear breakeven model, the difference between selling price per unit and variable cost per unit is referred to as:
Answer
variable margin per unit
variable cost ratio
contribution margin per unit
target margin per unit
Question 3
Theoretically, in a long-run cost function:
Answer
all inputs are fixed
all inputs are considered variable
some inputs are always fixed
capital and labor are always combined in fixed proportions
Question 4
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
Question 5
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.
Question 6
George Webb Restaurant collects on the average $5 per customer at its breakfast & lunch diner. Its variable cost per customer averages $3, and its annual fixed cost is $40,000. If George Webb wants to make a profit of $20,000 per year at the diner, it will have to serve__________ customers per year.
Answer
10,000 customers
20,000 customers
30,000 customers
40,000 customers
50,000 customers
Question 7
If price exceeds average costs under pure competition, ____ firms will enter the industry, supply will ____, and price will be driven ____.
Answer
more; decrease; down
more; decrease; up
more; increase; down
more; increase; up
Question 8
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 9
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
Question 10
What is the profit maximization point for a firm in a purely competitive environment?
Answer
The output where P = MC
The output where P < MC
The output where P > MC
The output where MR = MC
The output where AVC < P
Question 11
In the purely competitive case, marginal revenue (MR) is equal to:
Answer
cost
profit
price
total revenue
Question 12
The price for used cars is well below the price of new cars of the same general quality. This is an example of:
Answer
The Degree of Operating Leverage
A Lemon's Market
Redeployment Assets
Cyclical Competition
The Unemployment Rate
Question 13
Uncertainty includes all of the following except ____.
Answer
unknown effects of deliberate actions
incomplete information as to the type of competitor
random disturbances
unverifiable claims
accidents due to weather hazards
Question 14
The practice by telephone companies of charging lower long-distance rates at night than during the day is an example of:
Answer
inverted block pricing
second-degree price discrimination
peak-load pricing
first-degree price discrimination
none of the above
Question 15
When the cross elasticity of demand between one product and all other products is low, one is generally referring to a(n) ____ situation.
Answer
oligopoly
monopoly
pure competition
substitution
monopolistic competition
Question 16
The demand curve facing the firm in ____ is the same as the industry demand curve.
Answer
pure competition
monopolistic competition
oligopoly
pure monopoly
Question 17
In the electric power industry, residential customers have relatively ____ demand for electricity compared with large industrial users. But contrary to price discrimination, large industrial users generally are charged ____ rates.
Answer
similar, similar
elastic, lower
elastic, higher
inelastic, lower
inelastic, higher
Question 18
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 19
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 20
A cartel is a situation where firms in the industry
Answer
have an agreement to restrict output.
agree to produce identical products.
obey the rules of dominant firm price leadership.
experience the pain of a kinked demand curve.
have a barometric price leader
Question 21
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 22
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 23
Some industries that have rigid prices. In those industries, we tend to
Answer
find that output is also rigid over the business cycle
find that output varies greatly over the business cycle
find the employment in these industries is quite stable over the business cycle
find that the rate of return is negative in boom times
Question 24
Which of the following is an example of an oligopolistic market structure?
Answer
public utilities
air transport industry
liquor retailers
wheat farmers
Question 25
In a kinked demand market, whenever one firm decides to lower its price,
Answer
other firms will automatically follow.
none of the other firms will follow.
one half of the firms follow and one half of the firms don't follow the price cut.
other firms all decide to exit the industry
all of the other firms raise their prices.
ECO 550 FINAL EXAM PART 1 SECOND VERSION
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
Question 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
Question 3
George Webb Restaurant collects on the average $5 per customer at its breakfast & lunch diner. Its variable cost per customer averages $3, and its annual fixed cost is $40,000. If George Webb wants to make a profit of $20,000 per year at the diner, it will have to serve__________ customers per year.
Answer
10,000 customers
20,000 customers
30,000 customers
40,000 customers
50,000 customers
Question 4
The degree of operating leverage is equal to the ____ change in ____ divided by the ____ change in ____.
Answer
percentage; sales; percentage; EBIT
unit; sales; unit; EBIT
percentage; EBIT; percentage; sales
unit; EBIT; unit; sales
Question 5
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.
Question 6
In the linear breakeven model, the breakeven sales volume (in dollars) can be found by multiplying the breakeven sales volume (in units) by:
Answer
one minus the variable cost ratio
contribution margin per unit
selling price per unit
standard deviation of unit sales
Question 7
A firm in pure competition would shut down when:
Answer
price is less than average total cost
price is less than average fixed cost
price is less than marginal cost
price is less than average variable cost
Question 8
Under asymmetric information,
Answer
you never get what you pay for
you sometimes get cheated
you always get cheated
at best you get what you pay for
sellers make profits in excess of competitive returns
Question 9
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 10
A "search good" is:
Answer
One that depends on how the product behaves over time
A product whose quality is only found out over time by finding how durable it is
Like a peach that can be examined for flaws
Like a used car, since it is easy to determine its inherent quality
Question 11
All of the following are mechanisms which reduce the adverse selection problem except ____.
Answer
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
Question 12
Asset specificity is largest when
Answer
value in first best use is large
value in second best use is large
customers choose their supplier at random
very valuable assets are non-redeployable
customers are loyal to a particular seller
Question 13
In the purely competitive case, marginal revenue (MR) is equal to:
Answer
cost
profit
price
total revenue
Question 14
In the electric power industry, residential customers have relatively ____ demand for electricity compared with large industrial users. But contrary to price discrimination, large industrial users generally are charged ____ rates.
Answer
similar, similar
elastic, lower
elastic, higher
inelastic, lower
inelastic, higher
Question 15
Declining cost industries
Answer
have upward rising AC curves.
have upward rising demand curves.
have ∩-shaped total costs.
have diseconomies of scale.
have marginal cost curves below their average cost curve.
Question 16
The demand curve facing the firm in ____ is the same as the industry demand curve.
Answer
pure competition
monopolistic competition
oligopoly
pure monopoly
Question 17
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 18
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 19
When the cross elasticity of demand between one product and all other products is low, one is generally referring to a(n) ____ situation.
Answer
oligopoly
monopoly
pure competition
substitution
monopolistic competition
Question 20
The existence of a kinked demand curve under oligopoly conditions may result in
Answer
volatile prices
competitive pricing.
prices above the monopoly price.
an increase in the coefficient of variation of prices.
price rigidity
Question 21
A(n) ____ is characterized by a relatively small number of firms producing a product.
Answer
monopoly
syndicate
cooperative
oligopoly
Question 22
Some market conditions make cartels MORE likely to succeed in collusion. Which of the following will make collusion more successful?
Answer
The products are heterogeneous
The orders are small and frequent
The firms are all about the same size
Costs differ across the firms
Firms are geographically widely scattered
Question 23
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 24
Which of the following is an example of an oligopolistic market structure?
Answer
public utilities
air transport industry
liquor retailers
wheat farmers
Question 25
A cartel is a situation where firms in the industry
Answer
have an agreement to restrict output.
agree to produce identical products.
obey the rules of dominant firm price leadership.
experience the pain of a kinked demand curve.
have a barometric price leader

Question 1
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 2
When there is an Equilibrium (or a Nash Equilibrium), we expect that:
Answer
once the firm’s get there, no one will change their strategy.
firms will tend to select a randomized strategy.
neither firm will care what it does.
this is always a dominated strategy.
Question 3
An illustration of a non-credible commitment is the promise
Answer
to not increase capacity in a declining industry
to match a new entrant's discount price
to enter a profitable industry
to restrain output to the quota assigned by a cartel
to exit in the face of projected losses.
Question 4
To trust a potential cooperator until the first defection and then never cooperate thereafter is
Answer
a dominant strategy
an irrational strategy
a grim trigger strategy
a non-cooperative finite game strategy
a subgame imperfect strategy
Question 5
The difference between cooperative and non-cooperative games is
Answer
cooperative games allow side payments to support collusion
non-cooperative games encourage communication of sensitive information between arms-length competitors
cooperative games involve randomized behavior
cooperative games necessitate an explicit order of play
inconsequential except when players have contractual relationships
Question 6
Vacation tours to Europe invariably package visits to disparate regions: cities, mountains, and the seaside. Bundling, a type of second degree price discrimination, is most profitable when:
Answer
the preference rankings of vacationers travelling together are negatively correlated.
a preference for cities is always higher than preferences for mountain vistas.
preference rankings of vacationers travelling together are positively correlated.
preference for the seaside is always higher than preferences for city excursions.
Question 7
Which of the following pricing policies best identifies when a product should be expanded, maintained, or discontinued?
Answer
full-cost pricing policy
target-pricing policy
marginal-pricing policy
market-share pricing policy
markup pricing policy
Question 8
____ 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
Question 9
Electricity pricing that varies in its billing expense throughout the day is called
Answer
full pricing
marginal cost pricing
dynamic pricing
variable pricing
full cost pricing pricing
Question 10
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.
Question 11
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 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 13
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 14
To accomplish its purpose a linear profit-sharing contract must
Answer
induce the employee to moonlight
communicate a code of conduct that will be monitored and enforced
meet either the participation or the incentive compatibility constraint
establish a separating equilibrium
not realign incentives
Question 15
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 ____.
Answer
reliance relationships
uncertainty
moral hazard
creative ingenuity
insurance reliance
Question 16
The antitrust laws regulate all of the following business decisions except ____.
Answer
collusion
mergers
monopolistic practices
price discrimination
wage levels
Question 17
The sentiment for increased deregulation in the late 1970's and early 1980's has been felt most significantly in the price regulation of
Answer
coal
grain
transportation
automobiles
electric power generation
Question 18
The ____ is equal to the some of the squares of the market shares of all the firms in an industry.
Answer
market concentration ratio
Herfindahl-Hirschman index
correlation coefficient
standard deviation of concentration
Question 19
The Herfindahl-Hirschman index (also shortened to just the Herfindahl index) is a measure of ____.
Answer
market concentration
income distribution
technological progressiveness
price discrimination
Question 20
____ 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 21
All of the following except ____ are shortcomings of cost-benefit analysis.
Answer
difficulty in measuring third-party costs
difficulty in measuring third-party benefits
failure to consider the time value of benefits and costs
difficulty of accounting for program interactions
Question 22
In the constant-growth dividend valuation model, the required rate of return on common stock (i.e., cost of equity capital) can be shown to be equal to the sum of the dividend yield plus the ____.
Answer
yield-to-maturity
present value yield
risk-free rate
dividend growth rate
Question 23
Capital expenditures:
Answer
are easily reversible
are forms of operating expenditures
Affect long-run future profitability
Involve only money, not machinery
Question 24
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 25
Which of the following should not be counted in a cost-benefit analysis?
Answer
direct benefits and costs
real secondary benefits
technological secondary costs
pecuniary benefits
intangibles
SECOND VERSION OF EXAM PART 2
Question 1
In a game, a dominated strategy is one where:
Answer
It is always the best strategy
It is always the worst strategy
It is the strategy that is the best among the group of worst possible strategies.
Is sometimes the best and sometimes the worst strategy
Question 2
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 3
Consider the game known as the Prisoner's Dilemma. What's the dilemma?
Answer
By both not confessing, both get to the cooperative solution and minimize time in prison.
By both confessing, both get to the noncooperative solution and both serve significant time in prison.
As a group, they are better off cooperating by not confessing, but each player has an incentive to be first to confess in a double cross.
The problem is that the spies should never have been caught; they should move to Rio.
Question 4
To trust a potential cooperator until the first defection and then never cooperate thereafter is
Answer
a dominant strategy
an irrational strategy
a grim trigger strategy
a non-cooperative finite game strategy
a subgame imperfect strategy
Question 5
When airlines post prices on an electronic bulletin board at 8:00 a.m. each morning, the decision-makers are engaged in
Answer
a single play game
a sequential game
an entry decision
a simultaneous game
an infinite repetition game
Question 6
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.
Question 7
____ 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
Question 8
____ is the price at which an intermediate good or service is transferred from the selling to the buying division within the same firm.
Answer
Incremental price
Marginal price
Full-cost price
Transfer price
Question 9
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.
Question 10
To maximize profits, a monopolist that engages in price discrimination must allocate output in such a way as to make identical the ____ in all markets.
Answer
ratio of price to marginal cost
ratio of marginal cost to marginal utility
ratio of price to elasticity
marginal revenue
Question 11
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 12
Non-redeployable durable assets that are dependent upon unique complementary and perfectly redeployable assets to achieve substantial value-added will typically be organized as
Answer
an export trading company
a spot market contract
a vertically integrated firm
an on-going relational contract
a joint stock company.
Question 13
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 ____.
Answer
reliance relationships
uncertainty
moral hazard
creative ingenuity
insurance reliance
Question 14
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 15
Buying electricity off the freewheeling grid at one quarter 'til the hour for delivery on the hour illustrates:
Answer
relational contracts with distributors
vertical requirements contracts
spot market transactions
variable price agreements
Question 16
The antitrust laws regulate all of the following business decisions except ____.
Answer
collusion
mergers
monopolistic practices
price discrimination
wage levels
Question 17
The ____ is equal to the some of the squares of the market shares of all the firms in an industry.
Answer
market concentration ratio
Herfindahl-Hirschman index
correlation coefficient
standard deviation of concentration
Question 18

____ 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 19
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 20
The Herfindahl-Hirschman index (also shortened to just the Herfindahl index) is a measure of ____.
Answer
market concentration
income distribution
technological progressiveness
price discrimination
Question 21
Any current outlay that is expected to yield a flow of benefits beyond one year in the future is:
Answer
a capital gain
a wealth maximizing factor
a capital expenditure
a cost of capital
a dividend reinvestment
Question 22
In order to help assure that all relevant factors will be considered, the capital-expenditure selection process should include the following steps except:
Answer
generating alternative capital-investment project proposals
estimating cash flows for the project proposals
reviewing the investment projects after they have been implemented
allocate manpower to the various divisions within the firm
Question 23
Cost-benefit analysis is the public sector counterpart to ____ used in private, profit-oriented firms.
Answer
ratio analysis
break-even analysis
capital budgeting techniques
economic forecasting
Question 24
The decision by the Municipal Transit Authority to either refurbish existing buses, buy new large buses, or to supplement the existing fleet with mini-buses is an example of:
Answer
independent projects
mutually exclusive projects
contingent projects
separable projects
Question 25
If the acceptance of Project A makes it impossible to accept Project B, these projects are:
Answer
contingent projects
complementary projects
mutually inclusive projects
mutually exclusive projects