ECO 550 Final Exam – 116 Questions With Answers 100% Correct

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Midterm And Final Exam Solution

ECO 550 Midterm And Final Exam Solution Set 1

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 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?

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.