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ECO 550 Final Exam Set 1


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1) The degree of operating leverage is equal to the ____ change in ____ divided by the ____ change in ____.

A). percentage; sales; percentage; EBIT

B). unit; sales; unit; EBIT

C). Percentage; EBIT; percentage; sales

D). unit; EBIT; unit; sales


2) In the linear breakeven model, the difference between selling price per unit and variable cost per unit is referred to as:

Contribution margin per unit


3) Break-even analysis usually assumes all of the following except:

A). In the short run, there is no distinction between variable and fixed costs.

B). revenue and cost curves are straight-lines throughout the analysis.

C). there appears to be perfect competition since the price is considered to remain the same regardless of quantity.

D). the straight-line cost curve implies that marginal cost is constant.

E). both c and d


4) The short-run cost function is:

A). where all inputs to the production process are variable

B). Relevant to decisions in which one or more inputs to the production process are fixed

C). not relevant to optimal pricing and production output decisions

D). crucial in making optimal investment decisions in new production facilities


5) In the short-run for a purely competitive market, a manufacturer will stop production when:

A). the total revenue is less than total costs

B). The contribution to fixed costs is zero or less

C). the price is greater than AVC

D). operating at a loss


6) In the long-run, firms in a monopolistically competitive industry will

A). earn substantial economic profits

B). Tend to just cover costs, including normal profits

C). seek to increase the scale of operations

D). seek to reduce the scale of operations


7) A "search good" is:

A). One that depends on how the product behaves over time

B). A product whose quality is only found out over time by finding how durable it is

C). Like a peach that can be examined for flaws

D). Like a used car, since it is easy to determine its inherent quality


8) 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 = MC

B). P= AC

C). Economic profits become zero in the long-run

D). The barriers to entry and exit are relatively easy


9) 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


10) 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.

A). similar, similar

B). elastic, lower

C). elastic, higher

D). inelastic, lower

E). Inelastic, higher


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). Oligopoly

B). Monopoly

C). pure competition

D). substitution

E). monopolistic competition


12) 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:

A). Price would equal average cost.

B). price would exceed average cost.

C). price would be below average cost.

D). price would be at the profit maximizing level for natural monopoly


13) A(n) ____ is characterized by a relatively small number of firms producing a product.

A). Monopoly

B). Syndicate

C). Cooperative

D). Oligopoly


14) 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.

A). Price

B). Output

C). marketing strategy

D). inventory

E). Barometric price leadership exists when


15) The existence of a kinked demand curve under oligopoly conditions may result in

A). volatile prices

B). competitive pricing.

C). prices above the monopoly price

D). an increase in the coefficient of variation of prices.

E). Price rigidity


16) "Conscious parallelism of action" among oligopolistic firms is an example of ____.

A). intense rivalry

B). a formal collusive agreement

C). Informal, or tacit, cooperation

D). a cartel


17) A key to analyzing subgame perfect equilibrium strategy in sequential games is

A). predictable behavior

B). An explicit order of play for at least some participants

C). information sets that are known with certainty

D). credible threats clearly communicated

E). randomness


18) Credible promises and hostage mechanisms can support a continuous stream of cooperative exchanges except when

A). the promisor is better off fulfilling than ignoring his promise

B). neither party has a prior dominant strategy

C). The hostage can be revoked for just causes

D). the hostage is more valuable than any given exchange

E). the hostage is difficult to replace


19) 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

A). establishing a bond forfeited by violating the commitment

B). investing in a non-redeployable reputational asset tied to the promise or threat

C). interrupting the communication of negotiated compromises

D). Offering a warranty

E). delivering a hostage (e.g., a patent license triggered by violating the promise)


20) In a game, a dominated strategy is one where:

It is always the best strategy


21) The segmenting of customers into several small groups such as household, institutional, commercial, and industrial users, and establishing a different rate schedule for each group is known as:

A). first-degree price discrimination

B). market penetration

C). Third-degree price discrimination

D). second-degree price discrimination

E). none of the above


22) The following are possible examples of price discrimination, EXCEPT:

A). prices in export markets are lower than for identical products in the domestic market.

B). senior citizens pay lower fares on public transportation than younger people at the same time.

C). A product sells at a higher price at location A than at location B, because transportation costs are higher from the factory to A.

D). subscription prices for a professional journal are higher when bought by a library than when bought by an individual


23) The optimal mark-up is:  m = -1/ (E+1).  When the mark-up on cookware equals 50%, then demand elasticity (E) for cookware is:

A). -1

B). -1.5

C). -2

D). -3


24) 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.

A). ratio of price to marginal cost

B). ratio of marginal cost to marginal utility

C). ratio of price to elasticity

D). Marginal revenue


25) Non-redeployable durable assets that are dependent upon unique complementary and perfectly redeployable assets to achieve substantial value-added will typically be organized as

A). an export trading company

B). a spot market contract

C). A vertically integrated firm

D). an on-going relational contract

E). a joint stock company.


26) 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


27) When manufacturers and distributors establish credible commitments to one another, they often employ

Vertical requirements contracts


28) Reliant assets are always all of the following except:

A). Durable

B). have substantially less value in second best use

C). Dependent on unique complementary inputs

D). pivotal in designing strategy


29) The sentiment for increased deregulation in the late 1970's and early 1980's has been felt most significantly in the price regulation of

A). Coal

B). grain

C). Transportation

D). Automobiles

E). Electric power generation


30) The antitrust laws regulate all of the following business decisions except ____.

A). Collusion

B). Mergers

C). monopolistic practices

D). price discrimination

E). Wage levels


31) 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


32) The lower the barriers to entry and exit, the more nearly a market structure fits the ____ market model.

A). monopolistic competition

B). Perfectly contestable

C). Oligopoly

D). Monopoly

E). none of the above


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


34) Any current outlay that is expected to yield a flow of benefits beyond one year in the future is:

A). a capital gain

B). a wealth maximizing factor

C). A capital expenditure

D). a cost of capital

E). a dividend reinvestment


35) 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


36) Which of the following would not be classified as a capital expenditure for decision-making purposes?

A). purchase of a building

B). investment in a new milling machine

C). Purchase of 90-day Treasury Bills

D). investment in a management training program

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