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ECO 550 Final Exam Set 4


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1). In the absence of any legally binding enforcement mechanism, individual cartel producers may find it advantageous to cheat on the agreements and engage in secret price concessions.



2). When a promisor 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

A.breach of contractual obligations

B.denial of good guarantee

C.loss of reputation

D.moral hazard

3). The Herfindahl-Hirschman index is a measure of ____.

A.market concentration

B.income distribution

C.technological progressiveness

D.price discrimination

E.none of the above

4). In long-run equilibrium, all firms in a pure competition market situation operating under a condition of certainty will have identical costs even though they may use different production and operation techniques.



5). The distinctive characteristic of an oligopolistic market structure is that there are recognizable interdependencies among the decisions of the firms.



6). The Sherman Act prohibits:

A.contracts in restraint of commerce

B.monopolization of an industry

C.price discrimination

D.a and b

E.a, b, and c

7). Buying electricity off the freewheeling grid at one quarter 'til the hour for delivery on the hour illustrates:

A.relational contracts with distributors

B.vertical requirements contracts

C.spot market transactions

D.variable price agreements

8). Effective collusion generally is more difficult as the number of oligopolistic firms involved increases.



9). 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

10). An oligopoly is characterized by:

A.a relatively small number of firms

B.either differentiated or undifferentiated products

C.actions of any individual firm will affect sales of other firms in the industry

D.a and b

E.a, b, and c

11). 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

12). The profit-maximizing monopolist, faced with a negative-sloping demand curve, will always produce:

A.at an output greater than the output where average costs are minimized

B.at an output short of that output where average costs are minimized

C.at an output equal to industry output under pure competition

D.a and c

E.none of the above

13). Capital expenditures:

A.are easily reversible

B.are forms of operating expenditures

C.affect future profitability

D.should be evaluated on a before-tax basis

E.none of the above

14). Which of the following public policies has (have) the effect of restricting competition:



C.import quotas

D.a and b only

E.a, b, and c

15). The cost of capital can be thought of as the rate of return required by investors in the firm's securities.




16). ____ occur 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



D.Monopoly costs and benefits

E.none of the above

17). 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


18). The expected rate of return from a share of stock consists of:

A.a dividend return

B.capital appreciation (or depreciation)


D.a and b only

a, b, and c

19). In the purely competitive case, marginal revenue (MR) is equal to




D.total revenue

E.none of the above

20). 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

E.a and b

21). 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

22). A monopoly will always produce less than a purely competitive industry, ceteris paribus.



23). The practice by telephone companies of charging lower long-distance rates at night than during the day is an example of:

A.inverted block pricing

B.second-degree price discrimination

C.peak-load pricing

D.first-degree price discrimination

E.none of the above

24). When the cross elasticity of demand between one product and all other products is low, one is generally referring to a(n) ____ situation.



C.pure competition


E.monopolistic competition

25). 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:

A.independent projects

B.mutually exclusive projects

C.contingent projects

D.separable projects

E.none of the above

26). Which of the following statements is (are) true concerning a pure competition situation?

Its demand curve is represented by a vertical line.

A.Firms must sell at or below market price.

B.Marginal revenue is equal to price.

C.both b and c

D.both a and b

27). Which of the following are not approaches to resolving the principal-agent problem:

A.ex ante incentive alignment

B.deferred stock options

C.ex post governance mechanism

D.straight salary contracts

E.monitoring by independent outside directors

28). 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

29). In the electric power industry, residential customers have relatively ____ demands for electricity compared with large industrial users and generally are charged ____ rates.

A.similar, similar

B.elastic, lower

C.elastic, higher

D.inelastic, lower

E.inelastic, higher

30). 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

31). 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.

32). 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

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





E.none of the above

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



C.monopolistic practices

D.price discrimination

E.wage levels

36). 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

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