· Web viewECO 550 Week 11 Final Exam. 1.Capital expenditures: a.are easily reversible. b.are...

ECO 550 Week 11 Final Exam

1. Capital expenditures:a. are easily reversibleb. are forms of operating expendituresc. Affect long-run future profitabilityd. Involve only money, not machinerye. none of the above

2. Any current outlay that is expected to yield a flow of benefits beyond one year in the future is:a. a capital gainb. a wealth maximizing factorc. a capital expenditured. a cost of capitale. a dividend reinvestment

3. If the acceptance of Project A makes it impossible to accept Project B, these projects are:a. contingent projectsb. complementary projectsc. mutually inclusive projectsd. mutually exclusive projectse. none of the above

4. Which of the following is (are) a guideline(s) to be used in the estimation of cash flows?a. cash flows should be measured on an incremental basisb. cash flows should be measured on an after-tax basisc. all the indirect effects of the project should be includedd. all of the abovee. none of the above

5. 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 proposalsb. estimating cash flows for the project proposalsc. reviewing the investment projects after they have been implementedd. allocate manpower to the various divisions within the firme. a and d

6. Which of the following would not be classified as a capital expenditure for decision-making purposes?a. purchase of a buildingb. investment in a new milling machinec. purchase of 90-day Treasury Billsd. investment in a management training programe. all of the above are capital expenditures

7. 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 projectsb. mutually exclusive projectsc. contingent projectsd. separable projectse. none of the above

8. Which of the following is (are) a basic principle(s) when estimating a project's cash flows?a. cash flows should be measured on a pre-tax basisb. cash flows should ignore depreciation since it is a non-cash chargec. only direct effects of a project should be included in the cash flow calculationsd. cash flows should be measured on an incremental basise. all of the above

9. Which of the following items is (are) not considered as part of the net investment calculation?a. installation and shipping chargesb. acquisition cost of new assetc. salvage value of old equipment that is being replacedd. first year's net cash flowe. c and d

10. The relationship between NPV and IRR is such that :a. both approaches always provide the same ranking of alternatives

b. the IRR of a project is equal to the firm's cost of capital when the NPV of a project is $0c. if the NPV of a project is negative, then the IRR must be greater than the cost of capitald. all of the abovee. none of the above

11. GE Appliance Division believes which of the following warrants shifting assembly of appliances back from Shanghai to Louisville, KY:.a. The negotiation of a two-tiered wage structure for union labor,b. Faster innovations when product design engineers and assembly line team leaders are located in the same place,c. quicker delivery to retail dealers reduce inventory storaged. none of the above,e. all of the above.

12. The cost of capital can be thought of as the rate of return required by investors in the firm's securities.a. trueb. false

13. In cost of capital calculations, the flotation cost on new debt is usually ignored because the flotation cost percentage for large debt issues is relatively low.a. trueb. false

14. The cost of internal equity (retained earnings) is ____ the cost of external equity (new common stock).a. greater thanb. equal toc. less than

15. The expected rate of return from a share of stock consists of:a. a dividend returnb. capital appreciation (or depreciation)c. interestd. a and b onlye. a, b, and c

16. The weights used in calculating the firm's weighted-average cost of capital are equal to the proportion of debt and equity ____.a. used to finance the projectb. used to finance the projects undertaken last yearc. in the industry average capital structure

d. in the firm's target capital structuree. none of the above

17. In determining the optimal capital budget, one should choose those project's whose ____ exceeds the firm's ____ cost of capital.a. internal rate of return, averageb. internal rate of return, marginalc. internal rate of return, historicd. average rate of return, marginale. none of the above

18. 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 ____.a. yield-to-maturityb. present value yieldc. risk-free rated. dividend growth ratee. none of the above

19. The ____ depicts the risk-return relationship in the market for all securities:a. characteristic lineb. security market linec. investment opportunity curved. marginal cost of capital schedulee. none of the above

20. Beta in the CAPM is ____.a. one measure of the systematic risk of a stockb. estimated as the slope of a regression line between an individual security's returns and returns for the market index.c. useful in estimating the firm's cost of debt capitald. a and b onlye. a, b, and c

21. The effect of changes in the level of interest rates on security returns is an example of ____.a. systematic riskb. unsystematic riskc. nondiversifiable riskd. a and c onlye. b and c only

22. The ____ method assumes that the cash flows over the life of the project are reinvested at the ____.a. net present value; computed internal rate of returnb. internal rate of return; firm's cost of capitalc. net present value; firm's cost of capitald. net present value; risk-free rate of returne. none of the above

23. All of the following except ____ are shortcomings of cost-benefit analysis.a. difficulty in measuring third-party costsb. difficulty in measuring third-party benefitsc. failure to consider the time value of benefits and costsd. difficulty of accounting for program interactionse. a and b

24. Which of the following should not be counted in a cost-benefit analysis?a. direct benefits and costsb. real secondary benefitsc. technological secondary costsd. pecuniary benefitse. intangibles

25. The social rate of discount is best approximated by:a. the cost of government borrowingb. the opportunity cost of resources taken from the private sectorc. 3 percentd. 30 percente. none of the above

26. In cost-effectiveness analysis, constant cost studies:a. are rarely usedb. attempt to specify the output which may be achieved from a number of alternative programs, assuming all are funded at the same levelc. are useless because they fail to adequately evaluate program benefitsd. try to find the least expensive way of achieving a certain objectivee. none of the above

27. Cost-benefit analysis is the public sector counterpart to ____ used in private, profit-oriented firms.

a. ratio analysisb. break-even analysisc. capital budgeting techniquesd. economic forecastinge. none of the above

28. Direct costs of a public sector investment project are generally easier to measure than the direct benefits.a. trueb. false

29. In calculating the benefit-cost ratio, social benefits and costs are discounted at thea. internal rate of returnb. federal funds ratec. Treasury Bill rated. long-term government bond ratee. none of the above

30. The discount rate utilized in public sector budgeting performs the functions of:a. allocating funds between the public and private sectorsb. allocating funds between present consumption and investment (i.e., future consumption)c. allocating funds between debt and equity securitiesd. a and b onlye. none of the above

31. In cost-benefit analysis, a low discount rate tends to favor projects with relatively ____ lives.a. shortb. long

32. The social discount rate used in cost-benefit analysis is equal to a weighted average of the Treasury Bill rate and the long-term government borrowing rate.a. trueb. false

33. Public sector investment projects are economically justifiable only when:a. the discounted social benefits exceed the discounted social costsb. the internal rate of return exceeds the social discount ratec. the benefit-cost ratio exceeds zerod. a and b only

e. a, b, and c

1. Differentiate the following TC function: TC = 150 + 200 Q - 4 Q2 + .6 Q3a. dTC/dQ = 200 - 8Q + 1.8 Q2b. dTC/dQ =-8 + 1.8 Q2c. dTC/dQ = 200d. dTC/dQ = 200 - 4Q + .6Q2e. dTC/dQ = 1.8 Q2

2. The total revenue function (where Q = output), is: TR = 400 Q - 4 Q2a. TR is maximized at Q = 20b. TR is maximized at Q = 30c. TR is maximized at Q = 40d. TR is maximized at Q = 50e. TR is maximized at Q = 60

3. The following is a cubic demand function in P. Find the derivative dQ/dP of: Q= 4+3P-.5P2 + .02P3.a. dQ/dP = 4 + 3P – P + .06P2b. dQ/dP = 3c. dQ/dP = 3 – P + .06P2d. dQ/dP = .06P2e. dQ/dP = .06

4. If the first derivative of Y with respect to X is: dY/dX = -4•X2, then the second derivative is:a. -4b. -8•Xc. -4•Xd. -8•X2e. -8

5. The second derivative of the function (d2Y/dX2 ) is negative at the optimal solution of X=22. Therefore, we know that the solution X=22, where the first derivative equals zero…a. must be a minimum.b. must be a maximum.c. may be either a maximum or a minimum.d. would be nothing, because the second derivative is negative.

6. Differentiate the following function with respect to Q: TC = 50 + 100Q -6Q2 +.5Q3

a. dTC/dQ = 50 + 100 -6Q + .5Q2b. dTC/dQ = 100 -12Q + 1.5Q2c. dTC/dQ = 50 + 100 -2Q + 3Q2d. dTC/dQ = 100

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; salesThe 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

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

Evidence from empirical studies of long-run cost-output relationships lends support to the:

Answer

existence of a non-linear cubic total cost function

hypothesis that marginal costs first decrease, then gradually increase over the normal operating range of the firm

hypothesis that total costs increase quadratically over the ranges of output examined

hypothesis that total costs increase linearly over some considerable range of output examined

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

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

Buyers anticipate that the temporary warehouse seller of unbranded computer equipment willAnswer

deliver high quality products consistent with expectations

not attempt to establish any warranty enforcement mechanisms

offer several prices and qualities

produce only one quality

In the long-run, firms in a monopolistically competitive industry willAnswer

earn substantial economic profits

tend to just cover costs, including normal profits

seek to increase the scale of operations

seek to reduce the scale of operationsIn the short-run for a purely competitive market, a manufacturer will stop production when:Answer

the total revenue is less than total costs

the contribution to fixed costs is zero or less

the price is greater than AVC

operating at a lossA 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 costAsset specificity is largest whenAnswer

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 sellerUncertainty 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 hazardsExperience goods are products or servicesAnswer

that the customer already knows

whose performance is highly unusual

whose quality is undetectable when purchased

not likely to cause repeat purchasesDeclining cost industriesAnswer

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

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

____ 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 discriminationThe 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 aboveWhen 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

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 monopolyA cartel is a situation where firms in the industryAnswer

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 leaderThe existence of a kinked demand curve under oligopoly conditions may result inAnswer

volatile prices

competitive pricing.

prices above the monopoly price.

an increase in the coefficient of variation of prices.

price rigidity

Which of the following is an example of an oligopolistic market structure?Answer

public utilities

air transport industry

liquor retailers

wheat farmers

Even ideal cartels tend to be unstable becauseAnswer

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

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.

Some industries that have rigid prices. In those industries, we tend toAnswer

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

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 exceptAnswer

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) Essential components of a game include all of the following except:Answer

players

payoffs

actions

an information set

cooperation

A key to analyzing subgame perfect equilibrium strategy in sequential games isAnswer

predictable behavior

an explicit order of play for at least some participants

information sets that are known with certainty

credible threats clearly communicated

randomness

When airlines post prices on an electronic bulletin board at 8:00 a.m. each morning, the decision-makers are engaged inAnswer

a single play game

a sequential game

an entry decision

a simultaneous game

an infinite repetition game

Credible promises and hostage mechanisms can support a continuous stream of cooperative exchanges except whenAnswer

the promisor is better off fulfilling than ignoring his promise

neither party has a prior dominant strategy

the hostage can be revoked for just causes

the hostage is more valuable than any given exchange

the hostage is difficult to replace

Firms that have a cover charge for their customers and charge for each item they purchase as well are exhibitingAnswer

universal access price discrimination

declining block price discrimination.

mixed bundling price discrimination.

two-part price discrimination.

uniform pricing

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:Answer


market penetration

third-degree price discrimination


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

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

____ 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

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

Mac trucks and their dealers would likely have an organizational form ofAnswer

fixed profit sharing franchise contracts

spot market recontracting

alliances

vertical integration

Contracts are distinguished from tactical alliances by which of the following characteristics:Answer

involve sequential responses

require third-party enforcement

raise shareholder value

elicit diminished reactions from competitor

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

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

____ 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

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

collusion

mergers

monopolistic practices

price discrimination

wage levels

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

coal

grain

transportation

automobiles

electric power generation

The Herfindahl-Hirschman index (also shortened to just the Herfindahl index) is a measure of ____.Answer

market concentration

income distribution

technological progressiveness


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


perfectly contestable

oligopoly

monopoly

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

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

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

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 fir

The social rate of discount is best approximated by:Answer

the cost of government borrowing

the opportunity cost of resources taken from the private sector

3 percent

30 percent

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

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

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

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


selling price per unit

standard deviation of unit sales

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


target margin per unit

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

The problems of asymmetric information exchange arise ultimately becauseAnswer

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

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

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

In the purely competitive case, marginal revenue (MR) is equal to:Answer

cost

profit

price

total revenue

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

Buyers anticipate that the temporary warehouse seller of unbranded computer equipment willAnswer

deliver high quality products consistent with expectations

not attempt to establish any warranty enforcement mechanisms

offer several prices and qualities

produce only one quality

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

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


peak-load pricing


none of the above

The demand curve facing the firm in ____ is the same as the industry demand curve.Answer

pure competition


oligopoly

pure monopoly

Declining cost industriesAnswer

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.

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

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


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

Barometric price leadership exists whenAnswer

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.

A cartel is a situation where firms in the industryAnswer

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

The existence of a kinked demand curve under oligopoly conditions may result inAnswer

volatile prices

competitive pricing.

prices above the monopoly price.

an increase in the coefficient of variation of prices.

price rigidity

Some industries that have rigid prices. In those industries, we tend toAnswer

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

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.Answer

average total cost

average profit

marginal profit

marginal cost

marginal revenue

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

monopoly

syndicate

cooperative

oligopoly

The Prisoner’s Dilemma involves two spies who are held in separate soundproof rooms. But even if the two spies could communicate, what makes it difficult for them to achieve the cooperative solution (both not confessing)?Answer

The problem is their lack of information.

The problem is that it is a nonzero sum game.

The problem is that both spies have incentives to double cross each other.

The problem is that all the outcomes are not particularly good for either player.

A key to analyzing subgame perfect equilibrium strategy in sequential games isAnswer

predictable behavior

an explicit order of play for at least some participants

information sets that are known with certainty

credible threats clearly communicated

randomness

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)

The starting point of many methods for predicting equilibrium strategy in sequential games isAnswer

designing proactive reactions to rival actions

information sets

uncertain outcomes

backwards induction based on an explicit order of play

endgame analysisCredible promises and hostage mechanisms can support a continuous stream of cooperative exchanges except whenAnswer

the promisor is better off fulfilling than ignoring his promise

neither party has a prior dominant strategy

the hostage can be revoked for just causes

the hostage is more valuable than any given exchange

the hostage is difficult to replace

Firms that have a cover charge for their customers and charge for each item they purchase as well are exhibiting

Answer

universal access price discrimination

declining block price discrimination.

mixed bundling price discrimination.

two-part price discrimination.

uniform 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.

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

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.

____ 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

Contracts are distinguished from tactical alliances by which of the following characteristics:Answer

involve sequential responses

require third-party enforcement

raise shareholder value

elicit diminished reactions from competitors

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 aAnswer

breach of contractual obligations

denial of good guarantee

loss of reputation

moral hazard

When borrowers who do not intend to repay are able to hide their bad credit histories, a lender's well-intentioned borrowers shouldAnswer

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

To accomplish its purpose a linear profit-sharing contract mustAnswer

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

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

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


perfectly contestable

oligopoly

monopoly

____ 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

____ 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

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

collusion

mergers

monopolistic practices


wage levels

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

coal

grain

transportation

automobiles

electric power generation

The ____ depicts the risk-return relationship in the market for all securities:Answer

characteristic line

security market line

investment opportunity curve

marginal cost of capital schedule

If the acceptance of Project A makes it impossible to accept Project B, these projects are:Answer

contingent projects

complementary projects

mutually inclusive projects


Capital expenditures:Answer

are easily reversible

are forms of operating expenditures

Affect long-run future profitability

Involve only money, not machinery

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


contingent projects

separable projects

Which of the following items is (are) not considered as part of the net investment calculation?

Answer

installation and shipping charges

acquisition cost of new asset

salvage value of old equipment that is being replaced

first year's net cash flow

• Question 1 In the linear breakeven model, the difference between selling price per unit and variable cost per unit is referred to as:• Question 2

Evidence from empirical studies of long-run cost-output relationships lends support to the:• Question 3 Theoretically, in a long-run cost function:• Question 4

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:• Question 5 A ____ total cost function implies that marginal costs ____ as output is increased.• 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:• Question 7

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:

• Question 8 All of the following are mechanisms which reduce the adverse selection problem except ____.• Question 9

In the long-run, firms in a monopolistically competitive industry willAnswer• Question 10

An "experience good" is one that:• Question 11

The price for used cars is well below the price of new cars of the same general quality. This is an example of:• Question 12

In the short-run for a purely competitive market, a manufacturer will stop production when:• Question 13

Experience goods are products or services• Question 14 Declining cost industries• Question 15 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:• Question 16

When the cross elasticity of demand between one product and all other products is low, one is generally referring to a(n) ____ situation.• Question 17

Regulatory agencies engage in all of the following activities except _______.

• Question 18 ____ 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.

• Question 19The practice by telephone companies of charging lower long-distance rates at night than

during the day is an example of:

• Question 20Some industries that have rigid prices. In those industries, we tend to

• Question 21The existence of a kinked demand curve under oligopoly conditions may result in

• Question 22 Barometric price leadership exists when• Question 23

A cartel is a situation where firms in the industry• Question 24

Even ideal cartels tend to be unstable because• Question 25

Some market conditions make cartels MORE likely to succeed in collusion. Which of the following will make collusion more successful?

1. Evidence from empirical studies of long-run cost-output relationships lends support to the:a. existence of a non-linear cubic total cost functionb. hypothesis that marginal costs first decrease, then gradually increase over the normal operating range of the firmc. hypothesis that total costs increase quadratically over the ranges of output examinedd. hypothesis that total costs increase linearly over some considerable range of output examinede. none of the above

2. The short-run cost function is:a. where all inputs to the production process are variableb. relevant to decisions in which one or more inputs to the production process are fixedc. not relevant to optimal pricing and production output decisionsd. crucial in making optimal investment decisions in new production facilitiese. none of the above

3. Theoretically, in a long-run cost function:a. all inputs are fixedb. all inputs are considered variablec. some inputs are always fixedd. capital and labor are always combined in fixed proportionse. b and d

4. 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

5. What is another term meaning the degree of operating leverage?a. The measure of the importance of fixed cost.b. The operating profit elasticity.c. The measure of business risk.d. D.O.L.e. All of the above.

6. 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:a. regression to the mean analysis.b. breakeven analysis.c. survivorship analysis.d. engineering cost analysis.e. a Willie Sutton analysis.

7. 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.a. 10,000 customersb. 20,000 customersc. 30,000 customersd. 40,000 customerse. 50,000 customers

8. Which of the following is not a limitation of the survivor technique for measuring the optimum size of firms within an industry?a. since the technique does not employ actual cost data in the analysis, there is no way to assess the magnitude of the cost differentials between firms of varying size and efficiency.b. the managerial and entrepreneurial aspects of the production process are not included in the analysisc. because of legal factors, the long-run cost curve derived by this technique may be distorted and may not measure the cost curve postulated in economic theoryd. a and be. b and c

9. The primary disadvantage of engineering methods for measuring cost functions is that they deal with the managerial and entrepreneurial aspects of the production process or plant.a. Trueb. False

10. A linear total cost function implies that:a. marginal costs are constant as output increasesb. average total costs are continually decreasing as output increasesc. a and bd. none of the above

11. A ____ total cost function implies that marginal costs ____ as output is increased.a. linear; increase linearlyb. quadratic; increase linearlyc. cubic; increase linearlyd. a and be. none of the above

12. A ____ total cost function implies that marginal costs ____ as output is increased.a. linear; increase linearlyb. quadratic; are constantc. cubic; increase linearlyd. linear; are constante. none of the above

13. A ____ total cost function yields a U-shaped average total cost function.a. Cubicb. Quadraticc. Linear

d. a and b onlye. a, b, and c

14. In the linear breakeven model, the difference between selling price per unit and variable cost per unit is referred to as:a. variable margin per unitb. variable cost ratioc. contribution margin per unitd. target margin per unite. none of the above

15. Which of the following is not an assumption of the linear breakeven model:a. constant selling price per unitb. decreasing variable cost per unitc. fixed costs are independent of the output leveld. a single product (or a constant mix of products) is being produced and solde. all costs can be classified as fixed or variable

16. In the linear breakeven model, the breakeven sales volume (in dollars) is equal to fixed costs divided by:a. unit selling price less unit variable costb. contribution margin per unitc. one minus the variable cost ratiod. a and b onlye. a, b, and c

17. The degree of operating leverage is equal to the ____ change in ____ divided by the ____ change in ____.a. percentage; sales; percentage; EBITb. unit; sales; unit; EBITc. percentage; EBIT; percentage; salesd. unit; EBIT; unit; salese. none of the above

18. The linear breakeven model excludes ____ from the analysis.a. financing costsb. Taxesc. contribution margind. a and b onlye. a, b, and c

19.In the linear breakeven model, the relevant range of output is that range where the linearity assumptions of the model are assumed to hold.a. Trueb. False

20. In the linear breakeven model, the breakeven sales volume (in dollars) can be found by multiplying the breakeven sales volume (in units) by:a. one minus the variable cost ratiob. contribution margin per unitc. selling price per unitd. standard deviation of unit salese. none of the above

21. In the linear breakeven model, a firm incurs operating losses whenever output is less than the breakeven level.a. Trueb. False

1. The main difference between perfect competition and monopolistic competition is:a. The number of sellers in the marketb. The ease of entry and exit in the industryc. The degree of information about market priced. The degree of product differentiatione. Whether it is the short run or the long run

2. 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:a. Governmental pressure to lower the priceb. Reduced demand for long distance servicec. Entry into this industry pushes prices downd. Lower price for a barrel of crude oile. Increased cost of providing long distance service

3. What is the profit maximization point for a firm in a purely competitive environment?a. The output where P = MCb. The output where P < MCc. The output where P > MCd. The output where MR = MCe. The output where AVC < P

4. 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 = MCb. P = ACc. Economic profits become zero in the long-rund. The barriers to entry and exit are relatively easye. None of the above is an exception

5. Which of the following statements is (are) true concerning a pure competition situation?a. Its demand curve is represented by a vertical line.b. Firms must sell at or below market price.c. Marginal revenue is equal to price.d. both b and ce. both a and b

6. In pure competition:a. the optimal price-output solution occurs at the point where marginal revenue is equal to priceb. a firm's demand curve is represented by a horizontal linec. a firm is a price-taker since the products of every producer are perfect substitutes for the products of every other producerd. a and b onlye. a, b, and c

7. In the short-run for a purely competitive market, a manufacturer will stop production when:a. the total revenue is less than total costsb. the contribution to fixed costs is zero or lessc. the price is greater than AVCd. operating at a losse. a and b

8. In the purely competitive case, marginal revenue (MR) is equal to:a. costb. profitc. priced. total revenuee. none of the above

9. 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.a. trueb. false10. If price exceeds average costs under pure competition, ____ firms will enter the industry, supply will ____, and price will be driven ____.a. more; decrease; downb. more; decrease; upc. more; increase; downd. more; increase; upe. none of the above

11. A firm in pure competition would shut down when:a. price is less than average total costb. price is less than average fixed costc. price is less than marginal costd. price is less than average variable cost

12. In the long-run, firms in a monopolistically competitive industry willa. earn substantial economic profitsb. tend to just cover costs, including normal profitsc. seek to increase the scale of operationsd. seek to reduce the scale of operations

13. Uncertainty includes all of the following except ____.a. unknown effects of deliberate actions

b. incomplete information as to the type of competitorc. random disturbancesd. unverifiable claimse. accidents due to weather hazards

14. Experience goods are products or servicesa. that the customer already knowsb. whose performance is highly unusualc. whose quality is undetectable when purchasedd. not likely to cause repeat purchasese. all of the above

15. Buyers anticipate that the temporary warehouse seller of unbranded computer equipment willa. deliver high quality products consistent with expectationsb. not attempt to establish any warranty enforcement mechanismsc. offer several prices and qualitiesd. produce only one qualitye. none of the above

16. All of the following are mechanisms which reduce the adverse selection problem except ____.a. warranties from established enterprises with non-redeployable assetsb. high interest ratesc. large collateral requirementsd. brand names and product-specific promotions and retail displayse. higher prices in repeat customer transactions

17. Asset specificity is largest whena. value in first best use is largeb. value in second best use is largec. customers choose their supplier at randomd. very valuable assets are non-redeployablee. customers are loyal to a particular seller

18. Under asymmetric information,a. you never get what you pay forb. you sometimes get cheatedc. you always get cheatedd. at best you get what you pay for

e. sellers make profits in excess of competitive returns

19. To escape adverse selection and elicit high quality experience goods buyers cana. offer price premiums to new firms in the marketb. seek out unbranded goodsc. buy from generic storefronts that have leased temporary spaced. secure warranties from warehouse retailerse. none of the above

20. The problems of asymmetric information exchange arise ultimately becausea. one party to the exchange possesses different information than anotherb. one party has more information than anotherc. one party knows nothingd. one party cannot independently verify the information of anothere. information is scarce

21. The market for "lemons" is one in whicha. the rational buyer discountsb. the seller's product claims are unverifiable at the point of purchasec. "the bad apples drive out the good"d. the problem of adverse selection is rampante. all of the above

22. The fraudulent delivery of low quality experience goods at high prices is more likely ifa. interest rates declineb. information about notorious firms is speedily disseminatedc. price premiums for allegedly high quality increased. sellers invest in non-transferable reputatione. none of the above

23. An "experience good" is one that:a. Only an expert can useb. Has undetectable quality when purchasedc. Can be readily experienced simply by touching or tastingd. Improves with age, like a fine winee. All of the above

24. 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 isc. Like a peach that can be examined for flawsd. Like a used car, since it is easy to determine its inherent qualitye. None of the above

25. The price for used cars is well below the price of new cars of the same general quality. This is an example of:a. The Degree of Operating Leverageb. A Lemon's Marketc. Redeployment Assetsd. Cyclical Competitione. The Unemployment Rate

1. Unique Creations has a monopoly position in magnometers. If the marginal cost for a magnometer is $50 and the price elasticity for magnometers is -4, what is the optimal monopoly price?

Hint: P (1 +1/E) = MC.a. $37.50b. $41.25c. $66.67d. $75.00e. $82.50

2. Land’s End estimates a demand curve for turtleneck sweaters to be:Log Q = .41 + 2.3 Log Y - 3 Log P where Q is quantity, P is price, and Y is a measure on national income. If the marginal cost of imported turtleneck sweaters is $9.00. (HINT: P (1 +1/E) = MC). The optimal monopoly price would be:a. P = $13.50b. P = $26.50c. P = $27.50d. P = $34.50e. P = $56.22

3. Declining cost industriesa. have upward rising AC curves.b. have upward rising demand curves.c. have-shaped total costs.d. have diseconomies of scale.e. have marginal cost curves below their average cost curve.

4. A monopolist seller of Irish ceramics faces the following demand function for its product: P = 62 - 3Q. The fixed cost is $10 and the variable cost per unit is $2. What is the maximizing QUANTITY for this monopoly? Hint: MR is twice as steep as the inverse demand curve: MR = 62 – 6 Q. (Pick closest answer) a. Q = 10b. Q = 15c. Q = 22d. Q = 37e. Q = 41

5. Globo Public Supply has $1,000,000 in assets. Its demand curve is: P = 206 - .20•Q and its total cost function is: TC = 20,000 + 6•Q where TC excludes the cost of capital. If Globo Public Supply is UNREGULATED, find Globo's optimal price.a. $206b. $106c. $56d. $6e. $3

6. A monopolist faces the following demand curve: P = 12 - .3Q with marginal costs of $3. What is the monopolistic PRICE?a. P = $5.50b. P = $6.50c. P = $7.50d. P = $8.50e. P = $9.50

7. 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 monopolye. all of the above

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

c. at an output equal to industry output under pure competitiond. a and ce. none of the above

9. In the case of pure monopoly:a. one firm is the sole producer of a good or service which has no close substitutesb. the firm's profit is maximized at the price and output combination where marginal cost equals marginal revenuec. the demand curve is always elasticd. a and b onlye. a, b, and c

10. A monopoly will always produce less than a purely competitive industry, ceteris paribus.a. trueb. false

11. The demand curve facing the firm in ____ is the same as the industry demand curve.a. pure competitionb. monopolistic competitionc. oligopolyd. pure monopolye. none of the above

12. When the cross elasticity of demand between one product and all other products is low, one is generally referring to a(n) ____ situation.a. oligopolyb. monopolyc. pure competitiond. substitutione. monopolistic competition

14. Of the following, which is not an economic rationale for public utility regulation?a. production process exhibiting increasing returns to scaleb. constant cost industryc. avoidance of duplication of facilitiesd. protection of consumers from price discriminatione. none of the above

15. The practice by telephone companies of charging lower long-distance rates at night than during the day is an example of:a. inverted block pricingb. second-degree price discriminationc. peak-load pricingd. first-degree price discriminatione. none of the above

16. 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, similarb. elastic, lowerc. elastic, higherd. inelastic, lowere. inelastic, higher

17. ____ 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.a. Peak load pricingb. Inverted block pricingc. Block pricingd. First degree price discriminatione. none of the above

18. Regulatory agencies engage in all of the following activities except _______.a. controlling entry into the regulated industriesb. overseeing the quality of service provided by the firmsc. setting federal and state income tax rates on regulated firmsd. setting prices that consumers will paye. none of the above

1. "Conscious parallelism of action" among oligopolistic firms is an example of ____.a. intense rivalryb. a formal collusive agreementc. informal, or tacit, cooperationd. a cartele. none of the above

2. The kinked demand curve model was developed to help explain:a. fluctuations of prices in pure competitionb. rigidities observed in prices in oligopolistic industriesc. fluctuations observed in prices in oligopolistic industriesd. all of the abovee. none of the above

3. An oligopoly is characterized by:a. a relatively small number of firmsb. either differentiated or undifferentiated productsc. actions of any individual firm will affect sales of other firms in the industryd. a and be. a, b, and c

4. Which of the following is an example of an oligopolistic market structure?a. public utilitiesb. air transport industryc. liquor retailersd. wheat farmerse. none of the above

5. 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. priceb. outputc. marketing strategyd. inventorye. none of the above

6. 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 costb. average profit

c. marginal profitd. marginal coste. marginal revenue

7. 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.a. trueb. false

8. A(n) ____ is characterized by a relatively small number of firms producing a product.a. monopolyb. syndicatec. cooperatived. oligopolye. none of the above

9. The distinctive characteristic of an oligopolistic market structure is that there are recognizable interdependencies among the decisions of the firms.a. trueb. false

10. Factors that affect the ability of oligopolistic firms to successfully engage in cooperation include ____.a. number and size distribution of sellersb. size and frequency of ordersc. product heterogeneityd. a and b onlye. a, b, and c

11. Effective oligopolistic collusion is more likely to occur when customer orders are small, frequent, and received on a regular basis as compared with large orders that are received infrequently at irregular intervals.a. trueb. false

12. Effective collusion generally is more difficult as the number of oligopolistic firms involved increases.a. trueb. false

13. The largest problem faced in cartel pricing agreements such as OPEC is:a. detecting violations of quota barriers by cartel participantsb. arriving at a profit maximizing pricec. attracting participants in the carteld. none of the above

14. Some market conditions make cartels MORE likely to succeed in collusion. Which of the following will make collusion more successful?a. The products are heterogeneousb. The orders are small and frequentc. The firms are all about the same sized. Costs differ across the firmse. Firms are geographically widely scattered

15. Even ideal cartels tend to be unstable becausea. firms typically prefer competition to collusion as competition, because it leads to more profits.b. collusion leads to lowest possible overall profits in the industry.c. oligopolistic managers are extremely risk loving.d. firms can benefit by secretly selling more than they promised the other firmse. all of the above

16. Suppose that in a perfectly competitive industry the equilibrium industry quantity is 10,000 units. Suppose that the monopoly output is 5,000. For a2-firm Cournot Oligopoly (N =2) known as a duopoly, what is a likely Cournot QUANTITY for the industry?a. 3,000 unitsb. 5,000 unitsc. 6,667 units

d. 10,000 unitse. 15,000 units

17. A cartel is a situation where firms in the industrya. have an agreement to restrict output.b. agree to produce identical products.c. obey the rules of dominant firm price leadership.d. experience the pain of a kinked demand curve.e. have a barometric price leader

18. In a kinked demand market, whenever one firm decides to lower its price,a. other firms will automatically follow.b. none of the other firms will follow.c. one half of the firms follow and one half of the firms don't follow the price cut.d. other firms all decide to exit the industrye. all of the other firms raise their prices.

19. The existence of a kinked demand curve under oligopoly conditions may result ina. volatile pricesb. competitive pricing.c. prices above the monopoly price.d. an increase in the coefficient of variation of prices.e. price rigidity

20. Barometric price leadership exists whena. 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.b. one firm imposes its best price on the rest of the industry.c. all firms agree to change prices simultaneously.d. one company forms a price umbrella for all others.e. the firms are all colluding.

21. Some industries that have rigid prices. In those industries, we tend toa. find that output is also rigid over the business cycleb. find that output varies greatly over the business cyclec. find the employment in these industries is quite stable over the business cycled. find that the rate of return is negative in boom times

e. all of the above.

1. In ____ 2-person, nonzero-sum games there is no communication between the participants and no way to enforce agreements.a. noncooperativeb. cooperativec. a and bd. none of the above

2. A strategy game isa. any pricing competition among firmsb. a situation arising from independent decision making among economic participantsc. interpendent choice behavior by individuals or groups who share a common goald. none of the above

3. Essential components of a game include all of the following except:a. playersb. payoffsc. actionsd. an information sete. cooperation

4. In a zero-sum gamea. all players receive a $0 payoffb. all players can simultaneously winc. the gains to the winners equal the losses of the losersd. none of the above

5. When airlines post prices on an electronic bulletin board at 8:00 a.m. each morning, the decision-makers are engaged ina. a single play gameb. a sequential gamec. an entry decisiond. a simultaneous gamee. an infinite repetition game

6. The starting point of many methods for predicting equilibrium strategy in sequential games isa. designing proactive reactions to rival actionsb. information setsc. uncertain outcomesd. backwards induction based on an explicit order of playe. endgame analysis

7. Consider the game known as the Prisoner's Dilemma. What's the dilemma?a. By both not confessing, both get to the cooperative solution and minimize time in prison.b. By both confessing, both get to the noncooperative solution and both serve significant time in prison.c. 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.d. The problem is that the spies should never have been caught; they should move to Rio.

8. When there is an Equilibrium (or a Nash Equilibrium), we expect that:a. once the firm’s get there, no one will change their strategy.b. firms will tend to select a randomized strategy.c. neither firm will care what it does.d. this is always a dominated strategy.

9. The Prisoner’s Dilemma involves two spies who are held in separate soundproof rooms. But even if the two spies could communicate, what makes it difficult for them to achieve the cooperative solution (both not confessing)?a. The problem is their lack of information.b. The problem is that it is a nonzero sum game.c. The problem is that both spies have incentives to double cross each other.d. The problem is that all the outcomes are not particularly good for either player.

10. When there is no Equilibrium (or no Nash Equilibrium), we expect that:a. the firms end up in the cooperative strategy.b. a firm will follow a randomized strategy.c. a firm will not care what it does.d. a firm will very likely have a dominant strategy.

11. In a game, a dominated strategy is one where:a. It is always the best strategyb. It is always the worst strategy

c. It is the strategy that is the best among the group of worst possible strategies.d. Is sometimes the best and sometimes the worst strategy

12. If two firms operate in a market that is characterized as being a Prisoner’s Dilemma, and the two strategies given them are to restrict output or expand output, which of the following strategy pairs would represent the cooperative solution in a duopoly for firm 1 and firm 2, and firm 1 given first in each pair?a. {expand output, restrict output}b. {restrict output, expand output}c. {restrict output, restrict output}d. {expand output, expand output}

13. A key to analyzing subgame perfect equilibrium strategy in sequential games isa. predictable behaviorb. an explicit order of play for at least some participantsc. information sets that are known with certaintyd. credible threats clearly communicatede. randomness

14. Credibility in threats and commitments in sequential games is based ona. randomizing one's actions so they are unpredictableb. explicit communications with competitorsc. effective scenario planningd. analyzing best reply responsese. none of the above

15. 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 excepta. establishing a bond forfeited by violating the commitmentb. investing in a non-redeployable reputational asset tied to the promise or threatc. interrupting the communication of negotiated compromisesd. offering a warrantye. delivering a hostage (e.g., a patent license triggered by violating the promise)

16. The difference between cooperative and non-cooperative games isa. cooperative games allow side payments to support collusion

b. non-cooperative games encourage communication of sensitive information between arms-length competitorsc. cooperative games involve randomized behaviord. cooperative games necessitate an explicit order of playe. inconsequential except when players have contractual relationships

17. An illustration of a non-credible commitment is the promisea. to not increase capacity in a declining industryb. to match a new entrant's discount pricec. to enter a profitable industryd. to restrain output to the quota assigned by a cartele. to exit in the face of projected losses.

18. A dominant strategy differs from a Nash equilibrium strategy in thata. Nash equilibrium strategy does not assume best reply responsesb. dominant strategy assumes best reply responsesc. only Nash strategy applies to simultaneous gamesd. one dominant strategy is sufficient to predict behavior in a multi-person gamee. Nash strategy is often unique

19. In adopting mixed Nash equilibrium strategy, a player is attempting toa. randomize his or her own behaviorb. make the opponent favor a course of action preferred by the first playerc. randomize the outcome of actionsd. make the opponent indifferent between one action and anothere. none of the above

20. To trust a potential cooperator until the first defection and then never cooperate thereafter isa. a dominant strategyb. an irrational strategyc. a grim trigger strategyd. a non-cooperative finite game strategye. a subgame imperfect strategy

21. Non-cooperative sequential games can incorporate all the following features excepta. a single decision-maker in the endgameb. no communicationc. finite or infinite time periodsd. third-party enforceable agreementse. an explicit order of play

22. If one-time gains from defection are always less than the discounted present value of an infinite time stream of cooperative payoffs at some given discount rate, the decision-makers have escapeda. the Folk Theoremb. the law of large numbersc. the Prisoner's dilemmad. the paradox of large numberse. the strategy of recusal

23. The chain store paradox of an incumbent who accommodates a finite stream of potential entrants threatening to enter sequentially numerous markets illustratesa. backwards inductionb. the unraveling problemc. subgame perfect equilibriumd. best reply responsese. all of the above

24. Cooperation in repeated prisoner's dilemma situations seems to be enhanced by all of the following excepta. limited punishment schemesb. clarity of conditional rewardsc. grim trigger strategyd. provocability--i.e., credible threats of punishmente. tit for tat strategy

25. Credible promises and hostage mechanisms can support a continuous stream of cooperative exchanges except whena. the promisor is better off fulfilling than ignoring his promiseb. neither party has a prior dominant strategyc. the hostage can be revoked for just causesd. the hostage is more valuable than any given exchange

e. the hostage is difficult to replace

1. In deciding whether to invest in excess capacity in order to deter entry, incumbents should consider all of the following excepta. the order of play in pricing and capacity choice decisionsb. the customer sorting patternc. the sunk cost required to achieve excess capacityd. the joint-profit-maximizing cartel outpute. the potential entrant's projected profitability

2. An inverse intensity customer sorting rule is one in whicha. customers with high willingness to pay secure the discounted goodsb. customers are rationed randomly between the discounted and full price goodsc. no customers purchase below their willingness to payd. customers with the lowest willingness to pay secure the discounted goodse. brand loyalty allows the incumbent to retain its regular customers

3. An efficient customer sorting rule is one in whicha. customers with high willingness to pay secure the discounted goodsb. customers are rationed randomly between the discounted and full price goodsc. no customer purchase below her willingness to payd. customers with the lowest willingness to pay secure the discount goodse. brand loyalty allows the incumbent to retain its regular customers

4. All of the following are sunk cost investments that precommit an incumbent to aggressively defend market share and the cash flow prior to threatened entry excepta. reputational investments in company logos (e.g., Beatrice)b. automobile showroomsc. retail displays which hold only L’eggs egg-shaped hosiery packagesd. neon signage for an independently owned Krispy Kreme storee. excess capacity in a declining industry

MULTIPLE CHOICE

1. 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 discriminationb. market penetrationc. third-degree price discriminationd. second-degree price discrimination

e. none of the above

2. Which of the statements about price discrimination is (are) false?a. It must be possible to segment the market.b. It must be difficult to transfer the seller's product from one market segment to another.c. Public utilities practice first-degree price discrimination.d. There must be differences in the elasticity of demand from one segment to another.e. c and d

3. Which of the following pricing policies best identifies when a product should be expanded, maintained, or discontinued?a. full-cost pricing policyb. target-pricing policyc. marginal-pricing policyd. market-share pricing policye. markup pricing policy

4. Second-degree price discrimination:a. is also known as block rate settingb. is imperfect in the eyes of a monopolistc. is regularly practiced by public utilitiesd. is effective only in the case of services or products which are sold in easily metered unitse. all of the above

5. Electricity pricing that varies in its billing expense throughout the day is calleda.full pricing b. marginal cost pricingc.dynamic pricingd. variable pricinge. full cost pricing pricing

6. In ____ price discrimination, the monopolist charges each consumer the highest price that purchaser is willing to pay for each unit purchased (provided that this price exceeds the marginal cost of production).a. first-degreeb. second-degreec. third-degreed. a and be. none of the above

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.a. Prestige pricingb. Price liningc. Skimmingd. Incremental pricinge. None of the above

8. ____ is the price at which an intermediate good or service is transferred from the selling to the buying division within the same firm.a. Incremental priceb. Marginal pricec. Full-cost priced. Transfer pricee. none of the above

9. For a monopolist that engages in price discrimination, when the price elasticity in market 1 is less (in absolute value) than in market 2, the optimal price in market 1 will exceed the optimal price in market 2.a. trueb. false

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.a. ratio of price to marginal costb. ratio of marginal cost to marginal utilityc. ratio of price to elasticityd. marginal revenuee. none of the above

11. Barbers give a price discount to kids. According to price discrimination, if barbers use price discrimination, this implies demand for hair cuts by kids is more elastic.a. Trueb. False

12. Third-degree price discrimination exists whenever:a. the seller knows exactly how much each potential customer is willing to pay and will charge accordingly.b. different prices are charged by blocks of services.c. the seller can separate markets by geography, income, age, etc., and charge different prices to these different groups.

d. the seller will bargain with buyers in each of the markets to obtain the best possible price.

13. 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.

14. Firms that have a cover charge for their customers and charge for each item they purchase as well are exhibitinga. universal access price discriminationb. declining block price discrimination.c. mixed bundling price discrimination.d. two-part price discrimination.e. uniform pricing

15. A manufacturer produces two types of computer software, Word processing (W) and Spreadsheet (S), which is offered to two different retail outlets (#1 and #2). The following table shows the maximum price each retail outlet is willing to pay for each individual software product.

Product W Product SRetail #1 $170 $105Retail #2 $95 $135What is the optimal pricing strategy that will maximize revenue for the manufacturer, given the maximum the retail outlets are willing to pay?a. Bundle both products (W and S) and sell them at $230.b. Price product W at $170 and Product S at $135.c. Price product W at $170 and Product S at $170.d. Price product W at $95 and Product S at $105.e. Bundle both products (W and S) and sell them at $275.

16. 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:a. the preference rankings of vacationers travelling together are negatively correlated.b. a preference for cities is always higher than preferences for mountain vistas.

c. preference rankings of vacationers travelling together are positively correlated.d. preference for the seaside is always higher than preferences for city excursions.e. no one wants to take a European vacation package to cities, mountains, and the seaside.

17. 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. -1b. -1.5c. -2d. -3

18. [Advanced Material] Cross functional revenue management examines capacity, pricing, and customer account management in order to maximize revenue.

Capacity Planning

order acceptance

Pricing Customer Account ManagementIf the MegaPlex Movie Theater finds that too often they have to turn customers away from their theaters at peak movie times for blockbusters creating too much slippage, cross functional revenue management suggests:a. They could consider increasing the capacity of each theater to be able to seat more customers.b. They could lower the price at the peak times to reduce the problem of spoilage.c. They could stop showing blockbuster movies and select more critically acclaimed art films to decrease spoilage.d. They could stop showing movies at night.19. [Advanced Material] Restaurants try to buy just enough fish to match the expected walk-ins and reservations. If they buy a lot more fish, in the language of revenue management:a. Spoilage increasesb. Spillage increasesc. Overbooking increases

20. [Advanced Material] If an airline company decides to buy smaller jets with fewer seats, then the problem of:

a. spillage and spoilage both increase.b. spillage decreases, but spoilage increases.c. spillage and spoilage both decrease.d. spoilage decreases, but spillage increases.

21. [Advanced Material] If airlines found that the number of no-shows starts to increase, then its policy for optimal overbooking would tend to:a. make them reduce the amount of overbooking.b. cause them to increase the amount of overbooking.c. let them keep the same amount of overbooking.

1. Non-redeployable durable assets that are dependent upon unique complementary and perfectly redeployable assets to achieve substantial value-added will typically be organized asa. an export trading companyb. a spot market contractc. a vertically integrated firmd. an on-going relational contracte. a joint stock company.

2. Vertical integration may be motivated by all of the following except:a. Upstream market powerb. Economies of ever wider spans of managerial controlc. Technological interdependenciesd. Reduced search and bargaining coste. The hold-up problem.

3. Contracts are distinguished from tactical alliances by which of the following characteristics:a. involve sequential responsesb. require third-party enforcementc. raise shareholder valued. elicit diminished reactions from competitors

4. When manufacturers and distributors establish credible commitments to one another, they often employa. vertical requirements contractsb. third-party monitoring

c. credible threat mechanismsd. non-price tactics

5. Which of the following is not among the functions of contract?a. to provide incentives for efficient relianceb. to reduce transaction costsc. to discourage the development of asymmetric informationd. to provide risk allocation mechanisms

6. Buying electricity off the freewheeling grid at one quarter 'til the hour for delivery on the hour illustrates:a. relational contracts with distributorsb. vertical requirements contractsc. spot market transactionsd. variable price agreements

7. 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 aa. breach of contractual obligationsb. denial of good guaranteec. loss of reputationd. moral hazard

8. 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 relationshipsb. uncertaintyc. moral hazardd. creative ingenuitye. insurance reliance

9. Which of the following are not approaches to resolving the principal-agent problem?a. ex ante incentive alignmentb. deferred stock optionsc. ex post governance mechanismd. straight salary contracts

e. monitoring by independent outside directors

10. To accomplish its purpose a linear profit-sharing contract musta. induce the employee to moonlightb. communicate a code of conduct that will be monitored and enforcedc. meet either the participation or the incentive compatibility constraintd. establish a separating equilibriume. not realign incentives

11. Mac trucks and their dealers would likely have an organizational form ofa. fixed profit sharing franchise contractsb. spot market recontractingc. alliancesd. vertical integration

12. Reliant assets are always all of the following except:a. durableb. have substantially less value in second best usec. dependent on unique complementary inputsd. pivotal in designing strategy

13. Governance mechanisms are designeda. to increase contracting costsb. to resolve post-contractual opportunismc. to enhance the flexibility of restrictive covenantsd. to replace insurancee. none of the above

14. When borrowers who do not intend to repay are able to hide their bad credit histories, a lender's well-intentioned borrowers shoulda. complain to regulatory authoritiesb. withdraw their loan applicationsc. offer more collateral in exchange for lower interest chargesd. divulge still more information on their loan applicationse. hope for a pooling equilibrium

15. Each of the following is an example of moral hazard in which people modify their behavior in an opportunistic way, often frustrating the intent of governmental or management policies. Which is NOT an example of moral hazard?a. After a firm gets a loan from a bank to purchase inventory, the borrower instead decides to use it to invest in call options on stocks.

b. Based on motorcycle accident data, a state passes a law requiring motorcyclists to wear helmet, but then the motorcyclist wearing helmets start to drive faster and more recklessly.c. Bank and nonbank mortgage lenders make money granting loans. But the Government through Freddie Mac and Fannie Mae decides to purchase these loans. The mortgage lenders find that they earn a fee for each mortgage that they grant and then sell to Freddie Mac or Fannie Mae. Since they never intended on holding on to the mortgage, the mortgage granters are not too particular on whether the customer can really pay it back. The lowest quality loans are sold to the Government.d. A fellow buys a $1 million life insurance policy and then travels to Nepal to climb Mount Everest.e. A student learns that if he or she reads the chapter and studies lecture notes, the student does better on the next test.16. Agency problems appear in many settings within a firm. All of the following are examples, except which is NOT a good example of this problem?a. Diversified stockholders are more enthusiastic on accepting business risks than are firm managers.b. Firm managers receive cash bonuses based on the performance of the firm.c. Employees sometime take items from the store in which they work.d. Lenders to firms want the managers to invest in safe projects to protect their collateral in the project but managers want to invest in projects that will make a name for them and warrant promotion.e. Firm managers sometime want to relax on the job.

1. Common value auctions with open bidding necessarily entaila. asymmetric informationb. ascending pricesc. more than two biddersd. amendment of bidse. sealed final offers.

2. An incentive-compatible mechanism for revealing true willingness to pay in a private value auction isa. impossibleb. a Dutch auctionc. a second-highest sealed bid auctiond. a sequential auction with open biddinge. a discriminatory price all-or-nothing auction.

3. In comparing rules for serving a queue, last-come first-served has all of the following effects except

a. reduces the waiting timeb. causes few customers to arrive and depart more than oncec. increases the side payments among those yet to be servedd. hastens the adoption of a lottery system for deciding who should get the tickets

4. The principal advantage of an open bidding system for allocating telecommunications spectrum licenses wasa. the pooling of asymmetric information by the biddersb. the reconfiguring of cell phone license areasc. the substitute value of adjacent service areasd. reduced cost

5. A Dutch auction implies all of the following excepta. more than one unit sale availableb. higher prices later in the auctionc. identical expected seller revenue for common value itemsd. greater expected seller revenue in estate sales with risk-averse bidders

6. Each partner in a simple profit-sharing contract that splits the independently verifiable sales revenue minus unobservable cost has an incentivea. to reject an automatic renewal of the contractb. to understate fixed costc. to overstate avoidable costd. to understate customer loyalty for repeat purchasese. to renew the partnership contract

7. An optimal incentives contract can induce the revelation of true costs in a partnership bya. imposing penalties when costs are overstatedb. offering bonus payments when costs are verifiedc. renewing the reliance relationshipd. linking revealed cost to the partner's foregone expected profitse. enlisting third-party enforcement

8. An incentive-compatible revelation mechanism isa. self-enforcingb. always multi-periodc. too complicated to influence decisionsd. prevalent in vertically integrated businessese. not adopted by franchise businesses

9. Incentive-compatible revelation mechanisms attempt toa. induce an employee to reject the next best alternative employment opportunityb. elicit privately-held informationc. secure enforcement primarily by third partiesd. reject voluntary contracting with third partiese. impose similar risk premiums on all employees

10. Revenue equivalence theorem refers to equal seller revenue in which of the following pairs:a. sealed bid auctions and English auctionsb. second highest wins and pays auctions and Dutch auctionsc. English highest wins and pays auctions and sealed bid Dutch auctionsd. highest wins and pays auctions and second highest wins and pay auctions

11. In Dutch auctions, the biddinga. starts low and rises until the highest bidder wins.b. is done in secret “sealed bids” which are opened at a specified time.c. begins with a very high price, and is reduced until the first person takes it.d. is accomplished by giving the price of the second highest bid to the highest bidder.

13. Suppose that a private firm wants to go public to give the owners a chance to retire. It follows the lead of the Google IPO by using a modified Vickrey (or uniform price) auction. The owners of the firm plans to sell 1 million shares and hope to raise at least $10 million from the auction. The following bids were submitted.Bob 250,000 shares at $12Sam 350,000 shares at $13Mary 300,000 shares at $9Sue 100,000 shares at $10Ravi 450,000 shares at $11a. The market clearing price is $13, and the sellers of the firm get $13 million.b. The market clearing price is $12, and the sellers of the firm get $13 million.c. The market clearing price is $11, and the sellers of the firm get $11 million.d. The market clearing price is $10, and the sellers of the firm get $10 million.e. The market clearing price is $9, and the sellers of the firm get$9 million

14. Auctions are used in place of markets when the items traded are unique (e.g., a Ming vase or a right to drill for oil). Which of the following examples are typically sold using Vickrey auction methods?a. For-sale-by-owner housesb. Household furnishingsc. Items sold in Filene’s Basement, with the price discounted after a certain date

d. Vintage postage stamps

15. Sealed bids can be used in multiple rounds. How is this done?a. The winner of the first round automatically wins all future rounds.b. The winner’s price in the first round is the reservation price in the next round. If higher prices come in the next round, the highest price is the new reservation price for round three, and so forth.c. The second best price in the first round is the winner.d. Bidding continues in more and more rounds until someone yells “uncle.”

16. Research suggests that an auction for a private value item will yield the HIGHEST payout if:a. we use a Dutch auctionb. we use an English auctionc. we use only cash, and not allow credit cardsd. use a fixed price

1. 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 monopolyb. patents may not be necessary to encourage inventive activityc. the current patent monopoly period (17 years) is too short to encourage any inventive activity.d. a and b onlye. all of the above

2. The Sherman Act prohibits:a. contracts in restraint of commerceb. monopolization of an industryc. price discriminationd. a and be. a, b, and c

3. The sentiment for increased deregulation in the late 1970's and early 1980's has been felt most significantly in the price regulation ofa. Coalb. Grainc. transportationd. automobilese. electric power generation

4. Which of the following public policies has (have) the effect of restricting competition?

a. licensingb. patentsc. import quotasd. a and b onlye. a, b, and c

5. The concept of market structure refers to three main characteristics of buyers and sellers in a particular market. These include ____.a. the degree of seller and buyer concentration in the marketb. the degree of actual or imagined differentiation between the products or services of competing producersc. the pricing behavior of the firmsd. a and be. a, b, and c

6. The concept of market conduct includes such things as ____.a. pricing behavior of the firm or group of firmsb. product policy of the firm or group of firmsc. the degree of seller and buyer concentration in the marketd. a and b onlye. a, b, and c

7. ____ yields the same results as the theory of perfect competition, but requires substantially fewer assumptions than the perfectly competitive model.a. Baumol's sales maximization hypothesisb. The Pareto optimality conditionc. The Cournot modeld. The theory of contestable marketse. none of the above

8. The lower the barriers to entry and exit, the more nearly a market structure fits the ____ market model.a. monopolistic competitionb. perfectly contestablec. oligopolyd. monopolye. none of the above

9. The Herfindahl-Hirschman index (also shortened to just the Herfindahl index) is a measure of ____.a. market concentration

b. income distributionc. technological progressivenessd. price discriminatione. none of the above

10. The ____ is equal to the some of the squares of the market shares of all the firms in an industry.a. market concentration ratiob. Herfindahl-Hirschman indexc. correlation coefficientd. standard deviation of concentratione. none of the above

11. Industry A has market shares of 50, 30, and 20. Industry B has market shares of 45, 40, and 15. Hint: HHI = (si2), where si is the market shares of the i-th firm in the industry.a. The Herfindahl index for A is 100.b. The Herfindahl index for A is 3,800.c. The Herfindahl index for B is 3,600d. The Herfindahl index for A is greater than for B.e. The Herfindahl index is for B is 4,000.

12. The antitrust laws regulate all of the following business decisions except ____.a. collusionb. mergersc. monopolistic practicesd. price discriminatione. wage levels

13. ____ 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.a. Pecuniary benefits and costsb. Externalitiesc. Intangiblesd. Monopoly costs and benefitse. none of the above

14. The Coase Theorem works best in places that transaction costs for contracts among people is low. Often in the world of torts and externalities both parties can claim that they have rights to impose on others. One case is that of a railroad that is noisy and scares the cattle and

the rancher whose cattle sometimes wander in front of moving trains causing damage to them and the train. What does the Coase say would happen?a. The train should have property right to be safe from wandering cattle, and the rancher should be liable for train damage of rampaging cattle.b. The rancher should have the property right to be safe from noisy trains, and the railroad should be liable for weight loss of cattle from train whistles and rumbling noise.c. If transaction costs are low, the efficient activity will occur, either the rancher or railroad installing fences to protect from rampaging cattle and/or sound insulation with trees, or if it is cheaper, fewer train trips per day. The cheapest or most efficient solution will happen, regardless of who is assigned the original property right.

· Web viewECO 550 Week 11 Final Exam. 1.Capital expenditures: a.are easily reversible. b.are...

Documents

Transcript of · Web viewECO 550 Week 11 Final Exam. 1.Capital expenditures: a.are easily reversible. b.are...