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ECO 550 Final Exam 2 Click here to get your grade A+ answers 1.If two small perfectly competitive firms merge, the merged firm will be: A. B. C. D.

a price-taker. a market leader. a price-discriminator. an oligopoly.

2.In a market characterized by many buyers and one seller, investment in informative advertising by a seller can ____ the price of a commodity to customers and lower their _____ cost of acquiring information. A. B. C. D.

decrease; increase; increase; decrease;

sunk cost cost sunk transaction cost transaction cost

3. Which of the following industries can create barriers to the entry of new firms due to size and specificity? A. B. C. D.

A hydroelectric power plant A garment manufacturer exporting apparels An owner of a retail chain An automobile manufacturing company

4. Which of the following activities can create an external cost? Answer A. B. C. D.

Honking continuously while driving past a hospital. Reducing the use of plastic carry bags while shopping. Burying garbage under the soil and planting trees on it. Using smog controls on private cars.

5. Which of the following is an aim of a price-fixing agreement? A. B. C. D.

Reducing entry barriers Increasing profit Reducing price Increasing demand


6. If the costs of negotiating and enforcing contracts are _____ relative to the benefits, buyers and sellers have incentives to make economically efficient arrangements that _____ value. A. B. C. D.

high; increase low; increase high, decrease low; decrease

7. Refer to Table 10-1. What would be the combined gain of the two if both breach the unitization contract? The matrix given below represents the payoffs to oil well owners Mike and Frasel if they enter into a unitization contract. Each of the owners know the exact amount of oil in the pool and the market price of oil. Table 10-1

A. B. C. D.

$22 $20 $28 $32

8. Which of the following exemplifies specific performance that a court might order from the party in breach of a contract? A. A seller ordered to pay back the price of the commodity to

the customer having failed to deliver it on-time. B. A popular singer requested to forgo the fee for her

performance at a social fund raising program. C. The owner of a polluting factory ordered to convert his private plot into a public garden. D. A movie director ordered to work with an actress he had previously contracted with, instead of one he later found was available for a lower price. 9. Parties to the contract prefer to keep the actual agreement incomplete when: A. B. C. D.

they have conflicting terms and conditions. they are large in count. the economic value of the contract is low. the cost of negotiation is high.


10. Which of the following theories states that people who are highly risk-averse are less likely to engage in high-risk activities? A. B. C. D.

The The The The

theory of moral hazard theory of adverse selection propitious selection theory death spiral theory

11. Which of the following situations can lead to a winner’s curse? A. A bid which is won by multiple bidders but fails to cover the

expectations of the seller. B. A win which makes a player over-enthusiastic about further

gambles. C. An overoptimistic bid which helps the bidder to win but fails to cover his costs. D. A win which makes the player risk-averse toward future gambles. 12. An individual will be considered risk neutral if: A. he is indifferent between taking and not taking up the

gamble. B. he pays someone to take away the gamble from him. C. he pays someone to allow him to take the gamble. D. he takes up the gamble under any situation. 13.Independent workers using specialized capital save the costs of contracting but risk: A. B. C. D.

generalization. opportunism. inefficiency. over-utilization.

14. A corporation’s _____ can sometimes influence its decisions without making efforts to replace its management. A. B. C. D.

hierarchy specialized workforce small shareholders block holders

15. Which of the following properties is common to a partnership business? A. Limited liability B. Centralized ownership and management


C. Continuity and unlimited existence of the business D. Co-ownership of contributed assets

16. Which of the following is a disadvantage of the U-form structure? A. In case of multiple products sold in different markets, a U-

form structure is difficult to maintain. B. A U-form structure requires a larger staff to evaluate top-

level decision making than other organization structures. C. A U-form structure necessitates a multiple-level decisionmaking process. D. The amount of information that is considered for decisionmaking in a U-form structure is less than other structures. 17. _____ is the only type of firm where it is possible for a person to hold all of the information that matters for all types of decisions. A. B. C. D.

Corporation A firm where decision-making is centralized Sole proprietorship A firm where there is separation of ownership and management

18. Identify the correct statement about relationships depicted in an organization chart.

A. A line that links an individual/division with the same at a

lower level depicts informal authority of the former over the latter. B. Equality on the chart for individuals A and B must mean they both have the same authority in practice. C. It shows all relations between employees of an organization. D. A line that links an individual/division with the same at a lower level depicts formal authority of the former over the latter. 19. During the peak season, when demand for pipeline transport of natural gas at the maximum legally allowable price exceeds the available capacity: A. B. C. D.

buy-sell transactions take place. pipeline owners vertically integrate into gas production. price discrimination becomes prominent. pipeline owners use discretionary powers to ration capacity to shippers.


20. Which of the following changes can facilitate the transfer or outsourcing of formerly internal activities of a firm? A. B. C. D.

Changes in Decline in Decline in Rapid pace

technology and market structure domestic input prices net exports of industrialization

21. Successive monopolies face the problem of: A. B. C. D.

double marginalization. volumetric interdependence. opportunism. predatory pricing.

22. A competitive firm hires workers as long as: A. B. C. D.

marginal value of marginal value of rate.

product of labor marginal product product of labor marginal product

is of is of

positive. labor is positive. greater than the wage rate. labor is greater than the wage

23. The _____ of using the market for corporate control make it important to build incentives into executive pay packages that can reduce _____ by better aligning the incentives of shareholders and managers. A. B. C. D.

benefits; costs and benefits; costs and

principal/agent problems uncertainties; principal/agent problems influence costs uncertainties; influence costs

24. Over the long run, migration by workers to higher-wage regions: A. B. C. D.

allows wages to equalize across regions. explains why wage differentials may persist. causes disequilibrium in the labor market. increases wages further in those regions.

25. If A and B are two disjoint sets, and “Pr� represents the probability, then Pr[A and B] will be: A. B. C. D.

negative. infinity. unity. zero.


26. Two events A and B in a sample space are considered _____ if the probability that A will happen is the same regardless of whether or not B has happened. A. B. C. D.

conditional correlated independent exclusive

27. If the writer of an option, holds shares of the stock or an actual quantity of the commodity when she writes the call option on it, her position is said to be: A. B. C. D.

protected. exposed. covered. naked.

28. Alex’s production is worth $60, Harry’s is worth $40, Rob’s is worth $40, and Julia’s is worth $55. They decide to combine their resources and produce together. For this to be a superadditive game, which of the following conditions must hold? A. They should be able to produce more in groups of two than

what they can produce together. B. Their combined production must exceed the total they can individually produce. C. Their resources must be perfect substitutes. D. Their resources must be perfect complements. 29. Elizabeth’s opportunity cost of selling a widget is $18, while Jess values it at $27. Identify the correct statement from the following. A. Jess can threaten to go to another seller if the transaction

benefits Elizabeth more than her. B. The core is of the zone of agreement. C. The core consists of prices above $27, which benefits both parties. D. Elizabeth can threaten to go to another seller if the transaction benefits Jess more than her. 30. A characteristic function is: A. one that identifies negotiations which depend on the

characteristics of the bargainers. B. one that gives the value each possible coalition of a group’s members can create by operating independently.


C. one that identifies the most beneficial price for the buyer

involved in a transaction. D. one that identifies the most beneficial price for the seller involved in a transaction.


Eco 550 final exam answers set 2