question
Which of the following is not an incentive scheme to ensure workers do a good job?
Paying waitresses low wages but allowing them to collect tips.
Profit-sharing plans in large companies.
Commission pay schedules for salesmen.
Straight hourly wages for dock workers.
Paying waitresses low wages but allowing them to collect tips.
Profit-sharing plans in large companies.
Commission pay schedules for salesmen.
Straight hourly wages for dock workers.
answer
Straight hourly wages for dock workers.
question
Which of the following is not a means of avoiding opportunism?
contracts.
spot exchange.
vertical integration.
long-term contracts.
contracts.
spot exchange.
vertical integration.
long-term contracts.
answer
spot exchange.
question
Long-term contracts become longer
when specialized investment becomes more important.
when the exchange environment is more complex.
spot markets work well.
marginal costs are declining.
when specialized investment becomes more important.
when the exchange environment is more complex.
spot markets work well.
marginal costs are declining.
answer
when specialized investment becomes more important.
question
A relationship-specific exchange occurs when
a partnership is dissolved.
specialized investments are important.
a partnership is initiated.
shareholders receive dividends.
a partnership is dissolved.
specialized investments are important.
a partnership is initiated.
shareholders receive dividends.
answer
specialized investments are important.
question
When relationship-specific exchange occurs in complex contractual environments the best way to purchase inputs is through
spot markets.
vertical integration.
short-term agency agreements.
long-term contracts.
spot markets.
vertical integration.
short-term agency agreements.
long-term contracts.
answer
vertical integration.
question
A firm might choose to produce its own inputs if
specialized investment is not important.
long-term contracts are costly to write.
the exchange environment is not complex.
spot markets for the input exist.
specialized investment is not important.
long-term contracts are costly to write.
the exchange environment is not complex.
spot markets for the input exist.
answer
long-term contracts are costly to write.
question
The disadvantage of vertical integration is that
relationship-specific exchange may cause holdup.
long-term contracts may be inflexible.
the principal-agent problem causes shirking.
the firm loses focus on what it does best.
relationship-specific exchange may cause holdup.
long-term contracts may be inflexible.
the principal-agent problem causes shirking.
the firm loses focus on what it does best.
answer
the firm loses focus on what it does best.
question
In the absence of worker incentives
everyone always gives maximum effort.
there is a natural tendency for workers to not give their maximum effort.
managers have little or no control.
none of the statements associated with this question are correct.
everyone always gives maximum effort.
there is a natural tendency for workers to not give their maximum effort.
managers have little or no control.
none of the statements associated with this question are correct.
answer
there is a natural tendency for workers to not give their maximum effort.
question
A drawback of separating ownership from control by creating a firm is:
The losses of specialization.
Increased transaction costs.
The principal-agent problem.
Synergies of team production.
The losses of specialization.
Increased transaction costs.
The principal-agent problem.
Synergies of team production.
answer
The principal-agent problem.
question
A potential problem with piece rate plans is that:
workers will out produce a large quantity.
workers have no incentive to work hard.
it is difficult for managers to control.
workers may stress quantity instead of quality.
workers will out produce a large quantity.
workers have no incentive to work hard.
it is difficult for managers to control.
workers may stress quantity instead of quality.
answer
workers may stress quantity instead of quality.
question
Transactions costs refer to
fixed costs of capital.
variable costs of labor.
costs of exchange unrelated to production costs.
economies of scale.
fixed costs of capital.
variable costs of labor.
costs of exchange unrelated to production costs.
economies of scale.
answer
costs of exchange unrelated to production costs.
question
Long-term contracts are not efficient if
a firm engages in relationship-specific exchange.
specialized investments are unimportant.
the contractual environment is simple.
managers shirk.
a firm engages in relationship-specific exchange.
specialized investments are unimportant.
the contractual environment is simple.
managers shirk.
answer
specialized investments are unimportant.
question
Which of the following mergers is an example of vertical integration?
Bethlehem Steel purchases U.S. Steel.
IBM purchasing a California computer chip company.
AT&T purchases MCI.
GM purchases Ford.
Bethlehem Steel purchases U.S. Steel.
IBM purchasing a California computer chip company.
AT&T purchases MCI.
GM purchases Ford.
answer
IBM purchasing a California computer chip company.
question
The principal-agent problem refers to the fact that the agent's goals
do not always coincide with those of the principal.
coincide with those of the principal.
do not overlap with those of the principal.
overlap with those of the principal.
do not always coincide with those of the principal.
coincide with those of the principal.
do not overlap with those of the principal.
overlap with those of the principal.
answer
do not always coincide with those of the principal.
question
Specialized investments
result in relationship-specific exchange.
make spot exchange efficient.
cause managers to shirk.
are equally valuable in any productive use.
result in relationship-specific exchange.
make spot exchange efficient.
cause managers to shirk.
are equally valuable in any productive use.
answer
result in relationship-specific exchange.
question
Vertical integration
occurs when a firm purchases its inputs in a market.
is attractive when relationship-specific exchange is unimportant.
occurs when a firm produces its own inputs.
is a spot exchange phenomenon.
occurs when a firm purchases its inputs in a market.
is attractive when relationship-specific exchange is unimportant.
occurs when a firm produces its own inputs.
is a spot exchange phenomenon.
answer
occurs when a firm produces its own inputs.
question
Long-term contracts
increase transaction costs and increase opportunism.
increase transaction costs.
can reduce opportunistic behavior.
reduce transaction costs and increase flexibility.
increase transaction costs and increase opportunism.
increase transaction costs.
can reduce opportunistic behavior.
reduce transaction costs and increase flexibility.
answer
can reduce opportunistic behavior.
question
The problem with spot exchange in the presence of specific assets is that both parties
have incentives to behave as principals.
have incentives to behave opportunistically.
take the risk of price fluctuations.
do not take advantage of the economies of scope.
have incentives to behave as principals.
have incentives to behave opportunistically.
take the risk of price fluctuations.
do not take advantage of the economies of scope.
answer
have incentives to behave opportunistically.
question
Which of the following is not a solution to the manager-worker principal agent problem?
Sales sharing.
Piece rates.
Fixed hourly wages.
Spot checks.
Sales sharing.
Piece rates.
Fixed hourly wages.
Spot checks.
answer
Fixed hourly wages.
question
Which of the following is the primary disadvantage of producing inputs within a firm?
increases in transaction costs.
loss of specialization.
reductions in opportunism.
mitigation of hold-up problems.
increases in transaction costs.
loss of specialization.
reductions in opportunism.
mitigation of hold-up problems.
answer
loss of specialization.
question
An increase in the marginal cost arising from a more complex specialized investment environment will cause the optimal contract length to
increase.
decrease.
remain constant.
may increase or decrease.
increase.
decrease.
remain constant.
may increase or decrease.
answer
decrease.
question
Which of the following is not a type of specialized investment?
Site specificity.
Physical-asset specificity.
Human capital.
All of the statements associated with this questions are types of specialized investments.
Site specificity.
Physical-asset specificity.
Human capital.
All of the statements associated with this questions are types of specialized investments.
answer
All of the statements associated with this questions are types of specialized investments.
question
Which of the following are measures of industry concentration?
Four
Four
answer
firm concentration ratio.
HHI index.
Consumer surplus.
A and B above. - A and B above.
HHI index.
Consumer surplus.
A and B above. - A and B above.
question
A firm has a marginal cost of $20 and charges a price of $40. The Lerner index for this firm is:
0.20.
0.50.
0.33.
0.75.
0.20.
0.50.
0.33.
0.75.
answer
0.50.
question
An industry is comprised of 20 firms, each with an equal market share. What is the 4 firm concentration ratio of this industry?
0.2.
0.4.
0.6.
0.8.
0.2.
0.4.
0.6.
0.8.
answer
0.2.
question
An unregulated industry has a Lerner index of zero. These numbers:
reveal that social welfare would be improved by regulating the firms.
are consistent with the industry being monopolistically competitive.
are consistent with the industry being perfectly competitive.
reveal that social welfare would be improved by regulating the firms and are consistent with the industry being monopolistically competitive.
reveal that social welfare would be improved by regulating the firms.
are consistent with the industry being monopolistically competitive.
are consistent with the industry being perfectly competitive.
reveal that social welfare would be improved by regulating the firms and are consistent with the industry being monopolistically competitive.
answer
are consistent with the industry being perfectly competitive.
question
The industry elasticity of demand for gadgets is 2, while the elasticity of demand for an individual gadget manufacturer's product is -2. Based on the Rothschild approach to measuring market power, we conclude that
there is little monopoly power in this industry.
there is significant monopoly power in this industry.
the Herfindahl index for this industry is -2.
the Herfindahl index for this industry is 2.
there is little monopoly power in this industry.
there is significant monopoly power in this industry.
the Herfindahl index for this industry is -2.
the Herfindahl index for this industry is 2.
answer
there is significant monopoly power in this industry.
question
Monopolistic competition is characterized by:
heterogenous products.
employing labor from a perfectly competitive labor market.
no free entry.
large markets.
heterogenous products.
employing labor from a perfectly competitive labor market.
no free entry.
large markets.
answer
heterogenous products.
question
Oligopoly differs from monopoly as follows:
Oligopoly involves a few firms; monopoly involves a single firm.
Oligopoly does use advertisement; monopoly does not use advertisement.
Oligopoly involves free entry; monopoly involves no free entry.
Oligopoly involves a few firms; monopoly involves a single firm and oligopoly involves free entry; monopoly involves no free entry.
Oligopoly involves a few firms; monopoly involves a single firm.
Oligopoly does use advertisement; monopoly does not use advertisement.
Oligopoly involves free entry; monopoly involves no free entry.
Oligopoly involves a few firms; monopoly involves a single firm and oligopoly involves free entry; monopoly involves no free entry.
answer
Oligopoly involves a few firms; monopoly involves a single firm.
question
Which of the following is used to measure market structure and performance?
Four firm concentration ratio.
HHI (Herfindahl-Hirschman Index).
Dansby-Willig Performance Index.
All of the statements associated with this question are correct. -
Four firm concentration ratio.
HHI (Herfindahl-Hirschman Index).
Dansby-Willig Performance Index.
All of the statements associated with this question are correct. -
answer
All of the statements associated with this question are correct.
question
As a general rule of thumb, industries with a Herfindahl Hirshmann index below ______ are considered to be competitive, while those above ______ are considered non-competitive.
1,000, 1,800.
1,800, 1,000.
1,000, 3,000.
1,800, 3,000.
1,000, 1,800.
1,800, 1,000.
1,000, 3,000.
1,800, 3,000.
answer
1,000, 1,800.
question
In the 1960s, each firm in the computer industry was able to make extremely large profit margins, some as high as 50 60%. The margin decreased to 20-40% in the 1970s and to 10-20% in the 1980s. We conclude that:
Market power increased in the two decades.
The industry has evolved from oligopolistic to a more competitive industry in the two decades.
Lower profit margins were due to the government's regulation to protect consumers.
Lower profit margins were largely due to the mal-management of computer firms.
Market power increased in the two decades.
The industry has evolved from oligopolistic to a more competitive industry in the two decades.
Lower profit margins were due to the government's regulation to protect consumers.
Lower profit margins were largely due to the mal-management of computer firms.
answer
The industry has evolved from oligopolistic to a more competitive industry in the two decades.
question
The concentration and HHI reported in the U.S. Bureau of Census must be interpreted with caution since:
They are calculated by excluding foreign imports hence bias upward the degree of concentration.
They are based on figures for the entire national market.
The definition of product classes used to define an industry affects the results.
All of the statements associated with this question are correct.
They are calculated by excluding foreign imports hence bias upward the degree of concentration.
They are based on figures for the entire national market.
The definition of product classes used to define an industry affects the results.
All of the statements associated with this question are correct.
answer
All of the statements associated with this question are correct.
question
An industry consists of six firms with annual sales of $300, $500, $400, $700, $600, and $600, respectively. What is the industry's C4?
0.58.
0.62.
0.74.
0.77.
0.58.
0.62.
0.74.
0.77.
answer
0.77.
question
An industry consists of six firms with annual sales of $300, $500, $400, $700, $600, and $600, respectively. What is the industry's HHI?
1,659.
1,779.
1,839.
1,909.
1,659.
1,779.
1,839.
1,909.
answer
1,779.
question
Suppose that there are two industries, A and B. There are five firms in industry A with sales at $5 million, $2 million, $1 million, $1 million, and $1 million, respectively. There are 4 firms in industry B with equal sales of $2.5 million for each firm. The four-firm concentration ratio for industry A is:
0.9.
1.0.
0.8.
0.7.
0.9.
1.0.
0.8.
0.7.
answer
0.9.
question
According to the "feedback critique"
the conduct of firms in an industry may affect the firm's performance.
the conduct of firms in an industry may affect the market structure.
market structure may affect the firm's conduct.
all of the statements associated with this question are correct.
the conduct of firms in an industry may affect the firm's performance.
the conduct of firms in an industry may affect the market structure.
market structure may affect the firm's conduct.
all of the statements associated with this question are correct.
answer
all of the statements associated with this question are correct.
question
The industry elasticity of demand for telephone service is 2 while the elasticity of demand for a specific phone company is -5. What is the Rothchild index?
0.2.
0.4.
0.5.
0.7.
0.2.
0.4.
0.5.
0.7.
answer
0.4.
question
The Dansby Willig Index measures the potential for a change in
production cost.
firm's revenue.
firm's profit.
social welfare.
production cost.
firm's revenue.
firm's profit.
social welfare.
answer
social welfare.
question
Which of the following integration types exploits economies of scope?
Vertical integration.
Horizontal integration.
Cointegration.
Conglomerate integration.
Vertical integration.
Horizontal integration.
Cointegration.
Conglomerate integration.
answer
Horizontal integration.
question
An electronic company takes over one of its original suppliers in a merger. This is an example of:
vertical integration.
horizontal integration.
cointegration.
conglomerate integration.
vertical integration.
horizontal integration.
cointegration.
conglomerate integration.
answer
vertical integration.
question
Which of the following integration types aims at reducing transaction costs?
Vertical integration.
Horizontal integration.
Cointegration.
Conglomerate integration.
Vertical integration.
Horizontal integration.
Cointegration.
Conglomerate integration.
answer
Vertical integration.
question
In perfect competition, which is not true?
Both concentration ratios and Rothschild indexes tend to be close to zero.
There are a large number of firms, and each is small relative to the entire market.
At least one firm has a perceptible impact on the market price.
Firms produce homogenous goods.
Both concentration ratios and Rothschild indexes tend to be close to zero.
There are a large number of firms, and each is small relative to the entire market.
At least one firm has a perceptible impact on the market price.
Firms produce homogenous goods.
answer
At least one firm has a perceptible impact on the market price.
question
The causal view of the industry believes that
market structure is caused by firm behavior.
firm behavior is caused by market structure.
market performance causes firms to have a certain structure.
market performance causes firms to behave in a certain way.
market structure is caused by firm behavior.
firm behavior is caused by market structure.
market performance causes firms to have a certain structure.
market performance causes firms to behave in a certain way.
answer
firm behavior is caused by market structure.
question
The tobacco industry has a Lerner index of 0.76. Based on this information, compute the optimal markup factor.
4.17 times price.
4.17 times marginal cost.
0.24 times price.
there is not sufficient information to determine the optimal markup factor.
4.17 times price.
4.17 times marginal cost.
0.24 times price.
there is not sufficient information to determine the optimal markup factor.
answer
4.17 times marginal cost.
question
The industry elasticity of demand for good X is neg1.5, while the elasticity of demand for an individual manufacturer of good X product is neg9. Based on this information, the Rothschild index of market power is:
1/6, indicating there is little monopoly power in this industry.
6, indicating there is significant monopoly power in this industry.
6, indicating there is little monopoly power in this industry.
none of the statements associated with this question are correct.
1/6, indicating there is little monopoly power in this industry.
6, indicating there is significant monopoly power in this industry.
6, indicating there is little monopoly power in this industry.
none of the statements associated with this question are correct.
answer
1/6, indicating there is little monopoly power in this industry.
question
Producer and consumer surpluses are measures of
industry performance.
market structure.
firm conduct.
none of the statements associated with this question are correct.
industry performance.
market structure.
firm conduct.
none of the statements associated with this question are correct.
answer
industry performance.
question
Which of the following kinds of market structure are not associated with market power?
oligopoly.
perfect competition.
monopolistic competition.
perfect competition and monopolistic competition.
oligopoly.
perfect competition.
monopolistic competition.
perfect competition and monopolistic competition.
answer
perfect competition.
question
MR=MC, a rule that works for all industry forms
answer
Profit Maximizing Rule
question
Problems associated with getting the agent manager to act in the interests of the owner, often solved through incentive arrangements.
answer
Principle-Agent Problem
question
Exemplified by declines in long-run average costs as output expands.
answer
Economies of Scale
question
One firm, producing an unique product, dominates the industry.
answer
Monopolist
question
Cost advantages that accrue from joint production of goods.
answer
Economies of Scope
question
Numerous firms producing similar products with product differentiation as a chief characteristic.
answer
Monopolistic Competition
question
A measure of market power indicated by the excess of price to marginal cost in ratio to price which is related to the "mark-up" rule.
answer
Lerner Index
question
The advertising to total revenue ratio equates with the ratio of output elasticities of advertising to price.
answer
Optimal Advertising
question
An expenditure that must be made to allow two parties to exchange, but has little or no value in any alternative use.
answer
Specialized Investment
question
A few firms dominating an industry with interdependence of action as a chief characteristic.
answer
Oligopoly
question
Costs associated with acquiring an input at that are in excess of the amount paid to the input supplier
answer
Transaction Costs
question
The merging of firms that produce similar product types.
answer
Horizontal Integration
question
An index of industry concentration generally regarded as superior to the 4 firm concentration ratio.
answer
Hefindahl-Hirschmann Index
question
The ratio of industry price elasticity of demand to firm elasticity, a low value indicating competitiveness.
answer
Rothschild Index
question
An informal relationship between buyer and seller with no obligations for the future.
answer
Spot Exchange
question
A situation where a firm produces the inputs required to make its final product.
answer
Vertical Integration
question
T/F A monopolist could conceivably experience an economic loss, exemplified by the price below average total cost at the quantity where MR=MC.
answer
True
question
T/F Demand functions for monopolistically competitive firms tend to be quite flat, owing to the presence of substitutes.
answer
True
question
T/F In the long run, perfectly competitive firms do not earn profit of any type, economic, normal or accounting profits.
answer
False (The earn a normal rate of profit, that which is just sufficient to keep them on that line of business and covers implicit costs.)
question
T/F Dead weight loss is comparatively small in monopolistic market structures.
answer
True
question
T/F In the long run, monopolistic competitors earn only a normal profit, exemplified by tangency of the demand function and the average total cost curve.
answer
True
question
T/F Product differentiation and advertising are key characteristics of monopolistically competitive industries.
answer
True
question
T/F That quantity of output wherein price equals marginal cost is characterized by economists are the "economically efficient" level of output.
answer
True (The last unit consumed has value equal to the additional cost of production)
question
T/F In the short-run, a firm will shut-down is it cannot meet its average fixed costs.
answer
False(A firm must meet its average variable costs to produce in the short-run. The workers must be paid.)
question
T/F For a firm in a perfectly competitive industry, the short-run supply curve is that portion of the marginal cost curve above minimum average total cost.
answer
False (MC function above minimum average variable costs is the short run supply curve. Price below minimum AVC, the firm will shut down.)
question
T/F A monopolist faces the entire market demand curve and must produce a unique product for which there are no close substitutes.
answer
True
question
T/F Losses in the long run experienced by the typical firm in a competitive market will result in firms leaving the industry and the industry supply function shifting to the left. Given demand function constant, profitability can be restored to remaining firms.
answer
True
question
T/F In the long run, a firm must meet have accounting profits equal to implicit opportunity costs to stay in business.
answer
True(All opportunity costs must be met in the long run to stay in business. If there are implicit costs, accounting profits must exist in order to offset these costs.)
question
T/F A firm can be a monopolist only if it competes in national markets.
answer
False (A firm can have a monopoly hold in a regional market.)
question
T/F A formula for estimating Dead Weight Loss is to take the difference between Price and MC at the profit maximizing level times the difference between Q where P=MC and Q where MR=MC.
answer
False (The formula is correct if it is multiplied by 0.5 or, of course, divided by 2. This is the "triangle" estimate of Dead Weight Loss.)
question
T/F Under conditions of monopolistic competition, Price exceeds marginal revenue significantly in comparison to monopoly.
answer
False (Price and marginal revenue tend to be fairly close together owing to high elasticity of demand, as shown by the formula MR = P [1 + Ed]/Ed. With an Ed= -10, MR = 0.9*P.)
question
T/F Maximum profitability is obtained by running the plant at that output level that yields minimum average total cost, that is, at the engineering efficient output.
answer
False (The profit maximizing rule is always MR=MC. This can occur before, at, or after the point of optimal engineering efficiency.)
question
T/F Monopolisitically competitive firms in the long run earn a normal profit, signified by demand curve tangency with the average total cost curve.
answer
True
question
T/F P > MC, P > min ATC, and economic profits in the long run are typical of monopoly.
answer
True
question
T/F P = MC, P = ATC (zero economic profits), and output at the engineering efficient level are characteristic of perfect competition.
answer
True
question
T/F P > MC but not by much, P = ATC, and output less than the engineering efficient level are characteristic of monopolistic competition in the long run.
answer
True
question
Agreements to restrain output among formerly competing firms to maximize profits.
answer
Collusion
question
In Cournot duopoly, a schedule of optimal output levels given the output decision of a competing firm.
answer
Reaction Function
question
A strategy that results in the highest payoff no matter what the other party chooses as a strategy.
answer
Dominant Strategy
question
With N identical firms, a formula that states how price elasticity of demand for the firm is related to price elasticity of demand for the industry.
answer
EF=NEM
question
A choice of strategy is made after observing the strategy of the other party to a game.
answer
Sequential Move
question
Profit maximizing output adjustments are made among competitors assuming that the other firms will keep their outputs constant.
answer
Cournot Oligopoly
question
In duopoly, all combinations of output levels of two firms that yield a constant level of profit for one of those firms.
answer
Isoprofit Curve
question
Industry leader sets price and output decision independent of weaker competitors, leaving the remainder to be divided among these weaker competitors.
answer
Stackleberg Oligopoly
question
Competition on price yielding a P=MC result even in situations of only a few competitors.
answer
Bertrand Oligopoly
question
A combination of strategic choices among players from which there is no incentive to change by either party.
answer
Nash Equilibrium
question
Incumbent firms have no market power over consumers in the absence of sunk costs.
answer
Contestable Markets
question
Competitors ignore price increases but match price decreases, yielding a kinked demand curve and price stickiness.
answer
Sweezy Oligopoly
question
A characteristic feature of oligopolistic industries wherein the price output decisions of one firm impact other firms in the industry.
answer
Interdependence
question
Representation of a game involving players, strategies, and outcomes.
answer
Normal Form Game
question
Players choose strategies simultaneously with no repetition of the game.
answer
One-Shot Game
question
A strategy played over time contingent on the other party continuing with their strategic choice.
answer
Trigger Strategy
question
T/F Interdependence of action among firms is a key characteristic feature of oligopolistic industries.
answer
True
question
T/F The kinked demand curve, wherein firms follow price decreases but don't follow price increases is a result of the Bertrand model of oligopoly.
answer
False (Sweezy)
question
T/F Prices tend to be "sticky" in the kinked-demand curve model in that MC can vary in a range without impacting product price.
answer
True
question
T/F In the Cournot model of duopoly, firms respond to the output decisions of their competitor thinking that their counterpart will keep their output constant.
answer
True
question
T/F Collusion to lower output can yield greater profits for firms in a duopoly situation, but the urge to cheat is substantial.
answer
True
question
T/F As shown in the Stackelberg model, cost advantages can quickly result in a leader-follower situation wherein the leader optimally chooses her output decision knowing full well the response function of her competitor.
answer
True(what the book says, but in practice just knowing that competitors have higher costs can yield independent action even if the exact response function of the competitor is not known.)
question
T/F Competition on price can lead to a P=MC result even in the presence of a duopolistic industry. This model is known as the Bertrand model.
answer
True (Point being, don't compete on price if you can avoid it.)
question
T/F In a game theoretic approach, collusion will always fail in the long run because of the incentive to cheat.
answer
False (With use of a trigger strategy, collusion can exist in the long run)
question
T/F In the following one-shot, independent action game, both firms will choose the "high price" option. This game is reminiscent of the Bertrand model of duopoly.
answer
False(The one-shot Nash equilibrium low,low. Notice that both have a dominant strategy and that is Low Price.)
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