Multiple Choice Questions

1. Which of the following forms of payment is not an incentive plan?

A. Commission plans for salesman B. Flat salary for a plant manager
C. Bounses for managers that increase as profits increase D. None of the above

2. When relationship-specific exchange occurs in complex contractural environments, the best way to purchase inputs is through:

A. Spot markets B. Vertical integration
C. Short-term agency agreements D. Long-term contracts

3. Suppose compensation is given by W = 512,000 + 217X(Profits)+ 10.08S, where W = total compensation of the CEO, X = company profits (in millions) = $200, and S = Sales (in millions) = $400. What percentage of the CEO's total earnings are tied to profits of the firm.

A. 8.2% B. 10.9% C. 7.8% D. 5.1%

4. Long-term contracts are not efficient if:

A. A firm engages in relationship-specific exchange
B. Specialized investments are unimportant
C. The contractural environment is simple
D. A and C, only

5. The solutions to the principal-agent problem ensures that the firm is operating

A. On the production function B. Above the production function
C. Below the production function D. Above the isoquant curve

6. Spot exchange typically involves

A. No transaction costs B. Some transaction costs
C. Extremely high transaction costs D. Long-term contracts

7. Given that the income of franchise restaurant managers is directly tied to profits and the income of the manager of the company owned restaurant is paid a flat fee, we might expect profits to be

A. Higher in company-owned restaurants B. Lower in company-owned restaurants
C. Equal in both types of restaurants D. None of the above

8. Which of the following is the primary disadvantage of producing inputs within a firm?

A. Increases in transaction costs B. Loss of specialization
C. Reductions in opportunism D. Mitigation of hold-up problems

9. A firms average cost is $20 and it charges a price of $20. The Lerner index for this firm is:

A. .20 B. .50 C. .33 D. Insufficient information

10. The concentration and Herfindahl indices computed by the US Bureau of Census must be interpreted with caution because:

A. They overstate the actual level of concentration in markets served by foreign firms.
B. They undersate the degree of concentration in local markets, such as the gas market.
C. All of the above.
D. None of the above.

11. Suppose that there are 2 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 HHI for industry A is:

A. 3200 B. 2800 C. 1800 D. 2500

12. As a general rule of thumb, industries with a Herfindahl index below are considered to be competitive, while those above are considered non-competitive.

A. 1000, 1800 B. 1800, 1000 C. 1000, 3000 D. 1800, 3000

13. Which of the following measures market structure?

A. Four-firm concentration ratio B. Lerner index
C. Herfindahl-Hirshman index D. All of the above may be used to make inferences about market structures

14. Which of the following integration types exploits economies of scope?

A. Vertical integration B. Horizontal integration C. Cointegration D. Conglomerate integration

15. Which of the following may transform an industry from oligopoly to monopolistic competition?

A. Entry B. Takeover C. Exit D. Acquisition

16. Which market structure has the most market power?

A. Monopolistic competition B. Perfect competition C. Monopoly D. Oligopoly

17. You are the manager of a firm that produces output in 2 plants. The demand for your firm's product is P = 78 - 15Q, where Q = Q1 + Q2. The marginal cost associated with producing in 2 plants are MC 1= 3Q 1 and MC 2 = 2Q 2. What price should be charged to maximize profits?

A. 20.5 B. 40.5 C. 60.5 D. 80.5

18. Which of the following is true?

A. A monopolist produces on the inelastic portion of its demand.
B. A monopolist always earns an economic profit.
C. The more inelastic the demand, the closer marginal revenue is to price.
D. In the short run a monopoly will shutdown if P < AVC.

19. You are the manager of a monopoly that faces a demand curve described by P = 63 - 5Q. Your costs are C = 10 + 3Q. Your firm's maximum profits are

A. 0 B. 66 C. 120 D. 170

20. If a monopolistically competitive firm's marginal cost increases, then in order to maximize profits the firm will:

A. Reduce output and increase price B. Increase output and decrease price
C. Increase both output and price D. Reduce both output and price

21. Suppose that initially the price is $50 in a perfectly competitive market. Firms are making zero economic profits. Then the market demand shrinks permanently and some firms leave the industry and the industry returns back to a long run equilibrium. What will be the new equilibrium price, assuming cost conditions in the industry remain constant?

A. $50 B. $45
C. Lower than $50 but exact value cannot be known without more information.
D. Larger than $45 buy exact value cannot be known without more information.

22. A monoploy has 2 production plants with cost functions C 1 =50 +0.1Q1(squared) and C 2 =30+0.05Q The demand it faces is Q=500-10P. What is the condition for profit maximization?

A. MC 1 (Q1 ) = MC 2 (Q2 ) = P (Q 1 + Q 2 )
B. MC 1 (Q1 ) = MC 2 (Q2) =MR (Q 1 + Q 2)
C. MC 1 (Q1 + Q 2) = MC 2 (Q1 + Q2) = P ( Q1+ Q 2)
D. MC 1 (Q 1+ Q 2) = MC 2 (Q 1+Q 2) = MR (Q1 + Q 2)

23. You are a manager in a perfectly competitive market. The price in your market is $14. Your total cost curve is C(Q) = 10 + 4Q + 0.5 Q(squared). What level of profits will you make in the short-run?

A. $20 B. $40 C. $60 D. $80

24. You are a manager for a monopolistically competitive firm. From experience, the profit- maximizing level of output of your firm is 100 units. However, it is expected that prices of other close substitutes will fall in the near future. How should you adjust your level of production in response to this change?

A. Produce more than 100 units. B. Produces less than 100 units.
C. Produce 100 units. D. Insufficient information to decide

25. Which of the following is true?

A. In Bertrand oligopoly each firm believes that their rivals will hold their output constant if it changes its output
B. In Cournot oligopoly firms produce an identical product at a constant marginal cost and engage in price competition
C. In oligopoly a change in marginal cost never has an affect on output or price
D. None of the above are true

26. Two firms compete in a Stackelberg fashion and firm 2 is the leader, then

A. Firm 1 views the output of firm 2 as given
B. Firm 2 views the output of firm 1 as given
C. All of the above
D. None of the above

27. A firm&#61501;s isoprofit curve is defined as:

A. The combinations of outputs produced by a firm that earns it the same level of profits
B. The combinations of outputs produced by all firms that yield the firm the same level of profit.
C. The combinations of outputs produced by all firms that makes total industry profits constant
D. None of the above

28.Two firms compete as a Stackelberg duopoly. The demand they face is P = 100 - 3Q. The cost function for each firm is C(Q) = 4Q. The outputs of the 2 firms are:

A. Q(L=leader) = 16; Q(F=follower) = 8
B. Q L = 24; Q F = 12
C. Q L = 12; Q F = 8
D. Q L = 20; Q F = 15

29. The spirit of equating marginal cost with marginal revenue is not held by:

A. Perfectly competitive firms B. Oligopolistic firms
C. Both A and B D. None of the above

30. Which would expect to make the highest profits, other things equal:

A. Bertrand oligopolist B. Cournot oligopolist C. Stackelberg leader D. Stackelberg follower

31. The inverse demand in a Cournot duopoly is P = a - b (Q 1 + Q 2), and costs are C1 (Q1 ) = c 1 Q 1, and C 2 (Q2) = c 2 Q 2 . The Government has imposed a per unit tax of $t on each unit sold by each firm. The tax revenue is:

A. t times the total output of the 2 firms should there be no sales tax
B. Less than t times the total output of the 2 firms should there be no sales tax
C. Greater than t times the total output of the 2 firms should there be no sales tax
D. None of the above

32. A new firm enters a market which is initially serviced by a Cournot duopoly charging a price of $20. What will the new market price be should the 3 firms co-exist after the entry?

A. $20 B. Below $20 C. Above $20 D. None of the above

33. An important condition for a contestable market is:

A. All producers have different technologies
B. There are high transaction costs.
C. Existing firms cannot respond quickly to entry by lowering their price
D. There are sunk costs