DAVENPORT ECON625/ ECON 625 FINAL EXAM (PERFECT ANSWER) - 94396

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Question Question 1 In the long run, the most helpful action that a monopolistically competitive firm can take to maintain its economic profit is to continue its efforts to differentiate its product. raise its price. lower its price. do nothing, because it will inevitably experience a decline in profits 2 points Question 2 The four-firm concentration ratio indicates the total profitability among the top four firms in an industry is an indicator of the degree of monopolistic competition. indicates the presence and intensity of an oligopoly market. is used by the government as a basis for anti-trust cases. 2 points Question 3 Which of the following industries is most likely to represent the monopolistic competition market structure? automobiles tobacco products restaurants farm equipment 2 points Question 4 Mutual interdependence occurs when all firms in an industry are affected by the same macro economic conditions, such as a recession, inflation, interest rates, exchange rates, etc. the actions of firms are independent of each other. the actions of one firm in an industry are easily recognized and perhaps copied by others. monopolists recognize that they must face eventual competition in the long run. 2 points Question 5 Firms in monopolistic competition would persistently realize economic profits in both the short and long run. may realize economic profits in the long run and normal profits in the short run. tend to incur persistent losses in both the short and long run. tend to realize economic profits in the short run and normal profits in the long run. 2 points Question 6 Transfer pricing is a method used to determine whether a firm should make or buy a component product. determine the correct value of a product as it moves from one stage of production to another. minimize a multinational firm's tax liabilities. All of these 2 points Question 7 Dominant price leadership exists when one firm drives the others out of the market. the dominant firm decides how much each of its competitors can sell. the dominant firm establishes the price at the quantity where its MR = MC, and permits all other firms to sell all they want to sell at that price. the dominant firm charges the lowest price in the industry. 2 points Question 8 In order for price discrimination to exist markets must be capable of being separated. markets must be interdependent. different demand price elasticities must exist in different markets. demand price elasticities must be identical in all markets. Both markets must be capable of being separated and different demand price elasticities must exist in different markets 2 points Question 9 Prices under an ideal cartel situation will be equal to monopoly prices. competitive prices. prices under monopolistic competition. marginal cost. 2 points Question 10 All of the following are conditions which are favorable to the formation of cartels except the existence of a small number of firms. geographic proximity of firms. homogeneity of the product. easy entry into the industry. 2 points Question 11 Market signaling is a way of conveying information to other parties in a transaction where asymmetric information exists. represents a dominant strategy in a multi-player game. results in an optimum solution to a beach kiosk scenario. None of these 2 points Question 12 In a zero-sum game the gains of one player are less than the gains of the other player. the gains of one player are greater than the gains of the other player. the gains of one player directly reflect the losses of another player. the gains and losses of players are all expressed in zeros. 2 points Question 13 Moral hazard is the outcome of a Prisoner's Dilemma. result of market signaling. risk associated with a Dutch auction. risk that one party to a contract may alter its post-contract behavior to the detriment of another party. 2 points Question 14 If banks face a problem in loan markets when bad credit risks are the ones most likely to seek bank loans, it is described as moral hazard. moral suasion. adverse selection. fraud. 2 points Question 15 Asymmetric information represents a market situation in which all parties to a transaction possess less than full information. one party in a transaction has more information than the other party. some information possessed by the parties in a transaction may be false. a zero-sum game exists. 2 points Question 16 In order to maximize profits, multinationals typically use transfer pricing by showing ________ profits in the high-tax country and by showing ________ profits in the low-tax country. high; low low; high economic; normal above-normal; accounting 2 points Question 17 Globalization has depressed wages in western industrialized countries, particularly those for highly skilled workers. highly educated workers. semi-skilled workers. low skilled workers. 2 points Question 18 Transfer pricing is a method used to determine whether a firm should make or buy a component product. determine the correct value of a product as it moves from one stage of production to another. minimize a multinational firm's tax liabilities. All of these 2 points Question 19 Which of the following would be an example of FDI? A Brazilian investor buys German government bond. An American buys a new Swedish car. An Italian firm builds a plant in Nebraska. A Canadian investor buys a French equity. 2 points Question 20 Which of the following represents a way in which multinational corporations can protect themselves from exchange rate risks? forward markets futures markets currency options All of these 2 points Question 21 When cost externalities exist, an optimal equilibrium can be attained if the government restricts production. levies a tax for the difference between private costs and social costs. prohibits production. All three of these Both restricts production and levies a tax for the difference between private costs and social costs 2 points Question 22 The supply for products that exhibit cost externalities is generally ________ the supply for products that do not. greater than less than the same as greater or less (depending on the market) than 2 points Question 23 Which of the following is an example of a government action to internalize a cost externality? a fine imposed on a company that pollutes a stream the closing of a public library a sales tax on jewelry the increase on bridge tolls 2 points Question 24 An example of a cost externality occurs when a mining company dumps waste in river upstream from a popular fishing spot. produces coal that is not in demand in a recession. underpays its employees. overwork its employees. 2 points Question 25 The demand for products that provide benefit externalities is generally ________ the demand for products that do not. greater than less than the same as greater or less (depending on the market) than
Solution Description

Question

Question 1

In the long run, the most helpful action that a monopolistically competitive firm can take to maintain its economic profit is to

continue its efforts to differentiate its product.

raise its price.

lower its price.

do nothing, because it will inevitably experience a decline in profits

2 points 

Question 2

The four-firm concentration ratio

indicates the total profitability among the top four firms in an industry

is an indicator of the degree of monopolistic competition.

indicates the presence and intensity of an oligopoly market.

is used by the government as a basis for anti-trust cases.

2 points

Question 3

Which of the following industries is most likely to represent the monopolistic competition market structure?

automobiles

tobacco products

restaurants

farm equipment

2 points

Question 4

Mutual interdependence occurs when

all firms in an industry are affected by the same macro economic conditions, such as a recession, inflation, interest rates, exchange rates, etc.

the actions of firms are independent of each other.

the actions of one firm in an industry are easily recognized and perhaps copied by others.

monopolists recognize that they must face eventual competition in the long run.

2 points

Question 5

Firms in monopolistic competition would

persistently realize economic profits in both the short and long run.

may realize economic profits

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