ECO 550 Week 5, Midterm Quiz 2 - 36134

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1.
The different methods by which the sellers inform their potential buyers about the product is called:
Answer

knowledge transfer.

advertising.

product offering.

information dissemination.
10 points
Question 2
1.
Jane regularly sends funds to organizations seeking to save endangered animal species. This is an example of:
Answer

fairness.

altruism.

selfishness.

self-interest.
10 points
Question 3
1.
Carla had received very low annual return from her investment portfolio comprising of stocks of five companies for two years. Her decision to continue holding the same portfolio of assets will be an example of:
Answer

bounded rationality.

selfishness.

altruism.

systematically missed opportunities.
10 points
Question 4
1.
In the example of Ireland described in the text, the country’s production set shifted outward over time because:
Answer

of technological advancements which improved its potato cultivation and overall agricultural production.

it gained new resources over time which enabled it to specialize and gain comparative advantage in software trade with the U.S. and Europe.

of new resources which allowed it to gain absolute advantage over many of its trading partners.

of reduction in trade barriers with the European Union.
10 points
Question 5
1.
Suppose Zia spends her time picking berries and apples. Her production set is described by the equation , where is the number of berries and y
the number of apples. Which of the following statements will be true?
Answer

25 apples and 10 berries is achievable but inefficient.

10 berries and 2 apples is efficient but unachievable.

20 apples and 5 berries is an inefficient level of production.

30 berries and 5 apples is an efficient level of production.
10 points
Question 6
1.
When the slope of a country’s production set declines, it implies:
Answer

the production set has shrunk.

the marginal cost of producing the good measured on the Y-axis has fallen.

the marginal cost of producing the good measured on the Y-axis has increased.

the marginal cost of producing the good measured on the X-axis has fallen.
10 points
Question 7
1.
Bankers supported the Federal Reserve Board’s Regulation Q because:
Answer

it allowed them to charge lower interest rates on loans.

it protected them from money market volatilities.

it increased the demand for loanable funds in the market.

it allowed them to borrow at a low rate of interest and lend out at a high rate of interest.
10 points
Question 8
1.
Suppose the adoption of a new software reduces the marginal cost of publishing books. For a given demand curve for books, this will be represented by:
Answer

an upward movement along the supply curve of books.

a downward movement along the supply curve of books.

an upward shift in the supply curve of books.

a downward shift in the supply curve of books.
10 points
Question 9
1.
Starting from a pure exchange equilibrium, an increase in the demand for a commodity will result in:
Answer

a fall in the market price.

a rise in the market price.

a rise in the equilibrium output.

a fall in the equilibrium output.
10 points
Question 10
1.
Let the marginal product of capital (MPK ) be 6; the marginal product of labor (MPL) be 2; the price of labor is given by $10. What will be the price of capital such that the isocost and the isoquant are tangent to each other?
Answer

$30

$3

$60

$6
10 points
Question 11
1.
Which of the following is a property of an isoquant?
Answer

It is concave to the origin.

Its slope is given by the ratio of the marginal products, for example, (marginal product of capital) ÷ (marginal product of labor), where capital and labor are measured on the Y and X-axes respectively.

It gives the lowest-cost way of producing a certain level of output.

Isoquants cannot intersect each other.
10 points
Question 12
1.
Refer to Figure 4-1. If the firm produces 2,000 dolls per month when the market price is $4:

Figure 4-1
The following figure shows the marginal cost curve (MC) for a firm producing fancy dolls for children. The market price for a doll is $4 per unit.

Answer

it will incur a loss.

it will earn maximum profit.

it will minimize cost on inputs.

it will earn the highest revenue.

Question 13
1.
Refer to Figure 5-1. Which of the following points represents the long-run equilibrium price-output combination?

In the figure given below MC denotes the marginal cost and AC denotes the average cost of a firm under perfect competition.
Figure 5-1

Answer

E0

E3

E1

E2
10 points
Question 14
1.
Which of the following conditions define the short-run for any industry?
Answer

Firms do not incur a fixed cost.

Firms incur both fixed as well as variable costs.

Firms can easily enter and leave the market.

Firms can enter but cannot leave the market.
10 points
Question 15
1.
Suppose beer producers in Munich became aware of the low price of one barrel of beer in the domestic market relative to that in the United States. What will be the impact of this price difference?
Answer

Beer production in Munich will decline.

Price of beer in the domestic market will increase.

Beer production in the U.S. will increase.

Beer consumption in the domestic market will increase.
10 points
Question 16
1.
Refer to Figure 6-2. What would be the consumer surplus if this remained a perfectly competitive market?

A group of firms in competitive market produced 20 units of a good when the market price was $2. They incurred no marginal cost. Eventually they realized the benefits they could get by teaming up and acting as a monopolist. The following figure shows the demand curve and marginal revenue curve for this profit maximizing monopolist.
Figure 6-2

Answer

$320

$160

$280

$140
10 points
Question 17
1.
Refer to Figure 6-4. Calculate the profit earned by the monopolist when the marginal cost of production is $15 per unit.

The following figure depicts the demand, marginal revenue (MR), and marginal cost (MC) for a monopolist.
Figure 6-4

Answer

$20

$35

$25

$45
10 points
Question 18
1.
Which of the following is a possible explanation for the fall in prices after an industry is monopolized by combining a group of competitors?
Answer

A monopolist faces a downward sloping demand curve. Hence, output expansion leads to lower prices.

.

A monopolist may reduce prices to make it difficult for other firms to compete.

A monopolist can increase profits by reducing price when its cost of production declines due to increased size of the new firm. The fall in price is less than the decline in cost.
10 points
Question 19
1.
Refer to Figure 4-2. Identify the supply curve of the firm.

Figure 4-2
The following figure shows the cost curves of a firm producing good X.
Answer It is given by the vertical axis for price below minimum AVC and the upward-sloping portion of the MC curve for prices above minimum AVC

s
10 points
Question 20
1.
High barriers to entry protect the market power of existing firms and discourage the formation of firms which:
Answer

invest heavily in research and development activities.

use illegal procedures to capture the market.

are inefficiently small and cannot realize economies of scale.

are large enough to dominate the existing firms.
10 points
Question 21
1.
The principle of backward induction proves that in price-fixing oligopoly games:
Answer

the players honor the agreement if the game is repeated.

the players honor the agreement if the game is played five times.

the players dishonor the agreement if the game is not played more than twice.

the players dishonor the agreement if the game is repeated a number of times, as determined prior to the start of play.
10 points
Question 22
1.
Refer to Figure 7-1. What will be the dominant firm’s profit maximizing output?

The figure given below represents the total output and price produced in an oligopoly market characterized by a dominant firm and a fringe. SF represents the supply curve of the fringe, D is the market demand curve, DRES represents the residual demand curve of the dominant firm, MRRES represents the residual marginal revenue curve of the dominant firm, and MCD
represents the marginal cost of the dominant firm.
Figure 7-1
Answer
Correct Answer: 2 units
.

.

.

.
10 points
Question 23
1.
In a mixed strategy situation, like the “heads or tails” game, the players can maximize their income by randomly choosing head or tail each with a probability of:
Answer

0.25

0.5

0.75

1.0
10 points
Question 24
1.
Refer to Table 7-3. What will be the Nash equilibrium if there is no interaction between the two students?

The following matrix represents the payoffs to two students who have been caught cheating in a class.
Table 7-3

Answer

Student A will confess while Student B will remain silent.

Student B will confess while Student A will remain silent.

Both the students will confess.

Both the students will remain silent.
10 points
Question 25
1.
Which of the following games will have a solution in mixed strategies?
Answer

A price-fixing game

A Prisoner’s dilemma

A drafting game used by racing cars.

A product choice game with asymmetric profits

Solution Description

 ECO 550 Week

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