# long-run cost-output relationships

ECO 550 FINAL EXAM PART 1

VERSION 1
Question 1

George Webb Restaurant collects on the average \$5 per customer at its breakfast & lunch diner. Its variable cost per customer averages \$3, and its annual fixed cost is \$40,000. If George Webb wants to make a profit of \$20,000 per year at the diner, it will have to serve__________ customers per year.

10,000 customers

20,000 customers

30,000 customers

40,000 customers

50,000 customers
Question 2

Evidence from empirical studies of long-run cost-output relationships lends support to the:

existence of a non-linear cubic total cost function

hypothesis that marginal costs first decrease, then gradually increase over the normal operating range of the firm

hypothesis that total costs increase quadratically over the ranges of output examined

hypothesis that total costs increase linearly over some considerable range of output examined
Question 3

In a study of banking by asset size over time, we can find which asset sizes are tending to become more prominent. The size that is becoming more predominant is presumed to be least cost. This is called:

regression to the mean analysis.

breakeven analysis.

survivorship analysis.

engineering cost analysis.

a Willie Sutton analysis.
Question 4

In the linear breakeven model, the breakeven sales volume (in dollars) can be found by multiplying the breakeven sales volume (in units) by:

one minus the variable cost ratio

contribution margin per unit

selling price per unit

standard deviation of unit sales
Question 5

A ____ total cost function implies that marginal costs ____ as output is increased.

linear; increase linearly

cubic; increase linearly

linear; are constant
Question 6

In the linear breakeven model, the difference between selling price per unit and variable cost per unit is referred to as:

variable margin per unit

variable cost ratio

contribution margin per unit

target margin per unit
Question 7

Long distance telephone service has become a competitive market. The average cost per call is \$0.05 a minute, and its declining. The likely reason for the declining price for long distance service is:

Governmental pressure to lower the price

Reduced demand for long distance service

Entry into this industry pushes prices down

Lower price for a barrel of crude oil

Increased cost of providing long distance service
Question 8

Experience goods are products or services

whose performance is highly unusual

whose quality is undetectable when purchased

not likely to cause repeat purchases
Question 9

Under asymmetric information,

you never get what you pay for

you sometimes get cheated

you always get cheated

at best you get what you pay for

sellers make profits in excess of competitive returns
Question 10

Asset specificity is largest when

value in first best use is large

value in second best use is large

customers choose their supplier at random

very valuable assets are non-redeployable

customers are loyal to a particular seller
Question 11

Buyers anticipate that the temporary warehouse seller of unbranded computer equipment will

deliver high quality products consistent with expectations

not attempt to establish any warranty enforcement mechanisms

offer several prices and qualities

produce only one quality
Question 12

In the long-run, firms in a monopolistically competitive industry will

earn substantial economic profits

tend to just cover costs, including normal profits

seek to increase the scale of operations

seek to reduce the scale of operations
Question 13

All of the following are mechanisms which reduce the adverse selection problem except ____.

warranties from established enterprises with non-redeployable assets

high interest rates

large collateral requirements

brand names and product-specific promotions and retail displays

higher prices in repeat customer transactions
Question 14

In natural monopoly, AC continuously declines due to economies in distribution or in production, which tends to found in industries which face increasing returns to scale. If price were set equal to marginal cost, then:

price would equal average cost.

price would exceed average cost.

price would be below average cost.

price would be at the profit maximizing level for natural monopoly
Question 15

Of the following, which is not an economic rationale for public utility regulation?

production process exhibiting increasing returns to scale

constant cost industry

avoidance of duplication of facilities

protection of consumers from price discrimination
Question 16

____ as practiced by public utilities is designed to encourage greater usage and therefore spread the fixed costs of the utility’s plant over a larger number of units of output.

Inverted block pricing

Block pricing

First degree price discrimination
Question 17

In the electric power industry, residential customers have relatively ____ demand for electricity compared with large industrial users. But contrary to price discrimination, large industrial users generally are charged ____ rates.

similar, similar

elastic, lower

elastic, higher

inelastic, lower

inelastic, higher
Question 18

Declining cost industries

have upward rising AC curves.

have upward rising demand curves.

have ?-shaped total costs.

have diseconomies of scale.

have marginal cost curves below their average cost curve.
Question 19

When the cross elasticity of demand between one product and all other products is low, one is generally referring to a(n) ____ situation.

oligopoly

monopoly

pure competition

substitution

monopolistic competition
Question 20

In the Cournot duopoly model, each of the two firms, in determining its profit-maximizing price-output level, assumes that the other firm’s ____ will not change.

price

output

marketing strategy

inventory
Question 21

Conscious parallelism of action among oligopolistic firms is an example of ____.

intense rivalry

a formal collusive agreement

informal, or tacit, cooperation

a cartel
Question 22

Some industries that have rigid prices. In those industries, we tend to

find that output is also rigid over the business cycle

find that output varies greatly over the business cycle

find the employment in these industries is quite stable over the business cycle

find that the rate of return is negative in boom times
Question 23

In a kinked demand market, whenever one firm decides to lower its price,

other firms will automatically follow.

none of the other firms will follow.

one half of the firms follow and one half of the firms don’t follow the price cut.

other firms all decide to exit the industry

all of the other firms raise their prices
Question 24

Some market conditions make cartels MORE likely to succeed in collusion. Which of the following will make collusion more successful?

The products are heterogeneous

The orders are small and frequent

The firms are all about the same size

Costs differ across the firms

Firms are geographically widely scattered
Question 25

If a cartel seeks to maximize profits, the market share (or quota) for each firm should be set at a level such that the ____ of all firms is identical.

average total cost

average profit

marginal profit

marginal cost

marginal revenue

VERSION 2
Question 1
The short-run cost function is:

where all inputs to the production process are variable

relevant to decisions in which one or more inputs to the production process are fixed

not relevant to optimal pricing and production output decisions

crucial in making optimal investment decisions in new production facilities
Question 2
Which of the following is not an assumption of the linear breakeven model:

constant selling price per unit

decreasing variable cost per unit

fixed costs are independent of the output level

a single product (or a constant mix of products) is being produced and sold
Question 3
George Webb Restaurant collects on the average \$5 per customer at its breakfast & lunch diner. Its variable cost per customer averages \$3, and its annual fixed cost is \$40,000. If George Webb wants to make a profit of \$20,000 per year at the diner, it will have to serve__________ customers per year.

10,000 customers

20,000 customers

30,000 customers

40,000 customers

50,000 customers
Question 4
The degree of operating leverage is equal to the ____ change in ____ divided by the ____ change in ____.

percentage; sales; percentage; EBIT

unit; sales; unit; EBIT

percentage; EBIT; percentage; sales

unit; EBIT; unit; sales
Question 5
In a study of banking by asset size over time, we can find which asset sizes are tending to become more prominent. The size that is becoming more predominant is presumed to be least cost. This is called:

regression to the mean analysis.

breakeven analysis.

survivorship analysis.

engineering cost analysis.

a Willie Sutton analysis.
Question 6
In the linear breakeven model, the breakeven sales volume (in dollars) can be found by multiplying the breakeven sales volume (in units) by:

one minus the variable cost ratio

contribution margin per unit

selling price per unit

standard deviation of unit sales
Question 7
A firm in pure competition would shut down when:

price is less than average total cost

price is less than average fixed cost

price is less than marginal cost

price is less than average variable cost
Question 8
Under asymmetric information,

you never get what you pay for

you sometimes get cheated

you always get cheated

at best you get what you pay for

sellers make profits in excess of competitive returns
Question 9
An “experience good” is one that:

Only an expert can use

Has undetectable quality when purchased

Can be readily experienced simply by touching or tasting

Improves with age, like a fine wine
Question 10
A “search good” is:

One that depends on how the product behaves over time

A product whose quality is only found out over time by finding how durable it is

Like a peach that can be examined for flaws

Like a used car, since it is easy to determine its inherent quality
Question 11
All of the following are mechanisms which reduce the adverse selection problem except ____.

warranties from established enterprises with non-redeployable assets

high interest rates

large collateral requirements

brand names and product-specific promotions and retail displays

higher prices in repeat customer transactions
Question 12
Asset specificity is largest when

value in first best use is large

value in second best use is large

customers choose their supplier at random

very valuable assets are non-redeployable

customers are loyal to a particular seller
Question 13
In the purely competitive case, marginal revenue (MR) is equal to:

cost

profit

price

total revenue
Question 14
In the electric power industry, residential customers have relatively ____ demand for electricity compared with large industrial users. But contrary to price discrimination, large industrial users generally are charged ____ rates.

similar, similar

elastic, lower

elastic, higher

inelastic, lower

inelastic, higher
Question 15
Declining cost industries

have upward rising AC curves.

have upward rising demand curves.

have ?-shaped total costs.

have diseconomies of scale.

have marginal cost curves below their average cost curve.
Question 16
The demand curve facing the firm in ____ is the same as the industry demand curve.

pure competition

monopolistic competition

oligopoly

pure monopoly
Question 17
Of the following, which is not an economic rationale for public utility regulation?

production process exhibiting increasing returns to scale

constant cost industry

avoidance of duplication of facilities

protection of consumers from price discrimination
Question 18
In natural monopoly, AC continuously declines due to economies in distribution or in production, which tends to found in industries which face increasing returns to scale. If price were set equal to marginal cost, then:

price would equal average cost.

price would exceed average cost.

price would be below average cost.

price would be at the profit maximizing level for natural monopoly
Question 19
When the cross elasticity of demand between one product and all other products is low, one is generally referring to a(n) ____ situation.

oligopoly

monopoly

pure competition

substitution

monopolistic competition
Question 20
The existence of a kinked demand curve under oligopoly conditions may result in

volatile prices

competitive pricing.

prices above the monopoly price.

an increase in the coefficient of variation of prices.

price rigidity
Question 21
A(n) ____ is characterized by a relatively small number of firms producing a product.

monopoly

syndicate

cooperative

oligopoly
Question 22
Some market conditions make cartels MORE likely to succeed in collusion. Which of the following will make collusion more successful?

The products are heterogeneous

The orders are small and frequent

The firms are all about the same size

Costs differ across the firms

Firms are geographically widely scattered
Question 23
Even ideal cartels tend to be unstable because

firms typically prefer competition to collusion as competition, because it leads to more profits.

collusion leads to lowest possible overall profits in the industry.

oligopolistic managers are extremely risk loving.

firms can benefit by secretly selling more than they promised the other firms
Question 24
Which of the following is an example of an oligopolistic market structure?

public utilities

air transport industry

liquor retailers

wheat farmers
Question 25
A cartel is a situation where firms in the industry

have an agreement to restrict output.

agree to produce identical products.

obey the rules of dominant firm price leadership.

experience the pain of a kinked demand curve.

THIRD VERSION
Question 1
Theoretically, in a long-run cost function:

all inputs are fixed

all inputs are considered variable

some inputs are always fixed

capital and labor are always combined in fixed proportions
4 points
Question 2
In a study of banking by asset size over time, we can find which asset sizes are tending to become more prominent. The size that is becoming more predominant is presumed to be least cost. This is called:

regression to the mean analysis.

breakeven analysis.

survivorship analysis.

engineering cost analysis.

a Willie Sutton analysis.
4 points
Question 3
George Webb Restaurant collects on the average \$5 per customer at its breakfast & lunch diner. Its variable cost per customer averages \$3, and its annual fixed cost is \$40,000. If George Webb wants to make a profit of \$20,000 per year at the diner, it will have to serve__________ customers per year.

10,000 customers

20,000 customers

30,000 customers

40,000 customers

50,000 customers
4 points
Question 4
In the linear breakeven model, the difference between selling price per unit and variable cost per unit is referred to as:

variable margin per unit

variable cost ratio

contribution margin per unit

target margin per unit
4 points
Question 5
A ____ total cost function implies that marginal costs ____ as output is increased.

linear; increase linearly

cubic; increase linearly

linear; are constant
4 points
Question 6
Break-even analysis usually assumes all of the following except:

in the short run, there is no distinction between variable and fixed costs.

revenue and cost curves are straight-lines throughout the analysis.

there appears to be perfect competition since the price is considered to remain the same regardless of quantity.

the straight-line cost curve implies that marginal cost is constant.
4 points
Question 7
In the short-run for a purely competitive market, a manufacturer will stop production when:

the total revenue is less than total costs

the contribution to fixed costs is zero or less

the price is greater than AVC

operating at a loss
4 points
Question 8
The price for used cars is well below the price of new cars of the same general quality. This is an example of:

The Degree of Operating Leverage

A Lemon’s Market

Redeployment Assets

Cyclical Competition

The Unemployment Rate
4 points
Question 9
In the purely competitive case, marginal revenue (MR) is equal to:

cost

profit

price

total revenue
4 points
Question 10
A “search good” is:

One that depends on how the product behaves over time

A product whose quality is only found out over time by finding how durable it is

Like a peach that can be examined for flaws

Like a used car, since it is easy to determine its inherent quality
4 points
Question 11
The problems of asymmetric information exchange arise ultimately because

one party to the exchange possesses different information than another

one party knows nothing

one party cannot independently verify the information of another

information is scarce
4 points
Question 12
Experience goods are products or services

whose performance is highly unusual

whose quality is undetectable when purchased

not likely to cause repeat purchases
4 points
Question 13
If price exceeds average costs under pure competition, ____ firms will enter the industry, supply will ____, and price will be driven ____.

more; decrease; down

more; decrease; up

more; increase; down

more; increase; up
4 points
Question 14
Regulatory agencies engage in all of the following activities except _______.

controlling entry into the regulated industries

overseeing the quality of service provided by the firms

setting federal and state income tax rates on regulated firms

setting prices that consumers will pay
4 points
Question 15
In natural monopoly, AC continuously declines due to economies in distribution or in production, which tends to found in industries which face increasing returns to scale. If price were set equal to marginal cost, then:

price would equal average cost.

price would exceed average cost.

price would be below average cost.

price would be at the profit maximizing level for natural monopoly
4 points
Question 16
In the electric power industry, residential customers have relatively ____ demand for electricity compared with large industrial users. But contrary to price discrimination, large industrial users generally are charged ____ rates.

similar, similar

elastic, lower

elastic, higher

inelastic, lower

inelastic, higher
4 points
Question 17
Declining cost industries

have upward rising AC curves.

have upward rising demand curves.

have ?-shaped total costs.

have diseconomies of scale.

have marginal cost curves below their average cost curve.
4 points
Question 18
Of the following, which is not an economic rationale for public utility regulation?

production process exhibiting increasing returns to scale

constant cost industry

avoidance of duplication of facilities

protection of consumers from price discrimination
4 points
Question 19
The demand curve facing the firm in ____ is the same as the industry demand curve.

pure competition

monopolistic competition

oligopoly

pure monopoly
4 points
Question 20
If a cartel seeks to maximize profits, the market share (or quota) for each firm should be set at a level such that the ____ of all firms is identical.

average total cost

average profit

marginal profit

marginal cost

marginal revenue
4 points
Question 21
Some market conditions make cartels MORE likely to succeed in collusion. Which of the following will make collusion more successful?

The products are heterogeneous

The orders are small and frequent

The firms are all about the same size

Costs differ across the firms

Firms are geographically widely scattered
4 points
Question 22
Which of the following is an example of an oligopolistic market structure?

public utilities

air transport industry

liquor retailers

wheat farmers
4 points
Question 23
The existence of a kinked demand curve under oligopoly conditions may result in

volatile prices

competitive pricing.

prices above the monopoly price.

an increase in the coefficient of variation of prices.

price rigidity
4 points
Question 24
In a kinked demand market, whenever one firm decides to lower its price,

other firms will automatically follow.

none of the other firms will follow.

one half of the firms follow and one half of the firms don’t follow the price cut.

other firms all decide to exit the industry

all of the other firms raise their prices.
4 points
Question 25
Even ideal cartels tend to be unstable because

firms typically prefer competition to collusion as competition, because it leads to more profits.

collusion leads to lowest possible overall profits in the industry.

oligopolistic managers are extremely risk loving.

firms can benefit by secretly selling more than they promised the other firms

VERSION 4
Question 1

George Webb Restaurant collects on the average \$5 per customer at its breakfast & lunch diner. Its variable cost per customer averages \$3, and its annual fixed cost is \$40,000. If George Webb wants to make a profit of \$20,000 per year at the diner, it will have to serve__________ customers per year.

10,000 customers

20,000 customers

30,000 customers

40,000 customers

50,000 customers

Question 2

The short-run cost function is:

where all inputs to the production process are variable

relevant to decisions in which one or more inputs to the production process are fixed

not relevant to optimal pricing and production output decisions

crucial in making optimal investment decisions in new production facilities
Question 3

Which of the following is not an assumption of the linear breakeven model:

constant selling price per unit

decreasing variable cost per unit

fixed costs are independent of the output level

a single product (or a constant mix of products) is being produced and sold
Question 4

A ____ total cost function implies that marginal costs ____ as output is increased.

linear; increase linearly

cubic; increase linearly

linear; are constant
Question 5

The degree of operating leverage is equal to the ____ change in ____ divided by the ____ change in ____.

percentage; sales; percentage; EBIT

unit; sales; unit; EBIT

percentage; EBIT; percentage; sales

unit; EBIT; unit; sales
Question 6

In the linear breakeven model, the breakeven sales volume (in dollars) can be found by multiplying the breakeven sales volume (in units) by:

one minus the variable cost ratio

contribution margin per unit

selling price per unit

standard deviation of unit sales
Question 7

An “experience good” is one that:

Only an expert can use

Has undetectable quality when purchased

Can be readily experienced simply by touching or tasting

Improves with age, like a fine wine
Question 8

Under asymmetric information,

you never get what you pay for

you sometimes get cheated

you always get cheated

at best you get what you pay for

sellers make profits in excess of competitive returns
Question 9

Buyers anticipate that the temporary warehouse seller of unbranded computer equipment will

deliver high quality products consistent with expectations

not attempt to establish any warranty enforcement mechanisms

offer several prices and qualities

produce only one quality
Question 10

The problems of asymmetric information exchange arise ultimately because

one party to the exchange possesses different information than another

one party knows nothing

one party cannot independently verify the information of another

information is scarce
Question 11

In the short-run for a purely competitive market, a manufacturer will stop production when:

the total revenue is less than total costs

the contribution to fixed costs is zero or less

the price is greater than AVC

operating at a loss
Question 12

All of the following are mechanisms which reduce the adverse selection problem except ____.

warranties from established enterprises with non-redeployable assets

high interest rates

large collateral requirements

brand names and product-specific promotions and retail displays

higher prices in repeat customer transactions
Question 13

In the long-run, firms in a monopolistically competitive industry will

earn substantial economic profits

tend to just cover costs, including normal profits

seek to increase the scale of operations

seek to reduce the scale of operations
Question 14

Regulatory agencies engage in all of the following activities except _______.

controlling entry into the regulated industries

overseeing the quality of service provided by the firms

setting federal and state income tax rates on regulated firms

setting prices that consumers will pay
Question 15

____ as practiced by public utilities is designed to encourage greater usage and therefore spread the fixed costs of the utility’s plant over a larger number of units of output.

Inverted block pricing

Block pricing

First degree price discrimination
Question 16

In natural monopoly, AC continuously declines due to economies in distribution or in production, which tends to found in industries which face increasing returns to scale. If price were set equal to marginal cost, then:

price would equal average cost.

price would exceed average cost.

price would be below average cost.

price would be at the profit maximizing level for natural monopoly
Question 17

The practice by telephone companies of charging lower long-distance rates at night than during the day is an example of:

inverted block pricing

second-degree price discrimination

first-degree price discrimination

none of the above
Question 18

Of the following, which is not an economic rationale for public utility regulation?

production process exhibiting increasing returns to scale

constant cost industry

avoidance of duplication of facilities

protection of consumers from price discrimination
Question 19

The demand curve facing the firm in ____ is the same as the industry demand curve.

pure competition

monopolistic competition

oligopoly

pure monopoly
Question 20

Even ideal cartels tend to be unstable because

firms typically prefer competition to collusion as competition, because it leads to more profits.

collusion leads to lowest possible overall profits in the industry.

oligopolistic managers are extremely risk loving.

firms can benefit by secretly selling more than they promised the other firms
Question 21

A(n) ____ is characterized by a relatively small number of firms producing a product.

monopoly

syndicate

cooperative

oligopoly
Question 22

In a kinked demand market, whenever one firm decides to lower its price,

other firms will automatically follow.

none of the other firms will follow.

one half of the firms follow and one half of the firms don’t follow the price cut.

other firms all decide to exit the industry

all of the other firms raise their prices.
Question 23

The existence of a kinked demand curve under oligopoly conditions may result in

volatile prices

competitive pricing.

prices above the monopoly price.

an increase in the coefficient of variation of prices.

price rigidity
Question 24

Some market conditions make cartels MORE likely to succeed in collusion. Which of the following will make collusion more successful?

The products are heterogeneous

The orders are small and frequent

The firms are all about the same size

Costs differ across the firms

Firms are geographically widely scattered
Question 25

A cartel is a situation where firms in the industry

have an agreement to restrict output.

agree to produce identical products.

obey the rules of dominant firm price leadership.

experience the pain of a kinked demand curve.

VERSION 5
Question 1

Theoretically, in a long-run cost function:

all inputs are fixed

all inputs are considered variable

some inputs are always fixed

capital and labor are always combined in fixed proportions

Question 2

The degree of operating leverage is equal to the ____ change in ____ divided by the ____ change in ____.

percentage; sales; percentage; EBIT

unit; sales; unit; EBIT

percentage; EBIT; percentage; sales

unit; EBIT; unit; sales

Question 3

In the linear breakeven model, the difference between selling price per unit and variable cost per unit is referred to as:

variable margin per unit

variable cost ratio

contribution margin per unit

target margin per unit

Question 4

George Webb Restaurant collects on the average \$5 per customer at its breakfast & lunch diner. Its variable cost per customer averages \$3, and its annual fixed cost is \$40,000. If George Webb wants to make a profit of \$20,000 per year at the diner, it will have to serve__________ customers per year.

10,000 customers

20,000 customers

30,000 customers

40,000 customers

50,000 customers

Question 5

Break-even analysis usually assumes all of the following except:

in the short run, there is no distinction between variable and fixed costs.

revenue and cost curves are straight-lines throughout the analysis.

there appears to be perfect competition since the price is considered to remain the same regardless of quantity.

the straight-line cost curve implies that marginal cost is constant.

Question 6

In the linear breakeven model, the breakeven sales volume (in dollars) can be found by multiplying the breakeven sales volume (in units) by: