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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. Answer 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: Answer 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: Answer 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: Answer 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. Answer linear; increase linearly quadratic; are constant 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: Answer 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: Answer 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 Answer that the customer already knows whose performance is highly unusual whose quality is undetectable when purchased not likely to cause repeat purchases Question 9 Under asymmetric information, Answer 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 Answer 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 Answer 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 Answer 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 ____. Answer 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: Answer 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? Answer 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. Answer Peak load pricing 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. Answer similar, similar elastic, lower elastic, higher inelastic, lower inelastic, higher Question 18 Declining cost industries Answer 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. Answer 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. Answer price output marketing strategy inventory Question 21 “Conscious parallelism of action” among oligopolistic firms is an example of ____. Answer 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 Answer 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, Answer 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? Answer 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. Answer average total cost average profit marginal profit marginal cost marginal revenue VERSION 2 Question 1 The short-run cost function is: Answer 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: Answer 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. Answer 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 ____. Answer 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: Answer 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: Answer 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: Answer 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, Answer 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: Answer 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: Answer 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 ____. Answer 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 Answer 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: Answer 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. Answer similar, similar elastic, lower elastic, higher inelastic, lower inelastic, higher Question 15 Declining cost industries Answer 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. Answer pure competition monopolistic competition oligopoly pure monopoly Question 17 Of the following, which is not an economic rationale for public utility regulation? Answer 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: Answer 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. Answer oligopoly monopoly pure competition substitution monopolistic competition Question 20 The existence of a kinked demand curve under oligopoly conditions may result in Answer 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. Answer 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? Answer 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 Answer 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? Answer public utilities air transport industry liquor retailers wheat farmers Question 25 A cartel is a situation where firms in the industry Answer 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. have a barometric price leader THIRD VERSION Question 1 Theoretically, in a long-run cost function: Answer 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: Answer 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. Answer 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: Answer 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. Answer linear; increase linearly quadratic; are constant cubic; increase linearly linear; are constant 4 points Question 6 Break-even analysis usually assumes all of the following except: Answer 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: Answer 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: Answer 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: Answer cost profit price total revenue 4 points Question 10 A “search good” is: Answer 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 Answer one party to the exchange possesses different information than another one party has more 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 Answer that the customer already knows 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 ____. Answer 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 _______. Answer 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: Answer 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. Answer similar, similar elastic, lower elastic, higher inelastic, lower inelastic, higher 4 points Question 17 Declining cost industries Answer 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? Answer 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. Answer 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. Answer 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? Answer 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? Answer 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 Answer 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, Answer 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 Answer 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. Answer 10,000 customers 20,000 customers 30,000 customers 40,000 customers 50,000 customers Question 2 The short-run cost function is: Answer 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: Answer 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. Answer linear; increase linearly quadratic; are constant cubic; increase linearly linear; are constant Question 5 The degree of operating leverage is equal to the ____ change in ____ divided by the ____ change in ____. Answer 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: Answer 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: Answer 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, Answer 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 Answer 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 Answer one party to the exchange possesses different information than another one party has more 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: Answer 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 ____. Answer 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 Answer 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 _______. Answer 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. Answer Peak load pricing 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: Answer 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: Answer inverted block pricing second-degree price discrimination peak-load pricing first-degree price discrimination none of the above Question 18 Of the following, which is not an economic rationale for public utility regulation? Answer 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. Answer pure competition monopolistic competition oligopoly pure monopoly Question 20 Even ideal cartels tend to be unstable because Answer 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. Answer monopoly syndicate cooperative oligopoly Question 22 In a kinked demand market, whenever one firm decides to lower its price, Answer 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 Answer 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? Answer 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 Answer 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. have a barometric price leader VERSION 5 Question 1 Theoretically, in a long-run cost function: Answer 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 ____. Answer 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: Answer 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. Answer 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: Answer 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: Answer