Economics of Industrial Organization Practice Questions
Course Introduction
Economics of Industrial Organization explores the structure, conduct, and performance of firms and industries in the marketplace. The course examines how firms acquire and sustain market power, the role of government regulation and antitrust policies, and the strategic behavior of firms in various competitive environments. Topics include pricing strategies, product differentiation, barriers to entry, collusion, mergers and acquisitions, and innovation, drawing on both theoretical models and empirical case studies to analyze real-world industrial markets.
Recommended Textbook
Transactions and Strategies 1st Edition by Robert J. Michaels
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Chapter 1: Reasoning With Economics: Models and Information
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Sample Questions
Q1) Which of the following is a positive statement?
A)Heavy snowfall drives up the demand for heaters.
B)Fiscal expenditures should be increased to combat recession.
C)Government should encourage foreign direct investments to generate employment.
D)Organs trade should be banned across nations.
Answer: A
Q2) 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:
A)bounded rationality.
B)selfishness.
C)altruism.
D)systematically missed opportunities.
Answer: D
Q3) Which of the following is an example of a physical constraint?
A)The work you can perform on 1,500 calories a day.
B)The wages you can earn against each hour of work.
C)The bank balance of an individual at any point of time.
D)The contract price at which you agree to sell your house.
Answer: A
Page 3
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Chapter 2: Transactions and Institutions: the Building Blocks
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Sample Questions
Q1) Suppose a buyer hires an interpreter who charges $5 to negotiate a deal with a seller.The buyer's valuation of the good is $50 and the seller's opportunity cost is $35.If the net benefit to the buyer is equal to the same received by the seller, what is the price agreed upon by the two parties?
A)$42
B)$40
C)$44
D)$38
Answer: B
Q2) Standardized goods and services sold in the market are likely to have high switch-over costs.
A)True
B)False
Answer: False
Q3) What causes an economy to produce a level of output which lies inside the production set?
Answer: Inefficient use of resources causes an economy to produce an output which lies inside a production set.
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Chapter 3: Markets
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Sample Questions
Q1) Why does the elasticity of demand for a commodity change over time?
Answer: Elasticity of demand for a good can change over time, as experience in using it accumulates, information about substitutes becomes available, and the costs of adjusting its use falls.
Q2) The own-price elasticity of demand is defined as:
A)the ratio of a change in quantity demanded and the change in price.
B)the ratio of the percentage change in quantity demanded to the percentage change in price.
C)the ratio of the percentage change in quantity demanded to the percentage change in input prices.
D)the ratio of a change in output and the change in input usage.
Answer: B
Q3) If cheese spreads and butter are substitutes, an increase in the price of butter will:
A)shift the demand curve for cheese spreads upward.
B)shift the demand curve for cheese spreads downward.
C)shift the demand curve for butter upwards.
D)shift the demand curve for butter downward.
Answer: A
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Chapter 4: Cost and Production
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Sample Questions
Q1) How is the optimal level of input usage to produce a certain output identified with the help of isocosts and isoquants?
Q2) Which of the following cases exhibit increasing returns to scale?
A)Output increases by 5 percent when inputs are increased by 6 percent.
B)Output increases by 6 percent when inputs are increased by 5 percent.
C)Output increases by 7 percent when inputs are increased by 7 percent.
D)Output declines by 2 percent when inputs are increased by 1 percent.
Q3) An isoquant is the locus of the different combinations of inputs that produce the same level of output.
A)True
B)False
Q4) The relationship between inputs used by a firm and output produced is given by the cost function.
A)True
B)False
Q5) The gap between average total cost and average variable cost:
A)is constant at all ranges of output.
B)is high at high levels of production.
C)declines as output expands.
D)depends on the production technology.
Page 6
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Chapter 5: Extreme Markets I: Perfect Competition
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Sample Questions
Q1) When the existing firms in a competitive industry have different operating costs:
A)the highest-cost firm in operation breaks even, while the low cost firms will earn profit.
B)the highest-cost firm in operation breaks even, while the low cost firms leave the industry.
C)the low cost firms earn a larger profit than the high-cost firms.
D)the highest-cost firms will incur a deadweight loss.
Q2) How is the short run response to a change in demand or cost condition different from the long run response in a perfectly competitive market?
Q3) The long-run supply curve of a perfectly competitive market is a:
A)an upward rising step function.
B)a downward sloping step function.
C)a vertical line at the market price.
D)a horizontal line at the market price.
Q4) In the market for oranges, availability of substitutes limits a single seller's power over price.
A)True
B)False
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Chapter 6: Extreme Markets II: Monopoly
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Sample Questions
Q1) _____ is the practice of using extra resources to compete for obtaining monopoly, and leads to _____.
A)X-inefficiency; a deadweight loss
B)Rent seeking; a deadweight loss
C)X-inefficiency; a loss in producer surplus
D)Rent seeking; a loss in producer surplus
Q2) Refer to Figure .Which of the following conclusions can be drawn from this figure?
A)The monopolist produces at the point where marginal cost is zero.
B)The monopolist incurs a fixed marginal cost of OC'.
C)The monopolist charges a price of OP' and total revenue is OP'D'Q'.
D)The consumer surplus enjoyed by customers is PC'D".
Q3) Monopolies exist for each of the following reasons, EXCEPT:
A)competitors are legally unable to challenge them.
B)they have control over resources with very few good substitutes.
C)it is sometimes inefficient to have competition in certain markets.
D)it increases both producer and consumer surplus.
Q4) When can a monopolist practice price discrimination?
Q5) Identify some of the basic assumptions of monopoly.
Q6) How does a monopolist choose the profit maximizing output-price combination?
Page 8
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Chapter 7: Between the Extremes: Interaction and Strategy
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Sample Questions
Q1) Refer to Figure .If the supply curve of the fringe SF becomes steeper, which of the following changes will be observed in the oligopoly market?
A)The residual demand curve DRES will become less elastic
B)The dominant firm's profits will decrease
C)The fringe's profit will decrease
D)The dominant firm's market share will decrease
Q2) In a first-price auction:
A)the lowest bidder receives its actual bid as a payment for the job.
B)the lowest bidder wins the bid and pays the amount bid by the first runner-up.
C)the bidder bids less than its cost and incurs a loss.
D)the lowest bidder wins the bid and has to pay the actual bid for the good.
Q3) How does the existence of the fringe alter the price and output in an oligopoly market?
Q4) Refer to Figure .If the two producers agree to act as a single monopoly firm, what will be the total output produced in the economy?
A)10 units
B)6 units
C)12 units
D)3 units
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Chapter 8: Competition and Strategy
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Sample Questions
Q1) On which two factors do the consequences of a merger depend?
Q2) When can a seller's investment in reducing transaction cost increase the price of the product to customers but still leave them better off?
Q3) A person with no competitive ideas can earn above market average returns at low risk by investing in a diversified portfolio of stocks.
A)True
B)False
Q4) Refer to Figure .If the firm purchases a new machinery which produces fewer defective units of output using the same variable inputs as before, which of the following changes will be observed? (Assume that consumers suffer losses from defective units that they cannot otherwise recover.)
A)The marginal cost curve will shift upward from MC to MC'.
B)The marginal cost and demand curve will shift upward to MC' and MR' respectively.
C)The marginal revenue and demand curve will shift upward to MR' and D' respectively.
D)The marginal cost and marginal revenue will shift upward to MC' and MR' respectively
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Chapter 9: Beyond Markets; Property and Contracts
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Sample Questions
Q1) Which of the following activities can create a beneficial externality?
A)Parking cars on the road in front of your house.
B)Encouraging children to play on the field opposite a hospital.
C)Planting colorful flowers in your garden.
D)Practicing and playing drums in the morning hours.
Q2) Refer to Table .What will be the payoff to each producer in the presence of a unitization contract?
A)Each producer will earn $10
B)Frasel will earn $6 while Mike will earn $16
C)Frasel will earn $16 while Mike will earn $6
D)Each well owner will earn $14.
Q3) Contracts are usually less costly to arrange and enforce than spot market transactions, and they bring benefits that are unobtainable in spot markets.
A)True
B)False
Q4) Why are inclusive property rights considered to be sources of wealth?
Q5) What are the fundamentals of Coasian reasoning?
Q6) Define a contract and explain with examples.
Q7) What are property rights?
Page 11
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Chapter 10: The Economics of Contracts
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Sample Questions
Q1) Assume that James owns a wheat farm that produces an annual crop of 500 bushels.His only choice is to store it in a nearby grain elevator owned by Martin, whose facility will be empty unless James is using it.Martin contracts with James to provide storage at $5 per bushel every month.In this example James and Martin are in:
A)probabilistic positions.
B)asymptotic positions.
C)hypothetical positions.
D)symmetric positions.
Q2) A contract may remain incomplete because the expected benefits of greater completeness do not cover the costs of drafting it.
A)True
B)False
Q3) If parties to a contract can anticipate the court's decision in the event of a dispute with some degree of certainty:
A)opportunistic behavior will never be detected.
B)opportunistic behavior will be partially detected.
C)there will be less room for opportunism.
D)only one of the parties will be able to act opportunistically.
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Chapter 11: Risk and Information in Contracts
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Sample Questions
Q1) Which of the following is an example of a non-price provision in an automobile insurance contract that can reduce moral hazard?
A)A provision specifying that coverage is limited to 75 percent of the total damages caused by an accident.
B)A provision that disallows medical claims by drunk drivers involved in accidents.
C)A provision that restricts accident compensation to claims over $1,000.
D)A provision requiring that the insured car carry certain safety devices like air bags.
Q2) If too many high risk policyholders migrate to a comprehensive health insurance plan which covers a wide range of treatments, the price of a policy must increase.
A)True
B)False
Q3) An individual can avoid risks associated with a transaction by purchasing insurance. A)True B)False
Q4) How does asymmetric information affect a contract?
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Chapter 12: Organizations in Concept and Practice
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Q1) Large shareholders can sometimes influence a corporation's decisions without making efforts to replace its management.
A)True
B)False
Q2) Partnerships whose members have _____ can face difficult problems operating and reaching decisions.
A)diverse functions
B)specialized functions
C)multiple functions
D)limited functions
Q3) Why is it necessary to separate the management function in an organization from those of finance and residual claimancy?
Q4) Which of the following is true of a corporation's stock?
A)Stocks are highly illiquid assets.
B)Stocks can be easily transferred from one person to another.
C)Dividends declared on stocks are not subject to personal income tax.
D)Dividend declared on stocks assure a steady income to the stockholders.
Q5) Explain the reasons for separating ownership and management in all large organizations.
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Chapter 13: Organizational Design
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Sample Questions
Q1) In which of the following cases will centralization of decision making be appropriate?
A)When different departments in an organization function separately without much interrelation.
B)When information necessary for the decision making process originates from a variety of sources.
C)When the organization expands in size and its activities become more complex.
D)When all the information comes from an external source.
Q2) Define an M-form organization and discuss its advantages over a U-form organization.
Q3) One of the disadvantages of an organization which has a matrix structure is that :
A)each individual reports to one boss, causing excess flow of information to one individual.
B)flow of information is difficult when operations are so highly diversified.
C)each individual has two bosses whose interests may not be aligned.
D)there are limits to the information a firm's headquarters can use effectively in making decisions.
Q4) When is centralization of decision-making desirable?
Q5) Identify a disadvantage of organizational charts.
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Chapter 14: Vertical Relationships
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Sample Questions
Q1) _____ and _____ are major factors in de-integration, which act in opposite directions.
A)Vertical restraints; opportunism
B)Uncertainty; volumetric interdependence
C)Asset specificity; uncertainty
D)Volumetric interdependence; vertical restraints
Q2) The invention of the Bessemer converter in 1856:
A)increased the cost of continuous and coordinated operations of a steel industry.
B)motivated downstream integration of the steel industry into coal mining.
C)increased the efficient scale of steel production.
D)increased volumetric interdependence between different stages of steel production.
Q3) Explain the three dimensions of uncertainty which affects the choice among markets, contracts, and integration.
Q4) The maximum price pipelines can charge for distributing gas:
A)is determined in a monopolistic market.
B)depends on the market demand and supply.
C)is set by the federal government.
D)is always above the legal minimum.
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Chapter 15: Employment Relationships
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Q1) Hourly wages solve the problem of monitoring waiters' performances for a restaurant owner.
A)True
B)False
Q2) If wage falls below the rate determined by the market equilibrium, in which direction will it move and why?
Q3) A competitive firm hires workers as long as:
A)marginal product of labor is positive.
B)value of marginal product of labor is positive.
C)marginal product of labor is greater than the wage rate.
D)value of marginal product of labor is greater than the wage rate.
Q4) Over the long run, migration by workers to higher-wage regions:
A)allows wages to equalize across regions.
B)explains why wage differentials may persist.
C)causes disequilibrium in the labor market.
D)increases wages further in those regions.
Q5) Michael gets his first job after graduation with a weekly pay of $80.This implies that his productivity is less than $80.
A)True
B)False
Page 17
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Chapter 16: Time, Risk and Options
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Q1) According to the Black-Scholes formula, the price of a European call option depends on its strike price, the current price of the underlying asset, the volatility of the underlying's price, the time to expiration, and the interest rate.
A)True
B)False
Q2) Which of the following properties can be associated with an indifference curve of a risk-averse investor?
A)Indifference curve for a risk-averse investor is a vertical line parallel to the variance axis.
B)Two indifference curves can intersect at the equilibrium combination of risk and return. C)An indifference curve closer to the expected return axis gives a better utility than the one farther away.
D)Indifference curve for a risk-averse investor is always downward sloping.
Q3) When do financial options prove to be beneficial?
Q4) How is the writer of an option affected by changes in its stock price?
Q5) How is the optimal degree of diversification of a portfolio determined?
Q6) Point out the relevance of the Bayes' theorem.
Q7) Why are present value calculations used in real options?
Page 18
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Chapter 17: Conflict, Negotiation and Group Choice
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Q1) The value of goods produced by coalition A is worth $50, and by coalition B is worth $30.If together they produce $100 of them, the game is called superadditive.
A)True
B)False
Q2) Identify the correct statement from the following.
A)Good faith bargaining implies the seller will never decrease the price for a particular buyer.
B)Distrust is the norm when electricity producers negotiate a deal to exchange power by misrepresenting their costs.
C)Poker is the exception where norms do not come into play.
D)Good faith bargaining norms vary among different types of transactions.
Q3) What aspects of bargaining can affect market outcomes?
Q4) Which of the following statements is true about voting results if preferences are intransitive?
A)The result of voting never reflects majority preferences.
B)It is impossible to predict the outcome when preferences are intransitive.
C)The person who sets the agenda (sequence of votes) may be able to control the outcome.
D)Only a Borda Count yields a unique result when preferences are intransitive.
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