Industrial Organization Exam Preparation
Guide
Course Introduction
Industrial Organization explores the functioning of firms and industries in imperfectly competitive markets, focusing on how market structures, firm behavior, and government policies influence competition and economic outcomes. Students will examine topics such as pricing strategies, product differentiation, barriers to entry, collusion, mergers, and antitrust regulations, using both theoretical models and empirical evidence. The course equips students with analytical tools to understand the strategic interactions among firms and to assess the broader implications for consumers, market efficiency, and public policy.
Recommended Textbook
Managerial Economics 5th Edition by Luke M. Froeb
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21 Chapters
1734 Verified Questions
1734 Flashcards
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Page 2
Chapter 1: The One Lessor of Business
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54 Verified Questions
54 Flashcards
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Sample Questions
Q1) A consumer values a car at $30,000 and a producer values the same car at $20,000.The transaction will not take place if a tax is imposed
A)equal to the seller surplus
B)smaller than the total surplus
C)larger than the total surplus
D)smaller than the buyer surplus
Answer: C
Q2) Price ceilings cause
A)Some suppliers to drop out of the market
B)A decrease in the total production in the market
C)The creation of black markets
D)All the above
Answer: D
Q3) A good policy ________________ and a bad policy _________________.
A)Moves an asset to higher value use;moves an asset to lower value use
B)Moves an asset to lower value use;moves an asset to higher value use
C)Refrains from any government intervention;concentrates on government intervention
D)Concentrates on government intervention;refrains from government intervention
Answer: A
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Page 3
Chapter 2: Benefits, Costs, and Decisions
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Sample Questions
Q1) Scott used $4,000,000 from his savings account that paid an annual interest of 5% and a $60,000 loan at an annual interest rate of 5% to purchase a hardware store.After one year,Scott sold the business for $4,100,000. His economic profits is:
A)$300,000
B)$100,000
C)$97000
D)None.He runs an economic loss of $103,000
Answer: D
Q2) People tend to eat more at all you can eat buffets than they would at any other restaurants.This is so because the cost of consuming an additional item at an all you can eat buffet is
A)negative
B)zero
C)positive
D)None of the above
Answer: B
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4
Chapter 3: Extent How Much Decisions
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Sample Questions
Q1) A firm produces 1000 units per week.It hires 10 full-time workers (40 hours/week each)at an hourly wage of $20.Raw materials costs $5 per unit. Rent for the factory is $1,500 per week.What are the overall costs for the week?
A)total variable cost is $5,000;total fixed cost is $1,500;total cost is $6,500
B)total variable cost is $5,000;total fixed cost is $9,500;total cost is $14,500
C)total variable cost is $13,000;total fixed cost is $1,500;total cost is $14,500
D)total variable cost is $13,000;total fixed cost is $9,500;total cost is $22,500
Answer: C
Q2) When economists speak of "marginal",they mean
A)Opportunity
B)Scarcity
C)Incremental
D)Unimportant
Answer: C
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Chapter 4: Investment Decisions: Look Ahead and Reason
Back
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Sample Questions
Q1) A firm sells 1000 units per week.It charges $15 per unit,the average variable costs are $10,and the average costs are $25.In the long run,the firm should
A)Shut-down as the firm is making a loss of $10,000 per week
B)Shut-down as price is lower than average cost
C)Continue operating as the firm is covering all the variable costs and some of the fixed costs
D)Shut-down because it is cost effective to pay off the remaining fixed costs
Q2) In the short-run,a firm's decision to shut-down should not take into consideration
A)Avoidable costs
B)Variable costs
C)Fixed costs
D)Marginal costs
Q3) If the annual interest rate is 10%,the net present value of receiving $550 in the next year is:
A)$550
B)$551
C)$549
D)$500
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Chapter 5: Simple Pricing
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Sample Questions
Q1) Jim recently graduated from college.His income increased dramatically;from$5000 a year to $60,000 a year.Jim decides that instead of using the bus,he would buy a car.This implies that
A)The car is a normal goods for Jim
B)The car is an inferior goods for Jim
C)The bus and the car are complementary for Jim
D)Need information on the price of cars
Q2) A product can be classified as an inferior good if an increase in the income causes
A)A decrease in the quantity demanded
B)A decrease in demand
C)An increase in demand
D)An increase in the quantity demanded.
Q3) If potatoes are inferior goods,which of the following will increase the demand for potatoes?
A)Increase in the price of a complement
B)Decrease in income
C)Decrease in the price of a substitute
D)Increase in income
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Chapter 6: Economies of Scale and Scope
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Sample Questions
Q1) The law of diminishing marginal productivity states that
A)As you expand output,your marginal productivity eventually increases
B)As you expand output,your marginal productivity eventually declines
C)As you expand output,the total product eventually increases
D)None of the above
Q2) All the factors below are causes of diminishing marginal returns,except
A)Difficulty of monitoring and motivating larger workforces
B)Increasing complexity of larger systems
C)Specialization and division of Labor
D)The "fixity' of some factor
Q3) If long run average costs are constant with respect to output,you have
A)Increasing returns to scale
B)Decreasing returns to scale
C)Constant returns to scale
D)None of the above
Q4) What are economies of scope?
A)lower average costs when multiple different products are produced
B)higher average costs when multiple different products are produced
C)Constant average costs when multiple different products are produced
D)none of the above
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Chapter 7: Understanding Markets and Industry Changes
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Sample Questions
Q1) In the market for used cars we have 10 sellers,willing to sell at the prices of $1000,$2000,$3000,$4000,$5000,$6000,$7000,$8000,$9000,$10000.If the equilibrium price in the market is $2500,how many cars would be sold?
A)1
B)2
C)3
D)4
Q2) Peter's Pizzeria sells both pizzas and wings.It wants to increase the sales of its pizzas.Assuming that the pizza and the wings are complements,which of these strategies can it employ?
A)Increase the price of the wings
B)Decrease the price of the wings
C)Increase the quality of the pizza
D)Both B & C
Q3) The change in any factor other than ________ would shift the demand curve
A)Weather
B)interest rate
C)Price
D)all of the above
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Page 9
Chapter 8: Market Structure and Long Run Equilibrium
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Sample Questions
Q1) A market tends to be monopolistic if
A)The good has too many substitutes
B)The good has very few substitutes
C)There are too many rivals
D)The good has too few complements
Q2) Two cities A&B are deciding upon joint pollution laws.Right now they both face identical prices for their housing.If they decide that city A is to be a pollution free city "Clean town" and all the factories would locate in city B "Smogville",in the long run,we expect to see
A)Asthmatics moving to Cleantown
B)Poorer families moving to Smogville
C)Residents in both the cities relocating based on their tolerance for pollution
D)All of the above
Q3) Competitive firms can earn positive profits in the
A)Long run only
B)Long run and the short run
C)Short run only
D)All of the above
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Chapter 9: Strategy: the Quest to Keep Profit From Eroding
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Sample Questions
Q1) Intense market competition is ________ for producers,since it_______.
A)Bad;erode consumer surplus
B)Bad,erode producer profits
C)Good,increase the price level in the market
D)Good;decrease the price level in the market
Q2) Typical structure characteristics of interest to Industrial Organization researchers include
A)Barriers to entry
B)Product differentiation among firms
C)The number and size distribution of firms
D)All of the above
Q3) All of the following are examples of entry barriers,except
A)Government protection through patents or licensing requirements
B)Strong brands
C)Low capital requirements for entry
D)Lower costs driven by economies of scale
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11
Chapter 10: Foreign Exchange, Trade, and Bubbles
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83 Flashcards
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Sample Questions
Q1) The term to describe one currency in terms of another is called
A)The interest rates
B)The market price
C)The inflation rate
D)The exchange rate
Q2) John wants to buy a new lawn mower.He can either buy it in the US and pay $500 or buy it in Mexico and pay 6188 Mexican Pesos.At the exchange rate of 1 Mexican Peso=0.771US$,ignoring any other costs,he would
A)Prefer buying in the US
B)Prefer buying in Mexico
C)Be indifferent about where he buys his television
D)None of the above
Q3) A widget costs $1000 in the US and CAD$1200 in Canada.The current exchange rate is 1USD=1.09CAD.Given purchasing power parity,the Canadian dollar would_______to equilibrate prices
A)Appreciate
B)Depreciate
C)Not change
D)None of the above
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Page 12
Chapter 11: More Realistic and Complex Pricing
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72 Flashcards
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Sample Questions
Q1) The general rule to increase profits when two close substitute brands are jointly owned is
A)Increase prices for both brands
B)Decrease prices for both brands
C)Increase prices on one brand,decreasing it for the other
D)Increase prices on one brand,keeping the prices of the second brand constant
Q2) Firm X owns both a grocery store and the parking lot outside the grocery store.In order to increase the traffic at the store it must
A)Decrease the prices on the goods sold in the store
B)Decrease the parking rates
C)All of the above
D)None of the above
Q3) Why would large department stores such as Home Depot rather face shortages than increase the prices of basic food and repair items in cases of natural disasters such as Hurricanes?
A)They do not want to increase sales
B)They are maximizing sales
C)They do not want to be viewed as unfair
D)All of the above
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Page 13
Chapter 12: Direct Price Discrimination
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84 Flashcards
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Sample Questions
Q1) For a retailer buying from a wholesaler,volume discounts do not violate the Robinson-Patman act because
A)To sell larger volumes,the retailer himself has to offer discounts
B)To sell larger volumes,the retailer has to incur costs in promoting the item
C)To sell larger volumes,the retailer has to hold the items in inventory longer
D)All of the above
Q2) Which of the following is an example of the "metering" strategy
A)A doll company selling dolls at cost but charging high margins on doll accessories
B)A cell phone company offers free locked in phones but charges high prices per call
C)A catering company pays its chefs higher wages to make sure that the bargain meals are just slightly burnt
D)Only A&B
Q3) Amusement parks often offer discounts to locals with IDs.This is an example of
A)A direct discrimination scheme
B)An indirect discrimination scheme
C)Diminishing marginal returns
D)Vertical integration
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14
Chapter 13: Strategic Games
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91 Flashcards
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Sample Questions
Q1) What is the Nash equilibrium of this simultaneous game?
A)Steal,Vigilant
B)Steal,Not vigilant
C)Not steal,Vigilant
D)The game has no Nash equilibrium
Q2) Hire Consultants
A firm and its supplier are going to negotiate a deal.Since the supplier's cost is $10 million per quarter and the value to the firm is $14 million per quarter,there is $4 million per quarter to split between the two.However,they can each hire a negotiation consultant for $500,000 per negotiation.If neither hires the consultant,each expects to get half of the $4 million pot.If only one hires the consultant,it expects to get three-fourths of the pot minus the consultant costs.If they both hire consultants,they cancel each other out and they expect to get half the pot minus the consulting costs.What is the equilibrium of this simultaneous move game?
Q3) If Tattling Tina wants to not be hit,what strategy could she follow
A)Threaten to not tell
B)Always not tell
C)Threaten to tell
D)All of the above
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Page 15
Chapter 14: Bargaining
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Sample Questions
Q1) Jim is haggling with a car dealer on the price of a used car.During the bargaining,the storekeeper discovers that the car's stereo is better than he or Jim originally realized.If Jim is a huge music fan,the total surplus available from the sale
A)Increases
B)Decreases
C)Is not affected
D)All of the above
Q2) Armpit Homunculus
Prescott Pharmaceuticals is facing class action suit over side effects caused by its latest growth supplement.The lawyers representing the class are asking $200 million because they claim Prescott knew about and hid the fact that the supplement caused Armpit Homunculus.Prescott claims it had no foreknowledge of this and can take their chance at trial where they expect a $50 million payment.Just before the trial date,an internal Prescott email is discovered in which Dr.Colbert,D.F.A.is joking about "how hideous the armpits will be on all these giants." How does this affect the likely cost of settling the case?
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Page 16
Chapter 15: Making Decisions With Uncertainty
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Sample Questions
Q1) To better align your agent's incentives to your own when buying securities
A)Offer the agent a high price
B)Offer the agent a low price
C)Offer the agent a price based on performance of the security
D)All of the above
Q2) Three possibilities are equally likely and have payoffs of $3,$6,and $9.The expected value is:
A)$4
B)$5
C)$6
D)$7
Q3) Launching the simplified version would be a mistake for probabilities less than ___?
A)0.6
B)0.7
C)0.8
D)1.0
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Chapter 16: Auctions
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Sample Questions
Q1) A second-price auction
A)is also called a Vickrey auction
B)is where bidders submit increasing bids until all but one remains
C)is where the sole remaining bidder wins and pays his winning bid
D)all of the above
Q2) Anna's Antiques expects to get two bidders for the unique china teacup it sells.Each of the bidders can either have a high-value of $100 or a low-value of $70 with equal probability.If Anna instead holds an oral auction between the two bidders and one bidder of each type shows up,she earn ___ from the auction.
A)Just above $100
B)$100
C)Just above $70
D)$70
Q3) Ebay's use of "bidding agents" will
A)effectively turn an English auction into a Vickery auction
B)effectively turn a Vickery auction into an English auction
C)decide how much to shade your bid for you
D)make you a more aggressive bidder
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Chapter 17: The Problem of Adverse Selection
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Sample Questions
Q1) The following is an example of adverse selection
A)A majority of those applying for well paid jobs are well qualified
B)More reckless drivers opt for cars with more safety devices
C)Individuals living in less secure neighborhoods want to buy less insurance
D)Individuals with a strong family history of heart diseases opt to buy less insurance
Q2) An indication that Insurance companies anticipate adverse selection is
A)they do not require a deductible
B)they classify clients into different risk types according to their claim history
C)they do not classify clients into different risk types according to pre-existing conditions
D)they do not require a co-payment
Q3) The following is not an example of risk aversion
A)you lock your garage when you have expensive workshop tools
B)you are more careful when you buy a more expensive car
C)Individuals tend to gamble more with their money when the future is certain
D)you only go swimming when the lifeguard is not on duty
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Chapter 18: The Problem of Moral Hazard
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Sample Questions
Q1) An example of moral hazard is
A)workers working diligently even though the boss is not looking
B)health care insured employees forgoing their diet and exercise
C)drivers of safer cars turning their phones off before driving
D)borrowers investing their loan proceeds exactly as the bank requires
Q2) Moral hazard is caused by
A)Hidden actions
B)Hidden information
C)Both of the above
D)None of the above
Q3) An example of moral hazard is
A)A taxi driver paid per mile taking the shortest route
B)a piece-rate garment worker shirking more than a per hour worker
C)an hourly salesman working less hard than a commission salesman
D)an author on contract going to as many book signings as one with a percentage royalty rate
Q4) Rental Car Maintenance
Why do rental cars require more maintenance in their first 50,000 miles than comparable cars driven by private owners?
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Chapter 19: Getting Employees to Work in the Firms Best Interest
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Sample Questions
Q1) As a result of moving more decision making from the periphery of the organization toward the center,typically
A)the flow of relevant information to the decision maker can be weakened
B)the flow of relevant information from the decision should be enhanced
C)the incentive structure for the decision maker should be strengthened
D)incentive compensation at the periphery can be weakened
Q2) Which of the following is a way to reduce agency costs?
A)Change the decision maker
B)Transferring information to the decision maker
C)Change the decision maker's incentives
D)All of the above
Q3) The reason that a salaried salesman is not working diligently in making high margin sales for the principal could be
A)Adverse selection
B)Moral hazard
C)All of the above
D)None of the above
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Page 21
Chapter 20: Getting Divisions to Work in the Firms Best
Interest
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Sample Questions
Q1) A cost center
A)Records total costs of production
B)Is rewarded for increasing the costs of producing a specified output
C)Is rewarded for decreasing the costs of producing a specified output
D)None of the above
Q2) A profit center
A)Is very complicated to run and manage
B)Doesn't require a lot of attention from executives at the firm's headquarters
C)Requires the parent company's highest degree of attention
D)Does not properly incentivize the managers when it comes to their own division's performance
Q3) In a firm organized along functional lines,employee performance
A)Is easily evaluated because supervisor and employee have similar skills
B)Is more difficult to evaluate because the supervisor and the employee could have different skills
C)Does not need to be evaluated
D)None of the above
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Page 22
Chapter 21: Managing Vertical Relationships
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Sample Questions
Q1) Vertical contracts that aim to decrease retailer prices typically
A)Benefit the consumer and the manufacturer but hurt the retailer
B)Benefit the manufacturer and retailer but hurt the consumer
C)Benefit the retailer and consumer but hurt the manufacturer
D)Benefit the manufacturer,retailer and consumer
Q2) Vertical contracts between manufacturers and retailers often aim to
A)Serve as a "signal" of the manufacturer's belief of the likely success of his product
B)Reward the retailer for undertaking the risk inherent in introducing a new product
C)Reimburse the retailer for the cost of managing an extended inventory
D)All of the above
Q3) The problem of "double marginalization" is
A)The retail price being too low due to an exclusion of both manufacturer and retailer markup
B)The retail price being too high due to an inclusion of manufacturer markup
C)The retail price being too high due to an inclusion of both manufacturer and retailer markup
D)The retail price being too high due to an exclusion of retailer markup
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