Industrial Organization Exam
Preparation Guide
Course Introduction
Industrial Organization is a field of economics that examines how firms compete, how markets are structured, and how government policies influence market outcomes. This course explores the behavior of firms in different types of markets, ranging from perfect competition to monopoly and various forms of oligopoly, highlighting concepts such as pricing strategies, product differentiation, barriers to entry, and the role of information. Students will analyze real-world industries and case studies to understand the impact of mergers, antitrust policies, and regulation, with an emphasis on both theoretical models and empirical evidence.
Recommended Textbook
Microeconomics Theory and Applications 12th Edition by Edgar K. Browning
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Page 2
Chapter 1: An Introduction to Microeconomics
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Sample Questions
Q1) Explain why ticket prices sold by scalpers near the venue where an event will take place increase the closer you get to the venue.
Answer: There is a cost involved in turning back to purchase a ticket from someone standing further from the venue.
Q2) Positive economics differs from normative economics in that:
A)positive economics involves subjective outcomes.
B)positive economics deals with propositions that can be tested.
C)normative economics involves economic theory.
D)normative economics can be proved correct or incorrect.
Answer: B
Q3) Value judgments:
A)always produce predictable results.
B)are subjective opinions that cannot be proven correct on the basis of objective facts or evidence.
C)should be the basis for all serious policy discussions.
D)can always be tested and verified using accepted standards of logic and evidence.
Answer: B
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3
Chapter 2: Supply and Demand
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Sample Questions
Q1) As the price of shirts rises,the law of supply would predict a(n):
A)increase in the quantity of shirts supplied.
B)decrease in the quantity of shirts supplied.
C)increase in the supply of shirts.
D)decrease in the supply of shirts.
Answer: A
Q2) If the value of price elasticity of demand is 0.2,it implies that a 1 percent increase in price leads to a:
A)2 percent decrease in quantity demanded.
B)2 percent increase in quantity demanded.
C)0.2 percent decrease in quantity demanded.
D)0.2 percent increase in quantity demanded.
Answer: C
Q3) When the per-unit cost of producing a commodity is constant,the price elasticity of supply is:
A)zero.
B)infinite.
C)one.
D)negative.
Answer: B
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Chapter 3: The Theory of Consumer Choice
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Q1) Suppose hamburger is on the horizontal axis and pizza on the vertical axis.If you were consuming at a point on a convex indifference curve such that the slope at that point was -4,which of the following best describes your consumption bundle?
A)Your marginal utility of hamburger is 20 and for pizza it is 20.
B)Your marginal utility of hamburger is 5 and for pizza it is 10.
C)Your marginal utility of hamburger is 20 and for pizza it is 5.
D)Your marginal utility of hamburger is one-fifth that of pizza.
Answer: D
Q2) Jen does not care one way or another about blue jeans.In other words,blue jeans are a(n)_____ for Jen.
A)normal good
B)economic "bad"
C)economic "neuter"
D)inferior good
Answer: C
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5
Chapter 4: Individual and Market Demand
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Sample Questions
Q1) The bandwagon effect causes the market demand to become:
A)relatively more elastic.
B)relatively less elastic.
C)perfectly inelastic.
D)unit elastic.
Q2) Which of the following is likely to occur if a consumer's income declines with no change in the price level?
A)The consumer will shift to a lower indifference curve.
B)The consumer will consume fewer amounts of the inferior good.
C)The consumer's real income will increase.
D)The income effect on consumption will be zero.
Q3) If the price-consumption curve for X is upward-sloping,we can say that:
A)the price elasticity of demand for X is greater than one.
B)the price elasticity of demand for X is less than one.
C)X is an inferior good.
D)the price elasticity of demand for X is equal to one.
Q4) Let Jack's demand curve for coffee be given by P = 20 - Q,where P is price per cup and Q is quantity consumed per month.If Jack's monthly income is $2,500 and the price of a cup of coffee is $2,how much will consumer surplus fall if the coffee shop raises the price to $4 per cup?
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Chapter 5: Using Consumer Choice Theory
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Sample Questions
Q1) In the model of inter-temporal choice,will a person who initially consumes exactly their income in each period have more or less current consumption after a decrease in the interest rate?
Q2) A reduction in an individual's future income will cause:
A)consumption to fall in both time periods because consumption in both years are normal goods.
B)a fall in consumption in the future period but not the current period since the price of future consumption relative to current consumption did not change.
C)consumption to fall in the future period and rise in the current period as the consumer substitutes more current consumption for the future consumption.
D)an increase in current consumption if interest rates are high enough to induce consumption.
Q3) Describe the relationship among total utility,marginal utility,and preferences toward risk.
Q4) Show and explain why substituting an unrestricted cash transfer for an excise subsidy of equal cost to the government must lead to less consumption of the subsidized good and more consumption of other goods.
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Chapter 6: Exchange, Efficiency, and Prices
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Sample Questions
Q1) Economic efficiency is sometimes referred to as _____.
A)social welfare
B)Pareto optimality
C)equity
D)relative efficiency
Q2) How does a competitive exchange differ from a two-person model of exchange?
A)The Pareto criterion is satisfied only in a competitive exchange and not in a two-person exchange.
B)In two-person exchanges,the exact outcome of bargaining cannot be predicted unlike with a competitive exchange.
C)The outcomes of two-person exchanges tend to be more equitable than competitive exchanges.
D)In two-person exchanges consumers are price-takers while competitive exchange involves price-makers.
Q3) A competitive equilibrium:
A)results in an efficient and equitable allocation.
B)is characterized by equal marginal rates of substitution.
C)occurs when resources are equally allocated between different producers.
D)is not necessarily utility-maximizing.
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Page 8
Chapter 7: Production
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Sample Questions
Q1) A production function embodies increasing,constant,and decreasing returns to scale:
A)when the proportion of capital to labor used in production is constant.
B)at low output levels.
C)in the short-run.
D)at various points on an isoquant.
Q2) Which of the following is true of fixed costs?
A)Fixed costs can be changed,but it is extremely costly to do so in a short period of time.
B)Fixed costs cannot be changed in the long-run.
C)Fixed costs can be changed,but only in the short run.
D)Fixed costs cannot be changed in the short-run,because most firms experience constant returns to scale in the short run.
Q3) Estimation of a production function from the linear equation Q = a + bL + cK,assumes that the law of diminishing returns _____.
A)applies to labor only
B)applies to capital only
C)applies to both capital and labor
D)does not apply to either input
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Chapter 8: The Cost of Production
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Sample Questions
Q1) Suppose the wage rate is $15 per hour and the rental rate of capital is $10 per hour.If the
Marginal product of labor is 60 and the marginal product of capital 10,the profit maximizing firm should:
A)hire more labor and less capital.
B)utilize more capital and less labor.
C)maintain its current input mix of capital and labor.
D)employ more of both capital and labor.
Q2) Which of the following is true?
A)Diseconomies of scale imply increasing returns to scale.
B)Increasing returns to scale implies diseconomies of scale.
C)Increasing returns to scale implies economies of scale.
D)Economies of scale imply increasing returns to scale.
Q3) If the marginal product of labor is four times the marginal product of capital and the price of labor is twice the price of capital,then:
A)labor will be substituted for capital by a profit maximizing firm.
B)capital will be substituted for labor by a profit maximizing firm.
C)output cannot be expanded any further by using the same input levels.
D)input usage should be left unchanged.
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Page 10
Chapter 9: Profit Maximization in Perfectly Competitive Markets
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Sample Questions
Q1) Refer to Figure 9-4.If the firm chooses to shut down when the market price is $P,what is the loss it would incur?
A)KTVP
B)GTVS
C)GKPS
D)TBOV
Q2) The short-run supply curve for the firm operating in a perfectly competitive industry is:
A)its marginal cost curve.
B)its marginal cost curve above the minimum of average variable cost.
C)its marginal cost curve above the minimum of average total cost.
D)the average variable cost curve above average revenue curve.
Q3) Which of the following is constant along the industry long-run supply curve?
A)Technology
B)Number of firms
C)Input prices
D)Price of output
Q4) Derive the first-order and second-order conditions for perfect competition.
Page 11
Q5) Explain the difference between diminishing marginal returns to factor and a decreasing-cost industry.
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Chapter 10: Using the Competitive Model
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Sample Questions
Q1) Which of the following is true of a quota in a competitive market?
A)A quota increases total surplus as the quantity produced and consumed in the domestic market increases.
B)A quota is a trade policy used to promote greater efficiency in production within world markets.
C)A quota reduces the welfare of domestic consumers more than it increases the welfare of producers.
D)A quota is imposed in a competitive market to increase total world output of goods and services.
Q2) Deregulation of the taxicab industry is most likely to result in:
A)an increase in the operation of illegal cabs.
B)reduced safety of passengers.
C)a shift of taxicab services from poor neighborhoods to the city.
D)a large financial loss for those who own medallions.
Q3) Given that sale of crack cocaine for a positive price is completely banned in certain parts of the world,why is it that there is a thriving black market for this illegal drug? Explain with the help of demand and supply curves.
Q4) Is the outcome of a competitive market efficient? Explain with the help of a graph.
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Page 12
Chapter 11: Monopoly
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Sample Questions
Q1) The U.S.Postal Service [USPS] has a legal monopoly over first-class mail in the U.S.However,it has been running losses over the recent years.
a)Is this fact consistent with the fact that USPS operates with significant monopoly power?
b)What are the factors that could possibly be leading to USPS' losses?
Q2) Why is a monopoly considered to be an inefficient market?
A)In a monopoly market,consumers gain surplus at the cost of the producer.
B)A monopoly firm produces at the level where price is equal to marginal cost.
C)A monopoly market is characterized by a deadweight loss.
D)A monopoly firm profitably increases prices irrespective of demand.
Q3) Monopoly power possessed by any one firm is _____.
A)higher,the greater the number of firms
B)reduced,as the elasticity of supply by rival firms as a group decreases
C)reduced,as the elasticity of demand increases
D)higher,the higher the number of buyers
Q4) The demand curve for a firm operating in a monopoly market is the same as _____.
A)its average revenue curve
B)the industry supply curve
C)its marginal revenue curve
D)its marginal cost curve
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Chapter 12: Product Pricing With Monopoly Power
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Q1) We would expect price discrimination to be most successful in the market for: A)haircuts.
B)DVD's.
C)cars.
D)jeans.
Q2) Consider a profit-maximizing monopolist whose consumers have identical demand curves.Which of the following will be true if the firm employs a two-part tariff pricing strategy for these consumers?
A)The firm will produce less output compared to a firm that is not using this pricing strategy.
B)The firm will capture the entire consumer surplus.
C)The firm will charge a tariff that also maximizes revenues.
D)The firm will charge consumers a different entry fee,but a constant per-unit price.
Q3) Within the context of price discrimination,explain why airlines charge higher fares to their customers during Christmas but offer significant discounts at other times of the year.
Q4) Why is it difficult to implement first-degree price discrimination?
Q5) What is a two-part tariff? Make up a numerical example to support your definition.
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Page 14
Chapter 13: Monopolistic Competition and Oligopoly
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Sample Questions
Q1) Which of the following is not true of a monopolistically competitive firm in long run equilibrium?
A)Price exceeds marginal cost
B)The average total cost curve lies above the demand curve
C)Marginal revenue equals marginal cost
D)The price elasticity of demand is zero
Q2) A monopolistically competitive firm that is maximizing profit will choose to produce at the level where:
A)total revenue is maximized.
B)average total cost exceeds average revenue.
C)marginal revenue equals marginal cost.
D)marginal revenue exceeds average revenue.
Q3) Suppose a cartel is formed by the tomato farmers.Which of the following would increase the ability of this cartel to set output and prices in the domestic market?
A)Acreage restrictions by the government
B)Highly inelastic demand for tomatoes
C)A high supply elasticity for other tomato farmers
D)A high import tariff on tomatoes
Q4) What is a cartel and why are cartels considered to be inherently unstable?
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Chapter 14: Game Theory and the Economics of Information
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Sample Questions
Q1) For which of the following commodities will the benefit from search be the highest?
A)Washing machines
B)Real estate
C)Apparels
D)Books
Q2) Assume that two firms are engaged in a pricing rivalry and attempt collusion.If each firm knows that the pricing game will last for a finite number of periods,and the collusion contract is not enforceable,then they will have an incentive to:
A)cheat in every period.
B)cheat in alternate periods.
C)cheat in every period but the first.
D)cheat in every period but the last.
Q3) Under which of the following game theory circumstances is a collusive outcome most likely?
A)Prisoner's dilemma
B)Repeated games
C)Games with dominant-strategy outcomes
D)Games with Nash equilibrium
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Chapter 15: Using Noncompetitive Market Models
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Sample Questions
Q1) Which of the following is true of public ownership of a natural monopoly?
A)Most publicly owned natural monopolies run economic losses.
B)In publicly owned monopolies,the incentive to minimize cost is higher.
C)Public ownership of natural monopolies reduces production efficiency in the market.
D)Natural monopolies that are publicly owned tend to innovate and create cost-saving technologies.
Q2) Which of the following will be true if a regulator uses average-cost pricing to regulate a natural monopoly?
A)The natural monopoly will incur losses.
B)The output will be lower than that of an unregulated monopoly.
C)There will be an efficiency gain in the market.
D)The firm will benefit more than the consumers.
Q3) Answer the following:
a)Define and illustrate graphically average-cost pricing and marginal-cost pricing.
b)What are the problems faced in regulating natural monopolies?
Q4) What is a natural monopoly? Draw a diagram to illustrate the profit-maximizing output of a natural monopoly.
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17
Chapter 16: Employment and Pricing of Inputs
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Q1) Given the law of diminishing marginal returns,the marginal value product of labor curve for a competitive firm _____,when other inputs are fixed.
A)will be upward-sloping
B)coincides with the firm's average revenue curve
C)is horizontal at the price level
D)is the same as the firm's demand curve for labor
Q2) Using calculus,show the profit-maximizing employment of inputs for a perfectly competitive firm.
Q3) The reserve clause in Major League Baseball (MLb. ,which allowed baseball players to negotiate salary only with the first team that signed them,was removed in 1975.The dismantling of the reserve clause was undertaken to:
A)ensure that players got more playing time.
B)break up the MLB owner's monopoly power.
C)break up the MLB owner's monopsony power.
D)allow players to hire their own agents.
Q4) Using a graph,show the welfare effects of a monopsony input market compared to a perfectly competitive input market.Assume upward sloping cost curves.
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Chapter 17: Wages, Rent, Interest, and Profit
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Sample Questions
Q1) As a result of the substitution effect of a lower wage,hours of work will:
A)increase due to a higher opportunity cost of leisure time.
B)fall due to a higher opportunity cost of leisure time.
C)fall due to a lower opportunity cost of leisure time.
D)increase due to a lower opportunity cost of leisure time.
Q2) In some professions,a few people earn enormously high salaries,with the vast majority earning significantly less.This "superstar phenomenon" is often seen in the entertainment industry.For example,the movie star Brad Pitt earns millions of dollars per film and the baseball player Barry Bonds earns millions of dollars per season,while most actors and non-Major League baseball players do not even approach that level.In other words,the difference between the highest paid and least paid actors and baseball players is much greater than the same difference for carpenters or surgeons.Can you explain this phenomenon?
Q3) Which of the following correctly describes an interest rate?
A)It is the portion of the payment to an input supplier in excess of the minimum amount necessary to retain the input in its present use.
B)It is paid by suppliers of loanable funds.
C)It equates the value of future and present consumption.
D)It is the price paid to purchase an asset.
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Page 19
Chapter 18: Using Input Market Analysis
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Sample Questions
Q1) An increase in the minimum wage imposed by the government causes an increase in unemployment because:
A)the labor supply curves are backward-bending.
B)the demand curves for labor are downward-sloping.
C)leisure is a normal good.
D)the increase in the wage rate reduces the price of leisure.
Q2) Which of the following factors determines the extent of the fall in the net-of-tax wage rate after the imposition of a payroll tax?
A)The productivity of the employees
B)The efficiency wage in the labor market
C)The elasticities of supply and demand
D)The minimum wage imposed by the government
Q3) Identify some of the reasons due to which wage rates may differ among individuals even in the absence of gender or racial discrimination.
Q4) A cartel agreement between input buyers would try to:
A)make the supply curve of their product more elastic.
B)shift their demand curve for labor to the right.
C)replicate monopsony and reduce input prices.
D)replicate monopoly and increase prices.
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Chapter 19: General Equilibrium Analysis and Economic Efficiency
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Sample Questions
Q1) Which of the following is true of contract curves?
A)Every point on the contract curve indicates an inefficient distribution of goods among consumers.
B)At any point on the contract curve,all the consumers have equal marginal rates of substitution.
C)A movement along the contract curve indicates that,any trade that benefits one person will necessarily benefit the other.
D)At every point on the contract curve,the marginal utility derived from the consumption of a good is identical for all the consumers.
Q2) In Figure 19-1,point F represents a resource allocation that is:
A)is feasible but undesirable from the society's point of view.
B)inefficient.
C)desirable but not attainable.
D)both undesirable and unattainable.
Q3) Every point _____ corresponds to a point on the production possibility frontier.
A)on the production contract curve
B)in an Edgeworth production box
C)of tangency between the indifference curves
D)on the welfare frontier
Page 21
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Chapter 20: Public Goods and Externalities
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Q1) The marginal social cost and marginal private cost curves of an economic activity coincide:
A)when there are no negative externalities.
B)if the marginal social cost is a ray from the origin.
C)when marginal external benefits are small,but positive.
D)at very high output levels.
Q2) Identify the correct statement.
A)The marginal cost of producing a public good is zero.
B)Any good that is provided by the government can be considered as a public good.
C)A public good is often under consumed as supply usually exceeds demand.
D)The consumers of a public good tend to underestimate the value of the good.
Q3) According to Figure 20-1,the efficient output is ______ than the equilibrium output by _____ units.
A)more;400
B)less;400
C)more;100
D)less;200
Q4) Explain with the help of a suitable figure,why the government needs to subsidize inoculation against a viral infection.
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