Industrial Organization
Midterm Exam
Course Introduction
Industrial Organization explores the structure, behavior, and performance of firms and industries within the marketplace. The course examines how market competition, firm strategy, and regulatory policies influence outcomes such as pricing, innovation, market entry and exit, and consumer welfare. Key topics include market power, oligopoly models, product differentiation, barriers to entry, antitrust issues, and the effects of mergers and acquisitions. Through theoretical frameworks and real-world case studies, students gain a deep understanding of how industrial organization principles shape economic environments and inform business and regulatory decisions.
Recommended Textbook
Transactions and Strategies 1st Edition by Robert J. Michaels
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Page 2
Chapter 1: Reasoning With Economics: Models and Information
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Sample Questions
Q1) Economic models simplify reality and help us to better understand important aspects of it.
A)True
B)False
Answer: True
Q2) An elimination heuristic makes the choice on the basis of all the categories in which the events differ.
A)True
B)False
Answer: False
Q3) Assume that a cargo ship carrying the merchandise of a cloth merchant has been wrecked.Such a setback will be accounted as the merchant's:
A)sunk cost.
B)deadweight loss.
C)marginal cost.
D)opportunity cost.
Answer: A
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Page 3
Chapter 2: Transactions and Institutions: the Building Blocks
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Sample Questions
Q1) Laura's team can complete 15 reports and 5 presentations in a day.Albert can motivate his team to complete 12 reports in a day with 10 presentations.Suppose the boss needs 30 reports with 20 presentations completed during a particular day.Assigning the extra presentations to Laura's team would:
A)lead to an efficient outcome.
B)push the production level inside the production set.
C)enhance the production level along the production set.
D)increase the chances of achieving the target.
Answer: B
Q2) What are the three major forms of governance and what are their dimensions?
Answer: Transactions take place under governance arrangements that describe the opportunities available to the parties and the constraints under which they operate.The three major forms of governance are markets, contracts, and hierarchies.The two major dimensions of governance are trade-offs and mixed-modes of governance.Decisions taken under different forms of governance entail different trade-offs.On the other hand, transactions can also take place under a mix of governance modes.
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Chapter 3: Markets
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Sample Questions
Q1) Which of the following statements about elasticity of supply is true?
A)Elasticity of supply is always unity.
B)Elasticity of supply is always zero.
C)Elasticity of supply is always negative.
D)Elasticity of supply is always positive.
Answer: D
Q2) Suppose a commodity market is initially in equilibrium.An increase in the nation's skilled labor force then lowers the marginal cost of producing each unit of output.Which of the following changes will be observed?
A)The demand curve will shift upward
B)The supply curve will shift downward
C)The demand curve will shift downward
D)The supply curve will shift upward
Answer: B
Q3) What is the Law of One Price?
Answer: Buying and selling a good simultaneously in two different venues, referred to as arbitrage, unifies a market and brings about a single equilibrium price or price differences that just cover the cost of transacting.This tendency is called the Law of One Price.
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Page 5
Chapter 4: Cost and Production
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Sample Questions
Q1) _____ is the locus of the minimum points of various short-run average cost curves depicting different plant sizes.
A)Long-run marginal cost
B)Expansion path
C)Long-run average cost
D)Isocost
Q2) The average cost of production at the profit maximizing output level for Jones Inc., is $4 per unit.The average variable cost of production is $3.5 per unit at this output level.The introduction of cheaper substitutes reduces the demand drastically and the market price falls to $1.5 per unit.If the minimum average variable cost the firm must incur is $2.5, identify the correct statement from the following.
A)There are output levels where revenue exceeds variable cost when the price is $1.5 per unit.
B)The firm will continue to operate in the short run.
C)The firm will breakeven at the price of $1.5 per unit.
D)The firm will shut down.
Q3) What is marginal cost?
Q4) Define opportunity cost.
Q5) Define returns to scale.
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Chapter 5: Extreme Markets I: Perfect Competition
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Q1) Which of the following situations resulted from the North American Free Trade Agreement (NAFTA)?
A)The cost of tortillas in Mexico decreased.
B)Corn export to the U.S.from Mexico declined.
C)Corn export to the U.S.from Mexico increased.
D)The cost of tortillas in the U.S.increased.
Q2) Assume that recent oil exploration coupled with a fall in demand reduced petroleum imports of a nation to zero.We can expect:
A)the domestic price of petroleum to fall below the world price.
B)the world price of petroleum to fall to equal the domestic price.
C)petroleum exported by the domestic producers to increase.
D)petroleum exported by the domestic producers to decrease.
Q3) In a perfectly competitive market, firms are not restricted from entering or leaving an industry in response to profits or losses.
A)True
B)False
Q4) Was the U.S.government able to control the world petroleum prices? Support your choice with suitable reasons.
Q5) State two characteristics of the long-run equilibrium under perfect competition.
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Chapter 6: Extreme Markets II: Monopoly
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Sample Questions
Q1) _____ allow exclusive use of an identifier, such as a brand name, and can be renewed indefinitely.
A)Patents
B)Trademarks
C)Copyrights
D)Licenses
Q2) Which of the following statements is NOT true regarding DeBeers' rise to monopoly power in the diamond market?
A)DeBeers produces about 40 percent of the world's raw diamonds and controls another 30 percent.
B)DeBeers achieved dominance in this market by gaining control of South Africa's Kimberley "pipe," the world's largest source in the late nineteenth century.
C)DeBeers carefully limited the amount of diamonds it released into the market.
D)DeBeers did not worry about diamonds being discovered elsewhere because it already had full control of the industry in South Africa.
Q3) What is tying or bundling of goods?
Q4) Why does rent-seeking behavior lead to deadweight loss?
Q5) What are cover and commodity charges?
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Chapter 7: Between the Extremes: Interaction and Strategy
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Q1) Refer to Figure .Which of the following price and output combinations represents the overall oligopoly market equilibrium?
A)Price = $3 and output = 2.6 units
B)Price = $10.1 and output = 0.6 unit
C)Price = $7 and output = 2.6 units
D)Price = $7 and output = 1 unit
Q2) After the deregulation of the airline industry, the new airlines had a competitive cost advantage over the older ones as:
A)they could practice price discrimination.
B)they did not bear any legacy cost.
C)they enjoyed economies of scale.
D)they had to pay lower fuel surcharge.
Q3) Which of the following is a characteristic of the oligopoly model?
A)The oligopoly market consists of only a small number of sellers.
B)The sellers in an oligopoly market are price takers.
C)The output decisions taken by sellers are uniform and steady.
D)There are barriers to the exit of firms in an oligopoly market.
Q4) What is an ascending-value auction?
Q5) When is a game dominance solvable?
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Chapter 8: Competition and Strategy
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Sample Questions
Q1) Which of the following industries can create barriers to the entry of new firms due to size and specificity?
A)A hydroelectric power plant
B)A garment manufacturer exporting apparels
C)An owner of a retail chain
D)An automobile manufacturing company
Q2) Refer to Figure .Determine the profit earned by the perfume monopolist if it chooses to hire a retailer for selling its product.
A)$2.7
B)$6.5
C)$5.5
D)$2.4
Q3) A seller with market power has greater command over product price compared to a perfect competitor and is thus less enthusiastic in devising new ways to create economic value.
A)True
B)False
Q4) Explain the difference between the per se and "rule of reason" standards of the antitrust laws
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Chapter 9: Beyond Markets; Property and Contracts
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Q1) Which of the following statements about Coasian reasoning is true?
A)Coasian reasoning lacks symmetry, it does not provide a starting point for negotiations toward an efficient outcome.
B)Coasian reasoning emphasizes on the benefits received by the person having more rights compared to the others in the group.
C)Coasian reasoning explains how the costs and benefits of a transaction are distributed among the parties.
D)Coasian reasoning provides a starting point for negotiations toward an efficient outcome, if the cost of negotiation is low.
Q2) Government has the power to reduce the _____ associated with air pollution by automobiles because it can force changes in car design, can impose taxes on drivers, and has the power to punish those who fail to comply.
A)private cost
B)transaction cost
C)opportunity cost
D)positive externality
Q3) What do property rights usually depend on?
Q4) Define a contract.
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Chapter 10: The Economics of Contracts
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Sample Questions
Q1) Refer to Table .Under expectation damages, Mike's breach would entitle Frasel to:
A)a $10 payment from him.
B)a $16 payment from him.
C)a $8 payment from him.
D)a $6 payment from him.
Q2) The parties to a contract usually try to minimize the risks of costly opportunistic behavior by putting appropriate provisions in it.
A)True
B)False
Q3) A packaged fruit juice manufacturer contracts with several farmers to buy their orchards to support a new production facility.However, a particular orchard owner later refuses to sell his farm at the price in their contract.In such a case the court will order a liquidated damage.
A)True
B)False
Q4) How does opportunistic behavior affect a contract?
Q5) When should parties be allowed to breach a contract?
Q6) How can an incomplete contract prevent opportunism? Explain with an example.
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Chapter 11: Risk and Information in Contracts
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Sample Questions
Q1) An individual can avoid risks associated with a transaction by purchasing insurance.
A)True
B)False
Q2) According to the theory of propitious selection:
A)risk-neutral people are more likely to opt for insurance coverage.
B)risk-averse people are more likely to opt for insurance coverage.
C)high-risk people submit large claims for insurance coverage.
D)high-risk people submit smaller claims for insurance coverage.
Q3) When is disclosure economically desirable?
Q4) Which of the following can be a solution to the lemons problem?
A)Providing testimonials from previous buyers.
B)Providing accessories to be used in the car.
C)Providing discount on the purchase of a car.
D)Providing a warranty that covers the costs of certain repairs.
Q5) What is the difference between the utility function of a risk averse person and a risk neutral person.
Q6) When does the problem of adverse selection arise in any market?
Q7) When does an insurance contract benefit both the parties?
Q8) What are the disadvantages of a standard form contract?
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Chapter 12: Organizations in Concept and Practice
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Sample Questions
Q1) The owner of each share of a corporation's stock:
A)has the right to cast one vote for electing its board of directors.
B)is entitled to 1 percent of the total profit earned by the firm.
C)has the right to participate in its overall supervision.
D)is liable for 1 percent of the total loss incurred by the company.
Q2) The management function of a sufficiently large firm should be separated from finance and residual claimancy because of:
A)differences in skill requirements and opportunity costs.
B)differences in attitudes towards risk.
C)differences in investment choices and responsibilities.
D)differences in beliefs about a new strategy's probability of success.
Q3) Mention some areas where partnerships are common.Give reason for your answer.
Q4) Risk-averse people prefer to hold assets whose returns are positively correlated.
A)True
B)False
Q5) A sole proprietor has limited liability and cannot be forced to pay its creditors from his/her personal resources.
A)True
B)False
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Chapter 13: Organizational Design
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Sample Questions
Q1) A company X is unlikely to disclose its organizational chart to its competitor company Y to prevent leak of important strategic information about itself.
A)True
B)False
Q2) The board of directors of Fast Food Inc., have the final say in all decisions made for the firm.Market conditions and recent poor performance has caused some discord among the board members.Which of the following statements is likely to be true?
A)The decisions the board members take may lead to compromises that are not in the interests of the shareholders.
B)Decision-making will be decentralized in this firm.
C)People lower in the hierarchy of this firm will be better equipped to take decisions.
D)The board's incentives are aligned with those of the firm's principals.
Q3) Moving decisions downward into functional areas economizes on information and is efficient because a functional department is by definition expert at a subset of the firm's activities.
A)True B)False
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Chapter 14: Vertical Relationships
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Sample Questions
Q1) Why do vertical contracts impose restraints and obligations?
Q2) A firm that controls both the upstream as well as the downstream stages of production is said to be:
A)functionally integrated.
B)perpendicularly integrated.
C)vertically integrated.
D)horizontally integrated.
Q3) In order to lessen the monitoring problems and opportunistic behavior of a franchisor and a franchisee, franchise contracts:
A)create provisions for high liquidated damages.
B)are complete in all respect.
C)have similar fixed charge and royalty arrangements.
D)include certain flexible clauses.
Q4) _____ improves exchangeability, and reduces the cost of obtaining information about a good and about the parties involved in the transaction.
A)De-integration
B)Outsourcing
C)Vertical integration
D)Standardization
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Chapter 15: Employment Relationships
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Sample Questions
Q1) A firm that fills its vacancies in the upper levels of the hierarchy with its own employees:
A)avoids opportunistic behavior by employees.
B)uses an internal labor market.
C)avoids the difficult tasks of measuring and comparing the productivities of individual workers.
D)pays them according to their performance rather than seniority.
Q2) Identify the correct statement from the following.
A)Wages offered for a particular type of job are the same across the country.
B)The labor market exhibits rapid adjustment to changes in supply or demand conditions.
C)The labor market usually yields a range of wages rather than a unique equilibrium.
D)Wages exhibit frequent and prompt changes in response to changes in market conditions.
Q3) How does value of marginal product (VMP) of labor determine the number of workers a competitive firm will hire?
Q4) Explain the significance of efficiency wages in solving the principal/agent relationship in employment.
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Chapter 16: Time, Risk and Options
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Q1) According to the Black-Scholes formula:
A)the value of an in-the-money option will equal the difference between the stock's current price and the strike price.
B)the payoff from an average option is either a multiple or a power of the difference between the strike price and the price they are exercised at.
C)the holder of a basket option has the right to buy or sell the underlying at the highest price it has attained over the life of the option.
D)the price of a call or put option varies with the price of the underlying asset.
Q2) The _____ shows all of the combinations of risk and return that leaves an investor equally well off from holding either a low-risk or a high-risk investment.
A)indifference curve
B)expectation
C)standard deviation
D)correlation coefficient
Q3) Explain graphically how the prices of a call and a put option calculated from the Black-Scholes formula vary with the price of an underlying stock.
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Chapter 17: Conflict, Negotiation and Group Choice
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Q1) 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.
Q2) Terry wants to sell his car and the lowest price he is willing to accept is $3,000.Alice likes the car and is willing to pay at most $4,000 for it.What is the headroom for them?
A)Prices up to $1,000
B)Price range between $3,000 and $4,000
C)Prices above $4,000
D)Prices below $3,000
Q3) An advantage of settling disputes via arbitration rather than court cases is that:
A)the risk of an incorrect decision in the former case is negligible.
B)the former is inexpensive and binding.
C)the former is more likely to grant a lenient decision.
D)the former may be more knowledgeable than an uninformed jury.
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