Industrial Organization
Textbook Exam Questions
Course Introduction
Industrial Organization explores how firms and industries operate, compete, and evolve within various market structures. The course examines the strategic behavior of firms, including pricing, product differentiation, entry and exit decisions, and mergers and acquisitions. Emphasis is placed on analyzing the role of government policy and regulation in promoting competition and addressing market failures. Through a combination of theoretical models and real-world case studies, students gain a comprehensive understanding of how market power and competitive dynamics shape industries and influence consumer welfare.
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Managerial Economics and Strategy 2nd Edition by Jeffrey
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M. Perloff
Page 2
Chapter 1: Introduction
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Sample Questions
Q1) If a model's predictions are correct, then
A)its assumptions must have been correct.
B)it is proven to be correct.
C)Both A and B above.
D)None of the above.
Answer: D
Q2) Explain what the statement "We can't have everything we want" means.
Answer: Because resources are scarce, we face tradeoffs. For example, a baker cannot use a piece of dough she has for both pizza and a croissant, so she has to decide which to make.
Q3) Managerial economics
A)describes how pay for managers is set.
B)ensures managers always make good decisions.
C)helps managers make decisions in the face of scarcity.
D)explains which products consumers will buy.
Answer: C
Q4) What is profit?
Answer: Profit is the difference between a firm's revenue or income and its costs or expenses.
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Chapter 2: Supply and Demand
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Sample Questions
Q1) The above figure shows a graph of the market for pizzas in a large town. No pizzas will be demanded unless price is less than
A)$0.
B)$5.
C)$12.
D)$14.
Answer: D
Q2) After tickets for a major sporting event are purchased at the official box office price, a market often develops whereby these tickets sell at prices well above the official box office price. Which of the following scenarios would NOT be able to explain this result?
A)The official price was below equilibrium from the moment the tickets were available. B)Increased publicity causes the demand curve for the event to shift rightward.
C)The event was not a sellout.
D)Not everyone who wanted a ticket was able to buy one at the box office.
Answer: C
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4
Chapter 3: Empirical Methods for Demand Analysis
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Sample Questions
Q1) The t-statistic measures
A)the efficiency of the t-test relative to the standard z-test.
B)the probability that the estimated coefficient is within the range of the standard error.
C)whether the estimated coefficient is independent of the standard error.
D)whether the estimated coefficient is large relative to the standard error.
Answer: D
Q2) If two variables B and V are negatively correlated, B ________ when V ________.
A)goes up; goes down
B)goes up; goes up
C)goes down; goes down
D)remains unchanged; goes down
Answer: A
Q3) Sometimes distinct patterns around a trend line can be caused by A)poor underlying data.
B)dummy variables.
C)seasonal variation.
D)statistical anomalies.
Answer: C
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Chapter 4: Consumer Choice
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Sample Questions
Q1) Which of the following might explain the evidence of an endowment effect in behavioral economics?
A)government regulation
B)knowledge and experience
C)the federal tax code
D)class envy
Q2) An indifference curve represents bundles of goods that a consumer
A)views as equally desirable.
B)ranks from most preferred to least preferred.
C)refers to any other bundle of goods.
D)All of the above.
Q3) In behavioral economics, the term salience refers to
A)relevance to the problem being investigated.
B)people only consider information when it is conveyed in a subtle manner.
C)how an experiment is designed.
D)people consider information when it is presented in an "eye grabbing" manner.
Q4) What is the difference between ordinal and cardinal measurement?
Q5) Indifference curves cannot intersect.
A)True
B)False
6
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Chapter 5: Production
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Sample Questions
Q1) If MPK = 3, and MRTS = -4 what is MPL?
A)12
B)-12
C)4/3
D)-4/3
Q2) If a Cobb-Douglas production function has alpha = 0.34 and beta = 0.42, then a 1% increase in inputs results in a ________ change in output.
A)0.8%
B)8%
C)0.76%
D)-0.76%
Q3) Which of the following is likely to have the longest long run?
A)a beauty salon.
B)a pizza parlor.
C)a road construction firm.
D)an airline.
Q4) The above figure shows the isoquants for the production of steel. In which regions of production are there increasing, decreasing, and constant returns to scale?
Q5) Explain why labor might not always be a variable input.
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Chapter 6: Costs
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Sample Questions
Q1) Which of the following is most likely to have declining opportunity costs?
A)a delivery van
B)an apartment building in Manhattan
C)an acre of land in San Francisco
D)a park in downtown London
Q2) If a firm buys a specialized metal stamping machine that will last 4 years for $125,000 and cannot resell it, the opportunity cost is
A)$0.
B)$31,250.
C)$125,000.
D)$93,750.
Q3) The Nifty Gum Co. has purchased a large parcel of land for $1 million. The company recently discovered that the land is contaminated and is worthless to all possible buyers. The opportunity cost of the land is A)$0.
B)$1 million.
C)some amount greater than $0 but less than $1 million.
D)equal to the cost of the factory that was planned to be built there.
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Chapter 7: Firm Organization and Market Structure
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Sample Questions
Q1) If a profit-maximizing firm finds that, at its current level of production, MR > MC, it will
A)earn greater profits than if MR = MC.
B)increase output.
C)decrease output.
D)shut down.
Q2) A firm should always shut down if its revenue is
A)declining.
B)less than its average fixed costs.
C)less than its total costs.
D)less than its avoidable costs.
Q3) Corporate Social Responsibility
A)is illegal in most countries.
B)minimizes conflict between owners and managers.
C)is the pursuit of social objectives by corporations.
D)disputes the stakeholder theory of R. Edward Freeman.
Q4) If a firm sets marginal revenue equal to marginal cost it will make an economic profit.
A)True
B)False
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Chapter 8: Competitive Firms and Markets
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Sample Questions
Q1) If all conditions for a perfectly competitive market are met
A)firms face sunk cost when entering the market.
B)firms' demand curves are horizontal.
C)the market demand curve is horizontal.
D)the firms' demand curves are downward-sloping.
Q2) In the long run, firms in a competitive market
A)shut down because profit goes to zero.
B)lose money.
C)are not profit maximizing.
D)earn zero economic profit.
Q3) A firm will enter a competitive market when
A)it can gather market share at the expense of incumbent firms.
B)it would not be the last firm entering.
C)it can earn a positive long-run profit.
D)the long-run supply curve is upward sloping.
Q4) Consumers seek to
A)maximize profits.
B)maximize expected consumer surplus.
C)maximize expenditures.
D)maximize choice.
Page 10
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Chapter 9: Monopoly
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Sample Questions
Q1) The more inelastic the demand curve, a monopoly
A)will have a smaller Lerner Index.
B)will face a lower marginal cost.
C)will earn less profit.
D)will lose fewer sales as it raises its price.
Q2) Which of the following average cost functions suggests the presence of a natural monopoly?
A)AC = 2
B)AC = 100/Q + 2
C)TC = 100/Q + 2Q
D)All of the above.
Q3) A firm will increase its spending on advertising until
A)it has monopolized the market.
B)it has deterred all future entry.
C)the marginal benefit of advertising is zero.
D)the marginal benefit of advertising equals the marginal cost of advertising.
Q4) Since there are no close substitutes for the monopoly's product, the monopoly can charge any price it wishes.
A)True
B)False
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Chapter 10: Pricing With Market Power
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Sample Questions
Q1) Which of the following conditions must be TRUE so that a firm can profitably price discriminate?
A)There are no other firms in the market.
B)The good is a non-durable.
C)The good cannot be easily resold.
D)All of the above.
Q2) A specialized rice grower sells rice in two markets, the United States and Japan, and the marginal cost is the same in both markets. The price elasticity of demand in the United States is -2.0, and the price elasticity of demand in Japan is -1.5. If the grower practices group price discrimination, which country's consumers will pay a higher price and by how much?
Q3) All firms can increase profits using price discrimination.
A)True, because market demand curves are downward sloping
B)True, because firms can sell different versions of a product that is just right for an individual consumer
C)False, because consumers aren't forced to buy a firm's products
D)False, because some firms are in competitive markets
Q4) Explain why a firm can earn more profit by price discrimination than from setting a uniform price.
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Chapter 11: Oligopoly and Monopolistic Competition
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Sample Questions
Q1) In a sense, a cartel is self-destructive because
A)it reduces consumer surplus.
B)it sets price above marginal cost.
C)each cartel member has the incentive to cheat on the cartel.
D)each cartel member earns economic profit.
Q2) Which of the following conditions can help prolong the life of a cartel?
A)There are only a few firms in the market and they all belong to the cartel.
B)There are many firms in the market that are not members of the cartel.
C)It is difficult to know what price any cartel member is actually charging.
D)The cartel has no ability to punish members who cheat on the cartel.
Q3) The above figure shows the reaction functions for two pizza shops in a small isolated town. The perfect competitive outcome is that
A)each firm produces 40 pizzas.
B)each firm produces 50 pizzas.
C)the firms split the production of 200 pizzas.
D)each firm produces 200 pizzas.
Q4) Explain why gasoline stations across the street from each other with large signs displaying their prices may "legally" jointly set monopoly prices.
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Page 13
Chapter 12: Game Theory and Business Strategy
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Sample Questions
Q1) The above figure shows the payoff to two airlines, A and B, of serving a particular route. If the two airlines must decide simultaneously, what happens if the government imposes a $20 per firm tax on firms that service this route?
A)Neither firm has a dominant strategy.
B)Not entering is a dominant strategy for both firms.
C)Neither firm entering is a Nash equilibrium.
D)Only firm A will enter.
Q2) The above figure shows the payoff to two airlines, A and B, of serving a particular route. If the two airlines must decide simultaneously, what will happen if the government offers a $30 subsidy to airlines that serve this route?
A)Both firms will enter profitably.
B)Firm A will decide not to enter since firm B will.
C)Firm B is still better off not entering.
D)Neither firm will have a dominant strategy.
Q3) In a static game, firms
A)compete multiple times until there is a winner.
B)compete only once.
C)must have complete information.
D)act sequentially.
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Page 14
Chapter 13: Strategies Over Time
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Sample Questions
Q1) A specific investment is
A)one that can only be used in a transaction with a single firm.
B)an investment that cannot be physically moved, such as an oil refinery.
C)reduces the possibility of a holdup occurring.
D)is more expensive than a general investment.
Q2) Incumbents are unaffected by fixed costs of entry while potential entrants are affected by them because
A)for potential entrants the cost is avoidable, while for the incumbent, it is not.
B)fixed costs will be greater for the potential entrant than for the incumbent.
C)fixed costs are zero for the incumbent.
D)incumbents will act to prevent entry at all costs.
Q3) A holdup problem occurs
A)when a financial institution undertakes too little investment in security.
B)when one firm must make a specific investment and a second firm takes advantage of it.
C)if the firm that moves second in a Stackelberg game chooses the incorrect output level.
D)if you are entering into a contract with a government entity.
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Chapter 14: Managerial Decision-Making Under Uncertainty
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Sample Questions
Q1) If two events are perfectly negatively correlated, then
A)diversification can reduce but not eliminate risk.
B)diversification can eliminate risk.
C)diversification has no impact on risk.
D)diversification cuts risk in half.
Q2) The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. Bob is risk averse because
A)his utility function is concave.
B)he has diminishing marginal utility of wealth.
C)he is willing to pay a premium to avoid a risky situation.
D)All of the above.
Q3) If an individual makes her investment decisions based solely on the Expected Value criterion, one can conclude that she is
A)risk averse.
B)risk neutral.
C)risk loving.
D)extremely wealthy.
Q4) Explain why insurance companies usually do NOT offer earthquake insurance.
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Page 16
Chapter 15: Asymmetric Information
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Sample Questions
Q1) If a firm has established monitoring devices that have a 50% chance of detecting shirking, and an employee gains $5,000 from shirking, the employer can deter shirking by having employees post a bond equal to A)$2,500.
B)$5,000.
C)$10,000.
D)$50,000.
Q2) A person starts practicing poisonous snake charming after signing a contract with a health insurance company. This is an example of A)moral hazard.
B)adverse selection.
C)signaling.
D)screening.
Q3) Opportunism may occur when
A)both parties have limited information.
B)both parties have full information.
C)one party has information the other does not.
D)All of the above.
Q4) Explain how product liability laws can reduce adverse selection.
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Chapter 16: Government and Business
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Sample Questions
Q1) If children go to school and become productive members of society
A)a negative externality is created by the schools.
B)a positive externality is created by the schools.
C)no externality is created by the schools.
D)an externality is created that may be positive or negative.
Q2) Cartels persist despite laws against them because
A)international cartels are legal.
B)it is impossible to convict firms.
C)of the Prisoners' Dilemma issue.
D)All of the above.
Q3) The song "Happy Birthday" is likely protected
A)as a trade secret.
B)with a patent.
C)under copyright law.
D)in a trust.
Q4) If a production process generates pollution, then a competitive market will
A)produce more of the good than is socially optimal.
B)produce less of the good than is socially optimal.
C)produce the socially optimal quantity of that good.
D)produce zero output.
Page 18
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Chapter 17: Global Business
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Sample Questions
Q1) If a bottle of fine French wine costs US$250 in the U.S., 2500 rand in South Africa, there are no transaction costs, and the exchange rate is 20 rand/US$, then
A)there is an arbitrage opportunity by buying the wine in the U.S., and selling it in South Africa and the price in South Africa will drop.
B)there is an arbitrage opportunity by buying the wine in South Africa., and selling it in the U.S. and the price in the U.S. will drop.
C)here is an arbitrage opportunity by buying the wine in South Africa., and selling it in the U.S. and the price in the U.S. will rise.
D)there is no arbitrage opportunity.
Q2) International price discrimination for a good is possible if
A)goods are sold through the gray market.
B)the price difference between two countries is greater than the transaction costs in arbitrage.
C)the price difference between two countries is less than the transaction costs in arbitrage.
D)None of the above.
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