Law and Economics Final Exam Questions
Course Introduction
Law and Economics explores the intersection between legal principles and economic theory, analyzing how laws influence and are influenced by economic outcomes. The course examines the impact of legal rules on the allocation of resources, incentives, and behavior within society, employing tools such as cost-benefit analysis, game theory, and efficiency concepts. Topics include property rights, contract law, torts, regulation, criminal law, and the role of the judiciary in shaping economic activity. Through case studies and theoretical models, students learn to critically evaluate legal systems and propose reforms from an economic perspective.
Recommended Textbook
Transactions and Strategies 1st Edition by
Robert J. Michaels
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17 Chapters
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Page 2
Chapter 1: Reasoning With Economics: Models and Information
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Sample Questions
Q1) The math and graphics used in economics help us better understand the logic of:
A)verbal reasoning.
B)rational choice.
C)hypothesis testing.
D)business forecasting.
Answer: B
Q2) Researchers who make judgements in their experiments based on what is salient rather than on actual probabilities err by using a representativeness heuristic.
A)True
B)False
Answer: False
Q3) 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
Page 3
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Chapter 2: Transactions and Institutions: the Building Blocks
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Sample Questions
Q1) What is a production set?
Answer: A production set is all possible combinations of goods and services that an economy can produce with its available resources.
Q2) Which of the following statements is true regarding protocols in various types of auctions?
A)An English auction requires bidders to begin with the highest price.
B)A Dutch auction starts with the lowest price any bidder is willing to pay, which is displayed in a one-handed clock.
C)In a Dutch auction, the first buyer to bid gets the item at the price shown in the one-handed clock.
D)In a second-price auction, the second-highest bidder gets the item. Answer: C
Q3) In a two-person economy, Adam and Brandon both produce corn and cars.Adam's marginal cost of producing a car is 50 tons of corn, while Brandon's marginal cost is 70 tons of corn.In this economy, Brandon should produce cars and Adam should produce corn.
A)True
B)False
Answer: False
Page 4
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Chapter 3: Markets
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Sample Questions
Q1) Substitution of one commodity for another depends on all of the following factors, EXCEPT:
A)prices of the goods available to the consumers.
B)tastes and preferences of the buyers.
C)the information buyers possess.
D)market protocols.
Answer: D
Q2) Why is a futures contract considered valuable by both producers and consumers?
Answer: The futures contract is valuable to both producers and large consumers because it acts as a hedge which lessens the risk associated with the volatile spot prices.
Q3) The contact points where the terms of forward contracts are set are known as:
A)the underlying markets.
B)the derivative markets.
C)the over-the-counter markets.
D)the futures exchange.
Answer: C
Q4) What is a price floor?
Answer: A legislation fixing the minimum price of a commodity above the market-clearing or the equilibrium price is called a price floor.
5
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Chapter 4: Cost and Production
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Sample Questions
Q1) A tax accountant categorizes costs in conformity with rules of the Securities and Exchange Commission and the Financial Accounting Standards Board so that investors can better compare the records and prospects of different companies.
A)True
B)False
Q2) Let the marginal product of capital (MPK ) be 6; the marginal product of labor (MPL) be 2; the price of labor is given by $10.What will be the price of capital such that the isocost and the isoquant are tangent to each other?
A)$30
B)$3
C)$60
D)$6
Q3) When average variable cost is at its minimum, it is equal to the marginal cost of production at that level of output.
A)True
B)False
Q4) Define opportunity cost.
Q5) What is marginal cost?
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Chapter 5: Extreme Markets I: Perfect Competition
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Q1) Which of the following is true in a perfectly competitive market?
A)The sellers can partially influence the price level in the market.
B)All firms have identical costs.
C)Entry or exit of new sellers into the market is restricted.
D)Buyers and sellers have incomplete information about the product and the market.
Q2) Firms in a perfectly competitive market usually enter or leave an industry in the short-run and not in the long-run.
A)True
B)False
Q3) Refer to Figure 5-2.What will be the impact of the rise in raw materials cost on the long-run supply curve of this industry?
A)The long-run supply curve will shift upward.
B)The long-run supply curve will shift downward.
C)The long-run supply curve will remain unchanged.
D)The long-run supply curve will change into an upward rising step function.
Q4) State some of the policies adopted by the U.S.government to check petroleum prices.
Q5) State any two properties of the perfectly competitive market.
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Chapter 6: Extreme Markets II: Monopoly
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Sample Questions
Q1) Identify some of the basic assumptions of monopoly.
Q2) How is the profit maximizing price and output calculated for a monopolist when i) it incurs no marginal cost, and ii) when it incurs positive marginal cost? Discuss with an example.
Q3) Monopoly output is relatively lower than a competitive market output as resources remain unutilized under the former.
A)True
B)False
Q4) Refer to Figure .How much profit will the monopolist earn if he practices price discrimination?
A)$10
B)$25
C)$15
D)$22
Q5) The demand curve faced by a perfectly competitive firm is:
A)downward sloping.
B)the same as the market demand curve.
C)horizontal.
D)perfectly inelastic.
Q6) When can a monopolist practice price discrimination?
Page 8
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Chapter 7: Between the Extremes: Interaction and Strategy
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Sample Questions
Q1) Why did the attempts by some airlines to introduce uniform pricing for all air trips in 1980s and 1990s fail?
Q2) Refer to Figure .What will be the fringe's profit maximizing output?
A)0.6 unit
B)0.3 unit
C)1.6 units
D)2.6 units
Q3) Refer to Figure .If the market demand curve D rotates outward (while its vertical intercept remains unchanged), which of the following changes will be observed in the oligopoly market?
A)The fringe's market share will decline
B)The dominant firm's profits will decrease
C)The marginal cost will decrease
D)The overall market price will decline
Q4) In oligopoly outcomes, the dominant firm's profitability depends on how the fringe, consisting of small competing sellers, responds to its choices.
A)True
B)False
Q5) Explain the concept of Nash equilibrium with an example.
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Chapter 8: Competition and Strategy
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Sample Questions
Q1) What are the benefits of a franchise contract?
Q2) When an innovation spreads among producers, the earlier adopters enjoy longer-lived streams of profit before the market reaches its new long-run equilibrium.
A)True
B)False
Q3) Refer to Figure .Suppose the seller incurs an additional cost of $1 per unit of output to reduce the transaction costs of the buyers to zero.How will the profit earned by the seller change?
A)The firm's profit will increase by $0.62.
B)The firm's profit will increase by $2.6.
C)The firm's profit will remain unchanged.
D)The firm's profit will decrease by $6.2.
Q4) Refer to Figure.Determine the profit earned by the perfume monopolist if it chooses to retail its products?
A)$3.2
B)$1.5
C)$3.5
D)$2.2
Q5) How is economic value created during transactions between buyers and sellers?
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Chapter 9: Beyond Markets; Property and Contracts
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Sample Questions
Q1) Which of the following exemplifies inefficient legal assignment of rights with high transaction costs?
A)Agreement between an orchard farmer and a beekeeper.
B)LoJack installation in cars to prevent car theft.
C)The Huntington Beach oil wells.
D)Installation of smog control in cars.
Q2) A contract between a bee keeper and an orchard farmer usually break because of the high cost of writing the contract.
A)True
B)False
Q3) Which of the following is true of property rights?
A)They are rights to use a public good without paying for it.
B)They usually specify the owner's alternatives.
C)The are associated with the exchange of commodities but not services.
D)They are often open-ended and do not exhaustively specify the owner's alternatives.
Q4) Who is considered to be a free rider according to economists?
Q5) The farmer's association is a type of government with unlimited jurisdiction.
A)True
B)False
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Chapter 10: The Economics of Contracts
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Sample Questions
Q1) _____ is a contract that specifies actions to be taken if various situations come to prevail.
A)An insurance policy
B)Contingency
C)Unitization
D)An escalator
Q2) Refer to Table .If Mike has to pay Frasel expectation damages what would be his net payoff from the breach?
A)$8
B)$10
C)$0
D)$6
Q3) What does an efficient payment scheme in a principal/agent relationship depend on?
Q4) Refer to Table .What would be the total economic value of the transaction if both of them keep the contract?
A)$10
B)$16
C)$15
D)$30
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Chapter 11: Risk and Information in Contracts
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Sample Questions
Q1) The study conducted by Eric Bond of Vanderbilt University on the repair histories of a large sample of pickup trucks over three years old ascertained that:
A)the repair costs of trucks held by original users was similar to those held by second hand users.
B)the repair cost of trucks held by second hand users was higher compared to those held by original users.
C)the repair cost of trucks held by original users was higher compared to those held by second hand users.
D)the repair costs of trucks held by original users as well as those held by second hand users increased by the same magnitude every year.
Q2) The problem of adverse selection is usually more acute in case of automobile insurance compared to health insurance.
A)True
B)False
Q3) Mention some of ways in which insurers control the problem of moral hazard.
Q4) What are the disadvantages of a standard form contract?
Q5) What is an insurance premium?
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Chapter 12: Organizations in Concept and Practice
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Q1) Any form of wealth held by a sole proprietor will be factored into the terms of the loans she receives because:
A)her liability is limited.
B)her business is inseparable from her.
C)her business is too small to bear investment risks.
D)her investment decisions depend on her total output.
Q2) Unless the specialists involved in the different stages of production coordinate among themselves, specialization and division of labor can result in unused capacities and investment mismatches.
A)True
B)False
Q3) In which of the following economic activities do we commonly find a proprietor acting as a supervisor, a provider of capital, and a residual claimant?
A)A multinational bank
B)An oil exploration company
C)A small medical store
D)An aircraft manufacturer
Q4) What is a hierarchy?
Q5) How does supervision benefit team production?
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Chapter 13: Organizational Design
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Sample Questions
Q1) Which of the following statements is true of members of an organization?
A)They are either principals or subordinates.
B)Agents are closely monitored by principals at all times.
C)Each member generates information for the use of others in the organization.
D)Decision-makers decide on the basis of the information they generate themselves.
Q2) Each of the following can explain why an order could not been carried out as intended, EXCEPT:
A)incompetence.
B)opportunism.
C)impossibility.
D)obedience.
Q3) Centralization of decision-making in a firm is a good idea when:
A)the people who produce the information also have decision-making skills.
B)all the information comes from internal sources.
C)the incentives of the decision-makers is not aligned with the firm's share holders.
D)those who have the relevant information are not equipped to analyze it.
Q4) What factors determine how centralized or decentralized the decision-making in an organization should be?
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Chapter 14: Vertical Relationships
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Sample Questions
Q1) Which of the following transactions can be categorized as outsourcing?
A)A U.S.furniture manufacturer buying a lumber facility.
B)A U.S.firm transferring some of its operations to its new subsidiary in India.
C)Nike selling its sportswear to customers through its franchisees across the world.
D)A U.S.cosmetics firm using an advertising agency to market its products.
Q2) 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.
Q3) A firm chooses vertical integration to reduce all of the following costs, EXCEPT:
A)the cost of investing in diversified assets.
B)the cost of finding a trading partner.
C)the cost of devising and enforcing an agreement.
D)the cost of evaluating the other party's performance.
Q4) Explain the three dimensions of uncertainty which affects the choice among markets, contracts, and integration.
Q5) Why do vertical contracts impose restraints and obligations?
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Chapter 15: Employment Relationships
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Sample Questions
Q1) Influence cost is a type of _____ incurred while filling positions that have similar responsibilities but carry different pay.
A)deadweight loss
B)opportunity cost
C)externality
D)social cost
Q2) Susan works 60 hours a week while Rachel works 20 hours because she is unable to find full-time work.Which of the following statements is true?
A)Susan is likely to work for an extra hour without a pay hike.
B)Rachel is unlikely to give up another hour's leisure without a pay hike.
C)Susan's opportunity cost of leisure is likely to be lower than Rachel's.
D)Susan is unlikely to give up another hour's leisure without a pay hike.
Q3) Piece rates are used when:
A)an individual's output is independent of others and can be easily measured.
B)the job involves team production.
C)an individual's output can be affected by random events.
D)monitoring is difficult.
Q4) Why do firms opt for internal labor markets when they may be able to find more candidates with necessary qualifications outside?
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Chapter 16: Time, Risk and Options
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Sample Questions
Q1) Calculate the discounted value of $2,875 to be received from a bank a year later at an interest of 15 percent per annum.
A)$2,625
B)$2,075
C)$2,015
D)$2,500
Q2) Why are present value calculations used in real options?
Q3) Briefly describe the different conditions which affect the value of a real option.
Q4) Which of the following strategies are adopted by a business tycoon when the first new management of the purchased company fails?
A)He tries a second management team.
B)He tries to train and motivate the existing management team.
C)He sells off part of the company in the market.
D)He tries to reduce the cost of production by lowering output.
Q5) Why are interest rates considered to be the opportunity cost of investments?
Q6) Suppose Player X's probability of winning a gamble is 0.8 while that of Player Y is 0.5.Which of the two will be willing to pay for a test and why?
Q7) When do financial options prove to be beneficial?
Page 18
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Chapter 17: Conflict, Negotiation and Group Choice
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Sample Questions
Q1) What characteristics distinguish private goods from public goods?
Q2) The utility possibility frontier helps to predict the exact bargain two parties will arrive at.
A)True
B)False
Q3) On the boundary of the utility possibility frontier, if the utility of one person increases, that of the other will decline.
A)True
B)False
Q4) In which of the following cases are disputes more likely to be settled by negotiations than by court cases?
A)When the parties involved are risk averse
B)When time is not an important factor
C)When court costs are low
D)When parties have asymmetric beliefs about facts
Q5) When parties are risk averse, cases with more at stake are less likely to settle outside court.
A)True
B)False
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