ECO 320 MIDTERM EXAM NEWEST 2025 ACTUAL EXAM COMPLETE 120 QUESTIONS AND CORRECT
DETAILED ANSWERS
What is market power? - (answer) ability of a firm to raise and maintain prices above competition
prices, extent to which a firm can influence price by exercising control over supply/demand, ability to
create high barriers to entry
What business policies can firms use to acquire and maintain market power? - (answer) mergers, cartel
behavior/collusion, predatory pricing, innovation, advertising, bundling, pricing/price discrimination,
product differentiation, lobbying, limit pricing
Implications of market power for firms and social welfare - (answer) for firms: bigger profits, greater
firm value, for economic welfare: unclear, for consumers: higher prices w/low consumer surplus
Role of public policy re: market power - (answer) market regulation, competition policy, state
enterprises (extradition)
Why is the assumption of profit maximization imperfect? - (answer) large firms are often owned and
managed separately, hampered by short term focus, information asymmetry leading to agency issues
Why is the assumption of profit maximization reasonable? - (answer) there are solutions to combat
conflict between owners/management including internal controls/incentives and market discipline, data
tend to indicate deviations from profit maximization aren't too extreme
Horizontal dimension of the firm - (answer) LRAC curve/RTS, internal economies of scale (technical
economies, specialist capital machinery, purchasing economies, financial economies, network
economies, large-scale division of labor, diversification, specialist managers)
Diseconomies of scale - (answer) regulatory costs, office politics/industrial relations, principal-agent
problem, risk aversion, waste/inefficiency, cost of complexity
Vertical dimension of the firm - (answer) relates to how many stages of production take place in the
firm, market/firm are alternative means of organization of economic transactions to acquire
goods/services but market has transaction costs
Transaction costs - (answer) search costs, information costs, bargaining costs
, ECO 320 MIDTERM EXAM NEWEST 2025 ACTUAL EXAM COMPLETE 120 QUESTIONS AND CORRECT
DETAILED ANSWERS
Economies of scope - (answer) diversity of products can be cheaper to produce if they fall into similar
categories (e.g. hypermarkets, Amazon)
Economic integration definition - (answer) removal of economic frontiers which constrain free
movement of goods, services, capital, labor
Benefits of economic integration - (answer) enhanced consumption, more competition/higher
productivity, revealing of competitive advantage by country, larger market, FDI bringing technology,
stronger exports
Major milestones in EU economic integration - (answer) 1957 Treaty of Rome (6 countries), customs
1986 Single European Act-Schengen, mvmt.
1992 Maastricht Treaty-monetary union
1995 European Economic Area
2009 Lisbon Treaty, political union
Schengen Area Agreement - (answer) No travel restrictions between 26 member states
European Economic Area - (answer) provides for the free movement of persons, goods, services and
capital within the European Single Market
EU Single Market - (answer)
EU Market (business threats/opportunities) - (answer)
Market structure - (answer) organizational and other characteristics of a market (monopoly,
competition, oligopoly), determines business policies and firm performance
DETAILED ANSWERS
What is market power? - (answer) ability of a firm to raise and maintain prices above competition
prices, extent to which a firm can influence price by exercising control over supply/demand, ability to
create high barriers to entry
What business policies can firms use to acquire and maintain market power? - (answer) mergers, cartel
behavior/collusion, predatory pricing, innovation, advertising, bundling, pricing/price discrimination,
product differentiation, lobbying, limit pricing
Implications of market power for firms and social welfare - (answer) for firms: bigger profits, greater
firm value, for economic welfare: unclear, for consumers: higher prices w/low consumer surplus
Role of public policy re: market power - (answer) market regulation, competition policy, state
enterprises (extradition)
Why is the assumption of profit maximization imperfect? - (answer) large firms are often owned and
managed separately, hampered by short term focus, information asymmetry leading to agency issues
Why is the assumption of profit maximization reasonable? - (answer) there are solutions to combat
conflict between owners/management including internal controls/incentives and market discipline, data
tend to indicate deviations from profit maximization aren't too extreme
Horizontal dimension of the firm - (answer) LRAC curve/RTS, internal economies of scale (technical
economies, specialist capital machinery, purchasing economies, financial economies, network
economies, large-scale division of labor, diversification, specialist managers)
Diseconomies of scale - (answer) regulatory costs, office politics/industrial relations, principal-agent
problem, risk aversion, waste/inefficiency, cost of complexity
Vertical dimension of the firm - (answer) relates to how many stages of production take place in the
firm, market/firm are alternative means of organization of economic transactions to acquire
goods/services but market has transaction costs
Transaction costs - (answer) search costs, information costs, bargaining costs
, ECO 320 MIDTERM EXAM NEWEST 2025 ACTUAL EXAM COMPLETE 120 QUESTIONS AND CORRECT
DETAILED ANSWERS
Economies of scope - (answer) diversity of products can be cheaper to produce if they fall into similar
categories (e.g. hypermarkets, Amazon)
Economic integration definition - (answer) removal of economic frontiers which constrain free
movement of goods, services, capital, labor
Benefits of economic integration - (answer) enhanced consumption, more competition/higher
productivity, revealing of competitive advantage by country, larger market, FDI bringing technology,
stronger exports
Major milestones in EU economic integration - (answer) 1957 Treaty of Rome (6 countries), customs
1986 Single European Act-Schengen, mvmt.
1992 Maastricht Treaty-monetary union
1995 European Economic Area
2009 Lisbon Treaty, political union
Schengen Area Agreement - (answer) No travel restrictions between 26 member states
European Economic Area - (answer) provides for the free movement of persons, goods, services and
capital within the European Single Market
EU Single Market - (answer)
EU Market (business threats/opportunities) - (answer)
Market structure - (answer) organizational and other characteristics of a market (monopoly,
competition, oligopoly), determines business policies and firm performance
