ECO 320 Midterm Review 2025
Questions and 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
....COPYRIGHT ©️ 2025 ALL RIGHTS RESERVED...TRUSTED & VERIFIED 1
, 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
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
....COPYRIGHT ©️ 2025 ALL RIGHTS RESERVED...TRUSTED & VERIFIED 2
Questions and 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
....COPYRIGHT ©️ 2025 ALL RIGHTS RESERVED...TRUSTED & VERIFIED 1
, 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
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
....COPYRIGHT ©️ 2025 ALL RIGHTS RESERVED...TRUSTED & VERIFIED 2
