ECO 320 Midterm Review UPDATED
ACTUAL Exam Questions and CORRECT
Answers
What is market power? - CORRECT 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? - CORRECT
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 - CORRECT 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 - CORRECT ANSWER market regulation,
competition policy, state enterprises (extradition)
Why is the assumption of profit maximization imperfect? - CORRECT 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? - CORRECT 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 - CORRECT 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 - CORRECT ANSWER regulatory costs, office politics/industrial
relations, principal-agent problem, risk aversion, waste/inefficiency, cost of complexity
Vertical dimension of the firm - CORRECT 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 - CORRECT ANSWER search costs, information costs, bargaining costs
Economies of scope - CORRECT ANSWER diversity of products can be cheaper to produce
if they fall into similar categories (e.g. hypermarkets, Amazon)
Economic integration definition - CORRECT ANSWER removal of economic frontiers which
constrain free movement of goods, services, capital, labor
Benefits of economic integration - CORRECT 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 - CORRECT 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 - CORRECT ANSWER No travel restrictions between 26 member
states
ACTUAL Exam Questions and CORRECT
Answers
What is market power? - CORRECT 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? - CORRECT
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 - CORRECT 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 - CORRECT ANSWER market regulation,
competition policy, state enterprises (extradition)
Why is the assumption of profit maximization imperfect? - CORRECT 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? - CORRECT 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 - CORRECT 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 - CORRECT ANSWER regulatory costs, office politics/industrial
relations, principal-agent problem, risk aversion, waste/inefficiency, cost of complexity
Vertical dimension of the firm - CORRECT 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 - CORRECT ANSWER search costs, information costs, bargaining costs
Economies of scope - CORRECT ANSWER diversity of products can be cheaper to produce
if they fall into similar categories (e.g. hypermarkets, Amazon)
Economic integration definition - CORRECT ANSWER removal of economic frontiers which
constrain free movement of goods, services, capital, labor
Benefits of economic integration - CORRECT 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 - CORRECT 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 - CORRECT ANSWER No travel restrictions between 26 member
states
