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