1. ECO 550 Week 6 Quiz 4, Chapter 8
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Economics - General Economics
Question 1
1. In a market characterized by many sellers, if an outsider devises a way to reduce transaction costs it
will:
benefit both buyers and sellers.
cause both buyers and sellers to lose.
benefit the buyers but cause the sellers to lose.
benefit the sellers but cause the buyers to lose.
Question 2
1. If two small perfectly competitive firms merge, the merged firm will be:
a price-taker.
a market leader.
a price-discriminator.
an oligopoly.
Question 3
1. Refer to Figure 8-2. Suppose the adoption of a new technology lowers the cost of production while
the buyer’s valuation remains unchanged. Which of the following changes will be observed by the
firm?
The figure given below represents a firm in a market characterized by many buyers and one seller. MC
represents the marginal cost, MR the marginal revenue, and D the demand curve of a firm. The firm is
initially in equilibrium producing 6 units of output at a price of $10 per unit.
Figure 8-2
The demand curve for its product will shift to the left.
The marginal cost curve will shift downward.

2. The equilibrium output of the firm will fall below 6 units.
The marginal revenue curve will shift downward.
Question 4
1. Under which of the following situations would a seller prefer to incur the cost of improving the
product quality?
If the increase in buyer’s valuation for the improved product is higher than the cost of improving it.
If the increase in the seller’s opportunity cost of improving the product is higher than the price of the
product.
If the product improvement lowers the producer surplus.
If the product improvement allows the seller to a break even.
Question 5
1. A firm’s resource at a given point in time can be defined as:
those investments made by it in profitable organizations.
those tangible and intangible assets attached to it semi permanently.
its ability to control the market price.
its lobbying ability built over years of experience.
Question 6
1. Refer to Figure 8-3. 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?
The figure given below represents a firm in a market characterized by many buyers and one seller. MC
is the initial marginal cost of the seller. MC' denotes the marginal cost inclusive of the $1 transaction
cost. On the other hand, buyers incur a transaction cost worth $2 represented by the vertical distance
between D and D'. MR and MR' represent the marginal revenue curve corresponding to the demand
curves D and D' respectively.
Figure 8-3
The firm’s profit will increase by $0.62.
The firm’s profit will increase by $2.6.
The firm’s profit will remain unchanged.
The firm’s profit will decrease by $6.2.

3. Question 7
1. Which of the following activities undertaken by a competitive firm can improve its public relations?
Investing in assets that cannot easily be redeployed to other uses or locations.
Donating a portion of its annual profit to hurricane affected families
Providing good quality products at a high price.
Investing in in-house research
Question 8
1. Refer to Figure 8-5. Calculate the value of the deadweight loss resulting from the horizontal
merger?
The figure given below represents a perfectly competitive market in long-run equilibrium. LRS
represents the long-run supply curve of this market with demand (D) and price $50. When two large
firms merge, output declines to 400 units and per unit production cost drops to $30.
Figure 8-5
$800
$600
$400
$300
Question 9
1. Suppose the cost of producing cellular phones declines from $25 to $20. If buyers’ valuations
remain fixed at $30, the transaction would create _____ more economic value.
$10
$5
$2
$15
Question 10
1. Which of the following is an example of a one-time investment made by a seller to reduce the
transaction cost on all units of output?
Providing customers a wide range of products

4. Hiring a distribution agency
Merging with its rival brand
Creating a brand name which signals quality
Question 11
1. Temporary discounts offered to customers by competitive retailers usually reflect:
output rationing.
a rise in market demand.
price discrimination.
a fall in input prices.
Question 12
1. Refer to Figure 8-6. Determine the profit earned by the perfume monopolist if it chooses to hire a
retailer for selling its product.
The figure given below represents a monopoly firm producing perfume with downward sloping
demand and marginal revenue (MR) curves. The products of this firm are sold in the competitive
market by a retailer. Among the horizontal lines in the figure:
A - represents the marginal cost of per unit perfume production
B - represents the marginal cost of an independent perfume retailer
C - represents the sum of A and B
D - represents the marginal cost of the perfume monopolist for retailing its own output
E - represents the sum of A and D.
Figure 8-6
$2.7
$6.5
$5.5
$2.4
Question 13
1. Under a _____, the assets of two firms that operate in the same market are put under a single
ownership.
vertical merger
horizontal merger

5. vertical acquisition
horizontal acquisition
Question 14
1. Wal-Mart’s store managers have the authority to stock items and price them to satisfy localized
demand. Which of the following properties of this retail store is illustrated here?
Relationship with employees
Regional relationships
Centralized decision making
Decentralized decision making
Question 15
1. Which of the following industries can create barriers to the entry of new firms due to size and
specificity?
A hydroelectric power plant
A garment manufacturer exporting apparels
An owner of a retail chain
An automobile manufacturing company