What are the five major reasons for government involvement in a market economy? What will be an ideal response? ANSWER Provide the legal, monetary and social framework necessary for markets to operate. Insure that markets operate in a competitive manner. Redistribute income and wealth in a more desired (equitable) fashion. Guarantee a more efficient […]
A function of government is to regulate “natural monopolies.” Explain what is a natural monopoly and why it requires government regulation. What will be an ideal response? ANSWER Natural monopolies occur when there are large cost economies of scale such that one producer can operate in the declining range of average cost while meeting […]
Describe the basic motives for businesses to merge. What will be an ideal response? ANSWER Take advantage of synergies in operations: increase overall sales, reduce operating costs, lower costs of capital. Mutual acquisition of skilled managers, as each of the businesses may have skilled personnel that the other doesn’t possess. Take advantage of favorable […]
In a company, if high-ability workers get paid $80,000, while low-ability workers get paid $50,000, the education (MBA) that can qualify the workers as high-ability ones cost $20,000. What’s the highest share of high-ability workers to get a separating equilibrium? A) 1/4 B) 1/3 C) 1/2 D) 1 ANSWER B
One school of anti-trust thought argues that, rather than ensuring efficiency, anti-trust laws are really aimed at A) protecting small independent firms against large corporations. B) outlawing all monopolies whether they perform “bad acts” or not. C) price differentiation due to differences in quality and cost. D) restricting interlocking directorates. ANSWER A
Explain why risk can be insured against but uncertainty cannot. What will be an ideal response? ANSWER The provider of insurance policies can assign probabilities to the occurrences of insurable events and calculate premium rates to charge. With uncertainty, no probabilities can be attached to such events and it isn’t possible to construct the […]
Which of the following would not be considered a synergistic benefit from a merger? A) an improvement in distribution systems B) economies of scale in production C) decreased cost of capital D) None of the above ANSWER D
An example of an activity that is likely to generate benefit (positive) externality is A) a well manicured lawn of your neighbor. B) growing wild flowers on city street islands. C) fireworks on the 4th of July. D) an educated workforce. E) All of the above ANSWER E
A merger between two companies in unrelated fields of business A) will always lead to economies of scale. B) will generally increase the value of the unified firm compared to the value of the two companies before the merger because of the benefits of diversification. C) may not have any synergistic effects. D) will necessarily […]
The supply for products that exhibit cost externalities is generally ________ the supply for products that do not. A) greater than B) less than C) the same as D) greater or less (depending on the market) than ANSWER A
