1. What are the two components of short-
Two components of short-run total cost
run total cost? Describe each. – 5 points
2. It is the measure of variable cost on a
per unit basis. - 1 point
3. What is sunk cost? – 1 points
4. Explain/describe the following – 6
points
– Economies of scale
– Diseconomies of scale
– Constant returns to scale
5. What is Multiproduct Cost Function - 1
points
6. Explain Economies of scope – 2 points
7. What is Cost complementarity - 1
points
8. What are the methods of procuring
inputs? 3points.
9. What is spot exchange? How does it
happen? 2 points.
10. What is a contract? What does it
contain? 2 points
11. What is Vertical integration? Explain. 2
points
12. What is a transaction cost? – 2 points
13. What are included in transaction cost?
– 3 points
14. What is specialized investment? - 1
points
15. What is Relationship specific exchange
– 1 points
16. List the types of specialized
investment? - 4 points
17. What are the Implications of Specialized
Investments – 3 points
1.
are called 1) fixed costs and 2) variable
costs
 Fixed costs, denoted FC, are
costs that do not vary with
output. Fixed costs include the
costs of fixed inputs used in
production.
 Variable costs, denoted VC(Q),
are costs that change when
output is changed. Variable
costs include the costs of inputs
that vary with output.
2. Variable Cost
3. Sunk Cost - is a cost that is forever lost
after it has been paid.
4.
 Economies of scale – is a
condition where the long run
average costs decline as output
is increased
 Diseconomies of scale - Exist
when long run average costs
rise as output is increased.
 Constant returns to scale - Exist
when long run average costs
remain constant as output is
increased
5. Multiproduct Cost Function - A function
that defines the cost of producing given
levels of two or more types of outputs
assuming all inputs are used efficiently.
6. Economies of scope exist when the
total cost of producing Q1 and Q2
together is less than the total cost of
producing Q1 and Q2 separately
7. Cost complementarities exist in a
multiproduct cost function when the
 marginal cost of producing one output
is reduced when the output of another
product is increased.
8. .
 Purchase the Inputs Using Spot
Exchange
 Acquire Inputs under a Contract
 Produce the Inputs Internally
(Vertical Integration)
9. SPOT EXCHANGE - An informal
relationship between a buyer and seller
in which neither party is obligated to
adhere to specific terms for exchange.
Spot exchange occurs when the buyer
and seller of an input meet, exchange,
and then go their separate ways.
10. Contract - A formal relationship
between a buyer and seller that
obligates the buyer and seller to
exchange at terms specified in a legal
document. A contract is a legal
document that creates an extended
relationship between a particular buyer
and seller of an input. It specifies the
terms under which they agree to
exchange over a given time horizon,
say, three years
11. Vertical integration - A situation where
a firm produces the inputs required to
make its final product.
12. Transaction costs - Costs associated
with acquiring an input that are in
excess of the amount paid to the input
supplier.
13. 1) The cost of searching for a supplier
willing to sell a given input;
2) The costs of negotiating a price at
which the input will be purchased.
These costs may be in terms of the
opportunity cost of time, legal fees, and
so forth.
3) Other investments and expenditures
required to facilitate exchange.
14. Specialized investment - An expenditure
that must be made to allow two parties
to exchange but has little or no value in
any alternative use. mA specialized
investment is simply an investment in a
particular exchange that cannot be
recovered in another trading
relationship.
15. Relationship specific exchange – A type
of exchange that occurs when the
parties to a transaction have made
specialized investments.
16. 1) Site Specificity; 2) Physical-Asset
Specificity, 3) Dedicated Assets; 4)
Human Capital
17. 1) costly bargaining, 2)
underinvestment, 3) Opportunism and
the “Hold-Up Problem”
1. What is owner-manager/principal-agent
problem? How does it happen? - 5
points
2. What is manager–worker/principal–
agent problem? How does it happen? -
5 points
3. What is incentive contract? – 3 points
4. List down four (4) solutions to
manager–worker/principal–agent
problem. – 4 points
5. What are the major structural variables
that affect managerial decisions? – 5
points
6. What are the measures of industry
concentration? – 2 points
7. What are the differences in conduct 4. Solutions to manager–
that exist across industries – 4 points worker/principal–agent problem - 4
points
8. What is Lerner index? - 3 points
1) Profit-Sharing,2) Revenue-Sharing, 3)
9. What are the four Basic Models OF
Piece-Rates, 4) Time-clock and spot checks
Market Structure? – 4 points
5. 1) Firm Size, 2) Industry Concentration,
1. The owner–manager/principal–agent
3) Technology, 4) Demand and Market
problem arises when managers do not
Conditions, 5) Potential for Entry
share in the success of the day-to-day
- 5 points
operations of the firm. When managers
do not have a stake in company’s 6. 1) Four-firm concentration ratio (C4)
performance, some managers will have and2) Herfindahl-Hirschman index (HHI)
an incentive to substitute leisure for a -- 2 points
diligent work effort. - 5 points
7. 1) Pricing Behavior, 2) Integration and
2. The manager–worker/principal–agent Merger Activity, 3) Research and
problem arises when workers do not Development, 4) Advertising - 4 points
have a vested interest in a firm’s
8. Lerner index - A measure of the
success. Without a stake in the
difference between price and marginal
company’s performance, there will be
cost as a fraction of the product’s price.
an incentive for some workers not to
- 3 points
put forth their best efforts. - 5 points
9. 1) Perfect Competition, 2) Monopoly, 3)
3. An incentive contract between owner
Monopolistic Competition, 4) Oligopoly
and manager is one in which the
- 4 points
manager is provided with incentives to
perform in the best interest of the
owner. - 3 points