Micro Economics Test 4

Under the Five Forces framework, how can the market power of customers impact a seller's profitability?

Customers with market power can use their leverage to lower the selling price that sellers charge.

When a product is characterized by network effects, the the product ________ when more customers use the product.

becomes more valuable to each customer

Why do average variable costs eventually rise if a company's output increases enough?

Diminishing marginal product occurs, causing average variable costs to rise.

When would an improved next best alternative NOT yield results for a company owner that is negotiating?

The company does not make the other party aware of its improved next best alternative.

The market structure of ________ is rare because _______ and _______

perfect competition; most goods are not identical; most markets have some dominant firms

The threat of potential substitutes is larger when:

switching costs are low.

The table provides daily data on Artem's Sandwich Shop. Use these data to answer the question. What is Artem's profit margin?

$1 (Total revenue-total cost/quantity)

Corinne is offered a job with a salary of $70,000, which she turns down to start her own business. She uses $20,000 of her own savings to help start the business, saving that had been providing her a return of $1,000 per year. Over her first year in business, Corinne collects total revenue of $180,000 and must cover explicit costs of $105,000. During her first year in business Corinne's accounting profit is_______, and her economic profit is _______.

$75,000; $4,000

A merger benefits society when it results in

Cost savings.

What "balancing act" do imperfect competitors face as they set their product price?

If the price is too high, profit will be small as you sell a small quantity.

Which of the following is NOT one of the benefits that result when a company produces at several stages in a production chain rather than specializing in just one stage?

It increases within-brand competition.

How long does it take for a company to be in the long run?

It is any time period longer than one year.

Marcella is a tomato farmer. Under which of the following conditions would she face the most intense competition?

Marcella is one of 1,200 tomato farmers who sell in the same tomato market.

In which of the following situations would the level of competition be most intense?

More firms are in the market.

A cable TV company gives current customers a year-long discount for each new customer they bring to the cable company. Jose, a current customer, gets five of his friends to sign up for cable TV service with his provider so that he can receive discounts on his cable bill. The cable TV company is using a _________ strategy to create a barrier to entry.

Network effect

Relationship-specific investments are investments that:

are worth more in the context of a specific business relationship.

What protects a business from the threat of entry by potential competitors?

barriers to entry

In the long run, a company can remain profitable only if:

barriers to entry are present.

Over time, Paco's Pie Shop has developed a pie crust that cooks more rapidly than the crusts of other bakers and a filling that uses less costly inputs while maintaining comparable customer appeal. Other bakers have tried but failed to duplicate Paco's two cost advantages. Knowing that they will need to compete against Paco's Pie Shop, potential new entrants will:

be discouraged from entering, owing to the advantages Paco's has achieved.

The toothpaste aisle at a large store that sells personal care products contains many versions of toothpaste produced by a small number of sellers. This indicates that toothpaste producers are engaging in ________ to _______.

brand proliferation, deter new enterants

Price ceilings tend to create shortages when used to

bring down price in a competitive market.

How does the threat of potential substitutes lessen the market power of a business? If the substitute becomes available, the the:

business may lose customers to the substitute good's market unless it lowers price.

A seller strives to achieve consistently high quality in all its output so that customers can trust that they will be pleased with the product. Building a reputation for high quality is consistent with a seller trying to _______ through _______ strategy.

create customer lock-in; a demand-side

When free entry and free exit exist in a market, then in the long run, a seller's demand curve will:

cross its average cost curve.

Many governments require companies that produce drugs to obtain government approval before selling a new drug. This is done to ________, and it leads to ________ in the market for the new drug.

ensure public safety; a barrier to entry

When there is free entry and exit in a market, in the long run, price will:

equal average cost.

Companies with market power face a trade-off between

gaining market share and reducing costs

One of the market failures caused by market power is

high price.

Which of the following is a negative outcome of markets where sellers have market power?

higher prices

To gain as many customers as possible through product differentiation, a producer must consider _____ as the producer makes decisions about how to distinguish its product.

how rivals are positioning their products

What is the difference between accounting profit and economic profit?

implicit opportunity costs

Sellers in a market will become less profitable when:

new sellers enter the market.

When sellers in a market earn economic profits:

new sellers will be attracted into the market.

When a company has market power, it is _______ in its market.

not a price-taker

The five forces that determine the structure of competition do NOT include:

potential regulation.

Market power results in companies that _______ and that have _______ compared to perfect competition

produce less; higher price

A natural monopoly exists when

producing a large output has significantly lower marginal cost than producing a small output.

In a market, when a company's owner tries to make its product slightly different from the output of other companies so that it is more attracte to buyers, the company is engaged in

product differentiation.

In a market, when a company's owner tries to make its product slightly different from the output of other companies so that it is more attractive to buyers, the company is engaged in

product differentiation.

Which of the following is an example of the business-stealing effect in advertising? Jo Bakery's advertising campaign:

raises Jo's sales at the expense of sales by rival bakeries.

Avoiding the possibility of hold-up problems can lead to the problem of:

relationship-specific contracts

Marginal revenue is the difference between output effect or price and the ______ effect for a given quantity.

sales

When firms in a market with free entry and exit experience economic losses, then:

some sellers will exit the market, reducing average seller losses.

The Five Forces framework focuses on competitive forces. Which of the following is NOT one of the five forces?

substitute products

What determines a negotiator's bargaining power?

the negotiator's next best alternative

When Joe's Manufacturing Company successfully differentiates its product, then from the perspective of consumers:

the output of rival sellers is not a good substitute for Joe's output.

When a product is NOT differentiated and price competition prevails, then:

the sellers are not likely to earn economic profits

The costs of vertical integration do NOT include reduced:

within-brand competition

Junko earns a yearly salary of $130,000 in her job and $1,000 per year in interest on her savings. After she quits her job to start a company, she uses all her savings to purchase manufacturing equipment for her company. Given the above information and the data summarizing her first year in business in the table, how much accounting profit or loss does Junko earn?

$150,000 (accounting profit=Total revenue-implicit costs)

What level of market power exists for sellers in a perfectly competitive market?

All sellers lack market power.

Clarice's factory has invested in expensive equipment to produce a specialized weapon for her government's military. There are no other buyers of this type of weapon, and the equipment is not useful for the production of other goods. Which of the following statements describes Clarice's vulnerability based on the Five Forces framework?

Clarice is vulnerable because her customer has market power.

economic profit formula

Economic Profit= Total Revenue - Opportunity Costs = Total Revenue - (Explicit + Implicit Costs)

According to the Rational Rule for Sellers, this company should produce ______ of output and charge a price of _______.

Wherever Marginal revenue = Marginal cost

In the short run, companies face _______, and in the long run, ________.

a fixed set of competitors; the number of competitors can change

When collusion occurs, sellers in a market

act like a monopolist to increase profits.

Imperfectly competitive sellers can earn higher profits because they

face a less extreme trade-off between higher prices and higher quantity

In the short run, a seller _______, but in the long run, _________.

faces a fixed number of rivals; the number of rivals can vary

When a seller is able to differentiate its product successfully, the seller

gains market power.

According to the Five Forces framework, the ______ degree of rivalry in an industry, the _______ the average profits will be in the industry.

greater; lower

Vertical integration occurs in a merger when the companies that merge:

had a buyer-seller relationship prior to the merger, with each covering a different stage in a production chain.

The output in a market with market power is

inefficient because the marginal benefit to society of extra output exceeds the marginal cost.

The characteristics of search goods make _________ advertising particularly effective.

informative

A firm's average revenue curve is:

the same as the firm's demand curve.

"Learning by doing" can result in _______ for a company

unique cost advantages

The Rational Rule for Sellers is that sellers should choose the quantity _______ and choose the price ________.

where marginal revenue equals marginal cost; that is on the seller's demand curve for that quantity

Which of the following can reduce the incentive of business partners to hold up a company when the company has made relationship-specific investments?

A long-term relationship based on trust exists between the partners and the company.

Which of the following markets is an example of a perfectly competitive market?

Fast-food hamburgers

Which of the following is NOT true about imperfect competition?

Greater product differentiation decreases market power.

How does a business owner discover the business's demand curve?

The owner experiments with different prices for its product.

Which of the following conditions is NOT present in perfect competition?

The product price varies across the companies in the market

In which of the following situations would Maria's Doughnut Shop have the LEAST market power?

Within three miles, there are five other doughnut shops and three bakeries that sell breakfast pastries.

Which of the following is NOT an entry deterrence strategy that a seller would use?

a market demand growth strategy

A common strategy for a seller to increase its market power is to

differentiate its product.

Strategies used by entrepreneurs to overcome barriers to entry do NOT include:

duplicating the product of the industry leader.

The threat of potential substitues is high when the substitutes:

offer greater value for their price than the original product.

Marginal revenue reflects the _____ effect and the _______ effect

output; discount

In the absence of product differentiation, ________ to prevail, leading to _______ profits.

price competition tends; low

If a company gains market power as an input buyer, then:

the company may be able to purchase inputs at lower prices than other companies who use the same inputs can.

The basis of product differentiation is to convince your customers that your product _____ so that customers will ______ for your firm's product.

will more completely satisfy their wants; pay a higher price

When a single business can service the entire market demand at a lower cost than several smaller businesses, the market is

a natural monopoly.

All of the following government policies would create a barrier to entry in a market EXCEPT:

a requirement that there can be no switching costs for consumers

The change in total revenue from selling one additional unit of output is the

marginal revenue.

When an input seller has market power in the input market, its customers:

may end up paying a higher price for inputs.

Which of the following is a characteristic of monopoly that is not present in other market structures?

There is only one seller.

A certain city has four hospitals, and there are no other hospitals within 200 miles. Two of the hospitals are more specialized than the other two because one has a large cardiac unit and the other has a specialized cancer-treatment center. The local market for hospital services is what type of market?

Oligopoly

In which of the following cases would a company's profits be threatened?

One of its key input providers gains market power in the input market.

When a monopoly advertises, the goal is to ________ because ________.

Increase market demand; the monopoly faces the entire market demand

Which of the following is one of the five forces that determine the long-term profitability of a company in a market?

Potential competitors

If a business owner is maximizing their economic profit, the owner:

is better off financially than with any other use of the resources used in the business.

Ari owns a hair salon in a small city. Which of the following is NOT an effect that the opening of new hair salons in her city will have on her salon?

its cost curves will shift upward.

When a seller raises the switching costs of its customers:

its customers find it difficult or costly to switch to a different seller of the product.

A strategy to reduce the threat posed by substitutes is to:

make it more difficult for substitutes to enter the broad market.

Advertising does not:

make markets more efficient.

Victor owns a shoe store that is losing money, and several other shoe stores in his market are also losing money. Which of the following guidelines will help him decide whether to remain in business or exit the market?

Exit the market if price is expected to be less than average cost.

Which of the following is NOT an example of a type of law that tries to foster competition?

Patents

A product market has many buyers and sellers, and its largest company produces 1% of the market output. In addition, all sellers produces identical goods. What market structure is consistent with this description?

Perfect competition

Which of the following is NOT a strategy used by a company to "lock-in" customers to ensure demand for its product?

Pressuring the government to require a license for entry into the market

Which of the following statements about market power is TRUE?

The extent of market power held by a seller can vary along a spectrum from non to a high level

Which of the following does NOT occur in a market when one or more sellers exits the market?

The market demand rises.

In which of the following situations would the supplier have the greatest power to hurt a business that is its customer?

The supplier rents building space to a bakery in a real estate market with a vacancy rate of less than .5%

Marta's company definitely has economic profits in which of the following situations?

Totals costs are less than total revenue

________ the long-term profitability of a company.

Product type determines

Which of the follwing sellers faces the least competitive pressure?

a monopolist with no direct rivals

If more acceptable substitutes are available for a product, the market for the product will:

be less profitable