AGEC 333 Final Exam Review

A food manufacturer would like to innovate some new products to diversify its revenue stream. The manufacturer is thinking long term and so would like to follow macro consumer trends. Which of the following might be potential attributes to consider? New beverages with high caffeine and sugar content to appeal to extreme sports enthusiasts. Gourmet attributes that are in demand in countries that have a rapidly growing middle class and becoming Westernized. Low protein, high sugar snacks to increase flavor. None of the above.

Gourmet attributes that are in demand in countries that have a rapidly growing middle class and becoming Westernized.

This question is a general question about the competitive environment and market structure. Select all correct answers. (There are three correct answers.) a) As firms expand and gain market share, it's possible that they could actually increase total value. b) The U.S. Justice departments examines the tradeoff between deadweight loss and producer surplus when evaluating mergers. Correct Answer c) The main difference between monopolistic competition and perfect competition is that monopolistic competitors sell branded and differentiated products. d) A major difference between monopolistic competition and monopoly is that the demand function facing the monopolistic competitor is close to being flat. e) The pricing power of monopolistic competitors comes mainly from the fact that these firms are larger than perfectly competitive firms. f) Product innovation is more important to monopolistic competitors than firms under any other market structure.

a) As firms expand and gain market share, it's possible that they could actually increase total value. c) The main difference between monopolistic competition and perfect competition is that monopolistic competitors sell branded and differentiated products. d) A major difference between monopolistic competition and monopoly is that the demand function facing the monopolistic competitor is close to being flat.

This question is a general question about the competitive environment and market structure. Select all correct answers. (There are three correct answers. a) As firms expand and gain market share, they can gain pricing power even in the absence of product differentiation. b) The U.S. Justice departments will sometimes allow mergers to proceed if it can be shown that there are major cost reductions resulting from the merger. c) The main similarity between monopolistic competition and perfect competition is that they are both very small players so have limited pricing power. d) A major difference between monopolistic competition and monopoly is that the monopolist's potential competitors face major barriers to entry. e) The pricing power of monopolistic competitors comes mainly from the fact that these firms are larger than perfectly competitive firms. f) Product innovation is more important to oligopolists than firms under any other market structure.

a) As firms expand and gain market share, they can gain pricing power even in the absence of product differentiation. b) The U.S. Justice departments will sometimes allow mergers to proceed if it can be shown that there are major cost reductions resulting from the merger. d) A major difference between monopolistic competition and monopoly is that the monopolist's potential competitors face major barriers to entry.

Suppose that through some cultural revolution, one-third of Americans become vegetarians and would no longer eat meat. Assume that beef producers compete in an environment characterized by perfect competition. Also assume that everything else is constant (i.e. no other significant change in the economic environment). Check all the statements that are correct. (There are five correct answers.) a) Consumer surplus is willingness to pay minus price summed across the number of units of beef purchased. b) Aggregate consumer surplus for beef would fall. c) Market prices would increase. d) While industry output will fall, each individual producer who remains in the industry will expand output. e) Short run profit for individual producers would fall. f) In terms of strategies, focusing on reducing costs might take priority over strategies that focus on increasing revenues. g) Pork producers might benefit since beef prices would fall, and pork and beef are substitutes. h) Producer surplus would fall, all else equal.

a) Consumer surplus is a willingness to pay minus price summed across the number of units of beef purchased. b) Aggregate consumer surplus for beef would fall. e) Short-run profit for individual producers would fall. f) In terms of strategies, focusing on reducing costs might take priority over strategies that focus on increasing revenues. h) Producer surplus would fall, all else equal.

The following questions are related to the Marketing Bill. Select all statements that are correct. (There are three correct answers.) a) Grocery stores increase the marketing bill by providing convenience and service. b) Automation that saves labor costs will likely increase the marketing bill, all else equal. c) Grocery stores are not monopolists and therefore should not increase the marketing bill, all else equal. d) Trader Joe's, who operates like a monopolistic competitor, will likely increase the marketing bill. e) The marketing bill for Cliff energy bars will likely be higher than the marketing bill for the individual ingredients used in the bar, all else equal. f) The contribution to the marketing bill by wholesalers is not justified because they are just "middlemen" who take a slice of profits without contributing much value.

a) Grocery stores increase the marketing bill by providing convenience and service. d) Trader Joe's, which operates like a monopolistic competitor, will likely increase the marketing bill. e) The marketing bill for Clif energy bars will likely be higher than the marketing bill for the individual ingredients used in the bar, all else equal.

The various firms in the food marketing channel can enhance economic value. Which of the following statements are consistent with the creation of economic value? (There are two correct answers.) a) A shift in the demand curve to the left (or inward) b) A shorter demand function c) Higher prices d) More food production within 75 miles of the city. e) Retailers who make it easier for consumers to find products. f) New technology that enhances traceability and food safety. g) A shift in the supply function h) Product innovation that does not shift the demand curve.

e) Retailers who make it easier for consumers to find products. f) New technology that enhances traceability and food safety.

The following questions are about contracts. Select all answers that are consistent with what was discussed during the lectures. Note: two of the answers are correct. a) Suppose that you are the purchasing manager of a processing firm and must design a contract to obtain processing tomatoes with high sugar content. Suppose that the farmers that you intend to contract with are small and non-diversified, which implies that they are very risk-averse. In this case, you should offer them the strongest incentives possible or they may not produce the high level of sugar content that you want. b) Suppose that you are the purchasing manager of a processing firm and must design a contract to obtain processing tomatoes with high sugar content. Suppose that you offer contracts to farmers in Region A and Region B. In Region A, the weather is very volatile so sugar content will be highly variable regardless of what the farmers do. In Region B, the weather is more stable so farmers have much more control over the amount of sugar content in the tomatoes. In order to minimize your contracting costs, you may want to offer farmers in Region A a production contract that mainly requires them to farm by your guidelines while providing them with guaranteed payment, whereas you should offer farmers in Region B an incentive contract with pay-for-performance c) Suppose that you are a tomato processor who produces tomato soup. Tomato soup requires tomatoes that have good color characteristics and are fairly ripe. Usually, the level of ripeness is positively associated with good color. Therefore, these quality factors are complements. In your contract with tomato growers, you do not need to worry about balancing incentives for color vs. incentives for ripeness. d) Suppose that you conduct a survey and find that most growers in a region are risk-averse. If you ask them to produce a new crop with a much larger standard deviation of output than any crop they had produced in the past, then you need to lower the risk premium that you offer in your contract with them. f) Suppose that a contract promises a payoff of $90,000 under a good outcome (happens with a probability of 70%) and $40,000 under a bad outcome (happens with a probability of 30%). Then the standard deviation is $18,000

b) Suppose that you are the purchasing manager of a processing firm and must design a contract to obtain processing tomatoes with high sugar content. Suppose that you offer contracts to farmers in Region A and Region B. In Region A, the weather is very volatile so sugar content will be highly variable regardless of what the farmers do. In Region B, the weather is more stable so farmers have much more control over the amount of sugar content in the tomatoes. In order to minimize your contracting costs, you may want to offer farmers in Region A a production contract that mainly requires them to farm by your guidelines while providing them with a guaranteed payment, whereas you should offer farmers in Region B an incentive contract with pay-for-performance c) Suppose that you are a tomato processor who produces tomato soup. Tomato soup requires tomatoes that have good color characteristics and are fairly ripe. Usually, the level of ripeness is positively associated with good color. Therefore, these quality factors are complements. In your contract with tomato growers, you do not need to worry about balancing incentives for color vs. incentives for ripeness.

This question is about the function and role of food processors or manufacturers. Select all questions that are consistent with what you learned in lecture. (There are four correct answers.) a) Restaurants are generally less concerned with processor brands than grocery stores. b) Suppose that a processor wants to engage in market segmentation by putting consumers into different clusters. If there are 10000 consumers, a useful rule of thumb is to have roughly 70 or 71 clusters. c) Branding generally causes an increase in price competition. d) If a firm launches an advertising campaign that causes its demand elasticity to change from -1.2 to -0.8, then raising prices will increase revenue. e) A grocery store selling a well known nationally branded product decides to never promote this brand and instead tries to charge the lowest price in town. The manufacturer of the national brand can reduce incentives for this type of behavior by using resale price maintenance. f) If a manufacturer won't promote its brand because retailers also sell competing brands, then a solution to this problem is to introduce slotting fees.

a) Restaurants are generally less concerned with processor brands than grocery stores. b) Suppose that a processor wants to engage in market segmentation by putting consumers into different clusters. If there are 10000 consumers, a useful rule of thumb is to have roughly 70 or 71 clusters. d) If a firm launches an advertising campaign that causes its demand elasticity to change from -1.2 to -0.8, then raising prices will increase revenue. e) A grocery store selling a well known nationally branded product decides to never promote this brand and instead tries to charge the lowest price in town. The manufacturer of the national brand can reduce incentives for this type of behavior by using resale price maintenance.

This question is about the function and role of food processors or manufacturers. Select all questions that are consistent with what you learned in lecture. (There are four correct answers.) a) Restaurants are generally less concerned with processor brands than grocery stores. b) Suppose that a processor wants to engage in market segmentation by putting consumers into different clusters. If there are 10000 consumers, a useful rule of thumb is to have roughly 70 or 71 clusters. c) Branding generally causes an increase in price competition. d) If a firm launches an advertising campaign that causes its demand elasticity to change from -1.2 to -0.8, then raising prices will increase revenue. e) A grocery store selling a well-known nationally branded product decides to never promote this brand and instead tries to charge the lowest price in town. The manufacturer of the national brand can reduce incentives for this type of behavior by using resale price maintenance. f) If a manufacturer won't promote its brand because retailers also sell competing brands, then a solution to this problem is to introduce slotting fees.

a) Restaurants are generally less concerned with processor brands than grocery stores. b) Suppose that a processor wants to engage in market segmentation by putting consumers into different clusters. If there are 10000 consumers, a useful rule of thumb is to have roughly 70 or 71 clusters. d) If a firm launches an advertising campaign that causes its demand elasticity to change from -1.2 to -0.8, then raising prices will increase revenue. e) A grocery store selling a well-known nationally branded product decides to never promote this brand and instead tries to charge the lowest price in town. The manufacturer of the national brand can reduce incentives for this type of behavior by using resale price maintenance.

Below is a series of statements related to market power. Select all the statements that are consistent with the principles learned in class. (There are four correct answers.) a) Suppose that a small manufacturer produces new food ingredients that can be used to produce lower trans-fat food products. This innovation ultimately drives up the willingness to pay (WTP) of consumers. But just because this manufacturer innovated the ingredient, it does not mean that it will capture the value. b) While cost control is important to all businesses, it is not the most critical priority of oligopsonists. c) Suppose that you are in the restaurant business in a large city. In this industry, branding matters but there are very few insurmountable barriers to entry. Because entry might squeeze your economic profits to zero in the long run, perfect competition is a good representation of your competitive environment. d) Suppose that the demand for pork loin is highly inelastic. Then an increase in price for pork loin is likely to increase revenue. e) Suppose that the top four beef packers account for 90% of the cattle sold. The four-firm concentration ratio is 90%. f) Suppose that you are a monopsony buyer of beef. An increase in competition with the entry of other buyers would cause your purchase price to drop.

a) Suppose that a small manufacturer produces new food ingredients that can be used to produce lower transfat food products. This innovation ultimately drives up willingness to pay (WTP) of consumers. But just because this manufacturer innovated the ingredient, it does not mean that it will capture the value. b) While cost control is important to all businesses, it is not the most critical priority of oligopsonists. d) Suppose that the demand for pork loin is highly inelastic. Then an increase in price for pork loin is likely to increase revenue. e) Suppose that the top four beef packers account for 90% of the cattle sold. The four firm concentration ratio is 90%.

This is a general question about market structure and the competitive environment. Select all the statements that are correct. (There are three correct answers.) a) The deadweight loss under monosomy can be interpreted as a failure to produce at a quantity level that equates the buyer's marginal value to the seller's marginal cost of production. b) One of the important elements of market structure is the degree (if any) of product differentiation c) A monopsonist's marginal expenditure function is higher than the marginal cost function of sellers because the monopsonist is the only buyer in an industry so its demand is industry demand. As such, it can't help but drive up industry prices if it expands purchases. This causes the marginal expenditure function to increase at a faster rate than the marginal costs of sellers. d) A monopoly market, compared to perfect competition, will have a higher price and lower deadweight loss. e) Suppose that you are looking for a job in the food retailing sector. In Town A, there is only one major food retailer that employs the majority of people in this town. Now suppose that if you were to move 70 miles away to Town B, there are ten major food retailing employers. If you were to find a job, you would expect your salary/wages to be higher in Town A relative to Town B, all else equal. f) The marginal revenue of an individual firm under perfect competition is the price plus the change in price from an additional unit sold.

a) The deadweight loss under a monopsony can be interpreted as a failure to produce at a quantity level that equates the buyer's marginal value to the seller's marginal cost of production. b) One of the important elements of market structure is the degree (if any) of product differentiation c) A monopsonist's marginal expenditure function is higher than the marginal cost function of sellers because the monopsonist is the only buyer in an industry so its demand is industry demand. As such, it can't help but drive up industry prices if it expands purchases. This causes the marginal expenditure function to increase at a faster rate than the marginal costs of sellers.

Suppose that a supermarket sells fairly conventional products; that is, the products available at this market are also widely available at nearby grocery stories and also online. Thus, this supermarket does not have pricing power. In the eyes of consumers, this supermarket is not particularly special in terms service, shopping environment, etc. Select all of the following statements are are consistent with this competitive environment. (There are two correct answers.) a) The rule marginal revenue=marginal cost still applies for choosing the optimal amount any given product to stock. b) Suppose a recession occurs causing the industry demand to shift inward. Initially, no other supermarkets exit the industry. This suggests that price will stay constant. c) An increase in competition implies that the industry supply function will shift to the left. d) If industry demand increases due to strong economic growth, the supermarket will necessarily experience sales growth. e) In terms of business strategy, this supermarket should prioritize things like restructuring incentives for employees and suppliers to reduce costs. f) In terms of business strategy, this supermarket should prioritize things using creative pricing strategies. g) In terms of business strategy, renting a new building in a favorable location with easy access for customers would be very effective. h) Suppose that this supermarket rents a checkout technology that saves on labor costs. If the supermarket's competitors do not use this technology, then the supermarket will make positive economic profit even in the long-run.

a) The rule marginal revenue=marginal cost still applies for choosing the optimal amount any given product to stock. e) In terms of business strategy, this supermarket should prioritize things like restructuring incentives for employees and suppliers to reduce costs.

The food marketing channel and the supply chains within it are important for the following reasons (check all that apply). There are four correct answers. a) They open opportunities for trade. b) They minimize investment requirements of firms in the food marketing channel c) They increase the number of separate transactions conducted by each firm in the channel. d) They increase the economic value of each trade. e) Reduce the odds of stockouts by retailers. f) Decrease information available to each firm. g) Facilitate product creation that meets consumer needs. h) Maintain flexible supply chains in dealing with economic shocks.

a) They open opportunities for trade. d) They increase the economic value of each trade. e) Reduce the odds of stockouts by retailers. g) Facilitate product creation that meets consumer needs.

This question is about quality transparency, food fraud and/or food safety. Please select all statements that are consistent with what you learned during lectures. Note: three of the answers are correct. a) Adverse selection does not necessarily decrease economic value. b) Suppose that consumers are willing to pay for organic peaches because they are USDA certified. This suggests that third-party transparency has prevented adverse selection. c) Suppose that a third-party firm with a reputation for objectivity is hired by a government regulator to determine whether a food product contains additives that can reduce cancer risk as claimed by the food producer. If the firm verifies the food producer's claim, this can provide the transparency necessary to prevent adverse selection. d) If a food manufacturing has set up an internal grading system inside the firm for quality control purposes, this is sufficient to prevent adverse selection-type problems. e) Grading systems are still needed even if quality attributes are fully transparent to all parties. f) A grading system is a type of government regulation that does not stifle the ability of free markets to generate economic value. g) Grading systems ensure the trade of high quality products but might not prevent market collapse.

b) Suppose that consumers are willing to pay for organic peaches because they are USDA certified. This suggests that third-party transparency has prevented adverse selection. c) Suppose that a third-party firm with a reputation for objectivity is hired by a government regulator to determine whether a food product contains additives that can reduce cancer risk as claimed by the food producer. If the firm verifies the food producer's claim, this can provide the transparency necessary to prevent adverse selection. f) A grading system is a type of government regulation that does not stifle the ability of free markets to generate economic value.

You are a business strategist for a large food retailer (think Walmart, Target, Payless, etc). The food products you sell are not unique in the sense that, even if they are branded, they are also available at many other competing stores nearby. So there are plenty of substitutes for shoppers that don't buy from you. For example, Cheerios is available at Walmart, Target, Meijer, Payless, etc. giving consumers plenty of purchasing options. In addition, many shoppers are now using mobile devices when researching market information on food products. Choose all the statements that are consistent with this competitive environment. (There are five correct answers.) a) You are closer to being a ``price maker'' than a ``price taker.'' b) You are operating in an environment that is closer to perfect competition than monopoly. c) Your products are relatively homogeneous which facilitates price competition. d) The best way to gain a competitive advantage is to make sure you focus on targeted advertising about the quality of your products. e) To gain a competitive advantage in the short run, you should prioritize cost side rather than revenue side strategies. f) If Apple and Google removed the pricing app that consumers were using, this gives you more latitude to use revenue side strategies. g) To enhance your competitiveness, you should set price close to the minimum efficient scale. h) The demand curve that you are facing will be nearly flat.

b) You are operating in an environment that is closer to perfect competition than monopoly. c) Your products are relatively homogeneous which facilitates price competition. e) To gain a competitive advantage in the short-run, you should prioritize cost side rather than revenue side strategies. f) If Apple and Google removed the pricing app that consumers were using, this gives you more latitude to use revenue side strategies. h) The demand curve that you are facing will be nearly flat.

Suppose that a CEO of a supermarket chain was quoted as saying "...an improving economy is sparking demand for food products. We expect that shoppers will be increasing purchases across the board. Despite this, we anticipate that sales gains will be hard to come by for our stores. We expect that sales will be flat" Select all statements that might explain the CEO's predictions from the perspective of competitive environment analysis that you learned in class. (There are two correct answers.) a) The individual firm demand is horizontal so a change in sales at the aggregate level does not affect sales at the firm store level. b) This is not a perfectly competitive industry. Therefore, an increase in demand may not lead to more sales because companies with market power can determine their own supply. c) It could be that the CEO is also anticipating an increase in competition which could cut into the sales of individual firms in the industry. d) It could be that some lower cost competitors are price undercutting the company's stores. This has made it difficult to stimulate sales even though the economy has improved. e) An increase in the economy will also increase inflation. This would cause people to save more rather than more food products from the stores.

c) It could be that the CEO is also anticipating an increase in competition which could cut into the sales of individual firms in the industry. d) It could be that some lower cost competitors are price undercutting the company's stores. This has made it difficult to stimulate sales even though the economy has improved.