EC 201 - Exam #3 - Chapter 15
You are considering opening a small flower store. You anticipate that you will earn $100,000 each year in revenue. It will cost you $30,000 each year to rent the space necessary to run your business. Additionally, you will need to spend $10,000 each year on flower seeds, utilities, and other expenses necessary to operate your flower shop. You have just graduated from college with a degree in economics and have received an offer to work for a firm with a yearly salary of $70,000 ; What is your anticipated economic profit of opening the flower shop? Should you open the flower store?
-10,000 ; NO
A year ago, you graduated from college and decided to open your own computer software company. Over the past year, your firm generated $500,000 in revenue. You hired two software engineers and paid each of them $150,000 over the past year. You also purchased computer equipment that cost a total of $30,000. To save money, you decided to use the basement of your house for the business. Previously, you had rented this space to a tenant for $6,000 per year. Instead of opening your own business, you could have gone to work for Microsoft and earned $200,000 over the past year ; What were the economic profits of your firm over the past year? Should you have launched your own business?
-36,000 ; NO
Lakisha is a professor of economics. She is currently earning $100,000 a year as a professor. She decides to quit her job as a professor and opens a consulting firm. In order to do this, she cashes out her retirement fund of $200,000. Her retirement fund has been earning 10% interest each year. At the end of her first year as an economic consultant, she earns $120,000 in accounting profit ; What was her economic profit for the year?
0
Xavier is considering quitting his job as an editor for a major publisher to become a freelance editor ; he estimates that as a freelancer he'll earn $140,000 per year in revenue and have $40,000 per year in financial costs ; he currently earns $85,000 per year, plus an additional $15,000 worth of benefits ; to get started he'll need to withdraw $20,000 from his bank where it's earning 5% interest per year ; What is Xavier's economic profit?
100,000 - 101,000 = -1,000
Xavier is considering quitting his job as an editor for a major publisher to become a freelance editor ; he estimates that as a freelancer he'll earn $140,000 per year in revenue and have $40,000 per year in financial costs ; he currently earns $85,000 per year, plus an additional $15,000 worth of benefits ; to get started he'll need to withdraw $20,000 from his bank where it's earning 5% interest per year ; What is Xavier's accounting profit?
140,000-40,000 = 100,000
A year ago, you graduated from college and decided to open your own computer software company. Over the past year, your firm generated $500,000 in revenue. You hired two software engineers and paid each of them $150,000 over the past year. You also purchased computer equipment that cost a total of $30,000. To save money, you decided to use the basement of your house for the business. Previously, you had rented this space to a tenant for $6,000 per year. Instead of opening your own business, you could have gone to work for Microsoft and earned $200,000 over the past year ; What were your accounting profits of your firm over the past year?
170,000
Xavier is considering quitting his job as an editor for a major publisher to become a freelance editor ; he estimates that as a freelancer he'll earn $140,000 per year in revenue and have $40,000 per year in financial costs ; he currently earns $85,000 per year, plus an additional $15,000 worth of benefits ; to get started he'll need to withdraw $20,000 from his bank where it's earning 5% interest per year ; What is Xavier's implicit opportunity cost?
85,000 + 15,000 = 100,000 + 20,000 * 0.5 = 101,000
what are strategies used by a company to "lock-in" customers to ensure demand for its product?
Generating positive network effects. Building goodwill and loyalty among customers. Increasing switching costs.
In a business with some fixed costs, what do we expect the average total cost curve to look like?
Like a "U" : decreasing first and then increasing
Mario's company definitely has economic losses in which of the following situations?
Total costs exceed total revenue.
Michelle owns the largest florist shop in her town. Each week, she orders a truckload of flowers from the flower wholesaler. The other two florists in town order only one-third as many flowers. Because Michelle's order fills the delivery truck, the wholesaler sells flowers to her at a lower price than the other florists must pay. How will this situation impact potential new entrants?
New florists will be discouraged from entering the market because of the difficulty of competing on cost.
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
If all customers are charged the same price, what does average revenue equal?
Price (because we're charging everybody the same price) ; Average revenue = total revenue / Q → p x q / q = p
A demand curve that entails positive economic profits will be ... and the number of firms in the long run will ________
above the average cost curve increase
Suppose you are thinking of starting your own small business. Consider how your accounting profit is different than your economic profit ; Accounting profit is different than economic profit because ...
accounting profit ignores the opportunity cost of launching a new business.
A firm with economic profits will _____________ have accounting profits.
also
The decision to start a business and the decision to attend college
are similar in that in both cases, you will want to consider the cost-benefit principle and the opportunity cost principle
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 entrants
You run a profitable business that provides accounting services to other businesses in your home town. When you opened your firm, there were very few competitors in the market, but you have recently learned that several new firms providing similar services will be entering the market soon ; Suppose instead that most firms in this market are experiencing negative economic profits. Move the demand curve on the graph to illustrate the impact on your firm.
demand will shift right and slope will become steeper
Each of the given strategies has been used by Microsoft to limit competition. In each case, determine whether Microsoft was using a demand-side strategy, a supply-side strategy, or a deterrence strategy ; As of February 2018, 82.55% of all desktop PCs worldwide used the Microsoft Windows operating system. In this case, Microsoft is using a ____________ strategy.
demand-side
Each of the given strategies has been used by Microsoft to limit competition. In each case, determine whether Microsoft was using a demand-side strategy, a supply-side strategy, or a deterrence strategy ; Microsoft spends a large amount of resources to attract independent software developers to write programs and applications for its operating system. In this case, Microsoft is using a ____________ strategy.
demand-side
Identify whether each given scenario is an example of a demand-side, supply-side, regulatory, or deterrence strategy to limit competition in the market : Between 2015 and 2018, Facebook increased the number of active monthly users from 1.4 billion to 2.19 billion. This is an example of a _______________ strategy.
demand-side
Identify whether each given scenario is an example of a demand-side, supply-side, regulatory, or deterrence strategy to limit competition in the market : Delta Airlines provides frequent flyer miles to members when they travel. These miles can be redeemed for travel and upgrades on Delta flights. This is an example of a ________________ strategy.
demand-side
Each of the given strategies has been used by Microsoft to limit competition. In each case, determine whether Microsoft was using a demand-side strategy, a supply-side strategy, or a deterrence strategy ; Microsoft was charging an average price of $40 to $60 for its operating system to PC hardware companies such as Dell and HP instead of the monopoly profit maximizing price of $1,800. In this case, Microsoft is using a _____________ strategy.
deterrence
anna, the owner of a local bike repair shop, uses her time to operate her businesses instead of earning an annual salary of $100,000 at the Ford Motor Company ; is this economic profit, accounting profit or both?
economic profit
in 2018, Amazon opened its new office building in downtown Seattle ; instead of using the new office space itself, Amazon could have rented out the space to local companies for $250,000 per floor per year ; is this economic profit, accounting profit or both?
economic profit
Because _____ profit is calculated based on _____ costs, it allows firm owners to make better decisions about _____.
economic; total; entering and exiting a market
Adhika is deciding whether to open a company to produce step stools. He should start the company if he expects that :
his price will exceed his average cost.
forgone yearly salary of $40,000 and using office space to run your business that was previously rented out for income are examples of what type of cost?
implicit
When Mark Zuckerberg and his friends started Facebook, they has no employees and did everything themselves ; as their website expanded, they were able to hire people to do some of the administrative tasks so they could focus on coding and growing the website ; these first people hire exhibit :
increasing marginal returns to labor ; Initially : CEO answering the phone (increasing MPL) Then : company operating efficiently, everyone is specializing in what they do best (top of MPL curve) Eventually : additional employees can't add much value, and it becomes difficult to continue to grow business (decreasing MPL)
If a seller can create switching costs for its product, then:
it is difficult or costly for customers to switch to another seller of the product.
Consider some of the supply-side strategies used by firms to create cost advantages in a market : As firms gain experience making a product, they learn more efficient production methods, allowing them to produce more with the same inputs. This creates a _____________ cost advantage.
learning by doing
When new firms enter a market, existing firms will sell __________ than before, and their market power will _____________.
less decrease
When government regulations are influenced by lobbyists for the producers in a market, the regulations often:
make it more difficult for new producers to enter the market.
Consider some of the supply-side strategies used by firms to create cost advantages in a market : ____________ as opposed to producing in small batches, often creates cost savings from purchasing raw materials and other inputs in bulk.
mass production
When firms exit a market, remaining firms will sell __________ than before, and their market power will _____________.
more increase
The strong incentive of sellers to deter the entry of new sellers is a major reason that:
most markets are imperfectly competitive.
When the typical seller in a market has economic profits, then:
new sellers will enter the market.
Xavier is considering quitting his job as an editor for a major publisher to become a freelance editor ; he estimates that as a freelancer he'll earn $140,000 per year in revenue and have $40,000 per year in financial costs ; he currently earns $85,000 per year, plus an additional $15,000 worth of benefits ; to get started he'll need to withdraw $20,000 from his bank where it's earning 5% interest per year ; Should Xavier become a freelance editor?
no
does the market for asprin have sufficient barriers to entry?
no
does the market for lawn-care services have sufficient barriers to entry?
no
the business operates out of a building that is owned by the business owner ; she could lease the building to another company for $100,000 per year ... is this used to calculate accounting profit?
no
the business's owner could have earned an additional $20,000 over the past year, had she invested the $200,000, she used to start her company in the stock market instead ... is this used to calculate accounting profit?
no
the owner of the business uses her time to manage day-by-day operations ... is this used to calculate accounting profit?
no
A 2009 article in the Economist explained a barrier to entry that existed 40 years ago for foreign banks wanting to operate in Britain. Foreign banks could not operate in Britain unless they had an office that was within walking distance of the Bank of England, which served as the industry's regulator at the time ; This requirement served as a barrier to entry into the banking industry in Britain because ...
office space within walking distance to the Bank of England was limited.
Sellers try to avoid the entry of new rivals through the use of demand-side strategies. These demand-side strategies do NOT include:
raising the market demand for the product.
You run a profitable business that provides accounting services to other businesses in your home town. When you opened your firm, there were very few competitors in the market, but you have recently learned that several new firms providing similar services will be entering the market soon ; new firms entering the market will ________ your market power, and your customers will become ___________ price sensitive.
reduce more
Identify whether each given scenario is an example of a demand-side, supply-side, regulatory, or deterrence strategy to limit competition in the market : The top selling pharmaceutical drug in the world in 2017 was Humira, which is used to treat rheumatoid arthritis. Abbvie has a patent for Humira. This is an example of a ____________ strategy.
regulatory
Consider some of the supply-side strategies used by firms to create cost advantages in a market : _____________ is often associated with developing new products. However, it can also be used to develop new cheaper ways to make existing products that can provide a lasting cost advantage over potential entrants.
research and development
You run a profitable business that provides accounting services to other businesses in your home town. When you opened your firm, there were very few competitors in the market, but you have recently learned that several new firms providing similar services will be entering the market soon ; Consider how your firm will be impacted by rival firms entering the market.
shift of demand to the left, slope gets flatter
Suppose you are thinking of starting your own small business. Consider how your accounting profit is different than your economic profit ; After doing your research, you are confident that you will make an accounting profit if you launch the business but feel it is very unlikely that you will make an economic profit. In this case, you _____________ start the business.
should not
When firms in a market with free entry and exit experience economic losses, then:
some sellers will exit the market, reducing average seller losses.
Identify whether each given scenario is an example of a demand-side, supply-side, regulatory, or deterrence strategy to limit competition in the market : Automotive firms such as Toyota, Ford, and General Motors have invested in large manufacturing plants to produce millions of cars each year. This is an example of a __________ strategy.
supply-side
A demand curve that illustrates zero economic profits will be ... and the number of firms in the long run will ________
tangent to the average cost curve (touching) remain the same
what is price sensitivity?
the degree in which the price of a product affects consumers' purchasing behaviors ; when there are more firms in the market, consumers will be more sensitive to price because they have more options to choose from when a firm increases its price
You run a profitable business that provides accounting services to other businesses in your home town. When you opened your firm, there were very few competitors in the market, but you have recently learned that several new firms providing similar services will be entering the market soon ; As a result of rival firms entering the market, your annual revenue becomes $300,000 and your annual out-of-pocket expenses become $270,000 ... what is the economic profit? what is the accounting profit?
the economic profit cannot be determined the accounting profit is $30,000
what is economic profit?
total revenue - explicit costs - implicit costs
A demand curve that entails negative economic profits will be ... and the number of firms in the long run will ________
under the average cost curve decrease
does the market for sport-utility vehicles have sufficient barriers to entry?
yes
does the market for wireless telecommunications (such as mobile phone service) have sufficient barriers to entry?
yes
the business hires several employees, each of whom is paid an annual salary ... is this used to calculate accounting profit?
yes
in 2018, Boeing paid its Washington state employees nearly $600 million in bonuses ; is this economic profit, accounting profit or both?
both
what is profit margin?
demand price - average total cost price
Nordstrom pays $50 per square foot to lease space in a shopping mall ; is this economic profit, accounting profit or both?
both
Average fixed costs (AFC) ...
decrease as quantity increases
If there is free exit from and entry into an industry, long-run economic profits will be __________ for firms in that industry.
equal to zero
the expense of buying textbooks & purchases of office supplies are examples of what type of cost?
explicit
The formula for calculating accounting profit is total revenue minus _____ costs.
explicit financial
As output rises, average fixed costs :
fall
The two main types of implicit opportunity costs are :
forgone wages and forgone interest
When market leaders produce on a mass scale, new entrants:
have a hard time competing.
When new sellers enter a market, existing sellers will :
have less market power
Pharmaceutical companies that develop and manufacture prescription drugs have _________ fixed costs and _________ variable costs :
high ; low
