Econ exam #3
What is price discrimination?
-firms charge a higher price for a product when it is first introduced and a lower price later. -firms charge a higher price to customers who are less sensitive to price and a lower price to consumers who are more sensitive to price - firms charge each consumer a different price equal to that consumer's willingness to pay.
Give an example of a firm using a two-part tariff as part of its pricing strategy.
1. a golf club requiring the purchase of an annual membership in addition to a fee each time members use the golf course 2. sam's club requiring consumers to pay a membership fee before shopping at its stores.
Give an example of a government-imposed barrier to entry.
1. a quota on imports 2. occupational licensing.
Which of the following is an example of price discrimination?
1. an airline charging higher prices for business travelers than for leisure travelers. 2. a movie theater charging higher prices for evening showings than for afternoon showings
Why would the government be willing to erect barriers to entering an industry?
1. protect U.S. firms from international competition. 2. protect the public from incompetent practitioners. 3. encourage firms to carry out research and development of new and better products.
Lucas bought two units of the newest game console from a local retail store for $300 each and instantly resold them on eBay for $375 each. How much did he make in arbitrage profits if his transaction costs were a total of $50?
100 Lucas bought two units of the newest game console from a local retail store for $300 each and instantly resold them on eBay for $375 each. He made $100 in arbitrage profits if his transaction costs were a total of $50. Lucas sold each unit for $75 more than he paid for it, so his total profits before subtracting transaction costs were $150. After accounting for his transaction costs of $50, he was left with $100 in arbitrage profits.
A patent gives its holder the exclusive right to a product for a period of __________ from the date the patent is filed with the government.
20 yrs
What is the selling price a firm receives when it uses a 40% markup and cost-plus pricing if the average production cost is $150?
210 The firm will set a selling price of $210 when it uses a 40% markup and cost-plus pricing if the average production cost is $150. You can determine the selling price by taking the $150 average cost and multiplying by 1.4 since the markup is 40%. So, $150 × 1.4 = $210.
Economists believe that the oligopoly market is a market with a four-firm concentration ratio that is greater than or equal to:
40%
cartel
A group firms that collude to restrict output to increase prices and profits.
What is the definition of monopoly?.
A monopoly is a firm that is the only seller of a product in a given industry.
A monopoly is a market structure that is characterized by:
A single seller of a good or service that does not have a close substitute.
payoff matrix
A table that shows the payoffs that each firm earns from every combination of strategies.
Which of the following is the definition of business strategy?
Actions taken by firms to attain their objectives
cooperative equilibrium
An equilibrium in a game in which players cooperate to increase their mutual payoff.
Which of the following types of firms use the marginal revenue equals marginal cost approach to maximize profits?
Both perfectly competitive and monopolistically competitive
Which of these is an example of price discrimination across time?
Charging a high initial price for Blu-ray players and then lowering the price in six months
What is perfect price discrimination?
Charging every consumer a different price equal to their willingness to pay.
What trade-offs do consumers face when buying a product from a monopolistically competitive firm?
Consumers pay a price greater than marginal cost but also have a wider array of choices.
Price discrimination is the practice of:
Dividing consumers into two or more groups and charging different prices to each group.
The five competitive forces model suggests the bargaining power of buyers may affect industry competition.
GM has significant bargaining power in the tire market, which lowers tire prices
Another measure of industry concentration is the:
Herfindahl-Hirschman Index
What is a merger between firms in the same industry called?
Horizontal merger
What is the law of one price?
Identical products should sell for the same price everywhere, assuming no transactions costs.
Firms must typically purchase inputs from suppliers to produce output.
If many firms can supply an input then suppliers are unlikely to have the bargaining power to limit a firm's profits.
How does the prisoner's dilemma compare to the outcome of a repeated game?
In a repeated game, two firms are more likely to charge the high price and receive high profits.
Which of these statements is correct?
Legally enforcing trademarks can be difficult.
Which of the following best describes the additional revenue associated with selling an additional unit of output?
Marginal revenue
What is the term given to all the activities necessary for a firm to sell a product to a consumer?
Marketing
One measure of the extent of competition in an industry is the concentration ratio. What level of concentration indicates that an industry is an oligopoly? Is the concentration ratio an accurate measure of the extent of competition?
Most economists believe that a four-firm concentration ratio of greater than 40 percent indicates that an industry is an oligopoly. The four-firm concentration ratio is flawed in that it does not include sales in the U.S. by foreign firms
A situation where each firm chooses the best strategy, given the strategies chosen by other firms is known as:
Nash equilibrium
Which of the following statements regarding natural monopoly is true?
Natural monopoly is most likely to occur in markets where fixed costs are large relative to variable costs.
Which type of efficiency is achieved by a monopolistically competitive firm in the long run?
Neither allocative nor productive efficiency
Why do oligopolies exist?
Oligopolies exist due to barriers to entry
For what type of market structure is the demand curve the same as marginal revenue?
Perfect competition
Which of the following best describes how the product differentiation of monopolistically competitive firms may benefit consumers?
Product differentiation can locate firms more conveniently to consumers and offer versions of a product or service that better fits their needs.
Is price discrimination illegal?
Robinson-Patman Act such that price discrimination is illegal if it reduces competition.
Which of the following laws prohibited charging buyers different prices if the result would reduce competition?
The Robinson-Patman Act
What is the definition of market power?
The ability of a firm to charge a price greater than marginal cost.
Which of the following rights is given to the holder of a patent?
The exclusive right to a new product
When firms agree to act as a monopoly and set prices they are called __________.
a cartel
A strategy that is the best for a firm, no matter what strategies other firms use is known as:
a dominant strategy
When is a firm a monopoly, or are monopolies only theoretical concepts that do not exist?
a firm is a monopoly if its economic profits are not competed away in the long run
the Department of Justice and the Federal Trade Commission must define the relevant market when determining whether to allow a merger.How do economists identify the relevant market?
a price increase results in higher profits; otherwise, the market is too narrow
The five competitive forces model suggests the threat from potential entrants affects industry competition.How might an existing firm deter entry of new firms?
advertise to create product loyalty.
Which of these business types is more likely to consistently practice price discrimination?
an airline
Laws aimed at promoting competition among firms are known as:
antitrust laws
The process of simultaneously buying a good in one market and selling in another market is called:
arbitrage
A college practicing yield management will offer more financial aid to students they believe:
are more price sensitive
Natural monopoly happens when the:
average total cost curve is decreasing
if a monopolist can practice perfect price discrimination then consumer surplus will:
be zero
Any action the firm takes to maintain product differentiation over time is known as:
brand management
Arbitrage is
buying a product in one market at a low price and reselling it in another market at a higher price.
A group of firms that colludes by agreement to restrict output to increase prices and profits is called a(n) ________
cartel
An agreement among firms to charge the same price or to otherwise not compete is __________.
collusion
Price discrimination, or charging different prices to different customers for identical products, is:
commonly practiced
List the competitive forces in the five competitive forces model.
competition from existing firms, the threat of potential entrants, competition from substitutes, the bargaining power of buyers, and the bargaining power of suppliers.
mergers between two completely unrelated firms and therefore, do not impact market concentration or power.
conglomerate mergers
A cooperative equilibrium is equilibrium in which players __________ to increase their mutual payoffs, while a noncooperative equilibrium is an equilibrium in which players __________.
cooperate, do not cooperate
Equilibrium in a game in which players cooperate to increase their mutual payoff is called a:
cooperative equilibrium
The pricing strategy where the firm computes the average cost of production and then adds a percentage markup to determine the price is known as:
cost-plus pricing
Many firms advertise. What effect does advertising have on firm profits?
decrease profits by increasing the cost of production
The monopolistically competitive firm sells a __________ product and faces a __________ demand curve.
differentiated, downward-sloping
A consumer may pay more for an identical product from a given retailer due to:
differentiation based on something other than price.
How does the long-run equilibrium for a monopolistically competitive market differ from the long-run equilibrium for a perfectly competitive market?
do not produce at minimum average total cost
One way in which monopolistically competitive markets and perfectly competitive markets differ is that in long-run equilibrium, monopolistically competitive firms
do not produce at minimum average total cost
Does the strength of each of the five competitive forces remain constant over time? Briefly explain.
does not remain constant over time. For example, existing firms may set lower prices to keep profits low to make entry less attractive, reducing the threat from additional potential entrants.
The only legal restriction concerning price discrimination is that firms cannot use it to:
drive rivals out of business
Consumers dubbed __________ will pay a higher price to be among the first individuals to own a new product.
early adopters
What effect might market power have on technological change?
economic profits that can be spent on research to develop new products
Many firms might like to be monopolies because such firms earn economic profits in the long run. What might cause a monopoly?
economies of scale are so large that the firm has a natural monopoly
What are the most important barriers to entry?
economies of scale, ownership of a key input, and government imposed barriers.
is perfect price discrimination economically efficient?
efficient because it converts into producer surplus what had been consumer surplus and deadweight loss.
do airlines practice price discrimination?
engage in price discrimination by reducing the price on seats that they expect will not be sold -For example, business travelers have a more inelastic demand than leisure travelers, so airlines charge business travelers a higher price
In 2007, the U.S. government discovered a long-run formal conspiracy to fix the price of marine hose. This type of activity is known as:
explicit collusion
Cost-plus pricing may be the optimal way to determine prices when a firm's marginal cost and average cost are roughly equal or when a firm:
finds it difficult to estimate its product demand curve.
The four-firm concentration ratio is the percentage of sales accounted for by the largest:
four firms in the industry
A Nash equilibrium is where each firm chooses the best strategy:
given the strategies chosen by other firms
How might the government affect whether a firm is a monopoly?
grant a patent to a firm. giving it the exclusive right to produce a product
In a repeated game, the losses associated with not cooperating are __________ the losses of cooperating.
greater than
the aluminum company of America has faced limited competition in the market for aluminum , What barrier has kept new firms from entering the market for aluminum?
has had almost exclusive ownership of bauxite, which is a key input.
An oligopoly is a market structure with:
high barriers to entry
The monopolist charges a price that is ____ the perfectly competitive industry.
higher than
Which of the following is most likely to increase market power?
horizontal mergers
According to the law of one price:
identical products should sell for the same price regardless of location.
Price leadership is a form of __________ in which one firm in an oligopoly announces a price change and the other firms in the industry match the change.
implicit collusion
What effect might the government have on oligopolies?
impose barriers to entry with a tariff to limit foreign competition
A monopolistically competitive firm is characterized by the existence of many firms in the market, differentiated products and:
low barriers to entry
If the individual countries that are members of OPEC exceed their production quotas, the amount of oil supplied to the world __________, and the price of oil __________.v
increases, decreases
Consumers with __________ demand will be willing to pay more for a good or service.
inelastic
Does cost-plus pricing have any shortcomings?
is limited in that it ignores marginal cost
Describe a monopoly's demand curve.
is the same as the demand curve for the product.
What is the difference between explicit collusion and implicit collusion?
is where firms signal to each other without actually meeting and agreeing to not compete. where firms meet and agree to not compete, and an example of implicit collusion is price leadership.
Economists have developed broad and narrow definitions to identify monopolies. What is a characteristic that supports a firm being classified as a monopoly?
it earns profits in the long run.
For many years, De Beers of South AfricaDe Beers of South Africa essentially operated as a monopoly. What made this company a monopoly?
it had almost exclusive control of the world's supply of diamond deposits, used to make diamond jewelry
A monopolistically competitive firm in a long-run equilibrium produces where:
its demand curve is tangent to its average total cost curve
Compare monopolistically competitive industries with perfectly competitive industries in the long run. Which industry structure is more efficient?
less efficient because price is greater than marginal cost
The monopolist produces an output that is _______ the perfectly competitive industry would produce.
less than
Firms with __________ marginal costs generate more benefit when they practice price discrimination than firms with __________ marginal costs.
low, high
When should firms use cost-plus pricing?
marginal and average cost are roughly equal and the firm has difficulty estimating its demand curve.
A monopolist will maximize profit at the level of output where:
marginal cost equals marginal revenue
A monopolistically competitive firm produces where:
marginal revenue equals marginal cost
Is zero economic profit inevitable in the long run for monopolistically competitive firms?
may continue to earn profit by improving their product
Oligopolies exist because of barriers to entry. One of the most important barriers to entry is due to economies of scale. Why is this true?
minimum average cost occurs when firm output is a large fraction of industry output.
In which of the following market structures is the firm's demand curve the same as the market demand for the product?
monopoly
Which are more economically efficient, perfectly competitive markets or monopolies?
more economically efficient because they result in more economic surplus.
Firms in competitive markets:
must accept the market price.
What do barriers to entry have to do with the extent of competition, or lack thereof, in an industry?
new firms will enter industries where firms are earning economic profits.
Prisoner's dilemma is an example of:
non-cooperative equilibrium
In 2002, the cheese manufacturing industry in the United States had a four-firm concentration ratio of 34 percent. This implies that the cheese manufacturing industry is:
not an oligopoly market
Which of the following terms is defined as a market structure in which a small number of interdependent firms compete?
oligopoly
The primary reason that Ocean Spray faced limited competition was because
only Ocean SprayOcean Spray had access to most of the cranberries.
Economist Michael Porter argues that factors other than the number of firms affect industry competition and profits. What is an example of a factor that would limit profits?
other firms enhance customer service
How is the prisoner's dilemma result changed in a repeated game?
players can employ retaliation strategies.
If a monopolistically competitive firm's demand curve is above its average total cost curve, then this firm is making:
positive economic profit
If a monopolist can practice perfect price discrimination:
prices will increase
A game where pursuing dominant strategies results in noncooperation that leaves everyone worse off is called a:
prisoner's dilemma
Antitrust legislation outlaws price discrimination practiced in order to:
reduce competition.
The government indirectly influences the level of industry competition with its own barriers to entry. How?
requiring licenses for a firm to produce
how are games in game theory played?
rules determine what actions are allowable, players employ strategies to attain their objectives, and payoffs are the results of the interaction among the players' strategies.
For a firm to be able to practice price discrimination it must be able to:
segment the market
Encyclopedia Britannica is an encyclopedia publisher who sells printed encyclopedias. In the 1990s, encyclopedias began to be sold electronically. What effect did electronic encyclopedias have on Encyclopedia Britannica?
served as a new product that fills a consumer need better than printed encyclopedias did.
Odd pricing is the practice of:
setting a price that does not end in zero.
Which of the following laws outlawed monopolization?
sherman act
A firm may opt to pay millions of dollars for celebrity endorsements in order to:
signal to consumers that the advertised product is appealing and likely to be popular
Under what circumstances can a firm successfully practice price discrimination?
some consumers must have greater willingness to pay for the product than others and a firm must know consumer willingness to pay for the product.
A fast-food restaurant decides to raise the price of its hamburgers. Assume the firm is in a monopolistically competitive industry. What will happen to the demand for its hamburgers?
some of its customers will be willing to pay a higher price because they prefer this brand of hamburgers
Many factors under a firm's control affect profitability. Do factors that are not under a firm's control also affect profitability?
such as terrorist events affect profitability
Give an example of an antitrust law and give a brief description of how that law affects the government's antitrust policy.
the Robinson-patman act prohibited charging buyers different prices if the result would reduce competition
The competitive forces in the five competitive forces model does not include
the allocative efficiency of producers
What "forces" does the five competitive forces model address?
the allocative efficiency of producers
What is required for a firm to successfully engage in price discrimination?
the firm to know what prices customers are willing to pay
In the broadest sense, game theory studies the decisions of firms in industries where the profits of each firm depend on:
the firm's interactions with other firms
positive economic profit
the firms ability to differentiate its product
Monopolistically competitive firms have some control over price because:
the products they produce are differentiated
How is game theory used in economics?
the rules of the game include a firm's production function, a strategy is a firm maximizing profit, and the payoffs are profits.
Another form of price discrimination occurs when firms charge __________ price to consumers for goods or services that have different quality.
the same
Because the monopolist faces a downward sloping demand curve:
there will be deadweight loss
If patents reduce competition, why does the federal government grant them?
to encourage firms to spend money on research to create new products.
Product packaging, shipping fees, and listing fees are all considered:
transaction costs
The costs incurred during the process of agreeing to and carrying out an exchange of goods or services are known as:
transaction costs
What is required for the law of one price to hold?
transaction costs associated with arbitrage are zero.
When a country club charges an annual membership fee to use the golf course and then charges you again for each use of the course, it is called a(n);
two part tariff
Perfect price discrimination is
unlikely to occur because firms typically do not know how much each consumer is willing to pay.
Governments deal with natural monopolies by:
using regulation to protect consumers
mergers between firms in the same supply chain. For example, an automaker may merge with a tire manufacturer. In general, mergers of this type do not impact market power.
vertical mergers
In which of the following situations can a firm be considered a monopoly?
when a firm can ignore the actions of all other firms
What is an oligopoly?
where a small number of interdependent firms compete.
Suppose Amanda owns the only restaurant in town that serves hamburgers. Other restaurants serve tacos, fried chicken, and pizza. Suppose that in the long run, Amanda's restaurant continues to be the only one in town selling hamburgers. If Amanda is earning economic profits, then, under the broad definition, is Amanda's restaurant a monopoly?
yes
When a manager gathers information on customers and uses this information to rapidly adjust prices, it is known as:
yield management
In the long run, the monopolist can earn:
zero or positive economic profit
Three examples of oligopolies in the United States are industries that produce or sell
computers, athletic footware, and cigarettes.
