Economics chapter 13 Study Plan Qustions
If McDonald's raises the price it charges for Quarter Pounders above the prices charged by other fast-food restaurants, won't it lose all its customers?
No
Which of the following statements is true regarding monopolistic competition: A. The firm is productively efficient because the profit-maximizing price is equal to the average total cost. B. The firm is not productively efficient because the profit-maximizing price is not at the minimum of marginal cost. C. The firm is not productively efficient because the profit-maximizing price is not at the minimum of average total cost. D. The firm is productively efficient because the marginal revenue equals the marginal cost.
C
Is zero economic profit inevitable in the long run for a monopolistically competitive firm? A. No, a firm could try to continue making a profit in the long run by producing a product identical to those of competing firms. B. No, a firm could try to continue making a profit in the long run by reducing production costs and improving its products. C. Yes, there is nothing the firm can do to avoid zero economic profit in the long run. D. No, a firm could try to continue making a profit in the long run by simply offering goods that are cheaper to produce, even if those goods have less value than the goods competing firms offer.
B
Why doesn't competition among supermarkets drive the prices of vegetables they sell down to the prices of the vegetables sold in the Chinatown stands? A. Supermarkets seek to earn more economic profits with higher prices. B. Vendors in Chinatown have a cost advantage. C. Owners of Chinatown stands advertise extensively. D. Supermarkets seek to differentiate their products with higher prices.
B
In its advertising, the mattress company Sealy has claimed that "after years of simulated use, we maintained support 4 times better than other leading brands." If Sealy succeeds in convincing consumers that its claim is correct, its demand curve would become _____ elastic
less
A business analyst gives the following advice to managers of firms: "If you continue to swim in a sea of sameness, you are going to drown." Briefly explain what he means. Firms that fail to continually differentiate their products from the products of competitors will be unable to earn an economic profit in the _____ run
long
The ability of a publishing company to raise book prices when costs increase would be greater, the _____is the elasticity of demand for published books.
lower
Ten years from now, JAB's economic profit from selling cold-brewed coffee would be _____ _____ it is today.
lower than
Is it possible for marginal revenue for a firm operating in a perfectly competitive industry to be negative?
no
When a firm advertises a product, it is trying to shift the demand curve for the product to the ________ and make it more ________. A. right; inelastic B. left; inelastic C. right; elastic D. left; elastic
A
A monopolistically competitive firm is not productively efficient because it produces a level of output where A. marginal revenue is less than price. B. price exceeds marginal cost. C. average variable cost is not at a minimum. D. average total cost is not at a minimum.
D
A monopolistically competitive firm produces where _________, while a perfectly competitive firm produces where _________. A. price is greater than marginal cost; price is less than marginal cost B. price is equal to marginal cost; price is greater than marginal cost C. price is less than marginal cost; price is equal to marginal cost D. price is greater than marginal cost; price is equal to marginal cost
D
Some companies have done a poor job at protecting the images of their products. For example, Hormel's Spam brand name is widely ridiculed and is associated with annoying commercial messages received via e-mail. You might have heard of other cases where companies have failed to protect their brand names. What can firms do in such cases? A. Sue for damages. B. Advertise to change the firm's image. C. Rename the product. D. All of the above are possible.
D
A monopolistically competitive firm has excess capacity in the sense that if it increased output beyond the quantity associated with profit maximization, it could produce at a lower _____ cost.
average
True/False: An increase in the price of cappuccino will increase the quantity of cappuccinos demanded.
false
The third wave coffeehouse Intelligentsia offers 46 different "In Season" coffees over the course of the year. These coffees are sold to customers closer to the time the coffee beans were picked than is true of most coffee other coffeehouses sell. According to Intelligentsia's president, James McLaughlin, "You have a 9-month window to get it packed up and shipped. After that, there's a degradation of quality." Explain whether Intelligentsia achieves productive efficiency, given that it offers its customers such a large number of coffees, rather than the limited number that most other coffeehouses offer. Intelligentsia is ______ to be achieving productive efficiency. By offering a large number of coffees, it is likely the firm is producing each of these coffee varieties at a _______ cost per unit because the firm ______ taking advantage of the economies of scale in production. Economies of scale occur when the cost per unit _______ in the long run as a firm increases the quantity it produces.
unlikely; higher; is not; decreases
William Germano previously served as the vice president and publishing director at the Routledge publishing company. He once gave the following description of how a publisher might deal with an unexpected increase in the cost of publishing a book: "It's often asked why the publisher can't simply raise the price [if costs increase]... It's likely that the editor [is already]... charging as much as the market will bear. ... In other words, you might be willing to pay $50.00 for a ... book on the Brooklyn Bridge, but if... production costs [increase] by 25 percent, you might think $62.50 is too much to pay, though that would be what the publisher needs to charge. And indeed the publisher may determine that $50.00 is this book's ceiling—the most you would pay before deciding to rent a movie instead." Source: William Germano, Getting It Published: A Guide to Scholars and Anyone Else Serious about Serious Books, Chicago: University of Chicago Press, 2001, pp. 110-111. According to the graph on the right and what you have learned in this chapter, a monopolistically competitive firm responds to an increase in cost by adjusting the price _____
upward
Stephen runs a pet salon. He is currently grooming 100 dogs per week. If instead of grooming 100 dogs, he grooms 101 dogs, he will add $67.33 to his costs and $67.21 to his revenues. What will be the effect on his profits of grooming 101 dogs instead of 100 dogs? Stephen's profits will change by $_____. (Enter your response rounded to two decimal places.)
-0.12
A monopolistically competitive firm doesn't produce where P = MC like a perfectly competitive firm because A. P exceeds MR for a monopolistically competitive firm, and it's MR that must equal MC for profit maximization. B. perfectly competitive firms face downsloping demand curves and monopolistically competitive firms do not. C. perfectly competitive firms know the price with certainty while monopolistically competitive firms do not. D. the approach to profit maximization used by monopolistically competitive firms is fundamentally different from the approach used by firms in other markets.
A
A student remarks: "If firms in a monopolistically competitive industry are earning economic profits, new firms will enter the industry. Eventually, the representative firm will find its demand curve has shifted to the left, until it is just tangent to its average cost curve and it is earning zero profit. Because firms are earning zero profit at that point, some firms will leave the industry, and the representative firm will find its demand curve will shift to the right. In long-run equilibrium, price will be above average total cost by just enough so that each firm is just breaking even." Is the analysis correct or incorrect? A. The analysis is incorrect. Firms will not leave the industry when earning zero economic profit. When the firm's demand curve is tangent to its average cost curve it is still earning zero economic profit. B. The analysis is incorrect. Firms in a monopolistically competitive industry cannot enter and exit as easily as the analysis supposes. C. The analysis is incorrect. In the long-run equilibrium, price will be below average total cost by just enough so that each firm is just breaking even. D. The analysis is correct.
A
Does the fact that monopolistically competitive markets are not allocatively or productively efficient mean that there is a significant loss in economic well-being to society in these markets? Though monopolistically competitive markets are not allocatively or productively efficient, consumers benefit in that A. they are able to purchase a differentiated product that more closely suits their tastes. B. they are able to purchase products without brand names. C. they are able to purchase a product that was produced at minimum average cost. D. they are able to purchase a product at a price that equals marginal cost. E. production occurs with no excess capacity.
A
If marginal revenue slopes downward, which of the following is true? A. The firm must decrease its price to sell a larger quantity. B. The firm must decrease its price if it wants to continue selling the same quantity. C. The firm must increase its price to sell a larger quantity. D. The firm is unable to adjust price when the quantity sold changes.
A
Question content area Part 1 Define marketing. Is marketing just another name for advertising? Marketing is A. all the activities necessary for a firm to sell a product including advertising, product design, and product distribution. B. the actions of a firm intended to maintain the differentiation of a product over time including advertising, product design, and product distribution. C. All non-advertising activities necessary for a firm to sell a product including product design and product distribution. D. legal protection against others using the name of a firm's product. E. the advertising necessary for a firm to sell a product.
A
The monopolistically competitive firm sells _________ product and faces _________ demand curve. A. a differentiated; a downward-sloping B. a homogeneous; a downward-sloping C. a homogeneous; a horizontal D. a differentiated; a horizontal
A
There are about 400 wineries in California's Napa Valley. Suppose the owner of one of the wineries—Jerry's Wine Emporium—raises the price of his wine by $5.00 per bottle. If the industry is perfectly competitive, the reaction of consumers would be to A. buy wine from another winery. B. buy more of Jerry's wine. C. stop drinking wine. D. buy some, but less of, Jerry's wine.
A
What effect does the entry of new firms have on the demand curve of an existing firm in a monopolistically competitive market? The entry of new firms cause the demand curve of an existing firm in a monopolistically competitive market to A. shift to the left and become less elastic. B. shift to the right and become more elastic. C. shift to the left and become more elastic. D. shift to the right and become less elastic.
C
There are many wheat farms in the United States, and there are also more than 14,000 Starbucks coffeehouses. Why, then, does a Starbucks coffeehouse face a downward-sloping demand curve when a wheat farmer faces a horizontal demand curve? A. Wheat is a homogeneous good, while Starbucks is able to differentiate its coffee from other coffeehouses. B. Wheat is a heterogeneous good, while Starbucks coffee is homogeneous. C. Wheat is a heterogeneous good, while Starbucks is able to differentiate its coffee from other coffeehouses. D. While both wheat and coffee are homogeneous goods, Starbucks has market power.
A
What are the key factors that determine the profitability of a firm in a monopolistically competitive market? Monopolistically competitive firms will be profitable to the extent that they A. differentiate their product and produce at lower average cost than competitors. B. create no deadweight loss and produce at lower average cost than competitors. C. produce an identical product to that of competitors and produce at lower average cost than competitors. D. differentiate their product and produce where price equals marginal cost. E. produce where price equals marginal revenue and differentiate their product.
A
What trade-offs do consumers face when buying a product from a monopolistically competitive firm? A. Consumers pay a price greater than marginal cost, but they also have choices more suited to their tastes. B. Consumers pay a higher price, but they are happy knowing that the industry is highly efficient. C. Consumers pay a lower price, but they also have fewer choices. D. Consumers pay a price as low as the competitive price, but they have difficulty finding and buying the product.
A
Which of the following statements is correct? A. Legally enforcing trademarks can be difficult. B. Establishing franchises is the best strategy to protect a firm's brand name. C. Brand names can be easily protected, especially as time goes by. D. All of the above are correct.
A
Why does a local McDonald's face a downward-sloping demand curve for its Quarter Pounder? In monopolistically competitive markets, A. changing the price affects the quantity sold because firms sell differentiated products. B. changing the price does not affect the quantity sold because firms are price makers. C. changing the price affects the quantity sold because there are only a few sellers. D. changing the price affects the quantity sold because firms are price takers. E. changing the price does not affect the quantity sold because firms have market power.
A
JAB, a German company that now owns both Peet's and Intelligentsia, has been focusing on sales of cold-brewed coffee, which it sells in supermarkets and convenience stores. According to an article in the Wall Street Journal, "Making and distributing cold-brewed coffee, in particular, is challenging and expensive because it requires a lot of coffee beans to extract the flavor." Source: Zeke Turner and Julie Jargon, "The Secretive Company That Pours America's Coffee," Wall Street Journal, March 7, 2018. If cold-brew coffee is more costly for JAB to produce than is conventional ground coffee or hot coffee sold in coffeehouses (JAB sells those types of coffee as well), why would JAB focus on it? A. JAB is following a strategy of differentiating its product from those offered by competing firms. B. JAB is hoping to entice more firms to sell cold-brewed coffee to increase its popularity. C. JAB isn't worried about making a profit—it is a company that is passionate about cold-brew coffee. D. All of the above.
A
A skeptic says, "Marketing research and brand management are redundant. If a company wants to find out what customers want, it should simply look at what they're already buying." Which of the following statements is/are true? (Mark all that apply.) A. Firms who discover new information about what consumers want can make a profit in the short run. B. A firm can enter a market with products like those of the competition and earn a profit if its costs are lower. C. Firms who discover new information about what consumers want can make a profit in the long run. D. None of the above are true.
A and B
Briefly explain how Intelligentsia's product differentiation may benefit its customers more than if the coffeehouse achieved allocative and productive efficiency. A. less advertising B. lower prices C. fewer choices D. increased variety
D
A column in the Wall Street Journal argues that many firms have shifted away from traditional advertising towards providing "content": "Content, these days, is the catchall term for all the media that we consume. Tweets are content. Articles are content. Instagram posts are definitely content." The column also describes the YouTube videos many firms produce to highlight their products and the articles and other content—that may not be directly related to their products—that they post on their websites. Source: Jacob Gallagher, "The New Branding Strategy: Churn Out 'Content,'" Wall Street Journal, January 28, 2019. What are the potential advantages and disadvantages to firms of replacing traditional advertising with "content" of this type? A. A disadvantage is firms will not be able to reach an audience, particularly younger consumers, who do not watch many conventional TV programs or read print newspapers and magazines. B. An advantage is producing "content" may be cheaper for firms to create because companies do not need to pay for advertising on TV and in print media such as newspapers and magazines. C. A disadvantage is the volume of content of this type a firm can afford is likely to be less than the volume of traditional advertising. D. An advantage is it's harder for questionable or inaccurate content to be made publi
B
A columnist in the Wall Street Journal offers the following opinion of Starbucks: "Starbucks is in some ways the victim of its success, having attracted increasingly aggressive competitors into what is now a fairly crowded market." Source: James Freeman, "Tragedy of the Starbucks Commons," Wall Street Journal, January 19, 2019. Do all firms that are currently earning an economic profit eventually become "victims of their own success"? Which of the following statements is true? A. Any firm that earns an economic profit will attract competitors as long as there are significant barriers to entering the firm's market. B. A firm can only hope to earn a profit in the long run if it is able to continually find new ways to differentiate its product. C. Competition from new entrants will raise the price for the product and reduce the firm's economic profit to zero. D. All of the above.
B
A monopolistically competitive firm is not allocatively efficient because A. marginal cost is not at a minimum. B. price exceeds marginal cost. C. it has excess capacity. D. average total cost is not at a minimum.
B
Does Green Summit's strategy increase or decrease productive efficiency in the restaurant business? Briefly explain. A. Increases productive efficiency by increasing variety. B. Decreases productive efficiency by producing above the lowest average cost. C. Increases productivity efficiency by producing at the lowest marginal cost. D. Decreases productive efficiency by producing where marginal cost is greater than the marginal benefit to consumers.
B
Does the strategy increase or decrease allocative efficiency? Briefly explain. A. Decreases allocative efficiency by raising prices above marginal costs. B. Increases allocative efficiency by allowing products to better suit consumer preferences. C. Increases allocative efficiency by lowering fixed costs. D. Decreases allocative efficiency by reducing the marginal benefit to consumers.
B
Elijah is earning 1,360 dollars in economic profit, in the long run, Elijah's profits will A. rise as new firms enter the market B. fall as new firms enter the market C. rise as customers order more burgers D. fall as customers tire of burgers
B
Give two examples of products sold in perfectly competitive markets and two examples of products sold in monopolistically competitive markets. Part 5 A. Cigarettes and beer are sold in perfectly competitive markets and Starbucks coffee and Gap clothing are sold in monopolistically competitive markets. B. Apples and oranges are sold in perfectly competitive markets and Starbucks coffee and Gap clothing are sold in monopolistically competitive markets. C. Wheat and corn are sold in perfectly competitive markets and electricity and cable TV are sold in monopolistically competitive markets. D. The Sony PS3 and the Microsoft Xbox are sold in perfectly competitive markets and Starbucks coffee and Gap clothing are sold in monopolistically competitive markets. E. Starbucks coffee and Gap clothing are sold in perfectly competitive markets and cigarettes and beer are sold in monopolistically competitive markets.
B
If a publisher does not raise the price of a book following an increase in its production cost, the result will be A. economic losses. B. less than maximum profit. C. a negative economic profit. D. All of the above.
B
What does McCraw mean by "when their innovations dwindle"? Innovations dwindle when a firm A. fails to develop higher-cost ways of producing existing products B. produces fewer new products. C. develops lower-cost ways of producing existing products D. produces more new products.
B
With a downward-sloping demand curve, marginal revenue is below price A. since P = TR/Q and MR = ΔTR/ΔQ. B. because the firm must lower its price to sell additional units. C. since the slope of the demand curve is marginal revenue, and the slope is negative. D. the marginal revenue firms receive is always less that the price they charge due to selling costs.
B
Would a firm selling in a monopolistically competitive. market ever produce where marginal revenue is negative? A. Yes because revenue is maximized when marginal revenue is negative. B. No because marginal cost cannot be negative. C. No because marginal revenue cannot be negative. D. Yes because profit can be maximized when marginal revenue is negative.
B
What is the difference between zero accounting profit and zero economic profit? A. Zero economic profit corresponds to negative accounting profit for a firm. B. Zero economic profit includes a firm's fixed costs but zero accounting profit does not. C. Zero economic profit includes a firm's opportunity costs but zero accounting profit does not. D. Zero economic profit and zero accounting profit for a firm are equal. E. Zero accounting profit includes a firm's sunk costs but zero economic profit does not.
C
A firm that is first to the market with a new product frequently discovers that there are design flaws or problems with the product that were not anticipated. For example, the ballpoint pens made by the Reynolds International Pen Company often leaked. What effect do these problems have on the innovating firm, and how do these unexpected problems open up possibilities for other firms to enter the market? A. The design flaw will reduce the firm's profits over the short term. However, the first firm to market is usually the most successful over the long term. B. The design flaw will harm the firm's reputation, which is irreparable. This will create opportunities for competitors to enter the market with a better product. Often the first firm to market is not the most successful over the long term. C. The design flaw will harm the firm's reputation, which will be costly to restore. This will create opportunities for competitors to enter the market with a better product. Often the first firm to market is not the most successful over the long term. D. The design flaw will harm the firm's reputation, which will be costly to restore. This will create opportunities for competitors to enter the market with a better product. However, the first firm to market is usually the most successful over the long term.
C
A monopolistically competitive firm in a long-run equilibrium produces where A. its demand curve is below its average total cost curve. B. its demand curve is above its average total cost curve. C. its demand curve is tangent to its average total cost curve. D. None of the above is true.
C
Ben and Jerry are managers at the company, and they have this discussion: Ben: We should produce 4,000 lamps per month because that will minimize our average costs. Jerry: But shouldn't we maximize profits rather than minimize costs? To maximize profits, don't we need to take demand into account? Ben: Don't worry. By minimizing average costs, we will be maximizing profits. Demand will determine how high the price we can charge will be, but it won't affect our profit-maximizing quantity. Part 4 Evaluate the discussion between the two managers. Part 5 Ben's assertion that the firm should produce the quantity of lamps where average costs are minimized is A. correct because this is the same quantity that maximizes profits where marginal cost equals marginal revenue since consumer demand does not affect marginal cost or marginal revenue. B. incorrect because profits are instead maximized at the quantity where marginal cost equals price, which may be different since price depends on consumer demand. C. incorrect because profits are instead maximized at the quantity where marginal cost equals marginal revenue, which may be different since marginal revenue depends on consumer demand. D. incorrect because profits are instead maximized at the quantity where marginal cost equals marginal revenue, which may be different since the marginal cost of production is greater than the average cost when average costs are minimized. E. correct because this level of production occurs on the firm's minimum efficient scale, which is unaffected by consumer demand.
C
Does it increase or decrease the well-being of its customers? Briefly explain. A. Increases consumer well-being with lower prices. B. Decreases consumer well-being with more advertising. C. Increases consumer well-being with increased variety. D. Decreases consumer well-being with fewer choices.
C
How does the entry of new coffeehouses affect the profits of existing coffeehouses? A. Entry will not affect the profits of existing coffeehouses. B. Entry will increase the profits of existing coffeehouses by shifting each of their individual demand curves to the right. C. Entry will decrease the profits of existing coffeehouses by shifting each of their individual demand curves to the left and making the demand curves more elastic. D. Entry will increase the profits of existing coffeehouses by shifting the market demand curve for coffee to the right.
C
If the industry is monopolistically competitive, the reaction of consumers A. would be to stop drinking wine. B. would be to buy none of Jerry's wine. C. could be to remain loyal to Jerry's and pay the higher price. D. would be to switch to a lower-priced wine.
C
Question content area Part 1 An article in the Wall Street Journal discussed the sidewalk vegetable stands in New York City's Chinatown. About 80 of these small vegetable stands operate along a handful of streets in that neighborhood. Most supermarkets buy vegetables from large wholesalers. In contrast, the entrepreneurs who run the stands in Chinatown buy from smaller wholesalers located in the neighborhood. These wholesalers, in turn, buy primarily from smaller family farms, some located overseas. Because these wholesalers make several deliveries per day, the owners of the stands do not have to invest in substantial storage space and the refrigerators that supermarkets use to keep vegetables fresh. The reporter compared prices for vegetables sold by these stands with vegetables sold by her supermarket: "In almost every case, Chinatown's prices were less than half what I would pay at the supermarket. Among the bargains: broccoli for 85 cents a pound, $1 each for pomegranates, oranges for a quarter." Source: Anne Kadet, "Why Fruits and Veggies Are So Crazy Cheap in Chinatown," Wall Street Journal, June 26, 2016. Is it likely that the owners of these vegetable stands are earning an economic profit? Briefly explain. The owners of these vegetable stands are likely A. Yes, Chinatown vegetable stands are likely earning an economic profit since existing owners are exiting the industry. B. No, vegetable stands in Chinatown are likely incurring an economic loss because they remain in business. C. Yes, the owners of these vegetable stands are likely earning an economic profit because they remain in business. D. No, these vegetable stands are likely incurring economic losses because new owners are entering the industry.
C
The late Thomas McCraw of the Harvard Business School once wrote that "when their innovations dwindle, firms begin to die." What is an innovation? A. creative ability B. a government-granted exclusive right to produce and sell a creation C. the practical application of an invention D. the exclusive right to a product for a period of 20 years from the date the patent application is filed with the government
C
What are the differences between the long-run equilibrium of a perfectly competitive firm and the long-run equilibrium of a monopolistically competitive firm? Unlike perfectly competitive firms, in the long run monopolistically competitive firms A. earn positive economic profits and charge a price greater than marginal cost. B. do not produce at minimum average total cost and have no excess capacity. C. charge a price greater than marginal cost and do not produce at minimum average total cost. D. do not produce at minimum average total cost and achieve productive efficiency
C
Which of the following statements is true regarding monopolistic competition: A. The firm is allocatively efficient because the profit-maximizing price is equal to the average total cost. B. The firm is not allocatively efficient because the profit-maximizing price is not at the minimum of marginal cost. C. The firm is not allocatively efficient because the profit-maximizing price exceeds marginal cost. D. The firm is allocatively efficient because the marginal revenue equals the marginal cost.
C
A student makes the following comment: I can understand why a perfectly competitive firm will not earn profits in the long run because a perfectly competitive firm charges a price equal to marginal cost. But a monopolistically competitive firm can charge a price greater than marginal cost, so why can't it continue to earn profits in the long run? How would you answer this question? A. In the long run, price equals marginal revenue equals average total cost and marginal cost lies below the price. B. In the long run, entry shifts the firm's demand curve rightward until price equals average total cost at the quantity where marginal revenue equals marginal cost. At this quantity, price is greater than marginal cost. C. The student is incorrect. It is possible for a monopolistically competitive firm to make economic profits in the long run. D. In the long run, competition shifts the firm's demand curve leftward until price equals average total cost at the quantity where marginal revenue equals marginal cost. At this quantity, price is greater than marginal cost.
D
An article in the Wall Street Journal discussed the Ground Round restaurant chain, which had 219 restaurants at its peak in 1989 but today has only 22. According to the article, "Ground Round had its heyday in the 1980s, building its reputation on juicy hamburgers, a publike atmosphere and unlimited popcorn and peanuts." Do restaurants face any particular problems in being able to earn an economic profit in the long run? A. No, restaurants do not face any particular problems in being able to earn an economic profit in the long run—Ground Round was simply mismanaged. B. Yes, restaurants face problems earning an economic profit in the long run because barriers to entering the restaurant industry are high. C. Yes, it is common in the restaurant industry for firms to copy each other, thereby shifting each firm's individual demand curve to the right until economic profit falls to zero. D. Yes, restaurants face problems earning an economic profit in the long run because barriers to entering the restaurant industry are low.
D
Briefly explain whether you agree that when a firm stops innovating, it is likely to die. A. Firms that stop innovating save money by not investing in research and development, and therefore flourish. B. Firms can continue to make an economic profit indefinitely, even if they stop innovating, due to loyal customers. C. Firms who innovate spend too much money on introducing innovative new goods and services or innovative production methods and end up having their economic profit competed away. D. Firms can successfully compete only by introducing new goods and services or better ways of producing existing goods and services.
D
In 2019, an article on forbes.com discussed one of the new Reserve Roastery coffeehouses that Starbucks has introduced: A "23,000-square-foot three-story emporium, where specialty coffee, pizza and pastries to be served in-house had all been roasted or baked on site and a cocktail bar on the top floor served coffee-infused alcohol." The article described the new coffeehouses as Starbucks's attempt to meet competition from Blue Bottle Coffee and other upscale coffeehouses. The new Reserve Roastery coffeehouses are larger and more costly to operate than are conventional Starbucks coffeehouses. We've seen that Blue Bottle Coffee and other third wave coffee houses also have higher costs than conventional second wave coffeehouses. Source: Andria Cheng, "How Starbucks Plans to Roast Its Coffeehouse Competition," forbes.com, January 25, 2019. Are the strategies used by Starbucks, Blue Bottle, and other chains likely to give them the ability to earn an economic profit in the long run? If not, why do they bother pursuing these strategies? Which of the following statements is true? A. A firm can't earn an economic profit in the long run using strategies that can be easily copied. B. As long as a firm can stay a step ahead of competitors, it can continue to earn an economic profit, even though those profits would eventually disappear if it were to stop innovating. C. Firms hope that they can earn short-run profits by periodically introducing new products or new ways of selling their existing products. D. All of the above.
D
In Chicago, Green Summit appears to be running nine different restaurants, with names such as Butcher Block, Milk Money, and Leafage. In reality all of the food is cooked in one central kitchen and none of the restaurants have a physical location. The brands exist only as Web sites and on the containers the food is delivered in. An article on chicagotribune.com quoted the firm's CEO as saying: "I don't really think anybody cares. They just want really high-quality food." If nobody cares whether their restaurants exist as physical places, why does Green Summit have a Web site for each restaurant and packaging printed with each restaurant's name and logo? Aren't Green Summit's costs higher than if they just had a single name and one Web site? A. Green Summit is using product homogeneity for essentially no cost. B. The company is attempting to earn long-run economic profits through increased competition that is less expensive. C. It is trying to engage in advertising that is less costly. D. Green Summit is trying to differentiate its product to appeal to different consumers.
D
Officials at Washington, DC's Metro subway system have debated ways to reverse a decline in ridership. Currently, the system's costs significantly exceed its revenues, resulting in an operating deficit that has to be covered by contributions from the local governments the system serves. One proposal to increase ridership is to run the same number of subway trains during off-peak hours as the system currently does during peak hours. A member of the system's board of directors raised the possibility that "the marginal cost of running the additional service exceeds the marginal revenue of the new people we're getting." Source: Faiz Siddiqui, "Metro Board Members Back Away from Recommendations to Increase Service," Washington Post, October 11, 2018. Which of the following correctly characterizes this member's statement about the likely results of increasing the number of trains run during off-peak hours? A. The Metro's revenue and operating deficit will both decline. B. The Metro's revenue will increase, but its operating deficit will decline. C. The Metro's revenue will decline, but its operating deficit will increase. D. The Metro's revenue and operating deficit will both increase.
D
The hamburger chain Smashburger differentiates itself from other fast-food restaurants in the way it prepares its burgers: "Every burger at Smashburger starts as a fresh, never frozen ball of all-natural beef. As soon as you order, we smash that fresh ball of beef on a hot grill to sear the burger and seal in the juiciness." When Scott Crane became president of the firm in 2007, it had only two restaurants. When he left 10 years later, the chain had grown to 330 restaurants in 35 states. An article in the Wall Street Journal describing Crane's time running Smashburger notes that during the 2007-2009 economic recession, "Americans were looking for more value when they dined out. Also, real-estate prices had gone down, so Smashburger was able to expand in a way that wouldn't have been affordable before." Is it ever easy to determine whether a firm making an economic profit is doing so because of the skills of the firm's managers or because of luck? Briefly explain by discussing the situation of Scott Crane at Smashburger. A. Crane's success with Smashburger was only due to his skill as a manager. B. Crane's success with Smashburger was partly due to his skill as a manager and partly due to luck, and luck was definitely most important in the firm's success. C. Crane's success with Smashburger was only due to luck. D. Crane's success with Smashburger was partly due to his skill as a manager and partly due to luck, but determining which was most important in the firm's success would be difficult.
D
This model does not fit Germano's description because he assumes what? A. Demand is perfectly inelastic. B. Demand is unit-elastic. C. Demand is very, though not perfectly, elastic. D. Demand is perfectly elastic.
D
What are the most important differences between perfectly competitive markets and monopolistically competitive markets? Unlike in perfectly competitive markets, in monopolistically competitive markets, A. there are only a few sellers, and firms face downward−sloping demand curves. B. the products competitors sell are differentiated, and there are substantial barriers to entry. C. firms face horizontal demand curves, and there are no barriers to entry. D. firms face downward-sloping demand curves, and the products competitors sell are differentiated. E. firms face downward-sloping demand curves, and the products competitors sell are identical.
D
What factors under the control of owners and managers make a firm successful and allow it to earn economic profits? Owners and managers control some of the factors that make a firm successful such as A. the government's ability to promote economic growth. B. sheer chance. C. the firm's ability to produce at an average cost above the minimum long−run average cost. D. the firm's ability to differentiate its product. E. the role foreign oil plays in determining transportation costs.
D
What term describes the actions of a firm intended to maintain the differentiation of a product over time? A. campaigning B. marketing C. advertising D. brand management
D
Which type of efficiency does a monopolistically competitive firm achieve in the long run? A. only productive efficiency B. only allocative efficiency C. both allocative and productive efficiency D. Neither allocative nor productive efficiency
D
With a downward-sloping demand curve, average revenue is equal to price A. because the downward slope is constant. B. because the firm must lower its price to sell additional units. C. since average revenue is the slope of the demand curve. D. actually, average revenue is always equal to price, whether demand is downward sloping or not.
D
7-Eleven, Inc., operates more than 20,000 convenience stores worldwide. Edward Moneypenny, 7-Eleven's chief financial officer, was asked to name the biggest risk the company faced. He replied, "I would say that the biggest risk that 7-Eleven faces, like all retailers, is competition. . . .because that is something that you've got to be aware of in this business." Source: Company Report, "CEO Interview: Edward Moneypenny—7-Eleven Inc.," The Wall Street Transcript Corporation. Part 2 Which of the following statements is true? A. A company in the retail business needs to be particularly aware of competition because the barriers to entry are low in retailing. B. Competition is a "risk" to a business because it can reduce a firm's profits. C. Retailers like 7-Eleven have an elastic demand. D. All of these statements are true. E. Only A and B are true.
D
How might a monopolistically competitive firm continually earn economic profit greater than zero? To earn economic profit greater than zero, a monopolistically competitive firm must A. block entry of new firms with government-enforced trademarks. B. be the first firm to enter a market to obtain first-mover advantages. C. rely on chance events. D. eliminate excess capacity by producing at minimum average cost. E. produce a product that creates value for consumers relative to competitors.
E
Why are many companies so concerned about brand management? Companies use brand management A. to collude with other firms and earn economic profits in the short run. B. to achieve allocative efficiency and maximize economic surplus in the long run. C. to eliminate excess capacity and earn economic profits in the long run. D. to produce a product identical to that of competitors and create network externalities in the long run. E. to maintain product differentiation and earn economic profits in the short run.
E
In 1916, the Ford Motor Company produced 500,000 Model T Fords at a price of $440. The company made a profit of $60,000,000 that year. Henry Ford told a newspaper reporter that he intended to reduce the price of the Model T to $360, and he expected to be able to sell 800,000 cars at that price. Ford said, "Less profit on each car, but more cars, more employment of labor, and in the end we get all the total profit we ought to make." a. Did Ford expect the total revenue he received from selling Model Ts to rise or fall following the price cut?
Rise because he assumed demand was elastic
According to an article on barrons.com, earnings increased for Starbucks in early 2019 partly because of lower costs due to "streamlined operations." Source: David Marino-Nachison, "Starbucks Stock Is Up, but So Are Expectations, Analyst Says," barrons.com, April 8, 2019. Explain the effect of this cost decline on the price of a Starbucks cappuccino, on the quantity of cappuccinos a representative Starbucks coffeehouse sells, and on the profit of this Starbucks coffeehouse. Assume that the demand for Starbucks cappuccinos is unchanged. When Starbucks streamlines its operations, its MC curve shifts _____ and its ATC curve shifts _______. The ______ cost causes Starbucks to _____ the quantity of cappuccinos that it sells and to _____ the price of cappuccinos. Starbucks's profit ______.
downward; downward; lower; increase; decrease; increases
Explain the effect of installing Just Walk Out technology in a convenience store that had previously used a conventional checkout process with cash registers and cashiers. Assume that the technology causes a decline in both the fixed cost and the marginal cost of selling a quart of milk. Assume for simplicity that quarts of milk are the only product the store sells. When a convenience store installs Just Walk Out technology, its MC curve shifts ___ and its ATC curve shifts ____. The ____ cost causes the store to ____ the quantity of milk that it sells and to ____ the price of milk. The store's profit ______
downward; downward; lower; increase; decrease; increases
