Fundamentals of Strategic Decision Making - Exam 2

When the Herfindahl-Hirschman index (HHI) equals ___, a single firm exists in the market.

10,000

A firm should shut down when P ___ AVC.

<

When firms in monopolistic competition earn positive economic profits, how will additional firms react?

Additional firms enter and produce variations of the product.

Define the competitive firm's demand.

Df = P = MR

True or false: In the long-run, firms in a monopolistically competitive market earn positive economic profits.

False

What would happen to research and development of new products and technologies if the U.S. eliminated the current patent system?

Firms would have less incentive to develop new products.

How does the U.S. patent system create monopolies?

Grants an inventor exclusive right to sell the product

The Herfindahl-Hirschman index (HHI) is given by:

HHI = 10,000Σw^2i

Determine a key difference between monopolistic competition and monopoly.

In monopolist competition, there are other firms that sell similar products.

The Lerner index (L) is given by:

L = (P−MC)/P

A monopolist's linear inverse demand curve is P(Q) = 750 - 3Q. Which of the following is the monopolist's marginal revenue?

MR = 750 - 6Q

What is the marginal revenue (MR) of the inverse linear demand function, P(Q) = a + bQ?

MR = a + 2bQ

Which is a strategy firms use to tailor goods and services to meet the needs of a particular segment of the market?

Niche marketing

What do the key assumptions of a perfectly competitive market imply?

No one firm can influence market price.

To maximize profits, a perfectly competitive firm should produce in the range of increasing marginal cost where P = MC and

P ≥ AVC

What is the fundamental difference between monopolistic competition and perfect competition?

Products in monopolistic competition are differentiated

As firms exit a perfectly competitive industry in the long run, what happens to the profits of the remaining firms?

Profits increase due to increased market price.

The Rothschild index (R) is given by:

R = ET/EF

What happens to the industry supply as firms exit a perfectly competitive industry in the long run?

Supply decreases

Inferences drawn from the four-firm concentration ratio differ from those drawn from the Herfindahl-Hirschman index (HHI). This is due in part to which of the following?

The four-firm concentration ratio ignores the 5th-largest firm

What does the Dansby-Willig performance index measure?

The increase in social welfare from a socially efficient output increase.

Which is true regarding the Lerner index (L)?

(L) is a measure of how much firms mark up prices over marginal cost.

In the long run, firms in monopolistic competition produce a level of output where

- P > MC - P = ATC > minimum average costs

Market structures vary due to:

- ease at which firms can enter or exit the industry - technology and costs - demand conditions - the number of firms in the market - the relative size of firms

What does the free entry and exit assumption imply for a perfectly competitive market?

- new firms will enter when profits exist - in the long run, economic profits are zero - new firms will leave if they incur losses

Barriers to entry include which of the following?

- patents - economies of scale - capital requirements

What happens in a perfectly competitive industry when firms earn profits?

- price falls - supply increases - profits of remaining firms fall

What is the key difference in determining the profit-maximizing price and output under monopoly versus monopolistic competition?

There is no difference.

Suppose an organic salad shop attempts to increase demand for its food by differentiating itself as a healthy alternative to fast-food hamburgers. This is an example of ___ advertising.

comparative

When increasing the output of one product reduces the marginal cost of another product, it is called

cost complementarity

The welfare loss to society due to the level of output produced by a monopolist is called the ___ loss of monopoly.

deadweight

For a monopolist, it is necessary to _______ price to increase output by one unit. As a result, the price received from all previous units _________.

decrease, decreases

When long-run average costs rise as output increases, we say that the firm experiences ___ of scale.

diseconomies

When long-run average costs fall as output increases, we say that the firm experiences ___ of scale.

economies

In some markets, only one or two firms can exist due to

economies of scale

When the total cost of producing two goods within the same firm is less than the cost of producing them in separate firms, ______ exist.

economies of scope

One way firms can gain technological advantage is by:

engaging in research and development

When firms in monopolistic competition earn positive economic profits, other firms tend to ___ the market.

enter

In order to maximize profits, a monopolist should produce where marginal revenue is ________ marginal cost.

equal to

A monopolist charges a ________ price and produces ________ output than a perfectly competitive industry.

higher, less

The demand curve for a perfectly competitive firm is a ___ line at the market ___.

horizontal, price

If MR is greater than MC, a profit-maximizing monopolist should ___.

increase output to maximize profits

When a monopolist increases output by one unit, total revenue

increases by less than price

In monopolistic competition, each firm uses the ___________ demand curve and the marginal revenue curve to establish output and price. In monopoly, the firm uses the __________ demand curve and the marginal revenue curve to establish output and price.

individual, market

Economies of scope tend to encourage ______ firms.

larger

In a perfectly competitive firm, in the short run, a firm will shut down to minimize losses when price is ______ average variable cost.

less than

Multiproduct firms that have cost complementarities tend to have ______ marginal costs than firms producing a single product.

lower

Factors such as the number of firms, concentration, cost conditions, demand conditions, and the entry/exit conditions all refer to

market structure

When many buyers and sellers freely enter and exit a market having similar, yet differentiated products, it is called ________.

monopolistic competition

Fast-food hamburgers are characterized by a large group of sellers producing slightly different goods. What type of market is this?

monopolistically competitive

Economies of scale and scope, cost complementarity, and patents are all sources of ___ power.

monopoly

Suppose a market contains one supplier of a good that has no close, available substitutes. What type of market structure is this?

monopoly

The market structure where a firm has a large degree of market power is called

monopoly

When price (P) exceeds minimum average variable cost (AVC), each unit of output sold generates ___ revenue than the cost per unit of the variable inputs.

more

When four or fewer firms produce all of an industry's output, the four-firm concentration ratio is

one

In order to maximize profits in the short run, a manager must determine how much output should be produced, given

only variable inputs within his or her control

Firms gain technological advantages when they use research and development to acquire

patents

A market with many "small" buyers and sellers, identical products, no transaction costs, and free entry and exit where buyers and sellers have perfect information is called

perfect competition

If the market for corn contains many buyers and sellers (none of whom can influence price), a homogeneous product, and free entry in the market, we consider the market to be

perfectly competitive

In general, agriculture is considered a ___________ market.

perfectly competitive

For a perfectly competitive firm, marginal revenue is equal to the market

price

In a perfectly competitive market, the individual producer's demand curve is the market

price

π = P(Q) - C(Q) defines

profits

On a graph, profits are given by the vertical distance between the cost function and the ___ line.

renevue

A period of time during which at least one input is fixed is called the ___ run.

short

The amount of consumer and producer surplus generated in a market is called:

social welfare

Products that are close ___ are considered to be part of the same industry class.

substitutes

The Herfindahl-Hirschman index (HHI) is based on squared market shares. Consequently,

the (HHI) places greater weight on firms with large market shares than the four-firm concentration ratio

Marginal revenue is

the change in total revenue from a one-unit change in output.

The price an individual producer in a perfectly competitive market faces is determined by:

the market supply and market demand

Social welfare refers to ___ in a market.

the sum of consumer and producer surplus

When relevant markets are localized, the use of national data to establish concentration ratios tends to

understate the degree of concentration

Suppose a firm sets its price equal to the marginal cost of production. In this case, the Lerner index will be equal to

zero

When an industry is composed of many firms producing similar products, the Rothschild index (R) will be close to

zero

When an industry is less concentrated, the four-firm concentration ratio is close to

zero

When the Herfindahl-Hirschman index (HHI) equals ___, there are numerous, infinitesimally small firms in the industry.

zero

When there are no gains to be obtained by inducing firms in an industry to alter their output in a socially efficient manner, the Dansby-Willig performance index is

zero

If consumers are willing to pay more for "Roper's Rice" than they are for "Rice by Russell", then "Roper's Rice" is enjoying additional value due to _______.

brand equity