EC 515 Managerial Economics - Exam 2
Which of the following would NOT shift the demand curve for a good or service? a. A change in the price of the good b. A change in consumer income c. A change in the price of a substitute good d. A change in expectations about the future price of the good
A change in the price of the good
Which of the following combinations would definitely result in an increase in the equilibrium price in a market? a. A leftward shift in supply and a rightward shift in demand b. A leftward shift in supply and a leftward shift in demand c. A rightward shift in supply and a rightward shift in demand d. A rightward shift in supply and a leftward shift in demand
A leftward shift in supply and a rightward shift in demand
The forces that create high rivalry within an industry include all of the following except: Numerous competitors. High fixed costs. Fast industry growth Low switching costs for buyers.
Fast industry growth
Which of the following characteristics is most consistent with a perfectly competitive market? a. Firms earn positive economic profit. b. There are just a few sellers in the market. c. Firms are able to enter and exit the market freely. d. All of the above
Firms are able to enter and exit the market freely.
Which of the following is not a characteristic of markets in perfect competition? There are many buyers and sellers Firms can enter and exit the market freely in the long run Firms do not have information about their rivals' product and cost structure Firms produce a homogeneous product
Firms do not have information about their rivals' product and cost structure
If accounting profits are positive in an industry
Firms will enter or leave the industry, depending on whether or not economic profits are positive
Now suppose that competition among several market makers forces the spread down to$2. How many goods are traded? Five Four Three Two
Four
Attractive industries have all the following, except High supplier power Low buyer power High entry barriers Low rivalry
High supplier power
Price-takers' markets differ from price-searchers' markets in that individual price-takers earn less than price-searchers. have no desire to secure exclusive legal privileges from government. possess more political power, which can be transformed into market power. have no incentive to advertise. are almost always small businesses.
have no incentive to advertise.
A typical corn farmer won't use cost-plus-markup pricing because his costs are low enough. he isn't interested in maximizing net revenue. he strives for markdown pricing, not markup pricing. he has no control over the market price of corn.
he has no control over the market price of corn.
Price discrimination by sellers is usually observed only in situations where low-price customers can easily resell to high-price customers. prices are set by competing monopolies. sellers are bigots. sellers can effectively identify customers by their demand for the product.
sellers can effectively identify customers by their demand for the product.
In the figure, what market price would cause E-Z-Care to make a normal profit (zero economic profit)?
$12 per lawn
As shown in the figure, the firm will produce in the short run if the price is at least equal to
$15 per unit
Suppose that a new entry has decreased your demand elasticity from -2 to -3 (made demand more elastic) and that your price, before the new entry, was $20. You should adjust your price to $___________ due to the new entry and decreased demand elasticity.
$15.00 20*(1-1/2)=10 10/(1-1/3)=$15.00
A perfectly competitive firm's profit maximizing price is $15. At MC=MR, the output is 100 units. At this level of production, average total costs are $12. The firm's profits are $300 in the short run and long run $300 in short-run $500 in the short-run and long-run $500 in the short-run
$300 in short-run
Suppose there is a single market maker in this market. What is the optimal bid-ask spread? $2 bid; $10 ask $4 bid; $8 ask $5 bid; $7 ask $6 bid; $6 ask
$4 bid; $8 ask
Higher consumer incomes increase the demand for a particular good. How is this effect generally shown? a. A rightward shift of the demand curve b. A leftward shift of the demand curve c. A rightward movement along the demand curve d. A leftward movement along the demand curve.
A rightward shift of the demand curve
When a resource or capability is valuable, rare, hard to imitate, and non-substitutable firms may gain: A temporary competitive advantage. A complex competitive advantage. Competitive parity. A sustainable competitive advantage
A sustainable competitive advantage
Metering is A type of indirect price discrimination A type of direct price discrimination An evaluation of a product An example of bundling
A type of indirect price discrimination
Which of the following statements is true regarding the difference between monopoly prices and quantities compared to perfectly competitive prices and quantities? a. Monopoly prices and quantities are both lower than in perfect competition. b. Monopoly prices and quantities are both higher than in perfect competition. c. Monopoly prices are lower than prices in perfect competition but quantities are higher than in perfect competition. d. Monopoly prices are higher than prices in perfect competition but quantities are lower than in perfect competition.
Monopoly prices are higher than prices in perfect competition but quantities are lower than in perfect competition.
Which of the following types of firms are guaranteed to make positive economic profit? Both a perfectly competitive firm and a monopoly Neither a perfectly competitive firm nor a monopoly A perfectly competitive firm but not a monopoly A monopoly but not a perfectly competitive firm
Neither a perfectly competitive firm nor a monopoly
As shown in the figure, the price that will yield zero economic profit is
OB
As shown in the figure, if the monopolist produces the profit-maximizing output, total revenue is the rectangular area
OQ2DP4
Jet fuel prices have recently increased. This will most likely lead to which of the following changes? a. Demand for airplane trips increase. b. Demand for airplane trips decrease. c. Supply of airplane trips increase. d. Supply of airplane trips decrease.
Supply of airplane trips decrease.
Which of the following is the best example of an oligopolistic industry? The market for apples The public transportation industry The market for designer coffee (i.e., Starbucks, Peets) The U.S. automobile market
The U.S. automobile market
Firms tend to raise the price of their goods after acquiring a firm that sells a substitute good because They lose market power There is an increase in the overall demand for their products The bundle has a more elastic demand than individual goods The bundle has a more inelastic demand than individual goods
The bundle has a more inelastic demand than individual goods
Which of the following provides an example of how a resource may be valuable? a. Rivals do not simultaneously possess similar resources. b. The resource helps the firm achieve lower costs. c. The resource is very hard to imitate. d. All of the above.
The resource helps the firm achieve lower costs.
Holding other factors constant, a decrease in the tax for producing coffee causes The supply curve to shift to the left, causing the prices of coffee to rise The supply curve to shift to the right, causing the prices of coffee to rise The supply curve to shift to the left, causing the prices of coffee to fall The supply curve to shift to the right, causing the prices of coffee to fall
The supply curve to shift to the right, causing the prices of coffee to fall
If the government imposes a price floor at $9 (i.e., price must be $9 or higher) in the above market, how many goods will be traded? Five Four Three Two
Two
Changes in prices of a good causes Movement along the demand curve Movement along the supply curve No effect to either curve Both a and b
Both a and b
Three Steps to Analyzing Changes in Equilibrium
Decide whether the event shifts the supply or demand curve. Decide which direction the curve shifts. Use the supply-and-demand diagram to see how the shift changes the equilibrium
If a firm successfully adopts a product differentiation strategy, what should happen to the elasticity of demand for its product? Increase Decrease Become unit elastic Is unaffected
Decrease
A natural monopoly arises when a firm has: A license A patent Official approval to produce a product Decreasing average cost over the range of market demand
Decreasing average cost over the range of market demand
Recently, you observed both an increase in the price and quantity of wheat. These two outcomes could be the result of which of the following? a. Demand curve for wheat shifting rightward b. Demand curve for wheat shifting leftward c. Supply curve of wheat shifting rightward d. Supply curve of wheat shifting leftward
Demand curve for wheat shifting rightward
If the market clearing price of LCD televisions falls from $2,000 to $1,000, and the market clearing output decreases from 5 million to 4 million units, which of the following best explains this? Demand decreased and supply remained unchanged. Supply increased and demand remained unchanged. Demand increased and supply remained unchanged. Supply decreased and demand remained unchanged.
Demand decreased and supply remained unchanged.
the price that balances supply and demand.
Equilibrium Price The equilibrium price is often called the "market-clearing" price because both buyers and sellers are satisfied at this price.
the quantity supplied and the quantity demanded when the price has adjusted to balance supply and demand. If the actual market price is higher than the equilibrium price, there will be a surplus of the good.
Equilibrium Quantity
If the market for a certain product experiences an increase in supply and a decrease in demand, which of the following results is expected to occur? Both equilibrium price and the equilibrium quantity could rise or fall. Equilibrium price would rise, and the equilibrium quantity could rise or fall. Equilibrium price would fall, and the equilibrium quantity could rise or fall. Equilibrium price would fall, and the equilibrium quantity would fall.
Equilibrium price would fall, and the equilibrium quantity would fall.
Suppose recent and widely circulated medical article reports new benefits of cycling exercise. Simultaneously, the price of the parts needed to make bikes falls. If the change in supply is greater than the change in demand, the price will _________ and the quantity will _________. Rise, rise Rise, fall Fall, rise Fall, fall
Fall, rise
Airlines charge a ____________ price to business travelers compared to leisure travelers because business travelers have a ____________ demand than leisure travelers. Higher; more elastic Higher; less elastic Lower; more elastic Lower; less elastic
Higher; less elastic
In the long-run, which of the following outcomes is most likely for a firm? Zero accounting profits but positive economic profits. Zero accounting profits. Positive accounting profits and positive economic profits. Zero economic profits but positive accounting profits.
Zero economic profits but positive accounting profits
If a price floor on coffee is set above the equilibrium price, then
both the quantity of coffee demanded will decrease and the quantity of coffee supplied will increase will occur
A _______ strategy is an integrated set of choices designed to deliver products or services that customers perceive as being different in ways that are important to them. a. cost reduction b. resource integration c. differentiation d. product development
differentiation
Buyer power is generally higher when a. differentiation among industry products is low. b. switching costs among industry products is high. c. there is little concentration of buyers. d. substitute products are difficult to find.
differentiation among industry products is low.
Farmers can choose to produce eggs or milk. If there is an increase in the price of milk then what will be the effect in the egg market
egg supply will decrease
Marginal revenue for a price taker is equal to price. less than price. more than price. unrelated to price.
equal to price.
The process of supply and demand guarantees that a shortage or surplus will never exist. guarantees the greatest amount of social happiness. ensures that people will be able to obtain all that they need. generates useful information regarding the relative scarcities of goods and services. accomplishes all of the above
generates useful information regarding the relative scarcities of goods and services.
Fill in the blanks: An enterprise that price discriminates will tend to charge a __________ price for the category of customer with the ___________ elasticity of demand. higher; higher higher; lower lower; lower 100 percent markup; infinite
higher; lower
Barriers to entry are likely to be higher when a. switching costs among products are low. b. differentiation among products is low. c. significant benefits from economies of scale exist. d. access to distribution channels is relatively easy.
significant benefits from economies of scale exist.
supply curve
slope upward; that is, the higher the price, the higher the quantity supplied.
The price of hops, which is used in making beer, increases. In the market for beer you would expect that: a. the supply of beer would increase and the price of beer would decrease. b. the supply of beer would decrease and the price of beer would increase. c. the supply of beer would increase and the price of beer would increase. d. the supply of beer would decrease and the price of beer would decrease.
the supply of beer would decrease and the price of beer would increase.
If the price of insulin is currently above the market-clearing level, then there is a shortage of insulin. the market for insulin is fully coordinated. there is a surplus of insulin. insulin is no longer a scarce good.
there is a surplus of insulin.
something that affects demand that a company cannot control. income, weather, interest rates, and prices of substitute and complementary products owned by other companies
uncontrollable factors
What word is used to describe the amount customers are willing and able to pay in exchange for a product or service? a. Capacity b. Tangibility c. Price d. Value
value
Which of the following will definitely result if there is both a leftward shift in demand and a leftward shift in supply? a. An increase in equilibrium price. b. A decrease in equilibrium price. c. An increase in equilibrium quantity. d. A decrease in equilibrium quantity.
A decrease in equilibrium quantity.
When demand for a product falls, which of the following events would you NOT necessarily expect to occur? A decrease in the quantity of the product supplied. A decrease in its price. A decrease in the supply of the product. A leftward shift of the demand curve.
A decrease in the supply of the product.
If marginal revenue exceeds marginal cost: A firm increases its profit by producing more A firm decreases its profit by producing more A firm is maximizing its profit A firm is making losses
A firm increases its profit by producing more
At the individual firm level, which of the following types of firms faces a downward-sloping demand curve? Both a perfectly competitive firm and a monopoly Neither a perfectly competitive firm nor a monopoly A perfectly competitive firm but not a monopoly A monopoly but not a perfectly competitive firm
A monopoly but not a perfectly competitive firm
Suppose workers prefer a certain amount of autonomy and flexibility in their job responsibilities. Job A and B are identical in all respects except Job A offers some autonomy and flexibility. Which of the following combinations of annual salaries would you predict? a. A: $40,000 B: $40,000 b. A: $40,000 B: $50,000 c. A: $50,000 B: $40,000 d. A: $50,000 B: $50,000
A: $40,000 B: $50,000
Arbitrage Is the act of to buying low in one market and selling high in another market Can force a seller to go back to uniform pricing Can defeat direct price discrimination All of the above
All of the above
Which of the following conditions must be satisfied by a successful price discrimination scheme? The seller must have market power The seller must be able to identify different customer groups with different demand elasticities The seller must be able to prevent arbitrage between the two groups All of the above
All of the above
Which, if any, of the following would likely cause an increase in demand for DVD move rentals?
An increase in the price charged for cable TV movie channels
A market structure in which a few large firms produce most of the output in an industry is called: A monopoly A monopolistically competitive market An oligopoly An oligopsony
An oligopoly
"If war breaks out in the Middle East, it may become necessary to start rationing gasoline." What's wrong or misleading about that statement by a government official? Gasoline can be obtained in an emergency by giving up other petroleum products. Gasoline is already being rationed. Rationing never works, as experience amply demonstrates. Rationing only works when the supply is assured. The United States can produce domestically all the gasoline it needs.
Gasoline is already being rationed.
Which of the products below is closest to operating in a perfectly competitive industry? Nike shoes Eggs Purdue Chicken Restaurants
Eggs
For products like parking lots and hotels, costs of building capacity are mostly fixed or sunk and firms in this industry typically face capacity constraints. Therefore, If SRMR>SRMC at capacity, then the firms should price to fill capacity If SRMR<SRMC at capacity, then the firms should price to fill capacity If LRMR>LRMC at capacity, then the firms should price to fill capacity If LRMR>LRMC at capacity, then the firms should price to fill capacity
If SRMR>SRMC at capacity, then the firms should price to fill capacity
For a monopoly, the marginal revenue curve: Is flat at the market price Is below the demand curve and has a steeper slope Is U-shaped, with the minimum at the point where the marginal cost curve intersects it Is arch-shaped, with the maximum at the point where the marginal cost curve intersects the demand curve
Is below the demand curve and has a steeper slope
Predatory pricing: Is common among competing oligopolists Occurs when a firm discounts its price below its competitors' prices to increase its market share Occurs when a firm deliberately confuses customers by making it difficult for them to calculate the unit price of its product and be able to compare against competing product prices Is difficult to distinguish from fierce price competition in the marketplace
Is difficult to distinguish from fierce price competition in the marketplace
After massive promotion of Justin Bieber's latest music album, the producers reacted by raising prices for his albums. This implies that promotion expenditures made the album demand More Elastic Unitary elastic The Change is due to psychological pricing Less elastic
Less elastic
Which of the following types of firm is most likely to be a monopoly? a. Local restaurant b. Local electricity provider c. Local landscaping services company d. Local pet sitting company
Local electricity provider
A sudden decrease in the market demand in a competitive industry leads to Losses in the short-run and average profits in the long-run Above average profits in the short-run and average profits in the long-run New firms being attracted to the industry Demand creating supply
Losses in the short-run and average profits in the long-run
All of the following are examples of entry barriers, except Government protection through patents or licensing requirements Strong brands Low capital requirements for entry Lower costs driven by economies of scale
Low capital requirements for entry
Which of the following is NOT consistent with greater supplier power? a. Suppliers' products are critical inputs b. High differentiation of the suppliers' products c. Low switching costs to alternative sources of supply d. Only a few suppliers produce the product
Low switching costs to alternative sources of supply
Which of the following is true about a monopoly? Monopolies are guaranteed a profit Many monopolies are the result of the government restricting competition Monopolies are generally considered to be price takers, not price searchers Monopolies do not create social costs if they produce where marginal revenue equals marginal cost
Many monopolies are the result of the government restricting competition
A monopolist will maximize profits by producing where: Marginal cost equals marginal revenue Average total cost equals average revenue The difference between average total cost and average revenue is greatest The difference between marginal revenue and marginal cost is maximized
Marginal cost equals marginal revenue
Which statement below is true for a price searcher? Marginal revenue can only be positive. Marginal revenue can only be negative. Marginal revenue can only be zero. Marginal revenue can be positive, negative, or zero.
Marginal revenue can be positive, negative, or zero.
Suppose a price searcher faces the following demand curve: At $100, $90, $80, $70, and $60, the quantity demanded is 1, 2, 3, 4, and 5 units respectively. Which statement below is true? Total revenue is $100. Total revenue is $190 when 2 units are sold. Total revenue is $400 when 5 units are sold. Marginal revenue is $80 when the price is $90.
Marginal revenue is $80 when the price is $90.
Merrimack Industries sells its output in a perfectly competitive market. Which of the following statements is true about Merrimack? a. Merrimack faces a downward sloping demand curve. b. Merrimack will earn zero economic profits in long-run equilibrium. c. Merrimack would increase its total economic profits by charging a price slightly lower than the market price. d. The marginal revenue Merrimack receives from selling an additional unit of output will be different from the price at which it sells that unit.
Merrimack will earn zero economic profits in long-run equilibrium.
What is the main difference between a competitive firm and a monopoly firm? The number of customers served by the firm Monopoly firms are more efficient and therefore have lower costs. Monopoly firms can generally earn positive profits over a longer period of time. Monopoly firms enjoy government protection from competition.
Monopoly firms can generally earn positive profits over a longer period of time.
Imagine you are an expert on the carrot market. Recently, you notice that both the equilibrium price and quantity of carrots have increased. Which of the following combination of curve shifts could definitely account for those changes? (Hint: identify the effect on price and quantity for each individual shift and then consider the combination)
No change in supply; increase in demand
On average, if demand is unknown and costs of underpricing are _______ than the costs of overpricing, then _________. Smaller; overprice Smaller; underprice Larger; underprice None of the above
Smaller; underprice
If a firm in a perfectly competitive industry is experiencing average revenues greater than average costs, in the long-run Some firms will leave the industry and price will rise Some firms will enter the industry and price will rise Some firms will leave the industry and price will fall Some firms will enter the industry and price will fall
Some firms will enter the industry and price will fall
After firm A producing one good acquired another firm B producing another good, it raised the prices for the bundle of goods. One can conclude that the goods were Substitutes Complements Not related None of the above
Substitutes
Gillette's Mach 3, currently the most successful razor in the razor blade market, can only be used with its Mach 3 blades. Suppose rivals, Schick and Bic, announced new razors and replacements blades that are designed to work with Gillette's razor (which they did, by the way). What would happen to the razors' cross price elasticity of demand? The cross price elasticity of demand will decrease The cross price elasticity of demand will increase The cross price elasticity of demand will become a negative value The cross price elasticity of demand will not be affected
The cross price elasticity of demand will increase
In the 1990s, Oprah, the national talk-show host, convinced many Americans that eating beef could create major health problems. As a result, beef purchases and the price of beef fell substantially. Which of the following had occurred? The supply curve of beef shifted to the left. The demand curve for beef shifted to the left. The supply curve of beef shifted to the right. The demand curve for beef shifted to the right. Neither the supply curve nor the demand curve for beef had changed.
The demand curve for beef shifted to the left.
After the September 11th attack on the World Trade Center, and with the emergence of the anthrax scare, the price and the purchases of gas masks jumped dramatically in New York City. In the economic way of thinking, which of the following occurred? The supply curve for gas masks shifted to the right. The supply curve for gas masks shifted to the left. The demand curve for gas masks shifted to the right. The demand curve for gas masks shifted to the left. The demand curve for gas masks became upward-sloping.
The demand curve for gas masks shifted to the right.
When a firm practices perfect price discrimination, The demand curve is very inelastic The demand curve is the marginal revenue curve The demand curve is very elastic The marginal cost curve is the average cost curve
The demand curve is the marginal revenue curve
A firm that is a price taker: Can increase its market share by producing a product of higher quality and charging a small premium above the prevailing market price Will lose all its customers if it charges a price above the prevailing market price Can exert some influence over market price if it colludes with other firms Can increase its market share by advertising its unique product
Will lose all its customers if it charges a price above the prevailing market price
The idea of co-opetition from Brandenburger and Nalebuff refers to a. behavior that combines competition and cooperation. b. competitive behavior of co-ops, such as rural electricity providers. c. operation of co-owned resources. d. acquisition of competitors to co-opt their competitive advantage.
behavior that combines competition and cooperation.
One of the necessary conditions for price discrimination to occur is that
buyers in different markets have different elasticities of demand
Describe the difference in economic profit between a competitive firm and a monopolist in both the short and long run. Which should take longer to reach the long-run equilibrium? In the short run, both monopolists and competitive firms ______ earn positive economic profits. In the long run, _______ can earn a positive economic profit. True or False: The adjustment to long-run equilibrium occurs more quickly for competitive industries than for monopolists. True False
can neither monopolist nor competitive firms true
Changes in market prices tend to change the plans of suppliers. change the plans of demanders. change the plans of suppliers and demanders. have no predictable effect on anybody's plans.
change the plans of suppliers and demanders.
something that affects demand that a company can control. Price, advertising, warranties, product quality, distribution speed, service quality, and prices of substitute or complementary products also owned by the company
controllable factor
Sellers who find that the demand for their product is relatively inelastic at the price currently being charged could increase their net revenue by raising the price. could increase their total revenue by lowering the price. would decrease their net revenue if they raised the price. would decrease their total revenue if they raised the price.
could increase their net revenue by raising the price.
The General Motors Corporation hires people to decide what prices it should set, whereas sugar-beet farmers do not, because General Motors is a monopolist. is unionized. is large enough to ignore demand in setting its prices. receives subsidies and other assistance from government. could lose a lot of income by setting its prices inappropriately.
could lose a lot of income by setting its prices inappropriately.
a situation in which supply and demand have been brought into balance.
equilibrium
Land used for commercial Christmas trees can also produce pulpwood. Therefore, an increase in the expected market price of Christmas trees tends to
increase the cost of producing pulpwood
A new roasting innovation reduces the cost of producing coffee. As a result, the quantity of coffee ___________ and the price of coffee ________________. a. increases; rises b. decreases; rises c. increases; falls d. decreases; falls
increases; falls
As customer loyalty to a differentiated brand _______, their sensitivity to increases in price _______. a. increases; remains the same b. increases; grows c. decreases; falls d. increases; falls
increases; falls
In the figure, if this firm is currently producing 20 units of output, this firm
is at its profit-maximizing point
The cost-plus-markup theory of price setting explains why firms can't raise their prices until their costs rise. explains why percentage markups vary. is consistent with what many sellers say about how they set their prices. takes demand into account in explaining relative prices.
is consistent with what many sellers say about how they set their prices
Charlton Computer Company has a monopoly over the production of a specialized processor. It will be profitable for Charlton to increase production of its specialized processors as long as marginal cost a. is less than marginal revenue. b. equals marginal revenue. c. is greater than marginal revenue. d. is indifferent.
is less than marginal revenue.
E-commerce software, such as that purchased from Oracle, facilitates the online sale of products. Software such as this is unlikely to provide a source of competitive advantage because a. it is likely very expensive to install and run. b. it is available to all firms that want to purchase it, meaning it is not rare. c. it will likely become obsolete as time passes. d. its benefits only apply to products that can be sold online.
it is available to all firms that want to purchase it, meaning it is not rare.
Whether or not a particular firm is a price-taker will always depend on its size relative to others in the industry. its ability to manipulate the price of its product. its cost structure. all of the above. none of the above.
its ability to manipulate the price of its product.
the claim that the price of any good adjusts to bring the supply and demand for that good into balance.
law of supply and demand
Assume a monopolist's marginal cost and marginal revenue curves intersect and the demand curve passes above its average total cost curve. The firm will:
make an economic profit
Pat is the owner of United Local Supply, which makes zero economic profit. Pat is a. on the brink of going out of business. b. incurring short-run losses. c. making a return equal to his or her opportunity cost. d. trading off the short-run for the long-run.
making a return equal to his or her opportunity cost.
The development of the railroad in the middle of the 19th century reduced the market power of many U.S. manufacturing firms by making the demand for their products greater. smaller. more elastic. more inelastic. more certain and predictable.
more elastic.
Quantity demanded decreases from two units to one unit
movement along the demand curve
In the figure, at the profit-maximizing or loss-minimizing output, the monopolist's total economic profit is
negative
A surplus of peanuts implies that more peanuts have been produced than can be used currently. that peanuts are not currently scarce. that there is currently no demand for peanuts. all of the above. none of the above.
none of the above.
When marginal revenue for a seller is more than marginal cost, the seller is making a positive net revenue but not necessarily maximizing net revenue. maximizing net revenue and making a positive net revenue. maximizing net revenue even if net revenue is negative. not maximizing net revenue.
not maximizing net revenue.
High levels of industry rivalry are associated with a. a high level of differentiation. b. few competitors and high industry growth. c. low fixed costs and well differentiated products. d. numerous similarly situated competitors and slow industry growth.
numerous similarly situated competitors and slow industry growth.
If price discrimination enables sellers to increase net revenues, why don't all sellers try it? Because some sellers can't manipulate their price. some sellers can't control resentment. some sellers can't prevent low-price buyers reselling to high-price buyers. of all the above reasons.
of all the above reasons.
Minimum-price laws designed to preserve competition
offer the certainty of higher prices in order to eliminate the possibility of higher prices
Relative to managers in more competitive industries, managers in more monopolistic industries are more likely to spend their time on _____________________ .
pricing strategies
If a firm decreases output when MR<MC, then
profit will increase
Economists define "shortage" as quantity demanded exceeds quantity supplied. quantity demanded equals quantity supplied. quantity supplied exceeds quantity demanded. a situation whereby the prevailing price is higher than the market-clearing price.
quantity demanded exceeds quantity supplied.
Given that most people generally prefer to wear a bicycle helmet when riding, an increase in the price of bicycle helmets would tend to a. lead to fewer people walking to work. b. reduce demand for bicycles. c. increase demand for bicycles. d. reduce demand for cars.
reduce demand for bicycles.
Relative to managers in more monopolistic industries, managers in more competitive industries are more likely to spend their time on .
reducing costs
Consumer A Good 1 $2300 Good 2 $1700 Consumer B Good 1 $2800 Good 2 $1200 Suppose the monopolist only sold the goods separately. What price will the monopolist charge for Good 1 to maximize revenues for good 1? $2,300 $2,800 $1,200 $1,700 What is the total profit to the monopolist from selling the goods separately? $4,500 $6,300 $7,000 $6,200 What is a better pricing strategy for the monopolist? At this price, what are the total profits to the monopolist? Bundle the goods at $2,800; Profits=$5,600 Bundle the goods at $4,000; Profits=$8,000 Charge $2,800 for good 1 and charge $1,700 for good 2; Profits=$4,500 Charging the lowest price for each good individually is the best pricing strategy; profits = $7,000
$2,300 $7,000 Bundle the goods at $4,000; Profits=$8,000
National Mfg. Co. (NMC) is a monopoly in the market. Suppose it can sell 4 units of its output at $5.00 per unit and 5 units of its output at $4.90 per unit. NMC will produce and sell the fifth unit if its marginal cost is a. $5.00 or less. b. $4.90 or less. c. $4.50 or less. d. $4.00 or less.
$4.50 or less.
Suppose there are nine sellers and nine buyers, each willing to buy or sell one unit of a good, with values {$10, $9, $8, $7, $6, $5, $4, $3, $2}. Assuming no transactions costs and a competitive market, what is the equilibrium price in this market? $5 $6 $7 $8
$6
When the current price is higher than the equilibrium price, a. buyers want to purchase more than is produced. b. a shortage will exist. c. sellers want to produce and sell more than buyers want to purchase. d. quantity demanded equals quantity supplied.
sellers want to produce and sell more than buyers want to purchase.
To maximize net revenue, a price searcher should set total revenue equal to total cost. set marginal revenue equal to marginal cost. set net revenue equal to zero. reduce output if marginal costs are increasing.
set marginal revenue equal to marginal cost.
a situation in which quantity demanded is greater than quantity supplied (there will be upward pressure on the price). Sellers will respond to the shortage by raising the price of the good until the market reaches equilibrium.
shortage
If the price of the firm's product in the figure is $18 per unit, the firm should
stay in operation for the time being even though it is making an economic loss
If the price of the firm's product in the figure is $1.50 per unit, which intersects AVC at point B, the firm should
stay in operation for the time being even though it is making economic loss
If firms in a competitive industry begin to earn profit in the short run, new firms will enter. This will shift the industry a. demand curve to the right, meaning market price will rise. b. demand curve to the left, meaning market price will fall. c. supply curve to the right, meaning market price will fall. d. supply curve to the left, meaning market price will rise.
supply curve to the right, meaning market price will fall.
behavior of a group of sellers and tell you how much will be sold at a given price.
supply curves
a situation in which quantity supplied is greater than quantity demanded (there will be downward pressure on the price).
surplus To eliminate the surplus, producers will lower the price until the market reaches equilibrium. If the actual price is lower than the equilibrium price, there will be a shortage of the good.
Buyers have higher power when: firms sell a highly differentiated product. they are not a significant purchaser of the supplier's output. switching costs are low. the buyer industry is highly fragmented (buyers are not concentrated).
switching costs are low.
When a resource or capability is valuable and rare, a firm may gain a: sustainable competitive advantage. competitive parity. cost advantage. temporary competitive advantage.
temporary competitive advantage.
A decrease in the supply of a good will cause a larger increase in its price if there are many close substitutes for that good. the greater the scarcity of that good. the more elastic the demand for that good. the more inelastic the demand for that good.
the more inelastic the demand for that good.
For a seller who is a price taker, marginal revenue is always less than marginal cost. more than marginal cost. the same as marginal cost. less than price. the same as price.
the same as price.
If grocery stores in high-crime areas charge higher prices than stores elsewhere, it is because each item sold must bear its share of the higher insurance costs. residents of high crime areas tend to be less price-conscious shoppers. the costs of crime are a legitimate cost of doing business. the store owners are not setting marginal cost equal to marginal revenue. there is less competition between stores in high-crime areas.
there is less competition between stores in high-crime areas.
The existence of a temporary competitive advantage through resources is linked to a. the ratio between the value and cost of the resources. b. whether the resources are valuable and rare. c. a lack of clarity around what links resources to advantage. d. whether the resources are difficult to acquire.
whether the resources are valuable and rare.
A firm should shut down in the short run if
Average variable costs are greater than the price of the good
In the short run, why would a firm in perfect competition shut down? Because it is making a loss Because its sales revenue does not cover total cost Because its sales revenue does not cover fixed cost Because its sales revenue does not cover variable cost
Because its sales revenue does not cover variable cost
Why is a monopolist able to earn long run profit, unlike perfectly competitive firms which do not earn long run profit? Because being the only producer, a monopolist can charge any price and sell any quantity it likes Because monopolies usually produce superior products compared to perfectly competitive firms Because there are no barriers to entry in perfectly competitive markets, but there are entry barriers in a monopolistic market Because monopolies are larger and more efficient
Because there are no barriers to entry in perfectly competitive markets, but there are entry barriers in a monopolistic market
Suppose that Spam is an inferior good. If the U.S. economy hit bad times, and demanders' incomes were to fall, which of the following would tend to occur? Spam sales would increase. Spam demand would decrease. The price of Spam would increase. Both A and C above. Both B and C above.
Both A and C above.
What will be the principal and most immediate effect on the supply (schedule or curve) or demand (schedule or curve) for raw cotton grown in the United States of the development of a low-cost process for treating cotton cloth so that it dries wrinkle-free? Decrease in demand. Decrease in supply. Increase in demand. Increase in supply.
Increase in demand
The primary purpose of a cartel is to: Move output closer to society's wealth-maximizing output level Foster cooperation among firms to minimize the deadweight loss generated in imperfectly competitive markets Exert monopoly power so as to increase total industry profits Bring the price of a product closer to its marginal cost
Bring the price of a product closer to its marginal cost
Assume that the price elasticity of demand for movie theatres is -.85 during all evening shows but for all afternoon shows the price elasticity of demand is -2.28. For the theatre to maximize total revenue, it should Charge the same price for both shows, holding other things constant. Charge a higher price for the afternoon shows and lower price for the evening shows, holding other things constant Charge a lower price for the afternoon shows and higher price for the evening shows, holding other things constant Need more information
Charge a lower price for the afternoon shows and higher price for the evening shows, holding other things constant
You have recently been hired to advise the owners of Kenfield Insect Ltd. (KIL), which operates in a perfectly competitive industry. KIL is currently producing at a point where market price equals its marginal cost; KIL's total revenue is less than its total cost but exceeds its total variable cost. What advice should you provide KIL's owners? a. Shut down immediately because it is incurring a loss. b. Reduce prices in order to sell more units of output. c. Raise its price until it breaks even and then begins making profit. d. Continue production in the short run to minimize losses, but exit the industry in the long run.
Continue production in the short run to minimize losses, but exit the industry in the long run.
To maximize profit, a monopolist will produce and sell a quantity such that for the last unit sold, marginal revenue equals marginal cost and charges a price
Corresponding to the demand curve at that output level
In a market where price competition is fierce, Customers believe that the products are differentiated enough that they would purchase from the lowest-priced seller Customers perceive the products to be identical so that the customers will buy the product from the lowest-priced seller Customers are fiercely loyal and will support the producers of their favorite brands Customers expect preferential treatment in the form of differential pricing
Customers perceive the products to be identical so that the customers will buy the product from the lowest-priced seller
Which of the following factors would NOT cause a supply curve to shift to the right? a. A price of one of the important inputs to the supply process falls. b. Demand increases for the product. c. New firms enter the industry. d. A new technology is invented that reduces the costs to produce the product.
Demand increases for the product.
Which of the following describes one of the main justifications for the development of the resource-based view? a. Changes in environmental sensitivity led to greater interest in preservation of resources. b. Increases in the level of competition and pace of change within industries led to greater attention to resource efficiency. c. Observations that firms in the same industry differed in profitability, suggesting that something other than industry structure mattered. d. Arguments that low cost and differentiation were overlooked strategy alternatives .
Observations that firms in the same industry differed in profitability, suggesting that something other than industry structure mattered.
A software firm can offer a high-feature version of its software or a stripped down low-value version, each with similar production costs. Which of the following cannot be an optimal segmentation strategy? Offer only the high-feature version aimed only at a high-value market segment Offer only the low-value version aimed at all market segments Offer both versions targeted to different value segments Offer only the high-feature version aimed at all market segments
Offer only the low-value version aimed at all market segments
A firm in a perfectly competitive market (a price taker) faces what type of demand curve? Unit elastic Perfectly inelastic Perfectly elastic None of the above
Perfectly elastic
All the below choices are examples of promoting a firm's product, except Advertising Pricing Discount coupons End-of-aisle displays
Pricing
A monopolist earning economic profit in the short run determines that at its present level of output, marginal revenue is $23 and marginal cost is $30. Which of the following should the firm do to increase profit?
Raise price and lower output
A firm started advertising its product and this changed the product's elasticity from -2 to -1.5. The firm should Raise price from $10 to $15 Reduce price from $15 to $10 Raise price from $7.5 to $10 Reduce price from $10 to $7.5
Raise price from $10 to $15
A firm that acquires a substitute product can try and reduce inter-product cannibalization by Doing nothing Repositioning its product or the substitute so that they do not directly compete with each other Pricing each product at the same level Raising prices on the low-margin products
Repositioning its product or the substitute so that they do not directly compete with each other
The concept that explains firms possessing different bundles of resources is Resource heterogeneity Resource immobility Barriers to entry Imitability
Resource heterogeneity
Which of the following is not an example of a way to eliminate price competition? Caving in to pressure from powerful mine owners, the government of South Africa passed the Native Labour Regulation Act, which made it illegal for any mining company to attract black miners by offering them higher wages than they currently received The Mafia in New Jersey controls the trade of cocaine and prostitution in the city. Anyone who supplies cocaine or prostitutes would have to pay the Mafia tribute and accept Mafia-dictated prices You and four fellow classmates offer private economics tutoring at your college. You all agree to establish a "going rate" of $15 per hour Safeway grocery stores run a special on its house brand detergent: "buy one get one free"
Safeway grocery stores run a special on its house brand detergent: "buy one get one free"
A government agency releases a report warning consumers about the negative health effects of eating beef. Which of the following changes in the beef market is most likely to occur following the release? a. The supply curve will shift to the left, and the price of beef will rise. b. The demand curve will shift to the left, and price of beef will fall. c. The demand curve will shift to the right, and the price of beef will rise. d. Neither the supply curve nor the demand curve will shift, but quantity will decrease.
The demand curve will shift to the left, and price of beef will fall.
The price of peanuts increases. At the same time, we see the price for Jelly rise. How does this affect the market for peanut butter? The demand curve will shift to the left; the supply curve will shift to the left The demand curve will shift to the left; the supply curve will shift to the right The demand curve will shift to the right; the supply curve will shift to the left The demand curve will shift to the right; the supply curve will shift to the right
The demand curve will shift to the left; the supply curve will shift to the left
Why does a new hardcover Stephen King novel have a higher price than the paperback edition? It costs more to produce. The elasticity of demand differs. The publisher is more greedy when marketing the hardcover edition. The publisher is a price searcher on the hardcover editions and a price taker on the paperback editions.
The elasticity of demand differs.
A shoe-producing firm decides to acquire a firm that produces shoe laces. This implies that The firm's aggregate demand will be less elastic than the individual demand The firm's aggregate demand will be more elastic than the individual demand The firm's aggregate demand will be of the same elasticity as the individual demand None of the above
The firm's aggregate demand will be more elastic than the individual demand
Who, among the following, is least likely to price discriminate? The local tavern. The local diner. The local potato farmer. The telephone company.
The local potato farmer.
Which of the following is critical for a firm adopting a cost-reduction strategy? The firm must be the first to adopt the cost-reduction strategy. The strategy reduces costs by at least 10%. The strategy is focused on reducing internal production costs. The methods of achieving cost reductions are difficult to imitate.
The methods of achieving cost reductions are difficult to imitate.
Suppose the market for guitars "clears" at a price of $500 per guitar. What does this statement mean? Nothing, if an economist made the statement. Guitars are no longer a scarce good. The plans of guitar buyers and sellers are coordinated. There is no longer a demand for guitars.
The plans of guitar buyers and sellers are coordinated.
All of the following would affect the supply curve except: The cost of production The price of a jointly produced good The price of an input used to make the good The price of complements
The price of complements
After running a promotional campaign, the owners of a local shoe store decided to decrease the prices for the shoes sold in their store. One can imply that The promotional expenditures made the demand for their shoes more elastic The promotional expenditures made the demand for their shoes more inelastic The promotional expenditures has no effect on the shoe demand elasticity The owners got it wrong. To cover the promotional expenses, they should have raised the prices.
The promotional expenditures made the demand for their shoes more elastic
What would happen to revenues if a competitive firm raised prices? They would increase They would increase but profit would decrease They would increase along with profit They would fall to zero
They would fall to zero
Gillette's Mach 3, currently the most successful razor in the razor blade market, can only be used with its Mach 3 blades. Why would Gillette, the world's largest producer of shaving equipment, adopt such a strategy? Gillette is actually making a mistake by designing its product in this way and its market dominance is only the result of clever advertising It would be too costly to develop a razor that would be compatible with all other razor manufacturers' products The strategy is a way of creating brand recognition This strategy amounts to creating an entry barrier since it raises a consumer's cost of switching to another firm's product
This strategy amounts to creating an entry barrier since it raises a consumer's cost of switching to another firm's product
At a university faculty meeting, a proposal was made to increase health care benefits for new faculty to keep pace with the high cost of health care. True or False: In the long run, this increase in health care benefits will have no effect on the attractiveness of faculty positions compared to other jobs. (Hint: Consider how the indifference principle applies to this occupation in the long run.) True False
True
In order to calculate consumer surplus, what two amounts would you need? a. Value and cost b. Value and price c. Cost and price d. Profit and cost
Value and price
Which of the following markets is closest to meeting the assumptions of perfect competition? Wheat Car manufacturing Personal computer operating systems (like Windows or Mac OS X) Tank manufacturing (for the U.S. military)
Wheat
Distributors of beer earn some monopoly profits in their local markets but see them slowly erode as substitutes enter the market. Suppose Nebraska has scheduled a vote on the legalization of marijuana. Additionally, suppose that marijuana and beer are substitutes and that the legalization of marijuana would lead to a decrease in the price of marijuana. Given the relationship between marijuana and beer, the legalization of marijuana would lead to ________ in demand for beer. Thus, distributors of beer would likely_________ the legalization of marijuana.
a decrease oppose
An industry is defined as: a group of firms producing the exact same products and services. firms producing items that sell through the same distribution channels. firms that have the same resources and capabilities. a group of firms producing products that are close substitutes.
a group of firms producing products that are close substitutes.
A vertical demand curve is to a horizontal demand curve as an oligopoly is to a monopoly. a consumer is to a producer. a monopoly is to a price-taker. supply is to demand.
a monopoly is to a price-taker.
"Market clearing" refers to the case where the purchase and sale plans of buyers and sellers are fully coordinated. quantity demanded equals quantity supplied. there is neither a shortage nor surplus of a good. all of the above.
all of the above
Steps to increase differentiation of the firm's products may improve the firm's industry position because a. it may reduce buyer power. b. it may reduce rivalry. c. it may reduce threat from substitutes. d. All of the above
all of the above
If a firm can increase its sales only by lowering its price, then the firm is a price searcher. the firm's marginal revenue will be less than price. the demand curve for the firm's product is negatively sloped. all of the above are true.
all of the above are true.
If a producer can sell each and every unit he can possibly produce for $10 each, then he is a price taker. the demand for his product is infinitely elastic. his marginal revenue curve is a horizontal line at $10. all of the above are true.
all of the above are true.
Porter's Five Forces model is used to a. predict how an individual firm generates profit. b. assess how many firms will enter an industry. c. understand how individual firms create competitive advantage. d. assess the attractiveness (profit potential) of an industry.
assess the attractiveness (profit potential) of an industry.
