Econ 102 Final

अब Quizwiz के साथ अपने होमवर्क और परीक्षाओं को एस करें!

Given the decision tree​ below, TruImage's profits are​ $1.5 million if the firm accepts​ Dell's contract offer of​ $20 per copy. Given the decision tree​ above, will Dell offer TruImage a contract of​ $20 per copy or a contract of​ $30 per​ copy?

$30

What is the definition of​ monopoly?

A monopoly is a firm that is the only seller of a product in a given industry.

An article in the Wall Street Journal quoted a business consultant as saying​ that, "Today, companies are trying to get bigger to get economies of​ scale." ​Source: Sharon​ Terlep, "Big Companies Face Period of Rising Growth and​ Turmoil," Wall Street Journal​, January​ 22, 2018. a. What are economies of​ scale?

A situation in which a​ firm's long-run average costs fall as the firm increases output.

Shortly before the beginning of the​ Covid-19 pandemic, 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?

All of the above. A firm​ can't earn an economic profit in the long run using strategies that can be easily copied. Firms hope that they can earn​ short-run profits by periodically introducing new products or new ways of selling their existing products. 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.

What is the relationship between a perfectly competitive​ firm's marginal cost curve and its supply​ curve?

A​ firm's marginal cost curve is equal to its supply curve for prices above average variable cost.

What​ trade-offs do consumers face when buying a product from a monopolistically competitive​ firm?

Consumers pay a price greater than marginal​ cost, but they also have choices more suited to their tastes

When are firms likely to enter an​ industry? When are they likely to​ exit?

Economic profits attract firms to enter an​ industry, and economic losses cause firms to exit an industry.

How does the entry of new coffeehouses affect the profits of existing​ coffeehouses?

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.

A student​ argues: ​"To maximize profit.​, a firm should produce the quantity where the difference between marginal revenue and marginal cost is the greatest. If a firm produces more than this​ quantity, then the profit made on each additional unit will be​ falling." Is the above statement true or​ false?

False. Profit is maximized at the output level where marginal revenue equals marginal cost.

In​ 2021, Best Buy had the following​ price-matching policy posted to its​ website: We match local retail competitors​ (including their online​ prices) and these qualifying online​ retailers: Amazon.com, ​ Crutchfield.com, Dell.com,​ HP.com, and TigerDirect.com. ​Source:​ "Price Match​ Guarantee," bestbuy.com, accessed on February​ 16, 2021. Is Best​ Buy's policy likely to result in lower prices or higher prices on televisions and other products it sells in competition with Amazon and local​ brick-and-mortar stores? Briefly explain.

Higher​ prices, since the other firms know they would end up in a​ prisoner's dilemma noncooperative equilibrium.

Is it possible for marginal revenue for a firm operating in a perfectly competitive industry to be​ negative? No Would a firm selling in a monopolistically competitive market ever produce where marginal revenue is​ negative?

No No because marginal cost cannot be negative.

Is zero economic profit inevitable in the long run for a monopolistically competitive​ firm?

No, a firm could try to continue making a profit in the long run by reducing production costs and improving its products.

A monopolistically competitive firm​ doesn't produce where P​ = MC like a perfectly competitive firm because

P exceeds MR for a monopolistically competitive​ firm, and​ it's MR that must equal MC for profit maximization.

TR

P*Q

What is the relationship between​ price, average​ revenue, and marginal revenue for a firm in a perfectly competitive​ market?

Price is equal to both average revenue and marginal revenue.

Which of the following is an expression of profit for a perfectly competitive​ firm? Profit for a perfectly competitive firm can be expressed as

Profit=(P−ATC)×Q​, where P is​ price, Q is​output, and ATC is average total cost.

Alfred​ Chandler, a professor at the Harvard Business​ School, has​ observed, ​"Imagine the diseconomies of scale—the great increase in unit costs—that would result from placing close to​ one-fourth of the​ world's production of​ shoes, or​ textiles, or lumber into three factories or​ mills!" The​ shoe, textiles, and lumber industries are very competitive with many firms producing each of these products. ​Source: Alfred D.​ Chandler, Jr.,​ "The Emergence of Managerial​ Capitalism," in Alfred D.​ Chandler, Jr. and Richard S.​ Tedlow, The Coming of Managerial Capitalism​, New​ York: Irwin,​ 1985, p. 406. What does​ Chandler's observation​ suggest?

Smaller firms can produce at a lower​ long-run average cost than larger firms.

AR

TR/Q

A startup firm in a perfectly competitive market finds that its average total cost is higher than the market price. Since the firm is incurring​ short-run losses, the management is debating whether to continue operations. Alex​ Ferguson, a senior​ manager, feels that this is a temporary phase and the firm should continue operations. Which of the​ following, if​ true, would support​ Alex's argument?

The current price of the product covers the variable cost of production.

How does collusion make firms better​ off?

The firms can act as a single​ entity, like a monopoly.

Give two examples of products sold in perfectly competitive markets and two examples of products sold in monopolistically competitive markets.

Wheat and corn are sold in perfectly competitive markets and Maybelline cosmetics and Ralph Lauren cologne are sold in monopolistically competitive markets.

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?

Wheat is a homogeneous​ good, while Starbucks is able to differentiate its coffee from other coffeehouses.

Consider the graph to the right. Is it possible to say whether this firm is a perfectly competitive firm or a monopolistically competitive firm?

Yes. This is a monopolistically competitive firm because its demand curve is downward sloping.

If you own the only hardware store in a small​ town, do you have a​ monopoly?

Yes. You would have a monopoly if your profits are not competed away in the long run.

What is the difference between zero accounting profit and zero economic​ profit?

Zero economic profit includes a​ firm's implicit costs but zero accounting profit does not. Zero economic profit includes a​ firm's opportunity costs but zero accounting profit does not

What is a​ monopoly? A monopoly is

a firm that is the only seller of a good or service that does not have a close substitute.

What is a price​ taker? A price taker is

a firm that is unable to affect the market price

A buyer or seller that is unable to affect the market price is called

a price taker

Refer to the graphs. What do you expect to happen in this market as it approaches​ long-run equilibrium?

a shift to the right of the market supply curve as new firms enter

An economist argues that​ "the purpose of the competitive market system is to destroy businesses. The competitive market system acts like the cyborg played by Arnold Schwarzenegger in the movie The Terminator​, wiping out any firm that​ can't get out of its way. Without the destruction caused by​ competition, the economy could not achieve productive and allocative​ efficiency." a. Which of the following regarding the above statement is​ true? b. Do all firms lose as a result of the competitive market​ process? Do all consumers​ win?

a. all of the above; This is a fair analogy. The firms that survive are those that can produce at minimum​ long-run average cost while producing goods and services that consumers are willing and able to buy. In the long​ run, competition among firms in a competitive market forces firms that incur losses to shut down. b. Firms that are best able to respond to changing consumer tastes will​ win, and consumers generally win from competition because it forces firms to produce goods and services that match consumer wants at the lowest cost.

Give brief definitions of the following​ concepts: Game​ theory, cooperative​ equilibrium, noncooperative​ equilibrium, dominant​ strategy, and Nash​ equilibrium, and price leadership. To do​ this, identify the definition for each term from the following list. a. Game​ theory: 2 b. Cooperative​ equilibrium: c. Noncooperative​ equilibrium: d. Dominant​ strategy: e. Nash​ equilibrium: f. Price​ leadership:

a. Game​ theory: 2​ b. Cooperative​ equilibrium: 7 c. Noncooperative​ equilibrium: 8 d. Dominant​ strategy: 5 e. Nash​ equilibrium: 6 f. Price​ leadership: 10

What is the definition of market​ power? Market power is the

ability of a firm to charge a price greater than marginal cost.

What is a key factor that determines a​ firm's profitability?

all of the above A​ firm's average cost of production relative to that of competing firms. Factors affecting a​ firm's entire market. Chance events. Differentiation of a​ firm's product from other products.

Given the incentives to​ collude, why​ doesn't every industry become a cartel?

all of the above High profits attract entry into the market. Collusion is illegal in the United States. Most firms that collude have an incentive to​ "cheat."

What is marketing to an​ economist?

all of the above Marketing is deciding how to distribute the product. Marketing is designing the product. Marketing is advertising the product. Marketing is determining which product to produce.

Why would the government be willing to erect barriers to entering an​ industry? The government would be willing to impose barriers to

all of the above encourage firms to carry out research and development of new and better products. protect the public from incompetent practitioners. protect U.S. firms from international competition. both a and b.

Why do economists refer to the methodology for analyzing oligopolies as game​ theory? Economists refer to their methodology for analyzing oligopolies as game theory​ because, as in​ games,

all of the above firms are governed by rules that determine what actions are allowable. interactions among​ firms, which are​ players, are crucial in determining outcomes. firms employ strategies to attain their objectives. firms seek​ profits, which are​ payoffs, that are the result of firm interaction.

Actions of firms that are aimed at deterring entry include

all of the above introducing new products to fill market niches. advertising to create product loyalty. setting lower prices to keep profits at a level that makes entry less attractive.

Which of the following terms is a barrier to​ entry?

all of the above patents economies of scale ownership of a key input

A monopolistically competitive firm is not productively efficient because it produces a level of output where 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 average cost.

average total cost is not at a minimum average cost

What is the difference between a​ firm's shutdown point in the short run and its exit point in the long​ run? In the short​ run, a​ firm's shutdown point is the minimum point on the

average variable cost​ curve, while in the long​ run, a​ firm's exit point is the minimum point on the average total cost curve

Which of the terms below is defined as​ "anything that keeps new firms from entering an industry in which firms are earning economic​ profits"?

barriers to entry

Why do oligopolies​ exist? Oligopolies exist due to

barriers to entry

What is the difference between a horizontal merger and a vertical​ merger? A horizontal merger is a merger

between firms in the same​ industry, while a vertical merger is a merger between firms at different stages of the production of a good.

Which of the following statements is true when the difference between TR and TC is at its maximum positive​ value?

both A and B are true MR=MC Slope of TR=Slope of TC

Patents are granted for 20​ years, but pharmaceutical companies​can't use their​patent-guaranteed monopoly powers for anywhere near this long because it takes several years to acquire FDA approval of drugs. Suppose it is proposed that the life of drug patents be extended to 20 years after FDA approval. What would be the costs and benefits of this​extension?

both a and b Firms could earn higher profits for a longer period of​ time, but consumers would lose because prices of drugs would stay higher longer. Firms would be more likely to develop more new products and consumers would gain from having a wider range of medicines.

Who is in charge of enforcing​ them?

both a and b The Federal Trade Commission. The Antitrust Division of the U.S. Department of Justice.

Give an example of a​ government-imposed barrier to entry. An example of a​ government-imposed barrier to entry is

both a and b a tariff on imports occupational licensing

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 If the industry is monopolistically​ competitive, the reaction of consumers

buy wine from another winery. could be to remain loyal to​ Jerry's and pay the higher price.

How is the market supply curve derived from the supply curves of individual​ firms? The market supply curve is derived

by horizontally adding the individual​ firms' supply curves.

TC

change in TC/change in Q

MR

change in TR/change in Q

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

charge a price greater than marginal cost and do not produce at minimum average total cost.

Explain why market power leads to deadweight loss. Firms with market power create deadweight loss because they The total deadweight loss from market power for the economy is

charge a price that is greater than marginal cost to maximize profits. small

List the competitive forces in the five competitive forces model. The five competitive forces are

competition from existing​ firms, the threat of potential​ entrants, competition from​ substitutes, the bargaining power of​ buyers, and the bargaining power of suppliers.

How are decision trees used to analyze sequential​ games? A decision tree

contains decision nodes where firms must make​ decisions, arrows illustrating the​ decisions, and terminal nodes showing the resulting rates of return.

In early​ 2021, Ford Motor Company reported that during the last quarter of​ 2020, its revenue had declined by​ $36 billion, while its profit had increased by​ $3.4 billion. ​Source: Mike​ Coltas, "Ford's Results Hindered by Lower Truck​ Output, Air Bag​ Recall," Wall Street Journal​, February​ 4, 2021. It is possible for profits to increase even if revenue decreased if Can Ford maximize profit without maximizing​ revenue?

costs decrease A firm will typically not maximize its revenue at the output level that maximizes its profit. It a firm were to maximize​ revenue, it would typically produce a larger quantity than it does when maximizing profit.

Many firms advertise. What effect does advertising have on firm​ profits? One possible effect of advertising is to

decrease profits by increasing the cost of production. increase profits by shifting the demand curve for the product to the right. increase profits by making the demand curve for the product more inelastic

Suppose that a perfectly competitive industry becomes a monopoly. As a​ result, consumer surplus will, producer surplus will, and deadweight loss will

decrease, increase, increase

What is​ "natural" about a natural​ monopoly? A natural monopoly

develops automatically due to economies of scale.

During the​ Covid-19 pandemic, Starbucks announced that it would renovate 400 of its coffeehouses to permanently eliminate indoor dining. The coffeehouses would offer only​ drive-through, delivery, and pickup. The company expected that the changes to these coffeehouses would reduce the cost of selling coffee. ​Source: Heather​ Haddon, "Coronavirus Speeds Up Starbucks Shift to​ Takeout," Wall Street Journal​, June​ 10, 2020. 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 reduces the cost of selling​ coffee, its MC curve shifts downward and its ATC curve shifts downward. The lower cost causes Starbucks to increase the quantity of cappuccinos that it sells and to decrease the price of cappuccinos.​ Starbucks's profit increases.

downward, downward, lower, increase, decrease, increases

Explain why it is true that for a firm in a perfectly competitive market that P​ = MR​ = AR. In a perfectly competitive​ market, P​ = MR​ = AR because

firms can sell as much output as they want at the market price.

What are the most important differences between perfectly competitive markets and monopolistically competitive​ markets? Unlike in perfectly competitive​ markets, in monopolistically competitive​ markets,

firms face​ downward-sloping demand​ curves, and the products competitors sell are differentiated.

n​ 2010, Domino's launched a new advertising campaign admitting that its pizzas had not tasted very​ good, but claiming that they had developed a new recipe that greatly improved the taste. If​ Domino's succeeded in convincing consumers that its pizza was significantly better than competing​ pizzas, would its demand curve become flatter or​ steeper? When a product becomes less differentiated from other​ products, its demand curve becomes flatter. This happens because the slope of the demand curve reflects buyer responsiveness to a price​ change, which is determined in part by the availability of substitutes.​ Thus, when a product becomes less differentiated from other​ products, buyers perceive it as having more good​ substitutes, and this altered perception induces buyers to be more responsive to price.

flatter, more, more

One measure of the extent of competition in an industry is the concentration ratio. What level of concentration indicates that an industry is an​ oligopoly? Most economists believe that a​ four-firm concentration ratio of greater than 40 percent indicates that an industry is an oligopoly.

greater than 40

The Aluminum Company of America (Alcoa) has faced limited competition in the market for aluminum. What barrier has kept new firms from entering the market for aluminum​?

has had almost exclusive ownership of bauxite​, which is a key input. has had almost exclusive ownership of cranberries​, which is a key input.

In​ China, the government owns many more firms than in the United States. A former Chinese government official argued that a number of​ government-run industries such as oil refining were natural monopolies. ​Source: Shen​ Hong, "Former State Assets​ Regulator: SOE Monopolies​ 'Natural'," Wall Street Journal​, January​ 4, 2012. Oil refining would be a natural monopoly in a country if An industry is a natural monopoly when

having multiple firms would be highly inefficient. one firm can satisfy the entire market at the lowest cost.

Which type of merger is more likely to increase the market power of a newly merged​ firm? mergers are more likely to increase market power.

horizontal

What effect might the government have on​ oligopolies? In​ oligopolies, the government might

impose barriers to entry with a tariff to limit foreign competition.

Suppose that a monopoly becomes a perfectly competitive industry. As a​ result, consumer surplus will, producer surplus will, and deadweight loss will

increase, decrease, decrease

Is the concentration ratio an accurate measure of the extent of​ competition? The​ four-firm concentration ratio

is flawed in that it does not measure competition between industries. is flawed in that it does not include sales in the U.S. by foreign firms is flawed in that it is calculated for the national market even though competition in some industries is local.

What is the difference between explicit collusion and implicit​ collusion? Unlike explicit​ collusion, implicit collusion

is where firms signal to each other without actually meeting and agreeing to charge the same price.

Economists have developed broad and narrow definitions to identify monopolies. What is a characteristic that supports a firm being classified as a​ monopoly? Economists could find that a firm is a monopoly if

it earns profits in the long run.

The late Nobel​ Prize-winning economist George Stigler once​ wrote, "the most common and most important criticism of perfect competition...​ [is] that it is​ unrealistic." ​Source: George​ Stigler, "Perfect​ Competition, Historically​ Contemplated," Journal of Political Economy​, Vol.​ 55, No.​ 1, (February​ 1957), pp.​ 1-17. Despite the fact that few firms sell identical products in markets where there are no barriers to​ entry, economists believe that the model of perfect competition is important because

it is a benchmark—a market with the maximum possible competition—that economists use to evaluate actual markets that are not perfectly competitive.

When are firms likely to be price​ takers? A firm is likely to be a price taker when

it represents a small fraction of the total market it sells a product that is exactly the same as every other firm

A monopolistically competitive firm in a​ long-run equilibrium produces where

its demand curve is tangent to its average total cost curve.

Compare monopolistically competitive industries with perfectly competitive industries in the long run. Which industry structure is more​ efficient? Compared to perfect​ competition, monopolistically competitive industries are

less efficient because average cost is not minimized. less efficient because price is greater than marginal cost.

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." ​Source: Steve​ Dennis, "Macy's and JC Penney Earnings Offer Evidence of the Stall at the​ Mall; Here's How They Can Get on​ Track," forbes.com, February​ 28, 2019. 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 long run.

long

Economies of scale exist when a​ firm's ___________ average costs fall as it​ __________ output.

long-run; increases

b. What benefits might a firm receive from attaining economies of scale before competing firms in the industry​ do? If a firm attains economies of​ scale, its average cost will be lower than its competitors. This means the firm can sell its product at a lower price than its competitors.

lower than lower

What is the purpose of the antitrust​ laws? Antitrust laws are intended to

make illegal any attempts to form a monopoly or to collude.

Why would a monopolistically competitive firm​ advertise? A monopolistically competitive firm would advertise to

make its demand curve more inelastic shift its demand curve to the right

What are the three conditions for a market to be perfectly​ competitive? For a market to be perfectly​ competitive, there must be

many buyers and​ sellers, with all firms selling identical​ products, and no barriers to new firms entering the market.

The increase in total revenue that results from selling one more unit of output is

marginal revenue

Is zero economic profit inevitable in the long run for monopolistically competitive​ firms? In the long​ run, monopolistically competitive firms

may continue to earn profit by convincing consumers their products are different. may continue to earn profit by improving their product. may continue by reducing costs

Oligopolies exist because of barriers to entry. One of the most important barriers to entry is due to economies of scale. Why is this​ true? It is more likely for an industry to be an oligopoly than competitive in the presence of economies of scale because

minimum average cost occurs when firm output is a large fraction of industry output.

A column in the Washington Post argues that​ "network externalities turn market forces on their​ head." Consider two new products—product A and product B—neither of which receives patent protection. Assume that there are no network externalities when consumers use product​ A, whereas there are very large network externalities when consumers use product B. ​Source: Daniel W.​ Drezner, "The Best Work on Political Economy in​ 2018," Washington Post​, December​ 31, 2018. Briefly explain how market forces will determine the level of competition in equilibrium in industry A and in industry B. We would expect​ that, in​ equilibrium, the market for product A will be​ _______ competitive than the market for product B. This is because​ __________.

more; the very large network externalities in market B will make it difficult for new firms to enter the market

Which type of efficiency does a monopolistically competitive firm achieve in the long​ run?

neither allocative nor productive efficiency

An article in the Wall Street Journal noted that Google was planning on entering the market to provide wireless data services. According to the​ article, "Google has said it​ isn't looking to supplant the big​ carriers, and​ Verizon's and​ AT&T's enormous scale means they​ can't easily be​ dislodged." ​Source: Drew​ Fitzgerald, "Google Wants to Make Wireless Airwaves Less​ Exclusive, Cheaper," Wall Street Journal​, March​ 3, 2015. When Google says that it was not trying to​ "supplant" the big wireless​ carriers, it means that it was

not trying to offer the same products or services.

A column on bloomberg.com argues that natural gas pipelines​ "are a natural monopoly. Almost all of the costs are the fixed ones involved in building​ them; as long as​ there's spare​ capacity, the incremental expense of moving an extra cubic meter of gas down the line is​ infinitesimal." ​Source: David​ Fickling, "China's Pipeline Champion Misses an​ Opportunity," bloomberg.com​, June​ 12, 2018. Briefly explain why the cost structure of pipelines as the columnist describes it makes pipelines a natural monopoly. Be sure to define​ "natural monopoly" in your answer. A natural monopoly arises when

one firm can supply the entire market at a lower average total cost than can two or more firms.

Why might a monopoly​ arise? One firm will be present when

only one firm has control of a key raw material necessary to produce a good. wrong answers: the possibility for product differentiation is limited to only a couple of other firms. it can supply the entire market at lower marginal cost than can two or more firms. there exists no possibility for network externalities with other firms. All of the above.

A monopolistically competitive firm is not allocatively efficient because

price exceeds marginal cost

Which of the following terms is missing in the box on the​ right?

profitability

The government indirectly influences the level of industry competition with its own barriers to entry. ​ How? The government can restrict entry by

requiring licenses for a firm to produce. granting patents to firms with new inventions

When a firm advertises a​ product, it is trying to shift the demand curve for the product to the​ ________ and make it more​ ________.

right; inelastic

How do network externalities affect barriers to​ entry? Network externalities

serve as barriers to entry because new products are less useful.

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

shift to the left and become more elastic.

The graph shows a short-run equilibrium because the firm is making positive economic profits. What quantity on the graph represents​ long-run equilibrium if the firm were perfectly​ competitive? 6 burritos per week.

short-run, positive 6

A perfectly competitive firm is losing money in the short​ run, and its price is less than its average variable cost. In order to minimize its losses in the short​ run, this firm should

shut down

In the United​ States, the loss in economic efficiency due to market power is

small

In​ 2010, Domino's launched a new advertising campaign admitting that its pizzas had not tasted very​ good, but claiming that they had developed a new recipe that greatly improved the taste. If​ Domino's succeeded in convincing consumers that its pizza was significantly better than competing​ pizzas, would its demand curve become flatter or​ steeper? When a product becomes more differentiated from other​ products, its demand curve becomes steeper. This happens because the slope of the demand curve reflects buyer responsiveness to a price​ change, which is determined in part by the availability of substitutes.​ Thus, when a product becomes more differentiated from other​ products, buyers perceive it as having fewer good​ substitutes, and this altered perception induces buyers to be less responsive to price.

steeper, fewer, less

Many factors under a​ firm's control affect profitability. Do factors that are not under a​ firm's control also affect​ profitability? Factors not under a​ firm's control

such as sheer chance affect profitability. such as rising fuel prices affect profitability. such as terrorist events affect profitability.

Natural gas pipelines are a natural monopoly because

the average total cost curve for moving natural gas through a pipeline is still falling at the point where it crosses the demand curve.

If the market demand curve shifts to the​ right, how will a competitive​ firm's level of output​ change?

the firm will increase its output, and its profits will increase

What are the four most important ways a firm becomes a​ monopoly? The four main reasons a firm becomes a monopoly​ are:

the government blocks​ entry, control of a key​ resource, network​ externalities, and economies of scale.

How are prices determined in perfectly competitive markets? In perfectly competitive​ markets, prices are determined by

the interaction of market demand and supply because firms and consumers are price takers

Explain why it is true that for a firm in a perfectly competitive​ market, the​ profit-maximizing condition MR​ = MC is equivalent to the condition P​ = MC. When maximizing​ profits, MR​ = MC is equivalent to P​ = MC because

the marginal revenue curve for a perfectly competitive firm is the same as its demand curve

Why are firms willing to accept losses in the short run but not in the long​ run?

there are fixed costs in the short run but not in the long run.

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

they are able to purchase a differentiated product that more closely suits their tastes.

If patents reduce​ competition, why does the federal government grant​ them? The federal government grants patents

to encourage firms to spend money on research to create new products.

The scale of Verizon and​ AT&T's operations make it difficult for​ Google, or another​ entrant, to supplant them because

to enter the market at such a large size could be financially prohibitive and it would be difficult to gain market share.

According to an article in the Wall Street Journal​, in 2015 and​ 2016, Panera suffered from lower profits in part because of the costs of implementing its​ "clean food" strategy. ​Source: Maria​ Armental, "Panera's Quarterly Results Beat​ Projections," Wall Street Journal​, February​ 7, 2017. Assuming that​ Panera's clean food strategy​ doesn't affect the demand for its turkey​ sandwiches, the increase in costs will shift up ​Panera's marginal and average cost curves. As a​ result, the price it charges for turkey sandwiches will increase and the quantity it sells will fall.

up, cost, increase, fall

What is an​ oligopoly? An oligopoly is a market structure Three examples of oligopolies in the United States are industries that produce or sell

where a small number of interdependent firms compete. automobiles, athletic​foot ware, and cigarettes.

Give an example of each. An example of explicit collusion is

where firms meet and agree to charge the same price​, and an example of implicit collusion is price leadership.

Would a firm earning zero economic profit continue to​ produce, even in the long​ run? In​ long-run competitive​ equilibrium, a firm earning zero economic profit

will continue to produce because such profit corresponds with positive accounting profit. will continue to produce because such profit is as high a return as could be earned elsewhere.

In perfect​ competition, long-run equilibrium occurs when the economic profit is

zero

In the long​ run, the monopolist can earn Refer to the graph. What point represents the price and output level combination that a monopoly will​ choose?

zero or positive economic profit point B

c. Suppose you open a new restaurant in Los Angeles. Can you use economies of scale as a barrier to entry so that your restaurant will be profitable in the long​ run? Briefly explain.

​No, because there are no significant economies of scale in the restaurant​ industry, except possibly at very low levels of output.​ Consequently, making your restaurant larger will not be effective in preventing other restaurants from entering the market and competing against you at about the same average cost.

An article in Forbes described these characteristics of the airline​ industry: ​"Airlines aren't like normal consumer businesses... Infrastructure including​ aircraft, gates and runways takes years to put in place. Capacity rebalancing in response to demand shifts​ isn't easy and idle infrastructure of this magnitude is very​ expensive." ​Source: Kevin​ O'Marah, "The Lesson of the Delta​ Disaster: Flying Is Too​ Cheap," Forbes​, August​ 11, 2016. Do the characteristics referred to in the article help to explain why the airline industry is an​ oligopoly? Briefly explain.

​Yes, since the characteristics described in the article serve as a barrier to​ entry, which is characteristic of oligopolies.

Consider the graph at right At the​ profit-maximizing level of​ output, how much economic profit is this firm​ earning? Which of the following statements is​ true? Which of the following statements is true?

​Zero, because at the​ profit-maximizing output​ level, the price equals average total cost. The firm is not productively efficient because the​ profit-maximizing price is not at the minimum of average total cost. The firm is not allocatively efficient because the​ profit-maximizing price exceeds marginal cost.


संबंधित स्टडी सेट्स

"The Secret Life of Bees" Chapter 1-2

View Set

Chapter 4- Neo-Analytic and Ego Aspects of Personality

View Set

LearningCurve Module 22. Biology, Cognition, and Learning

View Set

N2 Ch. 25 asepsis and infection

View Set

Accounting 3303 chapter 1 mgraw hills

View Set