ECON 3310

Suppose that a new entry has decreased your demand elasticity from -5 to -6 (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.

$19.20

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 $30. You should adjust your price to_______ to the new entry and decreased demand elasticity.

30*(1-1/2)=15 15/(1-1/3)=$22.50 =$22.50

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. The adjustment to long-run equilibrium occurs more quickly for competitive industries than for monopolists.

CAN NEITHER MONOPOLIST NOR COMPETITIVE FIRMS TRUE EX: Monopolists have no rivals, because they produce a product or service with no close substitutes and enjoy high barriers to entry, which prevent potential competitors from entering the industry. For example, pharmaceutical companies with patents on new drugs are likely to enjoy monopoly power, since a patent ensures that there will be no close substitutes or competitors for a period of time. These barriers to entry and lack of substitute products allow monopolies to earn positive profits in the short run. In the long run, however, even the barriers that protect monopolists in the short run eventually fall; for example, patents expire, and other firms become able to develop close substitutes or invent new products that can compete with the products produced by monopolies. Thus, in the long run, even monopoly economic profit is driven to zero. By contrast, competitive firms face constant competition from rival firms producing substitute products as well as new firms that are free to enter the industry (due to low barriers to entry). These factors drive any positive economic profits, which may exist in the short run, to zero for all firms in a competitive industry in the long run.

Relative to managers in more _______________ industries, managers in more_________________ industries are more likely to spend their time on pricing strategies rather than on reducing costs.

COMPETITIVE MONOPOLISTIC

Ride sharing applications, such as Uber and Lyft, offer ground transportation at a lower cost than more standard forms of transportation, such as cab services and car rentals. In some areas, regulators have banned Uber and Lyft, making it illegal to offer rides using these applications. What group would you expect to be behind the efforts to ban ride sharing applications?

Cab drivers

Distributors of cigarettes 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 cigarettes are substitutes and that the legalization of marijuana would lead to a decrease in the price of marijuana. Given the relationship between marijuana and cigarettes, the legalization of marijuana would lead to____________ in demand for cigarettes. Thus, distributors of cigarettes would likely _________the legalization of marijuana.

DECREASE OPPOSE

Salon owners have recently started offering teeth whitening services to clients in addition to their more standard services. In a number of states, regulators have ordered salon owners to stop offering this service, claiming that it constitutes illegal dentistry. What group would you expect to be behind the state's efforts to ban salons from providing teeth whitening services?

DENTISTS Dentists are most likely to support the ban, since salon owners who can offer a similar service to that provided by dentists represent an increase in competitive intensity in this industry, leading to a decrease in profits for dentists. One common way to reduce such competition is to lobby government officials to pass legislation to restrain the entry of other firms into an industry.

Long-run average costs are higher for smaller quantities of output.

Economies of scale

The cost of producing two products separately is greater than the cost of producing both of those goods jointly.

Economies of scope

As compared to tangible resources, brand value is unlikely to be a source of sustainable competitive advantage because it cannot be easily imitated.

FALSE

Consider the U.S. passenger airline industry through the lens of the Five Forces model. In recent years, there have been significant advances in information and communication technology, such as video conferencing and video chat. Based on this information, threats from substitutes are _______________. All else equal, this implies that the airline industry is __________________ attractive to enter.

HIGH LESS

Consider the U.S. passenger airline industry through the lens of the Five Forces model. The industry, composed of many similar airlines, requires high fixed costs and is experiencing relatively low growth. Based on this information, rivalry among existing firms will tend to be____________ . All else equal, this implies that the airline industry is ____________________ attractive to enter.

HIGH LESS According to Michael Porter, a Harvard Business School professor, the most attractive industries to enter are characterized by: • Low threat of entry (or high barriers to entry) • Low buyer power • Low supplier power • Low threat from substitutes • Low levels of rivalry between existing firms If a large number of similarly situated firms compete in an industry with high fixed costs and slow industry growth, rivalry is likely to be high. Rivalry also tends to be higher when products are not well differentiated and buyers find it easy to switch between products, which is also the case with air travel. This high level of rivalry erodes profits and makes the industry less attractive to potential entrants.

Distributors of pipes 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 pipes are complements and that the legalization of marijuana would lead to a decrease in the price of marijuana. Given the relationship between marijuana and pipes, the legalization of marijuana would lead to _____ in demand for pipes. Thus, distributors of pipes would likely___________ the legalization of marijuana.

INCREASE SUPPORT

Distributors of snack foods 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 snack foods are complements and that the legalization of marijuana would lead to a decrease in the price of marijuana. Given the relationship between marijuana and snack foods, the legalization of marijuana would lead to ____________ in demand for snack foods. Thus, distributors of snack foods would likely _____________the legalization of marijuana.

INCREASE SUPPORT

Level of product differentiation

LOW According to Michael Porter's Five Forces model, the "best" industries to enter are characterized by: I.Low threat of entry (high barriers to entry) II.Low buyer power III.Low supplier power IV.Low threat from substitutes V.Low levels of rivalry between existing firms The final force, low rivalry among existing firms, is the force most directly related to an economist's typical view of "competition." If a large number of similarly situated firms compete in an industry with high fixed costs and slow industry growth, rivalry is likely to be quite high. Rivalry among existing firms also tends to be higher when products are not very well differentiated, so that buyers find it easy to switch between products. Conversely, if a relatively small number of firms compete in an industry with low fixed costs and high industry growth, rivalry is likely to be low. Rivalry also tends to be lower when products are highly differentiated and buyers find it more difficult to switch between products.

Relative to managers in more ___________Industries, managers in more _________________ industries are more likely to spend their time on reducing costs rather than on pricing strategies.

MONOPOLISTIC COMPETITIVE

To increase a company's profit, a manager suggests that the company needs to increase the value of its product to customers. Suppose, per the manager's advice, the company successfully increases the value of its product to its customers. At the same time, however, the cost per unit of the good increases by more than the price of the good increases. Think about the allocation of economic value for a product between cost, profit, and consumer surplus.

PROFIT PER UNIT: DECREASE

To increase a company's profit, a manager suggests that the company needs to increase the value of its product to customers. Suppose, per the manager's advice, the company successfully increases the value of its product to its customers, but the price remains the same, and the unit cost of production remains the same. Think about the allocation of economic value for a product between cost, profit, and consumer surplus.

PROFIT PER UNIT: NO CHANGE

To increase a company's profit, a manager suggests that the company needs to increase the value of its product to customers. Suppose, per the manager's advice, the company successfully increases the value of its product to its customers. At the same time, however, the price and cost per unit of the good both increase by the same amount. Think about the allocation of economic value for a product between cost, profit, and consumer surplus.

PROFIT PER UNIT: NO CHANGE

The widget market is competitive and includes no transaction costs. Five suppliers are willing to sell one widget at the following prices: $30, $20, $10, $5, and $2 (one seller at each price). Five buyers are willing to buy one widget at the following prices: $10, $20, $30, $38, and $44 (one buyer at each price). For each price shown in the following table, use the given information to enter the quantity demanded and quantity supplied. Price Quantity Demanded Quantity Supplied ($ per widget) (widgets) (widgets) Price QD QS $2 _____________ ________________ $5 ______________ _____________ $10 _____________ _____________ $20 _____________ _____________ $30 _____________ _____________ $38 _____________ _____________ $44 _______________ ____________

QD QS 5 1 5 2 5 3 4 4 3 5 2 5 1 5

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

The smartphone market has been dominated by Apple, but recently the Droid has been able to leverage Google's information services into market gains, while Blackberry, known for its secure business-oriented network, has attempted to become more attractive with a "friendlier" interface. At the same time, a number of less capable fringe firms are emerging. Suppose an economist analyzes this industry as follows: ECONOMIST: Each firm brings its own distinct capabilities to its product design, with each product design appealing to a different segment of the market. Apple is known for the aesthetics of its products; Google is known for its ability to manage information effectively; and Blackberry is known for its more secure data network. Each of these distinct capabilities is likely to be sustainable for some time and will be a source of competitive advantage for each. Fringe firms, on the other hand, do not appear to be able to replicate these capabilities; thus, they are more homogeneous and more likely to compete on price. This analysis is consistent with the resource-based view (RBV)

TRUE

Why might the company decide to do this under the Nike brand name?

The cost of producing sports beverages along with its current products under the Nike brand name is less than the cost of producing sports beverages under a new brand name plus the cost of producing Nike's current products under the Nike brand name.

Suppose Nike's managers were considering expanding into producing sports beverages. Why might the company decide to do this under the Nike brand name?

The cost of producing sports beverages under a new brand is greater than producing the sports beverages under the Nike brand, given the current products being produced by Nike.

Suppose Nike's managers were considering expanding into producing sports beverages. Why might the company decide to do this under the Nike brand name?

To take advantage of potential economies of scope between sports beverages and Nike's current products

The variety of Riverside Ranger logo T-shirts includes 12 different designs. Setup between designs takes one hour (and $22,000), and, after setting up, you can produce 1,000 units of a particular design per hour (at a cost of $5,000). Note: Assume Q denotes the quantity produced of a particular design. Which of the following best represents the average cost function for producing any single design? Based on this information, production in any one single design_____ economies of scale.

VC/Q=5000/1000=$5 Answer: AC=$22,000/Q+$5 exhibits

Suppose that due to the development of a new flu vaccine for a specific type of flu, the demand for hand sanitizer has decreased by 50%. Smith & Smith, a company that produces and sells hand sanitizer, should_________ production of its hand sanitizer? Suppose that there is no evidence of a new type of flu developing any time soon. True or False: Smith & Smith should significantly decrease production capacity by getting rid of capital equipment?

decrease true

Suppose that on Christmas, the demand for both Christmas trees and Christmas cards increases by the same percentage amount. However, the price of Christmas trees increases by more than the price of Christmas cards. Based on this information, you can conclude that the supply of trees is ___________ sensitive to price than the supply of Christmas cards.

less

Under constant returns to scale, average cost ______ as the quantity produced increases. Over this range of output, the marginal cost curve is ______the average cost curve.

remains constant equivalent to If marginal cost were greater than average cost, than average costs would rise. Similarly, if marginal cost were less than average cost, average costs would fall. Thus, if average cost is constant, it must be the case that average cost is equal to marginal cost. This means that the average cost curve and the marginal cost curve must be equal over the range of output where constant returns to scale are present.

Under decreasing returns to scale, average cost_______as the quantity produced increases. Over this range of output, the marginal cost curve _________ the average cost curve.

rises higher than

The launch of an effective advertising campaign for product A Demand Curve shifts? Direction of Shifts?

yes increase