Econ exam #3

What is price​ discrimination?

-firms charge a higher price for a product when it is first introduced and a lower price later. -firms charge a higher price to customers who are less sensitive to price and a lower price to consumers who are more sensitive to price - firms charge each consumer a different price equal to that​ consumer's willingness to pay.

Give an example of a firm using a​ two-part tariff as part of its pricing strategy.

1. a golf club requiring the purchase of an annual membership in addition to a fee each time members use the golf course 2. sam's club requiring consumers to pay a membership fee before shopping at its stores.

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

1. a quota on imports 2. occupational licensing.

Which of the following is an example of price​ discrimination?

1. an airline charging higher prices for business travelers than for leisure travelers. 2. a movie theater charging higher prices for evening showings than for afternoon showings

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

1. protect U.S. firms from international competition. 2. protect the public from incompetent practitioners. 3. encourage firms to carry out research and development of new and better products.

Lucas bought two units of the newest game console from a local retail store for $300 each and instantly resold them on eBay for $375 each. How much did he make in arbitrage profits if his transaction costs were a total of $50?

100 Lucas bought two units of the newest game console from a local retail store for $300 each and instantly resold them on eBay for $375 each. He made $100 in arbitrage profits if his transaction costs were a total of $50. Lucas sold each unit for $75 more than he paid for it, so his total profits before subtracting transaction costs were $150. After accounting for his transaction costs of $50, he was left with $100 in arbitrage profits.

A patent gives its holder the exclusive right to a product for a period of __________ from the date the patent is filed with the government.

20 yrs

What is the selling price a firm receives when it uses a 40% markup and cost-plus pricing if the average production cost is $150?

210 The firm will set a selling price of $210 when it uses a 40% markup and cost-plus pricing if the average production cost is $150. You can determine the selling price by taking the $150 average cost and multiplying by 1.4 since the markup is 40%. So, $150 × 1.4 = $210.

Economists believe that the oligopoly market is a market with a four-firm concentration ratio that is greater than or equal to:

40%

cartel

A group firms that collude to restrict output to increase prices and profits.

What is the definition of​ monopoly?.

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

A monopoly is a market structure that is characterized by:

A single seller of a good or service that does not have a close substitute.

payoff matrix

A table that shows the payoffs that each firm earns from every combination of strategies.

Which of the following is the definition of business strategy?

Actions taken by firms to attain their objectives

cooperative equilibrium

An equilibrium in a game in which players cooperate to increase their mutual payoff.

Which of the following types of firms use the marginal revenue equals marginal cost approach to maximize profits?

Both perfectly competitive and monopolistically competitive

Which of these is an example of price discrimination across time?

Charging a high initial price for Blu-ray players and then lowering the price in six months

What is perfect price​ discrimination?

Charging every consumer a different price equal to their willingness to pay.

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

Consumers pay a price greater than marginal cost but also have a wider array of choices.

Price discrimination is the practice of:

Dividing consumers into two or more groups and charging different prices to each group.

The five competitive forces model suggests the bargaining power of buyers may affect industry competition.

GM has significant bargaining power in the tire market, which lowers tire prices

Another measure of industry concentration is the:

Herfindahl-Hirschman Index

What is a merger between firms in the same industry called?

Horizontal merger

What is the law of one​ price?

Identical products should sell for the same price​ everywhere, assuming no transactions costs.

Firms must typically purchase inputs from suppliers to produce output.

If many firms can supply an input then suppliers are unlikely to have the bargaining power to limit a​ firm's profits.

How does the prisoner's dilemma compare to the outcome of a repeated game?

In a repeated game, two firms are more likely to charge the high price and receive high profits.

Which of these statements is correct?

Legally enforcing trademarks can be difficult.

Which of the following best describes the additional revenue associated with selling an additional unit of output?

Marginal revenue

What is the term given to all the activities necessary for a firm to sell a product to a consumer?

Marketing

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? Is the concentration ratio an accurate measure of the extent of​ competition?

Most economists believe that a​ four-firm concentration ratio of greater than 40 percent indicates that an industry is an oligopoly. The​ four-firm concentration ratio is flawed in that it does not include sales in the U.S. by foreign firms

A situation where each firm chooses the best strategy, given the strategies chosen by other firms is known as:

Nash equilibrium

Which of the following statements regarding natural monopoly is true?

Natural monopoly is most likely to occur in markets where fixed costs are large relative to variable costs.

Which type of efficiency is achieved by a monopolistically competitive firm in the long run?

Neither allocative nor productive efficiency

Why do oligopolies​ exist?

Oligopolies exist due to barriers to entry

For what type of market structure is the demand curve the same as marginal revenue?

Perfect competition

Which of the following best describes how the product differentiation of monopolistically competitive firms may benefit consumers?

Product differentiation can locate firms more conveniently to consumers and offer versions of a product or service that better fits their needs.

Is price discrimination​ illegal?

Robinson-Patman Act such that price discrimination is illegal if it reduces competition.

Which of the following laws prohibited charging buyers different prices if the result would reduce competition?

The Robinson-Patman Act

What is the definition of market power?

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

Which of the following rights is given to the holder of a patent?

The exclusive right to a new product

When firms agree to act as a monopoly and set prices they are called __________.

a cartel

A strategy that is the best for a firm, no matter what strategies other firms use is known as:

a dominant strategy

When is a firm a​ monopoly, or are monopolies only theoretical concepts that do not​ exist?

a firm is a monopoly if its economic profits are not competed away in the long run

the Department of Justice and the Federal Trade Commission must define the relevant market when determining whether to allow a merger.How do economists identify the relevant​ market?

a price increase results in higher profits; otherwise, the market is too narrow

The five competitive forces model suggests the threat from potential entrants affects industry competition.How might an existing firm deter entry of new​ firms?

advertise to create product loyalty.

Which of these business types is more likely to consistently practice price discrimination?

an airline

Laws aimed at promoting competition among firms are known as:

antitrust laws

The process of simultaneously buying a good in one market and selling in another market is called:

arbitrage

A college practicing yield management will offer more financial aid to students they believe:

are more price sensitive

Natural monopoly happens when the:

average total cost curve is decreasing

if a monopolist can practice perfect price discrimination then consumer surplus will:

be zero

Any action the firm takes to maintain product differentiation over time is known as:

brand management

Arbitrage is

buying a product in one market at a low price and reselling it in another market at a higher price.

A group of firms that colludes by agreement to restrict output to increase prices and profits is called a(n) ________

cartel

An agreement among firms to charge the same price or to otherwise not compete is __________.

collusion

Price discrimination, or charging different prices to different customers for identical products, is:

commonly practiced

List the competitive forces in the five competitive forces model.

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

mergers between two completely unrelated firms and therefore, do not impact market concentration or power.

conglomerate mergers

A cooperative equilibrium is equilibrium in which players __________ to increase their mutual payoffs, while a noncooperative equilibrium is an equilibrium in which players __________.

cooperate, do not cooperate

Equilibrium in a game in which players cooperate to increase their mutual payoff is called a:

cooperative equilibrium

The pricing strategy where the firm computes the average cost of production and then adds a percentage markup to determine the price is known as:

cost-plus pricing

Many firms advertise. What effect does advertising have on firm​ profits?

decrease profits by increasing the cost of production

The monopolistically competitive firm sells a __________ product and faces a __________ demand curve.

differentiated, downward-sloping

A consumer may pay more for an identical product from a given retailer due to:

differentiation based on something other than price.

How does the​ long-run equilibrium for a monopolistically competitive market differ from the​ long-run equilibrium for a perfectly competitive​ market?

do not produce at minimum average total cost

One way in which monopolistically competitive markets and perfectly competitive markets differ is that in​ long-run equilibrium, monopolistically competitive firms

do not produce at minimum average total cost

Does the strength of each of the five competitive forces remain constant over​ time? Briefly explain.

does not remain constant over time. For​ example, existing firms may set lower prices to keep profits low to make entry less​ attractive, reducing the threat from additional potential entrants.

The only legal restriction concerning price discrimination is that firms cannot use it to:

drive rivals out of business

Consumers dubbed __________ will pay a higher price to be among the first individuals to own a new product.

early adopters

What effect might market power have on technological​ change?

economic profits that can be spent on research to develop new products

Many firms might like to be monopolies because such firms earn economic profits in the long run. What might cause a​ monopoly?

economies of scale are so large that the firm has a natural monopoly

What are the most important barriers to​ entry?

economies of​ scale, ownership of a key​ input, and government imposed barriers.

is perfect price discrimination economically​ efficient?

efficient because it converts into producer surplus what had been consumer surplus and deadweight loss.

do airlines practice price discrimination?

engage in price discrimination by reducing the price on seats that they expect will not be sold -For​ example, business travelers have a more inelastic demand than leisure​ travelers, so airlines charge business travelers a higher price

In 2007, the U.S. government discovered a long-run formal conspiracy to fix the price of marine hose. This type of activity is known as:

explicit collusion

Cost-plus pricing may be the optimal way to determine prices when a firm's marginal cost and average cost are roughly equal or when a firm:

finds it difficult to estimate its product demand curve.

The four-firm concentration ratio is the percentage of sales accounted for by the largest:

four firms in the industry

A Nash equilibrium is where each firm chooses the best strategy:

given the strategies chosen by other firms

How might the government affect whether a firm is a​ monopoly?

grant a patent to a firm. giving it the exclusive right to produce a product

In a repeated game, the losses associated with not cooperating are __________ the losses of cooperating.

greater than

the aluminum company of America 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.

An oligopoly is a market structure with:

high barriers to entry

The monopolist charges a price that is ____ the perfectly competitive industry.

higher than

Which of the following is most likely to increase market power?

horizontal mergers

According to the law of one price:

identical products should sell for the same price regardless of location.

Price leadership is a form of __________ in which one firm in an oligopoly announces a price change and the other firms in the industry match the change.

implicit collusion

What effect might the government have on​ oligopolies?

impose barriers to entry with a tariff to limit foreign competition

A monopolistically competitive firm is characterized by the existence of many firms in the market, differentiated products and:

low barriers to entry

If the individual countries that are members of OPEC exceed their production quotas, the amount of oil supplied to the world __________, and the price of oil __________.v

increases, decreases

Consumers with __________ demand will be willing to pay more for a good or service.

inelastic

Does​ cost-plus pricing have any​ shortcomings?

is limited in that it ignores marginal cost

Describe a​ monopoly's demand curve.

is the same as the demand curve for the product.

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

is where firms signal to each other without actually meeting and agreeing to not compete. where firms meet and agree to not compete​, and an example of implicit collusion is price leadership.

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

it earns profits in the long run.

For many​ years, De Beers of South AfricaDe Beers of South Africa essentially operated as a monopoly. What made this company a monopoly​?

it had almost exclusive control of the world's supply of diamond deposits, used to make diamond jewelry

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?

less efficient because price is greater than marginal cost

The monopolist produces an output that is _______ the perfectly competitive industry would produce.

less than

Firms with __________ marginal costs generate more benefit when they practice price discrimination than firms with __________ marginal costs.

low, high

When should firms use​ cost-plus pricing?

marginal and average cost are roughly equal and the firm has difficulty estimating its demand curve.

A monopolist will maximize profit at the level of output where:

marginal cost equals marginal revenue

A monopolistically competitive firm produces where:

marginal revenue equals marginal cost

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

may continue to earn profit by improving their product

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?

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

In which of the following market structures is the firm's demand curve the same as the market demand for the product?

monopoly

Which are more economically​ efficient, perfectly competitive markets or​ monopolies?

more economically efficient because they result in more economic surplus.

Firms in competitive markets:

must accept the market price.

What do barriers to entry have to do with the extent of​ competition, or lack​ thereof, in an​ industry?

new firms will enter industries where firms are earning economic profits.

Prisoner's dilemma is an example of:

non-cooperative equilibrium

In 2002, the cheese manufacturing industry in the United States had a four-firm concentration ratio of 34 percent. This implies that the cheese manufacturing industry is:

not an oligopoly market

Which of the following terms is defined as a market structure in which a small number of interdependent firms compete?

oligopoly

The primary reason that Ocean Spray faced limited competition was because

only Ocean SprayOcean Spray had access to most of the cranberries.

Economist Michael Porter argues that factors other than the number of firms affect industry competition and profits. What is an example of a factor that would limit​ profits?

other firms enhance customer service

How is the​ prisoner's dilemma result changed in a repeated​ game?

players can employ retaliation strategies.

If a monopolistically competitive firm's demand curve is above its average total cost curve, then this firm is making:

positive economic profit

If a monopolist can practice perfect price discrimination:

prices will increase

A game where pursuing dominant strategies results in noncooperation that leaves everyone worse off is called a:

prisoner's dilemma

Antitrust legislation outlaws price discrimination practiced in order to:

reduce competition.

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

requiring licenses for a firm to produce

how are games in game theory​ played?

rules determine what actions are​ allowable, players employ strategies to attain their​ objectives, and payoffs are the results of the interaction among the​ players' strategies.

For a firm to be able to practice price discrimination it must be able to:

segment the market

Encyclopedia Britannica is an encyclopedia publisher who sells printed encyclopedias. In the​ 1990s, encyclopedias began to be sold electronically. What effect did electronic encyclopedias have on Encyclopedia​ Britannica?

served as a new product that fills a consumer need better than printed encyclopedias did.

Odd pricing is the practice of:

setting a price that does not end in zero.

Which of the following laws outlawed monopolization?

sherman act

A firm may opt to pay millions of dollars for celebrity endorsements in order to:

signal to consumers that the advertised product is appealing and likely to be popular

Under what circumstances can a firm successfully practice price​ discrimination?

some consumers must have greater willingness to pay for the product than others and a firm must know consumer willingness to pay for the product.

A​ fast-food restaurant decides to raise the price of its hamburgers. Assume the firm is in a monopolistically competitive industry. What will happen to the demand for its​ hamburgers?

some of its customers will be willing to pay a higher price because they prefer this brand of hamburgers

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

such as terrorist events affect profitability

Give an example of an antitrust law and give a brief description of how that law affects the​ government's antitrust policy.

the Robinson-patman act prohibited charging buyers different prices if the result would reduce competition

The competitive forces in the five competitive forces model does not include

the allocative efficiency of producers

What​ "forces" does the five competitive forces model​ address?

the allocative efficiency of producers

What is required for a firm to successfully engage in price​ discrimination?

the firm to know what prices customers are willing to pay

In the broadest sense, game theory studies the decisions of firms in industries where the profits of each firm depend on:

the firm's interactions with other firms

positive economic profit

the firms ability to differentiate its product

Monopolistically competitive firms have some control over price because:

the products they produce are differentiated

How is game theory used in​ economics?

the rules of the game include a firm's production function​, a strategy is a firm maximizing profit​, and the payoffs are profits.

Another form of price discrimination occurs when firms charge __________ price to consumers for goods or services that have different quality.

the same

Because the monopolist faces a downward sloping demand curve:

there will be deadweight loss

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

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

Product packaging, shipping fees, and listing fees are all considered:

transaction costs

The costs incurred during the process of agreeing to and carrying out an exchange of goods or services are known as:

transaction costs

What is required for the law of one price to​ hold?

transaction costs associated with arbitrage are zero.

When a country club charges an annual membership fee to use the golf course and then charges you again for each use of the course, it is called a(n);

two part tariff

Perfect price discrimination is

unlikely to occur because firms typically do not know how much each consumer is willing to pay.

Governments deal with natural monopolies by:

using regulation to protect consumers

mergers between firms in the same supply chain. For example, an automaker may merge with a tire manufacturer. In general, mergers of this type do not impact market power.

vertical mergers

In which of the following situations can a firm be considered a monopoly?

when a firm can ignore the actions of all other firms

What is an​ oligopoly?

where a small number of interdependent firms compete.

Suppose Amanda owns the only restaurant in town that serves hamburgers. Other restaurants serve tacos​, fried chicken, and pizza. Suppose that in the long​ run, Amanda​'s restaurant continues to be the only one in town selling hamburgers. If Amanda is earning economic profits, ​then, under the broad​ definition, is Amanda​'s restaurant a​ monopoly?

yes

When a manager gathers information on customers and uses this information to rapidly adjust prices, it is known as:

yield management

In the long run, the monopolist can earn:

zero or positive economic profit

Three examples of oligopolies in the United States are industries that produce or sell

​computers, athletic​ footware, and cigarettes.