Econ Exam #3 (Problem Sets)

Marginal revenue is the profit a company earns from selling an additional unit of output. change in revenue from selling an additional unit of output. rise in costs when an additional unit of output is produced. revenue obtained from giving discounts to customers to manipulate sales.

change in revenue from selling an additional unit of output.

Delta Airlines price discriminates by charging higher prices to business travelers than to vacation travelers. This pricing strategy reflects the fact that business travelers' _____ air travel is _____ than that of vacation travelers. demand for; more sensitive to price demand for; less sensitive to price supply of; more sensitive to price supply of; less sensitive to price

demand for; less sensitive to price

In the hurdle method of price discrimination, a seller gives a lower price only to those who are price sensitive by identifying a characteristic of those who are price sensitive and giving that group discounts. requiring price-sensitive buyers to do something extra to get a lower price. identifying those who are price sensitive by the goods they buy and then discounting those goods only. choosing a discount pattern so that every fifth or 100th (or whatever chosen frequency) customer receives a discount.

requiring price-sensitive buyers to do something extra to get a lower price.

Two objectives a company owner tries to achieve through price discrimination are to _____ and to _____. charge each person the highest possible price; sell to the maximum number of customers charge each person the highest possible price; reduce the marginal cost sell to every customer whose marginal benefit exceeds the firm's marginal cost; charge each person the highest possible price sell to every customer whose marginal benefit exceeds the firm's marginal cost; sell to the maximum number of customers

sell to every customer whose marginal benefit exceeds the firm's marginal cost; charge each person the highest possible price

Gino's Pizzeria bought a new delivery van last year for $10,000. It can now sell the van for $8,500. To buy this year's model of the same van, Gino would have to pay $11,000. What is the implicit opportunity cost of capital (assuming there is no interest to pay)? $2,500 $3,500 $1,000 $1,500

$1,500

A cable TV company gives current customers a year-long discount for each new customer they bring to the cable company. Jose, a current customer, gets five of his friends to sign up for cable TV service with his provider so that he can receive discounts on his cable bill. The cable TV company is using a _____ strategy to create a barrier to entry. free exit reputation and goodwill switching cost network effect

Network Effect

Coupons and rebates provide discounts to the especially price-sensitive consumers even though they are available to all consumers. Why do only price-sensitive consumers avail these discounts? Price-Sensitive consumers are the only ones who receive the coupons and rebate forms. have the identifying characteristic that the seller uses to segment the customers. are more willing to take the time to locate and use the coupons and rebate forms. want to buy at full price in order to appear prosperous.

are more willing to take the time to locate and use the coupons and rebate forms.

A merger benefits society when it results in increased market power. a larger number of sellers in the market. cost savings. decreased market demand.

cost savings

Free entry and exit means that in the long run, price will: trend upward. trend downward. equal average cost. allow all firms to earn economic profit.

equal average cost.

Perfectly competitive markets are rare because most firms advertise and most markets have many firms. goods are not identical and most markets have many firms. firms advertise and most markets have many buyers. goods are not identical and most markets have some dominant firms

goods are not identical and most markets have some dominant firms

A seller's demand curve will have a steep negative slope when the seller has a low level of market power. has a high level of market power. is in perfect competition. does not have a differentiated product.

has a high level of market power.

If American Airlines purchased all of its competitors to become a monopoly, all else equal, price will _____, and output will _____. fall; fall fall; increase increase; increase increase; fall

increase; fall

The degree to which a market provides socially optimal outcomes depends on the degree to which it engages in research to develop products to meet needs of customers. differentiates products to satisfy different consumer preferences. focuses on low prices rather than high output. is closer to the competition outcome than market power outcomes.

is closer to the competition outcome than market power outcomes.

If a monopolist is producing a quantity that generates MC = MR, then profit: is maximized. is maximized only if MC = P. can be increased by increasing production. can be increased by decreasing production.

is maximized.

The negative outcomes of market power include all of the following EXCEPT smaller quantity. higher costs. larger profits. lower prices.

lower prices

The better a company's _____, the greater its _____. next best alternative; bargaining power profit margin; total profits sales; bargaining power opportunity cost; market share

next best alternative; bargaining power

Marginal revenue reflects the _____ effect and the _____ effect. cost; revenue output; discount discount; cost revenue; sales

output; discount

If price is greater than average cost at the profit-maximizing quantity in the short run, a firm will: continue to produce at a loss. produce at a profit shut down production reduce its fixed costs.

produce at a profit.

A natural monopoly exists when the good produced by a monopoly is classified as a natural product. the monopoly-level of market power develops naturally due to the company's high product quality. producing a large output has significantly lower marginal cost than producing a small output. exploitative business tactics are used to force other companies out of the market illegally.

producing a large output has significantly lower marginal cost than producing a small output.

A company can reduce the chance that new sellers will enter the market with different versions of the market's product by: engaging in relationship-specific investments. ensuring that input markets remain highly competitive. avoiding dominance in the product market. selling a wide variety of versions of the product.

selling a wide variety of versions of the product.

Which of the following is NOT one of the five forces that determine the structure of competition in a market? the bargaining power of buyers the existing market price competition from existing competitors potential competitors

the existing market price

Which of the following conditions is present for all sellers in a perfectly competitive market? All sellers have an equal and high level of market power. The product price varies across the sellers. The number of sellers is small. All sellers are selling identical products.

All sellers are selling identical products.

Why is an expert hairstylist more likely to price discriminate than an expert jam maker? A hairstylist has no market power, but a jam maker can have market power. A haircut cannot be resold, but a jar of jam can be resold. There are many substitutes for a hairstyle but few substitutes for a particular jam. The stylist uses fewer inputs than the jam maker.

A haircut cannot be resold, but a jar of jam can be resold.

The market power of a firm is its ranking based on units sold compared to other firms selling the same product. ability to cause other firms in its market to drop out of the market. ability to raise its price without losing many of its customers to competing businesses. market share based on the percentage of total market revenue.

ability to raise its price without losing many of its customers to competing businesses.

A market characterized by many producers producing a similar yet differentiated product would be considered: a monopoly. a duopoly. an oligopoly. monopolistically competitive.

monopolistically competitive.

For a monopolist, a downward-sloping demand curve ensures that _____. P = AR P> MR P < MR P = MC

P> MR

Which of the following is NOT a condition needed for price discrimination? The company faces a flat demand curve. The company knows how much different customers are willing to pay for the product. The company has market power in its product market. The company can keep customers from reselling the product after they have purchased it.

The company faces a flat demand curve.

In which of the following situations would a company have a lower chance of losing customers when it raises the price of its product? There are low switching costs. Customers have many sellers to choose from. Companies advertise their prices. The product is differentiated across companies.

The product is differentiated across companies

Michelle owns the largest florist shop in her town. Each week, she orders a truckload of flowers from the flower wholesaler. The other two florists in town order only one-third as many flowers. Because Michelle's order fills the delivery truck, the wholesaler sells flowers to her at a lower price than the other florists must pay. How will this situation impact potential new entrants? New florists will be encouraged to enter because they will be energized by the challenge to succeed The cost differential can easily be offset by creating a demand differential, so it will have little impact. New florists will not be affected because input prices are minor factors in markets. New florists will be discouraged from entering the market because of the difficulty of competing on cost.

New florists will be discouraged from entering the market because of the difficulty of competing on cost.

Which scenario BEST illustrates an oligopolistic industry? A single cell phone provider services the entire Midwest. Thousands of quinoa farmers sell their output in global commodities markets. The Coca-Cola Company and PepsiCo (the companies that make Coke and Pepsi, respectively) sell most of the soft drinks consumed around the world. The State University of New York has one bookstore that caters to all students across all campuses.

The Coca-Cola Company and PepsiCo (the companies that make Coke and Pepsi, respectively) sell most of the soft drinks consumed around the world.