Micro Test 4-Everything
As new firms enter the market, a monopolistically competitive firm can maintain profits by
A and C only
Which of the following best describes how the product differentiation of monopolistically competitive firms may benefit consumers?
I AM SURE Product differentiation can locate firms more conveniently to consumers and offer versions of a product or service that better fits their needs.
Which of the following statements is correct?
Legally enforcing trademarks can be difficult.
Which of the following statements is true?
The firm is not productively efficient because the profit-maximizing price is not at the minimum of average total cost.
Consider the graph to the right. Is it possible to say whether this firm is a perfectly competitive LOADING... firm or a monopolistically competitive LOADING... firm?
Yes. This is a monopolistically competitive firm because its demand curve is downward sloping.
With a downward-sloping demand curve, marginal revenue is below price
because the firm must lower its price to sell additional units.
If the industry is monopolistically competitive, the reaction of consumers
could be to remain loyal to Jerry's and pay the higher price.
If a publisher does not raise the price of a book following an increase in its production cost, the result will be
less than maximum profit
Doing additional business at lunchtime could be particularly likely to add to Buffalo Wild Wings profits because the
marginal cost of doing so would be less than the marginal revenue.
A monopolistically competitive firm produces where:
marginal revenue equals marginal cost
Which of the following statements is true?
The firm is not allocatively efficient because the profit-maximizing price exceeds marginal cost.
If marginal revenue slopes downward, which of the following is true?
The firm must decrease its price to sell a larger quantity.
Which type of efficiency does a monopolistically competitive firm achieve in the long run?
neither allocative nor productive efficiency
A monopolistically competitive firm is not allocatively efficient because
price exceeds marginal cost.
Do consumers benefit in any way from monopolistic competition relative to perfect competition? Compared to perfect competition, when a consumer purchases a product from a monopolistically competitive firm, the consumer benefits from purchasing a product
that is appealing because it is differentiated
Refer to the figure to the right. What will happen if there is entry into the market?
the demand curve will shift to the left
Stephen runs a pet salon. He is currently grooming 100 dogs per week. If instead of grooming 100 dogs, he grooms 101 dogs, he will add $67.03 to his costs and $66.88 to his revenues. What will be the effect on his profits of grooming 101 dogs instead of 100 dogs?
-0.15
What quantity on the graph represents long-run equilibrium if the firm were perfectly competitive? 6 burritos per week.
6
If Daniel sells 300 Big Macs at a price of $4.00, and his average cost of producing 300 Big Macs is $3.75, what is his profit? Profit equals $ 75 (enter your response in dollars and cents).
75
For years, the Abercrombie & Fitch clothing stores received free advertising by placing the company logo prominently on the shirts, hoodies, and other clothing they sell. A news story indicated that in 2015, Abercrombie intended to remove its logos from its clothing. Source: Suzanne Kapner and Erin McCarthy, "Abercrombie to Remove Logos From Most Clothing," Wall Street Journal, August 29, 2014. Abercrombie would give up free advertising by removing the logos because the logos
are only a profitable strategy if consumers like wearing clothing with logos.
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
A monopolistically competitive firm is not productively efficient because it produces a level of output where
average total cost is not at a minimum.
The monopolistically competitive firm sells _________ product and faces _________ demand curve.
a differentiated; a downward-sloping
Why does a local McDonald's face a downward-sloping demand curve for its Quarter Pounder? In monopolistically competitive markets,
changing the price affects the quantity sold because firms sell differentiated products.
How does the long-run equilibrium for a monopolistically competitive market differ from the long-run equilibrium for a perfectly competitive market? One way in which monopolistically competitive markets and perfectly competitive markets differ is that in long-run equilibrium, monopolistically competitive firms
charge a price greater than marginal cost
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.
This model does not fit Germano's description because he assumes what?
demand is perfectly elastic
How do firms use marketing? A firm might use marketing to
determine which product to produce or decide how to distribute their product
What are the key factors that determine the profitability of a firm in a monopolistically competitive market? Monopolistically competitive firms will be profitable to the extent that they
differentiate their product and produce at lower average cost than competitors.
b. When the Bauers founded Crumbs, they could have
expected that competitors would reduce the company's profit and planned to diversify.
An increase in the price of cappuccino will increase the quantity of cappuccinos demanded.
false
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.
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 less differentiated from other products, its demand curve becomes
flatter
he ability of a publishing company to raise book prices when costs increase would be greater, the lower is the elasticity of demand for published books.
lower
Chipotle Mexican Grill restaurants have been a very popular "fast-casual" dining optionlong dashwith better food choices than fast-food restaurants like McDonald's, and faster service and lower prices than traditional restaurants. Chipotle's profit per restaurant is much greater than McDonald's. Looking forward to ten years from now, you would expect Chipotle's economic profit per restaurant to be
lower because more firms will imitate chipotle
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 improving their product.
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.
more more
If a monopolistically competitive firm's demand curve is above its average total cost curve, then this firm is making:
positive economic profit
A monopolistically competitive firm produces where _________, while a perfectly competitive firm produces where _________.
price is greater than marginal cost; price is equal to marginal cost
How might a monopolistically competitive firm continually earn economic profit greater than zero? To earn economic profit greater than zero, a monopolistically competitive firm must
produce a product that creates value for consumers relative to competitiors
Which of the following terms is missing in the box on the right?
profitability
As some bookstores exit the market, the demand curve faced by a remaining bookstore will shift to the right . The demand curve may also become less elastic because consumers will have fewer other stores to buy from. After the exit of the competing stores, this store is expected to break even
right less fewer break even
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
The graph shows a short-run equilibrium because the firm is making positive economic profits
short-run positive
Suppose a local McDonald's hamburger restaurant raises the price of its cheeseburgers from $2.00 to $2.50. What will happen to the quantity of McDonald's cheeseburgers demanded? If McDonald's raises the price of it's cheeseburgers, then
some of McDonald's customers, but not all of them, will still demand McDonald's cheeseburgers because this restaurant may be closer to them
Suppose the market for fast-food value meals is monopolistically competitive, with many restaurants selling their own brand of food. Assume the restaurants in the industry behave optimally by maximizing profit. The figure to the right represents the market for one monopolistically competitive firm's value meals. How will this figure change as the market moves toward long-run equilibrium? In the long run,
the demand curve will shift to the left and become more elastic because the firms are currently making profit.
What factors under the control of owners and managers make a firm successful and allow it to earn economic profits? Owners and managers control some of the factors that make a firm successful such as
the firm's ability to produce its product at a lower average cost than competitors
Suppose a firm introduces a significantly different version of an old product. How might that firm use brand management LOADING...? Such a firm might use brand management to
to postpone the time when they will no longer be able to earn economic profits
The increase in the cost of beef will shift up Chipotle's marginal and average cost curves. As a result, the price it charges for beef burritos will increase and the quantity it sells will fall .
up cost increase fall
Would this additional lunchtime business result in the chain earning economic profits in the long run?
No, because this strategy can be imitated by other similar firms.
At the profit-maximizing level of output, how much economic profit is this firm earning?
Zero, because at the profit-maximizing output level, the price equals average total cost.
With a downward-sloping demand curve, average revenue is equal to price
actually, average revenue is always equal to price, whether demand is downward sloping or not.
As a result of "recent brewing advances" that improve taste, the market for nonalcoholic beer will
all of the above
If McDonald's raises the price it charges for Quarter Pounders above the prices charged by other fast-food restaurants, won't it lose all its customers?
no
Determine the graph that shows the impact on a firm's profits when it increases spending on advertising and the increased advertising has no effect on the demand for the firm's product.
C
In the figure to the right, consider the marginal revenue of the eighth unit sold. When the firm cuts the price from $ 6.00 to $ 5.60 to sell the eighth unit, the area in the graph denoting the output effect is given by In dollars, this effect is When the firm cuts the price from $ 6.00 to $ 5.60 to sell the eighth unit, the area in the graph denoting the price effect is given by
C 5.60 B
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.
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 skeptic says, "Marketing LOADING... research and brand management are redundant. If a company wants to find out what customers want, it should simply look at what they're already buying." Which of the following statements is/are true? (Mark all that apply.)
Firms who discover new information about what consumers want can make a profit in the short run. Your answer is correct.B. A firm can enter a market with products like those of the competition and earn a profit if its costs are lower. A and B
A student makes the following comment: I can understand why a perfectly competitive LOADING... firm will not earn profits in the long run because a perfectly competitive firm charges a price equal to marginal cost. But a monopolistically competitive LOADING... firm can charge a price greater than marginal cost, so why can't it continue to earn profits in the long run? How would you answer this question?
In the long run, competition shifts the firm's demand curve leftward until price equals average total cost at the quantity where marginal revenue equals marginal cost. At this quantity, price is greater than marginal cost.
"In early January last year, after a disappointing Christmas season and amid worries about competition from discount retailers, Zale Corp. decided to shake things up: The self-proclaimed jeweler to Middle America was going to chase upscale customers. . . . The move was a disaster. The Irving, Texas, retailer lost many of its traditional customers without winning the new ones it coveted." Source: Ann Zimmerman and Kris Hudson, "Chasing Upscale Customers Tarnishes Mass-Market Jeweler," Wall Street Journal, June 26, 2006. p. A1. Why would a firm like Zale abandon one market niche for another market niche? (Mark all that apply.)
Increasing competition in the current market is eroding profits. Your answer is correct.B. To expand into a more profitable market.
Would a firm selling in a monopolistically competitive LOADING... market ever produce where marginal revenue is negative? A.
No because marginal cost cannot be negative.
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.
In 1916, the Ford Motor Company produced 500,000 Model T Fords at a price of $440. The company made a profit of $60,000,000 that year. Henry Ford told a newspaper reporter that he intended to reduce the price of the Model T to $360, and he expected to be able to sell 800,000 cars at that price. Ford said, "Less profit on each car, but more cars, more employment of labor, and in the end we get all the total profit we ought to make." a. Did Ford expect the total revenue he received from selling Model Ts to rise or fall following the price cut?
Rise because he assumed demand was elastic.
"If firms in a monopolistically competitive industry are earning economic profits, new firms will enter the industry. Eventually, the representative firm will find its demand curve has shifted to the left, until it is just tangent to its average cost curve and it is earning zero profit. Because firms are earning zero profit at that point, some firms will leave the industry, and the representative firm will find its demand curve will shift to the right. In long-run equilibrium, price will be above average total cost by just enough so that each firm is just breaking even." Is the analysis correct or incorrect?
The analysis is incorrect. Firms will not leave the industry when earning zero economic profit. When the firm's demand curve is tangent to its average cost curve it is still earning zero economic profit.
A firm that is first to the market with a new product frequently discovers that there are design flaws or problems with the product that were not anticipated. For example, the ballpoint pens made by the Reynolds International Pen Company often leaked. What effect do these problems have on the innovating firm, and how do these unexpected problems open up possibilities for other firms to enter the market?
The design flaw will harm the firm's reputation, which will be costly to restore. This will create opportunities for competitors to enter the market with a better product. Often the first firm to market is not the most successful over the long term.
Is Buffalo Wild Wings likely to sustain this greater pricing power in the long run?
No, because its attributes can be imitated by other similar firms.
Are the brewers responding to consumer desires or will consumers be exploited?
The market for beer is largely consumer driven and, with greater product differentiation from producers, consumers will clearly benefit.
Are monopolistically competitive firms efficient in long-run equilibrium? Monopolistically competitive firms
are not productively efficient because they do not produce at minimum average total cost and they are not allocatively efficient because they produce where price is greater than marginal cost.
There are many wheat farms in the United States, and there are also more than 1,800 Chipotle restaurants. Why, then, does a Chipotle restaurant face a downward-sloping demand curve when a wheat farmer faces a horizontal demand curve?
Wheat is a homogeneous good, while Chipotle is able to differentiate its food from other restaurants.
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.
The actions taken by General Mills and other food and beverage firms may benefit their consumers because consumers are
able to purchase a product that is differentiated and more closely suited to their tastes.
Define marketing. Is marketing just another name for advertising? Marketing is
all activities necessary for a firm to sell a product including advertising, product design, and product distribution
Michael Korda for many years was editor-in-chief at the Simon & Schuster book publishing company. He has described the many books that have become bestsellers by promising to give readers financial advice that will make them wealthy, by, for example, buying and selling real estate. Korda is very skeptical about how useful the advice in these books is: "I have yet to meet anybody who got rich by buying a book, though quite a few people got rich by writing one." Source: Michael Korda, Making the List: A Cultural History of the American Bestseller, 1900-1999, New York: Barnes & Noble Books, 2001, p. 168. a. On the basis of the analysis in this chapter, which of the following statements is true?
all of the above
Some companies have done a poor job at protecting the images of their products LOADING.... For example, Hormel's Spam brand name is widely ridiculed and is associated with annoying commercial messages received via e-mail. You might have heard of other cases where companies have failed to protect their brand names. What can firms do in such cases?
all of the above
7-Eleven, Inc., operates more than 20,000 convenience stores worldwide. Edward Moneypenny, 7-Eleven's chief financial officer, was asked to name the biggest risk the company faced. He replied, "I would say that the biggest risk that 7-Eleven faces, like all retailers, is competition. . . .because that is something that you've got to be aware of in this business." Source: Company Report, "CEO Interview: Edward Moneypennylong dash7-Eleven Inc.," The Wall Street Transcript Corporation. Which of the following statements is true?
all of the above
Refer to the figure to the right. Note that P and Q are the profit-maximizing price and quantity. This firm was first in the market. It is currently earning what?
an economic profit
The Wall Street Journal reported that Western European brewers such as Heineken, Carlsberg, and Anheuser-Busch InBev are increasing their production and marketing of nonalcoholic beer. The article quotes a Carlsberg executive for new-product development as saying: Nonalcoholic beer is a largely unexploited opportunity for big brewers. It is quite a natural move when you see that the overall beer market [in Western Europe is] going down. So, of course, we're battling for market share. The article further states that "brewers are hoping to capitalize on health consciousness" and that "recent brewing advances are helping improve the taste of nonalcoholic beers." Source: Ilan Brat, "Taking the Buzz Out of Beer" Wall Street Journal, August 30, 2011. Nonalcoholic beer is an "unexploited opportunity" for big brewers in the sense that it offers them a chance
both A and B
What term describes the actions of a firm intended to maintain the differentiation of a product over time?
brand managment
There are about 400 wineries in California's Napa Valley. Suppose the owner of one of the winerieslong dashJerry's Wine Emporiumlong dashraises the price of his wine by $5.00 per bottle. If the industry is perfectly competitive, the reaction of consumers would be to
buy wine from another winery
In recent years, consumers' have been less willing to buy packaged foods that contain gluten or high levels of fat and salt, or soft drinks containing sugar. Firms such as General Mills, Kellogg and Coca-Cola have responded by modifying many of their products by, for example, making them gluten-free and eliminating or reducing salt, sugar, and artificial flavors and colors. General Mills Chief Executive Officer Ken Powell explained, "The reality of the changing food values of our consumers is central to what we're doing." Monopolistically competitive firms do not achieve productive efficiency or allocative efficiency, but economists argue that consumers benefit when these firms differentiate their products to appeal to consumers.
do not produce at minimum average total cost, and do not set price equal to marginal cost.
The entry of new firms cause the demand curve of an existing firm in a monopolistically competitive market to shift to the left because ______ and become more elastic since ______.
each will have a smaller share of the existing market; consumers will have additional choices
JustFab is an online fashion retailer that analyzes information about customers obtained from its website to gauge the clothing they like most and the frequency of their purchases. This information has enabled the company to respond quickly to changes in fashion trends and to better control its inventory. The type of customer data JustFab gathers is not available to retailers that sell only in brick-and-mortar stores.
enhance its marketing efforts, and increase its sales and profits.
Ben and Jerry are managers at the company, and they have this discussion: Ben: We should produce 4,000 lamps per month because that will minimize our average costs. Jerry: But shouldn't we maximize profits rather than minimize costs? To maximize profits, don't we need to take demand into account? Ben: Don't worry. By minimizing average costs, we will be maximizing profits. Demand will determine how high the price we can charge will be, but it won't affect our profit-maximizing quantity. Evaluate the discussion between the two managers. Ben's assertion that the firm should produce the quantity of lamps where average costs are minimized is
incorrect because profits are instead maximized at the quantity where marginal cost equals marginal revenue, which may be different since marginal revenue depends on consumer demand.
Many firms advertise. What effect does advertising have on firm profits? One possible effect of advertising is to
increase profits by making the demand curve for the product more inelastic
A monopolistically competitive firm in a long-run equilibrium produces where:
its demand curve is tangent to its average total cost curve
A monopolistically competitive firm in a long-run equilibrium produces where
its demand curve is tangent to its average total cost curve.
Wealthy investors often invest in hedge funds. Hedge fund managers use investors' money to buy stocks, bonds, and other investments with the intention of earning high returns. But an article in the New York Times notes that: "Even professionals have a problem in evaluating hedge fund performance, because distinguishing skill from luck ... is extremely difficult." Source: Jesse Eisinger, "Pruning Hedge Fund Regulation Without Cultivating Better Rules," New York Times, September 5, 2012. Is it ever easy to determine whether a firm making economic profits is doing so because of the skills of the firm's managers or because of luck? Briefly explain. Determining why a firm is making economic profits (i.e., whether profitability is due to managerial skill or luck) is
never easy because profitability is determined by factors under a firm's control, such as the ability to differentiate its product, and factors beyond its control, such as chance events.
Is it possible for marginal revenue for a firm operating in a perfectly competitive industry to be negative?
no
An article in the New York Times describes Chipotle as "the restaurant chain that has come to symbolize the tastes of the millennial generation" and lists the sources of Chipotle's success as including the restaurant's allowing "their customers to tailor their meals, and still have them ready in a flash ... playing to consumer tastes for customization, speed and ingredients from sources that adhere to animal welfare, organic and other standards." Source: Stephanie Strom, "Chipotle Posts Another Quarter of Billion-Dollar Sales," New York Times, April 21, 2015. Are these attributes likely to ensure that Chipotle will earn an economic profit in the long run?
no, because these attributes can be imitated by other similar firms
n describing what happened to Crumbs Bakery, an analyst of the food industry noted the entry of competitors such as Sprinkles and Georgetown Cupcake. He concluded, "It got to the level where there were too many cupcakes and not enough people who wanted to, or could afford to, eat them." Source: Sydney Ember, "As the Cupcake Declines, Crumbs Shuts Its Doors," New York Times, July 8, 2014. a. When the analyst said there were too many cupcakes and not enough people who wanted to eat them, he meant that
the supply of cupcakes exceeded the demand for cupcakes.
Which of the following is a threat to a trademarked LOADING... company name? Trademarked brands are threatened by
their names becoming so widely used for a type of product that they no longer are associated with a specific company.
Which of the following is an example of a trademarked name that has become so widely used for a type of product that it is no longer associated with the product of a specific company?
thermos
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.
n 2015, analysts at the Goldman Sachs investment bank were optimistic that Buffalo Wild Wings would increase its profit over the next few years. They cited two factors as favorable to the chain's profitability: the chain's "greater pricing power allows them to easily implement menu changes to take advantage of [changes in] consumer preferences" and "the opportunity for the chain to grow as a lunch destination." Source: Kathleen Burke, "Goldman Upbeat on Casual Dining Amid Changing Consumer Tastes," marketwatch.com, July 1, 2015. When the analysts refer to the chain's greater pricing power, they mean
the chain's ability to change its price without losing substantial sales.
Why are many companies so concerned about brand management? Companies use brand management
to maintain product differentiation and earn economic profits in the short run.
William Germano previously served as the vice president and publishing director at the Routledge publishing company. He once gave the following description of how a publisher might deal with an unexpected increase in the cost of publishing a book: "It's often asked why the publisher can't simply raise the price [if costs increase]... It's likely that the editor [is already]... charging as much as the market will bear. ... In other words, you might be willing to pay $50.00 for a ... book on the Brooklyn Bridge, but if... production costs [increase] by 25 percent, you might think $62.50 is too much to pay, though that would be what the publisher needs to charge. And indeed the publisher may determine that $50.00 is this book's ceilinglong dashthe most you would pay before deciding to rent a movie instead." Source: William Germano, Getting It Published: A Guide to Scholars and Anyone Else Serious about Serious Books, Chicago: University of Chicago Press, 2001, pp. 110-111. According to the graph on the right and what you have learned in this chapter, a monopolistically competitive firm responds to an increase in cost by adjusting the price
upward
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
What effect does the entry of new firms have on the economic profits of existing firms? When new firms enter a monopolistically competitive market, the economic profits of existing firms
will decrease because their demand curves will shift to the left
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.
