Microecon Exam (ch. 14, 15, 16, 17, 18)

Liana gives up a salary of $80,000 per year at the Kellogg food manufacturing company to start her health food manufacturing company. She invests $50,000 of her savings in her company, savings that had been earning her $4,000 per year in interest. During Liana's first year in the health food business, total revenue is $300,000, and her explicit financial costs are $225,000. What is Liana's accounting profit from her first year in business?

$75,000

Price discrimination that involves charging different prices to different groups of people is called:

group pricing.

Google Chrome, Microsoft Edge, Firefox, and Opera are examples of:

product differentiation

You notice that the prices of coffee at your local supermarket vary from week to week, causing you to buy different brands, depending on which is cheaper that week. Your friend William, by contrast, is a hardcore Peet's fan and buys only Peet's, whether the price is $5.99 per pound or $12.99 per pound. By varying coffee prices, the supermarket sells both to you, who is relatively price ____ and ____ particular about coffee, and to William, who is relatively price ____ and ____.

sensitive; less; insensitive; more

When a seller offers lower prices to buyers willing to overcome some obstacle to get it, the seller is using ____ to get buyers to reveal their ____.

the hurdle method; reservation price

Use the table to answer the question. Gizelle tries to put herself in Devin's place. If she (Gizelle) charges a price of $7, then she thinks that Devin will charge ____ to earn a profit of ____.

$6; $2,500

Another name for product differentiation is:

non-price competition.

Many hotel chains offer discounts to AAA members. This is an example of ___ that is ___ in the United States.

price discrimination; legal

Samantha wants to practice price discrimination in her cupcake bakery. Which strategy should Samantha NOT use?

the same price for all consumers for all cupcakes available

As the owner of a contracting company, you've become tired of your lumber suppliers' price gouging. As a solution, you purchase your own sawmill to process the wood which you'll use to construct homes. This ____ will ____ for your company.

vertical integration; reduce transaction costs

Use the table to answer the question. If Maria charges $8, the Jose should charge ___. If Maria charges $4, then Jose should charge ___.

$4; $4

Malia's auto repair shop faces the threat of entry. This intensifies ____ in her market and pushes ____ prices and pushes ____ profits.

competition; down; down

Saudi Arabia has the second largest oil reserves and the lowest marginal cost of producing oil in the world. The Saudis have started several oil price wars to achieve various objectives, for example, in 2014-2015, when it sought to undermine the growing U.S. shale-based oil industry. They did so again in 2020, when it was unhappy with Russia's continued supply of oil as global demand plummeted during the COVID-19 pandemic. By repeatedly starting price wars, Saudi Arabia is:

using its cost advantages to deter competitors from bringing oil to market.

During a Hulu commercial break, an advertisement shows a person driving a new Toyota pickup. The camera pans and zooms to show all of the interior and exterior features at various angles. The narrator explains that you can now finance this vehicle for a zero percent annual percentage rate and reveals the sticker price you'd pay to purchase it. You also learn that the vehicle features Bose speakers, four-wheel drive, heated seats, and 25 miles per gallon on the highway. This commercial is an example of:

informative advertising

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

rise; fall

Ever since Giselle's company developed its new product ten years ago, Giselle has managed its production with little turnover in workers. During that time, the company's average cost has fallen by 30%, due to the refinement of its production methods, thereby achieving greater efficiency. Other rival companies have not achieved such low costs. The advantage that Giselle's company now has over rivals stems from ____ achieved through ____.

a unique cost advantage; learning by doing

If the demand side of a market holds a high level of market power, then the sellers ___ than they would otherwise.

are likely to sell at a lower price

Price discrimination occurs when a company:

charges different prices to different customers who are all buying the same product

Price discrimination is the practice of

charging different prices to buyers of the same good.

The science that is useful in helping decision makers analyze their options when an individual's best choice may depend on what other people choose, and other people's best choices may depend on what the individual chooses, is ____.

game theory

When the internet was still slow and used mainly for browsing web pages, people frequently rented DVDs at local video stores. Netflix launched as a subscription service through which subscribers rented and returned DVDs through the mail. As internet speeds improved, the ability to purchase and download movies online emerged, and Netflix transformed from a mail DVD service to a streaming platform. By pivoting into streaming, Netflix successfully:

limited the threat posed by potential substitutes in an emerging market.

Which is NOT an example of a relationship-specific investment that could result in a hold-up problem?

organizing the layout of a factory for the most efficient flow of the production line

Which is NOT a government action that results in a barrier to entry in a product market?

prohibiting advertisers from making false claims

The Mile End Deli serves traditional delicatessen food in Brooklyn, New York. Which cost is MOST likely fixed at the deli?

the chairs customers sit on

A Nash equilibrium is an equilibrium in which:

the choice that each player makes is a best response to the choices other players are making

A firm in an oligopoly knows that its ____ affect its ____ and that the reactions of its rivals will affect it.

actions; rivals

A market with negative externalities will tend to _____ compared to a market producing the socially optimal output.

overproduce and sell at a lower price

(Figure: Pay Per View Movies on Xfinity Cable) Use Figure: Pay Per View Movies on Xfinity Cable. The figure shows the demand and marginal revenue curves for on-demand movie rentals on finity. Assume that marginal cost and average cost are constant at $20. If the cable company has market power, what price will it charge?

$60

Suppose a local Home Depot has explicit financial costs of $2 million per year and implicit opportunity costs of $44,000 per year. If the store earned an economic profit of $50,000 last year, its accounting profit was:

$94,000

Belinda runs the only bakery in town and so has a monopoly position in the cake market. She initially makes and sells the quantity of cakes at which her marginal cost equals her marginal revenue, as shown in the accompanying graph:

$12; $24; $18; $24

Use the table to answer the question. If Angelica charges $1, then Raquel should charge ___. If Angelica charges $3, then Raquel should charge ___.

$1; $1

(Figure: Demand, Revenue, and Cost Curves for Thneeds) Use Figure: Demand, Revenue, and Cost Curves for Thneeds. Thneeds and Things is a monopolist in the thneed ("things we need") market. If the government wants to regulate Thneeds so that an efficient outcome is reached, it would impose a price ceiling of:

$40

Mr. Parker sells 10 bottles of wine per week at $50 per bottle. He can sell 11 bottles per week if he lowers the price to $45 per bottle. The quantity effect of the sale of an additional bottle would be _____, whereas the price effect of the sale of an additional bottle would be _____.

$45; -$50 NOT $45; -$5

Use the table with to answer the question. Tasha tries to put herself in Hui Er's shoes. Tasha concludes that if she (Tasha) charges $5, then Hui Er will charge ____ to earn a profit of ____.

$5; $3,000

A student-run latte stand at the center of campus serves two types of customers: students and professors. There are 500 students and 30 professors at the college. Each student's reservation price for a latte is $2; each professor's reservation price for a latte is $5. Each individual buys one latte per day. The latte stand's marginal cost of producing a latte is constant at $1. Suppose the latte stand can't price-discriminate. If it charges $2 per latte, the consumer surplus will be ___ per day, and the producer surplus will be ___ per day. Suppose now that the latte stand can price-discriminate. If it charges students (who must show their student IDs) $2 and professors $5, the consumer surplus will be ___ per day, and the producer surplus will be ___ per day.

$90; $530; $0; $620

When segmenting your market demand into groups, base them on ___ and ___ characteristics.

verifiable; difficult-to-change

You are a pricing strategist for Home Depot evaluating monthly sales of sheds, which customers purchase from Home Depot stores for backyard and garden storage. The table displays the marginal revenue for each quantity sold of sheds. If the marginal cost of a shed is $2,600, how many sheds should a Home Depot store sell per month?

3

(Figure: Pay Per View Movies on Xfinity Cable) Use Figure: Pay Per View Movies on Xfinity Cable. The figure shows the demand and marginal revenue curves for on-demand movie rentals on Xfinity Cable. Assume that marginal cost and average cost are constant at $30. If the cable company practices perfect price discrimination, then it will sell movie rentals.

8

(Figure: The Profit-Maximizing Output and Price in the Diamond Market) Use Figure: The Profit-Maximizing Output and Price in the Diamond Market. Assume that there are no fixed costs and that AC = MC = $200. The profit-maximizing output for a monopolist is:

8

(Figure: Bass Pro Shops Curves) As an economist for Bass Pro Shops, a large retail company that specializes in outdoor activities, you analyze sales data for kayaks. The graph shows the firm demand curve and marginal revenue curve for weekly kayak sales for each Bass Pro location. Bass Pro acquires each kayak from the manufacturer for $600. Bass Pro's optimal pricing strategy is to charge $___ per kayak for a weekly profit of $___.

900; 1200

Figure: David's Candle Company) David's Candle Company has a cost advantage over rival candle makers in the form of a long-term exclusive contract with a key supplier of paraffin, a key ingredient in candles. Consider the accompanying diagram. David's average cost curve is:

C

(Figure: Average Cost Curve) Which curve has the most common shape of an average cost curve?

Curve B (U shape)

Two prominent secondhand stores, Habitat for Humanity ReStore and Goodwill, are located next to each other in Memphis, Tennessee, sharing the same parking lot. Which is NOT a reason why Goodwill would choose to locate directly beside ReStore?

Goodwill intends to compete primarily with non-price competition.

Connor's Corner Gas and Steven's Super Fuel are the only two providers of gasoline in their small town. Connor summarizes his pricing strategy as, "I'll put a high price on my gas, since that's what Steven is doing. But if he lowers his price, I'll lower mine and keep it there." This is an example of a(n):

Grim Trigger strategy.

IBM once offered a laser printer in two versions: a regular version, which printed 10 pages per minute, and a Series E version "E" stands for "economy"), which printed 5 pages per minute. As befits a more efficient machine, the regular version cost more than the Series E version. However, the Series E version cost more to produce because IBM embedded in it an extra chip to slow it down! Why would IBM pay extra to compromise the effectiveness of one of its products, then charge less for it?

IBM was charging customers a price close to their marginal benefit but still above IBM's marginal cost.

Kelly is a cardiologist, wife, mother, and community volunteer. Based on Kelly's opportunity costs, which would you NOT expect Kelly to do?

Kelly performs clerical tasks at the hospital, such as filing insurance claims.

Marcella is a tomato farmer. In which situation would she face the most intense competition?

Marcella is one of 1,200 tomato farmers who sell in the same tomato market.

David's financial planner tells him that he made a profit of $31,300 running a ballroom dance studio in Sacramento. David's wife, an actuary, claims David lost $31,300 running his ballroom dance studio. This means his wife is claiming that he incurred ___ in ___ costs.

NOT $31,300; explicit financial Maybe $62,600; implicit opportunity?

Among the reasons for a social safety net is the desire to alleviate income inequality, reduce economic insecurity, and:

NOT eliminate poverty Provide access to healthcare?

How does output for a seller who has market power compare to output for a seller who does not have market power, assuming both follow the Rational Rule for Sellers?

Output is higher for the seller without market power than the one with market power.

Why would it be a bad idea for a retailer to use "wearing nail polish" as the basis for segmenting customers into groups for price discrimination?

People can easily switch from wearing nail polish to not wearing it.

(Figure: Price Discrimination) A business that price discriminates will produce at what output level?

Quantity 3 (blue Demand Curve crosses red Marginal Cost curve)

Which strategy would NOT reduce the threat posed by substitutes?

Raise price to show that product demand is strong.

____ markets do not necessarily lead to efficient outcomes, whereas ____ markets tend to yield efficient outcomes.

Strategic interactions in; competitive

Your student club, Bluegrass Lovers, is having a cookie sale to raise money to see Alison Krauss in concert. As you are covering your table in the student center with homemade cookies, you notice that the Stand Up with Us student comedy club is also selling cookies, to fund a trip to see John Mulaney do his stand-up act. The table displays the payoffs. A comedy club member texts you and suggests that both groups set a high price. Which is NOT a problem associated with this cooperative agreement?

The combined funds are greatest if both charge a high price.

How can price discrimination improve efficiency compared to a situation in which a company must charge a single price?

The company's output is where marginal cost equals the last customer's marginal benefit.

Use the table to answer the question. The payoff cells are labeled A, B, C, and D. If the payoffs in cells A or D are equally likely, which approach would help solve the problem and lead to D?

The government adds workforce skill training to compulsory education requirements.

Customers would be less loyal and more price sensitive in which situation?

The switching costs are low.

Jordan's food truck sells tacos and burritos. Her most popular items are chicken tacos and beef tacos. Bean burritos are the least popular item on her menu, although some buyers like the burrito's large size compared to that of the tacos. The tacos and the burritos both sell for $4. Jordan offers a special deal of a taco and a bean burrito for $7. How is this a form of price discrimination?

Those who prefer tacos and those who prefer burritos are induced to get a unit of their less preferred product because they can buy it at a discounted price of $3 by buying a bundle.

You own an orange juice stand in a competitive market, and so you are a price-taking firm. Which event would MOST likely increase your market power?

You acquire exclusive rights to harvest oranges from all domestic citrus orchards.

Rachelle is considered poor because her income is in the bottom quintile of the population. Marcella is considered poor because her income is below a long-standing poverty line of $10,000. Rachelle is considered to be in poverty under ___ poverty standard, and Marcella is considered to be in poverty under ___ poverty standard.

a relative; an absolute

Trade based on comparative advantage does NOT result in ___ but DOES result in ___.

a zero-sum situation; a win-win for participants

When price discriminating, a company owner should set price ___ for each customer.

at or just below the marginal benefit

The ability to negotiate a higher price as a seller or a lower price as a buyer is known as:

bargaining power.

Firms will choose a Grim Trigger strategy if they:

believe that the firms in the industry will compete with each other for a long time to come.

How does the threat of potential substitutes reduce the market power of a business? If the substitute becomes available, then the:

business may lose customers to the substitute good's market unless it lowers price.

If a monopolist produces a quantity that generates MC < MR, then profit:

can be increased by increasing output.

A company will be subject to price competition if:

customers view its product as the same as or very similar to the products of rival companies.

Candice's stand-up paddleboard company will earn profits producing and selling at any output level where the company's:

demand curve is above its average cost curve.

Marginal revenue is the output effect minus the ___ effect for a given quantity.

discount

In the long run, each firm in an industry will:

earn only enough to cover the opportunity costs of all resources used in production.

(Figure: Market for Designer Clothing) In the long run, firms will:

enter this market until all firms carn zero economic profit

Economic profits encourage firms to ___ the industry, and losses encourage firms to ___ the industry.

enter; exit

In which type of market structure is advertising used MORE intensively to increase demand for a companys product rather than market demand?

imperfect competition

Apple produces accessories such as chargers, cases, and ear plugs that are specific to Apple's iPhone and that are incompatible with phones of other companies. What strategy is Apple using to create a barrier to entry?

increasing switching costs to ensure demand for its product

The output in a market with market power is:

inefficient, since the marginal benefit to society of extra output exceeds the marginal cost.

The local cinema offers students discounts during the week but not on Friday and Saturday nights, when it charges everyone the same price. The theater believes students are:

less price sensitive on weekends than on weekdays.

(Figure: Payoff Matrix for Antojito and Carolina Reaper) Use Figure: Payoff Matrix for Antojito and Carolina Reaper. The combined profit of Carolina Reaper and Antojito is maximized when Carolina Reaper produces a ____, and Antojito produces a ____.

low quantity; low quantity

The market for orthodontic services in most communities is ___ because it offers a large number of similar but not identical options.

monopolistically competitive

The Tennessec Valley Authority (TVA) is the sixth-largest power supplier in the United States, supplying hydroelectric energy to power companies in several Southeastern states. In many rural towns, the TVA provides the only source of electricity. The market structure for electricity in these towns is:

monopoly

Being open to international trade helps a country foster competition for all the following reasons EXCEPT that there will be:

more bias toward domestic production.

In the United States, the top brands of kitchen appliances include Samsung and LG, which are South Korean companies, and General Electric and Whirlpool, which are American companies. Without international trade, General Electric and Whirlpool would have ___ market power, and American consumers would face ___ prices.

more; higher

Sellers in a market will become less profitable when:

new sellers enter the market

Which market type has the largest number of firms?

perfect competition

As a basic rule of thumb, a company owner should minimize product differentiation when:

price competition is minimal.

(Figure: Payoff Matrix for Alex and Sybil) Use Figure: Payoff Matrix for Alex and Sybil. Alex and Sybil are the only producers of frozen yogurt in their town. Every week, cach decides whether to price high or low for the following week. The figure shows the profit per week earned by the two businesses. The BEST response for Alex is to:

price low.

In contrast to perfect competition, a monopoly:

produces less at a higher price.

The demand curve for a monopoly is:

the market demand curve

Kendrick, a recent high school graduate, is trying to decide between going to college or running his family's food catering business. Which would be an implicit opportunity cost of going to college?

the profit he would earn running the catering business

(Figure: Prisoners' Dilemma for Thelma and Louise) Use Figure: Prisoners' Dilemma for Thelma and Louise. Thelma and Louise are arrested and jailed for bank robbery. Given the payoff matrix in the figure, the BEST response for Louise is:

to confess.

Average cost is:

total cost divided by quantity

Ulrik, an antiques dealer, acquires 12 authentic Tiffany lamps for $10,000 each - items that he knows from experience, he can sell for anywhere between $4,000 and $1 million each. He toys with the idea of pricing each at $30,000, which, given the projected demand shown in the accompanying diagram, would yield a revenue of $90,000 and a profit of $60,000 (and three unsold lamps, which he would save to sell at a later date). He then decides to auction off each lamp individually, expecting thereby to better approximate buyers' reservation prices. In the first auction, the winning bid is $50,000; in the second, it's $40,000; in the third, it's $30,000; in the fourth, it's $20,000; and in the final auction, it's $10,000. He thus receives a total revenue of ___ and a profit of ___.

$150,000; $100,000

As the owner of a contracting company, you've become tired of your lumber suppliers' price gouging. As a solution, you purchase your own sawmill to process the wood which you'll use to construct homes. Which is NOT a possible trade-off of this decision?

NOT Managing a larger company is inherently more challenging and expensive than managing a smaller one.

(Figure: The Cost Curves for Charlie's Cookie Confections) Use Figure: The Cost Curves for Charlie's Cookie Confections. The curve labeled X represents the firm's ____ cost curve.

NOT average Maybe variable costs per unit?

Which scenario BEST illustrates an oligopolistic industry?

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 demand curve for a monopoly is:

above the marginal revenue curve

When a seller uses group pricing, members of the same group pay:

the same price for a product.

As an entrepreneur, which graph illustrates the ideal brand loyalty you would like to see for your product, that is, the demand curve you would like to achieve as closely as possible?

NOT graph C (steep slope curve) Maybe: Graph A?

(Figure: Oligopoly Pricing Strategy for TV Service Providers II) Use Figure: Oligopoly Pricing Strategy for TV Service Providers II. If Philo followed a high-price strategy one period but found that Sling followed a noncooperative low-price strategy, and Philo decided to lower prices for the next month, one would say that Philo is following a:

Grim Trigger strategy.

Advertising does not:

NOT raise the cost of production. Maybe: make markets more efficient