Microeconomics Exam 4

When collision occurs, sellers in a market

Act like a monopolist to increase profits

Relationship-specific investments are investments that:

Are worth more in the context of a specific business relationship

What protects the business from the threat of entry by potential competitors?

Barriers to entry

In the long run, a company can remain profitable only if:

Barriers to entry are present

Overtime, Paco's pie shop has developed a pie crust that cooks more rapidly than the crusts of other bakers and a filling that uses less costly and inputs while maintaining comparable customer appeal. Other bakers have tried but failed to duplicate Pacos to cost advantages. Knowing that they will need to compete against Paco's pie shop, potential new entrants will:

Be discouraged from entering, owing to the advantages Pacos has achieved

Under the five forces framework, how can the market power of customers impact a sellers profitability?

Customers with market power can use their leverage to lower the selling price that sellers charge

Why do average variable costs eventually rise if a company as output increases enough?

Diminishing marginal product occurs, causing average variable cost to rise

Strategies used by entrepreneurs to overcome barriers to entry do not include:

Duplicating the product of the industry leader

In the short run a seller____ but in the long run____

Face is a fixed number of rivals; the number of rivals can vary

According to the Five Forces framework the____ the degree of rivalry in the in industry the___the average profits will be in the industry

Greater; lower

Vertical integration occurs in a merger when the companies that merge:

Had a buyer-seller relationship prior to the merger with each covering a different stage in a production chain

If a business owner is maximizing their economic profit the owner:

Is better off financially then with any other use of the resources used in the business

Which of the following is not one of the benefits that result when a company produces at several stages in a product chain rather than specializing in just one stage?

It increases within- brand competition

When an input seller has a market power in the input market its customers

May end up paying a higher price for inputs

In a market when a company's owner tries to make its product slightly different from the output of other companies so that it is more attractive to buyers the company is engaged in

Product differentiation

If a company gains market power as an input buyer, then:

The company may be able to purchase inputs at lower prices than other companies who use the same inputs can

According to the rational rule for sellers this company should produce____ of output in charge of price of____

Three units; $200

The rational rule for sellers is that seller should choose the quantity____ and choose the price____

Where marginal revenue equals marginal cost; that is on the sellers demand curve for that quantity

The basis of product differentiation is to convince your customers that your product ____ so that customers will____ for your firm's product

Will more completely satisfy their wants; pay a higher price

In which of the following situations with Maria's donut shop have the least market power?

Within 3 miles, there are five other donut shops and three bakeries that sell breakfast pastries

monopolistic competition?

many buyers and sellers selling differentiated products product differentiation--- efforts by sellers to make their products different from other competitors most markets are this no barriers to enter or exit lots of innovation imperfect competition

Perfect competition?

many buyers and sellers-- but each is small relative to the size of the market it is in all businesses in an industry sell an identical good there are no barriers to entry/exit over time (anyone can join/leave, just outcome might not be as good bc skill not as high) commodities (corn) everyone in this market is a price taker (taking a price that is given...not setting it)

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 the 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

network effect

Four common market structures

perfect competition. monopoly monopolistic competition (most common) oligopoly (2nd most) this list decreases in competition + economic outcomes

what does it mean to have market power?

the certain extent to which a seller can charge a higher price without losing many sales to a competing business

Junko earned a yearly salary of $130,000 in her job and $1000 per year in interest on her savings. after she quit her job to start a company, she uses all her savings to purchase manufacturing equipment for her company. Given the above information and the data summarizing our first year in business in the table (#37), how much accounting profit or loss does Junko earn

$150,000

In the short run companies face____ and in the long run____

A fixed set of competitors; the number of competitors can charge

Which of the following is not an entry deterrent strategy that a seller would use?

A market demand growth strategy

Which of the following sellers faces the least competitive pressure?

A monopolist with no direct rivals

Clarissa's factory has invested in expensive equipment to produce a specialized weapon for her governments military. There are no other buyers of this type of weapon, and equipment is not useful for the production of other goods. Which of the following statements describes Clarices vulnerability based on the Five Forces framework?

Clarice is vulnerable because her customer has market power

A common strategy for a seller to increase its market power is to

Differentiate its product

Mini governments require companies that produce drugs to obtain government approval before selling a new drug. This is done to___ end it leads to___ in the market for the new drug

Ensure public safety; a barrier to entry

When there's free entry and exit in a market, in the long run, price will:

Equal average cost

When a seller is able to differentiate its product successfully, the seller

Gains market power

Which of the following is not true about imperfect competition?

Greater product differentiation decreases market power

Which of the following is a negative outcome of markets where sellers have market power?

Higher prices

A strategy to reduce the threat posed by substitutes is to

Make it more difficult for substitutes to enter the broad market

The change in total revenue from selling one additional unit of output is the

Marginal revenue

So there's a market will become less profitable when:

New sellers enter the market

When a company has market power it is___ in it's market

Not a price taker

Marginal revenue reflects the ___ effect and the ____ effect

Output; discount

Which of the following is not an example of a type of law that tries to foster competition

Patents

Which of the following does not occur in a market when one or more sellers exits the market

The market demand rises

What determines a negotiators bargaining power?

The negotiators next best alternative

When Joe's manufacturing company successfully differentiated product, and from the perspective of consumers:

The output of rival sellers is not a good substitute for Joe's output

How does a business owner discover the businesses demand curve?

The owner experiments with different prices for its product

A firms average revenue curve is

The same as the firms demand curve

A merger benefits society when it results in...

cost savings

monopoly?

one one seller lots of barriers to entry (because it is such a small market)

Oligopoly?

only a handful of large sellers goods can be identical or differentiated aka cereal market 2nd most popular market imperfect competition

Price ceilings tend to create shortages when used to

Bring down price in a competitive market

To gain as many customers as possible through product differentiation a producer must consider ____ as the producer makes decisions about how to distinguish it's

How rivals are positioning their products

What "balancing act" do imperfect competitors face as they set their product price?

If the price is too high, profit will be small as you sell a small quantity

What is the difference between accounting profit and economic profit?

Implicit opportunity cost

What a monopoly advertises the goal is to ____ because _____

Increase in market demand; the monopoly faces the entire market demand

The characteristics of search goods make___ advertising particularly effective

Informative

Which of the following is one of the five forces that determine the long-term profitability of a company in a market

Potential competitors

In the absence of product differentiation,____ to prevail, leading to____profits

Price competition tends; low

Which of the following is a characteristic of Monopoly that is not present in the other market structures?

There's only one seller

The output in a market with market power is

inefficient because the marginal benefit to society of extra output exceeds the marginal cost

what happens to the demand curve as there is more competition?

it becomes flatter

When sellers in a market or an economic profits:

New sellers will be attracted into the market

The threat of potential substitutes is high when the substitutes:

Offer greater value for their price than the original product

A certain city has four hospitals, and there are no other hospitals within 200 miles. Two of the hospitals are more specialized than the other two because one has a large cardiac unit and the other has a specialized cancer-treatment center. The local market for the hospital services is what type of market?

Oligopoly

A product market has many buyers in mini sellers, and its largest company produces 1% of the market output. In addition, all sellers produce identical goods. What market structure is consistent with this description?

Perfect competition

Which of the following is not a strategy used by a company to lock in customers to ensure demand for its product?

Pressuring the government to require a license for entry into the market

When firms in a market with free entry and exit experience economic losses, then:

Some sellers will exit the market reducing average seller losses