Chapter 14

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Choose the correct statement.

A brand name provides an incentive to the producer to achieve high and consistent quality.

In monopolistic competition​ _______.

each firm has limited power to influence the price of its product

Excess capacity is the amount by which the​ _____ exceeds the quantity that the firm produces.

efficient scale

Markup is the amount by which price​ _____ cost

exceeds marginal

​Starbucks' new plan will​ ______ product differentiation and​ ______, which will increase economic profit.

increase; increase demand

The figure shows the situation facing a producer of running shoes. In the market for running​ shoes, all the firms face a similar demand curve and have similar cost . In the long​ run, how does the number of firms producing running shoes​ change? In the long​ run, the number of firms producing running shoes​ ______.

increases because the economic profit that the firm is making encourages entry

There is a price markup over marginal cost in monopolistic competition because at the​ profit-maximizing quantity​ _______.

marginal revenue equals marginal cost and with a​ downward-sloping demand​ curve, price exceeds marginal revenue

Complete the sentence. In the long​ run, a firm in monopolistic competition​ _______.

produces a​ profit-maximizing output that is less than its efficient scale

Which of the following industries is an example of monopolistic​ competition?

shampoo

A signal is an action taken by an​ _____ person​ (or firm) to send a message to​ _____ people.

​informed; uninformed

Firms in monopolistic competition compete in three​ areas, which are​ _______.

​quality, price, and marketing

Tommy Hilfiger uses advertising as a signal because​ ______.

by spending large sums on advertising Tommy Hilfiger is signaling that its jackets are high quality

Why might product development be efficient and why might it be​ inefficient? Product development is efficient if the marginal social benefit from an improved product​ _______. Product development is inefficient because in monopolistic​ competition, _______.

equals its marginal social​ cost; profit is maximized when marginal revenue equals marginal​ cost, and marginal revenue is less than price

How does a firm in monopolistic competition decide how much to produce and at what price to offer its product for​ sale? A firm in monopolistic competition​ _______.

produces the output at which marginal revenue equals marginal​ cost, and charges the price that buyers are willing to pay for this quantity

​How, other than by adjusting​ price, do firms in monopolistic competition​ compete? Other than by adjusting​ price, the two main ways in which a firm in monopolistic competition competes with other firms are by​ ______ and​ ______.

product​ development; advertising

Which of the following firms produce at the efficient scale​?

Dell produces 100 computers a week at which its average total cost is minimized.

Having a brand name helps Tommy Hilfiger increase its economic profit because​ _______.

a brand name provides an incentive to achieve high and consistent​ quality, and consumers will purchase goods from Tommy Hilfiger rather than from an unknown producer because they know what to expect from Tommy Hilfiger

Are advertising and brand names​ efficient? Advertising and brand names​ ______.

can be efficient but are not always efficient

In the short​ run, a firm in monopolistic competition​ ______.

can incur an economic loss

The Shoe that​ Won't Quit I finally decided to buy a pair of​ Uggs, but when I got around to shopping for my​ Uggs, the style that I wanted was sold out. The scarcity factor is a strategy by​ Ugg's parent Deckers Outdoor that is one of the big reasons behind the​ brand's success. Deckers tightly controls distribution to ensure that supply does not outstrip demand. If Deckers ever opened up the supply of Uggs to meet​ demand, sales would shoot up like a​ rocket, but​ they'd come back down just as fast. Deckers intentionally restricts the quantity of Uggs that it sells to​ _______.

differentiate its product

​Food's Next​ Billion-Dollar Brand? While​ it's not the biggest brand in​ margarine, Smart Balance has an edge on its rivals in that​ it's made with a patented blend of vegetable and fruit oils that has been shown to help improve​ consumers' cholesterol levels. Smart Balance sales have skyrocketed while overall sales for margarine have stagnated. It remains to be seen if Smart​ Balance's healthy message and high price will resound with consumers. How do you expect advertising and the Smart Balance brand name will affect Smart​ Balance's ability to make a positive economic​ profit? Advertising and the Smart Balance brand name​ ______ for Smart Balance because​ ______.

increase demand and may increase economic​ profit; advertising is a signal that Smart Balance improves cholesterol levels

Product differentiation​ ________.

is making a product that is a close substitute but not a perfect substitute for the products of other firms

The market for sugar ​______ an example of monopolistic competition. The market for athletic footwear ​______ an example of monopolistic competition.

is not; is

The market for hydroelectricity ​______ an example of monopolistic competition. The market for jewelry ​______ an example of monopolistic competition.

is not​; is

​Food's Next​ Billion-Dollar Brand? While​ it's not the biggest brand in​ margarine, Smart Balance has an edge on its rivals in that​ it's made with a patented blend of vegetable and fruit oils that has been shown to help improve​ consumers' cholesterol levels. Smart Balance sales have skyrocketed while overall sales for margarine have stagnated. It remains to be seen if Smart​ Balance's healthy message and high price will resound with consumers. ​Source: Fortune​, June​ 4, 2008 Are​ long-run economic profits a possibility for Smart​ Balance? In​ long-run equilibrium, will Smart Balance have excess capacity or a​ markup? In the long​ run, economic profit​ ______ a possibility for Smart Balance. In the long​ run, Smart Balance​ ______ have excess capacity.

is​ not; does has

Hair gel ​______ sold by firms in monopolistic competition because​_______.

is​; many firms produce differentiated hair gel and entry into the market is easy

If in the short​ run, firms in monopolistic competition​ _______, then in the long​ run, new firms will enter the market.

make an economic profit

In the new​ long-run equilibrium, firms​ _______.

make zero economic profit

In monopolistic competition in the long​ run, firms​ _______.

make zero economic profit and have excess capacity

The graph shows the marginal cost​ curve, average total cost​ curve, demand​ curve, and marginal revenue curve of a firm in monopolistic competition. In the short​ run, a firm in monopolistic competition​ _______.

makes its output and price decision just like a monopoly firm does

Is the market for running shoes efficient or inefficient in the long​ run? Explain your answer. In the long​ run, the market for running shoes ​ _______.

might be efficient if the loss that arises because the quantity of running shoes produced is less than the efficient quantity is offset by the gain that arises from having a greater degree of product variety

All the existing firms in a monopolistically competitive market​ advertise, and the number of firms in the market increases. The demand for any one​ firm's product decreases such that the​ price-maximizing quantity for any one firm decreases. Complete the sentences. The demand faced by any one firm becomes​ _______ elastic. The​ profit-maximizing price​ _______ and the markup​ _______.

more ​decreases; decreases

Why can a firm in monopolistic competition make an economic profit only in the short​ run? When firms in monopolistic competition are making positive economic profit in the short​ run, ______.

new firms​ enter, and the demand for the good produced by each firm decreases until price equals average total cost

Is monopolistic competition​ efficient? Monopolistic competition might be efficient if​ _______.

the loss that arises because the quantity produced is less than the efficient quantity is offset by the gain that arises from having a greater degree of product variety

The​ ______ the good produced by each individual firm will​ ______.

demand​ for; decrease

Suppose that Tommy​ Hilfiger's marginal cost of a jacket is a constant ​$75.00 and the total fixed cost at one of its stores is ​$2,5002,500 a day. This store sells 2525 jackets a​ day, which is its​ profit-maximizing number of jackets. Then the stores nearby start to advertise their jackets. The Tommy Hilfiger store now spends ​$2,000 a day advertising its​ jackets, and its​ profit-maximizing number of jackets sold jumps to 6565 a day. What is this​ store's average total cost of a jacket sold before the advertising begins and after the advertising begins. ​>>> Answer to 2 decimal places. Can you say what happens to the price of a Tommy Hilfiger​ jacket, Tommy's​ markup, and​ Tommy's economic​ profit?

Before the advertising​ begins, the average total cost of a jacket sold in this store is ​$175.00. After the advertising​ begins, the average total cost of a jacket sold in this store is ​$144.23. If the nearby​ firms' advertising decreases the demand for Tommy Hilfiger jackets and makes the demand more​ elastic, the price of a Tommy Hilfiger jacket​ ______. If Tommy​ Hilfiger's advertising increases the demand for Tommy Hilfiger jackets and makes the demand less​ elastic, the price of a Tommy Hilfiger jacket​ _____. ​falls; rises If the price​ falls, Tommy​ Hilfiger's markup falls. If the price​ rises, Tommy​ Hilfiger's markup rises. In the long​ run, Tommy's economic profit is ​$0.

Choose the correct statement.

If advertising is a​ signal, it​ doesn't need any specific product information.

Which of the following is an example of product differentiation​?

I prefer Nike shoes while my friend prefers Puma shoes.

Explain how advertising influences the demand for a​ firm's product.

Successful advertising increases demand for the​ firm's product and increases economic profit. New firms enter the​ market, and demand decreases for any one firm in the market.

​______ sold by firms in monopolistic competition because​ _______.

are not​; in the apple market each firm produces an identical product

Wake Up and Smell the Coffee Every change that Starbucks made over the past few yearslong dash—automated espresso​ machines, preground​ coffee, drive-throughs, fewer soft chairs and less carpetinglong dash—was made to smooth operations or boost sales. Those may have been the right choices at the​ time, but they diluted the​ coffee-centric experience. By​ 2008, Starbucks experienced a drop in traffic as customers complained that the company has strayed too far from its roots. Starbucks will once again grind beans in its stores for drip​ coffee, give free drip​ refills, and provide two hours of​ wi-fi. ​Source: Time​, April​ 7, 2008 Explain how​ Starbucks' past attempts to maximize profits ended up eroding product differentiation. Explain how​ Starbucks' new plan intends to increase economic profit.

becoming more like the​ competition; decreased demand for its coffee

Firms in monopolistic competition compete on​ ______ and firms​ ______ .

product​ quality, price, and​ marketing; are free to enter and exit

Explain how selling costs influence a​ firm's cost curves and its average total cost. Selling costs​ ______ and​ ______ average total cost.

shift the total fixed cost curve and the total cost curve​ upward; may​ increase, decrease, or not change

Why do firms in monopolistic competition operate with excess​ capacity? Firms in monopolistic competition operate with excess capacity because​ _______.

the demand curve is downward​ sloping, which in the long run makes marginal cost less than average total cost

The graph shows a​ firm's average total cost curves with advertising and without advertising. Without​ advertising, the firm sells 25 pairs of shoes a day. If the firm advertises and sells 100 pairs a​ day, how do costs​ change?

total cost​ increases, but average total cost decreases

Advertising expenditures are​ _______ costs and the per unit cost​ _______ as production increases.

​fixed; decreases

The​ four-firm concentration ratio for garden centers is 1212 and for CD manufacturers it is 6868. The HHI for garden centers is 7272 and for CD manufacturers it is 2,8572,857. Which of these markets is an example of monopolistic​ competition? The garden center market​ ______ an example of monopolistic competition. The CDCD market​ ______an example of monopolistic competition.

​is; is not

Monopolistic competition is a market in which a​ _____ number of firms compete by making similar but slightly​ _____ products.

​large; different

Monopolistic competition is a market structure in which a​ ______ number of firms compete and each firm produces a​ ______ product.

​large; differentiated

The graph shows the​ long-run situation facing a producer of running shoes. In the market for running​ shoes, all the firms face a similar demand curve and have similar cost curves. Draw a vertical arrow that shows the​ firm's markup at the​ profit-maximizing quantity. Label it. A​ firm's markup is the amount by which​ ______ exceeds​ ______.

​price; marginal cost no markup


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