econ exam 3 MEL
A price taker is
. a firm that is unable to affect the market price.
Most economists believe that a four-firm concentration ratio of greater than ________ percent indicates that an industry is an oligopoly.
40
Economies of scale exist when a firm's ___________ average costs fall as it __________ output. A. long-run; increases B. long-run; decreases C. short-run; decreases D. short-run; increases
A
Economist Michael Porter argues that factors other than the number of firms affect industry competition and profits. What is an example of a factor that would limit profits? According to Porter's model, industry profits will be reduced if A. other firms enhance customer service. B. fewer close substitutes are available. C. barriers prevent new firms from entering. D. inputs are not specialized. E. buyers have less bargaining power.
A
An example of technological change is
A. being able to produce more output using the same inputs. B. being able to produce the same output using fewer inputs. C. a decline in the quantity of output that can be produced from a given quantity of inputs. D. both a and b. E. all of the above. (RIGHT)
Does the strength of each of the five competitive forces remain constant over time? Briefly explain. The strength of the five competitive forces A. remains constant over time. For example, competitors rarely introduce new products to fill consumer needs better than current products. B. does not remain constant over time. For example, existing firms may advertise to create product loyalty to make entry less attractive, reducing the threat from additional potential entrants. C. does not remain constant over time. For example, as new firms enter, it is easier to implicitly collude, increasing competition from existing firms. D. remains constant over time. For example, existing firms may introduce slightly differentiated new products to make entry less attractive, reducing the threat from additional potential entrants. E. remains constant over time For example, the entry of new firms decreases profits, reducing the threat from additional potential entrants.
B
What is the difference between explicit collusion and implicit collusion? Unlike explicit collusion, implicit collusion A. is where firms meet and agree to charge the same price without appointing a price leader. B. is where firms signal to each other without actually meeting and agreeing to not compete. C. is where firms meet and agree to charge the same price without employing retaliation strategies. D. is where firms meet to discuss charging the same price without actually reaching an agreement. E. is illegal.
B
Which of the following is an expression of profit for a perfectly competitive firm? Profit for a perfectly competitive firm can be expressed as
Profit=(P×Q)−(ATC×Q), where P isprice, Q isoutput, and ATC is average total cost.
Give an example of a government-imposed barrier to entry. An example of a government-imposed barrier to entry is A. a tariff on imports. B. a patent. C. economies of scale. D. both a and b. E. all of the above.
a and b
Monopoly: To maximize profit,
a monopoly produces output up to the point where the marginal revenue from selling the last unit of output is just equal to the marginal cost.
What is the definition of monopoly?
monopoly is a firm that is the only seller of a product in a given industry.
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 __________ good substitutes, and this altered perception induces buyers to be _______ responsive to price.
more, more
In graph firm is making profit In the long run, will new firms enter the market or will existing firms exit? In the long run,
new firms will enter because the firm is currently making profit.
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
Perfectly competitive markets have
no barriers to new firms entering
Why might a monopoly arise? One firm will be present when
only one firm has control of a key raw material necessary to produce a good.
firms in monopolistically competitive markets are
price makers
Encyclopedia Britannica is an encyclopedia publisher who sells printed encyclopedias. In the 1990s, encyclopedias began to be sold electronically. What effect did electronic encyclopedias have on Encyclopedia Britannica? Electronic encyclopedias A. served as a new product that fills a consumer need better than printed encyclopedias did. B. used printed encyclopedias from Encyclopedia Britannica as a key input. C. served as a complement, increasing sales of electronic and printed encyclopedias. D. resulted in the government introducing occupational licensing laws for educational materials. E. prompted Encyclopedia Britannica to form the first cartel for encyclopedias.
A
What "forces" does the five competitive forces model address? The competitive forces in the five competitive forces model does not include A. technological change. B. the bargaining power of buyers. C. the threat from potential entrants. D. both a and b. E. none of the above.
A
In monopolistically competitive markets, what is a factor under a firm's control that determines whether it will be successful?
A firm's ability to produce at a lower average cost than competing firms.
Economist Michael Porter argues that if buyers have more bargaining power, then A. fewer firms will be in the industry. B. more factors will affect industry competition. C. firm profits in the industry will be lower. D. efficiency in the industry will be reduced. E. the prices of firms in the industry will be higher
C
The five competitive forces model suggests the threat from potential entrants affects industry competition. How might an existing firm deter entry of new firms? An existing firm might A. charge higher prices to increase profits. B. downsize to produce less output. C. build a larger store to produce more output. D. form a cartel to raise prices. E. engage in price leadership for price matching
C
What is the government's policy on collusion in the United States? Explain the rationale for this policy. In the United States A. the government promotes collusion with the Federal Trade Commission because perfectly competitive markets enhance economic efficiency. B. the government encourages collusion with subsidies because resulting profits can be used to develop new products. C. the government makes collusion illegal with antitrust laws because monopolies reduce economic efficiency. D. the government makes collusion unnecessary with government-imposed barriers to entry because monopolies enhance economic efficiency. E. the government makes collusion legal with antitrust laws because monopolies create no deadweight loss.
C
What was the primary reason why Ocean Spray at one time faced limited competition due to barriers to entry? The primary reason that Ocean Spray faced limited competition was because A. average costs were decreasing with the quantity of fresh and frozen cranberries sold. B. consumers viewed fresh and frozen cranberries as having many close substitutes. C. only Ocean Spray had access to most of the cranberries. D. Ocean Spray had successfully formed cranberry cartels. E. only Ocean Spray had received a government patent to sell fresh and frozen cranberries.
C
Suppose that a perfectly competitive industry becomes a monopoly. As a result, consumer surplus will... PS will... DWL...
CS: decrease PS: increase DWL: increase
Firms must typically purchase inputs from suppliers to produce output. What effect might suppliers have on an industry? A. If suppliers are price takers, then a firm will likely be a price taker with no ability to raise price. B. Suppliers cannot affect output markets, although an output market with only a few firms is likely to have the bargaining power to limit a supplier's profits. C. If an input is specialized, then the supplier is unlikely to have the bargaining power to limit a firm's profits. D. If many firms can supply an input, then suppliers are unlikely to have the bargaining power to limit a firm's profits. E. If only a few firms can supply an input, then markets will likely experience shortages because firms are unable to produce sufficient output.
D
Give an example of each. An example of explicit collusion is A. price leadership, and an example of implicit collusion is firms advertising that they will match the lowest price offered by any competitor. B. firms advertising that they will match the lowest price offered by any competitor, and an example of implicit collusion is price leadership. C. where firms meet and agree to charge the same price, and an example of implicit collusion is firms forming a cartel. D. where firms meet and agree to not compete, and an example of implicit collusion is price leadership. E. price leadership, and an example of implicit collusion is firms forming a cartel.
D
List the competitive forces in the five competitive forces model. The five competitive forces are A. competition from existing firms, trade barriers, competition from substitutes, the bargaining power of buyers, and the bargaining power of suppliers. B. competition from existing firms, the threat of potential entrants, international competition, the bargaining power of buyers, and the bargaining power of suppliers. C. competition from existing firms, the threat of potential entrants, competition from substitutes, the bargaining power of buyers, and legislation. D. competition from existing firms, the threat of potential entrants, competition from substitutes, the bargaining power of buyers, and the bargaining power of suppliers. E. competition from existing firms, the threat of potential entrants, competition from substitutes, international competition, and the bargaining power of suppliers.
D
he government indirectly influences the level of industry competition with its own barriers to entry. How? The government can restrict entry by A. regulating the size of profits that firms can earn. B. reducing the duration of patents on inventions. C. eliminating quotas to promote free trade. D. preventing lobbyists from influencing policymakers. E. requiring licenses for a firm to produce.
E
Oligopolies exist because of barriers to entry. One of the most important barriers to entry is due to economies of scale. Why is this true? It is more likely for an industry to be an oligopoly than competitive in the presence of economies of scale because A. a firm's average costs increase when it produces more output. B. a firm's average costs do not change when it produces more output. C. economic profits are lower when firm output is a large fraction of industry output. D. minimum average cost occurs when firm output is a large fraction of industry output. E. a firm's total cost is a large fraction of total revenue when output is low.
D
The De Beers Company of South Africa has faced limited competition in the market for diamonds. What barrier has kept new firms from entering the market for diamonds? The De Beers Company of South Africa A. has had lower long-run average costs than competitors. B. has enjoyed economies of scope from producing multiple types of products. C. has been able to convince customers that its brand of diamonds has extra value. D. has had almost exclusive ownership of diamond mines, which is a key input. E. has had a patent on diamonds
D
The five competitive forces model suggests the bargaining power of buyers may affect industry competition. Which of the following is an example of a way buyers might affect an industry? A. The Technicolor Company no longer has any bargaining power over movie studios, limiting the profitability of producing color movies. B. Wal-Mart has limited bargaining power over suppliers, which results in many of their suppliers altering their distribution systems to accommodate Wal-Mart's need to control the stocks of goods in stores. C. Wal−Mart has significant bargaining power over its suppliers, which increases the profitability of the suppliers. D. GM has significant bargaining power in the tire market, which lowers tire prices. E. McDonald's has significant bargaining power over napkin suppliers, which raises the napkin prices they pay.
D
The guidelines used by the Department of Justice and the Federal Trade Commission when evaluating proposed mergers include three main parts. What are they? The three main parts of the mergerLOADING... guidelines involve A. government revenue, economies of scale, and network externalities. B. economic profits, market definition, and government revenue. C. merger standards, consumer surplus, and deadweight loss. D. market definition, measure of concentration, and merger standards. E. deadweight loss, measure of concentration, and economic profits.
D
What are the most important barriers to entry? A. economies of scale, lack of network externalities, and patents. B. ownership of a key input, patents, and diseconomies of scale. C. ownership of a key input, lack of tariffs, and economies of scale. D. economies of scale, ownership of a key input, and government imposed barriers. E. economies of scale, lack of tariffs, and ownership of a key input.
D
What do barriers to entry have to do with the extent of competition, or lack thereof, in an industry? Without barriers to entry,, A. existing firms will experience price leadership. B. new firms will enter industries where firms are earning accounting profits. C. new firms will enter industries exhibiting economies of scale. D. new firms will enter industries where firms are earning economic profits. E. existing firms will agree to charge the same price and not compete.
D
What effect might the government have on oligopolies? In oligopolies, the government might A. promote competition by allowing large firms to lobby state legislators and members of Congress for favorable laws. B. promote competition with a patent, which grants exclusive rights to product a good. C. impose barriers to entry with a copyright, which allows only the government to supply a good or service. D. impose barriers to entry with a tariff to limit foreign competition. E. impose barriers to entry with a free-trade agreement with another country to promote competition.
D
Which of the following terms is a barrier to entry? A. patents B. economies of scale C. ownership of a key input D. All of the above.
D
How did De Beers attempt to convince consumers that used diamonds were not good substitutes for new diamonds?
De Beers developed the slogan "a diamond is forever" to increase sentimental value.
How were De Beers' profits affected?
De Beers has remained profitable.
How did De Beers' strategy affect the demand curve for new diamonds?
The demand for new diamonds has remained unchanged.
The production function is the relationship between
The inputs employed by a firm and the maximum output it can produce with those inputs.
Why are firms willing to accept losses in the short run but not in the long run?
There are fixed costs in the short run but not in the long run.
Which of the following is true of the relationship between the average product of labor and the marginal product of labor?
Whenever the marginal product of labor is less Than the average product of labor, the average product of labor must be decreasing.
The marginal cost of production shows the change in a firm's total cost from producing one more unit of a good or service. What is the shape of the marginal cost curve? Graphically, the marginal cost curve is
a U shape, initially falling when the marginal product of labor is rising and then eventually rising when the marginal product of labor is falling.
Why was De Beers worried that people might resell their old diamonds? If people resell their old diamonds, then
market competition would increase, decreasing profits.
Why would the government be willing to erect barriers to entering an industry? The government would be willing to impose barriers to A. encourage firms to carry out research and development of new and better products. B. protect the public from incompetent practitioners. C. protect U.S. firms from international competition. D. both a and b. E. all of the above.
all the above
Firms experience economies of scale for several reasons. What is one such reason? A firm might experience economies of scale because
as a firm expands, it may be able to borrow money more inexpensively
What is the difference in the short run and the long run?
at least one of the firm's inputs is fixed, while in the long run, the firm is able to vary all its inputs, adopt new technology, and change the size of its physical plant.
In the short run, a firm's shutdown point is the minimum point on the
average variable cost curve, while in the long run, a firm's exit point is the minimum point on the average total cost curve.
Why do oligopolies exist? Oligopolies exist due to
barriers to entry
His decision on what price to charge and how much to produce in the long run will be
based on optimal plant size determination based on cost minimization.
If one of the two firms expands production, then that firm will
be able to offer lower prices, driving the other firm out of business.
Your company incurs a cost for factory rent, which, in the short run, is fixed. What happens to this cost in the long run? In the long run, the cost of factory rent
becomes a variable cost.
Three examples of oligopolies in the United States are industries that produce or sell A. first−class mail delivery, dog and cat food, and pharmaceutical drugs. B. wheat, pharmaceutical drugs, and beer. C. automobiles, athletic footware, and cigarettes. D. DVDs, college textbooks, and breakfast cereal. E. groceries in supermarkets, toys, and aircraft.
c
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 reducing costs.
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.
Many firms advertise. What effect does advertising have on firm profits? One possible effect of advertising is to A. increase profits by making the supply curve for the product more inelastic. B. increase profits by allowing the firm to produce the same amount of output with fewer inputs. C. increase profits by making the demand curve for the product more elastic. D. increase profits by shifting the demand curve for the product to the left. E. decrease profits by increasing the cost of production.
decrease profits by increasing the cost of production.
Perfect competition: Equilibrium in a perfectly competitive market is
determined by the intersection of the demand and supply curves.
What is "natural" about a natural monopoly? A natural monopoly
develops automatically due to economies of scale
output effect
extra revenue from selling one more unit
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
a perfect competition demand curve is
flat
What are the three conditions for a market to be perfectly competitive? For a market to be perfectly competitive, there must be
identical products. many firms, no barriers to entry and exit
Describe a monopoly's demand curve. A monopoly's demand curve
is the same as the demand curve for the product.
Economists have developed broad and narrow definitions to identify monopolies. What is a characteristic that supports a firm being classified as a monopoly? Economists could find that a firm is a monopoly if
it earns profits in the long run
For many years, the International Nickel Company of Canada essentially operated as a monopoly. What made this company a monopoly? The International Nickel Company of Canada was essentially a monopoly because
it had almost exclusive control of the world's supply of nickel, used to make nickel products.
A firm is likely to be a price taker when
it sells a product that is exactly the same as every other firm
Compare monopolistically competitive industries with perfectly competitive industries in the long run. Which industry structure is more efficient? Compared to perfect competition, monopolistically competitive industries are
less efficient because average cost is not minimized.
Why would a monopolistically competitive firm advertise? A monopolistically competitive firm would advertise to A. shift its demand curve to the left. B. reduce the total cost of production. C. reduce product differentiation. D. make its demand curve more inelastic. E. decrease the price it charges.
make its demand curve more inelastic.
if marg revenue is less than price
marg revenue curve is below demand curve
A fast-food restaurant decides to raise the price of its hamburgers. Assume the firm is in a monopolistically competitive industry. What will happen to the demand for its hamburgers? When the fast-food restaurant raises the price of hamburgers,
some of its customers will be willing to pay a higher price because they prefer this brand of hamburgers.
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
steeper, flatter
Many factors under a firm's control affect profitability. Do factors that are not under a firm's control also affect profitability? Factors not under a firm's control A. such as the ability to lower the average cost of production affect profitability. B. such as rising fuel prices affect profitability. C. do not affect profitability. D. such as product differentiation affect profitability. E. such as marketing affect profitability.
such as rising fuel prices affect profitability.
Technology is
the processes a firm uses to turn inputs into outputs of goods and services.
price effect
the "bad thing" that happens when the firm cuts its price
If patents reduce competition, why does the federal government grant them? The federal government grants patents
to encourage firms to spend money on research to create new products
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.
What is an oligopoly? An oligopoly is a market structure
where a small number of interdependent firms compete.
Suppose that last semester your semester GPA was 3.70 and your resulting cumulative GPA was 2.57. Next, suppose that this semester your semester GPA will be 3.30. If so, then your cumulative GPA
will increase because your "marginal" GPA will be above your cumulative GPA.
Look again at the section "The Department of Justice and the Federal Trade Commission Merger Guidelines" in the textbook. Evaluate the following situations: A market initially has 20 firms, each with a 5 percent market share. Of the firms, 11 propose to merge, leaving a total of 10 firms in the industry. Are the Department of Justice and the Federal Trade Commission likely to oppose the merger? The Department of Justice and the Federal Trade Commission would challenge ______________ such a merger. A market initially has 5 firms, each with a 20 percent market share. Of the firms, 4 propose to merge, leaving a total of 2 firms in the industry. Are the Department of Justice and the Federal Trade Commission likely to oppose the merger? The Department of Justice and the Federal Trade Commission would challenge ___________ such a merger.
would challenge x2
Suppose Kimowns the only restaurant in town that serves fried chicken. Other restaurants serve pizza, hamburgers, and tacos. Suppose that in the long run, Kim's restaurant continues to be the only one in town selling fried chicken. If Kim is earning economic profits, then, under the broad definition, is Kim's restaurant a monopoly?
yes
Flaws of the four-firm concentration ratio
≻Concentration ratios do not include sales in the United States by foreign firms. ≻Concentration ratios are calculated for the national market even though the competition in some industries is mainly local. ≻Competition sometimes exists between firms in different industries
