Microecon final

Describe four strategies companies may use to deter new companies from entering a market.

Demand-side strategies that create customer lock-in. Supply-side strategies to develop unique cost advantages. Regulatory strategies that enlist government policy to prevent entry. Entry deterrence strategies to scare off potential rivals.

You are an economic advisor to your state legislature. The government is considering implementing a price ceiling on smartphones on the grounds that Apple and Samsung charge excessively high prices and that cell phones have become a necessity to modern life. Which statement is FALSE?

If the price ceiling is implemented, it should be set below marginal cost.

What effect does increasing competition have on price for firms with market power?

It drives the price down toward cost.

Which statement about the prevalence of different types of market structures is TRUE?

Oligopoly and monopolistic competition are more common than monopoly and perfect competition.

In a product market, why would a company owner prefer to face fewer competitors than more?

With fewer competitors, companies have more market power.

When collusion occurs, sellers in a market:

act like a monopolist to increase profits.

What is the dominant factor determining market price in the long run?

average cost

Over the years, activists have claimed that Amazon, one of the largest companies in the United States, should be federally regulated. They make various arguments, including that Amazon is too big and that Amazon Basics, Amazon's generic versions of many products, stifles competition. Opponents argue that Amazon can offer its Prime membership and Basics line at low prices as a result of strategic competition. In a policy that regulates market power, the goal is to _____, but the trade-off is that doing so _____.

bring the outcome closer to the social optimum; distorts market incentives

Suppose you were the only firm that has an official license to sell corn dogs in your community. Your monopoly would result from:

government-created barriers.

One characteristic of a perfectly competitive market is that there are _____ sellers of the good or service.

many

Marginal revenue reflects the _____ effect and the _____ effect.

output; discount

The Rational Rule for Entry says that a seller should enter a market when:

price exceeds average cost.

In contrast to perfect competition, a monopoly:

produces less at a higher price

The implicit opportunity cost of capital is:

the opportunity cost of the capital used by a business.

One market failure associated with market power is:

underproduction

A year ago, Jaime left his investment banking job, in which he earned $150,000 per year, to start a fintech company that provides real-time stock-picking consulting. Over the past year, during which his company generated $750,000 in revenue, Jaime employed two software engineers and two financial analysts, paying each $150,000. To save money, Jaime runs his business on the upper floor of his house, a space he previously rented out for $10,000 per year. Jaime's economic profit is _____. He therefore _____ have launched the business.

−$10,000; should not

Fiona has a monopoly on motorboat rentals on Nantucket Island during the summer. She can rent five boats per week at $21,000 each. If she wants to rent six, she can charge only $20,000 each. The output effect of renting the sixth motorboat is:

$20,000

How would the discount effect on marginal revenue differ for a seller increasing sales from 100 units to 101 units compared to an increase in sales from 1,000 units to 1,001 units?

The discount effect would be smaller for a change from 100 to 101 units than 1,000 to 1,001 units.

How does a business owner discover the business's demand curve?

The owner experiments with different prices for its product.

What effect do patents have on competition?

They reduce competition by creating a barrier to new companies entering a market.

(Figure: Market Power) Based on the demand curves for four sellers, which firm has the least market power?

Firm A (flat horizontal curve)

Which statement BEST describes a condition for the existence of a perfectly competitive market?

Firms produce an identical product.

Suppose your local Lowe's home improvement store has explicit financial costs of $3 million per year and implicit opportunity costs of $74,000 per year. If the store earned an economic profit of $22,000 last year, the store's accounting profit was:

$96,000

As the quantity sold rises for a seller in imperfect competition, what happens to the difference between price and marginal revenue?

It gets larger

Patents have the positive effect of _____ and the negative effect of _____.

encouraging research; creating a monopoly

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

enter this market until all firms earn zero economic profit.

Companies with market power face a trade-off between:

having a higher profit margin and selling a larger quantity

A firm's ability to raise its product price without losing many customers to competing businesses exemplifies:

market power.

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

monopolistically competitive

The Tennessee 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

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.

Monopolizing is when a company gains market share by:

pushing suppliers not to sell inputs to rival companies

The negative effects of market power do NOT include:

smaller demand

You decide to quit your $70,000-per-year job as a hotel concierge to be an online hotel review blogger. At the end of the first year of blogging, you have earned $90,000. You also spent $10,000 for a high-end computer and wireless network. Your economic profit in the first year as a blogger is:

$10,000

The Bowery Hotel is located on Third Street in Manhattan. Suppose the hotel has explicit financial costs of $200,000 per year and implicit opportunity costs of $50,000 per year. If the hotel earned an economic profit of $50,000 last year, the hotel's accounting profit equaled:

$100,000

Which has the MOST market power?

Meta, which through its ownership of Facebook, Instagram, and WhatsApp holds the majority of the social media market share

Priscilla sells 10 bottles of olive oil per week at $5 per bottle. She can sell 11 bottles per week if she lowers the price to $4.50 per bottle. The discount effect would be a decrease of _____.

$5.00