Unit 2 Test Microeconomics
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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?
We would need information on the cost of buying the existing operations to determine profits.
At a price of $50 per barrel, were the companies buying the existing oil sands operations earning a profit of $27 per barrel? If not, explain what information we would need to calculate their profit. A. These companies were earning profits of $27 per barrel because fixed costs are sunk. B. We would need information on the cost of buying the existing operations to determine profits. C. We would need information on sunk costs associated with drilling to determine profits. D. These companies were earning profits of $27 per barrel because opportunity costs must be included.
minimum average cost occurs when firm output is a large fraction of industry output.
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 do not change when it produces more output. B. a firm's average costs increase when it produces more output. C. a firm's total cost is a large fraction of total revenue when output is low. D. economic profits are lower when firm output is a large fraction of industry output. E. minimum average cost occurs when firm output is a large fraction of industry output.
Dell will offer $20 per copy of the software and Symantec will accept the offer.
Dell first chooses whether to offer Symantec $30 or $20 for each copy of its software, and then Symantec responds by either accepting or rejecting the offer. The strategies and corresponding profits (in millions) for Dell (D) and Symantec (S) are depicted in the decision tree to the right. What is the Nash equilibrium of the game? A. Dell will offer $30 per copy of the software and Symantec will accept the offer. B. Dell will offer $20 per copy of the software and Symantec will reject the offer. C. Dell will offer $30 per copy of the software and Symantec will reject the offer. D. Dell will offer $20 per copy of the software and Symantec will accept the offer.
Barriers to entry
Why do oligopolies exist? Oligopolies exist due to
a horizontal line equal to the minimum point on the typical firm's average total cost curve.
Discuss the shape of the long-run supply curve in a perfectly competitive market. The long-run supply curve is A. a horizontal line equal to the minimum point on the typical firm's average variable cost curve. B. an upward-sloping line equal to the sum of the portion of each firm's marginal cost curve that is above minimum average variable cost. C. an upward-sloping line equal to the sum of each firm's supply curve. D. a horizontal line equal to the minimum point on the typical firm's average total cost curve. E. an upward-sloping line equal to the sum of each firm's marginal cost curve.
that is more closely suited to their tastes.
Do consumers benefit in any way from monopolistic competition relative to perfect competition? Compared to perfect competition, when a consumer purchases a product from a monopolistically competitive firm, the consumer benefits from purchasing a product A. produced without government regulations. B. whose price equals marginal cost. C. whose marginal benefit to that consumer equals its marginal cost of production. D. without coercion from advertising. E. that is more closely suited to their tastes.
is a natural monopoly because average cost is decreasing when it crosses demand.
The figure to the right shows the average cost of production (AC) for a cable company that is a monopoly as well as the corresponding demand (D) for cable subscriptions in the city to which the company provides service. Is this company a natural monopoly? This firm A. is not a natural monopoly because it must advertise. B. is not a natural monopoly because its demand is downward sloping. C. is a natural monopoly because total cost does not always increase with output. D. is a natural monopoly because average cost is decreasing when it crosses demand. E. is a natural monopoly because it has excess capacity.
requiring licenses for a firm to produce.
The government indirectly influences the level of industry competition with its own barriers to entry. How? The government can restrict entry by A. eliminating quotas to promote free trade. B. reducing the duration of patents on inventions. C. regulating the size of profits that firms can earn. D. requiring licenses for a firm to produce. E. preventing lobbyists from influencing policymakers.
Profit=(P−ATC)×Q, where P is price, Q is output, and ATC is average total cost.
Which of the following is an expression of profit for a perfectly competitive firm? Profit for a perfectly competitive firm can be expressed as A. Profit=P−MC, where P is price and MC is marginal cost. B. Profit=P×Q, where P is price and Q is output. C. Profit=(P−ATC)×Q, where P is price, Q is output, and ATC is average total cost. D. Profit=(P×Q)−(TC×Q), where P is price, Q is output, and TC is total cost. E. Profit=P−ATC, where P is price and ATC is average total cost.
All of the above.
Which of the following will influence the level of competition in an industry? A. The bargaining power of suppliers. B. A new product that fills a consumer need better. C. The bargaining power of buyers. D. Competition from other firms in the form of longer warranties. E. All of the above.
There are fixed costs in the short run but not in the long run.
Why are firms willing to accept losses in the short run but not in the long run? A. Sunk costs are larger in the long run than in the short run. B. It is always profitable to incur losses in the short run because profits will always arise in the long run. C. Firms cannot shut down in the short run. D. Firms are price takers in the short run but not in the long run. E. There are fixed costs in the short run but not in the long run.
to maintain product differentiation and earn economic profits in the short run.
Why are many companies so concerned about brand management? Companies use brand management A. to eliminate excess capacity and earn economic profits in the long run. B. to achieve productive efficiency and maximize economic surplus in the short run. C. to maintain product differentiation and earn economic profits in the short run. D. to collude with other firms and earn economic profits in the long run. E. to produce a product identical to that of competitors and create network externalities in the short run.
With many firms selling an identical product, single firms have no effect on market price.
Why do single firms in perfectly competitive markets face horizontal demand curves? A. With many firms selling an identical product, single firms have no effect on market price. B. With many buyers, single firms can sell as much as they want regardless of price. C. With only a few firms in the market selling an identical product, single firms have the ability to charge a constant price. D. With each firm facing a unique demand for its product, single firms can sell as much as they want regardless of price. E. Both a and b.
changing the price affects the quantity sold because firms sell differentiated products.
Why does a local McDonald's face a downward-sloping demand curve for its Quarter Pounder? In monopolistically competitive markets, A. changing the price affects the quantity sold because there are only a few sellers. B. changing the price affects the quantity sold because firms are price takers. C. changing the price does not affect the quantity sold because firms have market power. D. changing the price does not affect the quantity sold because firms are price makers. E. changing the price affects the quantity sold because firms sell differentiated products.
only one firm has control of a key raw material necessary to produce a good.
Why might a monopoly arise? One firm will be present when A. there exists no possibility for network externalities with other firms. B. only one firm has control of a key raw material necessary to produce a good. C. the possibility for product differentiation is limited to only a couple of other firms. D. it can supply the entire market at lower average fixed cost than can two or more firms. E. All of the above.
market competition would increase, decreasing market prices.
Why was De Beers worried that people might resell their old diamonds? If people resell their old diamonds, then A. market supply would increase, increasing profits. B. used diamonds would not have a brand name. C. market competition would increase, decreasing market prices. D. De Beers would become a natural monopoly. E. De Beers would not be able to gain patent protection.
all of the above.
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.
was not a monopoly because candles were a good substitute for electricity.
The great baseball player Ty Cobb was known for being very thrifty. Near the end of his life he was interviewed by a reporter who was surprised to find that Cobb used candles, rather than electricity, to light his home. From Ty Cobb's point of view, was the local electric company a monopoly? For Cobb, the local electric company A. was not a monopoly because candles were a good substitute for electricity. B. was a monopoly because it charged high prices for electricity. C. was a monopoly because it was the only source of electricity. D. was not a monopoly because it earned no economic profit. E. was a monopoly because it produced only one good.
market definition, measure of concentration, and merger standards.
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. deadweight loss, merger standards, and economic profits. C. market definition, measure of concentration, and merger standards. D. economic profits, measure of concentration, and government revenue. E. market definition, consumer surplus, and deadweight loss.
The products sold by all firms in the market will be identical.
Which of the following is a characteristic of perfectly competitive markets? A. The products sold by all firms in the market will be identical. B. There will be many buyers but only a few firms, all of whom will charge the same price. C. There will be a few firms in the market selling an identical product. D. The barriers to new firms entering the market will be natural ones. E. There will be only a few buyers but many firms, all of whom are small relative to the market.
American will leave fares unchanged and Southwest will leave fares unchanged.
A flight route is served by American Airlines (AA) and Southwest Airlines (SW). Suppose American is the industry leader. American will decide whether to raise airfares, and then Southwest will decide whether to match the price increase. What is the Nash equilibrium of the game? A. American will raise fares and then Southwest will raise fares. B. American will raise fares and then Southwest will leave fares unchanged. C. American will leave fares unchanged and Southwest will raise fares. D. The game does not have a Nash equilibrium. E. American will leave fares unchanged and Southwest will leave fares unchanged.
A firm is a monopoly if it can ignore other firms' prices.
A form of market structure studied by economists is monopoly. When is a firm a monopoly, or are monopolies only theoretical concepts that do not exist? A. A firm is a monopoly if it can ignore other firms' prices. B. Monopolies do not exist because just about every product has substitutes. C. Monopolies do not exist because many markets have barriers to entry. D. A firm is a monopoly if it earns economic profits at least in the short run. E. A firm is a monopoly if its economic profits are competed away in the long run.
all of the above.
An example of yield management is A. a college adjusting the cost of tuition with financial aid according to whether the student came for an on−campus visit. B. a ship adjusting cruise prices according to the number of days remaining before departure. C. a book company adjusting the price of a novel according to time since introduction. D. an airline adjusting plane ticket prices each day according to day of the week. E. all of the above.
are not productively efficient because they do not produce at minimum average total cost and they are not allocatively efficient because they produce where price is greater than marginal cost.
Are monopolistically competitive firms efficient in long-run equilibrium? Monopolistically competitive firms A. are productively efficient because they produce at minimum average total cost and they are allocatively efficient because they produce where price is less than marginal revenue. B. are not productively efficient because they do not produce at minimum average total cost and they are not allocatively efficient because they produce where price is greater than marginal cost. C. are not productively efficient because they do not produce at minimum marginal cost and they are not allocatively efficient because they produce where price is less than marginal revenue. D. are not productively efficient because they do not produce at minimum average total cost and they are not allocatively efficient because they produce where price is less than marginal cost. E. are not productively efficient because they do not produce at minimum marginal cost and they are not allocatively efficient because they produce where marginal cost equals marginal revenue.
Yes, because firms produce where the marginal benefit to consumers equals the marginal cost of production.
Are perfectly competitive markets allocatively efficient in the long run? A. Yes, because firms produce at the lowest average cost possible. B. Yes, because firms produce where the marginal benefit to consumers equals the marginal cost of production. C. No, because firms earn zero economic profits. D. No, because firms will not shut down unless price is less than the average variable cost of production. E. Both a and b.
some of its customers will be willing to pay a higher price because this restaurant is close to them.
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, A. some of its customers will be willing to pay a higher price because this restaurant is close to them. B. none of its customers will be willing to pay the higher price and will stop buying hamburgers. C. all of its customers will be willing to pay the higher price because this restaurant faces no competition. D. all of its customers will be willing to pay the higher price because they prefer this brand of hamburgers. E. none of its customers will be willing to pay the higher price because this restaurant faces competition from other restaurants.
less efficient because price is greater than marginal cost.
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 A. more efficient because there is excess capacity. B. more efficient because average cost is minimized. C. less efficient because there are fixed costs. D. less efficient because marginal revenue is greater than marginal cost. E. less efficient because price is greater than marginal cost.
does not remain 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.
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, the entry of new firms decreases profits, reducing the threat from additional potential entrants. B. remains constant over time. For example, existing firms may set lower prices to keep profits low to make entry less attractive, reducing the threat from additional potential entrants. C. remains constant over time. For example, competitors rarely introduce new products to fill consumer needs better than current products. D. does not remain constant over time. For example, as new firms enter, it is easier to implicitly collude, increasing competition from existing firms. E. does not remain 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.
Eckerd Pharmacy will choose the large quantity and CVS Pharmacy will not enter.
Eckerd Pharmacy must choose how much to produce first and then CVS Pharmacy will choose whether to enter the industry. The strategies and corresponding profits for Eckerd (E) and CVS Pharmacy (C) are depicted in the decision tree to the right. What is the Nash equilibrium of the game? A. Eckerd Pharmacy will choose the small quantity and CVS Pharmacy will enter. B. Eckerd Pharmacy will choose the large quantity and CVS Pharmacy will not enter. C. Eckerd Pharmacy will choose the small quantity and CVS Pharmacy will not enter. D. Eckerd Pharmacy will choose the large quantity and CVS Pharmacy will enter.
other firms enhance customer service
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. inputs are not specialized. B. barriers prevent new firms from entering. C. other firms enhance customer service. D. buyers have less bargaining power. E. fewer close substitutes are available.
enhanced by products more closely suited to consumer tastes.
Economists have debated the effects of monopolistically competitive market structures on the well-being of society. How do monopolistically competitive market structures affect consumers? Compared to perfect competition, consumer welfare with monopolistic competition is A. reduced by lower product quality. B. enhanced by products more closely suited to consumer tastes. C. enhanced by products being produced at lower average cost. D. reduced by less product variety. E. enhanced by lower product prices.
it earns profits in the long run.
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 A. it is a price taker. B. its production decisions are unresponsive to price. C. it achieves productive efficiency. D. it earns profits in the long run. E. it produces a large quantity.
served as a superior product to heavy, bulky, and expensive printed encyclopedias.
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. resulted in the government introducing occupational licensing laws for educational materials. B. served as a superior product to heavy, bulky, and expensive printed encyclopedias. C. served as a complement, increasing sales of electronic and printed encyclopedias. D. used printed encyclopedias from Encyclopedia Britannica as a key input. E. prompted Encyclopedia Britannica to form the first cartel for encyclopedias.
incorrect because profits are instead maximized at the quantity where marginal cost equals marginal revenue, which may be different since marginal revenue depends on consumer demand.
Evaluate the discussion between the two managers. Ben's assertion that the firm should produce the quantity of lamps where average costs are minimized is A. incorrect because profits are instead maximized at the quantity where price equals marginal revenue, which may be different since price depends on consumer demand. B. correct because this is the same quantity that maximizes profits where marginal cost equals marginal revenue since consumer demand does not affect marginal cost or marginal revenue. C. correct because this level of production occurs on the firm's minimum efficient scale, which is unaffected by consumer demand. D. incorrect because profits are instead maximized at the quantity where marginal cost equals marginal revenue, which may be different since the marginal cost of production is less than the average cost when average costs are minimized. E. incorrect because profits are instead maximized at the quantity where marginal cost equals marginal revenue, which may be different since marginal revenue depends on consumer demand.
firms can sell as much output as they want at the market price.
Explain why it is true that for a firm in a perfectly competitive market that P = MR = AR. In a perfectly competitive market, P = MR = AR because A. firms have market power. B. firms are price makers. C. firms can sell as much output as they want at the market price. D. firms face downward sloping demand curves. E. firms sell a differentiated product.
charges higher prices for DVD players when they are first introduced and lower prices later.
Firms are sometimes able to engage in price discrimination over time. Give an example of this form of price discrimination. A typical example of price discrimination over time would be when a company A. charges men higher prices for flat−screen plasma televisions than women. B. charges higher prices for DVD players when they are first introduced and lower prices later. C. charges lower prices for hardcover editions of books than for paperback editions that are published months later. D. segments the market to charge more price-sensitive customers higher prices for digital cameras than less price-sensitive customers. E. buys iPods in one market at a low price and resells them in another market at a higher price.
it had almost exclusive control of the world's supply of nickel, used to make nickel products.
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 A. Nickel, used to make nickel products, has many close substitutes that can also be used to produce nickel products. B. the buyers of nickel products had virtually no bargaining power. C. the suppliers of nickel, used to make nickel products, had substantial bargaining power. D. the input market for nickel, used to make nickel products, was perfectly competitive. E. it had almost exclusive control of the world's supply of nickel, used to make nickel products.
a firm that is the sole, government-designated provider of electricity, and an example of a public enterprise is the government directly providing sewage service.
Give an example of a public franchise and an example of a public enterprise. An example of a public franchise is A. a firm that is the sole, government-designated provider of electricity, and an example of a public enterprise is the government directly providing sewage service. B. the government directly providing water, and an example of a public enterprise is a natural monopoly providing sewage service. C. a firm that is the sole, government-designated provider of natural gas, and an example of a public enterprise is a firm that sells a differentiated product such as clothing. D. the government directly providing water, and an example of a public enterprise is a firm that is the sole, government-designated provider of natural gas. E. a perfectly competitive peach farmer, and an example of a public enterprise is a duopoly that provides railroad transportation.
both a and b.
Give an example of a government-imposed barrier to entry. An example of a government-imposed barrier to entry is A. a quota on imports. B. occupational licensing. C. economies of scale. D. both a and b. E. all of the above.
where firms meet and agree to not compete, and an example of implicit collusion is price leadership.
Give an example of each. An example of explicit collusion is A. where firms meet and agree to not compete, and an example of implicit collusion is price leadership. B. where firms meet and agree to not compete, and an example of implicit collusion is firms forming a cartel. C. price leadership, and an example of implicit collusion is firms forming a cartel. D. firms advertising that they will match the lowest price offered by any competitor, and an example of implicit collusion is price leadership. E. price leadership, and an example of implicit collusion is firms advertising that they will match the lowest price offered by any competitor.
Apples and oranges are sold in perfectly competitive markets and Maybelline cosmetics and Ralph Lauren cologne are sold in monopolistically competitive markets.
Give two examples of products sold in perfectly competitive markets and two examples of products sold in monopolistically competitive markets. A. Maybelline cosmetics and Ralph Lauren cologne are sold in perfectly competitive markets and cigarettes and beer are sold in monopolistically competitive markets. B. The Sony PS3 and the Microsoft Xbox are sold in perfectly competitive markets and Maybelline cosmetics and Ralph Lauren cologne are sold in monopolistically competitive markets. C. Apples and oranges are sold in perfectly competitive markets and electricity and cable TV are sold in monopolistically competitive markets. D. Aircraft and automobiles are sold in perfectly competitive markets and Maybelline cosmetics and Ralph Lauren cologne are sold in monopolistically competitive markets. E. Apples and oranges are sold in perfectly competitive markets and Maybelline cosmetics and Ralph Lauren cologne are sold in monopolistically competitive markets.
grant a copyright to a firm, giving it the exclusive right to produce a product.
Governments often have the potential to influence whether firms are monopolies How might the government affect whether a firm is a monopoly? The government could A. reduce taxes so that a firm benefits from diseconomies of scale. B. grant a firm a public franchise, making it a natural monopoly. C. grant a firm a public enterprise, allowing it to benefit from network externalities. D. grant a copyright to a firm, giving it the exclusive right to produce a product. E. grant a patent to a firm, making it a natural monopoly.
Robinson-Patman Act such that price discrimination is illegal if it reduces competition.
Is price discrimination illegal? In recent years, the courts have interpreted the A. Robinson-Patman Act such that all forms of price discrimination are illegal. B. Cellar−Kefauver Act such that price discrimination is legal if it is not based on differences in cost. C. Clayton Act such that price discrimination is legal if it increases competition. D. Robinson-Patman Act such that price discrimination is illegal if it reduces competition. E. Clayton Act such that price discrimination is illegal if it is based on race and gender.
contains decision nodes where firms must make decisions, arrows illustrating the decisions, and terminal nodes showing the resulting rates of return.
How are decision trees used to analyze sequential games? A decision tree A. is a table that shows the payoff each firm earns from every combination of strategies by the firms. B. contains strategy nodes where firms must make decisions, arrows illustrating the decisions, and terminal nodes showing the resulting rates of return. C. is a model identifying five forces that determine the level of competition in an industry. D. contains decision nodes where firms must make decisions, arrows illustrating the decisions, and terminal nodes showing the resulting rates of return. E. is a situation in which each firm chooses the best strategy, given the strategies chosen by other firms, and where no firm can make itself better off by changing its decision at any node.
the interaction of market demand and supply because firms and consumers are price takers.
How are prices determined in perfectly competitive markets In perfectly competitive markets, prices are determined by A. consumers because firms individually are very small relative to the market. B. firms because they each have market power. C. the interaction of market demand and supply because firms and consumers are price takers. D. firms because they sell differentiated products. E. consumers because firms sell identical products.
The government can require occupational licensing to provide goods and services.
How can the government impose barriers to entry? A. The government can require occupational licensing to provide goods and services. B. The government can remove quota limits on the quantity of a good that can be imported into a country. C. The government can repeal laws requiring patents to produce goods and services. D. The government can reduce tariffs on imports. E. None of the above.
De Beers developed the slogan "a diamond is forever" to increase sentimental value.
How did De Beers attempt to convince consumers that used diamonds were not good substitutes for new diamonds? A. De Beers developed the slogan "a diamond is forever" to increase sentimental value. B. De Beers claimed that used diamonds were "blood diamonds." C. De Beers eliminated microscopic branding from their diamonds. D. De Beers claimed that their diamonds are mined under ethical, environmentally friendly conditions. E. Both a and b.
Remain unchanged has remained
How did De Beers' strategy affect the demand curve for new diamonds? The demand for new diamonds has __________________________ De Beers _____________________ profitable
new firms will enter industries where firms are earning economic profits.
How do barriers to entry affect 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 exhibiting economies of scale. C. existing firms will agree to charge the same price and not compete. D. new firms will enter industries where firms are earning economic profits. E. new firms will enter industries where firms are earning accounting profits.
determine which product to produce.
How do firms use marketing? A firm might use marketing to A. shift the demand curve for their product to the left through advertising. B. eliminate barriers to entry. C. make their product more similar to that produced by competitors. D. determine which product to produce. E. identify the long-run equilibrium price where firms break even.
players can employ retaliation strategies.
How is the prisoner's dilemma result changed in a repeated game? In a repeated game, A. players can implicitly collude. B. players can essentially form a cartel. C. players are unable to employ enforcement mechanisms. D. players can appoint a first-mover. E. players can employ retaliation strategies.
the difference between total revenue and total cost is as large as possible.
How should firms in perfectly competitive markets decide how much to produce? Perfectly competitive firms should produce the quantity where A. the difference between total revenue and total cost is as large as possible. B. their individual price is as low as possible. C. their individual price is equal to the market price. D. the difference between explicit costs and implicit costs is as large as possible. E. the market price is as high as possible.
to encourage firms to spend money on research to create new products.
If patents reduce competition, why does the federal government grant them? The federal government grants patents A. to create natural monopolies. B. to increase the number of close substitutes available. C. to encourage firms to collude. D. to prevent network externalities. E. to encourage firms to spend money on research to create new products.
A firm's ability to produce at a lower average cost than competing firms.
In monopolistically competitive markets, what is a factor under a firm's control that determines whether it will be successful? A. A firm's ability to produce at a lower average cost than competing firms. B. Consumer preferences. C. Chance events. D. Factors that affect all firms in a market. E. Both a and b.
Try to cut her costs of production to decrease the loss in the short run.
In the figure to the right, Sacha Gillette reduces her output from 7750 to 5750 dozen eggs when the price falls to $1.80. At this price and this output level, she is operating at a loss. What option does Gillette have in this situation? A. Raise her price back up to $2.05. B. Try to cut her costs of production to decrease the loss in the short run. C. Increase the quantity produced. D. Continue producing 7750 dozen eggs.
steeper fewer less
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 more differentiated from other products, its demand curve becomes _______________________ 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 more differentiated from other products, buyers perceive it as having ______________________ good substitutes, and this altered perception induces buyers to be _______________________ responsive to price.
Yes. Firms can charge higher prices at times when consumers are less price sensitive and lower prices at times when consumers are more price sensitive.
Is it possible to price discriminate across time? Briefly explain. A. No. Transactions costs prevent price discrimination across time. B. No. Arbitrage prevents price discrimination across time. C. Yes. Firms can charge higher prices at times when consumers are less price sensitive and lower prices at times when consumers are more price sensitive. D. No. The inability to practice yield management across time prevents price discrimination across time. E. Yes. Firms can charge higher prices at times when consumer demand is more elastic and lower prices at times when consumer demand is less elastic.
competition from existing firms, the threat of potential entrants, competition from substitutes, the bargaining power of buyers, and the bargaining power of suppliers.
List the competitive forces in the five competitive forces model. The five competitive forces are A. competition from existing firms, international competition, competition from substitutes, the bargaining power of buyers, and the bargaining power of suppliers. B. competition from existing firms, the threat of potential entrants, competition from substitutes, trade barriers, 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, international competition, the bargaining power of buyers, and the bargaining power of suppliers. E. competition from existing firms, the threat of potential entrants, competition from substitutes, the bargaining power of buyers, and the bargaining power of suppliers.
it represents a small fraction of the total market.
When are firms likely to be price takers? A firm is likely to be a price taker when A. barriers to entry are substantial. B. firms in the industry collude. C. it represents a small fraction of the total market. D. it sells a differentiated product. E. it has market power.
Best Buy will choose the large quantity and RadioShack will not enter.
Suppose Best Buy is the only electronics store in a particular market, but RadioShack is thinking about entering the market. Best Buy chooses how much to produce first and then RadioShack chooses whether to enter the industry. The strategies and corresponding profits for Best Buy (BB) and RadioShack (RS) are depicted in the decision tree to the right. What will the firms do? A. Best Buy will choose the large quantity and RadioShack will enter. B. Best Buy will choose the large quantity and RadioShack will not enter. C. Best Buy will choose the small quantity and RadioShack will not enter. D. Best Buy will choose the small quantity and RadioShack will enter.
can increase his profit by producing less output.
Suppose Farmer Lane grows and sells cotton in a perfectly competitive industry. The market price of cotton is $1.52 per kilogram, and his marginal cost of production is $1.62 per kilogram, which increases with output. Assume Farmer Lane is currently earning a profit. Can Farmer Lane do anything to increase his profit in the short run? Farmer Lane A. may or may not be able to increase his profit. B. can increase his profit by producing less output. C. cannot do anything to increase his profit. D. can increase his profit by shutting down. E. can increase his profit by raising his price.
to postpone the time when they will no longer be able to earn economic profits.
Suppose a firm introduces a new product. How might that firm use brand management? Such a firm might use brand management to A. increase productive efficiency by producing the good at lower average cost. B. produce the same amount of output using fewer inputs. C. increase profits in the short run by making their demand curve more elastic. D. inspire competitors to copy the product. E. to postpone the time when they will no longer be able to earn economic profits.
some of McDonald's customers, but not all of them, will still demand McDonald's cheeseburgers because they may prefer McDonald's cheeseburgers to cheeseburgers at other fast−food restaurants.
Suppose a local McDonald's hamburger restaurant raises the price of its cheeseburgers from $2.00 to $2.50. What will happen to the quantity of McDonald's cheeseburgers demanded? If McDonald's raises the price of it's cheeseburgers, then A. some of McDonald's customers, but not all of them, will still demand McDonald's cheeseburgers because they may prefer McDonald's cheeseburgers to cheeseburgers at other fast−food restaurants. B. all of McDonald's customers will continue to demand McDonald's cheeseburgers because cheeseburgers from other fast-food restaurants are at least slightly differentiated. C. none of McDonald's customers will continue to demand McDonald's cheeseburgers because they can buy comparable cheeseburgers from other fast-food restaurants. D. some of McDonald's customers, but not all of them, will still demand McDonald's cheeseburgers because cheeseburgers from fast-food restaurants are identical. E. all of McDonald's customers will continue to demand McDonald's cheeseburgers because McDonald's faces no competition.
Advertise, Advertise
Suppose only two airlines, United and Delta, provide flights between Atlanta and Louisville. Both firms must choose whether to advertise or not advertise. The advertising strategies with corresponding profits are depicted in the payoff matrix to the right. United Airline's profits are in blue and Delta Airline's are in red. United Airline's dominant strategy is to __________________ and Delta Airline's dominant strategy is to _______________________
has had almost exclusive ownership of bauxite, which is a key input.
The Aluminum Company of America (Alcoa) has faced limited competition in the market for aluminum. What barrier has kept new firms from entering the market for aluminum? The Aluminum Company of America (Alcoa) A. has had lower long-run average costs than competitors. B. has been able to convince customers that its brand of aluminum has extra value. C. has had a patent on aluminum. D. has enjoyed economies of scope from producing multiple types of products. E. has had almost exclusive ownership of bauxite, which is a key input.
prohibited restraint of trade, including price fixing and collusion.
The federal government has passed various laws addressing mergers. What did the Sherman Act do? The Sherman Act A. established the Federal Trade Commission. B. prohibited restraint of trade, including price fixing and collusion. C. prohibited firms from buying stock in competitors. D. prohibited charging buyers different prices if the result would reduce competition. E. prohibited any merger that would reduce competition.
is a natural monopoly because it can supply the entire market at lower average total cost than can two or more firms.
The figure illustrates market demand for a monopoly along with its average total cost (ATC) curve. Is the monopoly a natural monopoly? The firm A. is a natural monopoly because its demand curve is downward sloping. B. is a natural monopoly because it has the potential to earn economic profits. C. is a natural monopoly because it can supply the entire market at lower average total cost than can two or more firms. D. is not a natural monopoly because its demand curve is not infinitely elastic. E. is not a natural monopoly because it experiences diseconomies of scale.
Experience Losses
The figure to the right represents the cost structure for a perfectly competitive firm with its average total cost (ATC) curve, average variable (AVC) curve, and marginal cost (MC) curve. Fixed costs are $50.00. Suppose the market price is $22.00 per unit. Characterize the firm's profit. If the firm produces output, then it will
automobiles, athletic footware, and cigarettes.
Three examples of oligopolies in the United States are industries that produce or sell A. automobiles, athletic footware, and cigarettes. B. wheat, pharmaceutical drugs, and beer. C. tap water, dog and cat food, and pharmaceutical drugs. D. clothing, toys, and aircraft. E. DVDs, college textbooks, and breakfast cereal.
create barriers to entry because if a firm can attract enough customers initially, it can attract additional customers as its product's value increases by more people using it, which attracts even more customers.
To have a monopoly, barriers to entering the market must be so high that no other firms can enter. Do network externalities create or remove barriers to entry? Explain. Network externalities A. create barriers to entry because economies of scale are so large that one firm can supply the entire market at lower average total cost than can two or more firms. B. create barriers to entry because a firm efficiently offers products that satisfy consumer preferences. C. remove barriers to entry because consumption of a firm's product increases the value of goods and services produced by other firms. D. remove barriers to entry because such externalities require multiple firms to provide the goods and services in the network. E. create barriers to entry because if a firm can attract enough customers initially, it can attract additional customers as its product's value increases by more people using it, which attracts even more customers.
charge a price greater than marginal cost and do not produce at minimum average total cost.
What are the differences between the long-run equilibrium of a perfectly competitive firm and the long-run equilibrium of a monopolistically competitive firm? Unlike perfectly competitive firms, in the long run monopolistically competitive firms A. do not produce at minimum average total cost and achieve productive efficiency. B. earn positive economic profits and charge a price greater than marginal cost. C. charge a price greater than marginal cost and do not produce at minimum average total cost. D. do not produce at minimum average total cost and have no excess capacity.
economies of scale, ownership of a key input, and government imposed barriers.
What are the most important barriers to entry? The most important barriers to entry are A. economies of scale, ownership of a key input, and government imposed barriers. B. ownership of a key input, lack of tariffs, and economies of scale. C. economies of scale, lack of network externalities, and patents. D. economies of scale, lack of tariffs, and ownership of a key input. E. ownership of a key input, occupational licensing, and diseconomies of scale.
firms face downward-sloping demand curves, and the products competitors sell are differentiated.
What are the most important differences between perfectly competitive markets and monopolistically competitive markets? Unlike in perfectly competitive markets, in monopolistically competitive markets, A. firms face downward-sloping demand curves, and the products competitors sell are identical. B. firms face downward-sloping demand curves, and the products competitors sell are differentiated. C. there are only a few sellers, and firms face downward−sloping demand curves. D. firms face horizontal demand curves, and there are no barriers to entry. E. the products competitors sell are differentiated, and there are substantial barriers to entry.
many buyers and sellers, with all firms selling identical products, and no barriers to new firms entering the market.
What are the three conditions for a market to be perfectly competitive? For a market to be perfectly competitive, there must be A. many buyers and a small number of firms that compete, selling differentiated products, and barriers to new firms entering the market. B. many buyers and sellers, with firms selling similar but not identical products, with low barriers to new firms entering the market. C. many buyers and a few sellers, with all firms selling identical products, and no barriers to new firms entering the market. D. many buyers and one seller, with the firm producing a product that has no close substitutes, and barriers to new firms entering the market. E. many buyers and sellers, with all firms selling identical products, and no barriers to new firms entering the market.
identical products sold by all firms.
What characterizes perfectly competitive markets? Perfectly competitive markets have A. a few buyers. B. firms that are price makers. C. identical products sold by all firms. D. a few sellers. E. barriers to new firms entering.
it has many buyers and many sellers, all of whom are selling identical products, with no barriers to new firms entering the market.
What conditions make a market perfectly competitive? A market is perfectly competitive if A. it has many buyers and a few sellers, all of whom are selling identical products, with barriers to new firms entering the market. B. it has many buyers and a few sellers, all of whom are selling differentiated products, with no barriers to new firms entering the market. C. it has many buyers and many sellers, all of whom are selling differentiated products, with no barriers to new firms entering the market. D. it has many buyers and many sellers, all of whom are selling identical products, with no barriers to new firms entering the market. E. it has many buyers and one firm, which produces a product with no close substitutes, with barriers to new firms entering the market.
will decrease because their demand curves will shift to the left.
What effect does the entry of new firms have on the economic profits of existing firms? When new firms enter a monopolistically competitive market, the economic profits of existing firms A. will decrease because their demand curves will become more inelastic. B. will decrease because their demand curves will shift to the right. C. will decrease because their demand curves will shift to the left. Your answer is correct. D. will increase because their average cost of production will decrease. E. will remain unchanged because they sell differentiated products.
All of the above.
What is a key factor that determines a firm's profitability? A. Differentiation of a firm's product from other products. B. Chance events. C. A firm's average cost of production relative to that of competing firms. D. Factors affecting a firm's entire market. E. All of the above.
a firm that is unable to affect the market price.
What is a price taker? A price taker is A. a firm that does not seek to maximize profits. B. a firm that is unable to affect the market price. C. a firm with a perfectly inelastic demand curve. D. a firm that has the ability to charge a price greater than marginal cost. E. a firm with a downward-sloping demand curve.
where one firm acts first and then the other firms respond.
What is a sequential game? A sequential game is a game A. where one firm acts first and then the other firms respond. B. with a cooperative equilibrium. C. where all firms act simultaneously. D. without a subgame-perfect equilibrium. E. without bargaining between firms.
where a small number of interdependent firms compete.
What is an oligopoly? An oligopoly is a market structure A. where only one firm buys an input in a factor market. B. where only one firm supplies the entire market. C. where a small number of interdependent firms compete. D. where many sellers compete by selling differentiated products. E. where many sellers compete by selling an identical product.
All of the above.
What is marketing to an economist? A. Marketing is advertising the product. B. Marketing is designing the product. C. Marketing is deciding how to distribute the product. D. Marketing is determining which product to produce. E. All of the above.
United and Delta will both choose to advertise.
What is the Nash equilibrium for this game? A. United will choose not to advertise and Delta will choose to advertise. B. United and Delta will both choose to advertise. C. United will choose to advertise and Delta will choose not to advertise. D. United and Delta will both choose not to advertise.
A monopoly is a firm that is the only seller of a product in a given industry.
What is the definition of monopoly? A. A monopoly is a firm that is the only seller of a product in a given industry. B. A monopoly is a firm that is the only seller of a product that can ignore the fixed cost of production. C. A monopoly is a firm that earns large economic profits. D. A monopoly is a firm that is created and regulated by the government. E. All of the above.
average variable cost curve, while in the long run, a firm's exit point is the minimum point on the average total cost curve.
What is the difference between a firm's shutdown point in the short run and its exit point in the long run? In the short run, a firm's shutdown point is the minimum point on the A. average total cost curve and in the long run, a firm's exit point is the minimum point on the average total cost curve. B. average variable cost curve, while in the long run, a firm's exit point is the minimum point on the average total cost curve. C. marginal cost curve and and in the long run, a firm's exit point is the minimum point on the marginal cost curve. D. average variable cost curve, while in the long run, a firm cannot exit. E. average variable cost curve, while in the long run, a firm's exit point is the minimum point on the average fixed cost curve.
is where firms signal to each other without actually meeting and agreeing to not compete.
What is the difference between explicit collusion and implicit collusion? Unlike explicit collusion, implicit collusion A. is illegal. B. is where firms meet and agree to charge the same price without appointing a price leader. C. is where firms meet to discuss not competing without actually reaching an agreement. D. is where firms meet and agree to not compete without employing retaliation strategies. E. is where firms signal to each other without actually meeting and agreeing to not compete.
Zero economic profit includes a firm's opportunity costs but zero accounting profit does not.
What is the difference between zero accounting profit and zero economic profit? A. Zero economic profit corresponds to negative accounting profit for a firm. B. Zero economic profit and zero accounting profit for a firm are equal. C. Zero economic profit includes a firm's opportunity costs but zero accounting profit does not. D. Zero accounting profit includes a firm's sunk costs but zero economic profit does not. E. Zero accounting profit includes a firm's fixed costs but zero economic profit does not.
the government makes collusion illegal with antitrust laws because monopolies create deadweight loss.
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 makes collusion unnecessary with government-imposed barriers to entry because monopolies create no deadweight loss. B. the government makes collusion legal with antitrust laws because monopolies enhance economic efficiency. C. the government makes collusion illegal with antitrust laws because monopolies create deadweight loss. D. the government promotes collusion with the Federal Trade Commission because perfectly competitive markets result in no deadweight loss. E. the government encourages collusion with subsidies because resulting profits can be used to develop new products.
continually adjusting prices to take into account fluctuations in demand.
What is yield management? Give an example of a firm using yield management to increase profits. Yield management is the practice of A. continually adjusting prices to take into account fluctuations in demand. Your answer is correct. B. buying a product in one market at a low price and reselling it in another market at a higher price. C. charging one price to different customers for the same product even when the cost of production varies. D. charging each consumer a price equal to consumer willingness to pay. E. charging a fixed price to all customers in accordance with the law of one price.
develops automatically due to economies of scale.
What is "natural" about a natural monopoly? A natural monopoly A. produces a product whose usefulness increases with the number of consumers who use it. B. develops automatically due to diseconomies of scale. C. is a public franchise. D. is the only firm legally allowed to produce a product due to a government copyright. E. develops automatically due to economies of scale.
only De Beers had access to most of the diamond mines.
What was the primary reason why De Beers at one time faced limited competition due to barriers to entry? The primary reason that De Beers faced limited competition was because A. only De Beers had received a government patent to sell diamonds. B. consumers viewed diamonds as having many close substitutes. C. only De Beers had access to most of the diamond mines. D. De Beers had successfully formed diamond cartels. E. average costs were decreasing with the quantity of diamonds sold.
