Eco 211 Test 3
The demand for labor would most likely become less inelastic as a result of:
An increase in the proportion of labor cost to total costs
Which of the following is the best example of oligopoly?
Automobile manufacturing.
If the marginal revenue product (MRP) of labor is less than the wage rate:
Less labor should be employed
The basic purpose of antitrust laws is to:
Limit monopoly power in industry
Refer to the diagram for a monopolistically competitive firm in short-run equilibrium. This firm's profit-maximizing price will be:
MC = MR && D = P
MRP = MRC application
Marginal Revenue product equals marginal resource (labor) cost. ; MP * price == MRP; Wage * Marginal Resource (labor) == MRC
Which of the following is a unique feature of oligopoly?
Mutual interdependence.
If economies of scale in an industry are so extensive that a single firm could serve the entire market at a lower cost than if the market was split between two or more firms, this industry is called a(n):
Natural monopoly
Rule of reason
Not every monopoly is illegal. Only contracts unreasonabally restricting trade are subject to antitrust laws.
Which business practice is rarely challenged by the government under antitrust laws?
Price discrimination
In which of these continuums of degrees of competition (highest to lowest) is oligopoly properly placed?
Pure competition, monopolistic competition, oligopoly, pure monopoly.
Which of the following is not a basic characteristic of monopolistic competition?
Recognized mutual interdependence.
Characteristics of monopolistic competition
Relatively large number of sellers ;Product differentiation; Easy entry and exit; Nonprice competition like advertising
Nash equilibrium
a stable state of a system involving the interaction of different participants, in which no participant can gain by a unilateral change of strategy if the strategies of the others remain unchanged. Must be stable
Vertical merger (definition & application)
a union between two companies in the same industry but at different stages. of the production process.
The labor demand curve of an imperfectly competitive seller is downsloping:
because of both diminishing returns and the necessity to lower price to sell more output.
The kinked-demand curve of an oligopolist is based on the assumption that:
competitors will follow a price cut but ignore a price increase.
Conglomerate merger (definition & application)
a merger between firms that are involved in totally unrelated business activities.
Natural monopoly (and examples)
a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming advantage over potential competitors. Ex: Utilities; Railway infrastructure; National fibre-optic broadband network.
Marginal revenue product measures the:
amount by which the extra production of one more worker increases a firm's total revenue.
A significant difference between a monopolistically competitive firm and a purely competitive firm is that the:
former sells similar, although not identical, products.
Monopolistic competition means:
many firms producing differentiated products.
The following are the respective numbers for the four-firm concentration ratio and Herfindahl index in an industry. Which set of numbers would suggest that the industry was monopolistically competitive?
25 and 207
Assume labor is the only variable input and that an additional input of labor increases total output from 72 to 78 units. If the product sells for $6 per unit in a purely competitive market, the MRP of this additional worker is:
$36.00
A merger between one firm and another firm that is its supplier is known as a:
Vertical merger
A significant benefit of monopolistic competition compared with pure competition is:
greater product variety.
Cartels are difficult to maintain in the long run because:
individual members may find it profitable to cheat on agreements.
In a sequential game with two firms, the first mover into a new market:
runs the risk that the untested new market will not provide enough customers.
A firm will employ more of an input whose relative price has fallen and, conversely, will use less of an input whose relative price has risen. Thus, a fall in the price of capital will increase the relative price of labor and thereby reduce the demand for labor. This describes the:
substitution effect.
Marginal product is:
the amount an additional worker adds to the firm's total output.
Cartel
Organization that is set up to fix prices
Four-firm concentration ratio
Percentage of sales by 4 largest firms
Which of the following is a primary concern of social regulation?
Product design
Application of the MC=MR rule (using graphs or tables) Simultaneous consumption
Pure monolopist maximizes profit by producing at the MR= MC output, then chargin demand price at MR=MC quantity.
Which of the following is a characteristic of monopolistic competition?
Relatively easy entry
An increase in the demand for HDTV sets leads to an increase in demand for LCD and LED TV screens. This situation arises because:
The demand for LCD and LED screens is a derived demand
Barriers of entry
factors that prevent firms from entering the industry; Economies of scale ; Legal barriers to entry like patents and licenses ; Ownership or control of essential resources ; Pricing and other strategic barriers
Concentration ratios measure the:
percentage of total industry sales accounted for by the largest firms in the industry.
Marginal resource cost is:
the increase in total resource cost associated with the hire of one more unit of the resource.
Monopolistically competitive and purely competitive industries are similar in that:
there are few, if any, barriers to entry.
If a nondiscriminating imperfectly competitive firm is selling its 100th unit of output for $35, its marginal revenue
will be less than $35.
Suppose the MRP of a firm's 12th worker is $22 and the worker's marginal wage cost is $16. We can say with certainty that the firm:
will find it profitable to hire more workers.
Refer to the profits-payoff table for a duopoly. If initially firms X and Y are charging $5 and $4 respectively:
both firms would find it advantageous to collude to raise their prices by $1 each.
A profit-maximizing firm employs resources to the point where:
MRP = MRC.
The term oligopoly indicates:
a few firms producing either a differentiated or a homogeneous product.
Resource X has many close substitutes, whereas resource Y has no close substitutes. Other things equal, we would expect:
the demand for resource X to be more elastic than the demand for resource Y.
If the four-firm concentration ratio for industry X is 80:
the four largest firms account for 80 percent of total sales.
An example of derived demand in the auto industry is the demand for:
Auto workers
Game Theory Matrix
Learn It
Answer the question on the basis of the following information. A farmer who has fixed amounts of land and capital finds that total product is 24 for the first worker hired; 32 when two workers are hired; 37 when three are hired; and 40 when four are hired. The farmer's product sells for $3 per unit and the wage rate is $13 per worker.Refer to the given information. How many workers should the farmer hire?
3
Answer the question on the basis of the following information. A farmer who has fixed amounts of land and capital finds that total product is 24 for the first worker hired; 32 when two workers are hired; 37 when three are hired; and 40 when four are hired. The farmer's product sells for $3 per unit and the wage rate is $13 per worker.Refer to the given information. The marginal product of the second worker is:
8
Which of the following statements best illustrates the concept of derived demand?
A decline in the demand for shoes will cause the demand for leather to decline.
Which of the following will not cause a shift in the demand for resource X?
A decline in the price of resource X.
Which would result in a decrease in the elasticity of demand for a particular resource?
A decrease in the percentage of the firm's total costs accounted for by the resource
price-discriminating monopolist
A discriminating monopoly is a single entity that charges different prices—typically, those that are not associated with the cost to provide the product or service—for its products or services for different consumers.
Horizontal merger (definition & application)
A horizontal merger is a merger or business consolidation that occurs between firms that operate in the same industry. Competition tends to be higher among companies operating in the same space, meaning synergies and potential gains in market share are much greater for merging firms.
Refer to the diagram where the numerical data show profits in millions of dollars. Beta's profits are shown in the northeast corner and Alpha's profits in the southwest corner of each cell. If Alpha and Beta agree to a high-price policy through collusion, the temptation to cheat on that agreement is demonstrated by the fact that:
Beta can increase its profit by lowering its price.
Refer to the payoff matrix. Suppose that Speedy Bike and Power Bike are the only two bicycle manufacturing firms serving the market. Both can choose large or small advertising budgets. Is there a Nash equilibrium solution to this game?
Cell A represents a Nash equilibrium.
Determinants for resource demand
Changes in product demand; Changes in productivity; Quantities of other resources; Technological advance; Quality of the variable resource
Which act specifically outlawed price discrimination when such discrimination is not justified on the basis of cost differences and when it reduces competition?
Clayton Act
The "active antitrust perspective" in policy enforcement strongly espouses the following beliefs, except:
Competition and creative destruction could lead to monopolies
Social regulation (definition and application)
Conditions under which goods and services are produced; Impact of production on society; Physical qualities of goods; Applied "across the board" to all industries
Obstacles for collusion
Demand and cost differencesl Number of firms; Cheating; Recession; New entrants; Legal obstacles
The decision on the DuPont cellophane case of 1956 dealt with the issue of:
Determining the relevant market for a particular product
Refer to the diagram for a monopolistically competitive firm in short-run equilibrium. This firm will realize an economic:
Diagram
Price leadership
Dominant firm initiates price changes ; Other firms follow the leader
The economic inefficiency in an oligopoly may be reduced by the following, except:
Economic profits used to fund technological advance
The public interest theory of regulation stipulates that government regulation of a natural monopoly is necessary in order to achieve the following, except:
Eventually breaking up the monopoly to achieve competition within the industry
An example of a government organization involved primarily in public regulation or industrial regulation of natural monopolies would be the:
Federal Energy Regulatory Commission
Industrial regulation (definition and application)
Focus on regulating the price; Natural monopoly; Economies of scale; Ex: Public utilities
Characteristics of oligopoly
Four-firm concentration ratio ; 40% or more to be an oligopoly; Localized markets ; Interindustry competition ; Import competition ; Dominant firms
Supporters of social regulation contend that:
Higher costs are the price that must be paid for a better society
The merger of a firm in one industry with another firm in the same industry that sells similar products is called a:
Horizontal merger
Natural monopoly
If the market demand curve intersects the long run ATC curve at anypoint where the ATC are declining.
In a competitive resource market, a decrease in the demand for a productive resource, ceteris paribus, will cause all of the following except a(n):
Increase in the price of the resource
Network effects
Increases in the value of a product to each user (including existing users) as the total number of users rise.
Other things being the same, if the demand for labor is inelastic:
Increases in wage rates will result in greater payrolls
Characteristics of a pure monopoly
Single seller — a sole producer ; No close substitutes — unique product ; Price maker — control over price; Blocked entry — strong barriers to entry ; Non-price competition — mostly PR but can engage in advertising to increase demand
Government regulation concerning the conditions under which goods are produced, the impact of production on society, and the physical qualities of the goods is known as:
Social regulation
"There is no free lunch"
Social regulation could produce higher prices, reduce innovation, and reduce competition
Herfindahl index
Sum of squared market shares to indicate total market competitiveness ;Ex. A = 10% B = 50% C = 40%: 10^2+50^2+40^2=100+2500+1600=4,200 out of possible 10,000
Antitrust policy (definition)
The purpose of antitrust policy is to: Prevent monopolization; Promote competition; Achieve allocative efficiency
Which of the following increases in labor demand is due to a change in the product demand?
Tourism increases in popularity, increasing the demand for workers at tourist resorts
Collusion
Working together to fix prices
Suppose the only three existing manufacturers of video game players signed a written contract by which each agreed to charge the same price for products and to distribute their products only in the geographical area assigned them in the contract. This best describes:
a cartel.
Derived demand (defined and application)
a demand for a commodity, service, etc. which is a consequence of the demand for something else.
Price wars
a fierce competition in which retailers cut prices in an attempt to increase their share of the market.
Nonprice competition refers to:
advertising, product promotion, and changes in the real or perceived characteristics of a product.
Tying contracts (definition)
an agreement by a party to sell one product but only on the condition that the buyer also purchases a different (or tied) product, or at least agrees he will not purchase the product from any other supplier.
If two resources are highly substitutable for one another:
an increase in the price of one will increase the demand for the other.
Other things equal, we would expect the labor demand curve of a monopolistic seller to:
decline more rapidly than that of a purely competitive seller.
A union might increase the demand for the labor services of its members by:
decreasing the prices of complementary inputs.
The mutual interdependence that characterizes oligopoly arises because:
each firm in an oligopoly depends on its own pricing strategy and that of its rivals.
Game theory:
is the analysis of how people (or firms) behave in strategic situations.
In a monopolistic labor market, the employer will maximize profits by employing workers up to that point at which:
marginal revenue product equals marginal resource (labor) cost.
Assuming a firm is selling its output in a purely competitive market, its resource demand curve can be determined by:
multiplying marginal product by product price.
