Q&A Hero

Q: Consider a U-shaped long-run average cost curve that has a minimum efficient scale at 6,000 units of output. In this case, this industry would be A) perfectly competitive if the market quantity demanded is 20,000 units. B) monopolistically competitive if the market quantity demanded is 12,000 units. C) an oligopoly if the market quantity demanded is 18,000 units. D) an oligopoly if the four-firm concentration ratio is more than 10 percent.

Q: Which of the following is not an example of a government-imposed entry barrier? A) patents B) occupational licensing C) barriers to international trade D) antitrust legislation

Q: For many years the Aluminum Company of America (Alcoa) controlled most of the world's supply of high quality bauxite, the ore needed to produce aluminum. What type of entry barrier was responsible for Alcoa's position in the aluminum industry? A) ownership of a key input B) a government-imposed barrier C) a patent on the manufacture of aluminum D) economies of scale

Q: A patent is an example of A) how ownership of a key input creates a barrier to entry. B) a government-imposed barrier to entry. C) occupational licensing. D) how market failure can lead to oligopoly.

Q: If economies of scale are relatively important in an industry, the typical firm's A) marginal cost curve will decline continuously until it reaches minimum efficient scale. B) long-run average cost curve will begin rising before it reaches minimum efficient scale. C) long-run average cost curve will reach a minimum at a level of output that leaves room for a large number of firms to enter the industry. D) long-run average cost curve will reach a minimum at a level of output that is a relatively large fraction of total industry sales.

Q: Economies of scale will create a barrier to entry in an oligopoly industry when A) a firm's minimum efficient scale occurs where long-run average total costs are constant. B) the typical firm's long-run average total cost curve reaches a minimum at a level of output that is a large fraction of total industry sales. C) the typical firm's long-run average total cost curve reaches a minimum at a level of output that is a small fraction of total industry sales. D) the industry's four-firm concentration ratio is less than 40 percent.

Q: Which of the following is not a barrier to entry? A) an inelastic demand curve B) economies of scale C) ownership of a key input D) a patent

Q: Which of the following is not a characteristic of oligopoly? A) the ability to influence price B) a small number of firms C) low barriers to entry D) interdependent firms

Q: As a measure of competition in an industry, concentration ratios have several flaws. One of these flaws is that concentration ratios A) assume that all industries have low barriers to entry. B) assume that a ratio less than 40 percent means an industry is perfectly competitive. C) assume there are only four firms in an industry. D) are calculated for the national market, even though competition in some industries is mainly local.

Q: A four-firm concentration ratio measures A) the extent to which industry sales are concentrated among the four largest firms in the industry. B) the price elasticity of demand among the four largest firms in an industry. C) the number of firms in an industry. D) the price elasticity of demand in an industry.

Q: The fraction of an industry's sales that are accounted for by the largest firms is called A) the four-firm competition ratio. B) the four-firm concentration ratio. C) the four-firm industry ratio. D) the four-firm oligopoly ratio.

Q: When large firms in oligopoly markets cut their prices A) rival firms will also cut their prices to avoid losing sales. B) rival firms will not change their prices because most of their customers have signed contracts that commit them to doing business with the same firms for the life of their contracts. C) we don't know for sure how rival firms will respond. D) rival firms will not cut their prices because they fear that the federal government will accuse them of collusion.

Q: We can draw demand curves for firms in perfectly competitive and monopolistically competitive industries, but not for oligopoly firms. The reason for this is A) there are no barriers to entry in perfectly competitive and monopolistically competitive industries. There are high barriers to entry in oligopoly industries. B) we can assume that the prices charged by perfectly competitive and monopolistically competitive firms have no impact on rival firms. For oligopoly this assumption is unrealistic. C) that perfectly competitive and monopolistically competitive firms are price takers. Oligopoly firms are price makers. D) perfectly competitive and monopolistically competitive firms sell standardized products. Oligopoly firms sell differentiated products.

Q: Oligopoly differs from perfect competition and monopolistic competition in that A) barriers to entry are lower in oligopoly industries than they are in perfectly competitive and monopolistically competitive industries. B) demand and marginal revenue curves are more useful for analyzing oligopoly than they are for analyzing perfect competition and monopolistic competition. C) because oligopoly firms often react when other firms in their industry change their prices, it is difficult to know what the oligopolist's demand curve looks like. D) the concentration ratios of oligopoly industries are lower than they are for perfectly competitive and monopolistically competitive firms.

Q: Which of the following is not part of an oligopolist's business strategy? A) deciding on how to manage relations with suppliers B) choosing what new technologies to adopt C) selecting which new markets to enter D) independently setting a product's price without consideration of its rivals' pricing policies

Q: What do Sony, Microsoft, and Nintendo have in common? A) Each achieved a dominant position in its industry because it owned a key input in the production of its product. B) The industry in which each firm competes is an oligopoly because of government-imposed barriers to entry. C) Each company was founded in the same state. D) The profitability of each firm depends on its interactions with other firms.

Q: Which of the following is not necessarily a consequence of occupational licensing laws? A) They restrict competition. B) Consumers pay higher prices for the services of licensed professions. C) They result in a higher quality of service. D) They ensure that licensed professionals meet some minimum qualifications.

Q: Patents, tariffs and quotas are all examples of A) government-imposed barriers. B) economic regulations that increase efficiency. C) entry barriers that improve a country's standard of living. D) entry barriers that protect consumers.

Q: The DeBeers Company of South Africa was able to block competition through A) economies of scale. B) ownership of an essential input. C) government-imposed barriers. D) differentiating its product.

Q: One reason why, in the last four decades, the number of new auto makers in the world has been very small compared to the past is that A) the automobile cannot be improved upon in any way by new producers. B) new auto makers cannot obtain necessary inputs to produce new cars. C) governments restrict who can produce automobiles. D) new producers cannot match the economies of scale of existing auto makers.

Q: A reason why there is more competition among restaurants than among large discount department stores is that restaurants A) have to cater to a variety of consumer tastes while department stores do not. B) unlike department stores, have to abide by government sanitation rules. C) unlike department stores, do not have significant economies of scale. D) have more elastic demand for their product compared to department stores.

Q: Economies of scale can lead to an oligopolistic market structure because A) if larger firms have lower costs, new small entrants will not be able to produce at the low costs achieved by the big established firms. B) if economies of scale are insignificant, only a few firms are able to produce at the low costs achieved by the big established firms. C) a few firms can force rivals to produce at low levels of output. D) a few firms can use high profits to keep out new entrants.

Q: Which of the following is important in determining the extent of competition in an industry? A) the minimum level of short run average total costs of production B) the minimum efficient scale of production relative to market demand C) whether or not the industry product is differentiated or standardized D) the level of market demand for the industry's product

Q: An example of a barrier to entry is A) product differentiation. B) high profits. C) superior technological knowledge. D) increasing marginal costs

Q: Oligopolies exist and do not attract new rivals because A) of competition. B) of barriers to entry. C) the firms keep profits and prices so low that no rivals are attracted. D) there can be no product differentiation.

Q: Interdependence of firms is most common in A) monopolistically competitive industries. B) monopolistic industries. C) monopolistically competitive and oligopolistic industries. D) oligopolistic industries.

Q: Which of the following is nota reason why government officials are willing to impose entry barriers? A) to raise revenue B) to encourage innovation which may improve the standard of living in the long run C) to increase economic efficiency D) to promote an equitable distribution of income

Q: Marginal revenue for an oligopolist is A) identical to the demand for the firm's product. B) difficult to determine because the firm's demand curve is typically unknown. C) downward sloping beneath the firm's demand curve. D) horizontal on a price-quantity diagram.

Q: An oligopolist's demand curve is A) identical to that of a perfect competitive firm. B) identical to that of a monopolistically competitive firm. C) vertical on a price quantity diagram. D) unknown because a response of firms to price changes by rivals is uncertain.

Q: In an oligopoly market A) the pricing decisions of all other firms have no effect on an individual firm. B) individual firms pay no attention to the behavior of other firms. C) advertising of one firm has no effect on all other firms. D) one firm's pricing decision affects all the other firms.

Q: Oligopolies are difficult to analyze because A) the firms are so large. B) demand and cost curves do not exist for these types of industries. C) how firms respond to a price change by a rival is uncertain. D) oligopolies are a recent development so economists have not had time to develop models.

Q: The "Discount Department Stores" industry is highly concentrated. What does this mean? A) There are many large stores such as Wal-Mart, Target, Kohl's, in this industry. B) A few large stores account for a significant portion of industry sales. C) There is cut-throat competition in this industry because there are no entry barriers. D) The sales volume in this industry is consistently high.

Q: Which of the following is not a shortcoming of the concentration ratio as a measure of the extent of competition in an industry? A) Concentration ratios do not include sales in the United States by foreign firms. B) Concentration ratios are calculated for the national market, even though the competition in some industries is mainly local. C) Concentration ratios assign weights to only the four largest firms in an industry. D) Concentration ratios do not address the fact that competition sometimes exists between firms in different industries.

Q: The value of the four-firm concentration ratio that many economists consider indicative of the existence of an oligopoly in a particular industry is A) anything greater than 10 percent. B) anything greater than 20 percent. C) anything greater than 30 percent. D) anything greater than 40 percent.

Q: If an industry is made up of five identical firms, the four-firm concentration ratio is A) 5%. B) 20%. C) 80%. D) 100%.

Q: A four-firm concentration ratio measures A) the fraction of an industry's sales accounted for by the four largest firms. B) the production of any four firms in an industry. C) how the four largest firms became so concentrated. D) the fraction of employment of the four largest firms in an industry.

Q: Producing a differentiated product occurs in which of the following industries? A) oligopoly, monopolistic competition and perfect competition B) monopolistic competition only C) oligopoly only D) monopolistic competition and oligopoly

Q: Producing a homogeneous product occurs in which of the following industries? A) oligopoly, monopolistic competition and perfect competition B) perfect competition only C) oligopoly and perfect competition D) monopolistic competition and perfect competition

Q: A characteristic found only in oligopolies is A) break even level of profits. B) interdependence of firms. C) independence of firms. D) products that are slightly different.

Q: All of the following are examples of oligopolistic markets except A) the broadcasting industry B) aircraft manufacture C) college bookstores D) seafood restaurant chains

Q: Article SummaryAccording to Edmunds.com, incentives for the purchase of automobiles rose to an average of $2,500 per vehicle in the United States in May 2013, or about 8 percent of market value. The incentives offered by the big 3 U.S. auto companies were higher than the average, with Chrysler at 10.3 percent of market value, General Motors at 10 percent, and Ford at 9 percent. Despite the increase in incentives, there was little change in sales volume for the first half of 2013.Source: Kyle Stock, "Lauderdale CVB ramps up LGBT summer marketing," Bloomberg Businessweek, June 11, 2013.Refer to the Article Summary. What happens to the profit a car company makes on each car sold if it offers incentives such as cash rebates to customers? What happens to the company's profit per car if it offers zero percent financing as an incentive? How might a car company decide which of these strategies to use?

Q: Which of the following is the best example of an oligopolistic industry? A) the beef market B) the pharmaceutical industry C) public education D) the beauty products industry

Q: The four-firm concentration ratio in the breakfast cereal industry is 78 percent. How does the five competitive forces model provide better insight into the degree of competition in the breakfast cereal industry than just observing the concentration ratio?

Q: An oligopolist differs from a perfect competitor in that A) there is cutthroat competition in perfect competition but little competition in oligopoly because firms have significant market power. B) firms in an oligopoly do not produce homogeneous products while firms in perfect competition do. C) the market demand curve for a perfectly competitive industry is perfectly elastic but it is downward-sloping in an oligopolistic industry. D) there are no entry barriers in perfect competition but there are entry barriers in oligopoly.

Q: Does the strength of each of the five competitive forces from Michael Porter's model remain constant over time? Briefly explain.

Q: An oligopoly firm is similar to a monopolistically competitive firm in that A) both firms face the prisoner's dilemma. B) both operate in a market in which there are entry barriers. C) both firms have market power. D) both firms are in industries characterized by an interdependent firm.

Q: In Michael Porter's five competitive forces model, what do the competitive forces determine?

Q: An oligopolistic industry is characterized by all of the following except A) existence of entry barriers. B) the possibility of reaping long run economic profits. C) firms pursuing aggressive business strategies, independent of rivals' strategies. D) production of standardized products.

Q: List the competitive forces in the five competitive forces model.

Q: Which of the following is not part of an oligopolist's business strategy? A) meeting worker health and safety standards required of all firms B) deciding the level of total output of a new product C) determining the amount of advertising a new product needs D) setting the product's price after considering what rivals will do

Q: According to Porter's Five Competitive Forces Model, similar products produced by different firms within the industry affects a firm's ability to raise prices far more than substitutable products produced outside the industry.

Q: A key part of Microsoft's business strategy in the video game console market has been A) to wait until competitors introduce new technology in their products before incorporating the technology in its products. B) to concentrate on selling its products through large discount retailers like Wal-Mart. C) the innovation of new products which initially have little to no competition. D) to dominate the market by offering low-end products and beating its competitors' prices.

Q: Competition in the form of advertising, better customer service, or longer warranties can also reduce profits by raising costs.

Q: In the 1930s and 1940s, the Technicolor company was able to leverage its bargaining power over the movie industry because Technicolor was the sole producer of cameras and films needed to produce color films.

Q: Competition from substitute goods is more of a threat when switching costs are high.

Q: A supplier of paper napkins to the fast food industry is unlikely to have significant bargaining power.

Q: Prices of PlayStation 4 game systems are similar at almost every large retailer and little price competition occurs among these retailers. An explanation for this is A) retailers are all price takers. B) retailers have lobbied state governments to allow them to collude legally to set the prices of certain products. C) pricing PlayStation 4 game systems is a repeated game. Over a long period of time a cooperative equilibrium has been reached where retailers charge high prices for these systems. D) retailers are in a prisoner's dilemma which causes them to all charge the same price for PlayStation 4 game systems.

Q: An example of a supplier that used its bargaining power to charge high prices to its customers is A) Wal-Mart, which required many of its suppliers to alter their distribution systems to accommodate Wal-Mart's need to control the flow of goods to its stores. B) the firms that supply paper napkins to McDonald's restaurants. C) the Technicolor Company, the sole producer of cameras and film that movie studios needed to produce color movies in the 1930s and 1940s. D) the publishers of the Encyclopedia Britannica.

Q: In recent years online bookseller Amazon.com has lowered its profits by offering some of its customers free shipping and building more warehouses to hold its inventories. Which of the following explains Amazon.com's actions? A) Amazon.com feared government regulation if its profits were too high. B) Amazon.com took these actions to deter entry into its market by new online booksellers. C) Amazon.com took these actions to compete more effectively with existing online booksellers. D) Amazon.com was forced to take these actions because of the bargaining power of its suppliers.

Q: For years economists believed that market structure explained the ability of some firms to earn economic profits. For example, firms in industries with little competition and high barriers to entry would earn higher profits than firms in competitive industries with low entry barriers. Which of the following has caused economists to question this explanation and seek other explanations for why firms are profitable? A) Studies have shown that, on average, firms in competitive industries earn higher profit rates than firms in industries with little competition. B) In recent years new technologies have increased the potential entry of new firms in industries with high entry barriers. C) Studies have shown that firms in industries that have little competition and high entry barriers are not very profitable. Economists conclude from this that some competition is necessary in order to force firms to lower their costs and develop products that satisfy new consumer demands. D) The market structure explanation fails to explain how firms in the same industry can have very different levels of profit.

Q: By the 21st century few people purchased printed encyclopedias. Which of the following competitive forces best explains this? A) competition from substitutes B) the bargaining power of buyers C) the bargaining power of suppliers D) the threat from potential entrants

Q: In 2013, the Educational Testing Service (ETS) charged $51 to take the Scholastic Aptitude Test (SAT) but $150 to take the Graduate Record Exam (GRE). One reason for this difference in price is A) more people took the SAT than the GRE in 2013. B) the GRE is a longer test with more questions. C) an average, those who take the GRE have higher incomes than those who take the SAT. D) the ETS faces competition in the market for the SAT but no competition for the GRE.

Q: A supplier of an input is unlikely to have bargaining power if A) the input supplied is specialized. B) many firms can supply the input. C) it is the sole supplier of the input. D) it has a patent on the input.

Q: Which of the following statements is generally true? A) Rivalry is less the larger the number of firms in an industry. B) The smaller the number of firms in an industry, the greater the rivalry. C) The larger the number of firms in an industry, the greater the rivalry. D) The degree of rivalry in an industry is largely independent of the number of firms.

Q: Assume that the four-firm concentration ratio in an industry is 85 percent. Which of the following statements uses one of the five competitive forces to argue that this industry may be more competitive than its concentration ratio suggests? A) The high concentration may be due to patents owned by the largest firms but competition will increase when patent rights expire. B) If high concentration is the result of large firms owning much of the available supply of a key input, the industry will become more competitive when new sources of the input are discovered by other firms. C) Even though concentration is high, large firms in the industry may act competitively by spending large sums on advertising. D) The threat of entry into this industry can cause firms in the industry to lower their prices and profits in order to deter entry.

Q: Which of the following is not one of the five competitive forces? A) the threat from potential entrants B) the bargaining power of buyers C) the firm's ability to differentiate its product D) the bargaining power of suppliers

Q: The five competitive forces model was developed by A) Michael Porter. B) John Nash. C) Michael Spence. D) Porter Smith.

Q: A large majority of the personal computers (PCs) in the United States use an operating system purchased from Microsoft. Microsoft's relationship with PC manufacturers is an example of which of Porter's competitive forces? A) the threat from new entrants B) the bargaining power of suppliers C) the bargaining power of buyers D) competition from substitute goods or services

Q: For years economists believed that market structure explained the ability of some firms to earn economic profits. Today, economists and business strategists put greater emphasis on A) the number of years a firm has been in business and the average price of the products sold by the firm. B) the number of countries in which a firm conducts business and the number of employees the firm has in each country. C) the characteristics of individual firms and the strategies their managements use to continue to earn economic profits. D) the size of a firm relative to the industry average and the number of firms in the domestic industry.

Q: The bargaining power of buyers increases if A) there are many large buyers. B) the input in question has few substitutes. C) the input in question is not a critical component of production. D) there are wide variations in the quality of inputs from supplier to supplier.

Q: The bargaining power of suppliers increases if A) the cost of switching suppliers is relatively low. B) there are only a few competitors to the supplier. C) the input in question is not a critical component of production. D) the input supplied is relatively standardized.

Q: In Porter's Five Competitive Forces model, "competition from substitute goods or services" refers to A) substitute products that come from outside the industry. B) substitute products that come from domestic competitors in the same industry. C) substitute products that come from foreign competitors in the same industry. D) competition from producers of substitutes who outsource their production.

Q: According to Porter's Five Competitive Forces Model, which kinds of products are most likely to limit the ability of firms in an industry to raise prices? A) differentiated products that target a small subsegment of the industry B) substitutable products produced by firms in different industries C) similar products produced by similar industries in low-cost countries D) complementary products produced by different firms in the same industry

Q: The larger the number of firms in an industry A) the easier it is to implicitly collude to fix prices. B) the more intense the rivalry among firms. C) the greater the need for a price enforcement mechanism. D) the larger the potential number of market segments.

Q: According to an article the Wall Street Journal, "The big car makers are pushing a wide array of new technology into production, responding to relentless competitive pressure, rising energy prices and consumer demand for better safety. Source: Joseph B. White, "Ford, GM Eye Shift in Buying Habits," Wall Street Journal, May 22, 2006. Which of Porter's competitive forces does this statement allude to? A) the threat of competition from new entrants B) competition from foreign auto manufacturers C) competition from existing firms within the industry D) competition from substitute products from outside the industry

Q: As word processing on personal computers expanded, sales of typewriters began to disappear. Which of Porter's competitive forces does this event demonstrate? A) the threat of competition from new entrants B) bargaining power of suppliers C) bargaining power of buyers D) competition from substitute goods or services

Q: Which of the following is most likely to exert the bargaining power of a buyer? A) Barnes and Noble purchases books from publishers for sale in its online stores. B) Wal-Mart, The world's largest discount store, seeks vendors to supply products made exclusively for its stores. C) Ground beef producers seek to purchase cattle from ranchers. D) Cowgirl Creamery, a small cheese producer, seeks a dairy farm for its organic milk supplies.

Q: Which of the following is not among Porter's competitive forces? A) power of buyers B) power of suppliers C) threat of new entrants D) changing consumer tastes

Q: Figure 14-9 Refer to Figure 14-9. Uniguest, Inc. is a company that provides PCs with internet access and touch-sensitive screens to hotels. Suppose the Hard Rock Hotel and Casino in Las Vegas informs Uniguest that it is considering installing these systems in its hotel rooms. The Hard Rock expects to be able to charge higher prices for these rooms if it installs Uniguest's systems in its rooms. The two companies begin bargaining over what price the Hard Rock will pay Uniguest for its systems, and the decision tree shown above illustrates this bargaining game. Note that the profit figures listed in the decision tree are additional profits for the Hard Rock and total profits for Uniguest. a. Suppose the Hard Rock offers Uniguest $1,200 per system. Will Uniguest accept or reject this offer? Why? b. Suppose the Hard Rock offers Uniguest $800 per system. Will Uniguest accept or reject this offer? Why? c. Suppose Uniguest attempts to obtain a favorable outcome from the bargaining by telling the Hard Rock it will reject an $800-per-system offer. If the Hard Rock does not believe the threat is credible, what will it do? Why? What will Uniguest do? Why? d. Is there a sub-game perfect equilibrium in this situation? Explain.

Q: Figure 14-8 Refer to Figure 14-8 Use the decision tree to determine whether Microsoft should deter Toshiba from entering the market for electronic book readers (e-readers). Assume that each firm must earn a 20% return on investment to break even. Explain Microsoft's decision process.