eco105 9-10

Question 1

Marginal Revenue

Answer 1

Additional revenue from more sales or from selling one more unit

Question 2

The simple rule for smart business decisions

Answer 2

choose when marginal revenues are greater than marginal costs

Question 3

Fixed costs ____ affect smart choices

Answer 3

don’t

Question 4

Marginal revenue equals

Answer 4

the price of output, and both are constant as the quantity produced increases

Question 5

Marginal revenue depends on

Answer 5

market structure → how competitive your industry is and whether your business is a price taker or price maker

Question 6

Marginal revenue can also be defined in two ways

Answer 6

Change in total revenue
Revenue from selling one more unit

Question 7

One price rule

Answer 7

Most products and services have one price, not a different price for each customer because competitive economic forces tend to equalize prices

Question 8

In perfect competition, what effects does producing more have on the market

Answer 8

no effect on the market because as a small producer, the increase in supply does not affect market supply or market price

Question 9

What creates pricing power

Answer 9

Barriers to entry, brand loyalty or advertising

Question 10

For price makers, the marginal revenue curve is

Answer 10

different from the demand curve because marginal revenue is less than price

Question 11

For price takers, the marginal revenue curve is

Answer 11

the demand curve

Question 12

Diminishing returns

Answer 12

as output increases, decreasing productivity increases marginal costs

Question 13

When increases in output lead to lower (diminishing) productivity

Answer 13

marginal costs increase

Question 14

Most businesses that are not operating near capacity have

Answer 14

constant marginal costs as they increase output, looks like a horizontal line

Question 15

Recipe for Profits

Answer 15

estimate marginal revenues and marginal costs and then set the highest price that allows you to sell the highest quantity for which marginal revenue is greater than marginal cost

Question 16

Fixed costs

Answer 16

costs that do not change with the quantity of output produced

Question 17

Price discrimination

Answer 17

charging customers different prices for the same product or service, increases a business’s total profits

Question 18

Price discrimination breaks the one-price rule, and is possible only when a business can:

Answer 18

Prevent low-price buyers from reselling to high-price buyers and
Control resentment among high-price buyers

Question 19

How do businesses control resentment among the high-price buyers?

Answer 19

Discount: businesses describe the higher price as the “regular” price, and the lower price as the “discounted” price

Question 20

Discriminate by Elasticity

Answer 20

set a lower price for the customers who have elastic demands, and a higher price for the customers with inelastic demands

Question 21

Recipe for Price Discrimination

Answer 21

1. Prevent resale of the product or service
2. Charge a lower price to the elastic demand group (lower willingness to pay)
3. Charge a higher price to the inelastic demand group (higher willingness to pay)
4. Control resentment among higher price buyers

Question 22

Why is perfect competition efficient

Answer 22

the price in the market is equal to the minimum of the long-run average cost curve.

In other words, goods are being produced and sold at the lowest possible average cost

Question 23

Price-making power is inefficient

Answer 23

1. Must lower price to sell more
2. marginal revenue is less than price due to one-price rule
3. monopolist is producing less and charging a higher price, inefficient for the economy as a whole
4. Deadweight loss present, signaling an inefficient market outcome
5. Price-making power allows businesses to restrict output and raise prices to maximize their profits, but creates deadweight loss

Question 24

Natural monopoly

Answer 24

economies of scale allow only a single seller to achieve lowest average total cost

Question 25

ECONOMIES OF SCALE

Answer 25

when more units of a good or service can be produced on a larger scale with (on average) fewer input costs

As a business’s scale of production increases, average total costs decrease with increasing quantities

Question 26

Market Failure

Answer 26

when markets produce outcomes that are inefficient or inequitable

Question 27

Crown corporations

Answer 27

publicly owned businesses in Canada

Created by the federal/provincial governments, which own 100% of the corporation’s assets

Question 28

Regulated Private Monopoly

Answer 28

allow a single private business, but have the government regulate it, like banks

Question 29

Rate of return legislation

Answer 29

sets a price allowing the regulated monopoly to just cover average total costs, including normal profits (principle)

Question 30

Rate of return legislation

Answer 30

sets a price allowing the regulated monopoly to just cover average total costs, including normal profits (principle)

Question 31

Game theory

Answer 31

a mathematical tool for understanding how players make decisions, taking into account what they expect rivals to do

Question 32

Prisoner’s dilemma

Answer 32

a game with two players who must each make a strategic choice, where results depend on the other player’s choice

Question 33

Nash equilibrium

Answer 33

outcome of a game in which each player makes her own best choice given the choice of the other

Question 34

Smart choices – game theory

Answer 34

confess if you don’t trust the other, or deny if you can trust the other

Question 35

Collusion

Answer 35

conspiracy to cheat or deceive others

Question 36

Cartel

Answer 36

association of suppliers formed to maintain high prices and restrict competition

Question 37

OPEC

Answer 37

Organization of Petroleum Exporting Countries, best-known international cartel, acted like a single monopoly

Question 38

The Competition Act

Answer 38

maintain and encourage competition in Canada in order to promote the efficiency and adaptability of the Canadian economy, anti-combine law

Question 39

Criminal offenses

Answer 39

include price fixing, bid rigging, and false or misleading advertisement → penalties include prison sentences and fines

Question 40

Civil offenses

Answer 40

less serious, include mergers abusing a business’s dominant market position, and other actions that lessen competition → penalties are fines and legal prohibitions of mergers and anti-competitive business practices

Question 41

Caveat emptor

Answer 41

let the buyer beware

Question 42

3 major forms of government regulation in Canada

Answer 42

1. Federal and provincial government departments regulate certain industries or roles
2. Governments appoint independent agencies and boards (commissions) to regulate another type of industry
3. Governments give professional associations the authority to regulate themselves

Question 43

Public-interest view

Answer 43

government regulation eliminates waste, achieves efficiency, and promotes the public interest

Question 44

Capture view

Answer 44

government regulation benefits the regulated businesses, not the public interest

Question 45

Government Failure

Answer 45

when regulations fail to serve public interest