Economic Concepts - Part 2 Flashcards
Which of the following is not a characteristic of an oligopoly market?
A. Firms face a downward-sloping demand curve. B. Barriers to enter the market are significant. C. Firms tend to compete on non-price factors. D. There are many sellers.
D. There are many sellers.
The presence of few sellers in the market is one of the basic characteristics of the oligopoly form of market structure.
Definition of Oligopoly
Oligopoly is a market structure in which a small number of firms has the large majority of market share. An oligopoly is similar to a monopoly, except that rather than one firm, two or more firms dominate the market.
Which of the following pricing policies results in establishment of a price to external customers higher than the competitive price for a given industry? A. Collusive pricing. B. Dual pricing. C. Predatory pricing. D. Transfer pricing.
A. Collusive pricing.
Collusive pricing occurs when the few firms in an oligopolistic market (or industry) conspire to set the price at which a good or service will be provided. Such collusion typically is carried out to establish a price higher than would exist under normal competition. Overt collusive pricing is illegal in the U.S.A.
A group of firms that conspires to make price and output decisions for a product or service is called A. an oligopoly. B. a cartel. C. price leadership. D. monopoly.
A. an oligopoly.
A cartel is a group of firms that conspire to make price and output decisions for a product or service; it is overt collusion and illegal in the U.S. A prime example is OPEC, which meets regularly to set output quotas for oil for member oil-exporting countries.
An air route between two cities is served by only three U.S. airlines. Every week, the largest of the three airlines posts its prices for future flights on the internet. The other two airlines immediately match the posted prices for future bookings. This practice illustrates which of the following? A. Overt collusion. B. Tacit collusion. C. Price-war. D. An illegal cartel.
B. Tacit collusion.
The circumstances described illustrate price leadership, which is a form of tacit collusion. Tacit collusion is not illegal in the U.S.
Which of the following market structures is least likely to be found in any industry in the U.S.? A. Perfect competition. B. Monopolistic competition. C. Oligopoly. D. Monopoly.
A. Perfect competition.
An industry or market that meets all of the characteristics of perfect competition is virtually nonexistent in the U.S. (or in other developed market systems).
While some industries or markets possess some of the characteristics of perfect competition, none possesses all of the essential characteristics of perfect competition.
For example, perfect competition assumes the product or service is perfectly homogeneous, such that there are no differences in size, quality, style, or other features and, therefore, no reason to advertise in order to compete.
Which one of the following would not cause an increase in demand for a commodity?
A. An increase in the number of consumers.
B. An increase in the price of a substitute commodity.
C. An increase in consumers’ preference for the commodity.
D. A reduction in the price of the commodity.
D. A reduction in the price of the commodity.
A reduction in price will not cause an increase in demand for a commodity, but rather will change (increase) the quantity demanded. An increase in demand causes a shift of the demand curve (up and to the right). A change in price causes movement along a specific demand curve.
When a demand schedule is plotted on a graph, the resulting demand curve will be A. positively sloped. B. negatively sloped. C. completely vertical. D. completely horizontal.
B. negatively sloped.
The demand schedule of an individual or of the market shows that more units of a commodity are demanded as the price decreases. Therefore, the demand curve would be negatively sloped; the quantity demanded would be lower at higher prices and would increase as price decreases. The quantity demanded varies inversely with price along a given demand curve:
Thus, a demand curve has a negative slope; quantity is inversely related to price.
If a change in market variables causes a supply curve to shift inward, which one of the following will occur?
A. The price at which the same quantity will be provided after the shift will be less than the price before the shift. B. At a given price, a greater quantity will be provided after the shift than the quantity provided before the shift. C. The supply curve after the shift will intercept the Y axis at a lower point than before the shift. D. In order for the same quantity to be provided after the shift as was provided before the shift, price will have to increase.
D. In order for the same quantity to be provided after the shift as was provided before the shift, price will have to increase.
If the supply curve shifts inward (to the left), the same quantity will be provided after the shift as was provided before the shift, only at a higher price.
Which one of the following factors would not cause an increase in the supply curve of a commodity?
A. Improvements in related technology.
B. A decrease in the cost of production inputs.
C. An increase in the number of manufacturers of the commodity.
D. An increase in the price of the commodity.
D. An increase in the price of the commodity.
A change in price changes the quantity supplied, which is a movement along a supply curve, not a shift in the supply curve. An increase in the price of a commodity would increase the quantity supplied, but would not shift the supply curve.
What is the effect on the quantity of a commodity supplied relative to demand as a result of a government-mandated price ceiling or price floor?
Price Ceiling Price Floor Quantity Shortage Quantity Shortage Quantity Shortage Quantity Surplus Quantity Surplus Quantity Shortage Quantity Surplus Quantity Surplus
Price Ceiling Price Floor
Quantity Shortage Quantity Surplus
A price ceiling is a government-mandated maximum price that can be charged for a good or service. Rent controls, for example, establish the maximum price that can be charged for rent.
Price ceilings result in a lower price than would otherwise occur in a free market and cause the quantity of a commodity supplied to be less than would be demanded at a free market price.
Thus, a shortage exists as the difference between quantity supplied at the price ceiling and the greater quantity demanded at that price. A price floor is a government-mandated minimum price for a good or service. The minimum wage law, for example, establishes the minimum wage that can be paid to employees.
Price floors result in a higher price than would otherwise occur in a free market and cause the quantity of a commodity supplied to be greater than would be demanded at a free market price.
Thus, a surplus exists as the difference between quantity supplied at the price floor and the lesser quantity demanded at that price.
An increase in the price of Commodity Y from $50 to $60 resulted in an increase in the quantity supplied, from 80 units to 88 units. Which one of the following is the price elasticity of supply? A. + 2. B. + 0.5. C. - 2. D. - 0.5.
B. + 0.5.
Elasticity of supply is measured by the formula: % change in quantity supplied divided by % change in price. For the facts given, the calculation would be .10/.20, or + .5. Since the elasticity factor is less than 1, a change in price results in a proportionately smaller change in quantity supplied.
The elasticity of demand is measured by
A. The change in quantity divided by the change in price.
B. The change in price divided by the change in quantity.
C. The percentage change in quantity divided by the percentage change in price.
D. The percentage change in price divided by the percentage change in quantity.
C. The percentage change in quantity divided by the percentage change in price.
The elasticity of demand measures the percentage change in the quantity demanded of a commodity as a result of a given percentage change in the price of the commodity. The formula for a commodity is:
Elasticity = Percentage change in quantity demanded
Percentage change in price
The percentage change in quantity demanded is computed by dividing the change in quantity by the original quantity (or the new quantity or the average of the original and new quantities).
The percentage change in price is computed by dividing the change in price by the original price (or the new price or the average of the original and new prices).
The absolute value of the percentage change in quantity is then divided by the absolute value of the percentage change in price. The result is expressed as a positive number. The resulting demand elasticity can be:
Less than 1 = inelastic: quantity percentage change is less than the percentage change in price. Equal to 1 = unitary: quantity percentage change is the same as the percentage change in price. Greater than 1 = elastic: quantity percentage change is more than the percentage change in price.
A company has a policy of frequently cutting prices to increase sales. Product demand is significantly elastic. What impact would this have on the company’s situation?
A. Quantity increases proportionally more than the price declines.
B. Quantity increases proportionally less than the price declines.
C. Price increases proportionally more than the quantity declines.
D. Price increases proportionally less than the quantity declines.
A. Quantity increases proportionally more than the price declines.
Elasticity of demand measures the percentage change in the quantity of a commodity demanded as a result of a given percentage change in the price of a commodity. When demand is elastic (an elasticity coefficient > 1), the percentage change in quantity is greater than the percentage change in price. Therefore, for a given price decline, there will be a greater than proportional increase in quantity.
If demand for a product is elastic, what would be the effect of a price increase and a price decrease on total revenue (TR) generated? Price Increase Price Decrease TR Increase TR Increase TR Increase TR Decrease TR Decrease TR Increase TR Decrease TR Decrease
TR Decrease TR Increase
When demand is elastic (with a calculated elasticity coefficient greater than 1), the percentage change in demand is greater than the percentage change in price.
Therefore, an increase in price would result in a greater than proportionate decrease in quantity, which would cause a decrease in total revenue. A decrease in price would result in a greater than proportionate increase in quantity, which would cause an increase in total revenue.
Which of the following characteristics would indicate that an item sold would have a high price elasticity of demand?
A. The item has many similar substitutes.
B. The cost of the item is low compared to the total budget of the purchasers.
C. The item is considered a necessity.
D. Changes in the price of the item are regulated by governmental agency.
A. The item has many similar substitutes.
Price elasticity of demand measures the percentage change in the quantity of a commodity demanded as a result of a given percentage change in the price of the commodity. A high price elasticity of demand means that the percentage change in demand would be greater than the percentage change in price. For example, an increase in price would result in a greater than proportionate decrease in demand. Such a result would likely indicate that there are many similar substitutes for the commodity for which the price was increased; buyers would have many other options when the price of the commodity of concern is increased.
A 4% increase in the market price of Commodity X resulted in an 8% increase in the quantity of Commodity X supplied. Which one of the following statements is correct? A. Supply is inelastic. B. Supply is unitary. C. Supply is elastic. D. Supply is price neutral.
C. Supply is elastic.
Since the percentage change in supply (8%) was greater than the percentage change in price (4%), supply is elastic.
Allen buys only beer and pizza. When the price of beer is $2.00 per bottle and the price of pizza is $10.00, Allen maximizes his total utility (satisfaction) by buying 5 beers and 4 pizzas. If the marginal utility of the 5th beer is 100 utils, which one of the following would be the marginal utility of the 4th pizza? A. 40 utils. B. 100 utils. C. 200 utils. D. 500 utils.
D. 500 utils.
When total utility is maximized, the marginal utility (MU) of the last dollar spent on each and every item acquired must be the same. Thus, total utility is maximized when: MU of beers/price of beers = MU of pizza/price of pizza. Using the values given: 100 utils/$2.00 = MU of pizza/$10.00. The equation for beers = 100/$2 = 50 utils per dollar. The MU of pizza also must be 50 utils per dollar. Therefore, 50 = MU of pizza/$10 = 500 utils.
Which one of the following cost curves does not have a general "U-shape"? A. Average variable cost (AVC) curve. B. Average fixed cost (AFC) curve. C. Average total cost (ATC) curve. D. Marginal cost (MC) curve.
B. Average fixed cost (AFC) curve.
Since, by definition, fixed costs do not change with changes in output over the relevant range of production, the more units produced, the lower the average fixed cost. Simply put, more units are being produced for a fixed cost. Therefore, the average fixed cost decreases continuously over the relevant range of production. It is not “U-shaped.”
According to the law of diminishing returns, which one of the following is correct?
A. The marginal product (output) falls as more units of a variable input are added to fixed inputs.
B. The marginal product (output) increases as more units of a variable input are added to fixed inputs.
C. The total product (output) falls as more units of a variable input are added to fixed inputs.
D. Marginal utility falls as more units of goods are consumed.
A. The marginal product (output) falls as more units of a variable input are added to fixed inputs.
According to the law of diminishing returns, as more units of a variable input are added to fixed inputs, a point is reached at which the continued addition of variable inputs results in decreasing output per unit of variable input. Generally, this diminishing return results when the increasing variable inputs overwhelm the fixed inputs, which results in inefficiencies.
Which of the following is a characteristic of monopolistic competition?
A. There are a very few sellers.
B. The product or service is only slightly differentiated.
C. There are no close substitutes for the product or service.
D. Firms cannot easily enter or leave the market.
B. The product or service is only slightly differentiated.
In monopolistic competition, firms sell a product or service that is only slightly differentiated; the product or service is similar to, but not identical with, other products or services.
In addition, monopolistic competition has the following characteristics:
A large number of sellers. Close substitutes for the product or service. Ease of entry into or exit from the market.
In which of the following market structures are firms most likely to avoid price competition for fear of creating a "price war"? A. Perfect competition. B. Monopolistic competition. C. Oligopoly. D. Monopoly.
C. Oligopoly.
In an oligopoly, there are few sellers and the actions of each firm are known by and affect the other firms in the industry. Therefore, if one firm lowers its price in an effort to increase market share, other firms are likely to lower their prices.
This could create a “chain reaction,” whereby the few firms are continuously lowering their prices, constituting a “price war.”
Which of the following characteristics is common to the four basic market structures–perfect competition, monopolistic competition, oligopoly, and pure monopoly?
A. Firms can make profits in the long run.
B. Firms face a negatively sloped demand curve.
C. Firms have control over the price charged.
D. Firms will seek to produce at the quantity where marginal revenue (MR) equals marginal cost (MC).
D. Firms will seek to produce at the quantity where marginal revenue (MR) equals marginal cost (MC).
Under each of the four basic market structures firms, will seek to produce where marginal revenue (MR) equals marginal cost (MC). At the quantity of output where marginal revenue equals marginal cost, a firm will maximize profits or minimize losses in the short run, and in the long run, for firms in oligopoly and pure monopoly.
For production under any of the market structures, if MR > MC, any additional output will increase profit or reduce losses, and if MC > MR, any additional output will decrease profit or increase losses.
Which of the following is not a characteristic of perfect competition?
A. A large number of independent buyers and sellers.
B. All firms sell a homogeneous product or service.
C. Each selling firm is too small to separately affect the price of the commodity.
D. Firms cannot easily enter or leave the market.
D. Firms cannot easily enter or leave the market.
In a perfectly competitive market, firms can easily enter or leave the market. In addition, a perfectly competitive market has the following characteristics:
A large number of independent buyers and sellers, each of whom is too small to separately affect the price of a commodity. All firms sell a homogeneous product or service. Resources are completely mobile. Buyers and sellers have perfect information. Government does not set prices.
