LESSON 3 MIDTERMS

Question 1

refers to the business environment within which the firm operates.

Answer 1

Market Structure

Question 2

Market structure determines whether a firm has?

Answer 2

market power

Question 3

is the ability to price a product above marginal cost and earn a positive
economic profit.

Answer 3

Market Power

Question 4

A firm in an industry consisting of a large number of equivalently-sized rivals producing a
homogeneous product has market power. T OR F

Answer 4

FALSE (NO MARKET POWER)

Question 5

may also be categorized by the number and size
distribution of buyers.

Answer 5

Markets

Question 6

The extreme case of this is a market that consists of a single buyer,
which is referred to as a

Answer 6

monopsony.

Question 7

A market comprising a few large buyers is referred to as an

Answer 7

oligopsony

Question 8

the degree to which the product of
a firm differs from those of its rivals.

Answer 8

Product Differentiation

Question 9

when products are perfect substitutes, buyers will purchase from
the firm that charges the lowest price. T O F

Answer 9

TRUE

Question 10

The ease with which investment flows into and out of an industry can affect a
firm’s market power.

Answer 10

Entry and Exit Conditions

Question 11

identified five “forces” that affect an industry’s
ability to sustain profitability and attract new investment.

Answer 11

Michael Porter (1980)

Question 12

Three of Porter’s five forces come from internal sources. T OR F

Answer 12

FALSE (EXTERNAL)

Question 13

Although a firm may be able to earn positive economic profits in the
short term, there is no guarantee that it will continue to do so in the
long run given the competitive pressures of the market place. T OR F

Answer 13

TRUE

Question 14

GIVE The Five Forces Michael Porter (1980)

Answer 14

Threat of Entry
Threat of Substitutes
Competitive Rivalry
Bargaining Power of Buyers
Bargaining Power of Suppliers

Question 15

Above-normal returns attract new firms into an industry, which
increase total output, depress prices and squeeze profits.

Answer 15

Threat of Entry

Question 16

The existence of close substitutes erodes profitability, which
reduces the amount of new investment flowing into the
industry.

Answer 16

Threat of Substitutes

Question 17

is the main driver in Porter’s five forces
model.the intensity of competitive rivalry can have
a profound effect on the ability of firms to sustain long-run
profits. Competitive tensions, which tend to be greatest in
industries that are not highly concentrated, exert down- ward
pressure on profits.

Answer 17

Competitive Rivalry

Question 18

Buyers that are able to extract discounts and other more
favorable terms reduce a firm’s ability to extract and sustain
profits.

Answer 18

Bargaining Power of Buyers

Question 19

Profits also tend to be lower in industries where suppliers of
raw materials, components, labor services, and so on have
the power to negotiate more favorable terms

Answer 19

Bargaining Power of Suppliers

Question 20

is an industry characterized by a very large number
of small firms (in terms of output) producing a homogeneous output.

Answer 20

Perfect Competition

Question 21

perfect competition is a comparatively common
market structure since there are very few industries in which firms produce
identically the same product. T OR F

Answer 21

FALSE (RARE)

Question 22

Perfectly competitive firms have
market power. T OR F

Answer 22

FALSE (NO MARKET POWER)

Question 23

can exercise a degree of discretion of
the price charged for their products.

Answer 23

Imperfect Competition

Question 24

TYPES OF Imperfect Competition

Answer 24

monopolistic competition
oligopoly

Question 25

is also characterized by large number of firms
in which entry and exit is unimpeded. The difference between this and perfect competition is that each firm attempts to carve out its own market niche by distinguishing its product on the basis of design, workmanship, customer ser-vice, and so on

Answer 25

Monopolistic Competition

Question 26

is an industry structure that consists of a few firms producing a standardized or
a differentiated product.

Answer 26

Oligopoly

Question 27

occurs when a
firm attempts to boost sales by providing consumers with information about the physical
attributes of its product.

Answer 27

Informative advertising

Question 28

attempts to boost sales by creating an image that may have little
or nothing to do with the product’s physical characteristics, such as when a group of
elegantly dressed socialites are shown drinking a particular brand of scotch.

Answer 28

persuasive advertising

Question 29

is an industry that consists of a single firm that
produces a unique product with no close substitutes.

Answer 29

monopoly

Question 30

Unlike perfectly competitive firms, which are described as
price makers, monopolies are referred to as price takers. T OR F

Answer 30

FALSE

Question 31

refers to the proportion of total industry
sales that is accounted for by the largest firms. It can be an important source of market
power and profits.

Answer 31

Industrial concentration

Question 32

A useful indicator of market power that measures the demand sensitivity of a change in the price of the output of an entire
industry relative to that for an individual firm.

Answer 32

Rothschild Index

Question 33

Suppose that the price elasticity of demand for the output of an
individual firm is −4 while the price elasticity of demand for the output
of the entire industry is −2. Calculate the Rothschild index for this
industry.

Answer 33

Rothschild Index for this industry is R = 0.5.

Question 34

Industrial
concentration in perfectly competitive industries is high because
total output is diffused across a very large number of small firms. T Or F

Answer 34

False (low)