Managerial Economics (Final Examination-Monday)

Question 1

The network of operations that account for the creation of a product.

Answer 1

Value chain

Question 2

Expansion in which a business’s new activity is in the same stage of its value chain or a similar value chain as its prior activities.

Answer 2

Horizontal integration

Question 3

Expansion in which a business’s new activity is in the same value chain as its prior activities but at a different stage.

Answer 3

Vertical integration

Question 4

Expansion in which a business’s new activity is part of a different value chain.

Answer 4

Conglomerate merger

Question 5

Vertical expansion of business operations into an earlier stage of the value chain.

Answer 5

Upstream integration

Question 6

Vertical expansion of business operations into a later stage of the value chain.

Answer 6

Downstream integration

Question 7

A process through which a single vertically integrated firm can realize higher profit than two independent firms operating at different stages of the value chain and making exchanges.

Answer 7

Double marginalization

Question 8

The tendency of one party to a potential agreement to assume pessimistic circumstances and hold to conservative agreement terms when it is aware that it has limited information about the other party.

Answer 8

Adverse selection

Question 9

A theory that explains when a firm should expand, not expand, break apart, or sell off business units based on the costs involved in making exchanges.

Answer 9

Transaction cost economics

Question 10

The established value assigned to an item exchanged between a selling division and an acquiring division of the same corporation.

Answer 10

Transfer pricing

Question 11

An incentive to induce an employee to be productive and retain his or her job that is based on a value somewhat above the employee’s marginal revenue product.

Answer 11

Efficiency wage

Question 12

The situation that results when an employer is not able to monitor all of an employee’s actions and thus has insufficient information about whether an employee takes actions that are not necessarily what the employer would want.

Answer 12

Principal agent-problem

Question 13

The suggestion that measures of performance that reflect individual employee effort be included in employee contracts.

Answer 13

Informativeness Principle

Question 14

Observable actions that a potential employee takes that help distinguish him or her as a high-quality worker.

Answer 14

Signaling

Question 15

The idea that paying a CEO well beyond what is justifiable on the basis of the individual’s contributions creates an incentive for other executives on the team to put in extra effort in order to have a chance at similar rewards in the future.

Answer 15

Tournament theory

Question 16

An idealized market in which there are many buyers and sellers who are price takers, sellers are free to either enter or exit the market, the good or service being sold is the same for all sellers, and all buyers and sellers have perfect information.

Answer 16

Perfect competition

Question 17

A buyer who presumes his or her purchase decision has no impact on the price charged for the good; a seller who presumes its production decisions have no impact on the price charged for the good by other sellers.

Answer 17

Price taker

Question 18

The characteristic that every seller sells the same good, and the buyer does not care which seller he or she uses if all sellers charge the same price.

Answer 18

Product homogeneity

Question 19

Producers understand the production capabilities known to other producers and have immediate access to any resources used by other producers; both buyers and sellers know all the prices being charged by other sellers.

Answer 19

Perfect information

Question 20

A segment of a firm’s marginal cost curve that is above the shutdown price level and for which marginal cost is increasing up to the point of maximum production.

Answer 20

Firm supply curve

Question 21

A curve that represents the relationship between total quantity provided in a market and the market price; a graphical illustration of the willingness of firms to increase production in response to improved profitability.

Answer 21

Market supply curve

Question 22

The quantity and price at which there is concurrence between sellers and buyers; the point on a graph where the market demand curve and market supply curve intersect.

Answer 22

Market equilibrium

Question 23

The price adjustment process that moves a market to equilibrium when the market price is above or below the equilibrium price.

Answer 23

Price adjustment mechanism (Invisible Hand)

Question 24

The examination of the impact of a change on the equilibrium point (implied by the structure of economic models).

Answer 24

Comparative statics

Question 25

The difference between what consumers would pay to buy a unit of a good or service and a lower equilibrium price that they actually pay; the area under the demand curve down to a horizontal line corresponding to the market equilibrium price.

Answer 25

Consumer surplus

Question 26

The difference between the market price and sellers' marginal cost or the combined economic profit of all sellers in the short run; the area above the supply curve up to a horizontal line corresponding to the market equilibrium price.

Answer 26

Producer surplus

Question 27

The sum of consumer surplus and producer surplus, which is maximized when a market is in equilibrium and is less than its maximum value when there is deadweight loss.

Answer 27

Total surplus

Question 28

Former surplus that no longer goes to either consumers or producers.

Answer 28

Deadweight loss

Question 29

A model of a market that is similar to perfect competition but in which the good sold may have slight variations from seller to seller.

Answer 29

Monopolistic competition

Question 30

An idealized market that is similar to perfect competition but in which there are a modest number of sellers, each of which represents a sizeable portion of overall sales.

Answer 30

Contestable market

Question 31

A response to a highly competitive market in which a firm adopts an aggressive program to keep its costs below the costs of other sellers.

Answer 31

Cost leadership strategy

Question 32

A response to a highly competitive market in which a firm adopts an aggressive program to keep its products distinguishable from the products of other firms.

Answer 32

Product differentiation strategy

Question 33

The strongest form of seller market power; a market structure in which there is only one seller with market power.

Answer 33

Monopoly

Question 34

The one seller that possesses market power.

Answer 34

Monopolist

Question 35

A market in which there are multiple sellers, at least some of which provide a significant portion of sales and recognize that their decisions on output volume have an effect on market price.

Answer 35

Oligopoly

Question 36

An arrangement in which sellers coordinate their activities so well that they behave in effect like divisions of one enterprise, rather than as competing businesses that make independent decisions on quantity and price.

Answer 36

Cartel

Question 37

The process through which firms agree to operate at the same production volume and price; it is illegal in many countries.

Answer 37

Collusion

Question 38

An approach that assumes all firms can anticipate the prices that their competitors will charge and that each firm can decide what production level and price leads to the highest profit it can achieve.

Answer 38

Bertrand model / Price competition

Question 39

An approach that assumes all firms can determine the upcoming production levels or operating capacities of their competitors and can make adjustments to price to use the committed capacity effectively.

Answer 39

Cournot model / Quantity competition

Question 40

In an oligopoly market, a firm that makes a decision on either its price or its capacity commitment before the other firms, anticipating how the other firms in the market will react.

Answer 40

Leader firm

Question 41

In an oligopoly market, firms that react to the price or capacity decision of a leader firm.

Answer 41

Follower firms

Question 42

The percentage of all sales that are purchased from a particular firm.

Answer 42

Market share

Question 43

The sum of the market shares of the firms having the highest market shares in a market; if the value for one firm is above 90, that firm may function as a monopoly.

Answer 43

Concentration ratio

Question 44

The sum of the squared individual market shares of all the firms in a market; a value of less than 1000 indicates that a market should be reasonably competitive, whereas a value over 8000 indicates that the market has a firm that may function like a monopoly.

Answer 44

Herfindahl-Hirschman Index (HHI)

Question 45

Applied mathematical tools that are used to describe strategic behavior in oligopolies.

Answer 45

Game theory

Question 46

A strategy in which a firm sets its price below the average cost of a competitor in order to drive out existing competition.

Answer 46

Predatory pricing

Question 47

A strategy for warding off competition in which an existing firm sets a low price that is just enough for it to make a small profit but that will cause a new entrant to lose money.

Answer 47

Limit pricing

Question 48

A pricing strategy in which a firm changes prices frequently in order to extract higher prices from customers and make it more difficult for other firms to compete on price.

Answer 48

Dynamic pricing

Question 49

A strategy in which a firm sets the price very high at first and drops the price progressively over time in order to attract most customers at a price close to the maximum they would be willing to pay.

Answer 49

Price skimming

Question 50

A means of increasing the likelihood a firm's product or service is among those actually considered by consumers.

Answer 50

Shelf space

Question 51

A means of competing in which a firm invests in a very high production volume in order to convince other firms that a lower price tactic will not succeed.

Answer 51

Capacity precommitment

Question 52

A strategy in which a firm uses advertising to make an ongoing presence in a market desired by customers so as to distinguish themselves from short-term sellers.

Answer 52

Reputation strategy

Question 53

A promise to repair or replace a product that is only of value to the buyer if the seller is likely to be available when the buyer makes a claim on the promise.

Answer 53

Warranty

Question 54

Firms take advantage of natural production economies of scope by selling complementary products together at a lower cost.

Answer 54

Bundling

Question 55

A situation in which products increase in value when the adoption rate of the product increases.

Answer 55

Network externality

Question 56

In a market with a single buyer, the buyer has the power to push the price down to a minimum.

Answer 56

Monopsony

Question 57

Cost per unit decreases as volume increases.

Answer 57

Economies of scale

Question 58

Cost per unit of different goods can be reduced by producing multiple products using the same production resources.

Answer 58

Economies of scope

Question 59

The market consists of many buyers.

Answer 59

Assumptions of the Perfect Competition Model

Question 60

The market consists of many sellers.

Answer 60

Assumptions of the Perfect Competition Model

Question 61

Firms that sell in the market are free to either enter or exit the market.

Answer 61

Assumptions of the Perfect Competition Model

Question 62

The good sold by all sellers in the market is assumed to be homogeneous.

Answer 62

Assumptions of the Perfect Competition Model

Question 63

Buyers and sellers in the market are assumed to have perfect information.

Answer 63

Assumptions of the Perfect Competition Model

Question 64

Assumptions of the Perfect Competition Model

Answer 64

* The market consists of many buyers. * The market consists of many sellers. * Firms that sell in the market are free to either enter or exit the market. * The good sold by all sellers in the market is assumed to be homogeneous. * Buyers and sellers in the market are assumed to have perfect information.

Question 65

Operation of a Perfectly Competitive Market in the Short Run

Answer 65

* All exchanges in a perfectly competitive market will quickly converge to a single price. * Since goods are of identical quality and buyers have perfect information, they will buy from the lowest-priced seller. * This leads all sellers that remain in the market to charge the same price.

Question 66

All exchanges in a perfectly competitive market will quickly converge to a single price.

Answer 66

Operation of a Perfectly Competitive Market in the Short Run

Question 67

Since goods are of identical quality and buyers have perfect information, they will buy from the lowest-priced seller.

Answer 67

Operation of a Perfectly Competitive Market in the Short Run

Question 68

This leads all sellers that remain in the market to charge the same price.

Answer 68

Operation of a Perfectly Competitive Market in the Short Run

Question 69

All firms will need to reach ____ to survive.

Answer 69

minimum efficient scale

Question 70

Perfect Competition in the Long Run

Answer 70

* In the long run, all firms must operate cost-efficiently or exit the market. * With identical production processes, economic profits will shrink to zero as firms undercut each other. * All firms will need to reach minimum efficient scale to survive.

Question 71

In the long run, all firms must operate cost-efficiently or exit the market.

Answer 71

Perfect Competition in the Long Run

Question 72

With identical production processes, economic profits will shrink to zero as firms undercut each other.

Answer 72

Perfect Competition in the Long Run

Question 73

All firms will need to reach minimum efficient scale to survive.

Answer 73

Perfect Competition in the Long Run

Question 74

Shows how much buyers would purchase at different prices.

Answer 74

Demand curve

Question 75

Adjust the quantity they supply based on price changes.

Answer 75

Producers

Question 76

The ____ corresponds to the portion of the ____above the ____, where ____ is rising.

Answer 76

firm’s supply curve, marginal cost curve, shutdown point, marginal cost

Question 77

Shows the highest price buyers will pay for a given quantity.

Answer 77

Market demand curve

Question 78

Shows the lowest price sellers will accept for a given quantity.

Answer 78

Market supply curve

Question 79

The point where supply equals demand — the price and quantity where sellers and buyers agree.

Answer 79

Market equilibrium

Question 80

Persistent changes in conditions can shift either the demand or supply curve.

Answer 80

Shifts in Supply and Demand Curves

Question 81

These shifts lead to new market equilibria, reflecting changes in buyer behavior or seller operations.

Answer 81

Shifts in Supply and Demand Curves

Question 82

Shifts in Supply and Demand Curves

Answer 82

* Persistent changes in conditions can shift either the demand or supply curve. * These shifts lead to new market equilibria, reflecting changes in buyer behavior or seller operations.

Question 83

Occurs where the marginal cost of producing one more unit equals the highest price buyers are willing to pay.

Answer 83

Equilibrium

Question 84

This point maximizes ____, meaning both consumers and producers benefit the most.

Answer 84

Collective surplus

Question 85

Uses the same assumptions as perfect competition except the good may be heterogeneous.

Answer 85

Monopolistic Competition

Question 86

Product variation makes sense only if ____ and willing to pay more for their preferences.

Answer 86

Consumers are responsive

Question 87

Product variation makes sense only if consumers are responsive and willing to pay more for their preferences.

Answer 87

Monopolistic Competition

Question 88

Contestable Market Model

Answer 88

* Modifies the assumption of many indistinguishable sellers. * Allows a modest number of sellers, each holding a sizable market share. * Focuses on the idea that even limited competition can discipline pricing if entry and exit are easy.

Question 89

Modifies the assumption of many indistinguishable sellers.

Answer 89

Contestable Market Model

Question 90

Firm Strategies in Highly Competitive Markets

Answer 90

* From a customer and social surplus viewpoint, competitive markets are ideal. * From a firm’s perspective, survival depends on tight cost control and market awareness. * Returns on capital are modest, and only efficient firms thrive in the long term.

Question 91

Allows a modest number of sellers, each holding a sizable market share.

Answer 91

Contestable Market Model

Question 92

Focuses on the idea that even limited competition can discipline pricing if entry and exit are easy.

Answer 92

Contestable Market Model

Question 93

From a customer and social surplus viewpoint, ____ are ideal.

Answer 93

Competitive markets

Question 94

From a firm’s perspective, survival depends on ____and ____.

Answer 94

tight cost control, market awareness

Question 95

Returns on capital are ____, and only ____ thrive in the long term.

Answer 95

modest, efficient firms

Question 96

A ____ exists when there is only one seller in the market.

Answer 96

monopoly

Question 97

The ____ can set prices higher and produce less than in competitive markets.

Answer 97

monopolist

Question 98

This leads to higher profits for the firm but lower consumer surplus.

Answer 98

Monopoly

Question 99

An ____ is a market structure with a few sellers, each holding a significant market share.

Answer 99

oligopoly

Question 100

Firms are interdependent and must consider the reactions of other firms when making decisions.

Answer 100

Oligopoly

Question 101

Firms are ____ and must consider the reactions of other firms when making decisions.

Answer 101

interdependent

Question 102

A ____is a group of firms that ____to limit production and raise prices, acting like a monopoly.

Answer 102

cartel, collude

Question 103

Are illegal in many countries due to their negative impact on consumer welfare.

Answer 103

Cartels

Question 104

Firms in competitive markets adopt pricing strategies to gain market share and increase profits: (3)

Answer 104

o Deep discounting o Limit pricing o Yield management (dynamic pricing)

Question 105

o Deep discounting o Limit pricing o Yield management (dynamic pricing)

Answer 105

Pricing strategies

Question 106

Firms also rely on nonprice methods to maintain or grow market power: (6)

Answer 106

o Advertising o Excess capacity o Reputation building o Warranties o Product bundling o Network effects

Question 107

o Advertising o Excess capacity o Reputation building o Warranties o Product bundling o Network effects

Answer 107

Non-pricing strategies

Question 108

Arises when there are few buyers in the market.

Answer 108

Buyer power

Question 109

These buyers can push prices down due to their influence.

Answer 109

Buyer power

Question 110

A ____ is an extreme form of buyer power where only one buyer exists.

Answer 110

monopsony