Deck 11: Performance and Strategy in Competitive Markets

Question 1

Society's right to a clean environment is asserted through:

A) fines.
B) tradeable emission permits.
C) subsidy policy.
D) price and profit regulation.

Answer 1

A

Question 2

A government policy that addresses market failures caused by positive externalities is:

A) patent grants.
B) subsidies for pollution reduction.
C) tax policy.
D) the establishment of operating controls.

Answer 2

A

Question 3

Consumer sovereignty reflects:

A) buyer power.
B) failure by market structure.
C) failure by incentive.
D) externalities.

Answer 3

A

Question 4

Competition in the cable television service industry is furnished by:

A) imports.
B) potential entrants.
C) large numbers of providers in local markets.
D) government regulation.

Question 5

Producer surplus is the:

A) amount paid to sellers above and beyond the value received by consumers.
B) amount paid to sellers above and beyond the required minimum.
C) amount paid to sellers.
D) cost of production.

Question 6

The welfare loss triangle depicts:

A) deadweight losses suffered by consumers.
B) deadweight losses suffered by producers.
C) deadweight losses suffered by consumers and producers.
D) lost profits.

Question 7

Externalities are:

A) differences between social costs and social benefits.
B) differences between social benefits and private benefits.
C) social costs.
D) social benefits.

Question 8

From an economic perspective, imposition of a per unit tax is only advantageous if:

A) the social benefits derived from added tax revenues are sufficient to overcome the social costs at a risk-adjusted rate of return.
B) the social benefits derived from added tax revenues are sufficient to overcome the private costs at a risk-adjusted rate of return.
C) the benefits derived from added tax revenues are sufficient to overcome the economic costs tied to the deadweight loss in social welfare.
D) positive tax revenues are generated.

Question 9

In competitive markets:

A) high-wage workers tend to be those that are most productive.
B) companies earn excess profits by better serving customer needs.
C) fairness is sacrificed in the interest of efficiency.
D) firms dictate the quantity and quality of goods and services provided.

Question 10

Undue market power is indicated when buyer influence results in:

A) higher than competitive prices.
B) less than competitive output.
C) less than competitive costs.
D) excess profits.

Question 11

A per unit tax will cause output prices to increase least when:

A) marginal cost is constant.
B) marginal cost is falling.
C) average cost is falling.
D) marginal cost is rising.

Question 12

Profits stemming from market power reflect:

A) high prices.
B) superior efficiency.
C) exceptional capability.
D) rapid industry growth.

Question 13

No externalities exist when:

A) private costs exceed social costs.
B) private costs and benefits equal social costs and benefits.
C) private benefits are less than social benefits.
D) private benefits exceed social benefits.

Question 14

Failure by market structure is caused by:

A) positive spillover effects.
B) positive externalities.
C) negative externalities.
D) none of these.

Question 15

In competitive market equilibrium, social welfare is measured by the:

A) difference of net benefits derived by consumers and producers.
B) sum of net benefits derived by consumers and producers.
C) benefits derived by consumers.
D) benefits derived by producers.

Question 16

Utility price and profit regulation is designed to address:

A) failure by incentive.
B) failure by market structure.
C) positive externalities.
D) negative externalities.

Question 17

Who pays the economic cost of a tax is answered at the point of tax:

A) burden.
B) assessment.
C) collection.
D) incidence.

Question 18

Failure by market structure can occur when:

A) joint products are produced in variable proportions.
B) joint products are produced in fixed proportions.
C) externalities exist.
D) few buyers or sellers are present.

Question 19

The burden of a per unit tax on a product will fall primarily on producers when:

A) the tax is collected from customers.
B) demand is highly elastic with respect to price.
C) demand is highly inelastic with respect to price.
D) the tax is collected from producers.

Question 20

A per unit tax on pollution:

A) results in deadweight loss.
B) raises private benefits.
C) lowers social benefits.
D) lowers private costs.

Question 21

Per Unit Tax and Elastic Demand. Assume that the supply of tickets to an outdoor music festival in Thousand Oaks, California, is a function of price such that:
where Q is the number of tickets (in thousands) and P is the ticket price. Also assume that the demand for such concert tickets is perfectly elastic at a price of $30. This means that the ticket demand curve can be drawn as a horizontal line that passes through $30 on the Y-axis.

Question 22

Franchise Tax and Inelastic Demand. Assume the supply of sewer and water services in the City of Portland can be described as:
where Q is thousands of homes served per month with sewer and water service, and P is the price per month. Also assume that sewer and water service demand is perfectly inelastic at a quantity of 25(000). This means that the sewer and water demand curve can be drawn as a vertical line that passes through 25(000) on the X-axis.

Question 23

Percentage Tariff and Elastic Demand. Assume that the supply of imported personal computers (PCs) from China is given by the expression:
where Q is the number of PCs sold (in thousands) and P is the PC price. Given the availability of PCs on the Internet, assume that the demand for PCs is perfectly elastic at a price of $800. This means that the PC demand curve can be drawn as a horizontal line that passes through $800 on the Y-axis.

Question 24

Percentage Tax and Inelastic Demand. Assume the supply of cable TV services in the City of San Marcos, Texas, can be described as:
where Q is thousands of homes served per month with cable TV service, and P is the price per month. Also assume that cable TV service demand is perfectly inelastic at a quantity of 25(000).

Question 25

Competitive Market Equilibrium. Assume demand and supply conditions in the competitive market for unskilled labor are as follows:
where Q is millions of hours of unskilled labor and P is the wage rate per hour.

Question 26

Above-normal returns earned in the time interval that exists between when a favorable influence on industry demand or cost conditions first transpires and the time when competitor entry or growth finally develops are called:

A) disequilibrium profits.
B) a normal rate of return on investment.
C) disequilibrium losses.
D) economic rents.

Question 27

Sales Tax and Elastic Demand. Assume that the supply of a best-selling book at local book stores throughout the United States is a function price such that:
where Q is the number of books sold (in thousands) and P is the book price. Given the availability of this book on amazon.com for $20, demand is perfectly elastic at a price of $20.

Question 28

Franchise Tax and Inelastic Demand. Assume the supply of sewer and water services in the City of Greenville, North Carolina, can be described as:
where Q is thousands of homes served per month with sewer and water service, and P is the price per month. Also assume that sewer and water service demand is perfectly inelastic at a quantity of 50(000).

Question 29

Competitive Market Surplus. Suppose demand and supply conditions in the competitive market for unskilled labor are as follows:
where Q is millions of hours of unskilled labor and P is the wage rate per hour.

Question 30

A price floor is a costly and commonly used mechanism for:

A) restraining excess supply.
B) restraining excess demand.
C) counteracting the effects of falling productivity.
D) counteracting the effects of rising productivity.

Question 31

The costs of pollution taxes are shared by consumers and producers when:

A) supply is perfectly elastic.
B) supply is perfectly inelastic.
C) demand is perfectly inelastic.
D) none of these.

Question 32

Competitive Market Equilibrium. Suppose demand and supply conditions in the competitive market for unskilled labor are as follows:
where Q is millions of hours of unskilled labor and P is the wage rate per hour.

Question 33

Economic rents are profits due to:

A) luck.
B) uniquely productive inputs
C) monopoly power.
D) regulation.

Question 34

Compulsory Benefit Costs. Columbia Federal Savings & Loan, Inc. offers low-cost home mortgage refinancing services on the Internet. Each refinancing brings the company $250 in fees, and these fees are stable given the competitive nature of Internet marketing. Columbia's relies upon independent contractors (sales associates) who work on a commission-only basis. Weekly total cost (TC) and marginal cost (MC) relations are:

where Q is thousands of refinancing applications processed.
Suppose the US Department of Labor recently ruled that Columbia's sales associates must be considered employees entitled to benefits under the Employee Retirement Income Security Act (ERISA). As a result, Columbia's marginal cost of doing business will rise by $25 per unit. Columbia's fixed expenses, which include a required return on investment, will be unaffected.

Question 35

Competitive Market Surplus. Assume demand and supply conditions in the competitive market for unskilled labor are as follows:
where Q is millions of hours of unskilled labor and P is the wage rate per hour.

Question 36

Regulation Costs. Kingston Components, Inc., produces electronic components for cable TV systems. Given vigorous import competition, prices are stable at $4,500 per unit in this dynamic and very competitive market. Kingston's annual total cost (TC) and marginal cost (MC) relations are:

where Q is output.
Suppose the Occupational Health and Safety Administration (OSHA) has recently ruled that the company must install expensive new shielding equipment to guard against worker injuries. This will increase the marginal cost of manufacturing by $100 per unit. Kingston's fixed expenses, which include a required return on investment, will be unaffected.

Question 37

Recycling Fee and Elastic Demand. Assume that the weekly supply of 16-ounce bottles of soda at convenience stores in the Twin Cities of Minneapolis and St. Paul is a function of price such that:
where Q is the number of sodas sold in convenience stores (in thousands) and P is the soda price. Assume demand is perfectly elastic at a price of $1.

Question 38

Franchise Tax and Inelastic Demand. Assume the supply of broadband services in the City of Williamsburg can be described as:
where Q is thousands of homes served per month with broadband service, and P is the price per month. Also assume that broadband service demand is perfectly inelastic at a quantity of 30(000). This means that the broadband demand curve can be drawn as a vertical line that passes through 30(000) on the X-axis.

Question 39

A price ceiling is a costly and seldom used mechanism for:

A) restraining excess supply.
B) restraining excess demand.
C) counteracting the effects of falling productivity.
D) counteracting the effects of rising productivity.

Question 40

Social Welfare Concepts. Indicate whether each of the following statements is true or false, and explain why.
A. Producer surplus tends to fall as the supply curve becomes more elastic.
B. Consumer surplus tends to rise as demand becomes more elastic.
C. The market demand curve indicates the minimum price buyers are willing to pay at each level of production.
D. The market supply curve indicates the minimum price required by sellers as a group to bring forth production.
E. Consumer surplus is the amount that consumers are willing to pay for a given good or service above and beyond the amount actually paid.

Question 41

Competitive Strategy. Bob Ice owns and operates Bob's Music Center, Ltd., a small firm that offers music lessons in Huntsville, Alabama. Given the large number of competitors and the lack of entry barriers, it is reasonable to assume that the market for music lessons is perfectly competitive and that the average $60 per hour price equals marginal revenue, P = MR = $60. Assume that Bob's annual operating expenses are typical of several such firms and individuals operating in the local market, and can be expressed by the following total and marginal cost functions:
where TC is total cost per year, MC is marginal cost, and Q is the number lessons given. Total costs include a normal profit and allow for Bob's employment opportunity costs.

Question 42

Compulsory Benefit Costs. The Telemarketing Louisianan Company generates leads for a major credit card company using over-the-phone solicitations. Each lead generated brings TLC $10 in fees, and these fees are stable given the competitive nature of the telemarketing business. TLC's relies upon independent contractors (sales associates) who work on a commission-only basis. Weekly total cost (TC) and marginal cost (MC) relations are:

where Q is thousands of refinancing applications processed.
Suppose the US Department of Labor recently ruled that TLC's sales associates must be considered employees entitled to benefits under the Employee Retirement Income Security Act (ERISA). As a result, TLC's marginal cost of doing business will rise by $1 per unit. TLC's fixed expenses, which include a required return on investment, will be unaffected.

Question 43

Costs of Regulation. The Appalachian Coal Company sells coal to electric utilities in the southeast. Unfortunately, Appalachian's coal has high particulate content and, therefore, the company is adversely affected by state and local regulations governing smoke and dust emissions at its customer's electricity-generating plants. Appalachian's total cost and marginal cost relations are:
where Q is tons of coal produced per month and TC includes a normal rate of return on investment.

Question 44

Outsourcing Tariffs. The Seattle Software Company develops, manufactures, licenses, and supports a wide range of software products. Its software products include operating systems for servers, personal computers (PC), and intelligent devices; and server applications for distributed computing environments. To cut costs, the company has begun to outsource to various Asian markets a significant amount of code checking and software verification. The global code checking and software verification service market is fiercely price competitive with prices stable at $25 per hour for services provided by trained and experienced software engineers. Relevant total cost (TC) and marginal cost (MC) relations for a typical foreign supplier of code checking and software verification services (Q) are:

Question 45

Regulation Costs. Finlandia, Inc., manufacturers molded plastic products used to improve industrial productivity. Suppose the Occupation Health and Safety Administration (OSHA) has required the firm to enhance the durability of its popular safety helmet at a cost of $10 per unit. Prior to these costs, Finlandia's annual manufacturing costs of this item are:
where Q is units produced per year and TC includes a normal rate of return on investment.

Question 46

Regulation Costs. Ottawa Construction, Ltd., is a medium-sized housing contractor located in eastern Ontario. The company is adversely affected by new local regulations requiring it to pay $10,000 to cover sewer and water hook-up charges for each new apartment Ottawa builds. Before such expenses, Ottawa's construction costs are described as:
where Q is the number of apartment units built per year and TC includes a normal rate of return on investment.

Question 47

Price Floors and Consumer Surplus. The U. S. wheat crop averages about 2 billion bushels per year, and is about 10 percent of the 20 billion-bushel foreign wheat crop. Typically, the market has a relatively good estimate of the wheat crop from the United States and Canada, but wheat crops from the Southern Hemisphere are much harder to predict. Argentina's wheat acreage varies dramatically from one year to another, for example, and Australia has hard-to-predict rainfall in key wheat production areas. To illustrate some of the cost in social welfare from agricultural price supports, assume the following market supply and demand conditions for wheat:
where Q is output in bushels of wheat (in millions), and P is the market price per bushel.

Question 48

Competitive Strategy. Carry Underwood runs Tax Preparation Services, Inc., a small firm that offers timely tax preparation services in Oklahoma City. Given the large number of competitors, the fact that tax preparers rely heavily upon standard tax-preparation software, and the lack of entry barriers, it is reasonable to assume that the tax form preparation market is perfectly competitive and that the average $150 price equals marginal revenue, P = MR = $150. Assume that TPS's annual operating expenses are typical of several such firms operating in the local market, and can be expressed by the following total and marginal cost functions:
where TC is total cost per year, MC is marginal cost, and Q is the number of clients served. Total costs include a normal profit and allow for Underwood's employment opportunity costs.

Question 49

Price Floors and Producer Surplus. The U. S. wheat crop averages about 2 billion bushels per year, and is about 10 percent of the 20 billion-bushel foreign wheat crop. Typically, the market has a relatively good estimate of the wheat crop from the United States and Canada, but wheat crops from the Southern Hemisphere are much harder to predict. Argentina's wheat acreage varies dramatically from one year to another, for example, and Australia has hard-to-predict rainfall in key wheat production areas. To illustrate some of the cost in social welfare from agricultural price supports, assume the following market supply and demand conditions for wheat:
where Q is output in bushels of wheat (in millions), and P is the market price per bushel.

Question 50

Tariffs. The Manchester Shoe Corporation is an importer and distributor of foreign-made footwear that is sold at popular prices in leading discount retailers. The U.S. Commerce Department recently informed the company that it will be subject to a new 25% tariff on the import cost of rubberized footwear originating from China. The company is concerned that the tariff will slow its sales growth, given the highly competitive nature of the footwear market where wholesale prices are stable at $5 per unit. Relevant total cost (TC) and marginal cost (MC) relations for this product are: