Question 1

The manufacturers of information products typically

Accepted Answer

Manufacturers of information products generally have to invest heavily in fixed costs such as research and development, equipment, software, and licensing fees. Once these fixed costs are covered, the marginal cost of producing additional units is relatively low.

Question 2

The ATC curve for a firm that produces an information product

Accepted Answer

The ATC (Average Total Cost) curve for a firm that produces an information product typically slopes downward because the average variable cost (AVC) tends to be constant due to the nature of information goods (low marginal cost after the initial product is developed). The average fixed cost (AFC) decreases as output increases because the fixed costs are spread over more units, leading to a downward-sloping ATC curve when ATC is calculated as the sum of AVC and AFC.

Question 3

Explain why the amount that firms spend on advertising depends on the characteristics of their products.

Accepted Answer

The answer of Explain why the amount that firms spend...

Question 4

A good that entails relatively high fixed costs associated with the use of knowledge and other information-intensive inputs as key factors of production is

Accepted Answer

An information product is a good that entails relatively high fixed costs associated with the use of knowledge and other information-intensive inputs as key factors of production. Examples include textbooks, research papers, and software programs. These goods require significant investment in research and development or specialized expertise, making their production costly.

Question 5

If a monopolistically competitive firm selling an information product engages in marginal cost pricing, it will

Accepted Answer

If a monopolistically competitive firm engages in marginal cost pricing, it sets its price equal to its marginal cost in order to maximize profits. However, since the firm has market power but faces competition, its demand curve is downward sloping and its marginal revenue curve lies below it. Therefore, marginal cost pricing will only generate enough revenue to cover variable costs, not fixed costs. As a result, the firm will fail to earn sufficient revenues to cover its fixed costs and may eventually exit the market.

Question 6

Why would Sunkist incur substantial costs to advertise and establish a brand name when the quality of its oranges can easily be evaluated by consumers?

Accepted Answer

The answer of Why would Sunkist incur substantial costs to...

Question 7

Which of the following statements is generally TRUE about information products?

Accepted Answer

Information products typically have high fixed costs due to the initial development and creation expenses, but low marginal costs because reproducing and distributing digital copies is inexpensive.

Question 8

Out of all advertising spending, the largest share goes to

Accepted Answer

The answer of Out of all advertising spending, the largest...

Question 9

Advertising intended to induce a consumer to discover a previously unknown taste or preference is

Accepted Answer

The answer of Advertising intended to induce a consumer to...

Question 10

There is no incentive for additional producers of an information product to enter the industry when the price charged for these products by each firm already in the industry is equal to

Accepted Answer

The answer of There is no incentive for additional producers...

Question 11

Products such as office supplies are examples of

Accepted Answer

Office supplies are generally search goods, which are easy for consumers to evaluate based on objective characteristics such as price, brand, and quality. Customers can easily compare different brands and types of office supplies to choose the one that best meets their needs. Experience goods, on the other hand, require assessment through usage or trial, while selective goods involve personal taste and preference. Simple goods are those with minimal features or attributes.

Question 12

The production of information products is characterized by

Accepted Answer

The production of information products typically involves high fixed costs (such as the cost of developing software or creating content) but low marginal costs (such as the cost of duplicating digital files). This is because once the product is created, it can be copied and distributed at minimal additional cost. Therefore, option B is the best choice, as it accurately describes this characteristic of information product production.

Question 13

Explain how advertising can act as a signal.

Accepted Answer

The answer of Explain how advertising can act as a...

Question 14

A product that must be actually consumed before the quality of the product can be determined is a(n)

Accepted Answer

An experience good is a product that must be actually consumed before the quality of the product can be determined. This is because it often involves subjective evaluation, such as taste or personal preference. A search good, on the other hand, can be evaluated before purchase without consumption. A consumable good and a consumption good are both terms that refer to a product being used up during consumption, but do not necessarily imply that the quality can only be determined after consumption.

Question 15

When a pharmaceutical company advertises that its allergy medication is clinically proven to alleviate hay fever symptoms, the pharmaceutical company is engaging in

Accepted Answer

The answer of When a pharmaceutical company advertises that its...

Question 16

Explain the difference between informational advertising and persuasive advertising. Give an example of a product that would be the subject of each type of advertising and explain why that type of advertising fits the product.

Accepted Answer

The answer of Explain the difference between informational advertising and...

Question 17

If the producer of an information product engages in marginal cost pricing, it earns

Accepted Answer

The answer of If the producer of an information product...

Question 18

In the long run, the price of information products in monopolistically competitive markets will be equal to

Accepted Answer

In the long run, firms in monopolistically competitive markets will produce at the point where price equals average total cost (ATC) to maximize their profits. Therefore, the price of information products in such markets will be equal to ATC, which includes both variable and fixed costs. Options A, B, and C are not relevant for pricing decisions in the long run.

Question 19

In a long-run equilibrium in a monopolistically competitive industry that produces information products, revenues are equal to the ________ costs of developing, producing, and selling the product.

Accepted Answer

In the long-run equilibrium of a monopolistically competitive industry that produces information products, firms will have adjusted their output levels and prices so that they are earning normal profits. This means that revenues (which come from sales of the product) will be equal to the total costs of developing, producing, and selling the product. Therefore, the correct choice is (A) total. Fixed costs (B) and variable costs (C) are not relevant in this context, as all costs are taken into account in the total cost calculation. Marginal costs (D) are not relevant either, as the long-run equilibrium is concerned with the overall cost structure and not the cost of producing one additional unit of output.

Question 20

Which of the following conditions best explain the short-run economies of operation associated with production of an information product?

Accepted Answer

The production of an information product is likely to have a high fixed cost component (such as software development), leading to a downward sloping AFC curve. Meanwhile, variable costs such as wages for labor or server maintenance may not change significantly as output changes, leading to a relatively constant AVC curve. Therefore, the short-run economies of operation are best explained by option B, where AVC is constant and AFC slopes downward, leading to a downward-sloping ATC curve. Option A does not accurately reflect the commonly observed shapes of AFC and AVC curves, while option C and D do not reflect how changes in AFC and AVC would affect ATC in the short run.

Quiz 25: Monopolistic Competition