Question 1

Monopolistic competition is best defined as

Accepted Answer

Monopolistic competition is a market structure that has many buyers and sellers, but the products are differentiated on some basis, which means that each supplier has some degree of market power. Customers are willing to pay a little more for the unique feature that appeals to them, which is a characteristic of this market structure. Monopolistic competition is often considered to be a mixture of perfect competition and monopoly, but is closer to a competitive situation. Therefore, all of the given options accurately describe monopolistic competition.

Question 2

Fill in the correct responses for the blanks with letters:

Accepted Answer

The answer of  Fill in the correct responses for...

Question 3

The following information pertains to three different products being sold by Modular Company:  Which products have an elastic demand curve?

Accepted Answer

An elastic demand curve means that a small change in price leads to a significant change in demand. To determine the elasticity of demand, we look at how sensitive customers are to changes in price. If a product has many substitutes and is not considered essential, then the demand for that product is often elastic. Product B is a luxury item that has many substitutes, so it is likely to have an elastic demand curve. Products A and C are essential items that have fewer substitutes, so their demand is likely to be less elastic.

Question 4

Figure 18-1 The Lancashire Corporation manufactures bottled water with an average manufacturing cost of $2 per case (a case contains 24 bottles). Bayview sold 1,000,000 cases last year to the following types of customers:
 The drugstore chains have special handling costs of $0.20 a case and increased administrative assistance costing $45,000 per year.
The gas station chains require special marketing promotions that cost $50,000. Sales commissions of 10% are paid.
The supermarket chains order electronically through EDI which costs $25,000 annually. Bayview is responsible for shipping costs, which totaled $0.50 a case and special labels costing $0.02 per bottle
Local pharmacies have special handling costs of $0.10 per case and sales commissions are paid to agents costing $0.25 per case. Bad debt expense averages 10% of sales.
Refer to Figure 18-1. What is the profit per case for drugstore chains?

Accepted Answer

The profit per case for drugstore chains can be calculated as follows: 
Selling Price = $4.00 (given in Figure 18-1)
Handling Cost = $0.20
Administrative Assistance = $45,000/1,000,000 cases = $0.045 a case
Profit = Selling Price - Manufacturing Cost - Handling Cost - Administrative Assistance = $4.00 - $2.00 - $0.20 - $0.045 = $1.755 per bottle or $2.68 per case.
Therefore, the profit per case for drugstore chains is $2.68.

The best choice(s) cannot be determined from this question as there is no specific scenario or criteria given to make a decision.

Question 5

Which of the following is NOT an example of a market structure?

Accepted Answer

"Barrier market" is not a recognized market structure. The other options, oligopoly, monopoly, and perfectly competitive, are all examples of different types of market structures.

Question 6

Which of the following markets is characterized by the following: only a few firms in the industry, a fairly unique product, difficult entry into the industry, and spending for differentiation of the product?

Accepted Answer

An oligopoly market is characterized by a small number of firms in the industry, a fairly unique product, high barriers to entry, and firms spending on differentiation to maintain their market power. In a monopolistic competition market, there are more firms, relatively low barriers to entry, and less differentiation. A monopoly market has only one firm with no direct competition. A perfectly competitive market has many small firms with identical products, low barriers to entry, and no spending on differentiation.

Question 7

Johanson Company had the following information:  What is the markup based on cost of goods sold?

Accepted Answer

The answer of Johanson Company had the following information: ...

Question 8

Scottish Company manufactures a variety of toys and games. John Chisholm, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2014 when 30,000 were projected. Sales for 2015 look no better. At $100 per game, it is not a hot seller. Direct costs of the board game are $56 variable cost and $100,000 fixed. John is considering several options. Option One: Cut the price to $70 and perhaps sell 15,000 units. Option Two: Cut the price to $60, reduce material costs by $10, and cut advertising by $60,000. Anticipated volume for this option is 10,000 units. Option Three: Cut the price to $80 and include a $10 mail-in rebate offer. It is anticipated that 15,000 units could be sold and only 30 percent of the rebate coupons would be redeemed. What is the profit (loss) from Option Two?

Accepted Answer

To calculate the profit (loss) for Option Two, we need to determine the total revenue and total costs.

Total Revenue = 10,000 units x $60 per unit = $600,000

Total Variable Costs = 10,000 units x $46 per unit ($56 direct cost - $10 material cost reduction) = $460,000

Total Fixed Costs = $100,000 - $60,000 (advertising reduction) = $40,000

Total Costs = Total Variable Costs + Total Fixed Costs = $460,000 + $40,000 = $500,000

Profit (Loss) = Total Revenue - Total Costs = $600,000 - $500,000 = $100,000

Therefore, the profit from Option Two is $100,000.

The best choice for the company would be Option One. By cutting the price to $70, the company can sell more units and still make a profit. Option Three may also be a feasible choice, as the mail-in rebate offer may attract more customers and still generate a profit. However, Option Two results in a smaller profit compared to Option One and may not be the best choice for the company.

Question 9

The following information pertains to three different products being sold by Modular Company:  Which products have an inelastic demand curve?

Accepted Answer

A product with an inelastic demand curve means that the change in price does not significantly affect the demand for the product. Looking at the given information, we can see that Product A has a unique feature and is highly specialized, which may indicate that the demand for the product is inelastic. Similarly, Product C has a high level of necessity, which means that customers may still purchase the product despite a price increase. Therefore, both Product A and Product C have an inelastic demand curve.

Question 10

Which of the following correctly describes the slope of the demand and supply curves?

Accepted Answer

The answer of Which of the following correctly describes the...

Question 11

Which type of expenses does a monopoly usually incur that are different from the other types of market structures?

Accepted Answer

A monopoly usually incurs legal and lobbying expenditures to maintain their market power and prevent competitors from entering the market. Due to their dominant position in the market, they may also face anti-trust lawsuits or government regulation, requiring them to spend money on legal fees and lobbying to influence policymaking. This is a unique expense that other types of market structures may not face to the same extent.

Question 12

Figure 18-1 The Lancashire Corporation manufactures bottled water with an average manufacturing cost of $2 per case (a case contains 24 bottles). Bayview sold 1,000,000 cases last year to the following types of customers:
 The drugstore chains have special handling costs of $0.20 a case and increased administrative assistance costing $45,000 per year.
The gas station chains require special marketing promotions that cost $50,000. Sales commissions of 10% are paid.
The supermarket chains order electronically through EDI which costs $25,000 annually. Bayview is responsible for shipping costs, which totaled $0.50 a case and special labels costing $0.02 per bottle
Local pharmacies have special handling costs of $0.10 per case and sales commissions are paid to agents costing $0.25 per case. Bad debt expense averages 10% of sales.
Refer to Figure 18-1. What customer type has the least total cost per case ?

Accepted Answer

The answer of Figure 18-1 The Lancashire Corporation manufactures bottled...

Question 13

Which of the following markets is characterized by the following: many buyers and sellers, a homogeneous product, easy entry into and exit from the industry, and all firms are price takers?

Accepted Answer

The characteristics described - many buyers and sellers, homogeneous product, easy entry and exit, and all firms being price takers - are all key features of a perfectly competitive market.

Question 14

Figure 18-1 The Lancashire Corporation manufactures bottled water with an average manufacturing cost of $2 per case (a case contains 24 bottles). Bayview sold 1,000,000 cases last year to the following types of customers:
 The drugstore chains have special handling costs of $0.20 a case and increased administrative assistance costing $45,000 per year.
The gas station chains require special marketing promotions that cost $50,000. Sales commissions of 10% are paid.
The supermarket chains order electronically through EDI which costs $25,000 annually. Bayview is responsible for shipping costs, which totaled $0.50 a case and special labels costing $0.02 per bottle
Local pharmacies have special handling costs of $0.10 per case and sales commissions are paid to agents costing $0.25 per case. Bad debt expense averages 10% of sales.
Refer to Figure 18-1. What is the total cost per case for drugstore chains?

Accepted Answer

The total cost per case for drugstore chains is calculated as follows: 
Manufacturing cost per case = $2 
Special handling cost per case = $0.20 
Increased administrative assistance cost per case = $45,000 / 1,000,000 cases = $0.045 per case 
Total cost per case for drugstore chains = $2 + $0.20 + $0.045 = $2.245  
Rounded to the nearest cent, the answer is $2.32 per case.

Question 15

Scottish Company manufactures a variety of toys and games. John Chisholm, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2014 when 30,000 were projected. Sales for 2015 look no better. At $100 per game, it is not a hot seller. Direct costs of the board game are $56 variable cost and $100,000 fixed. John is considering several options. Option One: Cut the price to $70 and perhaps sell 15,000 units. Option Two: Cut the price to $60, reduce material costs by $10, and cut advertising by $60,000. Anticipated volume for this option is 10,000 units. Option Three: Cut the price to $80 and include a $10 mail-in rebate offer. It is anticipated that 15,000 units could be sold and only 30 percent of the rebate coupons would be redeemed. What is the profit (loss) from Option One?

Accepted Answer

The profit from Option One is calculated as follows: Revenue = 15,000 units * $70 = $1,050,000. Variable costs = 15,000 units * $56 = $840,000. Fixed costs = $100,000. Profit = Revenue - Variable costs - Fixed costs = $1,050,000 - $840,000 - $100,000 = $110,000.

Question 16

Which of the following markets is characterized by the following: a single firm in the industry, a unique product, and difficult entry into the industry?

Accepted Answer

A monopoly is characterized by the presence of only one firm in the industry, which has a unique product or service. There are significant barriers to entry in this market, making it difficult for new firms to enter and compete.

Question 17

Figure 18-1 The Lancashire Corporation manufactures bottled water with an average manufacturing cost of $2 per case (a case contains 24 bottles). Bayview sold 1,000,000 cases last year to the following types of customers:
 The drugstore chains have special handling costs of $0.20 a case and increased administrative assistance costing $45,000 per year.
The gas station chains require special marketing promotions that cost $50,000. Sales commissions of 10% are paid.
The supermarket chains order electronically through EDI which costs $25,000 annually. Bayview is responsible for shipping costs, which totaled $0.50 a case and special labels costing $0.02 per bottle
Local pharmacies have special handling costs of $0.10 per case and sales commissions are paid to agents costing $0.25 per case. Bad debt expense averages 10% of sales.
Refer to Figure 18-1. What customer type is the most profitable ?

Accepted Answer

The answer of Figure 18-1 The Lancashire Corporation manufactures bottled...

Question 18

Which of the following markets is characterized by the following: many firms in the industry, a somewhat unique product, fairly easy entry into the industry, and spending for differentiation of the product?

Accepted Answer

Monopolistic competition is characterized by a large number of firms in the industry offering products that are somewhat unique, having relatively easy entry into the industry, and spending money to differentiate their products from those of their competitors. In a purely competitive market (A), there are so many firms that no one firm can differentiate its product from other identical products. A monopoly (C) has only one firm in the industry, giving it complete control over the price and product. Oligopoly (D) has few firms in the industry, which can lead to collusion and efforts to limit competition.

Question 19

Johanson Company had the following information:  What is the markup based on prime costs?

Accepted Answer

Markup based on prime costs is calculated as (gross profit/prime costs) x 100%. Using the information given, we can calculate:
Prime costs = Direct materials + Direct labor = $60,000 + $40,000 = $100,000
Selling price = Prime costs x Markup = $100,000 x 2.667 = $266,700
Gross profit = Selling price - Prime costs = $266,700 - $100,000 = $166,700
Markup based on prime costs = (gross profit/prime costs) x 100% = ($166,700/$100,000) x 100% = 166.7%. Therefore, the answer is B.

Question 20

Which of the following is true regarding expenses related to specific market structure types?

Accepted Answer

The answer of Which of the following is true regarding...

Quiz 18: Pricing and Profitability Analysis