Question 1

If double marginalization exists between an upstream firm and a downstream firm, the vertical integration of the two firms will generate more economic profit.

Accepted Answer

When two firms face double marginalization, they mark up their prices to cover the costs of the markup from the other firm. This results in higher prices and lower quantities for consumers, reducing the overall economic efficiency. Vertical integration eliminates the double markup and can lead to a more efficient outcome, generating more economic profit.

Question 2

In a successive monopoly structure, if distributor has a constant marginal cost, the wholesale demand curve will lie below the retail marginal revenue curve.

Accepted Answer

In a successive monopoly structure, the wholesale price is set by the supplier (monopolist) which includes a markup on their constant marginal cost. This markup leads to a higher wholesale price than the distributor's marginal cost. As the distributor sells the product at the retail level, they then set a markup on the wholesale price to arrive at the retail price. Since their marginal cost is constant, the retail price curve will be horizontal at the distributor's marginal cost. The retail demand curve will be higher than the distributor's marginal revenue curve because consumers face a higher price when purchasing from the distributor than the marginal cost of production. Therefore, the wholesale demand curve must lie below the retail marginal revenue curve.

Question 3

The manager of View Your World, a high- end window manufacturer, notices that the cost to distribute their windows in the spot market has risen. As a result of the change, which of the following is true?
A)The manager has more of an incentive to integrate backward.
B)The manager has less of an incentive to integrate backward.
C)The manager has more of an incentive to integrate forward.
D)The manager has less of an incentive to integrate forward.

Accepted Answer

If the cost to distribute their windows in the spot market has risen, it would be advantageous for the manager of View Your World to integrate forward, meaning they would invest in facilities to manufacture and distribute their windows themselves. This would allow them to have more control over the distribution process and potentially save money on distribution costs. Integrating backward, meaning to invest in suppliers and raw materials, would not be as beneficial in this situation, as it does not directly address the increased cost of distribution.

Question 4

All of the following are true if both the upstream and downstream firm have market power except which one?
A)This situation is referred to as double marginalization.
B)Both the upstream firm and the downstream firm set a price that exceeds their respective marginal costs.
C)If the two firms were to merge, the combined firm would earn the same profit than if they did not merge.
D)This situation is referred to as a successive monopoly.

Accepted Answer

Double marginalization refers to the phenomenon where both the upstream and downstream firms, having market power, add their own markup above their marginal costs, leading to higher prices for consumers. If these firms were to merge, the combined entity could potentially reduce the overall markup (since it would be setting a single markup instead of each firm adding its own), potentially leading to lower prices and higher total profits compared to when they operate separately. This makes option C incorrect as it suggests that merging would not change the profit situation, which overlooks the potential efficiency gains and profit increase from eliminating the double markup.

Question 5

The manager of Slick Lens, a sunglasses manufacturer, notices that the cost to distribute their sunglasses in the spot market has risen. As a result of the change, which of the following is true?
A)The manager has less of an incentive to integrate backward.
B)The manager has more of an incentive to integrate forward.
C)The manager has less of an incentive to integrate forward.
D)The manager has more of an incentive to integrate backward.

Accepted Answer

If the cost to distribute their sunglasses in the spot market has risen, it would make more sense for the manager to integrate forward, such as by owning their own retail stores, in order to reduce distribution costs and improve profitability. Therefore, the manager would have more of an incentive to integrate forward.

Question 6

Vertical integration is not an economically sound decision in a successive monopoly situation.

Accepted Answer

Vertical integration can be economically sound in a successive monopoly situation as it can eliminate double marginalization, leading to lower prices and potentially higher overall profits for the integrated entity.

Question 7

In a successive monopoly structure, the profit- maximizing wholesale price is equal to the difference between the and the of distribution.
A)marginal revenue; marginal cost
B)wholesale demand; marginal cost
C)retail demand; marginal revenue
D)wholesale demand; marginal revenue

Accepted Answer

In a successive monopoly structure, the profit-maximizing wholesale price is determined by the difference between the marginal revenue and the marginal cost. This is because the monopolist aims to maximize profits by producing up to the point where the additional revenue from selling one more unit (marginal revenue) equals the additional cost of producing that unit (marginal cost).

Question 8

Vertical integration of a monopoly and a perfectly competitive firm does not yield greater economic profit.

Accepted Answer

Vertical integration occurs when a company expands its business by acquiring firms at different stages of production. When a monopoly (a single seller controlling the market) integrates with a perfectly competitive firm (a firm in a market with many sellers and buyers), the integration may not yield greater economic profit. This is because the monopoly already has control over the market, and the added firm may not add much value or competitive advantage. In fact, it may even lower the monopoly's profits by increasing costs or decreasing efficiency. Therefore, vertical integration of a monopoly and a perfectly competitive firm does not necessarily lead to greater economic profit.

Question 9

The manager of View Your World, a high- end window manufacturer, notices that the cost to purchase glass for their windows in the spot market has increased. As a result of the change, which of the following is true?
A)The manager has less of an incentive to integrate backward.
B)The manager has more of an incentive to integrate backward.
C)The manager has less of an incentive to integrate forward.
D)The manager has more of an incentive to integrate forward.

Accepted Answer

With the increase in the cost of glass in the spot market, the manager of View Your World has a higher incentive to integrate backward by investing in glass production themselves. This would reduce their dependence on the spot market and possibly lower their costs in the long run.

Question 10

In a ______monopoly structure, the wholesale demand for a monopoly retailer depends on the retailer's______ .
A)dual; demand
B)successive; demand
C)successive; marginal revenue
D)dual; marginal revenue

Accepted Answer

In a successive monopoly structure, the wholesale demand for a monopoly retailer depends on the retailer's marginal revenue, as each stage of the supply chain acts as a monopoly.

Question 11

The manager of Slick Lens, a sunglasses manufacturer, notices that the cost to purchase lenses for their sunglasses in the spot market has fallen. As a result of the change, which of the following is true?
A)The manager has less of an incentive to integrate forward.
B)The manager has more of an incentive to integrate forward.
C)The manager has less of an incentive to integrate backward.
D)The manager has more of an incentive to integrate backward.

Accepted Answer

When the cost to purchase lenses (a key input) falls in the spot market, the company can buy lenses at a lower cost without needing to control the lens production process. This reduces the incentive to integrate backward (taking control of supply sources), as the external market is providing inputs at a cheaper rate.

Question 12

If a firm has a monopoly in both the production and distribution of a product and the managers of both the production and distribution divisions maximize profits, all of the following are true except which one?
A)The firm will maximize its total profit.
B)The manager of one of the divisions should be instructed to maximize profit and the manager of the other division should be instructed to operate as a perfectly competitive firm.
C)A successive monopoly will occur within the firm.
D)Double marginalization will occur within the firm.

Accepted Answer

When both divisions maximize their own profits independently, it leads to double marginalization, reducing the firm's total profit. Therefore, the firm will not maximize its total profit.

Question 13

If a firm has a monopoly in both the production and distribution of a product and the managers of both the production and distribution divisions maximize profits, all of the following are true except which one?
A)A successive monopoly will occur within the firm.
B)Double marginalization will occur within the firm.
C)The firm will maximize its total profit.
D)The firm will not earn the maximum total profit.

Accepted Answer

Double marginalization refers to a situation where both the production and distribution divisions of a firm set their own profit-maximizing prices independently. This leads to higher prices and lower quantities sold than if the firm maximized profits as a single entity, thus not achieving maximum total profit. Therefore, the statement that the firm will maximize its total profit is incorrect in the context of double marginalization.

Question 14

The manager of Slick Lens, a sunglasses manufacturer, notices that the cost to purchase lenses for their sunglasses in the spot market has increased. As a result of the change, which of the following is true?
A)The manager has more of an incentive to integrate forward.
B)The manager has less of an incentive to integrate backward.
C)The manager has less of an incentive to integrate forward.
D)The manager has more of an incentive to integrate backward.

Accepted Answer

If the cost to purchase lenses in the spot market has increased, it means that purchasing lenses from suppliers has become more expensive. As a result, the manager of Slick Lens may have more of an incentive to integrate backward and start producing their own lenses, therefore avoiding the increased cost of purchasing them from suppliers.

Question 15

The wholesale demand for a monopoly retailer depends of the retailer's marginal revenue.

Accepted Answer

A monopoly retailer has control over the price of its products and therefore its marginal revenue directly affects the wholesale demand for its products. If the retailer sets a high price (resulting in a small quantity demanded and high marginal revenue), the demand from wholesale buyers will be lower. On the other hand, if the retailer sets a lower price (resulting in a larger quantity demanded and lower marginal revenue), the demand from wholesale buyers will be higher.

Question 16

The manager of View Your World, a high- end window manufacturer, notices that the cost to distribute their windows in the spot market has fallen. As a result of the change, which of the following is true?
A)The manager has less of an incentive to integrate backward.
B)The manager has more of an incentive to integrate forward.
C)The manager has more of an incentive to integrate backward.
D)The manager has less of an incentive to integrate forward.

Accepted Answer

When the distribution costs fall, it reduces the incentive for the manufacturer to integrate forward (towards distribution) as it becomes cheaper to outsource the distribution. Therefore, the manager of View Your World has less of an incentive to integrate forward.

Question 17

The manager of View Your World, a high- end window manufacturer, notices that the cost to purchase glass for their windows in the spot market has fallen. As a result of the change, which of the following is true?
A)The manager has less of an incentive to integrate forward.
B)The manager has more of an incentive to integrate forward.
C)The manager has more of an incentive to integrate backward.
D)The manager has less of an incentive to integrate backward.

Accepted Answer

The answer of The manager of View Your World, a...

Question 18

In a successive monopoly structure, if distributor has a constant marginal cost of $5 and is paying the producer $12 per unit, which is the profit- maximizing wholesale price, what is the distributor's marginal revenue at this output level?
A)$7
B)$5
C)$12
D)$17

Accepted Answer

The distributor's marginal revenue at this output level is $17. This is because the distributor pays the producer $12 per unit and has a constant marginal cost of $5. Therefore, for each unit sold, the distributor incurs a total cost of $12 (payment to producer) + $5 (marginal cost) = $17. Since marginal revenue equals the additional revenue from selling one more unit, and assuming the distributor sells the unit at the profit-maximizing wholesale price without any markup or discount, the marginal revenue would also be $17.

Question 19

The manager of Slick Lens, a sunglasses manufacturer, notices that the cost to distribute their sunglasses in the spot market has fallen. As a result of the change, which of the following is true?
A)The manager has more of an incentive to integrate backward.
B)The manager has less of an incentive to integrate backward.
C)The manager has less of an incentive to integrate forward.
D)The manager has more of an incentive to integrate forward.

Accepted Answer

When distribution costs fall, the company has less incentive to integrate forward because it is cheaper to use the spot market for distribution rather than investing in its own distribution channels.

Question 20

A _______ monopoly is a market structure in which a monopoly producer sells to a monopoly distributor.
A)dual
B)two- stage
C)double
D)successive

Accepted Answer

A successive monopoly refers to a situation where a monopoly producer sells to a monopoly distributor, creating a chain of monopolies in the supply chain.

Quiz 11: Decisions About Vertical Integration and Distribution

If double marginalization exists between an upstream firm and a downstream firm, the vertical integration of the two firms will generate more economic profit.

In a successive monopoly structure, if distributor has a constant marginal cost, the wholesale demand curve will lie below the retail marginal revenue curve.

The manager of View Your World, a high- end window manufacturer, notices that the cost to distribute their windows in the spot market has risen. As a result of the change, which of the following is true?

All of the following are true if both the upstream and downstream firm have market power except which one?

The manager of Slick Lens, a sunglasses manufacturer, notices that the cost to distribute their sunglasses in the spot market has risen. As a result of the change, which of the following is true?

Vertical integration is not an economically sound decision in a successive monopoly situation.

In a successive monopoly structure, the profit- maximizing wholesale price is equal to the difference between the and the of distribution.

Vertical integration of a monopoly and a perfectly competitive firm does not yield greater economic profit.

The manager of View Your World, a high- end window manufacturer, notices that the cost to purchase glass for their windows in the spot market has increased. As a result of the change, which of the following is true?

In a monopoly structure, the wholesale demand for a monopoly retailer depends on the retailer's .

The manager of Slick Lens, a sunglasses manufacturer, notices that the cost to purchase lenses for their sunglasses in the spot market has fallen. As a result of the change, which of the following is true?

If a firm has a monopoly in both the production and distribution of a product and the managers of both the production and distribution divisions maximize profits, all of the following are true except which one?

If a firm has a monopoly in both the production and distribution of a product and the managers of both the production and distribution divisions maximize profits, all of the following are true except which one?

The manager of Slick Lens, a sunglasses manufacturer, notices that the cost to purchase lenses for their sunglasses in the spot market has increased. As a result of the change, which of the following is true?

The wholesale demand for a monopoly retailer depends of the retailer's marginal revenue.

The manager of View Your World, a high- end window manufacturer, notices that the cost to distribute their windows in the spot market has fallen. As a result of the change, which of the following is true?

The manager of View Your World, a high- end window manufacturer, notices that the cost to purchase glass for their windows in the spot market has fallen. As a result of the change, which of the following is true?

In a successive monopoly structure, if distributor has a constant marginal cost of $5 and is paying the producer $12 per unit, which is the profit- maximizing wholesale price, what is the distributor's marginal revenue at this output level?

The manager of Slick Lens, a sunglasses manufacturer, notices that the cost to distribute their sunglasses in the spot market has fallen. As a result of the change, which of the following is true?

A _______ monopoly is a market structure in which a monopoly producer sells to a monopoly distributor.