Question 1

Soda companies pay universities for the exclusive right to sell their products on campus. For example, the University of Buffalo agreed to sell only Pepsi on campus in exchange for $220,000 per year. This agreement:
A) is beneficial for students because they no longer have to make a choice about which soda to purchase.
B) is beneficial for students if Pepsi charges a monopoly price on campus.
C) may be beneficial for students, depending on how the university uses the $220,000.
D) is harmful to students because the extra money gained by the university cannot be used for their benefit.

Accepted Answer

The agreement may be beneficial for students if the university uses the $220,000 to improve student services or facilities, enhancing their overall experience.

Question 2

Network externalities:
A) increase the likelihood that an industry will become a winner-take-all industry.
B) increase competition among existing firms in a market.
C) weaken forces that lead to monopoly in an industry.
D) promote the entry of new firms in a market.

Accepted Answer

Network externalities increase the value of a product or service as more people use it, which can lead to a winner-take-all scenario where one firm dominates the market due to the large user base it has attracted.

Question 3

The cost of dispensing fluoxetine (the generic for Prozac) is about $5 to $10 per prescription, but the consumer's price at most pharmacies is about $85. This suggests that the market for prescription drugs is:
A) perfectly competitive.
B) a pure monopoly.
C) something that cannot be explained by economic theory.
D) not very competitive.

Accepted Answer

The large difference between the cost of dispensing and the consumer price suggests that there is limited competition, allowing pharmacies to charge higher prices.

Question 4

The technological lock-in argument suggests that:
A) it is inefficient to try and adapt to new technology.
B) more efficient technologies always immediately replace less efficient technologies.
C) many of our institutions and technologies may be inefficient but are ingrained regardless.
D) existing institutions and technologies are always the most efficient.

Accepted Answer

Technological lock-in refers to the situation where certain technologies or institutions become entrenched and persist despite potentially being inefficient, due to factors like high switching costs, established standards, or network effects.

Question 5

Network externalities can:
A) create diffuse profits for producers.
B) decrease the benefits of a winner-take-all industry.
C) lead to the adoption of inefficient technologies.
D) increase the value of new technologies.

Accepted Answer

Network externalities can lead to the adoption of inefficient technologies because once a technology gains a large user base, it becomes more valuable, even if it's not the most efficient option.

Question 6

Using the basic supply/demand framework, economic analysis of market structure leads to the conclusion that:
A) perfect competition promotes efficient outcomes, whereas the other market structures are associated with some deadweight loss.
B) monopoly promotes efficient outcomes, whereas the other market structures are associated with some deadweight loss.
C) oligopoly promotes efficient outcomes, whereas the other market structures are associated with some deadweight loss.
D) monopolistic competition promotes efficient outcomes, whereas the other market structures are associated with some deadweight loss.

Accepted Answer

Perfect competition leads to efficient outcomes because firms produce at a level where price equals marginal cost, maximizing total surplus and minimizing deadweight loss. Other market structures, like monopoly, oligopoly, and monopolistic competition, typically result in some level of inefficiency and deadweight loss due to pricing above marginal cost.

Quiz 16: Real-World Competition and Technology

Soda companies pay universities for the exclusive right to sell their products on campus. For example, the University of Buffalo agreed to sell only Pepsi on campus in exchange for $220,000 per year. This agreement:

Network externalities:

The cost of dispensing fluoxetine (the generic for Prozac) is about $5 to $10 per prescription, but the consumer's price at most pharmacies is about $85. This suggests that the market for prescription drugs is:

The technological lock-in argument suggests that:

Network externalities can:

Using the basic supply/demand framework, economic analysis of market structure leads to the conclusion that: