Question 1

"Learning by doing" can result in _____ for a company.
A)unique cost advantages
B)increased product demand
C)higher switching costs
D)lobbying gains

Accepted Answer

"Learning by doing" refers to the process of gaining knowledge and skills through hands-on experience. This can result in unique cost advantages for a company, as they are able to optimize their processes and methods based on their experience. This can lead to more efficient and cost-effective operations, which can in turn give the company a competitive edge. Increased product demand and higher switching costs are not necessarily direct results of "learning by doing," and lobbying gains are not related to this concept at all.

Question 2

Over time, Paco's Pie Shop has developed a pie crust that cooks more rapidly than the crusts of other bakers and a filling that uses less costly inputs while maintaining comparable customer appeal. Other bakers have tried but failed to duplicate Paco's two cost advantages. Knowing that they will need to compete against Paco's Pie Shop, potential new entrants will:
A)cut corners on pie quality to reduce demand.
B)have less potential demand because of increased costs.
C)be discouraged from entering, owing to the advantages Paco's has achieved.
D)have free entry into but not free exit from the market.

Accepted Answer

Potential new entrants will be discouraged from entering because they will not be able to replicate Paco's cost advantages, making it difficult for them to compete with Paco's Pie Shop. Therefore, they may choose not to enter the market.

Question 3

Mass production typically creates:
A)higher demand.
B)cost disadvantages.
C)lower demand.
D)cost advantages.

Accepted Answer

Mass production creates cost advantages due to economies of scale. When large quantities of a product are manufactured, the cost per unit decreases, making it more profitable for the producer.

Question 4

Which of the following is NOT one of the ways companies create barriers to entry through unique cost advantages?
A)advantageous relationships with suppliers
B)mass production
C)regulations
D)learning by doing

Accepted Answer

Regulations do not create unique cost advantages for companies. Instead, they often increase costs for businesses, particularly for smaller firms that may not be able to afford compliance. Advantageous relationships with suppliers, mass production, and learning by doing can all create cost advantages that are difficult for new entrants to replicate.

Question 5

When market leaders produce on a mass scale, new entrants:
A)can easily compete.
B)have a hard time competing.
C)have higher switching costs.
D)have lower switching costs.

Accepted Answer

When market leaders produce on a mass scale, they often achieve economies of scale which enable them to produce goods at a lower cost. This makes it difficult for new entrants to compete on price. Additionally, the market leader may have established brand recognition and customer loyalty, making it harder for new entrants to gain market share. Therefore, new entrants usually have a hard time competing with market leaders who produce on a mass scale.

Question 6

Which of the following strategies would allow a seller to develop unique cost advantages to create a barrier to new sellers entering its market?
A)Gain market power as a buyer in a critical input market.
B)Convince the government to require licenses to enter the market.
C)Add switching costs to lock in customers.
D)Use brand proliferation to cover all market niches.

Accepted Answer

By gaining market power as a buyer in a critical input market, a seller can negotiate lower input costs, creating a cost advantage that new entrants may find difficult to match, thus serving as a barrier to entry.

Question 7

How can a company's research and development expenditures create a barrier to entry into its market?
A)It increases switching costs, which means companies cannot change production techniques.
B)It generates larger network effects for the product.
C)It prevents learning by doing, which keeps consumers from learning about new options.
D)It can result in new production technologies that reduce the cost of production.

Accepted Answer

R&D expenditures can lead to the development of new and more efficient production technologies, which can reduce the cost of production for the company. This can create a barrier to entry for potential competitors who may not have the resources to develop similar technologies, and thus cannot compete on price.

Question 8

If a company gains market power as an input buyer, then:
A)the company may be able to purchase inputs at lower prices than other companies who use the same inputs can.
B)the company can set its product price without losing customers.
C)new entry into the industry will be more likely because inputs are available.
D)network effects will result, discouraging new entry into the market.

Accepted Answer

When a company gains market power as an input buyer, it can negotiate lower prices from suppliers due to its large purchasing power. This gives the company a cost advantage over its competitors who have to pay higher prices for the same inputs. However, it does not necessarily mean that the company can set its product price without losing customers or that new entry into the industry will be more likely. Network effects may also play a role, but it is not a given.

Question 9

Michelle owns the largest florist shop in her town. Each week, she orders a truckload of flowers from the flower wholesaler. The other two florists in town order only one-third as many flowers. Because Michelle's order fills the delivery truck, the wholesaler sells flowers to her at a lower price than the other florists must pay. How will this situation impact potential new entrants?
A)New florists will be encouraged to enter because they will be energized by the challenge to succeed.
B)The cost differential can easily be offset by creating a demand differential, so it will have little impact.
C)New florists will not be affected because input prices are minor factors in markets.
D)New florists will be discouraged from entering the market because of the difficulty of competing on cost.

Accepted Answer

The situation of Michelle's shop being able to purchase flowers at a lower price because of her large order volume puts potential new florists at a disadvantage in terms of cost competitiveness. New entrants will likely struggle to compete on cost with Michelle's established business, making it difficult for them to gain market share. This may discourage potential new entrants from entering the market.

Question 10

A government may want to create barriers to sellers entering a given market for all of the following reasons EXCEPT:
A)encouraging research and development by offering patents on new inventions and technologies.
B)ensuring that sellers provide products and services that are safe for consumers.
C)increasing the market demand for a product so that all sellers enjoy higher demand.
D)keeping average cost low when there is a natural monopoly.

Accepted Answer

All of the other options provide reasons for why a government may create barriers to sellers entering a market. Option C is incorrect because increasing market demand for a product would encourage more sellers to enter the market, not create barriers to entry.

Question 11

Many governments require companies that produce drugs to obtain government approval before selling a new drug. This is done to _____, and it leads to _____ in the market for the new drug.
A)ensure public safety; a barrier to entry
B)create network effects; a barrier to exit
C)reduce production costs; a lower equilibrium price
D)meet consumer needs; greater drug availability

Accepted Answer

Government approval before selling a new drug ensures public safety by making sure that the drug is safe and effective. This leads to a barrier to entry for other companies since they also have to obtain government approval, which can be a lengthy and expensive process.

Question 12

When the government requires a license or government approval for a company to produce and sell a product, then in the market for that product:
A)the price will be lower.
B)demand must be strong.
C)companies are using a supply-side strategy.
D)there will be fewer sellers.

Accepted Answer

Government approval or licensing requirements limit entry into the market, leading to fewer sellers. This may result in higher prices for consumers.

Question 13

When a government is concerned about the safety of the product for sale in a given market, often the government:
A)taxes producers.
B)creates networks of consumers.
C)imposes regulations on the product or providers.
D)raises the switching costs for consumers of the product.

Accepted Answer

The government imposes regulations on the product or providers when it is concerned about the safety of the product for sale in a given market. This ensures that the product meets certain standards and is safe for consumers to use. Taxes, consumer networks, and raising switching costs are not directly related to product safety regulations.

Question 14

All of the following government policies would create a barrier to entry in a market EXCEPT:
A)a requirement that only companies with a license to produce the specific product can sell it.
B)a requirement that all versions of the product for sale are subject to extensive safety testing.
C)a requirement that there can be no switching costs for consumers.
D)the granting of a patent to the developer of the product.

Accepted Answer

The other options create barriers to entry by restricting who can enter the market or imposing costly requirements, whereas the absence of switching costs would actually make it easier for new companies to enter the market.

Question 15

Which of the following government policies would create a direct barrier to entry for new sellers in a market?
A)taxing business profits with a progressive tax
B)banning switching costs to protect consumers
C)ensuring that all sellers have equal access to inputs
D)granting a patent to the developer of a new product

Accepted Answer

By granting a patent to the developer of a new product, the government is giving the developer exclusive rights to produce and sell that product for a certain period of time, thereby creating a direct barrier to entry for new sellers in that market. This is because they will not be able to produce or sell the same product during the patent period without facing legal consequences.

Question 16

Which of the following is NOT a government action that results in a barrier to entry in a product market?
A)granting a patent on a product
B)requiring that advertising not make false claims
C)imposing regulations that increase start-up costs for new companies
D)issuing compulsory licenses to produce the product

Accepted Answer

Requiring that advertising not make false claims does not result in a barrier to entry in a product market as it is a consumer protection regulation, not a regulation that limits competition or entry into the market. A, C, and D all result in barriers to entry as they involve government intervention that restricts competition in some way.

Question 17

When government regulations are influenced by lobbyists for the producers in a market, the regulations often:
A)make it more difficult for new producers to enter the market.
B)reduce costs of production, increasing competitive pressures.
C)are biased in favor of consumer safety.
D)raise market demand.

Accepted Answer

When regulations are influenced by lobbyists for producers, they may push for regulations that create barriers to entry, making it more difficult for new producers to compete in the market. This can give the established producers an advantage and reduce competition.

Question 18

When developing laws and regulations, elected government leaders are often biased in favor of the interests of established companies over those of new entrants because:
A)new entrants have clear reasons for being biased in their proposals, and established companies do not.
B)change has uncertain effects and is therefore avoided.
C)established companies and their employees are voters who have clear interests in preserving the success of established companies.
D)profits are important to tax revenues.

Accepted Answer

Established companies and their employees are voters who have clear interests in preserving the success of established companies. Elected government leaders need the support of voters to stay in power, so they may be biased towards established companies to keep their votes. New entrants, on the other hand, do not have an established voter base or the same level of influence.

Question 19

Effective entrance deterrent strategies are based on:
A)rising costs.
B)decreasing market demand.
C)enacted regulations.
D)credible threats.

Accepted Answer

Effective entrance deterrent strategies are based on credible threats, meaning that the prevention of unwanted entry is more likely if potential intruders perceive a significant risk of detection or capture. Rising costs may deter some intruders, but may also motivate others to take greater risks to obtain the desired outcome. Decreasing market demand and enacted regulations are generally unrelated to entrance deterrence.

Question 20

Which of the following is NOT an entry deterrence strategy that a seller would use?
A)brand proliferation to cover all product niches
B)a market demand growth strategy
C)maintaining cash balances
D)building excess production capacity

Accepted Answer

Brand proliferation, maintaining cash balances, and building excess production capacity are all entry deterrence strategies that a seller can use. However, a market demand growth strategy is not an entry deterrence strategy because it is focused on increasing demand for the seller's products rather than deterring entry by competitors.

Quiz 15: Entry, Exit, and Long-Run Profitability

"Learning by doing" can result in _____ for a company.

Mass production typically creates:

Which of the following is NOT one of the ways companies create barriers to entry through unique cost advantages?

When market leaders produce on a mass scale, new entrants:

Which of the following strategies would allow a seller to develop unique cost advantages to create a barrier to new sellers entering its market?

How can a company's research and development expenditures create a barrier to entry into its market?

If a company gains market power as an input buyer, then:

A government may want to create barriers to sellers entering a given market for all of the following reasons EXCEPT:

Many governments require companies that produce drugs to obtain government approval before selling a new drug. This is done to _, and it leads to _ in the market for the new drug.

When the government requires a license or government approval for a company to produce and sell a product, then in the market for that product:

When a government is concerned about the safety of the product for sale in a given market, often the government:

All of the following government policies would create a barrier to entry in a market EXCEPT:

Which of the following government policies would create a direct barrier to entry for new sellers in a market?

Which of the following is NOT a government action that results in a barrier to entry in a product market?

When government regulations are influenced by lobbyists for the producers in a market, the regulations often:

When developing laws and regulations, elected government leaders are often biased in favor of the interests of established companies over those of new entrants because:

Effective entrance deterrent strategies are based on:

Which of the following is NOT an entry deterrence strategy that a seller would use?