Question 1

The addition of gasoline pumps at a grocery store is a good example of a network externality.

Accepted Answer

The addition of gasoline pumps can create a network externality because it attracts more customers to the store who are looking to purchase gasoline. This can also lead to increased sales for the grocery store as customers may decide to also purchase groceries while they are at the gas station. Additionally, the convenience of having both gasoline and groceries available in one location can create a positive network effect for the store, as more customers may choose to shop there due to the added convenience.

Question 2

The proposed merger between Staples and Office Depot and the FTC's opposition to it underscore the importance of how a market is defined when assessing the amount of market power possessed by an individual firm.

Accepted Answer

The statement is true. The definition of the market is crucial in determining the level of competition and market power possessed by a company. In the case of the proposed merger between Staples and Office Depot, the FTC defined the market narrowly, focusing on office supplies sold to large corporations, which allowed them to conclude that the merger would reduce competition and harm consumers. Had the market been defined more broadly, the analysis might have reached a different conclusion.

Question 3

The purpose of the Horizontal Merger Guidelines developed by the Department of Justice and the FTC is to prevent customers from being harmed by the increased market power that might result from a merger of two or more firms.

Accepted Answer

The Horizontal Merger Guidelines are designed to prevent harm to customers and competition that could result from increased market power resulting from a merger between two or more firms.

Question 4

The monopoly characteristic of monopolistically competitive firms ensures that such firms will earn positive economic profits over the long run.

Accepted Answer

Monopolistically competitive firms do not have complete market power, and there are alternatives available to consumers. Therefore, in the long run, new firms are likely to enter the market, which will increase competition and drive down economic profits. While monopolistically competitive firms may earn positive economic profits in the short run, they will not do so over the long run.

Question 5

If the cross-price elasticity of demand between two products is positive,we can conclude that the two products are substitutes.

Accepted Answer

A positive cross-price elasticity of demand indicates that an increase in the price of one product leads to an increase in demand for the other product. This suggests that the two products are substitutes as consumers are willing to switch from one product to the other in response to a change in price.

Question 6

Use Figure 8.2,which represents the situation faced by a monopolist,to answer questions a-c.
 
a. In Figure 8.2, indicate the profit maximizing price and output level and label them P₁ and Q₁.
b. Shade in the area that represents the firm's economic profit (or loss).
c. If this firm wished to discourage entry by other firms it could produce the output level at which it earns only a zero economic profit. Indicate the price and output level associated with a zero economic profit and label them P₂ and Q₂.

Accepted Answer

The answer of Use Figure 8.2,which represents the situation faced...

Question 7

As their respective names imply,monopoly and monopolistic competition are the most similar of the four market structures.

Accepted Answer

Monopoly is a market structure where a single firm controls the entire market, while monopolistic competition involves many firms selling similar but not identical products, making them significantly different in terms of competition and market control.

Question 8

For lock-in to be an effective competitive strategy,a firm must successfully raid the customer base of competing firms on a regular basis.

Accepted Answer

Lock-in as a competitive strategy is aimed at retaining the current customers and making it difficult for them to switch to competitors, rather than raiding the customer base of other firms. The focus is on retaining the loyalty of existing customers rather than aggressively taking customers away from competitors.

Question 9

As the price elasticity of demand for a particular good decreases,the corresponding Lerner Index,and hence the amount of market power attributed to the firm that produces the product in question,decreases as well.

Accepted Answer

The Lerner Index, which measures the market power of a firm, is inversely related to the price elasticity of demand. Therefore, as the price elasticity of demand decreases (meaning the demand becomes more inelastic), the Lerner Index increases, indicating an increase in the firm's market power.

Question 10

A decrease in the number of competitors in a monopolistically competitive market causes an increase in the price elasticity of demand for the output of each of the remaining firms in the market.

Accepted Answer

A decrease in the number of competitors in a monopolistically competitive market would actually decrease the price elasticity of demand for the output of each remaining firm, as there are now fewer close substitutes available for consumers.

Question 11

Compare and contrast the potential for a perfectly competitive firm and a monopolistically competitive firm to earn positive economic profits in the short run versus the long run.Explain your reasoning.

Accepted Answer

The answer of Compare and contrast the potential for a...

Question 12

The Lerner Index is preferred to the Herfindahl-Hirschman Index as a measure of market power due to the former's simplicity and straightforward interpretation.

Accepted Answer

The Lerner Index and the Herfindahl-Hirschman Index (HHI) serve different purposes: the Lerner Index measures a firm's pricing power above marginal cost, while the HHI measures market concentration. Their preference depends on the context of the analysis rather than simplicity or interpretation alone.

Question 13

Assume the market shares of the six largest firms in an industry are 15 percent each.The six-firm concentration ratio would indicate that the industry is highly concentrated,while the Herfindahl- Hirschman Index would not.

Accepted Answer

The six-firm concentration ratio measures the market share of the six largest firms in an industry. A high concentration ratio indicates that a small number of firms control a large share of the market. The Herfindahl-Hirschman Index (HHI) is a measure of market concentration that takes into account the market shares of all firms in an industry. A high HHI indicates that the industry is concentrated, while a low HHI indicates that the industry is competitive. In this case, the six-firm concentration ratio is high, indicating that the industry is highly concentrated. However, the HHI is not high, indicating that the industry is not concentrated. This is because the market shares of the six largest firms are relatively equal.

Question 14

Microsoft was charged with violating the antitrust laws not because it had a virtual monopoly in the form of its Windows operating system,but because it acted like a monopolist in trying to control the market for certain software applications.

Accepted Answer

This statement is true. Microsoft was charged with violating antitrust laws because it used its monopoly in the operating system market to unfairly dominate and control the market for certain software applications, such as web browsers.

Question 15

Assume the firms in a monopolistically competitive market are currently incurring economic losses.Because they are price searchers,existing firms will raise their prices until the losses are eliminated and each firm is once again earning zero economic profit.

Accepted Answer

In a monopolistically competitive market, firms can only raise prices to a certain extent as there are close substitutes available in the market. Therefore, they cannot simply raise prices until economic losses are eliminated. Instead, firms may try to differentiate their products or decrease their costs to increase their market share and eliminate economic losses.

Question 16

Patents have become less important than such factors as secrecy,lead time,and increased sales and service efforts as a means to maintain a competitive advantage in the pharmaceutical industry.

Accepted Answer

Patents remain critically important in the pharmaceutical industry as they provide exclusive rights to market a new drug for a certain period, allowing companies to recoup their investment in research and development. This exclusivity is a key factor in maintaining a competitive advantage.

Question 17

All else constant,so long as it is negative,as the cross price elasticity of demand between a firm's product and those of its competitors increases,so does the market power possessed by the firm.

Accepted Answer

The statement is false. As the cross price elasticity of demand between a firm's product and those of its competitors increases (meaning that customers are more likely to switch to a competitor's product if the firm raises its prices), the firm's market power decreases. Higher cross price elasticity of demand indicates that the firm faces more competition and has less ability to raise prices without losing customers.

Question 18

The various antitrust laws are written in very specific terms.Thus,there is little or no question as to when a firm has run afoul of one or more of these laws.

Accepted Answer

While the antitrust laws do provide specific guidelines, there is still some room for interpretation and debate about whether a firm's actions violate the laws. Additionally, new technologies and business practices can create grey areas and require courts to interpret how the laws apply.

Question 19

Describe the basic characteristics of the monopoly model and explain how these characteristics affect the ability of a monopolist to earn positive economic profits,both in the short run and over time.

Accepted Answer

The answer of Describe the basic characteristics of the monopoly...

Question 20

Studies suggest that brand loyalty is based primarily on real differences among competing products,suggesting that persuasive advertising is an ineffective means to maintain or increase market share.

Accepted Answer

Brand loyalty often stems from perceived value, emotional connections, and brand identity rather than just real differences among products. Persuasive advertising can significantly influence brand loyalty by shaping perceptions and creating emotional attachments to the brand.

Quiz 8: Market Structure: Monopoly and Monopolistic Competition