Question 1

Which of the following parties is likely to have the most information about the health of an individual who is trying to purchase a health insurance policy?

Accepted Answer

The individual who is applying for the health insurance policy is likely to have the most information about their own health. They are able to provide details about their medical history, current health condition, and any pre-existing conditions. While insurance companies may gather additional information through medical exams or records, the individual themselves is the primary source of information about their health. The employer may have some information if they provide health benefits or if the individual has disclosed health issues to them, but it is typically less extensive than what the individual can provide. Option D is incorrect because parties do not always have access to the same level of information.

Question 2

Consider a used car market in which half the cars are good and half are bad (lemons).Suppose the average price of a good car is $9000 and the average price of a lemon is $3000.If rational buyers are willing to pay $6000 for a used car, then sellers will agree to sell mostly the lemons at this price.What is the term used to describe this situation?

Accepted Answer

This situation is known as adverse selection, where buyers have limited information about the quality of the car and sellers have an incentive to sell lemons at a higher price than they are worth. This results in buyers only being willing to pay a lower price, leading to the market being dominated by lower quality cars.

Question 3

Most pharmaceutical firms selling prescription drugs continue to earn economic profits long after the patents on the prescription drugs expire because they have established a strong foothold in the market.

Accepted Answer

When patents on prescription drugs expire, generic manufacturers can enter the market, often leading to significantly lower prices and reduced profits for the original pharmaceutical firms.

Question 4

Experience with patents in the pharmaceutical industry shows that when patents on drugs expire,

Accepted Answer

When patents on drugs expire, other firms are free to produce chemically identical drugs. This leads to increased competition, which reduces the profits earned by the firms that received patents. Prices of the drugs typically decrease without patent protection due to the competition, making it easier for patients to access the medication. While some firms may try to obtain additional patent protection by making cosmetic changes, this practice is generally frowned upon and may not be successful in extending patent protection.

Question 5

For which of the following firms is patent protection of vital importance?

Accepted Answer

Pharmaceutical firms heavily rely on patent protection because they invest heavily in research and development to bring a new drug to the market, which takes years and costs billions of dollars. If a drug gets approved by the FDA, the patent will protect the firm's exclusive rights to manufacture, use, and sell the product for a limited time, allowing the firm to recover its investment and earn a profit. Without patent protection, other firms could easily copy the drug and sell it for far less than the original firm, eliminating their ability to recoup their R&D costs and potentially harming future innovation.

Question 6

A successful trademark is one that becomes a generic name for a product, for example, 'Kleenex' has become a generic term for tissues.

Accepted Answer

A successful trademark uniquely identifies a product or service from a specific source, but if it becomes generic through common use (like "Kleenex" for tissues), it risks losing its trademark protection because it no longer distinguishes the brand from others.

Question 7

One reason patent protection is vitally important to pharmaceutical firms is

Accepted Answer

Pharmaceutical firms invest millions of dollars and several years in research and development of new drugs. The approval process through the Food and Drug Administration can take more than 10 years and is very costly. Patents enable firms to recover costs incurred during this process, and also to have a monopoly on sales of the drug for a period of time once it is approved, which ensures profitability. Without patents, firms would not have the financial incentives to invest in developing new drugs, and the progress in healthcare would be severely hindered.

Question 8

Many biologic drug manufacturers are pushing for patent protection to be extended to 12 years before generics are allowed to be introduced to the market.This reflects which of the following barriers to entry?

Accepted Answer

The extension of patent protection is an example of government action blocking entry, as it prevents generic drug manufacturers from entering the market and offering lower-priced alternatives to biologic drugs.

Question 9

Why are many companies concerned about brand management?

Accepted Answer

The answer of Why are many companies concerned about brand...

Question 10

What does a government do when it wants to give an exclusive right to one firm to produce a product?

Accepted Answer

Granting a patent or copyright to an individual or firm gives them exclusive rights to produce a product or use a certain process for a specific period of time. This is commonly done by governments to stimulate innovation and incentivize investment in research and development. Tariffs and quotas are trade policy tools used to restrict imports and protect domestic industries, while antitrust laws are used to prevent monopolistic practices and promote competition.

Question 11

In the highly competitive fast-food restaurant market, brand name restaurants have a strong profit incentive to maintain high sanitary conditions and avoid any negative consequences.

Accepted Answer

Brand name restaurants have a reputation to uphold, and any negative consequences, such as foodborne illness outbreaks or sanitation violations, can harm their brand and lead to loss of customers and profits. Therefore, they have a strong profit incentive to maintain high sanitary conditions.

Question 12

Ordinarily, governments attempt to promote competition in markets.Why do governments use patents to block entry into some markets when this prohibits competition?

Accepted Answer

Patents encourage firms to spend money on research necessary to create new products, which can lead to more innovation and ultimately benefit consumers in the long run.

Question 13

Advertising is the action of a firm that is intended to maintain the differentiation of its product over time.

Accepted Answer

Advertising can also aim to introduce new products, increase sales, build brand loyalty, or encourage trial among other objectives, not just to maintain product differentiation.

Question 14

What does a patent do?

Accepted Answer

A patent gives a firm the exclusive right to a new product for a certain period of time, typically 20 years from the date the product is invented. This means that no one else can manufacture or sell the product without the patent holder's permission during that time. The patent does not apply to creative works such as books, films, or music, which are protected by copyright.

Question 15

What is the term that is used to refer to a situation in which one party to an economic transaction has less information than the other party?

Accepted Answer

Asymmetric information refers to a situation where one party to a transaction has more information than the other party. This can lead to market failures as the party with less information may not be able to make informed decisions, leading to adverse selection or moral hazard.

Question 16

A key difficulty facing insurance companies is that people know more about their health than do insurance companies, and that those people who are seriously ill are the most likely to want to obtain health insurance.What is this phenomenon called?

Accepted Answer

The answer of A key difficulty facing insurance companies is...

Question 17

The 10-year protection period from generic competition for drug manufacturers is a form of

Accepted Answer

The 10-year protection period from generic competition for drug manufacturers is a form of patent protection. This prevents other companies from producing and selling the same drug during this time period, allowing the original manufacturer to recoup the costs of research and development and make a profit. After the 10-year period expires, other companies can produce and sell generic versions of the drug, which usually leads to lower prices for consumers.

Question 18

Research has shown that most economic profits from selling a prescription drug are eliminated 20 years after the drug is first offered for sale.The main reason for the elimination of profits is

Accepted Answer

After 20 years, patent protection is ended and other firms can produce less expensive generic versions of the drug, leading to increased competition and decrease in profits for the original producer.

Question 19

Consider a used car market in which half the cars are good and half are bad (lemons).A rational buyer in this market should

Accepted Answer

A rational buyer in this market should offer to pay a price somewhere between the price she would pay for a good car and the price she would pay for a lemon. This is because she knows that there is a chance of getting a lemon, but at the same time, she does not want to overpay for a good car. By offering a price between the two, she is balancing the risk of getting a bad car with the potential savings of getting a good deal on a good car.

Question 20

Consider a used car market in which half the cars are good and half are bad (lemons).If buyers are rational, the prices being offered for used cars will result in

Accepted Answer

In a market with asymmetric information, where sellers know more about the quality of the cars than buyers, buyers will adjust their willingness to pay based on the average quality of cars. This leads to a market where lemons are more likely to be sold, as the price will be too low for sellers of good cars, increasing producer surplus for sellers of lemons.

Quiz 14: Government Intervention in the Market