Chapter 5

Question 1

What condition occurs during a recession?

Answer 1

During a recession, potential output will exceed actual output. Actual unemployment will change with the cycle but natural rate of unemployment will not change

Question 2

An increase in short run aggregate supply will cause GDP and prices to do what?

Answer 2

It will cause real output to expand (GDP increase) and prices to fall (inverse relationship)

Question 3

A large increase in nominal wages, perhaps orchestrated by unions, would result in?

Answer 3

An increase in nominal wages represents an increase in input costs. This would shift the aggregate supply curve to the left resulting in a decrease in real GDP and an increase in the overall price level.

Question 4

What is an example of when the economy is in a recessionary phase?

Answer 4

Potential national income exceeds actual national income. (potential gross domestic product, also referred to as Long Run Aggregate Supply).

Question 5

What is one factor that would cause frictional unemployment to increase?

Answer 5

A reduction in the average age of the workforce (younger workers tend to move between jobs more frequently)

Question 6

When the overall price level is rising, nominal interest rates tend to…

Answer 6

Rising. nominal interest rate = real interest rate + inflation

Question 7

What is the best measure to combat a period of deflation?

Answer 7

Increase the money supply. It would cause the overall price level to rise.

Question 8

What is the consumer price index CPI?

Answer 8

It measures the costs of a market basket of specific goods commonly purchased by consumers. It measures consumer buying power and is not distorted by items generally bought by industry

Question 9

When markets are perfectly competitive, consumers…>

Answer 9

Have goods and services produced at the lowest cost in the long run. Since price is barley sufficient to give a firm a normal profit and stay in business, the consumer obtains the product at as low a price as is economically feasible.

Question 10

What are some key assumptions of perfect competition?

Answer 10

1. Customers are indifferent about which firm they buy their products from
2. The level of one firms output is small relative to total industry output
3. There is freedom of entry and exit into the market

Question 11

What is an example of a natural monopoly?

Answer 11

A natural monopoly exists when the economic and technical conditions only allow one sufficient supplier

Question 12

What is the effect on an increase in the minimum wage on supply?

Answer 12

There would be an excess supply (or surplus) of labor because it is now above the equilibrium point

Question 13

What happens to revenue when the demand for a product is price in-elastic?

Answer 13

Total revenue increases (positive relationship)

Question 14

What happens to revenue when the demand for a product is price elastic?

Answer 14

There will be a decrease in total revenue (an increase in price results in a decline in quantity demanded that is proportionately larger than an increase in price, thus the result is a decrease in total revenue)

Question 15

What happens when the demand for a product is price unit elastic?

Answer 15

An increase in price will have no effect on total revenue (think medications)

Question 16

What is the best description of the value chain analysis direction?

Answer 16

It starts with the suppliers who provide the raw materials for a production process, continues with the firm and its strategic plan, continues with the value created by the customers, and then ends with the disposal and recycling of materials

Question 17

What is the vertical linkage analysis?

Answer 17

It is understanding the activities of suppliers and buyers of the product and determining where value can be created external to the firms operations

Question 18

What are factors that increase the bargaining power of customers?

Answer 18

Customer’s make up a large volume of a firms business
There is much info available to the customer
The buyers have low switching costs
There is a high number of alternative suppliers

Question 19

What does the best cost strategy do?

Answer 19

It strives to have the firm evaluate and change its value chain such that it can achieve the lowest cost among it’s closest competitors while matching them on features desired by consumers (differentiation)

Question 20

Considering the SCOR Model of supply chain operations, which category does “collecting and processing vendor payments” fall under?

Answer 20

Source: Once demand has been planned, it is necessary to produce the resources required to meet it and to manage the infrastructure that exists for the sources

Question 21

When does a perfectly inelastic supply curve in a competitive market exist?

Answer 21

It exists when firms cannot vary input usage. Price elasticity of supply = %change in supply/% change in price. Perfectly inelastic supply curves are also vertical representing that supply is insensitive to changes in price (the quantity supplied will not change as price changes)

Question 22

The impact of a government price support system will most likely result in which of the following?

Answer 22

It will lead to surpluses. Govt. program acts as a subsidy that will encourage suppliers to increase supply beyond an equilibrium point where supply and demand meet

Question 23

What are the Porters 5 Forces?

Answer 23

1. Barriers to Entry
2. Market Competitiveness
3. Existence of substitute products
4. Bargaining power of customers
5. Bargaining power of supplier

Question 24

What is collusive pricing?

Answer 24

It anticipates that competitors will collude or conspire to maintain prices and mutual profitability. Collusive pricing undermines competitive pricing and maintains prices to external customers at levels higher than they would be in a competitive market place

Question 25

What is Game Theory?

Answer 25

Game theory is a study of mathematical models of conflict and cooperation between rational decision makers. There are several versions of game theory models that are used to evaluate participant behavior under OLIGOPOLIES

Question 26

What is returns to scale?

Answer 26

It focuses only on the relationship between input and output quantities. When output increases by less than the proportional change in inputs, the firm is exhibiting decreasing returns to scale

Question 27

Price discrimination is accomplished most effectively in markets with which of the following characteristics?

Answer 27

Fairly distinct segment of customers. A seller can change different prices to different groups by justifying that the products they are buying are unique to that specific group. There is also less power from the perspective of the customer because they cannot join together as easily and bargain with the seller

Question 28

Compared to firms in a perfectly competitive market, a monopolist tends to

Answer 28

Produce substantially less but charge a higher price

Question 29

Movement along the demand curve from one price-quantity combination to another is called?

Answer 29

Change in quantity demanded (NOT Change/shift/increase in demand which represents a shift in the curve)

Question 30

The trough of a business cycle is generally characterized by what?

Answer 30

Unused productive capacity and an unwillingness to risk investments. It is an economic low point with no positive indicators for the future.