Exam-3 Chapter 9 Imperfect Competition And Mulitinational Corporation

Question 1

Multinational corporations

Answer 1

Firm that operates through out the world

Question 2

Product differentiation

Answer 2

Means that the goods produced by a business are perceived by the consumers to be different from the goods produced by their competitors.

Question 3

Substitutes

Answer 3

Gods that can be used in place of each other

Question 4

In perfect competition, the goods are

Answer 4

Perfect substitutes, that is, they are identical.

Question 5

Product differentiation means that

Answer 5

Goods are imperfect substitutes

Question 6

Why do consumers feel that some goods arebetter than other goods ?

Answer 6

Because of quality, physical characteristics or image. Perception is just as powerful as fact.

Question 7

When does ultimate product differentiation occur

Answer 7

When goods that are technically substitutes to the casual observer are no longer regarded as such.
Example: some people buy Ford pickups would never buy a Chevy.
Or some drink Pepsi and refuse to drink coke.

Question 8

What will strong product differentiation create

Answer 8

Huge competitive advantages for the firm and disadvantages for the competitors.

Question 9

What are the advantages of product differentiation

Answer 9

Both advantages are related to price.

1. consumers will be less price sensitive when product differentiation is strong. Economists would say product differentiation makes the demand for a good less elastic. To the business, it means that they can charge higher prices without significantly affecting the quantity demanded.
2. It allows firms to compete using factors other than price called non - price competition. While a firm can compete only on the basis of price, where product differentiation exists, the price is often less important than quality, service, features, image, and other non monetary factors. Example: local restaurants compete on the basis of taste of their food and their services, in addition to price.

Question 10

Monopolistic competitors

Answer 10

Are small businesses with differentiated products.

Question 11

What are the assumptions of Monopolistic competitors

Answer 11

1. Many are small firms. - so small that that the action of 1 firm does not impact more than a small portion of the market.
2. Differentiated products- the products of these firms are close, but not perfect substitutes.
3. Free entry and exit of firms- there are no barriers to entry of her firms into this market, nor are existing firms prevented from going out of business.

Question 12

Monopolistic competitive firms include

Answer 12

Restaurant, hair salons, convenience stores, and lawn care business.

Question 13

Are multi billion dollar industries or chain stores like McDonald’s or Burger King , monopolistic competitors or not?

Answer 13

Yes , for the most part each restaurant is part of the monopolistic competitive industry. Those that are part of the national chains, will have advantages over their competitors.

Question 14

Just like a competitive firm, a monopolistic competition will find its its highest profit at

Answer 14

The point where marginal revenue is equal to marginal costs.

Question 15

What is the difference between the competitive firm and monopolistic competition

Answer 15

The difference is in how the price is determined.
Competitive firm - is a price taker, for whom price is constant and equal to marginal revenue.
Monopolistically competitive firm- is a price searcher. It has control over its price. This control comes from product differentiation. Some consumers will be willing to pay more for a particular product than for its substitutes.

Question 16

Why is the ability of a monopolistic competitive firm , to control its prices limited?

Answer 16

As there are so many firms in a monopolistically competitive industry that the effect of the product differentiation is typically small.
The firm faces tremendous competition for the consumers dollar, and so many competitors selling in so many different ways, that the firms prices are likely to be similar.

Question 17

Price discrimination

Answer 17

Small sandwich stores offering senior or student discounts ( third degree discrimination) or buy 10 get one free deals ( second degree discrimination)

Question 18

In the short run, the monopolistically competitive firm may earn

Answer 18

An economic profit.
The existence of product differentiation helps this firm, compared to a competitive firm, because the ability to differentiate and adjust prices gives it a greater opportunity to create an economic profit.

Question 19

In the long run, monopolistically competitive firms must remember that

Answer 19

There are many firms and free entry of new firms. Any formula that is successful in the short run will be copied by existing and new firms. So this firm can expect only a normal profit in the long run.
Just as with the competitive firm, this is because of the entry of new firms into the market.

Question 20

A firm in monopolistic competition,such as a restaurant

Answer 20

Will always face tremendous pressure from competitors, must continually differentiate its produce, and can expect profits to be in jeopardy from time to time. And it means, that poorly run firms will not survive long.

Question 21

In a monopolistically competitive firm, what is larger, price or marginal revenue?

Answer 21

Price will be larger than marginal revenue for the monopolistically competitive firm.

Question 22

Summarize monopolistic competition

Answer 22

1. Output will be slightly lower [restricted] compared with the competitive solution, except where price discrimination increases the level of output. This is always true when P>MR, because we always set MC =MR to maximize profit.
2. Price will be higher than marginal cost, since the firm is a price searcher. This means the firm will not be resource allocative efficient,
   unless price just a nation is used to mitigate the outcome and set
   P= MC, but this is extremely unlikely.
3. Price will not be equal to the lowest possible average total cost because the firm faces a U-shaped ATC curve, and it restricts Output, the monopolistically competitive firm Will not be able to reach productive efficiency either.

Question 23

monopolistically competitive firms

Answer 23

Will charge higher prices
Produce lower levels of outputs
Produce at higher cost per unit
Be generally less efficient

Question 24

What are the characteristics of an oligopoly

Answer 24

1. The industry consist of only a few firms. There is no specific number of firms, other than at least two, but there is a test. The number of firms must be few enough that the firms are interdependent.
2. The forms in an oligopoly are interdependent. This means that action of one firm affects the other.
3. Strong barriers to entry and exit. It is difficult or impossible to start a new business in this industry.

Question 25

Oligopolies include

Answer 25

Airlines, automakers, steelmakers, college textbook publishers, oil companies, television networks, record companies, movie studios etc.

Question 26

What is a problem in the oligopoly

Answer 26

The problem for the Oligopoly is that it is directly affected by the actions of its competitors.
There is no set or usual strategy for an oligopolist.

Question 27

Many economists just believe that the best way to look at an oligopoly is to view it as if

Answer 27

There were a game being played, where each firm is a player and they are competing to win the game.
The strategy becomes more complex as the number of players increase.

Question 28

What is the most basic form of game theory

Answer 28

Prisoners dilemma

Question 29

Prisoners dilemma

Answer 29

Is a two-person game. There must be two suspects to the crime. We offer each of them a deal : confess and implicate your comrade, and we’ll ask the judge to go easy on you. There are three possible outcomes for each person;

1. Both suspects keep silent and get to go free
2. One suspect confesses, gets a short sentence, and the other suspect goes for a long prison term.
3. Both confess and both get long prison terms.

Question 30

What is the best strategy in prisoners dilemma

Answer 30

The best strategy would be for neither to confess,but that is actually unlikely to happen. Because they are separated, they have fear that their partner in crime will confess to save themselves, so they are likely to confess to protect themselves.

Question 31

What is the dominant strategy in prison is dilemma

Answer 31

The dominant strategy in business dilemma is for both to confess, which is the worst possible outcome

Question 32

What does prisoners Dilemma say for oligopoly

Answer 32

If the firms complete, they will hurt each other.

If they cooperate, they will both benefit.

Question 33

How do you oligopolies differ from other form of businesses

Answer 33

Oligo bodies different from other form of businesses and that they will attempt to find ways to collude or work together. They believe that competition is destructive and cooperation bring profits

Question 34

How do firms in oligopoly collude

Answer 34

Their collusion can take form of explicitly working together
Or it can be a tactic collusion, which means that the collude secretly, without public meeting or communication.

Question 35

Standard equilibrium

Answer 35

Means that everyone reaches a point where benefits and cost are equal. Everyone is happy at standard equilibrium.

Question 36

Nash equilibrium

Answer 36

Is an outcome where no one can make a change that improves their position. Your position maybe terrible, but every option is worse.

Question 37

What is the key to understanding oligopoly

Answer 37

Collusion

Question 38

Cartel

Answer 38

A cartel is a group of firms that operate through direct collusion. That is they get together and openly agree on how to run or control their businesses.
There is one price for the product in the market. This is because arbitrage is possible

Question 39

Trusts

Answer 39

Example the tobacco companies would meet and decide how to divide up there Market. These groups were called trusts

Question 40

What is the most obvious modern version of the cartel?

Answer 40

OPEC the organization of petroleum exporting countries

Question 41

A cartel lets an oligopoly act like

Answer 41

A monopoly

Question 42

Single price monopolies

Answer 42

Restrict output to raise the price

Question 43

If cartels work so well, why doesn’t everyone have one?

Answer 43

Cartels are illegal in the United States and in most developed nations
There is a fundamental problem with them that almost always leads to their demise. [In OPEC’s case, periods when they are unable to control the prices]

Question 44

Cartels function as long as

Answer 44

Everyone follows the rules. Some members, however, will maximize their profits if they break the rules.

Question 45

Name an instance when cartels will fail

Answer 45

The cartel may also fail when countries need money.

Question 46

How to oligopolies take advantage of the gains from collusion if they cannot meet and legally collude?

Answer 46

Through tactic collusion.

Example Coca-Cola and Pepsi cola these companies compete fiercely for soda drinkers, yet never using prices.

Question 47

Price leadership

Answer 47

Is a strategy that is often used for best selling products or brands ,setting their own prices.

Question 48

How do oligopolies try to prevent the entry of new competitors

Answer 48

1. High start up cost- in industry such as automobiles, the cost of creating a company from scratch is high even into the billions of dollars.
2. Product proliferation-companies that produce large number of different products [proliferation] to prevent the entry of a new competitor who takes a niche in the market left open to them.
   Example if there were no oats cereals, then a new competitor could enter the market by using oats to make cereal.
3. Control of resources-to start an airline, one must find gates at airports at which to park the planes. If all the gates at a particular airport are owned by existing airlines, the new airlines are excluded.

Question 49

Summarize oligopoly behavior

Answer 49

1. Oligopolies will try to act like monopolies. -In a single price industry, they will restrict output to raise prices. In a multiple price industry they will use price discrimination to take consumer surplus from their customers.
2. oligopolies will use non-price competition. -If they can find a way they will not use price as a basis for competition. Firms in an oligopoly that use price to compete are generally the smaller competitors.
3. oligopolies will conclude. By working together they can maximize their individual profits.
4. Oligopolies will attempt to limit competition. -They will edit barriers to entry and buy out competitors.

Question 50

Why are oligopolies “ risk adverse”

Answer 50

This means that they will try to avoid risk.
The oligopoly benefits if everything stays the same. So they don’t try new things, and when a competitor does innovate,the oligopoly will only act after they see what happens.

Question 51

Generally innovation comes from

Answer 51

The fringe, small outsiders, and not from the big players.

Example: Microsoft has not generally innovated, they have adapted innovations created by new players in the market.

Question 52

In the short run, the oligopoly firm may earn an

Answer 52

Economic profit. The existence of product differentiation helps this firm, compared to a competitive firm, because the ability to differentiate and adjust price gives it a greater opportunity to create an economic profit.

Question 53

In the long run, the oligopoly

Answer 53

Has barriers to the entry of new competition. Without the problem of new competitors, the economic profits of the oligopoly can exist into the long run.

Question 54

Some economists believe that the oligopoly is not primarily interested in Maximizing its profits. Why?

Answer 54

1. The oligopoly exist for the long-term. The firm may trade short-term profits for long-term success
2. The separation of ownership and control makes the primary goal of the oligopoly maximizing it’s short term stock price, so that current management can stay in power.
3. The oligopoly faces a complex world with many markets, suppliers, Union’s etc. some believe that it will react by setting a variety of goals with minimum levels of performance in each as the overall goal. This is called satisficing.
4. The oligopoly might be interested in maximizing its revenue or share of the market, subject to the constraint that its profits not fall below a certain level. Some view this as another long-term strategy.

Question 55

For an oligopoly what is larger, price or marginal revenue?

Answer 55

Price will be larger than marginal revenue for the oligopoly

Question 56

Summarize oligopoly

Answer 56

1. Output will be lower or restricted compared with the competitive solution, except where price discrimination increases the level of output. This is always true when P>MR, because we always set MC =MR to maximize profit
2. Price will be higher than marginal cost, says the firm is a price searcher . This means the firm will not be resource allocative efficient,unless price discrimination is used to mitigate the outcome and set P= MC, but this is extremely unlikely.
3. Price will not be equal to the lowest possible average total cost. If the firm faces a U-shaped ATC curve, and it restricts output , The oligopoly probably will not be able to reach productive efficiency either.

Question 57

What are the exceptions to the three outcomes?

Answer 57

1. Price discrimination can lead the firm to set P= MC and create a competitive level of output and resource allocative efficiency
2. The oligopoly may not have a U shaped cost curve, which means it may be a productive efficient producer of goods.

Question 58

Law of diminishing returns

Answer 58

Tells us that when we add one resource to a production process, without adding all the others, diminishing returns set in.

Question 59

What is the way around diminishing returns

Answer 59

Expand the business by the replication

Example McDonald’s does not expand by making its restaurants larger, it expands by building new restaurants.

Question 60

Replication

Answer 60

Is the expansion of the company by duplicating it’s existing production facilities.

Question 61

Individual factories, restaurants and businesses generally have

Answer 61

U shaped cost curves. This means that there is an optimal size for them

Question 62

The estimated cost curves for real multi plant firms are almost always found to be

Answer 62

L shaped

Question 63

Multinational firms

Answer 63

Is one that has wholly or partially owned affiliated that operate in countries other than the home country of the firm. An example, general motors owns Opel, which build cars for sale in Europe.

Question 64

Why do Multinational firms exist?

Answer 64

1. Cost - a multinational can take advantage of low labor costs in countries where they exist, low capital costs in others, and low natural resource costs in still other countries.
2. Culture- a multinational can use its affiliates to adapt its operations to the different cultures that exist in different countries
3. Immunity from exchange rate changes. - Changes in exchanges rates affect the price of imported goods, but not the cost of producing goods within a country
4. Immunity from import restrictions - If the US taxes Brazilian steel, the Brazilian company can buy a steel mill in the US, produce the steel within the US, and avoid paying the tariff.
5. Tax avoidance - Countries have different tax systems. A multinational may be able to lower its taxes by shifting is operation to take advantage of differences in tax laws among nations.

Question 65

Direct export

Answer 65

It produces the goods entirely at home, and then sells it directly into the other nation. This method has none of the advantages of a multinational firm, but it is simple and available to small businesses as well as large.

Question 66

Foreign partner

Answer 66

The partner in this case is not owned by domestic company but simply acts as a middle person, buying the goods from the US company and reselling it in its home country.

Question 67

What are the three options to available to a business that wishes to sell its output in other countries?

Answer 67

1. Direct export
2. Foreign partner
3. Foreign subsidiary or affiliate.

Question 68

Foreign subsidiary or affiliate

Answer 68

The process of doing this is called forgiven direct investment. The affiliate is part of the larger corporation but it is a separate unit when it is advantageous for the MNC to view it that way. It is through this model that the MNC will make use of all the advantages available to it.

Question 69

Vertical Integration

Answer 69

When a company produces some of the intermediate goods used in the production of the final product, then it is said to be vertically integrated

Question 70

non-vertically integrated

Answer 70

-

Question 71

MNC

Answer 71

will be at a competitive advantage compared with its wholly domestic competition

• Example = multinational auto producer can lower its costs by shifting production around the globe, a domestic company cannot, except where it can buy parts already produced elsewhere.

Question 72

A MNC likely produces

Answer 72

more than one product for sale to consumers.

• Example = Black and Decker makes dozens of different consumer goods, from household appliances to power tools to gardening equipment.

Question 73

horizontally integrated –

Answer 73

it produces many different unrelated consumer goods

Question 74

To be the most cost effective, a MNC will?

Answer 74

it will produce each good where it can be produced most efficiently.

Question 75

What is the conflict in Global production?

Answer 75

There is often a conflict in global production – we want inexpensive products, and we want domestically produced products. These two things may be incompatible.

Question 76

How will a MNC avoid restrictions imports of goods from abroad?

Answer 76

By producing them within a country.

Question 77

The United States has a tax on the

Answer 77

profits of corporations.

Question 78

VAT (Value Added Tax)

Answer 78

is the equivalent of a national sales tax, except it is paid by the business. It is called a Value Added Tax because it is not charged on the sales price, but rather on the difference between the cost of the inputs and the price of the final product (the value added).

Question 79

How a US company could use the multinational structure to avoid the corporate profits tax.

Answer 79

By shifting its profits to its foreign affiliates

Question 80

Transfer price

Answer 80

Suppose the affiliates of the MNC produce parts that are assembled into final products by the firmin the US. The affiliate does not give the parts to the parent company, it “sells” them to it. This sale is really just an accounting transaction. The parts were on the books of the subsidiary and are transferred at some price to the books of the parent.The price charged by one part of a MNC to another part of the same MNC for goods is called a transfer price.

Question 81

Flexible accounting

Answer 81

They have two sets of books. (Or more than that, one for every country). These multiple sets of books describe the company in whatever manner lowers the tax liability to the minimum in each country

Question 82

transfer pricing

Answer 82

This process of using different prices to move profits around

Question 83

Production differentiation creates

Answer 83

monopoly power for firms which are not monopolies.

Question 84

Monopolistic competition

Answer 84

is the economists term for businesses that have the characteristics of competitive firms, except that they have differentiated products.

Question 85

Firms in monopolistic competition

Answer 85

will charge slightly higher prices than in perfect competition, be a little less efficient, and potentially earn higher economic profits in the short run.

Question 86

Oligopoly

Answer 86

occurs when a small number of firms exist which are interdependent. Oligopoly does not follow the same theory of other market structures, but instead follows game theory, which requires it to respond to its competitors instead of making decisions in isolation.

Question 87

Multinationals have the ability to

Answer 87

use foreign resources and foreign locations to lower costs, avoid taxes, and avoid issues with exchange rates.