Unit 4

Question 1

A(n) ___ is a threat that does not harm the threatener if it is carried out.

Answer 1

Credible threat

Question 2

A(n) ___ is a game in which exactly the amount one competitor gains must be lost by other competitors.

Answer 2

zero-sum game

Question 3

A(n) ___ results when each player adopts the strategy that gives the highest possible payoff if the rival sticks to the strategy it has chosen.

Answer 3

Nash equilibrium

Question 4

The ___ requires a player to select the strategy that yields the maximum payoff on the assumption that the opponent will do as much damage as it can.

Answer 4

maximum criterion

Question 5

A(n) ___ for one of the competitors in a game is a strategy that will yield a higher payoff than any of the other strategies that are possible, no matter what choice of strategy is made by competitors.

Answer 5

dominant strategy

Question 6

A(n) ___ shows how much each of two competitors (players) can expect to earn, depending on the strategic choices each of them makes.

Answer 6

payoff matrix

Question 7

A price is called ___ if it does not change often, even when there is a moderate change in cost.

Answer 7

sticky

Question 8

A(n) ___ is a demand curve that changes its slope abruptly at some level of output.

Answer 8

kinked demand curve

Question 9

A firm’s objective is said to be ___ if it seeks to adopt prices and output quantities that make its total revenue (the money value of its sales), rather than its profits, as large as possible.

Answer 9

sales maximization

Question 10

In a(n) ___, each competing firm is determined to sell at a price that is lower than the price of its rivals, often regardless of whether that price covers the pertinent cost. Typically, in such a ___, Firm A cuts its price below Firm B’s price; B retaliates by undercutting A; and so on until some of the competitor firms surrender and let themselves be undersold.

Answer 10

price war

Question 11

What does it mean for an industry to have a Herfindahl-Hirschman Index of 10,000?

Answer 11

One firm has 100% market share.

Question 12

Tell whether the following scenario is an example of tying, bottleneck, or predatory pricing.

Heat-Em-Up is the only firm producing grills. It costs $460 to produce a grill, and Heat-Em-Up sells each grill for $900. After Well Done, a new firm with the same costs as Heat-Em-Up, enters the market for grills, Heat-Em-Up starts selling its grills for a price of $330.

Answer 12

Predatory Pricing

Question 13

Tell whether the following scenario is an example of tying, bottleneck, or predatory pricing.

TransUSA is a railroad company that built and owns the only bridge to and from Coronado island to the mainland United States. Since there are no airports or boating docks in Coronado, any firms that want to ship goods from the mainland United States must use TransUSA’s trains and bridge. This makes it difficult for other shipping and freight companies in the area to compete with TransUSA.

Answer 13

Bottleneck

Question 14

Tell whether the following scenario is an example of tying, bottleneck, or predatory pricing.

Book Bound sells a wide variety of books to retail bookstores. Book Bound recently published two new books: a popular mystery novel and a much less popular history book. Book Bound requires bookstores to buy 15 copies of the history book for every 140 copies of the mystery novel ordered.

Answer 14

Tying

Question 15

Which of the following is an example of economies of scope?

A. Walmart can transport goods and services at a lower cost than any of its retail competitors can.

B. It is more profitable for Dell to buy computer processors from Intel than to manufacture them itself.

C. A university begins offering night classes to working adults. The evening classrooms are also used by full-time students during the day.

D. Coke makes a billion drinks per day at a lower average cost than if 1,000 soda companies made a million drinks per day.

Answer 15

C

Question 16

Which of the following inputs do you think include relatively large economic rents in their earnings? (Choose all that apply)

A. Petroleum

B. A champion racehorse

C. Nuts and bolts

Answer 16

A, B

Question 17

Three machines are employed in an isolated area. They each produce 2,000 units of output per month, the first requiring $20,000 in raw materials, the second $25,000, and the third $28,000.

If the services of the third machine can be hired at a price of $9,000 per month, the monthly charge for the first machine is ___ and the monthly charge for the second machine is ___.

Answer 17

$17,000; $12,000

Question 18

Three machines are employed in an isolated area. They each produce 2,000 units of output per month, the first requiring $20,000 in raw materials, the second $25,000, and the third $28,000.

The amount of economic rent paid to the first and second machines are ___ and ___ respectively.

Answer 18

$8,000; $3,000

Question 19

Economists conclude that a tax on the revenue of firms will be shifted in part to consumers of the products of those firms in the form of higher prices. However, they believe that tax on the rent of land usually can not be shifted and must be paid entirely by the landlord because…

Answer 19

The supply of land is perfectly inelastic

Question 20

Many economists argue that a tax on apartment buildings is likely to reduce the supply of apartments, but that a tax on all land, including the land on which apartment buildings stand, will not reduce the supply of apartment buildings because…

Answer 20

The supply of land is perfectly inelastic, while the supply of apartment buildings is not.

Question 21

___ is an inventory of plant, equipment, and other productive resources held by a business firm, an individual, or some other organization, whereas ___ is the amount by which ___ grows.

Answer 21

Capital; investment; capital

Question 22

___ is the act of generating an idea for a new product or a new method for making an old product. ___ is taking the next step, the act of putting the new idea into practical use.

Answer 22

Invention; innovation

Question 23

A(n) ___ is a ceiling above which regulators do not permit prices to rise. It is designed to provide an efficiency incentive to the firm by allowing it to keep part of any savings in costs it can achieve.

Answer 23

Price Cap

Question 24

___ measures the share of the total sales or assets of the industry in the hands of its largest firms.

Answer 24

Concentration of an industry

Question 25

___ means selling one product of the firm at a loss, which is balanced by higher profits on another of the firm’s products.

Answer 25

Cross-Subsidization

Question 26

___ are savings that are obtained through simultaneous production of many different products. They occur if a firm that produces many commodities can supply each good more cheaply than a firm that produces fewer commodities

Answer 26

Economies of Scope

Question 27

___ refers to a pricing arrangement under which the supplier offers substantial discounts to customers if they buy several of the firm’s products, so that the price of the bundle of products is less than the sum of the prices of the products if they were bought separately.

Answer 27

Bundling

Question 28

___ is pricing that threatens to keep a competitor out of the market. It is a price that is so low that it will be profitable for the firm that adopts it only if a rival is driven from the market.

Answer 28

Predatory Pricing

Question 29

The ___ is an alternative and widely used measure of the degree of concentration of an industry. It is calculated, in essence, by adding together the squares of the market shares of the firms in the industry, although the smallest firms may be left out of the calculation because of their small market share numbers have a negligable effect on the result.

Answer 29

Herfindahl-Hirschman Index (HHI)

Question 30

A(n) ___ is the percentage of an industry’s output produced by its four largest firms. It is intended to measure the degree to which the industry is dominated by large firms.

Answer 30

Concentration ratio

Question 31

___ refers to programs and laws that preclude the deliberate creation of monopoly and prevent powerful firms from engaging in related “anticompetitive practices.”

Answer 31

Antitrust policy

Question 32

___ are savings that are obtained through increases in quantities produced. They occur when an X percent increase in input use raises output by more than X percent, so that the more the firm produces, the lower its per unit costs become.

Answer 32

Economies of Scale

Question 33

___ is the ability of a business firm to earn high profits by raising the prices of its products above competitive levels and to keep those prices high for a substantial amount of time.

Answer 33

Monopoly Power

Question 34

___ is a mathematical procedure that takes account of the interdependence among the economy’s industries and determines the amount of output each industry must provide as inputs to the other industries in the economy.

Answer 34

Input-output analysis

Question 35

___ refers to a situation in which there is minimal government interference with the workings of the market system. The term implies that people should be left alone in carrying out their economic affairs.

Answer 35

Laissez-faire

Question 36

A(n) ___ is one that takes advantage of every opportunity to make some individuals better off in their own estimation while not worsening the lot of anyone else.

Answer 36

Efficient allocation of resources

Question 37

The ___ from a sale is the difference between the market price of the item sold and the lowest price at which the supplier would be willing to provide the item.

Answer 37

Producer’s Surplus

Question 38

The ___ from a purchase is equal to the difference between the maximum amount the consumer would be willing, if necessary, to pay for the item bought and the price that the market actually charges.

Answer 38

Consumer’s Surplus

Question 39

A(n) activity is said to generate a ___ if that activity causes incidental benefits or damages to others not directly involved in the activity and no corresponding compensation is provided to or paid by those who generate the ___.

Answer 39

Beneficial / detrimental externality

Question 40

Resources are ___ if it is possible to change the way they are used or the combination of goods and services they produce and thereby make consumers and producers better off.

Answer 40

Misallocated