November 2023 Knowledge Check Week 3 Score 24 23 Concepts Mastery Questions Characteristics of Market Structures 100 1 5 7 9 Relationship
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Business Finance
Knowledge Check Week 3 Score: 24/23
Concepts Mastery Questions
Characteristics of
Market Structures
100% 1 5 7 9
Relationship of Pricing
Strategy to Market
Structure
133% 2 4 6
Role of Profits 100% 3
Non-price Barriers to
Entry
100% 8 10 11
Product Differentiation 100% 12 13 14 15 16 17 18
19
Reducing Costs 100% 20 21 22 23
Concept: Characteristics of Market Structures
Concepts Mastery Questions
Characteristics of
Market Structures
100% 1 5 7 9
1.
A purely- or perfectly-competitive firm would be characterized by
which of the following?
Large number of firms, price taker, free
entry and exit, and standardized product
A.
Large number of firms, price maker, free
entry and exit, and a differentiated product
B.
Small number of firms, price maker,
limited entry and exit, and a standardized
C.
product
One firm, price maker, limited entry and
exit, and a unique product
D.
The correct answer is: A. Table 9.1 in Economics: Principles,
Problems, and Policies lists the basic characteristics that are
considered in determining what market structure a firm fits
into. Identifying a firmâs market structure is important to help
direct the firmâs overall strategy.
Correct!
5.
Oligopolies are characterized by a small number of firms where the
top three firms hold the majority of the market. If in an oligopoly
market, firm A is almost twice as big as firm B and firm C then
firm A is perfectly free to price however it
chooses, since it is by far the most
dominant firm in the market
A.
firm C has to beware of pricing collusion
by A and B to avoid being picked off in a
price war
B.
firms A, B, and C will tend to use nonprice
strategies to maintain their profits or
market share.
C.
firms B and C will try to observe non-price
strategies taken by firm A and follow
similar strategies to maintain their profits.
D.
The correct answer is: C. While firms operating in an
oligopolistic structure are interdependentâthe actions of one
affects the othersâthey may gravitate towards the same price
point depending on their strategy, assuming they are setting
prices without conferring or colluding. If the firms do not
maintain the same price as their competitors, they must use
nonprice strategies to maintain their profits or
Correct!
market share. Otherwise, as the other firms move to a lower
price point, the firm that does not move loses market share
and profits as consumers switch to other firmsâ products.
7.
Which factor characterizes the competitive relationship between
firms in an oligopoly market structure?
A. Total independence of action-reaction
Interdependence: what one firm doesâin
setting prices, determining production
levels, investing in R & D, and so
forthâcan significantly affect other firmsâ
competitive positions.
B.
Despite the relatively small number of
oligopoly firms, the action(s) of any one
firm have little direct effect on the
decisions of its competitors.
C.
The common practice of collusive pricesetting.
D.
The correct answer is: B. By definition, an oligopolistic
industry has a small number of firms. This means that there
are only a few providers of the good, whether it is identical or
slightly differentiated, for consumers to move to if a firm
changes prices or the product design. If Firm A lowers its
priceâassuming it is providing a product very similar or
identical to products of the other firms in the marketâmany
customers will purchase the product from Firm A rather than
from the previous provider. As customers move, the
revenues of the other firms decrease, which results in a
reaction to prevent further decreases. To prevent losses, the
firms follow each other in pricing decisions, which also is true
in other areas. While it is true that some firms in oligopoly
market structures may act collusively in setting prices, this
practice is illegal in many countries. Even in places where it
is not prevented, it is not common because firms can make
additional short-term profits by not following the terms of the
Correct!
deal.
9.
Regulated monopolies are empowered by public authority for which
specific reason?
The provision of a good or service that, if
left to the free market system, would
require additional government regulation
to prevent negative externalities to
consumers as well as the public.
A.
The need to avoid the unnecessary use of
duplicate resources that could be more
efficiently employed by a single supplier to
meet the needs of the broadest range of
consumers.
B.
The public policy of protecting consumers
from the excesses of unrestricted,
demand-driven pricing.
C.
The governmentâs goal of maintaining
artificially low prices for particular goods
or services.
D.
The correct answer is: B. Regarding a regulated monopoly,
while it may be feasible for more than one firm to provide the
good in question, because of externalities that exist in the
production of the good, the government generally intervenes
to ensure firms use resources effectively. While the
government may oversee pricing, its goal is to ensure that
the company remains viable through its overall revenue. By
regulating the firm, it attempts to ensure that sufficient
resources are devoted to production, while also ensuring that
the resources are also available for the production of other
goods. The government may also wish to ensure that the
resources used, such as roads or waterways, are not used
more than necessary because of duplicative efforts.
Correct!
Concept: Relationship of Pricing Strategy to Market Structure
Concepts Mastery Questions
Relationship of
Pricing Strategy to
Market Structure
133% 2 4 6
2.
For a purely-competitive firm, price must be
equal to marginal revenue and average
revenue
A.
greater than marginal revenue and
average revenue
B.
greater than marginal revenue, and equal
to average revenue
C.
less than both marginal revenue and
average revenue
D.
The correct answer is: A. In the case of a purely competitive
firm, as opposed to other market structures, a producer can
provide as much as they want at the market price, so
producers donât need to change the price for the product to
sell additional units. In other words, the revenue received for
the first unit is the same as that of the last unit sold, which is
the same as the revenue for the next unit sold (marginal
revenue). In addition, because the revenue received from
each unit sold is the sameâthat is it doesnât change with
additional salesâthe average revenue is equal to the price,
which is equal to the marginal revenue.
Correct!
4.
A pure-monopoly firmâs demand curve is also the market demand
curve. This kind of firm may successfully engage in price
discrimination to increase its total profit if it
engages in rent-seeking behaviors to
prevent possible price challenges from
firms in other industries
A.
segregates its market into clearly
definable groups of consumers with
different elasticity of demand, and
prevents buyers in one market segment
from reselling to buyers in another market
segment.
B.
determines that consumers are relatively
sensitive to price changes along its
envisioned range of price differentials
(price elastic)
C.
determines that demand for its goods or
services is relatively insensitive along its
envisioned range of differential prices
(price inelastic)
D.
The correct answer is: B. To entice additional consumption,
or to increase quantity, the price must be lowered. In
addition, because companies do not put one unit on the
market at a time, the price on all units must be lowered. The
elasticity of the good then influences whether the firmâs
revenue increases by lowering the price. However, when a
firm is the only supplier of a good, the firm may have the
power to set different prices for different groups. For this to
happen, the firm must set clearly definable groups and must
prevent the resale of its good. This allows the firm to set
different prices for different groupsâalso known as price
discriminating. The firm increases its overall profit by selling
larger quantitiesâtypically sold at the optimal monopoly price
and quantity combinationâas it sells what it can at the optimal
monopoly price, or higher, to some groups and at
Correct!
a lower price to others. Consider movie theaters. Tickets in
the afternoon are often less expensive and potential
customers are restricted to those not working during these
hours.
6.
In a monopolistic competition industry, if one firm appreciably
increased its price from the existing equilibrium price, which of the
following outcomes would most likely ensue?
It would likely suffer a significant decrease
in its market share, because its
competitors would be unlikely to deviate
from the established equilibrium price.
A.
The firm would stand to gain much
additional revenue if its competitors did
not follow suit by raising their prices.
B.
Any gain or loss in the firmâs revenue
from increasing its price would depend on
the price elasticity of demand: The more
elastic the demand, the higher the
revenue potential from a price increase.
C.
It would probably see no change in its
revenue position as its competitors would
raise their prices accordingly.
D.
The correct answer is: A. In a monopolistically competitive
industry, the goods sold, while not perfect substitutes, can be
viewed as acceptable substitutes by most people. As a
result, if Firm A raised the price of its good substantially,
consumers would decrease the quantity demanded from Firm
A and would move to other firms selling similar products. As
a result, Firm A would sell few units at the new higher price.
As the quantity a firm sells falls, so does its percentage of
sales in the industry, also known as its market share.
Correct!
Concept: Role of Profits
Concepts Mastery Questions
Role of Profits 100% 3
3.
What will excessive or economic profits induce for a firm in any
industry structure?
A. entry into the market
B. exit from the market
C. equilibrium in the market
D. greater demand in the market
The correct answer is: A. If other firms see excessive or
economic profits, they might enter the industry because they
see it is possible to make a profit by providing that product. In
some industries, in which high barriers to entry exist, firms
may not be able to overcome these barriers, and the existing
firms will continue to earn profits.
Correct!
Concept: Non-price Barriers to Entry
Concepts Mastery Questions
Non-price Barriers
to Entry
100% 8 10 11
8.
Unregulated (natural) monopolies maintain their status through a
variety of measures. Whether any particular measure can effectively
constrain new firms from entering the market depends on
proprietary technology, exclusive
ownership of resources, or government
licenses.
A.
the number and size of the firm(s)
attempting to enter the market
B.
the willingness of suppliers and
distributors doing business with the
monopoly firm to boycott potential
entrants
C.
the amount of revenue loss the monopoly
is willing to accept to undersell potential
competitors
D.
The correct answer is: A. Regarding unregulated (natural)
monopoly, because there are no legal barriers to entry, the
firm must consider other factors in maintaining its monopoly
position in the market. Such factors include proprietary
technology and control of an essential input. For example,
does the firm produce the only good like it in the market or
does the firm have a unique or technical means of production
that results in economies of scale that support only one firm
in the market supplying that good. The monopoly firm, when
considering these factors, cannot ignore firms of any size if
they develop a more efficient means of production or find a
new source for a scarce resource. The firm also cannot rely
Correct!
on others to maintain its position, as they may find it
beneficial to cheat. If the firm undersells its new competitor to
keep that firm out of the market, the established firm will be
found guilty under anti-trust laws in the United States and
possibly abroad.
10.
Using a significantly greater economy of scaleâwith attendant lower,
long-run average total costsâto restrict the market entry of new
competitors
can be a successful tactic for established
firms regardless of industry type,
technology, market dynamics, or nature of
the consumer base
A.
may not be effective in industries in which
dynamic technology-driven changes
frequently alter the demand for product
design features, performance qualities,
and or production methods
B.
is more effective in industry structures
having low, minimum efficiencies of scale
C.
is a tactic seldom employed due to
legislation governing unfair trade practices
D.
The correct answer is: B. While some firms may find that
significantly greater economies of scale restrict the entry of
new competitors, those industries that face continual change
and improvement because of changes in technology would
not benefit from this because of the continual change in their
cost structure as a result of the frequent changes in
technology. Thus, industries that frequently see changes
driven by technology would not want to invest in large
amounts of the old technology to take advantage of greater
economies of scale. In addition, the continual change,
improvement, and investment in R&D would be considered
fair and necessary to remain competitive in the market.
Correct!
11.
In technology-intensive oligopoliesâcharacterized by dynamically
evolving product designârestricting the entry of additional firms is
not possible through customary legal
protections, such as patents, because of
the wide latitude of possible product
alternatives afforded by highly advanced
technologies
A.
achieved by patenting, the effective use of
licensing restrictions, as well as by
maintaining sustained advantages in
design and production
B.
invariably a matter of establishing and
maintaining economy of scale to minimize
long-run average total cost
C.
accomplished by requiring key suppliers
of production factors to do business
exclusively with firms currently in the
industry
D.
The correct answer is: B. When industries are technology
intensive, they are able to protect their market position
through patents, licensing restrictions, and innovations in
their design or production by using the legal system. If firms
violate patents or licensing requirements, the original firm can
take the violating firm to court, where an injunction or other
legal requirements may prevent further violations. In addition,
continuing to evolve the product and add those
improvements to the patent can help strengthen the patent
and can lengthen the life of the patent. While a firm can
attempt to establish exclusive contracts with key suppliers,
these will only be maintained if the terms are beneficial to the
supplier.
Correct!
Concept: Product Differentiation
Concepts Mastery Questions
Product
Differentiation
100% 12 13 14 15 16 17 18
19
12.
Whether the market structure is monopolistic or oligopolistic, a firm
may increase consumer demand for its product as an overall portion
of market share if
the firm acquires or possesses a resource
that is difficult or impossible for
competitors to imitateâsuch as a
geographic location, technologies, or
design and production applications that
cannot be replicated
A.
it can field an advertising campaign large
and convincing enough to persuade large
numbers of consumers to purchase its
product
B.
it repackages its product to appeal to
fashion trends
C.
the firm restricts distribution of its product
to core market areas or demographic
groups
D.
The correct answer is: A. The overall market demand for a
product is the sum of all consumersâ demand for said
product. While all firms in that industry face the same market
demand curve, in those market structures in which market
power exists, a firm can try to influence consumers to
demand its product over one of its competitors through
reputation, location, or other factors. Consumers consider
such factors when purchasing a product: visiting the local
grocery store versus the gourmet store, convenience or
Correct!
prestige, or the quality of the product being offered compared
with similar products. If a firm can influence additional
consumers to prefer its product over its competitors, it is at
an advantage. While a firm could advertise or repackage its
product, the money is only worth spending if there is
something to advertiseâhow is the firm different and why
consumers should buy this as opposed to other goods.
13.
One difference between firms already established in a monopolistic
competition industry and those attempting to enter it is that
existing firms often have established,
core-consumer marketing bases, while
entrants may have to advertise and
otherwise promote themselves to develop
market share in the new industry
A.
product development is more important
than establishing market visibility for firms
entering a monopolistic industry
B.
cost control is more difficult for incumbent
than for entrant firms due to costs of
counter marketing
C.
established firms may be able to use
product differentiation to help distinguish
themselves from new competitors
D.
The correct answer is: D. Incumbents usually have more
lines of products and more pricing options to offer than
entrants.
Correct!
14.
An average firm in an industry characterized by a homogeneous
product, relatively low barriers to entry, and a low concentration ratio
is unable to make any changes in
characteristic product design or services
to enlarge its market share
A.
has no pricing options but the market
equilibrium price
B.
can attempt to increase market share
through consumer-oriented changes in
the design and perceived value of its
product(s)
C.
has numerous pricing options âfrequent
discounts, extended sales, and so forthâif
it properly uses the strength of its brandimage
relative to those of its competitors
D.
The correct answer is: C. All firms may try to differentiate
their product or service; however, their market structure may
control the options available to them. If the product is
characterized as homogeneous, frequent discounts and
extended sales would only result in the firm making less
money. If the firmâs product or service is the same as all the
others in the market, they are already able to sell as many as
they want at the market price. Because they are selling as
many as they want at the market price, lowering the price
results in lower total revenue. Even though the product is
characterized as homogeneous, customers often make
decisions based on other factors, such as experience with
sales people; therefore, the firm may be able to influence its
position in the market by differentiating itself through other
means, such as product design, customer service, and
perceived value.
Correct!
15.
A monopolistic firm may operate in a relatively mature market with
little likelihood for significant change in technology or process
efficiencies. To maximize its profits, such a firm might
observe the existing market equilibrium
price and concentrate on lowering its
break-even point through cost reduction
measures
A.
consider diversifying its product line by
offering modestly-enhanced variants of
the same good or service and selling
these at prices marginally higher than for
its existing product
B.
attempt to leverage its existing resources
to fund its acquisition of smaller
competitors, in hopes of increasing
market share and revenue
C.
abandon the market altogether, as it really
has no effective way of changing the
status quo
D.
The correct answer is: B. In this case, the market is relatively
mature with little likelihood for significant change. This
indicates that the firm and the industry have already found
the most cost-effective way to produce the product, and
thereby will be unable to lower its costs further. The firm
would be unable to acquire other firms because, as a
monopolist, there are no other firms to be acquired. If smaller
firms were offering the same product, the acquisition of said
firms would be prohibited by law. If the firm was thought of as
a monopolistically competitive firm, the acquisition of other
firms would not increase market size substantially. The firm
would still have minimal ability to adjust price, as other firms
would enter the market if substantial profit was available. It
would also not make sense to abandon the market, as the
firm is looking to increase profit, or it is making money. That
Correct!
leaves diversifying its product line as the only viable
alternative. By offering an improved version, the firm entices
new customers to try its products, and it might allow a
marginally higher price to be set.
16.
Production differentiation can effectively be achieved by
emphasizing the weaknesses and
disadvantages of competing products
through comparative advertising,
especially in oligopoly markets
A.
implementing a broader range of
combinations of price and quality than
those offered by competitors
B.
concentrating exclusively on market
segments most likely to recognize
differences in product value
C.
utilizing consumer satisfaction surveys
and other metrics to determine what it is
the customer really wants
D.
The correct answer is: B. Product differentiation can be
achieved through offering unique price and non-price
features different than those offered by a competitor. Some
firms offer a range of price points while others provide
features such as warrantees or style to differentiate their
products.
Correct!
17.
While mass retail industries have one or several dominant
producers, smaller firms have a limited set of nonpricing options. The
most feasible of these include
attempting to garner increased market
share by simultaneously expanding
capacity, increasing economy of scale,
and discounting prices
A.
seeking to differentiate themselves from
their larger competitors by appealing to
specific niche markets
B.
mimicking the advertising, marketing, and
other successful non-pricing strategies of
the dominant firm(s)
C.
attempting to develop markets in related
industries rather than trying to compete
head-to-head with industry leaders
D.
The correct answer is: B. With limited funding, smaller firms
are not able to compete with the dominant producers in the
industry. Therefore, smaller firms must find a niche market
and engage in a nonpricing, product-differentiation strategy.
Correct!
18.
In monopolistic competition industries, effective product
differentiation is illustrated by
widespread brand recognition across
most, if not all, consumer age and income
groups; otherwise, the firm cannot
generate sufficient demand to enlarge
market share
A.
concentrated appeal to consumers in
market demographics most likely to want
or use the firmâs principal products
B.
a balanced combination of innovation,
new product development, and intensive
marketing
C.
having a long-established reputation for
distinctly superior product quality
D.
The correct answer is: B. Under monopolistic competition,
there are numerous competitors that sell a differentiated
product. It is very important to study the demographics in a
Correct!
market to target potential consumers with limited resources.
As each firm might be small in size, the market can be highly
fractionalized.
19.
Differentiation strategies vary in degree of effectiveness from one
type of market structure to another. For firms other than perfect
competition
opportunities exist throughout the
acquisition, production, sales, and service
process to distinguish their products
based on perceived quality and consumer
appeal
A.
the competitive margin is so tight that they
cannot afford the costs associated with
extensive product or market development
B.
selective product development and
enhancements which appeal to particular
consumer classes can create marketable
differences between one firmâs products
and anotherâs
C.
the best way of distinguishing the firmâs
product is through every-day low pricing
D.
The correct answer is: C. For a firm that is not in perfect
competition, it is beneficial to distinguish both the productâs
features or qualities and the consumerâs perception of these
qualities. To achieve this, the firm must target its product
development and enhancements to particular consumers or
groups of consumers.
Correct!
Concept: Reducing Costs
Concepts Mastery Questions
Reducing Costs 100% 20 21 22 23
20.
If a firmâs industry devolved from a monopolistic competition into an
oligopolistic structure, the firm would discover that
clearly distinguishing its productsâ unique
attributes from those of competitors in an
oligopoly market would be more difficult
for consumers than in a monopolistic
structure
A.
quality of maintenance and warranty
service would become more important as
differentiating attributes in an oligopoly
market
B.
nothing has changed. It all depends on
the individual industry
C.
as surviving firms gain market share, they
may enjoy lower average costs.
D.
The correct answer is: D. As the firm transitions from the
short term to the longer term, their short run cost curves may
shift to the right and possibly downward. If so, the firm would
enjoy economies of scale. As firms enjoy economies of scale,
they lower their average costs. If firms continue to expand,
they may enter a region of rising average costs. The longterm
average cost curve will decline at first and then begin to
rise. If the firm violates the marginal cost equals marginal
revenue rule, there would come a point when producing more
goods would not be profitable.
Correct!
21.
A firm can increase both profit and per-unit profit margin by lowering
production costs. To make this a long-term outcome, the firm should
acquire factors of production at lower
prices, defer planned investments in
expansion capital, and downsize its
workforce
A.
increase productivity through better
applications of existing technologies,
curtail product development plans, and
implement energy conservation programs
B.
seek to update existing production
technologies for greater future
efficiencies, consider alternative energy
sources for production, and better retain
and develop its human and intellectual
capital resources
C.
concentrate on improving present levels
of productivity through greater process
efficiencies, seeking to reinvesting the
savings in future R&D programs
D.
The correct answer is: C. To increase long-term revenue and
per-unit profit, a firm must increase its productivity and
efficiency. Two ways to achieve this are using alternative,
cheaper energy or using human and intellectual capital
resources more effectively.
Correct!
22.
A firmâs cost-reduction strategies may span multiple stages, from
acquisition of production input factors to product service and
maintenance. When seeking to lower cost in the short term, firms
should
reduce capital indebtedness through
refinancing at more favorable long-term
A.
interest rates
curtail output across the board to reduce
variable operating costs
B.
streamline and consider alternative
methods of production
C.
attempt to restructure long-standing
contracts with suppliers and distributors,
to reduce fixed costs in the short-run
D.
The correct answer is: C. To reduce short-term or short-run
costs, a firm must reduce its variable cost, such as
eliminating redundant or less-productive operations.
Correct!
23.
Firms can shift their marginal cost curves to the right, resulting in
higher outputs at the same or lower maximum-profit prices. This can
be done by
eliminating fixed-cost components in the
short term
A.
reducing average total cost through
reorganizing, production and increasing
efficiencies in distribution
B.
only if demand for the firmâs product(s)
shifts to the right: Businesses are always
demand driven
C.
better product innovation through
enhanced research and development
D.
The correct answer is: B. There are several ways to reduce
MC. For example, a firm can cut MC through finding lower
cost ways to operate. If firms find lower cost ways to operate,
they can continue to be profitable. However, if a firm fails to
do this, competitors will overtake them and decrease its
profits.
Correct!
