November 2023 Knowledge Check Week 3 Score 24 23 Concepts Mastery Questions Characteristics of Market Structures 100 1 5 7 9 Relationship

ECO/561 ECO 561 ECO561 Week 3 Individual Assignment – Knowledge Check – A+ (100%) guaranteed!

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


133% 2 4 6

Role of Profits 100% 3

Non-price Barriers to


100% 8 10 11

Product Differentiation 100% 12 13 14 15 16 17 18


Reducing Costs 100% 20 21 22 23

Concept: Characteristics of Market Structures

Concepts Mastery Questions

Characteristics of

Market Structures

100% 1 5 7 9


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


Large number of firms, price maker, free

entry and exit, and a differentiated product


Small number of firms, price maker,

limited entry and exit, and a standardized



One firm, price maker, limited entry and

exit, and a unique product


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.



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


firm C has to beware of pricing collusion

by A and B to avoid being picked off in a

price war


firms A, B, and C will tend to use nonprice

strategies to maintain their profits or

market share.


firms B and C will try to observe non-price

strategies taken by firm A and follow

similar strategies to maintain their profits.


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


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.


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.


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.


The common practice of collusive pricesetting.


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




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.


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



The public policy of protecting consumers

from the excesses of unrestricted,

demand-driven pricing.


The governmentâs goal of maintaining

artificially low prices for particular goods

or services.


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.


Concept: Relationship of Pricing Strategy to Market Structure

Concepts Mastery Questions

Relationship of

Pricing Strategy to

Market Structure

133% 2 4 6


For a purely-competitive firm, price must be

equal to marginal revenue and average



greater than marginal revenue and

average revenue


greater than marginal revenue, and equal

to average revenue


less than both marginal revenue and

average revenue


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.



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


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



determines that consumers are relatively

sensitive to price changes along its

envisioned range of price differentials

(price elastic)


determines that demand for its goods or

services is relatively insensitive along its

envisioned range of differential prices

(price inelastic)


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


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



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.


The firm would stand to gain much

additional revenue if its competitors did

not follow suit by raising their prices.


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.


It would probably see no change in its

revenue position as its competitors would

raise their prices accordingly.


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.


Concept: Role of Profits

Concepts Mastery Questions

Role of Profits 100% 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.


Concept: Non-price Barriers to Entry

Concepts Mastery Questions

Non-price Barriers

to Entry

100% 8 10 11


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



the number and size of the firm(s)

attempting to enter the market


the willingness of suppliers and

distributors doing business with the

monopoly firm to boycott potential



the amount of revenue loss the monopoly

is willing to accept to undersell potential



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


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.


Using a significantly greater economy of scaleâwith attendant lower,

long-run average total costsâto restrict the market entry of new


can be a successful tactic for established

firms regardless of industry type,

technology, market dynamics, or nature of

the consumer base


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


is more effective in industry structures

having low, minimum efficiencies of scale


is a tactic seldom employed due to

legislation governing unfair trade practices


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.



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



achieved by patenting, the effective use of

licensing restrictions, as well as by

maintaining sustained advantages in

design and production


invariably a matter of establishing and

maintaining economy of scale to minimize

long-run average total cost


accomplished by requiring key suppliers

of production factors to do business

exclusively with firms currently in the



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



Concept: Product Differentiation

Concepts Mastery Questions



100% 12 13 14 15 16 17 18



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


it can field an advertising campaign large

and convincing enough to persuade large

numbers of consumers to purchase its



it repackages its product to appeal to

fashion trends


the firm restricts distribution of its product

to core market areas or demographic



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


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.


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


product development is more important

than establishing market visibility for firms

entering a monopolistic industry


cost control is more difficult for incumbent

than for entrant firms due to costs of

counter marketing


established firms may be able to use

product differentiation to help distinguish

themselves from new competitors


The correct answer is: D. Incumbents usually have more

lines of products and more pricing options to offer than




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


has no pricing options but the market

equilibrium price


can attempt to increase market share

through consumer-oriented changes in

the design and perceived value of its



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


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.



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



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


attempt to leverage its existing resources

to fund its acquisition of smaller

competitors, in hopes of increasing

market share and revenue


abandon the market altogether, as it really

has no effective way of changing the

status quo


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


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.


Production differentiation can effectively be achieved by

emphasizing the weaknesses and

disadvantages of competing products

through comparative advertising,

especially in oligopoly markets


implementing a broader range of

combinations of price and quality than

those offered by competitors


concentrating exclusively on market

segments most likely to recognize

differences in product value


utilizing consumer satisfaction surveys

and other metrics to determine what it is

the customer really wants


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




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


seeking to differentiate themselves from

their larger competitors by appealing to

specific niche markets


mimicking the advertising, marketing, and

other successful non-pricing strategies of

the dominant firm(s)


attempting to develop markets in related

industries rather than trying to compete

head-to-head with industry leaders


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.



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


concentrated appeal to consumers in

market demographics most likely to want

or use the firmâs principal products


a balanced combination of innovation,

new product development, and intensive



having a long-established reputation for

distinctly superior product quality


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


market to target potential consumers with limited resources.

As each firm might be small in size, the market can be highly



Differentiation strategies vary in degree of effectiveness from one

type of market structure to another. For firms other than perfect


opportunities exist throughout the

acquisition, production, sales, and service

process to distinguish their products

based on perceived quality and consumer



the competitive margin is so tight that they

cannot afford the costs associated with

extensive product or market development


selective product development and

enhancements which appeal to particular

consumer classes can create marketable

differences between one firmâs products

and anotherâs


the best way of distinguishing the firmâs

product is through every-day low pricing


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.


Concept: Reducing Costs

Concepts Mastery Questions

Reducing Costs 100% 20 21 22 23


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



quality of maintenance and warranty

service would become more important as

differentiating attributes in an oligopoly



nothing has changed. It all depends on

the individual industry


as surviving firms gain market share, they

may enjoy lower average costs.


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.



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



increase productivity through better

applications of existing technologies,

curtail product development plans, and

implement energy conservation programs


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


concentrate on improving present levels

of productivity through greater process

efficiencies, seeking to reinvesting the

savings in future R&D programs


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.



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


reduce capital indebtedness through

refinancing at more favorable long-term


interest rates

curtail output across the board to reduce

variable operating costs


streamline and consider alternative

methods of production


attempt to restructure long-standing

contracts with suppliers and distributors,

to reduce fixed costs in the short-run


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.



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


reducing average total cost through

reorganizing, production and increasing

efficiencies in distribution


only if demand for the firmâs product(s)

shifts to the right: Businesses are always

demand driven


better product innovation through

enhanced research and development


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