Multiple Choice Answers

1. If price exceeds average variable cost but is less than average total cost, a firm should further differentiate its product. should stay in business for a while longer until its fixed costs expire. is making some profit but less than maximum profit. should shut down.

2. If a monopolistically competitive firm breaks even, the firm is earning an accounting profit and will have to pay taxes on that profit. is earning zero accounting and zero economic profit. should advertise its product to stimulate demand. expand production.

3. Unlike a perfectly competitive firm, for a monopolistically competitive firm price marginal cost for all output levels. price marginal revenue for all output levels. price average revenue for all output levels. marginal revenue = marginal cost at the profit maximizing output.

4. Brand management refers to picking a brand name for a new product that will attract attention. the efforts to maintain the differentiation of a product over time. efforts to reduce the cost of production. selling the right to use a brand name in a particular market.

5. You are planning to open a new Italian restaurant in your hometown where there are three other Italian restaurants. You plan to distinguish your restaurant from your competitors by offering northern Italian cuisine and using locally grown organic produce. What is likely to happen in the restaurant market in your hometown after you open? Your competitors are likely to change their menus to make their products more similar to yours. The demand curve facing each restaurant owner shifts to the right. The demand curve facing each restaurant owner becomes more elastic. While the demand curves facing your competitors becomes more elastic, your demand curve will be inelastic.

6. Why does a prisoners’ dilemma lead to a noncooperative equilibrium? because each player had agreed before the game started to minimize the harm that he can inflict on the other players because each player is uncertain how other players will play the game because players must choose from have a limited number of non-dominant strategies because each rational player has a dominant strategy to play a certain way regardless of what other players do

7. A key part of Sam Walton’s business strategy for Wal-Mart involved placing stores in small towns where the main competition was from small, locally owned stores. What is the rationale behind this strategy? to increase consumer welfare by offering consumers in small towns a wider variety of goods and services to create employment opportunities for those living in small towns to maintain a competitive edge – small stores cannot compete with Wal-Mart’s prices because Wal-Mart is able to pass to consumers some of its cost savings from economies of scale locating in small towns requires a lower financial outlay than locating in big cities

8. The “Discount Department Stores” industry is highly concentrated. What does this mean? There are many large stores such as Wal-Mart, Target, Kohl’s, in this industry. A few large stores account for a significant portion of industry sales. There is cut-throat competition in this industry because there are no entry barriers. The sales volume in this industry is consistently high.

9. Oligopolies exist and do not attract new rivals because of competition. of barriers to entry. the firms keep profits and prices so low that no rivals are attracted. there can be no product differentiation.

10. Refer to Table 13-2 ( Tabe will be attached). If Coke produces a high quantity, what is Pepsi’s best response? Produce a high quantity and earn a profit of $25 million. Produce a low quantity and earn a profit of $25 million. It does not matter what Pepsi does; its profit will be $10 million with a low or a high quantity. Produce a high quantity and earn a profit of $10 million