Economics 101: Principles of Microeconomics Ch 7. Market Structures in Economics

Market Equilibrium

point where price and production is optimized for both producers and consumers

What does the 'perfect' in 'perfect competition' describe?

1. Producers' behaviors is perfect- they charge prices that are just enough to cover their costs and a fair profit and never try to overcharge consumers.

2. Consumers' behavior is perfect- they buy only what they need and will pay what producers require, because they trust producers.

3. The goods and services sold in the market are perfect, meaning they exactly meet consumers' demands.

4. Prices are perfect, meaning they are in equilibrium at a point that is both the highest consumers are willing to pay and the lowest producers are willing to sell.

Prices are perfect, meaning they are in equilibrium at a point that is both the highest consumers are willing to pay and the lowest producers are willing to sell.

Which of the following is NOT one of the five requirements for a perfectly competitive market?

1. Firms sell differentiated products.

2. Firms are price takers.

3. Low barriers of entry/exit.

4. No single firm has significant market share.

Firms sell differentiated products.

Which of the following best describes the function of the invisible hand?

1. The invisible hand identifies the single best firm in any given industry.

2. The invisible hand ensures resources are equitably allocated among producers, regardless of how much producers are willing to pay for those resources.

3. The invisible hand sends signals between producers and consumers that result in optimum prices and supply levels.

4. The invisible hand stops consumers from paying too much for goods and services.

The invisible hand sends signals between producers and consumers that result in optimum prices and supply levels.

Which of these industries is closest to perfect competition?

1. Cell phone providers

2. Lemonade stands

3. TV manufacturers

4. Airlines

Lemonade stands

Who coined the term ''invisible hand,'' in what book, and when?

1. John Smith in The Economics of Nations (1787)

2. Thomas Paine in A History of the World (1787)

3. Adam Smith in On Nations and Economies (1776)

4. Adam Smith in The Wealth of Nations (1776)

Adam Smith in The Wealth of Nations (1776)

Monopoly

• when a single entity - a player in the game or a firm in the real world - controls an entire market

• a single firm large enough to set prices without impacting demand

True Monopoly

a single producer in the market

Regional Monoplies

monopolies that serve a certain geographic region

What is the biggest risk associated with monopolies?

1. The entity with complete market share could increase prices as high as they wanted, since consumers would have nowhere else to go.

2. A company with a monopoly can pick their customers, even if they discriminate against someone based on their race, gender, or religion.

3. Monopolies are typically owned and run by illegal groups, so they provide legal protection to criminal activities.

4. They limit consumer choice, so they are discouraged.

The entity with complete market share could increase prices as high as they wanted, since consumers would have nowhere else to go.

Which company did the Justice Department require be broken up in the early 1980s because they had become too powerful of a monopoly?

1. AT&T

2. Continental Railways

3. Atari

4. U.S. Power & Electric

AT&T

What controls exist to help discourage monopolies in the U.S. economy?

1. The free market encourages competition, and competition will limit monopolies.

2. Citizens can vote to dissolve a company that holds a monopoly.

3. Government regulations.

4. Monopolies are completely illegal.

Government regulations.

Which is the best example of a regional monopoly?

1. a gas station

2. A power company

3. A fast food restaurant

4. An airline

A power company

Which of the following best defines a monopoly?

1. A market where one individual owns companies through the entire distribution line, from raw materials to distribution of finished goods.

2. A market where there are many well-informed buyers and sellers.

3. A market where a single individual owns all of the companies in the market.

4. A market where a single entity is large enough to set prices without impacting demand.

A market where a single entity is large enough to set prices without impacting demand.

Monopolistic Competition

an industry somewhere on the continuum between a pure monopoly, where a single firm holds all market power, and perfect competition, where many firms exist and each is a perfect substitute for the other

How do barriers to entry affect the number of producers in an industry?

1. The lower the barriers to entry, the more producers there will be.

2. Barriers to entry alone don't have a substantial effect on the number of producers in an industry.

3. The lower the barriers to entry, the fewer producers there will be.

4. As barriers to entry rise, more and more producers join the industry.

The lower the barriers to entry, the more producers there will be.

As a market structure, monopolistic competition offers goods and services _____.

1. that have a perfect substitute from another industry

2. that do not have substitutes outside the industry

3. from a single firm

4. that only differ in price

that do not have substitutes outside the industry

Which of the following statements about goods and services in a monopolistic competition is TRUE?

1. Products and services produced by different firms in the industry are different in some way other than just price.

2. Each firm produces a perfect substitute for everything else produced in the industry.

3. Each firm in the industry produces a unique good or service but sells each unit of output at the exact same price as other firms in the industry.

4. Products and services produced in a monopolistically competitive market are luxury items, meaning they aren't required for survival.

Products and services produced by different firms in the industry are different in some way other than just price.

Which of the following statements describes how prices work under monopolistic competition?

1. Prices swing significantly based on producer output and consumer tastes.

2. Prices are set by producers.

3. Prices naturally fall to the lowest point possible that will still sustain many producers.

4. Prices are set based on consumer demand, and producers must take the price they can get.

Prices are set by producers.

Which of the following choices available to a consumer seeking to make a purchase does NOT represent a monopolistically competitive market?

1. Pizza delivered from a local restaurant or franchise chain

2. Deciding to purchase an iced coffee, an iced tea, or a smoothie.

3. A designer dress, a dress from a discount retailer, or a dress from a vintage store.

4. Lawn mowing services from a landscape company or college student start-up company

Deciding to purchase an iced coffee, an iced tea, or a smoothie.

Natural Monopoly

can arise when there are very high fixed costs or other barriers to entry in getting started in a certain business

Barriers to Entry

• extremely high capitol cost

• high start-up costs, specialized technology, or difficult licensing and regulation requirements

Why can a natural monopoly be advantageous for consumers?

1. The efficiency results in lower average costs for the consumer.

2. Natural monopolies ensure that everyone is provided with basic resources like electricity, water, and transportation.

3. Consumers do not have to bother choosing between competing companies.

4. The efficiency results in more consistent service for the consumer.

The efficiency results in lower average costs for the consumer.

If a large amount of existent infrastructure is required to run a particular kind of business, we would expect all of the following effects EXCEPT:

1. It would be wasteful for competitors to create new infrastructure when enough already exists.

2. Starting up a new business would be very expensive for the business.

3. Smaller businesses competing with the monopoly would coalesce into one single competitor.

4. Starting up a new business would be very expensive for the consumer.

Smaller businesses competing with the monopoly would coalesce into one single competitor.

_____ is NOT an example of a natural monopoly.

1. Cell phone service providers

2. Electricity providers

3. Gas providers

4. Water providers

Cell phone service providers

All of the following situations could lead to a natural monopoly EXCEPT:

1. There are heavy regulations and licensing requirements.

2. There are unique technologies needed.

3. There are high start-up costs.

4. The product is relatively easy to make.

The product is relatively easy to make.

Which of the following describes a natural monopoly?

1. A plumbing company that installs pipelines for a large water provider.

2. A pizza delivery service trying to out-compete other pizza restaurants in the area.

3. A park ranger who inspects campgrounds.

4. An electric company that has already laid a lot of underground cables and created a power grid.

An electric company that has already laid a lot of underground cables and created a power grid.

Oligopoly

a market structure where a few, large firms control most of the market

Monopoly

a single entity controls the entire market

Perfect Competition

many smaller companies selling the same goods and services

Game Theory

trying to anticipate your own best move based on the behavior of others

Price War

companies just keep lowering their prices to try and force the others out of business 

Which of the following industries is best described as a national oligopoly?

1. Cell phone providers

2. Movie theaters

3. Bowling alleys

4. Laundromats

Cell phone providers

The CEOs of Verizon, AT&T, T-Mobile, and Sprint are out golfing. The CEO of Sprint suggests a plan where they all offer cell plans that have different levels of data, minutes, and texts, but that when compared, they all cost the same. What is the CEO suggesting?

1. Starting a price war

2. Collaborative strategic pricing strategy

3. Price fixing

4. Creating a monopoly

Price fixing

Identify the agency of the U.S. government that is required to approve all proposed mergers and acquisitions.

1. Department of Commerce

2. Justice Department

3. Department of the Interior

4. The Federal Reserve Bank of New York

Justice Department

_____ describes the economic concept of making strategic plans based on anticipations of competitors' actions.

1. Predictive planning

2. Strategic planning

3. Game theory

4. Pro form strategy

Game theory

Which of the following is true if competitors in an oligopoly try to beat each other with lower prices?

1. Price war occurs, and it is not good for consumers because it ultimately limits competition.

2. Sales occur, and they are good for consumers because it makes them research for the best deals.

3. Price marketing occurs, and it is bad for consumers because it trains them to depend on price as a measure of quality.

4. Price war occurs, and it is good for consumers because prices are low.

Price war occurs, and it is not good for consumers because it ultimately limits competition.

monopoly

a situation in which a single seller of a product or service has the ability to completely dominate the market price of the product

imperfect market

one that is not a purely competitive market

monopsony

a situation in which a single buyer exists in a market with multiple sellers

What is a monopsony?

1. A type of monopoly that creates an imperfect market

2. A type of imperfect market in which there is a single (or very few) buyers for multiple sellers

3. A type of pure competition market that exists to support the buyer

4. A type of imperfect market in which there is one seller for multiple buyers

A type of imperfect market in which there is a single (or very few) buyers for multiple sellers

In what way can a job market be considered a monopsony?

1. When the employer and the worker have equal power to negotiate with each other

2. When there are many strong employers in a community all competing for eligible workers

3. When there is a strong union where workers have strong negotiating power

4. When there is only one main employer in a community of workers

When there is only one main employer in a community of workers

Which of the following is an example of a monopsony?

1. A parent setting requirements for their own child to earn an allowance

2. Farmers in a rural area having only one grocery store buyer to which to sell their produce

3. A union negotiating with one of many companies to get strong contracts for its members

4. A dog owner finding five different dog training companies to try when looking for dog training classes

Farmers in a rural area having only one grocery store buyer to which to sell their produce

The characteristics of a monopsony are _____.

1. High wages, buyer power over the market, and moderate profit for both buyer and seller

2. Low wages, buyer power over the market, and high profit for the buyer

3. Low wages, strong negotiating power for the seller, and high profits for the seller

4. High wages, strong worker negotiating position, and high profit for the employer

Low wages, buyer power over the market, and high profit for the buyer

How does a monopsony differ from a monopoly?

1. They are opposites: a monopsony is a single buyer for many sellers, whereas a monopoly is a single seller for many buyers.

2. They are actually different words for the same economic scenario.

3. One is an economic scenario and the other is a pop culture game.

4. Monopsonies can only exist in small, isolated communities, whereas monopolies are mainly found in large metropolitan cities.

They are opposites: a monopsony is a single buyer for many sellers, whereas a monopoly is a single seller for many buyers.

Economic System

the process of how scarce resources are allocated

Command System

an economic system where the government plays an active role in providing, or allocating, scarce resources

Socialism

an economic system where the government plays the primary role of allocating scarce resources to producers and consumers

Moral Hazard

an individual, or group of individuals, has a personal incentive to act in a way contrary to that which is best for the group of individuals they represent

Efficient Market

allocate resources where they are needed most at the lowest cost

Coordination Problem

the problem of deciding how to effectively coordinate the allocation of resources

A command economy is:

1. A system in which each person is commanded to purchase certain goods.

2. A system in which producers are required to meet growth targets every year.

3. A system in which resources are allocated by a centralized, top-down authority.

4. A system in which consumers command producers to provide the goods and services they want.

A system in which resources are allocated by a centralized, top-down authority.

Which of the following economic problems is NOT associated with a command system of economics?

1. People responsible for determining how goods are produced make choices designed to benefit themselves rather than the system as a whole.

2. Disparities between what is produced and what consumers need or want leads to waste.

3. Failure to allocate resources efficiently means that there are shortages of some goods, and consumers waste time waiting in line to acquire rationed items.

4. Prices are determined by what consumers are willing to pay, so some consumers won't be able to afford certain goods and services.

Prices are determined by what consumers are willing to pay, so some consumers won't be able to afford certain goods and services.

In a country with a command economy, people are angry because there are surpluses of snow shovels, overalls, and slow cookers, but shortages of toilet paper, canned food, and televisions. Which of the problems associated with command economic systems are they experiencing?

1. Moral hazard

2. Demand side economics

3. Principal-agent problem

4. Coordination problem

Coordination problem

Which of these government administrators is behaving in a way that exemplifies the problem of moral hazard in a command economic system?

1. Bob, who uses his position to have his political rivals thrown into prison.

2. Maureen, who uses her position to require that everyone adhere to her moral standards.

3. Ferdinand, who uses his position to decide what technical research projects the system should support.

4. Eloisa, who uses her position to manipulate the distribution of bread so that she can profit from it.

Eloisa, who uses her position to manipulate the distribution of bread so that she can profit from it.

Which of these countries provides a current or historical example of a command system of economics?

1. China

2. United States

3. England

4. India

China

Capitalism

an economic system that is organized around the principles of private property, freedom of exchange, competitive markets and limited government intervention

Economic system

the way a society structures how economic decisions will be made and resources allocated

Factors of production

the things that we use to make goods and services and include land, labor and capital

Which of the following is the best explanation of a free market in the real world?

1. A market with limited government intervention

2. A market where consumers set the terms of exchange

3. A market with no government intervention

4. A market where businesses set the terms of exchange

A market with limited government intervention

What determines the price of a good or service in a capitalistic economy?

1. Government

2. Supply and demand

3. Consumers

4. Businesses

Supply and demand

How should a government behave in a capitalist system?

1. By setting a ceiling on prices

2. By enacting laws to ensure there is a level playing field

3. By determining production levels

4. By regulating how many companies can compete in a given sector.

By enacting laws to ensure there is a level playing field

Which one of the following is NOT a characteristic of capitalism?

1. Competitive markets

2. Private property

3. Extensive government planning

4. Free exchange

Extensive government planning

Why is rewarding risk-taking an advantage to capitalism?

1. Because it creates great disparity in wealth

2. Because it recognizes the limited danger of climate change

3. Because it provides an incentive for innovation and economic growth

4. Because it promotes self-interest that is necessary for survival

Because it provides an incentive for innovation and economic growth

Economic Man

someone who makes decisions based on their own self-interest and chooses that which maximizes their own benefits

Game Theory

the result of your decision isn’t known to you until you find out what your friend (or competitor) is going to do, so you have to make the best decision you can based on the information you have

What is the 'prisoner's dilemma'?

1. An example of the economic concept of 'game theory'

2. The challenge of understanding supply and demand in a typical prison system

3. An economic theory that estimates the average number of prisoners in a normal society

4. The dilemma a prisoner faces when offered parole

An example of the economic concept of 'game theory'

What is 'game theory'?

1. The economic concept that states, if made enjoyable, learning economics is easy.

2. A concept related to the field of economics that states all economic theories are based on game-like situations, not real transactions or economies.

3. The economic concept that attempts to identify the optimal decision for one decision maker when another player's unknown selection impacts the original decision maker's results.

4. The theory that given the choice, most consumers approach purchasing common goods as a game.

The economic concept that attempts to identify the optimal decision for one decision maker when another player's unknown selection impacts the original decision maker's results.

While there are fictitious examples of game theory, which of the following is a good example of game theory in the real-world?

1. Purchasing gas or other commodities

2. Using a credit card for monthly expenses to earn bonus points, but paying it off in full so as to not be charged any interest.

3. Negotiating a strike or other union action

4. Attending school or professional development programs

Negotiating a strike or other union action

What is one difference between a game theory decision and other strategic business decisions?

1. Game theory decisions are only made by executives.

2. Game theory decisions do not involve strategic issues.

3. The results of a game theory decision are directly influenced by the decisions of another party.

4. Game theory decisions involve prisoners.

The results of a game theory decision are directly influenced by the decisions of another party.

What is the correct answer in the prisoner's dilemma?

1. Lie

2. Stay Silent

3. Confess

4. The correct answer is unknown without knowing the other player's decision.

The correct answer is unknown without knowing the other player's decision.

Game Theory

the idea that the results of one, or more, players’ decisions are based on the behaviors or choices of other players

Nash Equilibrium

outcome where both (or all) players are assumed to know the decisions of the other players and make the best decision for themselves, given the other players’ decisions

The prisoner's dilemma is a common example of what economic theory?

1. The incentive problem

2. Game theory

3. Principle-agent conflict

4. Supply and demand

Game theory

Game theory is the idea that the results of one, or more, players' decisions are based on _____.

1. selfish motives

2. their ability to find a Nash equilibrium

3. the behaviors or choices of other players

4. their own free will

the behaviors or choices of other players

In a situation with two players, how do we find the optimal solution?

1. By finding the option where each player would have no incentive to change their behavior, because doing so would result in a worse outcome

2. By finding the option with the best possible outcome for any single player

3. We can't say without knowing more about the particular situation.

4. By looking for the option where the two players, combined, have the best outcome

By looking for the option where the two players, combined, have the best outcome

In a situation with two players, how do we find the Nash equilibrium?

1. By finding the option where each player has no incentive to change their behavior, because doing so would result in a worse outcome

2. By looking for the option where both players, combined, have the best outcome

3. By finding the option with the best possible outcome for any single player

4. We can't say without knowing more about the particular situation.

By finding the option where each player has no incentive to change their behavior, because doing so would result in a worse outcome

Which of the following is necessary to be able to identify the Nash equilibrium?

1. The available actions of each player in the game

2. All you need to know is the optimal outcome for yourself.

3. The number of players involved in the game.

4. The relative outcome for every player

The available actions of each player in the game