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Quiz: Unit 3 (Business Economics)

Questions (Answers)
  1. At what point do firms profit maximise?
  2. At what point do firms sales maximise?
  3. At what point do firms revenue maximise?
  4. What are the conditions for perfect competition?
  5. What are the conditions for a monopoly?
  6. What are the conditions for monopolistic competition?
  7. What are the conditions for an oligopoly market?
  8. When is total revenue maximised?
  9. Who came up with the theory of Contestable Markets?
  10. What are the conditions for a contestable market?
  11. What are the implications of a contestable market for competition policy?
  12. What are the implications for efficiency in a contestable market?
  13. What is the condition for allocative efficiency?
  14. What is allocative efficiency?
  15. What is the condition for productive efficiency?
  16. What is productive efficiency?
  17. What are the conditions for price discrimination to occur?
  18. What is the shut-down price for a firm?
  19. What is x-inefficiency?
  20. What are the efficiencies in a perfectly competitive market in the long and short run?
  21. Show the deadweight loss which occurs in a monopolistically competitive market.
  22. Compare a perfectly competitive market and a monopoly market graphically and analytically.
  23. Show how 3rd degree price discrimination works.
  24. Give 3 evaluation points to the Kinked Demand Curve Model.
  25. Draw the Kinked Demand Curve Model.
  26. What would happen if the firm were to increase its price above P* in the kinked demand curve model?
  27. What would happen if the firm were to decrease its price below P* in the kinked demand curve model?
  28. Name a method of pricing strategy and explain it.
  29. Why would a price war happen?
  30. What are the benefits and negatives of a price war to consumers?
  31. What is predatory pricing?
  32. What is a condition necessary for limit pricing to occur?
  33. Draw a graph to show how limit pricing works and explain where the price will be set.
  34. Name 3 types of non-price competition.
  35. Explain the effects of increased advertising as a form of non-price competition.
  36. What are the effects of creating a brand in an oligopoly market?
  37. Why might creating a brand be a feasible option?
  38. What is a cartel?
  39. Draw a game theory matrix to explain why cartels occur.
  40. Why are overt (and to an extent covert) cartels rare in the UK?
  41. Name some factors which favour collusion.
  42. How do authorities encourage cartels to be reported?
  43. What is over collusion and covert collusion?
  44. What is tacit collusion?
  45. What are 2 methods that tacit collusion may occur from?
  46. What is X-Inefficiency?
  47. When does X-Inefficiency occur?
  48. What is the MES point?
  49. If a firm isn’t making a normal profit, what will it do?
  50. When would a firm be expected to shut down in the short run?
  51. What is satisficing behaviour?
  52. Why would a firm revenue maximise?
  53. Under what types of market structure can revenue maximisation occur?
  54. Why might a firm maximise sales?
  55. What is supernormal profit when sales maximisation is occurring?
  56. If AR and MR are constant what is TR?
  57. If AR and MR are downward sloping what is TR?
  58. What is a dominant strategy?
  59. What is Nash equilibrium?
  60. What type of growth are mergers?
  61. What is horizontal integration?
  62. What is forward vertical integration?
  63. What is backward vertical integration?
  64. Why might horizontal integration occur?
  65. Why might vertical integration occur?
  66. Why might a demerger occur?
  67. What is conglomerate integration?
  68. Why might conglomerate integration occur?
  69. How can organic growth occur?
  70. What are the reasons for growth?
  71. What are the costs of mergers?
  72. Name 5 types of economies of scale.
  73. When would diseconomies of scale occur?
  74. Why would this happen?
  75. When examining costs what is the difference between long run and short run?
  76. What are fixed costs?


  1. MR=MC
  2. AR=ATC 
  3. MR=0
  4. Firms profit maximise; there are many buyers and sellers in a market and none have significant market power. Firms are therefore price takers; the product is homogenous; there are no barriers to entry or exit; there is perfect knowledge of market conditions; there are no externalities
  5. There are no substitutes for the good; there are very few firms in the market; there are high barriers to entry into the market; the firm is profit maximising.
  6. Products are differentiated; there is freedom of entry into the market; there are many firms operating in the market and hence concentration is low
  7. Firms are interdependent; there are modest economies of scale; similar products
  8. MR = 0
  9. William Baumol
  10. No barriers to entry or exit especially sunk costs; Access to the same level of technology between incumbents and new entries; entry can take place rapidly
  11. Prices aren’t likely to be set much higher than average costs due to the threat of contestability and therefore regulatory authorities don’t need to actively intervene in such a market.
  12. Contestable markets are x-efficient, productively efficient and allocatively efficient.
  13. P=MC
  14. Allocative efficiency is a measure of whether resources are allocated to producing the goods and services demanded by consumers.
  15. MC=AC (operating at the lowest point on the average cost curve)
  16. Productive efficiency occurs when average cost is at its lowest point.
  17. Firms need to know consumers elasticities of demand; Consumers mustn’t be able to resell the product; the firm must have monopoly power.
  18. Any point below the average variable cost curve.
  19. X-inefficiency occurs if a firm is operating above its long run average cost curve, this may be due to organisational slack or other waste.
  20. Short run – Allocatively efficient, Long Run – Allocatively and productively efficient
  21. Image
  22. Image: Under perfect competition consumer surplus would be the triangle ABC. Under a monopoly it will be smaller at EFA. The highlighted triangle represents welfare loss under a monopoly as only QM will be produced. The rectangle PEBD is the monopoly profits, this would have been consumer surplus under perfect competition but this has been captured by the monopoly firm.
  23. Image
  24. There is no explanation as to how the firm arrives at P*Q* initially; the model doesn’t take into account non-price competition; it is based on the assumption that competitors won’t rise their price if the firm increases its own and that it will reduce prices if the firm reduces its own.
  25. Image
  26. Rival firms are unlikely to do the same, therefore the demand curve above P* is elastic and the firm will lose market share to competitors.
  27. Rival firms will match the price decrease hence the demand curve below P* is inelastic and the firm is just likely to lose profit from any price decrease.
  28. Cost-plus pricing; the average cost (at the given output level) plus a mark-up. This mark-up is likely to be higher in less competitive markets than in more competitive markets.
  29. A price war may occur if a firm believes it can take market share by reducing its prices, whilst competitors contemplate their decision, and then retain these new customers when prices return to their normal levels.
  30. In the short run consumers benefit from lower prices. However in the long run prices may rise in order for the firms to recoup their losses. Also if the price war results in less competition then consumers will have fewer products/services to chose from and may have to pay monopoly, or higher, prices.
  31. Where a firm sets prices below their average variable cost in order to drive competitors out.
  32. There must be economies of scale.
  33. ImageThe price will be set below CNE but above CI. Therefore the new entrant will make a loss (and this will deter entry or encourage the firm to leave the market) and the incumbent firm will make a supernormal profit.
  34. Advertising, branding, customer service.
  35. It may cause the whole industry to expand. A successful campaign may increase demand for the good of a firm and may cause the demand curve to become more inelastic. Advertising is less costly than price competition however it will still increase costs and may lead to lower supernormal profits. Competitors can also easily create their own ad campaign which may be more successful.
  36. If a successful brand is created then firms can charge a premium price (because it is perceived that there are few substitutes) and hence receive monopoly profits without seeing a fall in demand. It is also hard for competitors to attract a strongly branded good.
  37. It is hard to develop a strong brand and this can be time-consuming and expensive.
  38. A cartel is a group of firms who agree to fix a price or output in order to maximise their joint profits.

    Firm B High Output

    Firm B Low Output

    Firm A High Output



    Firm A Low Output



  40. It is illegal in the UK to run a cartel. The punishments can include a fine of up to 10% of its profits for every year the cartel has been running. Those that were aware of the collusion could also face prosecution. There may also be an urge to cheat in certain markets and hence make collusion unlikely.
  41. If there were a few firms in the market it would be easier to monitor to prevent cheating. If the game is to be repeated then cheating may not be beneficial in the long run interests of the cartel. If there is economic stagnation then it would be easier to detect cheating. If all firms in the cartel had spare capacity as then any cheating would be punished by increasing output using this spare capacity.
  42. They offer an amnesty to a firm which reports the existence of a cartel, even if it is a member.
  43. Overt collusion is obvious, for example the cartel of OPEC which is well known. Covert collusion is where firms secretly agree to set prices and output.
  44. Tacit collusion is when firms don’t compete on prices despite their being no agreement or communication on such a matter.
  45. One method is price leadership; whereby a dominant firm sets a price and competition follows its lead. A second method is barometric price leadership whereby one firm changes it prices and sees if rivals follow suit. If they don’t then the firm will put prices back in line with competition. The leader in this method doesn’t have to be the same firm in each occurrence. 
  46. It is when the firm is operating above its LRAC curve which may be due to organisational slack.
  47. If the firm is operating above its LRAC curve.
  48. The minimum efficient scale point is the lowest point on the LRAC curve, the point when all economies of scale have been utilised.
  49. In the short run, providing it is operating above its AVC curve, it should remain open to contribute towards fixed costs. In the long run it should shut down.
  50. If it was operating at a point below the AVC curve.
  51. Satisficing behaviour is when a manager has to meet certain targets of profit and revenue in order to satisfy the demands of the principles.
  52. Revenue maximisation may take place in order to fund organic growth or to ensure a healthy cash flow.
  53. All except under perfect competition.
  54. In order to increase market share.
  55. 0
  56. Upward Sloping
  57. –x2 curve
  58. The dominant strategy is the player’s best strategy regardless of other player’s decisions.
  59. Nash equilibrium occurs when there is no incentive for a player to change his strategy.
  60. Inorganic
  61. Integration with a firm at the same stage in the production process.
  62. Integration with a firm at a further stage in the production process.
  63. Integration with a firm at a lesser stage of the production process.
  64. To achieve economies of scale or to increase a firms’ market share.
  65. To increase barriers to entry or to ensure a smoother production process.
  66. Due to anti-competition laws or because a firm is experiencing diseconomies of scale, by splitting the business this may ameliorate profits.
  67. Is a merger between 2 unrelated businesses. 
  68. To reduce exposure to one market (hence reducing risk) or to permit cross-subsidy investment into new areas.
  69. Expanding its product range; entering new markets; expanding the distribution network.
  70. Increase market share; increase sales; greater economies of scale; prevent hostile takeovers; gain expertise; rationalisation to prevent duplication.
  71. Higher prices; job losses; diseconomies of scale
  72. Container principle, financial economies, marketing economies, managerial economies and purchasing economies.
  73. If the firms grows too large and moves past its MES point.
  74. Workers become unmotivated and productivity falls, managers are inexperienced to manage such a large firm, there is a breakdown in communication.
  75. In the short run we assume that Capital is a fixed input and cannot be increased easily, labour is considered a variable output as it can easily be increased. In the long run all factors of production are variable.
  76. Costs which do not change with output.