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Exam 15: Entry, Exit, and Long-Run Profitability

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Question 71

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The shampoo aisle at a large store that sells personal care products contains many versions of shampoo produced by a small number of companies. This indicates that shampoo producers are engaging in _____ to _____.

A) product differentiation; stimulate market demand
B) brand proliferation; deter new entrants
C) cost-switching; limit market supply
D) government policy support; create cost advantages

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Question 72

Multiple Choice

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Max earns a yearly salary of $120,000 per year from his job and $1,000 per year in interest on his savings. After he quits his job to start a company, he uses all his savings to purchase manufacturing equipment for his company. Given the above information and the data summarizing his first year in business in the table, how much economic profit or loss does Max earn? $Table\\\begin{array}{|l|l|}\hline \text { Revenue } & \begin{array}{l}\text { Bills paid for } \\\text { inputs }\end{array} \\\hline \$ 300,000 & \$ 175,000 \\\hline\end{array}$

A) $4,000
B) $5,000
C) $125,000
D) $126,000

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Question 73

Multiple Choice

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Adam's surfboard factory is making positive economic profits. If the price of a surfboard is $900, Adam's output is 300 surfboards per month, and his monthly average cost is $700, what is his monthly profit?

The market for electrician services is initially in long-run equilibrium, but then there is a decrease in the market demand for electrician services. One expects that in the long run, the economic profits of typical firms will be:

What is the dominant factor determining market price in the long run?

Waterworks Irrigation was a startup that was open for only one year of operation. During that year, it collected $175,000 in revenue and spent $50,000 on trucks, irrigation supplies, employees, and utilities. The owner of the firm, Cosmo, spent $100,000 of his own money to buy an office building and set up the office (instead of buying bonds and earning a 10% annual rate of return) , which he later sold at the end of the year for $100,000. The firm's economic profit is:

Obstacles that keep new firms out of a monopoly market are:

John is thinking of opening a florist shop. He forecasts revenues of $200,000 per year and explicit financial costs of $140,000 per year. He can pursue this opportunity only if he quits his current job as a driver, where he earns $45,000 per year. He would also need to invest $110,000 of his savings to set up the shop-funds on which he would otherwise be earning a 6% return. Based on this information, how much economic profit or loss would John earn in his first year in business?

If Elise's company is achieving cost advantages over rivals, it can maintain these advantages only if:

The table provides daily data on Artem's Sandwich Shop. Use these data to answer the question. What is Artem's profit margin? $\begin{array}{l}\text { Table: Artem's Sandwich Shop }\\\begin{array} { | c | c | c | c | c | c | } \hline \begin{array} { c } \text { Total } \\\text { revenue }\end{array} & \text { Total cost } & \begin{array} { c } \text { Average } \\\text { revenue }\end{array} & \begin{array} { c } \text { Fixed } \\\text { costs }\end{array} & \begin{array} { c } \text { Variable } \\\text { costs }\end{array} & \text { Quantity } \\\hline \$ 1,600 & \$ 1,400 & \$ 8 & \$ 400 & \$ 1,000 & 200 \\\hline\end{array}\end{array}$

In the long run, what is the main determinant of price when a market has free entry and exit? Explain why this occurs.

When firms in a market with free entry and exit experience economic losses, then:

Which of the following is NOT a strategy used by a company to "lock-in" customers to ensure demand for its product?

Consider a firm with market power. As firms exit the industry, one can see this as:

_____ allow a profitable company to maintain profits over time.

Obstacles that prevent other firms from entering the industry would be called:

Over time, Paco's Pie Shop has developed a pie crust that cooks more rapidly than the crusts of other bakers and a filling that uses less costly inputs while maintaining comparable customer appeal. Other bakers have tried but failed to duplicate Paco's two cost advantages. Knowing that they will need to compete against Paco's Pie Shop, potential new entrants will:

All of the following government policies would create a barrier to entry in a market EXCEPT:

When the average across all sellers in a market is zero economic profit, the profit level of each seller:

In the long run, a company's ability to maintain profits depends on: