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Which of the following is a characteristic of a contestable market? A) Barriers...
Jul 28, 2024
Which of the following is a characteristic of a contestable market? A) Barriers to entry are insurmountable B) There are many buyers but only one seller C) Potential competition ensures that existing firms behave competitively D) Products are highly differentiated and consumers have strong brand loyalties
Solution
a
Definition of Contestable Market: A contestable market is one where there are no significant barriers to entry or exit, allowing potential competition to influence the behavior of existing firms
b
Potential Competition: In a contestable market, the threat of potential competition ensures that existing firms behave competitively, even if there are few or no actual competitors
c
Incorrect Options: - A) Barriers to entry are insurmountable: This is incorrect because a contestable market requires low barriers to entry. - B) There are many buyers but only one seller: This describes a monopoly, not a contestable market. - D) Products are highly differentiated and consumers have strong brand loyalties: This is more characteristic of monopolistic competition, not a contestable market
Answer
C) Potential competition ensures that existing firms behave competitively
Key Concept
Contestable Market
Explanation
A contestable market is characterized by the ease of entry and exit, which ensures that the threat of potential competition keeps existing firms competitive.
250
Key Concept
Break-even point
Explanation
To determine the minimum number of copies that need to be sold to cover the costs, we need to calculate the break-even point. The total cost includes the up-front royalty payment (5000),thecostoftypesettingandprinting(5000), the cost of typesetting and printing (1000), and the cost of advertising (250),whichsumsupto250), which sums up to 6250. The selling price per book is 25.Therefore,thebreak−evenpointiscalculatedas25. Therefore, the break-even point is calculated as 6250 / $25 = 250 copies.
Solution
a
Opportunity Cost: The opportunity cost is the value of the next best alternative that you give up when making a choice. In this scenario, the next best alternative to going out to dinner and a live music event is cooking dinner for your friends
b
Preference Ranking: Since you prefer (1) going out to dinner and a live music event over (2) cooking dinner for your friends, the opportunity cost of choosing (1) is the benefit you would have received from (2)
c
Conclusion: Therefore, the opportunity cost of going out to dinner and a live music event is the benefit of cooking dinner for your friends
Answer
The benefit of cooking dinner for some friends
Key Concept
Opportunity Cost
Explanation
The opportunity cost is the value of the next best alternative that is foregone when a choice is made. In this case, the next best alternative to going out to dinner and a live music event is cooking dinner for friends, making the benefit of cooking dinner for friends the opportunity cost.
Solution
a
Sunk Cost: The initial $30 million spent on constructing the fleet of pirate ships is a sunk cost. Sunk costs are costs that have already been incurred and cannot be recovered. Therefore, they should not influence the decision to rebuild the set
b
Marginal Cost and Benefit: The decision to rebuild the set should be based on the additional cost of 70millionandtheexpectedrevenueof70 million and the expected revenue of 80 million. The marginal cost of rebuilding the set is 70million,andthemarginalbenefit(revenue)is70 million, and the marginal benefit (revenue) is 80 million
c
Rational Decision: Since the marginal benefit (80million)exceedsthemarginalcost(80 million) exceeds the marginal cost (70 million), it was rational to rebuild the set
Answer
Yes, it was rational.
Key Concept
Sunk Cost and Marginal Analysis
Explanation
The initial 30millionisasunkcostandshouldnotaffectthedecision.Thedecisiontorebuildthesetshouldbebasedontheadditionalcost(30 million is a sunk cost and should not affect the decision. The decision to rebuild the set should be based on the additional cost (70 million) and the expected revenue ($80 million). Since the revenue exceeds the additional cost, it was rational to rebuild the set.
Solution
a
Total Cost: The total cost of making the movie "Pirates VII" is 100100 million
b
Sunk Cost: The 3030 million spent on the initial fleet of pirate ships is a sunk cost because it cannot be recovered
c
Additional Cost: An additional 7070 million was spent to rebuild the set and finish the movie
d
Total Revenue: The movie generated a total of 8080 million in revenue
e
Loss Calculation: The losses for the producers can be calculated as follows: Losses=Total Cost−Total Revenue=$100 million−$80 million=$20 million \text{Losses} = \text{Total Cost} - \text{Total Revenue} = \$100 \text{ million} - \$80 \text{ million} = \$20 \text{ million}
f
Losses if Not Finished: If the movie was not finished, the losses would be the sunk cost of 3030 million
Answer
20 million;$30 million20 \text{ million} ; \$30 \text{ million}
Key Concept
Sunk Cost
Explanation
The sunk cost is the 3030 million spent on the initial fleet of pirate ships, which cannot be recovered. If the movie was not finished, the producers would have lost this amount. By finishing the movie, they incurred an additional 7070 million but generated 8080 million in revenue, resulting in a net loss of 2020 million.
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