Question

1) An example of a governmentminus?imposed barrier to entry gives a firm the exclusive right to a new product for a period of 20 years from the date the product is invented. This entry barrier is known as

A. a patent.

B. an exclusive marketing agreement.

C. a tariff.

D. a copyright.

2) Suppose Farmer Lane grows and sells cotton in a perfectly competitive industry. The market price of cotton is ?$1.401.40 per? kilogram, and his marginal cost of production is ?$1.711.71 per? kilogram, which increases with output. Assume Farmer Lane is currently earning a profit. Can Farmer Lane do anything to increase his profit in the short? run? Farmer Lane

A. can increase his profit by raising his price.

B. can increase his profit by producing lessless output.

C. may or may not be able to increase his profit.

D. can increase his profit by shutting down.

E. cannot do anything to increase his profit.

3) In the highly competitive fastminus?food restaurant? market, brand name restaurants have a strong profit incentive to maintain high sanitary conditions and avoid any negative consequences.

True False

Answer 1

1.

A. a patent.

Patents as defined are exclusive rights to new product for a defined period of time, in this case 20 years.

2. If Farmer Lane is earning a profit, this means his average variable cost is below the market price, even though his marginal cost of $1.71 is more than marginal reveneue $1.40, which is the market price. His profits will be maximized when marginal cost equals marginal revenue. So he has to lower his marginal cost to $1.40. He can do so by lowering output, since marginal cost increases with output and reduces by lowering output.

3) True. In a highly competitive environment brand name restaurants need to maintain high sanitary conditions. IF there are any lapses, they will affect their entire brand by negative publicity, not just the restaurant where the incident of bad sanitation occured. They will thus loose customers. They can not afford to loose customers. They also have high fixed costs (about $2 million per restaurant). They will incure huge losses if they loose customers across their restuarant chain because of bad publicity of any of their restaurants.