Question

1.1) As a result of the rise of Internet retailing of recorded​ music, the small traditional record stores had​ ___________.

A. to lower their price to​ compete, which resulted in economic loss

B. a decreased supply of recorded music which resulted in their prices rising above Internet prices

C. to use new technology which raised their average total cost

D. to set their price equal to minimum average total cost

1.2) Record stores decided to exit the market rather than shut down temporarily because​ _______.

A. price fell below minimum average fixed cost

B. they were incapable of providing music downloads

C. price fell below minimum average variable cost

D. consumers prefer to shop online

1.3) Amazon entered the market for recorded music because​ _______.

A. Jeff Bezos grew quickly bored of selling only books

B. Jeff Bezos wanted to take over the existing record stores to increase​ Amazon's economic profit

C. Amazon wanted to push existing record stores out of business

D. Amazon had​ lower-cost technology and could make an economic profit

1.4) Independent record stores exited the market for recorded music because​ _______.

A. independent record stores were incurring an economic loss

B. competition with Amazon inflated the fixed costs of independent record stores

C. after the entry of​ Amazon, independent record stores made zero economic profit

D. independent record stores could not keep up with the increased demand for recordings

Answer 1

Solution:

1.1) As the internet retailing of recorded music grew, the competition for small traditional or offline recorded music selling stores increased, as the internet provided the same music at ease and a lower price. In order to balance this increased competition, stores had to lower the price they charge to their buyers, in order to attract them and to be able to survive in the market.

Thus, correct option is (a) to lower their price to compete, which resulted in economic loss

1.2) Temporary shut down occurs when a firm is not able to cover the variable costs, but is still able to handle the fixed costs. As seen from the above part, the stores had to lower the price, ultimately facing the economic loss. This means that price charged was too low, they were not able to cover the average fixed costs as well, and so were forced to exit the market.

Thus, correct option is (a) price fell below minimum average fixed cost

1.3) Amazon is a big firm, and engaged enough in research and development. It could look up for new technology, giving out a more cost efficient and productive way of providing the recorded music. Thus, with lower cost it also could charge lower price for the same music.

Thus, correct option is (d) Amazon had lower-cost technology and could make an economic profit

1.4) Even with zero economic profit, firms may temporarily shut down but do not exit the market, till they are able to cover their variable costs as already explained. Furthermore, by facing the competition from Amazon, the fixed costs for independent stores increased while the price they charged decreased. Ultimately these stores faced an economic loss, and also could not cover for the fixed costs which were now even higher.

Thus, correct option is (b) competition with Amazon inflated the fixed costs of independent record stores