Test Bank For Introduction to Industrial Organization, second
edition 2nd Edition By Luis M. B. Cabral 9780262035941
Chapter 1-16 Complete Guide .
What does IO study? - ANSWER: it analyzes the strategies of firms, how they interact in the market,
evaluates the impact of the strategy, not only the profit but also competitors, consumers, and SW. It
is concerned with the imperfect competition.
what is the structure of a market - ANSWER: the concentration level of the industry, the number and
size of the firms belonging to it. it can change depending on vertical integration, diversification, entry
barriers
what does SCP study? - ANSWER: the correlation between the structure of the market and the
profitability of the firms. how much a raise in the concentration level, or in the entry barriers changes
the price above the costs.
what does comport a high concentration? - ANSWER: the industry will use more strategies to
compete the market, the equilibrium price will be higher, the size of the firms will be bigger.
should the gov. intervein in SCP? - ANSWER: yes, it should favor competition by lowering the entry
barriers and regulating price.
what is the idea behind the Chicago school? - ANSWER: the few firms that dominate the industry are
there because they are more efficient, they have the motivation to be more efficient because there is
a positive relationship between concentration and profitability.
should the gov intervein in the Chicago school model? - ANSWER: no, it shouldn't, the risk is to
increase the inefficiency.
what does change from the short run to the long run in the Schumpeter model? - ANSWER: in the
short run, there is a monopoly because of a production innovation or a product innovation, in the
long run other firms will imitate the monopolist, so the market goes back to a perfectly competitive
setting without the need for government intervention.
explain production innovation model. - ANSWER: we start from a competitive setting, then a
monopolist finds a new production innovation, so its marginal cost will go down, in the long run the
other firms will imitate his production process, so the perfect competitive market will set on a lower
MC curve, so the SW, quantity produced will increase and the price will decrease.
explain product innovation model. - ANSWER: we start from a perfectly competitive market, a
monopolist makes a new product, so the demand for that increases, the demand shifts rightwards,
the MC stays fixed. the other firms in the long run will imitate the product, so they will reach again a
perfectly competitive market, but the demand for goods will be higher, and so the social welfare, so
they will sell more goods.
should the government intervene in the Schumpeter model? - ANSWER: no, the extra profits are
dissipated naturally through the imitative process.
what states the porter five forces model? - ANSWER: the capability of setting a higher price depends
on: the market power of the suppliers, the market power of consumers, the entry barriers of the
market and the substitutability of the products.
, kay's model. - ANSWER: a firm dominates because of its distinctive capabilities, that permit it to gain a
competitive advantage, those are innovation, reputation, and relationship inside stakeholders and
stockholders.
What does MP represent? - ANSWER: how much the output increase if i increase the labor force. the
slope of the production function
What does AP represent? - ANSWER: the quantity of output/ number of workers. the value of the
slope of the rays exiting from the origin and reaching each point of the function
how is the graph of AP MP - ANSWER: when MP is higher means the additional output incrase
brought by the last worker increases the AP. AP increases when MP is higher, than decreases. they
cross at AP maximum
what happens if the production function is linear? - ANSWER: AP=MP, they are constant
what is the return to scale? - ANSWER: how much we are able to increase the output level if we
increase the inputs. it is possible only in the long run, because we are changing both inputs. it can be
increasing, decreasing or constant. @Q1>=<f(@x1)
what are factors of production? - ANSWER: they are labour and capital, it is not possible to change the
capital in the short run.
the production function - ANSWER: q=f(L,K) in th e long run, q=f(L) in th eshort run
what is the relationship between L and q in the short run? - ANSWER: they are realated by the law of
the deminishing return to scale also called as the law of deminishing MP. As increasing quantities of
labour are used in conjunction with a fixed quantity of capital, eventually the additional contribution
that each successive unit of labour makes to total output starts to decline.
what is an isoquant? - ANSWER: a combination of K and L that allows you to produce a certain level of
output, there are many possible combinations.
when are isoquansts L shaped? - ANSWER: when in the production process is not possible to
substitute K and L.
what is MRTS? - ANSWER: it is an index that helps us describe the substitutability degree of inputs.
how many machines do you need to compensate for 1 less worker and the opposite. It allows to
choose the combination that minimize the production cost. it represents the negative of the slope of
the isoquants. it is not constant, it decreases along the isoquant.
what is the formula of the MRTS? - ANSWER: MRTS=-(deltaK/deltaL)=MPL/MPK
total cost function - ANSWER: it is TC=FC+VC. how cost changes according to the output level that you
are producing.
by what is VC given? - ANSWER: it is wage times number of workers. w x L
marginal cost MC? - ANSWER: it is the additional cost to increase the level of output of one unit. MC=
deltaTC/deltaQ= deltaVC/deltaQ= w/MPl
MC in linear prod function? - ANSWER: it is linear, as the MP and AP
average cost AC. - ANSWER: AC=TC/Q= FC/Q+VC/Q
average variable cost AVC - ANSWER: AVC=VC/Q=w/APl(it can change) so in linear function it is
constant.
edition 2nd Edition By Luis M. B. Cabral 9780262035941
Chapter 1-16 Complete Guide .
What does IO study? - ANSWER: it analyzes the strategies of firms, how they interact in the market,
evaluates the impact of the strategy, not only the profit but also competitors, consumers, and SW. It
is concerned with the imperfect competition.
what is the structure of a market - ANSWER: the concentration level of the industry, the number and
size of the firms belonging to it. it can change depending on vertical integration, diversification, entry
barriers
what does SCP study? - ANSWER: the correlation between the structure of the market and the
profitability of the firms. how much a raise in the concentration level, or in the entry barriers changes
the price above the costs.
what does comport a high concentration? - ANSWER: the industry will use more strategies to
compete the market, the equilibrium price will be higher, the size of the firms will be bigger.
should the gov. intervein in SCP? - ANSWER: yes, it should favor competition by lowering the entry
barriers and regulating price.
what is the idea behind the Chicago school? - ANSWER: the few firms that dominate the industry are
there because they are more efficient, they have the motivation to be more efficient because there is
a positive relationship between concentration and profitability.
should the gov intervein in the Chicago school model? - ANSWER: no, it shouldn't, the risk is to
increase the inefficiency.
what does change from the short run to the long run in the Schumpeter model? - ANSWER: in the
short run, there is a monopoly because of a production innovation or a product innovation, in the
long run other firms will imitate the monopolist, so the market goes back to a perfectly competitive
setting without the need for government intervention.
explain production innovation model. - ANSWER: we start from a competitive setting, then a
monopolist finds a new production innovation, so its marginal cost will go down, in the long run the
other firms will imitate his production process, so the perfect competitive market will set on a lower
MC curve, so the SW, quantity produced will increase and the price will decrease.
explain product innovation model. - ANSWER: we start from a perfectly competitive market, a
monopolist makes a new product, so the demand for that increases, the demand shifts rightwards,
the MC stays fixed. the other firms in the long run will imitate the product, so they will reach again a
perfectly competitive market, but the demand for goods will be higher, and so the social welfare, so
they will sell more goods.
should the government intervene in the Schumpeter model? - ANSWER: no, the extra profits are
dissipated naturally through the imitative process.
what states the porter five forces model? - ANSWER: the capability of setting a higher price depends
on: the market power of the suppliers, the market power of consumers, the entry barriers of the
market and the substitutability of the products.
, kay's model. - ANSWER: a firm dominates because of its distinctive capabilities, that permit it to gain a
competitive advantage, those are innovation, reputation, and relationship inside stakeholders and
stockholders.
What does MP represent? - ANSWER: how much the output increase if i increase the labor force. the
slope of the production function
What does AP represent? - ANSWER: the quantity of output/ number of workers. the value of the
slope of the rays exiting from the origin and reaching each point of the function
how is the graph of AP MP - ANSWER: when MP is higher means the additional output incrase
brought by the last worker increases the AP. AP increases when MP is higher, than decreases. they
cross at AP maximum
what happens if the production function is linear? - ANSWER: AP=MP, they are constant
what is the return to scale? - ANSWER: how much we are able to increase the output level if we
increase the inputs. it is possible only in the long run, because we are changing both inputs. it can be
increasing, decreasing or constant. @Q1>=<f(@x1)
what are factors of production? - ANSWER: they are labour and capital, it is not possible to change the
capital in the short run.
the production function - ANSWER: q=f(L,K) in th e long run, q=f(L) in th eshort run
what is the relationship between L and q in the short run? - ANSWER: they are realated by the law of
the deminishing return to scale also called as the law of deminishing MP. As increasing quantities of
labour are used in conjunction with a fixed quantity of capital, eventually the additional contribution
that each successive unit of labour makes to total output starts to decline.
what is an isoquant? - ANSWER: a combination of K and L that allows you to produce a certain level of
output, there are many possible combinations.
when are isoquansts L shaped? - ANSWER: when in the production process is not possible to
substitute K and L.
what is MRTS? - ANSWER: it is an index that helps us describe the substitutability degree of inputs.
how many machines do you need to compensate for 1 less worker and the opposite. It allows to
choose the combination that minimize the production cost. it represents the negative of the slope of
the isoquants. it is not constant, it decreases along the isoquant.
what is the formula of the MRTS? - ANSWER: MRTS=-(deltaK/deltaL)=MPL/MPK
total cost function - ANSWER: it is TC=FC+VC. how cost changes according to the output level that you
are producing.
by what is VC given? - ANSWER: it is wage times number of workers. w x L
marginal cost MC? - ANSWER: it is the additional cost to increase the level of output of one unit. MC=
deltaTC/deltaQ= deltaVC/deltaQ= w/MPl
MC in linear prod function? - ANSWER: it is linear, as the MP and AP
average cost AC. - ANSWER: AC=TC/Q= FC/Q+VC/Q
average variable cost AVC - ANSWER: AVC=VC/Q=w/APl(it can change) so in linear function it is
constant.
