Barriers of Entry

For each situation, indicate what kind of entry barrier is implied (or no substantial barrier).

Question 1 options:

1 2 3 4 Incumbents have established reputations for quality in a rapidly changing and technically demanding industry, producing a complex product (e.g. microprocessors). 1 2 3 4 Patents. 1 2 3 4 A city requires every restaurant exceeding a certain size to provide a restroom. 1 2 3 4 Government sells only a fixed number of licenses, though a larger number of businesses or individuals would like to participate in the market. 1 2 3 4 The incumbents’ product is expensive to produce. 1 2 3 4 Incumbents have high name recognition. 1 2 3 4 A food company obtains exclusive rights to provide vending machines to a large chain of stores, for 30 years. 1 2 3 4 An incumbent secures control of most deposits of a critical mineral input.

1. Legal barrier. 2. Entrant cannot readily duplicate incumbents’ access to markets. 3. Entrant cannot readily duplicate incumbents’ costs or technology. 4. Not a substantial barrier.

Question 2 (1 point)

For each firm, choose the best description of the entry conditions in its market, based on the discussion in class.

Question 2 options:

1 2 3 4 5 Boeing. 1 2 3 4 5 Intel. 1 2 3 4 5 Merck (a large pharmaceutical company) 1 2 3 4 5 Coca-Cola 1 2 3 4 5 Starbucks

1. Has benefited from a patent barrier. 2. Has benefited from a technology-based cost barrier. 3. Has benefited from a contract-based barrier that reduces entrants’ access to potential buyers. 4. Has benefited from a resource-based cost barrier. 5. Operates in a market without significant barriers to entry.

Question 3 (1 point)

Rational consideration of sunk costs implies that:

Question 3 options:

	A person deciding whether to walk out of a movie should take into account how much was spent on the ticket.
	A person deciding whether to walk out of a movie should *not* take into account how much was spent on the ticket.
	A firm deciding whether to produce computers, using chips that it has already purchased, should take into account the current resale value of the chips.
	A firm deciding whether to produce computers, using chips that it has already purchased, should *not* take into account the current resale value of the chips.

Question 4 (1 point)

If someone is considering the cost of a professional athletic career, the future cost of traveling to competitive events is:

Question 4 options:

	A sunk cost.
	An implicit cost.
	An explicit cost.
	An opportunity cost.

Question 5 (1 point)

A bottling company paid $50,000 for a new machine to be installed on a new assembly line. If the firm does not build the assembly line, then it has no other use for the machine. It can return the machine to the manufacturer, but the manufacturer will pay only $30,000 for the returned machine. In this situation, the opportunity cost of the machine is:

Question 5 options:

	$0.
	$20,000.
	$30,000.
	$50,000.

Question 6 (1 point)

Suppose that a firm is considering a production process which would use the following resources: $100 in parts already purchased that have no alternative use; $400 in parts already purchased that could be resold for $300 if not used; $200 in parts not yet purchased.  Which of these values should be added together to determine the total economic cost of production (check all that apply)?

Question 6 options:

	$100
	$200
	$300
	$400

Question 7 (1 point)

Question 7 options:

Suppose that a bicycle firm bought $60,000 worth of custom parts last year, planning to use them in a new line of bikes this year.  The parts would have cost $70,000 this year.  Now, however, the firm is less confident that the new line will be profitable, and it is trying to decide whether to proceed on schedule or to cancel the project permanently.  The bicycle firm has paid a deposit of $10,000 for the parts, but it cannot walk away from the contract; it must pay the other $50,000 and take delivery.  Because of the custom design, the parts can be resold to another bicycle firm for only $25,000.  Alternatively, the bicycle firm could use them as substitutes for standard parts in its old line of bikes, but the standard parts would cost only $40,000.  Then the opportunity cost of using the special parts as originally intended is $

Question 8 (1 point)

Suppose that a firm pays $100 for a resource, which can be sold back to the market for the same price. If, over time, the market (and resale) price of the resource decreases to $60, then that ______ the firm’s opportunity cost of using that resource and ______ the firm’s sunk cost from the purchase of that resource.

Question 8 options:

	increases; increases
	increases; decreases
	decreases; increases
	decreases; decreases
	increases; does not affect
	decreases; does not affect
	does not affect; increases
	does not affect; decreases

Question 9 (1 point)

Suppose that a firm pays $100 for a resource, which can be sold back to the market for the same price. If, over time, the market price (and resale value) of the resource increases to $140, then that ______ the firm’s opportunity cost of using that resource and ______ the firm’s sunk cost from the purchase of that resource.

Question 9 options:

	increases; increases
	increases; decreases
	decreases; increases
	decreases; decreases
	increases; does not affect
	decreases; does not affect
	does not affect; increases
	does not affect; decreases

Question 10 (1 point)

Indicate which accounting concept is most useful, for each business purpose.

Question 10 options:

1 2 Determining taxes owed. 1 2 Guiding management’s decisions. 1 2 Informing shareholders about firm performance. 1 2 Catching and deterring fraud.

1. Economic profit. 2. Accounting profit.

Question 11 (1 point)

An astrologer earns revenue of $8,000 per month and pays office rent of $2,000 per month. If she quit her own business, she could work for a large firm of Wall Street astrologers for $6,500 per month. She has signed her lease through the end of 2023, and she cannot sublet. In this situation, and based on the information given, she should:

Question 11 options:

	Quit her business and go to Wall Street.
	Continue to operate her business through 2024.
	Continue to operate her business through 2023, but switch to Wall Street in 2024.

Question 12 (1 point)

If a firm earns “normal” profits, then its economic profits:

Question 12 options:

	Are zero.
	Are “normal” also.
	Equal its accounting profits.
	Increase when income rises.
	Are high enough to attract entry.

Question 13 (1 point)

Question 13 options:

Suppose that the Eats-A-Pizza Company owns the building that it uses and will have the following revenues and costs if it stays open in 2024.
    Total revenue = $55,000
    Wages paid to employees = $40,000
    Original cost of supplies already bought that have no alternative use = $20,000
    Rental value of building if rented to someone else = $10,000

Then the company’s economic profits from operating in 2024 would be $

Should the firm operate in 2024? (“Yes” or “No”)

Question 14 (1 point)

Question 14 options:

Suppose that, for 2023, a frame shop projects revenue of $50,000 and costs of $30,000 for materials. Of these materials, $20,000 have already been purchased and have no alternative use, and $10,000 remain to be purchased. If the owner closes the shop and works in a similar job for someone else, then she can earn $40,000 in 2023. Based on this information, the shop’s economic profits from operating in 2023 would be $

Question 15 (1 point)

Question 15 options:

Suppose that, for the second quarter, the Wilbur Wildcat Company projects revenue of $145,000 and costs of $60,000 for raw materials. Of these raw materials, $40,000 have already been purchased but because of rising commodity prices could be resold (if unused) for $70,000, and $20,000 remain to be purchased.  The company will also have to pay wages of $30,000.  If Wilbur, the company’s owner, worked in a similar job for someone else, then he could earn $20,000 during the same period.  He also uses his own building, which he could otherwise rent to someone else for $10,000.  Based on this information, the company’s economic profits from operating in the second quarter would be $

Question 16 (1 point)

In a competitive market with free entry, we expect to see entry by new sellers when:

Question 16 options:

	Economic profits are positive.
	Accounting profits are positive.
	Price exceeds the marginal cost of production.

Question 17 (1 point)

In the long run, in a competitive market with free entry, which of the statements I and II is true?
    I.  Firms earn zero economic profits.
    II. Firms produce in the way that minimizes their long run average costs.

Question 17 options:

	I is true, but II may not be true.
	II is true, but I may not be true.
	Both I and II are true.
	Neither statement is necessarily true.

Question 18 (1 point)

Consider four firms, producing four different products.  Any firm could produce any of the four products (after making appropriate investments), because it is easy to learn how to make these products. The four firms have different advantages.  
    Firm A sells in the largest market
    Firm B has the largest share of its market.
    Firm C produces in the market that is growing most rapidly.  
    Firm D has a secret process that cuts production costs, which others cannot duplicate.
       Which firm is most likely to earn positive economic profits in the very long run?

Question 18 options:

	Firm A.
	Firm B.
	Firm C.
	Firm D.

Question 19 (1 point)

In a competitive market, with free entry, the long run:

Question 19 options:

	Market supply curve is vertical.
	Market demand curve is vertical.
	Market supply curve is horizontal.
	Market demand curve is horizontal.

Question 20 (1 point)

If a business activity would generate a negative economic profit, then this means that:

Question 20 options:

	The activity generates a negative cash flow.
	More money can be made by investing the same resources elsewhere.
	The opportunity cost of the resources used exceeds the acquisition cost.
	The acquisition cost of the resources used exceeds the opportunity cost.