Page 715 - Krugmans Economics for AP Text Book_Neat

Tackle the Test: Multiple-Choice Questions
1. Which of the following is a form of product differentiation? 3. Advertising is an attempt to affect which of the following?
I. style or type a. consumer tastes and preferences
II. location b. consumer income
III. quality c. the price of complements
a. I only d. the price of substitutes
b. II only e. input prices
c. III only
4. Brand names generally serve to
d. I and II only
a. waste resources. Section 12 Market Structures: Imperfect Competition
e. I, II, and III
b. decrease firm profits.
2. In which of the following market structures will individual c. confuse consumers.
firms advertise? d. decrease information.
I. perfect competition e. signal quality.
II. oligopoly
5. Which of the following is true of advertising expenditures in
III. monopolistic competition
monopolistic competition? Monopolistic competitors
a. I only
a. will not advertise.
b. II only
b. use only informational advertising.
c. III only
c. waste resources on advertising.
d. II and III only
d. attempt to create popular brand names.
e. I, II, and III
e. earn long-run profits through advertising.
Tackle the Test: Free-Response Questions
1. Refer to the table below showing the effects of running
Answer (5 points)
television commercials on a firm’s total revenue. Assume that
each commercial costs $1,000 to run. 1 point: $8,000
Number of Commercials Total revenue
1 point: Yes.
0 $20,000
1 30,000 1 point: Because the marginal revenue of $6,000 exceeds the marginal cost of
2 38,000 $1,000.
3 44,000 1 point: 5
4 48,000
1 point: Marginal revenue exceeds marginal cost for the first 5 commercials.
5 50,000
th
Marginal revenue is less than marginal cost for the 6 commercial.
6 50,500
a. What is the marginal revenue from running the second
2. When is product differentiation socially efficient? Explain.
commercial?
When is it not socially efficient? Explain.
b. Should the firm run a third commercial? Explain.
c. If the firm has no variable costs aside from the cost of
commercials, how many commercials should the firm run to
maximize profits? Explain.

Section 12 Review

Summary

1. Many industries are oligopolies, characterized by a small 2. Predicting the behavior of oligopolists poses some-
number of sellers. The smallest type of oligopoly, a du- thing of a puzzle. The firms in an oligopoly could
opoly, has only two sellers. Oligopolies exist for more or maximize their combined profits by acting as a cartel,
less the same reasons that monopolies exist, but in setting output levels for each firm as if they were a sin-
weaker form. They are characterized by imperfect com- gle monopolist; to the extent that firms manage to do
petition: firms compete but possess market power. this, they engage in collusion. But each individual

module 68 Product Differentiation and Advertising 673