Lecture 7 Quiz

Model Answers Submitted By Students

  1. The best friend of free enterprise is ___________.

Competition. Perfect competition is ideal. (Kirstin L.)

  1. Describe how you can use competition to help motivate yourself to accomplish a goal.

I’m a Girl Scout, and competition is part of the job. If most of the girls sell 40 boxes of cookies and I only sold 30 boxes, I tell myself I have got to work harder for that extra 10 boxes. Competition enables people to stretch themselves to do more than they normally would. (Alexandra S.)

… Competing … gives me a standard or a goal to try to beat which motivates me to do my very best. (Matt P.)

… We can use competition to motivate us by watching someone else do something but then trying to do the good thing better. (Zack S.)

  1. Suppose Rebecca and Sarah own a widget factory having fixed costs of $10,000. They held a meeting and determined that a widget sells for $5,000. They then found that, in addition to the $10,000, they will have variable costs of $2,500 for each widget they make. Worse, the factory can make only 3 widgets in an entire year! Someone offered to buy their factory for $10,000. Should they sell it?

No, Rebecca and I should not sell the factory. In the short term, selling the company may seem like a good idea. However, a little patience and we will have paid off our debt and will be making a profit. On each widget we make, we will profit $2500. In 16 months we will have paid off the costs of building our factory, and we’ll start making $2500 every four months. (Sarah B.)

No. Even though they will lose $2500 the first year, the second year the fixed costs are already paid leaving them profits of $7,500 per year. (Ben S.)

I don’t think they should sell. Although the first year they were in business they lost $2,500, in all the following years they have been earning $7,500. I think the factory is worth more than sixteen months profits. (Brandon M.)

… If, however, these are not recurring fixed costs but are one-time losses, then they should keep the company because they will make money in subsequent years after the initial losses of $2,500. (Joseph S.)

  1. After a parent complained about her child not making the honor roll in a public school in Tennessee, it abolished the honor roll entirely. What do you think will happen to the quality of the work of the students in the school afterwards? Why?

The quality of work will go down because the competition to make the honor roll will be gone. … (Sarah C.)

The students will not work as hard and therefore not produce as good of work because there is nothing to look forward to if they do produce good work. (Scott J.)

I think that the quality of schoolwork will suffer because children won’t have as much motivation as before. (Cara M.)

Since the honor roll is now abolished entirely, the students in public schools will not have as many good grades as they did while trying to make the honor roll. … (Anthony B.)

  1. Assume Michael sells widgets. One day, he visited Wal-Mart to see if he could sell it some widgets. Wal-Mart said it has good new and bad news. The good news is that it wants high volume. The bad news is that it wants a price so low that Michael’s MC=MP for every unit sold to it. Should Michael agree? Explain. [NOTE: MP SHOULD HAVE BEEN MR : MC=MR]

Yes, he should do it, even if he only breaks even. If he doesn’t sell widgets to Wal-Mart then someone else will. That competition might put him out of business. (Abigail L.)

I think that Michael should take Mal-Mart up on the deal. The chances of Michael getting the type of exposure that he would get from Wal-Mart anywhere else is highly unlikely. (Lisa H.)

… [H]e might want to sell widgets to Wal-Mart for a while, if only to attract more business for his product. After he can sell his widgets to someone else for a higher price, he could quit his business with Wal-Mart. (Sarah S.)

Maybe. If I could toss in a fee for delivering the widgets or some other transaction cost, it might be a worthwhile transaction. (Michael N.)

  1. Suppose Patricia and Joshua own a company that has marginal cost (MC) = $9, average total cost (total cost divided by total output) = $11, average variable cost (average cost of variable inputs, like labor and materials) = $5 and price of the sold good (P) = $8. Should Patricia and Joshua make any additional goods at these numbers? Should they shut down their company?

Because MC>P ($9>$8), the owners should not make any more goods. They lose an extra dollar for every additional good they make. But they should not shut down either. Price ($8) exceeds average variable cost ($5). So they are making some extra money by producing some of their goods. They are doing better than they would if they shut down the factory. (Instructor)

Patricia and Joshua shouldn’t make any additional goods at that cost. They are losing money instead of making a profit. By selling the good at eight dollars they are dishing out more money to produce the goods than they are receiving in revenue from the sale of them. If they are using it as a loss leader, however, to get more revenue from other goods, they should keep the factory in production. (Kris T.)

  1. Suppose you are running a dinner event at a free facility that has 24 tables seating 8 apiece. Your marginal cost (MC) is $15 per person. Suppose your speaker costs $3500 in fees and expenses. Suppose your demand curve is this: at price P=$15, quantity Q=200; at P=$35, Q=120; at P=$50, Q=70; at P=$60, Q=40; at P=$150, Q=7. How would you price and market your tickets?

I would sell general admission tickets at $35, Contributor tickets at $50, Patron tickets at $60, and Sponsor tickets at $150. … (Gregory J.)

For my dinner I would use price discrimination. … (Jessica H.)

… Our total cost is $6380. So to set the price, I would charge for one person $150 and we would draw a maximum of 7 people for a profit of $1050. For a couple or two people I would charge $50 each and we would draw 70 couples for a profit of $3500. Then for a group of four or more I would charge $35 each and we would get 120 people for a profit of $4200. This adds up to 197 people but we will sell on a first-serve basis with those reserving first getting the tickets; so it is likely that five singles will be left out. With these prices we will raise $8000; with a profit of $1,620″ (Chris B.)

… By charging $150 per person, we get a demand of 7 people; by charging $82 per couple, we get a demand of 32 people; by charging $55 per table of 4, we get a demand of 56 people; and by charging $42 per table of 8 we get a demand of 96 people. This comes to a total of 191 people … [and] a total of $10,744. … (Chris R.)

  1. One of the greatest benefits of competition is accountability. Do you agree? Explain.

I do agree with the statement. As Adam Smith illustrated with his invisible hand, a free (and therefore competitive) market makes people accountable for their work, forcing them to be productive because, quite simply, if they are not productive they will not be able to support themselves. In a non competitive (probably government regulated) market, consumers must buy goods from a certain supplier, regardless of the quality or price of the good; in this scenario, the consumer is at the mercy of the producer, who can raise prices and lower quantity and quality as he so chooses. Accountability is without doubt one of the greatest benefits of competition. (Chris J.)

I agree that accountability is one of the greatest benefits of competition, because in order to be well known and on top of other businesses, you must have good quality products at a decent price so the people buying it will like it, and they will hold you accountable to keep that standard set, or they will stop buying from you. (Alyssa G.)

  1. Review the conditions for perfect economic competition. Now develop new conditions that you think would establish a perfectly competitive presidential election, where political principles alone determine the outcome.

… Each candidate must raise the same amount of money for their campaigns. The media should give equal time to each candidate, not choosing one as a favorite over another. … The voters must be fully informed about all the issues. … (Daniel L.)

… There should be a couple running for the same party in the actual presidential election, instead of saying Oh, I’m Republican, so I’ll just vote for a Republican. You’re now posed the question, Which Republican? (Phyllis S.)

… This could never exist due to the fact that … there will always be disparities, budget-wise, between the candidates … private broadcasting companies … can do whatever they want (within legal limits ) if they’re not publicly funded and that’s fine … votes will never, as a whole, be logical, because the illogical ones consistently outnumber the logical. (Mary Rose B.)