Describes The Differentiation Of A Product Quiz

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With many products being produced that meet the same consumer needs there is a growing benefit for a business to differentiate their products so that they may be more attractive to a prospective consumer. The quiz below describes the differentiation of a product. Give it a try and see how well you fair.


Questions and Answers
  • 1. 

    Which U.S. agency is responsible for preventing anticompetitive conduct?

    • A.

      Securities and Exchange Commission

    • B.

      Department of Justice

    • C.

      Office of Fair Trading

    • D.

      Competition Commission

    • E.

      Competition Authority

    Correct Answer
    B. Department of Justice
    Explanation
    The Department of Justice is responsible for preventing anticompetitive conduct in the United States. This agency enforces laws and regulations that promote fair competition and protect consumers from monopolistic practices. They investigate and prosecute cases involving antitrust violations, such as price fixing, bid rigging, and market allocation. The Department of Justice works to ensure that businesses operate in a competitive marketplace, fostering innovation, and protecting the rights of consumers.

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  • 2. 

    What criterion developed by the DOJ is used to identify all potential competitors within the market?

    • A.

      Market competition criterion

    • B.

      DOJ competition criterion

    • C.

      SSNIP criterion

    • D.

      SIC criterion

    • E.

      DOJ market criterion

    Correct Answer
    C. SSNIP criterion
    Explanation
    The correct answer is the SSNIP criterion. SSNIP stands for Small but Significant Non-transitory Increase in Price. This criterion is used by the Department of Justice (DOJ) to identify all potential competitors within a market. It involves analyzing the potential impact of a price increase on consumer behavior. If a hypothetical monopolist could profitably impose a small but significant price increase without losing a significant amount of customers, then the market is considered to be lacking in competition.

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  • 3. 

    Which of the following is not a characteristic of substitute products X and Y?

    • A.

      They have the same or similar product performance characteristics

    • B.

      They have the same or similar occasions for use

    • C.

      They are solid in the same geographic market

    • D.

      Customers are indifferent between X and Y?

    • E.

      A price increase of X while keeping the Y's price constant leads to a drop in purchases of X and an increase in purchases of Y

    Correct Answer
    D. Customers are indifferent between X and Y?
    Explanation
    The statement "Customers are indifferent between X and Y" is not a characteristic of substitute products X and Y. This means that customers do not have a preference for one product over the other and are equally satisfied with both options. However, the other statements describe characteristics of substitute products such as having the same or similar product performance characteristics, occasions for use, and being sold in the same geographic market. Additionally, a price increase of X while keeping Y's price constant leading to a drop in purchases of X and an increase in purchases of Y is a characteristic of substitute products.

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  • 4. 

     What empirical method generally is used to measure the degree to which products substitute for each other?

    • A.

      Cross-price elasticity

    • B.

      Price-comparison

    • C.

      Relatedness factor

    • D.

      Standard Industrial Classification

    • E.

      SSNIP

    Correct Answer
    A. Cross-price elasticity
    Explanation
    Cross-price elasticity is an empirical method commonly used to measure the degree of substitution between products. It measures how the quantity demanded of one product changes in response to a change in the price of another related product. By calculating the cross-price elasticity, economists can determine whether two products are substitutes or complements. A positive cross-price elasticity suggests that the products are substitutes, meaning that an increase in the price of one product leads to an increase in the demand for the other product. Conversely, a negative cross-price elasticity indicates that the products are complements, meaning that an increase in the price of one product leads to a decrease in the demand for the other product.

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  • 5. 

    What is a catchment area?

    • A.

      The area of a firm’s customers as defined by traditional county lines

    • B.

      The area a firm’s customers shops due to idiosyncratic reasons

    • C.

      The area a firm operates in which it has no competition

    • D.

      The area where a firms customer will go to shop in the event the firm were to raise prices

    • E.

      The contiguous area from which a firm draws most of its customers

    Correct Answer
    E. The contiguous area from which a firm draws most of its customers
    Explanation
    A catchment area refers to the contiguous area from which a firm draws most of its customers. This means that it is the geographic region surrounding the firm's location where the majority of its customers come from. It is important for businesses to understand their catchment area in order to effectively target their marketing and advertising efforts and to make informed decisions about their operations.

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  • 6. 

    What is defined by the number and size distribution of the firms in a market?

    • A.

      Herfindahl index

    • B.

      Market share

    • C.

      Market structure

    • D.

      SSNIP

    • E.

      Numbers-equivalent of firms

    Correct Answer
    C. Market structure
    Explanation
    Market structure refers to the organization and characteristics of a market, including the number and size distribution of firms operating within it. It describes the competitive environment in which businesses operate, such as whether it is monopolistic, oligopolistic, or perfectly competitive. The number and size distribution of firms in a market play a crucial role in determining the level of competition and market dynamics, which in turn influence pricing, product differentiation, and market power. Therefore, market structure is defined by the number and size distribution of firms in a market.

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  • 7. 

    Which of the following market structures generally has a Herfindahl index at .6 and above (usually having light competition, unless threatened by entry)?

    • A.

      Perfect competition

    • B.

      Monopolistic competition

    • C.

      Oligopoly

    • D.

      Monopoly

    • E.

      N-firm

    Correct Answer
    D. Monopoly
    Explanation
    A monopoly is a market structure where there is only one seller of a particular product or service, giving them complete control over the market. In such a market, there is little to no competition, as the monopolistic firm has the power to set prices and restrict output without fear of losing customers to rivals. A Herfindahl index measures the concentration of market power, with higher values indicating greater concentration. A Herfindahl index of .6 and above suggests a high level of market concentration, which is typically associated with a monopoly.

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  • 8. 

    In what type of market structure to sellers set identical prices and are prices generally driven down to marginal costs?

    • A.

      Perfect competition

    • B.

      Monopolistic competition

    • C.

      Oligopoly

    • D.

      Monopoly

    • E.

      Diversified

    Correct Answer
    A. Perfect competition
    Explanation
    Perfect competition is a market structure where sellers set identical prices and prices are generally driven down to marginal costs. In this type of market, there are many buyers and sellers, and no single seller has control over the market price. The products sold are homogenous, meaning they are identical across all sellers. Due to the large number of sellers and the ease of entry and exit into the market, competition is intense, leading to prices being pushed down to the level of marginal costs.

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  • 9. 

    What term describes a firm that faces little or no competition in one of its input markets?

    • A.

      Monopolist

    • B.

      Monopsonist

    • C.

      Oligopolist

    • D.

      Oligopsonist

    • E.

      Cartelist

    Correct Answer
    B. Monopsonist
    Explanation
    A monopsonist is a firm that faces little or no competition in one of its input markets. This means that the firm is the sole buyer of a particular input, giving it significant market power and the ability to influence prices. Unlike a monopolist, which is the sole seller in a market, a monopsonist has the power to dictate the terms and conditions of input purchases, potentially leading to lower prices for inputs and higher profits for the monopsonist.

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  • 10. 

    What term describes the differentiation of a product when it is unambiguously better or worse than competing products?

    • A.

      Horizontal differentiation

    • B.

      Vertical differentiation

    • C.

      Idiosyncratic differentiation

    • D.

      Spatial differentiation

    • E.

      Non-price differentiation

    Correct Answer
    B. Vertical differentiation
    Explanation
    Vertical differentiation refers to the differentiation of a product based on its quality or features that make it better or worse than competing products. In this case, the term describes the situation where a product is unambiguously better or worse than its competitors, indicating a clear distinction in terms of quality or features. This can help consumers make informed choices based on their preferences and needs.

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  • 11. 

    What term describes the differentiation of a product when only some consumers prefer it to competing products (holding price equal)?

    • A.

      Horizontal differentiation

    • B.

      Vertical differentiation

    • C.

      Idiosyncratic differentiation

    • D.

      Spatial differentiation

    • E.

      Non-price differentiation

    Correct Answer
    A. Horizontal differentiation
    Explanation
    Horizontal differentiation refers to the differentiation of a product based on non-price attributes, where only some consumers prefer it to competing products. This means that consumers have different preferences for different products in terms of features, quality, design, etc., even if the price remains the same. In horizontal differentiation, products are seen as substitutes for each other, and consumers make their choice based on their individual preferences and tastes.

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  • 12. 

    What group/type preferences describes when tastes differ markedly from one person to the next and result in horizontal differentiation?

    • A.

      Search preferences

    • B.

      Horizontal preferences

    • C.

      Consumer preferences

    • D.

      Spatial preferences

    • E.

      Idiosyncratic preferences

    Correct Answer
    E. Idiosyncratic preferences
    Explanation
    Idiosyncratic preferences refer to a situation where individual tastes and preferences vary significantly from person to person. This results in horizontal differentiation, meaning that different individuals have different preferences for a particular product or service. In other words, idiosyncratic preferences describe a scenario where there is a wide range of consumer preferences within a group, leading to diverse choices and a need for businesses to cater to individual preferences.

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  • 13. 

    Of the following industries listed, which one is generally thought of as having the highest search costs?

    • A.

      Consumer packaged goods

    • B.

      Electronics

    • C.

      Physician service

    • D.

      Automotive

    • E.

      Apparel

    Correct Answer
    C. Physician service
    Explanation
    Physician service is generally thought of as having the highest search costs among the listed industries. This is because finding a suitable physician often involves extensive research, referrals, and consultations. Patients may need to consider factors such as specialization, reputation, location, and insurance coverage. Moreover, the healthcare industry is highly regulated and complex, making it more challenging for individuals to navigate and find the right healthcare provider. In contrast, consumer packaged goods, electronics, automotive, and apparel industries typically have lower search costs as they are more easily accessible and have a wider range of options available.

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  • 14. 

    In what type of market do the actions of individual firms materially affect the overall market?

    • A.

      Perfect competitive

    • B.

      Monopolistically competitive

    • C.

      Oligopoly

    • D.

      Monopoly

    • E.

      Diversified

    Correct Answer
    C. Oligopoly
    Explanation
    In an oligopoly market, the actions of individual firms have a significant impact on the overall market. This is because there are only a few large firms in the market, and their decisions regarding pricing, production, and marketing strategies can greatly influence the market conditions and outcomes. Due to the interdependence among these firms, any change in one firm's behavior can trigger a chain reaction among the others, leading to significant changes in the overall market. Therefore, in an oligopoly market, the actions of individual firms play a crucial role in shaping the market dynamics.

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  • 15. 

    What kind of competition is generally described as quantity competition?

    • A.

      Bertrand competition

    • B.

      Cournot competition

    • C.

      Perfect competition

    • D.

      Chamberlin competition

    • E.

      Monopolistic competition

    Correct Answer
    B. Cournot competition
    Explanation
    Cournot competition is generally described as quantity competition. In Cournot competition, firms independently choose the quantity of their output, taking into account the quantities chosen by other firms in the market. The firms then compete based on the quantities produced rather than on prices. This type of competition is named after Antoine-Augustin Cournot, who first introduced the concept in his book "Researches into the Mathematical Principles of the Theory of Wealth" in 1838. In Cournot competition, firms aim to maximize their profits by strategically determining their output levels, considering the reactions of other firms in the market.

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  • 16. 

    What kind of competition is generally described as price competition?

    • A.

      Bertrand competition

    • B.

      Cournot competition

    • C.

      Perfect competition

    • D.

      Chamberlin competition

    • E.

      Monopolistic competition

    Correct Answer
    A. Bertrand competition
    Explanation
    Bertrand competition is generally described as price competition. In this type of competition, firms set their prices based on their competitors' prices. The firms assume that their competitors will not change their prices in response to their own price changes. This leads to intense competition and drives prices down to the marginal cost level. In Bertrand competition, firms compete solely on price, aiming to offer the lowest price in order to attract customers. Therefore, the correct answer is Bertrand competition.

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  • 17. 

    The average PCM (percentage contribution margin) in a Cournot equilibrium is given by the formula PCM=H/η, where H is the Herfindahl index and η is the price elasticity of market demand.  Given this equation, which of the following statements is true?

    • A.

      The more concentrated the industry, the smaller the PCMs in equilibrium

    • B.

      The industry concentration only raises the PCMs in equilibrium

    • C.

      The industry concentration has no bearing on PCM size in equilibrium

    • D.

      The less concentrated the industry, the larger the PCMs in equilibrium

    • E.

      The less concentrated the industry, the smaller the PCMs in equilibrium

    Correct Answer
    E. The less concentrated the industry, the smaller the PCMs in equilibrium
    Explanation
    In a Cournot equilibrium, the average PCM is determined by the Herfindahl index and the price elasticity of market demand. The Herfindahl index measures the concentration of the industry, with higher values indicating greater concentration. The equation suggests that as industry concentration decreases (i.e., the industry becomes less concentrated), the PCM in equilibrium decreases. This means that in a less concentrated industry, the PCMs in equilibrium are smaller.

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  • 18. 

    What terms does Sutton use to describe the costs of establishing a credible brand?

    • A.

      Brand investment

    • B.

      Cost of brand establishment

    • C.

      Cost of advertisement

    • D.

      Endogenous sunk cost

    • E.

      Market establishment cost

    Correct Answer
    D. Endogenous sunk cost
    Explanation
    Sutton uses the term "endogenous sunk cost" to describe the costs of establishing a credible brand. This refers to the expenses incurred in building a brand that cannot be recovered if the brand fails. It highlights the idea that these costs are internal to the firm and are a result of its own decisions and actions. This term emphasizes the long-term commitment and investment required to establish a brand and the potential risks involved if the brand does not succeed.

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  • 19. 

    Which of the following is a reason other than concentration that price-cost margins may vary across industries?

    • A.

      Accounting practices

    • B.

      Regulation

    • C.

      Product differentiation

    • D.

      Nature of sales transactions

    • E.

      All of the above

    Correct Answer
    E. All of the above
    Explanation
    Price-cost margins may vary across industries due to factors other than concentration. Accounting practices can impact price-cost margins as different industries may have different methods of accounting for costs and pricing their products. Regulation can also affect price-cost margins as industries may be subject to different regulations that can impact their costs and pricing strategies. Product differentiation can also play a role as industries with more differentiated products may be able to command higher prices and have higher price-cost margins. Finally, the nature of sales transactions can impact price-cost margins as industries with more complex sales transactions may have higher costs and lower price-cost margins.

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  • 20. 

    Based on Bresnahan and Reiss's study of the relationship between concentration and prices, how many firms did they determine generally need to be in a market for price competition to be as intense as it would likely get?

    • A.

      1

    • B.

      2

    • C.

      3

    • D.

      4

    • E.

      5

    Correct Answer
    C. 3
    Explanation
    Bresnahan and Reiss's study suggests that in order for price competition to be as intense as it would likely get, there generally need to be three firms in the market.

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  • Mar 20, 2023
    Quiz Edited by
    ProProfs Editorial Team
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    Orsay
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