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aec 305 exam 3 key from 2010

aec 305 exam 3 key from 2010 - NAME AEC 305 Exam m KEY(Fall...

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Unformatted text preview: NAME AEC 305 Exam m KEY (Fall 2010) 1. Identify four different characteristics that one would evaluate in determining the market structure of a particular industry. (4 points) Number/size of buyers and sellers Nature of the product (i.e. degree of product differentiation) Ease of Ent_ry/Exit Degree of Information Available Influence on Price 2. We studied several different market structure models, perfect competition, monopolistic competition, oligopoly, and monopoly, Identify which market structure model is best portrayed by the statement listed below. (3 points each) i A. perfect competition “I have NO PRICING POWER since the ag commodity that I am selling competes with a LARGE NUMBER OF OTHER SELLERS who are marketing a product with the SAME QUALITY CHARACTERISTICS AS MINE.” monopoly “As the ONLY John Deere equipment dealer in the area, I have to offer reasonable prices and superior service to my customers to discourage other equipment dealers from entering the market.” oligopoly “Our restaurant does not change menu prices very often SINCE WE WORRY HOW OUR CONIPETITORS MIGHT REACT TO OUR PRICE CHANGES, consequently we tend to focus more on non-price competition strategies such as advertising, service, and new menu offerings.” D. monopolistic competition “As a frequent seller at the local farmers market, I typically have SONIE, BUT LINIITED PRICING POWER since MANY OTHER VENDORS ARE SELLING PRODUCTS THAT ARE JUST SLIGHTLY DIFFERENT FROM MlNE.” 3. An oligopsonist refers to a fe_w_ (few or single) buyers (buyers or sellers), while a monopsonist refers to a single (few or single) buyer (buyer or seller). (4 pts) 4. a. What is a concentration ratio? (2 points) — the percentage of the market controlled by the top 4 firms for a CR4 or the top 8 firms for a CR8 \ b. Assume 6 firms make-up an entire industry, with the largest firm having a 50% share of the entire market. If the remaining five firms have an equal share of the remaining market, what would be the value of the four-firm concentration ratio (CR4) for. this industry? (3 points) If the largest firm has 50% of the market, then the remaining five firms have the remaining 50% or 10% each if they have equal shares. Thus the CR4 would be 50 + 10 + 10 +10 or 80% 5. In class we discussed that agricultural producers are increasingly selling their commodities to firms that possess imperfect market structure characteristics, while consumers are generally buying food (groceries and meals) from firms that possess imperfect market structure characteristics — both of which result in pricing and operational inefficiencies. Respond to the following questions. (4 points each) a. Briefly describe what is meant by the terms pricing and operational efficiency. 0 Operational or Technical Efficiency > Does price occur at the minimum of the average total cost curve (ATC)? True for Perfect Competition 0 Pricing Efficiency > Does P = MR= MC? True for Perfect Competition b. Identify a concern that food consumers may have in buying their products in an imperfect market structure Market power could lead to higher consumer prices Limits entry/ innovation of new firms Excess capacity Excessive advertising Limited Information Limited R&D Excessive profits and identify a concern that agricultural producers may have in selling their products/commodities to firms that are part of an imperfect market structure. I Market power may lead to higher lower producer prices I May also limit marketing opportunities c. As a CEO for one of these imperfectly competitive firms provide two reasons that this type of market structure may be beneficial to either agricultural producers or food consumers. Product Variety Economies of Scale can lead to lower prices Product innovation New markets for producers 6. What is meant by the term price discovery and briefly describe a couple of factors that would impact which price discovery system will be adopted? (5 points) “A mechanism (or processes) by which buyers and sellers find and agree on a mutually satisfactory price for a transfer of ownership of something.” The one(s) actually adopted will depend on the benefits vs the cost of each system, More specifically 0 Which system minimizes the “cost” of discovering price? (i.e., transaction costs such as time, transportation, search/info costs) 0 Which system provides correct price signals to producers and quality products to consumers? 0 Which system provides equitable returns to both producers and consumers? 0 Which system do buyers and sellers have the greatest trust? 7. You have been selected to testify before a congressional agricultural committee on the increasing prevalence of contracting in our food marketing system. Describe why this trend is occurring and be sure to indicate some benefits and concerns for producers, buyers, and consumers for this changing marketing environment. (10 points) In class we showed several graphs showing that contracting is increasing as a price discovery system for agricultural products due to a lot of the benefits for both firms buying agricultural products, those farmers selling agricultural commodities/products and we as consumers buying various food items made from agricultural commodities. Our powerpoint slides listed the following benefits to include: 0 Buyer Benefits 0 Input Supply Control 0 Reduced Price Risk 0 Quality Control 0 Potential to Reduce Competition Through Restricted Entry 0 Potential to Enhance Profits and Market Power 0 Seller Benefits 0 Guaranteed Market 0 Reduced Price and Income Risk 0 Information about Consumer Preferences 0 Access to Credit 0 Access to Technology and other inputs to Lower Costs and to Improve Quality 0 Consumer Benefits 0 More consistent supplies 0 Better and uniform quality 0 Reduced food safety concerns 0 Potentially lower prices But the increased market power of firms controlling the supply of goods purchased and sold by large agribusiness firms does raise some concerns of abuse of market power against both farmers and consumers, which could lead to various forms of government intervention 8. What are two major differences in a marketing contract versus a production contract? (5 points) Production Contracts 0 Contracts specifies approved production practices. 0 Contractors, not farmers retain ownership of the commodity 0 More prevalent for livestock producers (e.g., hogs and poultry) Marketing Contracts 0 Farmer generally controls selection of inputs and possess more independence in production decisions compared to a production contract. (Although they often do receive advice from the contractor.) 0 Farmers, not contractors retain ownership of the commodity 0 More prevalent for crops (e.g., tobacco, fruits, vegetables, peanuts, cotton) 9. One market conduct variable we studied was advertising. Using the orange industry as an example, answer the following. (4 points each) a. Distinguish between brand advertising and generic/commodity promotion advertising. Instead of advertising a particular brand name (e. g. Minute Maid, Tropicana orange juice, generic advertising is directed to an entire product (e. g. oranges). These generic programs are generally funded by producer “check-off programs which assess a fee on each product (e.g., bushel, 1b, head sold, etc.) b. Discuss the desired impacts of an advertising campaign on the demand curve for oranges and HOW ADVERTISING WILL IMPACT RETAIL PRICES. Shift the primary and derived demand to the right and make it less elastic (e. g. no decent quality/nutritional substitute) which will cause retail prices to increase, holding all other factors constant. c. Comment on Whether advertising is or is not a benefit to consumers. Can be beneficial to reduce search costs and to educate consumers, but it does increase consumer prices and may create unnecessary demand and incorrect market information Circle the best answer to the following multiple choice questions. (4 points each) 10. Congress and government agencies can influence market structure, conduct and performance by a. taxing industries that do not adhere to environmental standards b. restricting advertising on products that have adverse health effects on consumers c. dissolving firms that exhibit excessive market power all the above 11. Based on the GAO study listed on Exam III review, identify which of the following conclusions is INCORRECT regarding the increasing concentration in the US. food marketing system. a. Concentration generally has increased at all levels of the food marketing chain in all agricultural sectors since the 19805. b. While real annual per capita food expenditures have increased since the 19805, households now spend a smaller share of disposable income on food. c. Since 1982 farm prices have generally increased, but at a lower rate than food prices. Most research studies have indicated that food market concentration has adversely affected farm and food prices. 12. Oligopoly market structure models recognize that the actions of one firm will have an impact on other firms b. result in zero accounting and economic profits in the long run c. indicate that profit maximizing output occurs where price is equal to marginal revenue and marginal cost (1. are portrayed by relatively flat demand curves indicating limited degree of market power among the many firms in the industry 13. Which of the following statements is correct'about vertical integration? a. Farm operators are “employees” of the vertically integrated firm, providing labor and infrastructure (land, buildings, equipment) b. Integrated firms generally provide inputs (e.g. feed, seed, chemicals, veterinary supplies, animals) c. Prices are determined by the firm and not by an organized market All the above are correct 14. Read the following statements. Circle if the statement is True or False. (3 points) a. @or False? A firm that is the only seller in a market will generally produce at an output level which is below what would be produced in a perfectly competitive marketing environment. b. True 01.? Firms competing in a monopolistic competition industry face a STEEPER demand curve that firms in an oligopoly market structure. c. @01‘ False? Vertical integration occurs when successive stages of marketing and processing or marketing and production are linked together through ownership. d. True 01. Market power can lead to a great disparity between price and marginal cost and a MORE ELASTIC demand curve for a firm’s products. e. -r False? A firm in a perfectly competitive industry will earn zero economic profits in the long-run as limited barriers to entry will erode any existing short run economic profits. Bonus (5 points) The U.S. Senate is currently debating a major food safety bill which would enable the U.S. Food and Drug Administration (a government agency with oversight authority) to have more power to regulate food processors and farmers (e.g. penalties, additional regulatory/reporting requirements, shutting down firms who violate certain regulations, etc). As a marketing analyst use the structure-conduct-performance (SCP) model to analyze some of the potential implications that might evolve if this legislation becomes law on market structure and market conduct. Regulations lead to higher costs throughout the food marketing system which may result in a reduction in the number of firms, especially the higher cost producers (market structure issue). Product differentiation may evolve to insure safe products (market structure). Consumers will likely have to face higher prices, and firms will likely use these regulations to make a promotion push that their products are safe (conduct issues). Some products may be taken off the market (another conduct issue). ...
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