The airline dominating Charlotte, North Carolina, once contended that it could not overcharge for fear of potential competition, if not at Charlotte, then at Raleigh, a two-hour drive away. Do you find this argument compelling, given the theory of contestable markets?
What will be an ideal response?
The theory of contestable markets holds that oligopolists will have to charge competitive prices to ward off potential entry. But entry costs may be very high, especially if there are no gates in Charlotte. Also, Charlotte residents would rather not travel to Raleigh to depart. So the airline is likely to charge above the competitive price.
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Which of the following are potential problems faced by a firm that wants to provide warranties for its lawnmowers? (Select all that apply.)
a. A moral hazard problem might arise, in that homeowners may be less careful with the mower, since they can always return it if it breaks. b. The warranty may select for homeowners that don't have a lot of mowing to do, or have smooth lawns, because they won't have to pay as much for a warranty. c. The warranty will increase demand by assuring customers of the product's quality. d. The warranty will reduce demand because only makers of low-quality goods would need to reassure consumers in this way.
The law of diminishing marginal utility is consistent with the consumer behavior that produces a negatively sloped demand curve
a. True b. False Indicate whether the statement is true or false
What kind of changes would be expected in the demand of a country that has an increasing population?
a. a rise in the demand for recreation b. a shift in the demand for high-quality food c. a rise in the demand for shelter d. a lowering in the demand for automobiles
The reason that stagflation tends to follow an inflationary gap is that
A. output tends to fall even as prices continue to rise as part of the self-correcting mechanism. B. government officials tend to overact in controlling inflation. C. businesses try to increase profits by raising prices and increasing output. D. workers accept pay cuts to maintain employment.