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Table 17-3 Two cigarette manufacturers (Firm A and Firm B) are faced with lawsui

ID: 2439924 • Letter: T

Question

Table 17-3

Two cigarette manufacturers (Firm A and Firm B) are faced with lawsuits from provinces to recover the health-care related expenses associated with cigarette smoking. Both cigarette firms have evidence that indicates that cigarette smoke causes lung cancer (and other related illnesses). Provincial prosecutors do not have access to the same data used by cigarette manufacturers and thus will have difficulty recovering full costs without the help of at least one cigarette firm study. Each firm has been presented with an opportunity to lower their liability in the suit if they cooperate with attorneys representing the provinces.

Firm A

Concede that

cigarette smoke

causes lung cancer

Argue that there is no evidence that smoke causes cancer

Firm B

Concede that

cigarette smoke

causes lung cancer

Firm A loss = –$20

Firm B loss = –$15

Firm A loss = –$50

Firm B loss = –$5

Argue that there

is no evidence that

smoke causes cancer

Firm A loss = –$5

Firm B loss = –$50

Firm A loss = –$10

Firm B loss = –$10

____   17.   Refer to Table 17-3. Pursuing its own best interests, when will Firm B concede that cigarette smoke causes lung cancer?

a.

only if Firm A concedes that cigarette smoke causes lung cancer

b.

only if Firm A does not concede that cigarette smoke causes lung cancer

c.

regardless of whether Firm A concedes that cigarette smoke causes lung cancer

d.

under no circumstances

Scenario 17-1

Assume that the countries of Irun and Urun are the only two producers of crude oil. Further assume that both countries have entered into an agreement to maintain certain production levels in order to maximize profits. In the world market for oil, the demand curve is downward sloping.

____   18.   Refer to Scenario 17-1. What will invariably be the agreed-upon production level between the two countries?

a.

lower than the Nash equilibrium level

b.

equal to the Nash equilibrium level

c.

equal to the duopoly market equilibrium level

d.

higher than the duopoly market equilibrium level

Scenario 17-4

Assume that a local bank sells two services, chequing accounts and ATM card services. Mr. Tang is willing to pay $8 a month for the bank to service his chequing account and $2 a month for unlimited use of his ATM card. Ms. Gardner is willing to pay only $5 for a chequing account, but is willing to pay $9 for unlimited use of her ATM card. To keep this example simple, assume that the bank can provide each of these services at zero marginal cost.

____   19.   Refer to Scenario 17-4. If the bank is unable to use tying, what is the profit-maximizing price to charge for unlimited use of an ATM card?

a.

$8

b.

$9

c.

$11

d.

$14

____   20.   As a legitimate means of discouraging the problem of free riders, what do economists suggest using?

a.

tying

b.

resale price maintenance

c.

marginal cost pricing

d.

cost plus pricing

____   21.   Which of the following is a characteristic of the demand for a factor of production?

a.

It is based on the supply curve of the product market.

b.

It is a derived demand.

c.

It is a differentiated demand.

d.

It is likely to be upward sloping, in violation of the law of demand.

Firm A

Concede that

cigarette smoke

causes lung cancer

Argue that there is no evidence that smoke causes cancer

Firm B

Concede that

cigarette smoke

causes lung cancer

Firm A loss = –$20

Firm B loss = –$15

Firm A loss = –$50

Firm B loss = –$5

Argue that there

is no evidence that

smoke causes cancer

Firm A loss = –$5

Firm B loss = –$50

Firm A loss = –$10

Firm B loss = –$10

Explanation / Answer

C. regardless of whether Firm B concedes that cigarette smoke causes lung cancer