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
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