APPLIED ECONOMICS SEM 1 QUARTER 2

THIRD EXAM

ANALYSIS (5 points each)

Read and analyze every given situation. Answer the questions concisely.

1. Between 1880 and 1900, the Standard Oil Company came to control almost 90 percent of oil
production in the United States. It did this by buying up or driving other firms out of
business. With this monopoly power, the firm’s owners were able to earn as much as 20
percent profit on the value of the firm’s assets, such as its refineries, pipelines, etc. Much of
the firm’s profit was used to develop new technologies, that according to its owners,
contributed to lower prices. In your opinion, is it possible for monopolies to be good for
consumers? Explain your answer.

We can't deny that a monopolistic market benefits producer by providing

numerous incentives for innovation, encouraging investment, and generating large profits.
Is it, however, beneficial to consumers? In my perspective, there are numerous
drawbacks, but there are also some favorable impacts at times. The price of the products
is consistent because there are no competitors vying for customers and the  reducing
revenue of the other producers. The government can also act and regulate in order to
ensure that customers receive fair prices without jeopardizing the firm's growth.
Furthermore, there are advantages in terms of supplies too, as production would be
constant, particularly if the products are necessities. When it comes to customers, some of
the downsides of monopoly include low-quality products and the purchasers' lack of
options because that is the only market available. As I previously stated, there are perks in
price, but there are also times when prices aren't fair to consumers yet they don't have a
choice. With this form of market, power abuse is possible.

2. There are various brands of laundry detergent that you may see in any grocery store or
supermarket where you usually shop. How do the manufacturers of these detergents attempt
to make their products appealing than other brands? Why can some brands be sold at a
higher price and still sell well?

Consumers are affected by a variety of reasons that lead a product to be in such

high demand, even when prices rise. In my own experience, when I go grocery shopping
with my mother, she chooses this particular brand of laundry detergent because it is
popular and widely trusted. It is frequently shown in TV advertising supported by
celebrities, which is why she tried it out and used it for a long period. But, after being
persuaded by a friend to use or test the said brand, she changed her mind because she like
the second product's smell and quality. She has tried other kinds as well, but she has
settled on the one that works best for her. The main point is that consumers will choose
your brand based on its quality. The bandwagon effect can also occur, especially if your
product is known to be used by celebrities or influencers. Many people would buy the
goods if it was also unique. Apple products, for example, are quite pricey, but many
people still purchase them. Why? Because of its unique features that are unavailable on
non-iOS devices. Its camera is also a significant feature. Many individuals might buy your
brand of laundry detergent if it has a scent that other brands don't have. In today's world,
trend dictates everything.

3. Why would a new oil refinery have difficulty competing successfully with large oil
refineries such as Chevron, Shell Oil, and ExxonMobil?

As I previously stated, consumers examine a variety of parameters when

selecting a brand from which to purchase supplies. When comparing well-known brands
to a newly opened refinery, consumers are more likely to trust the well-known ones. The
new refinery would attract customers, but not as many as the well-known refineries. Even
if they had cheaper gasolines, some people would refuse to use them because they believe
the quality is inferior without even trying it. As a result, newly established businesses
should invest in getting their brand out there through word of mouth and advertising.
Opening a business is like to playing in a casino, where you can win or lose. That is why
decision-making is so important, and you should always be wise, because even the most
well-known businesses began where you are now.

4. In the 1990’s, many nations that grew coffee beans tried to set up a cartel that would have
limited coffee production and stabilized prices at a higher level. The effort failed. Explain
why it is so difficult to create a successful cartel when there are many producers.

Oligopolistic enterprises join a cartel to gain market power, and members

collaborate to establish the level of output and/or price that each member will charge. But,
even if only few producers are involved, a cartel will collapse; what more, if there are
many? Cartels breakup from time to time due to cheating or a lack of effective
monitoring. When there are so many producers involved in the arrangement, it would be
extremely difficult to keep track of everything. One can be tempted to break their
agreement to limit production by producing more than they have promised to produce in
order to increase their part of the cartel's earnings. Entry and adjustment of the coercive
agreement in response to changing economic conditions are also major obstacles for
cartels. As a result, cartels are difficult to sustain, especially when there are numerous
producers.