Economics 379 Quiz #4 Professor Thornton
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Economics 379 Quiz #4 Professor Thornton Wine Economics 100 points Fall 2015
Each question is worth 6 points. You will receive 4 points for writing your name on the answer sheet.
1. Nobel laureate George Akerlof’s adverse-selection lemons theory predicts which of the following?
a. If wine firms cannot find a way to convey quality information to consumers, then low-quality
products will come to dominate the wine market.
b. Because consumers cannot asses the quality of wine before they consume it, they make random
wine buying decisions.
c. Wine firms will attempt to conceal the true quality of their products to take advantage of
consumers,
d. Because consumers can’t adequately assess the quality of wine, lemon wine will eventually replace
grape wine.
2. Which of the following is an entry barrier that makes it difficult for new firms to enter the commodity
wine submarket?
a. Patents on the wine production process held by existing firms that produce commodity wine
products.
b. Economies of large scale production of existing firms that produce commodity wine products.
c. Established brand names of existing firms that produce commodity wine products.
d. Both b and c.
3. Like all theories, the theory of wine-firm behavior developed by Fiona Scott Morton and Joel Podolny
is based on a set of assumptions. Which of the following is not an assumption underlying their theory?
1 a. The market structure is monopolistic competition.
b. Wine firm owners must earn a positive accounting profit to remain in business.
c. Wine firm owners make rational choices.
d. Wine firm owners learn by doing.
4. Which of the following is a prediction of the theory of wine-firm behavior developed by Fiona Scott
Morton and Joel Podolny?
a. The marginal cost of producing wine will decrease the longer a proprietor operates in the wine
industry.
b. For a new proprietor to enter the wine industry, he must expect to make an economic profit.
c. Wine firm proprietors will respond to an increase in the average cost of producing wine by
lowering the price they charge for their wine.
d. All of the above.
5. You require 10 tons of grapes to produce your wine. You must decide whether to insource or
outsource grape production. The cost of growing grapes in your own vineyard is $60,000. The cost of contracting with a commercial vineyard to purchase the grapes is $40,000. The cost of finding a commercial vineyard from whom to buy the grapes, and negotiating enforcing the contract is $5,000. What is the net benefit of outsourcing the grapes?
a. $45,000
b. $40,000
c. $20,000
d. $15,000
2 6. All of the following affect the benefits and costs of insourcing and outsourcing a wine related activity
except:
a. transaction costs.
b. production costs.
c. duplication costs.
d. nonmarket goods.
7. The Glassware Bottle Company invests $1 million in equipment to produce a specialized wine bottle
for the Gallo Wine Company. Because it cannot use this equipment to produce bottles for any other wine firm, the next best use of the equipment is scrap metal with a value of $10,000. Which of the following is a reasonable conclusion?
a. The transaction cost of this exchange will be low because of a low degree of asset specificity.
b. The transaction cost of this exchange will be high because of a high degree of asset specificity.
c. The transaction cost of this exchange will be low because of low search cost.
d. The transaction cost of this exchange will be high because of the large investment required for the
bottling equipment.
8. A relatively new type of wine firm is a wine group. An example is Foley Family Wines. Foley has
acquired a number of different wineries and allows each to make its own wine production decisions, but uses its distribution system to market the products of all of its wineries. Which of the following is the most plausible explanation for the emergence of this type of wine firm?
a. They take advantage of asset specificity.
b. They take advantage of wine firm capability.
c. They achieve economies of scope in the distribution and marketing of wine products.
d. They more effectively utilize their vineyard land.
9. None of the largest wine firms in the U.S. grow all of their own grapes or produce all of their own
wine. Which of the following is a plausible reason for this behavior?
3 a. To avoid diseconomies of scale from excessively large grape growing and wine production
operations.
b. To achieve economies of scope by contracting with other growers and wine producers.
c. Certain types of grapes and wine are nonmarket goods that can only be obtained by purchasing
them from other growers and custom crush producers.
d. They use this as a bargaining chip when negotiating contracts to hire immigrant workers.
10. How do wine economists measure the expected quality of a wine product?
a. The quantities of the sensory characteristics of a wine product.
b. Willingness to pay for sensory characteristics of a wine product.
c. Willingness to pay for quality indicators.
d. Both a and b.
11. According to hedonic price theory, the implicit price of the characteristic of a good reflects:
a. consumer willingness to pay for an additional unit of a characteristic of a good.
b. producer cost of providing an additional unit of a characteristic of a good.
c. the quality of the characteristic of a good.
d. Both a and b.
12. The consumer-trained panel approach is used to analyze:
a. consumer preferences for wine.
b. factors that affect wine quality.
c. the effect of wine quality on price.
d. All of the above.
13. The contingent valuation approach to studying wine quality:
a. asks consumers how much they are willing to pay for wine products with hypothetical sensory
4 characteristics.
b. asks consumers how much they are willing to pay for wine products they sample in a blind
tasting.
c. asks consumers how much they actually paid for wine products they have purchased in the past
month.
d. is identical to the consumer-trained panel approach.
14. Hedonic price studies of the effect of wine scores on wine price suggest that wine scores have the
biggest effect on:
a. retail price of wine.
b. futures price of wine.
c. auction price of wine.
d. option price of wine.
15. When a consumer buys wine on the futures market:
a. she takes delivery of the wine today but does not pay for the wine until a future date.
b. she pays for the wine today but does not take deliver until a future date.
c. she makes an agreement today to both pay for a wine and take delivery at a future date.
d. she has an option to buy a wine at a future date but is not obligated to do so.
16. Landon and Smith study the effect of Bordeaux wine-firm reputation on wine price. Which of the
following is a finding of their study?
5 a. Both expected and actual wine quality have an effect on wine price.
b. The effect of expected wine quality on wine price is substantially bigger than actual quality.
c. Expected wine quality is more heavily influenced by a wine firm’s long-run reputation than the
quality of its products over the most recent couple of years.
d. All of the above.
6 EXTRA QUESTIONS
All of the following are wine-firm quality signals except: a. establishing a reputation for producing high-quality wine. b. advertising. c. under reporting the alcohol content of wine on the label. d. sending a wine sample to a wine critic to be evaluated and scored.
2. Large wine companies such as Gallo, The Wine Group, Constellation, and Trinchero Family Estates:
a. coordinate pricing decisions through a cartel agreement.
b. coordinate pricing decisions by a tacit price leadership arrangement with Gallo playing the role of
price leader.
c. engage in aggressive price competition to increase market share.
d. avoid significant price competition and compete by introducing new wine products and brands.
2. Large wine companies such as Gallo, The Wine Group, Constellation, and Trinchero Family Estates:
a. coordinate pricing decisions through a cartel agreement.
b. coordinate pricing decisions by a tacit price leadership arrangement with Gallo playing the role of
price leader.
c. engage in aggressive price competition to increase market share.
d. avoid significant price competition and compete by introducing new wine products and brands.
4. Which of the following is not a prediction of the theory of wine-firm behavior developed by Fiona Scott Morton and Joel Podolny?
a. Utility-maximizing wine firm owners are willing and able to produce higher quality wine than profit
maximizing owners.
b. The longer a wine firm owner is in business, the lower his marginal cost and the price he charges for
his wine.
7 c. Utility-maximizing owners have higher average ability, lower marginal cost, and charge a lower
price for wine of a given quality than profit-maximizing owners.
d. Both a and b.
Fiona Scott Morton and Joel Podolny analyze data on 184 California wine firms to test their theory. They find evidence that: a. utility-maximizing wine firms produce lower quality wine than profit-maximizing firms. b. utility-maximizing wine firms charge an average price below the average cost of production. c. utility-maximizing wine firms charge a higher average price than profit-maximizing firms for wine of
of the same quality. d. Both a and b.
5. You require 10 tons of grapes to produce your wine. You must decide whether to insource or outsource grape production. The cost of growing grapes in your own vineyard is $60,000. The cost of contracting with a commercial vineyard to purchase the grapes is $40,000. The cost of finding a commercial vineyard from whom to buy the grapes, and negotiating enforcing the contract is $5,000. What is the cost of insourcing the grapes?
a. $60,000
b. $45,000
c. $20,000
d. $15,000
7. When two or more products can be produced at a lower cost by a single plant or firm than if each of these products were produced by a separate plant or firm, this is called:
a. spreading overhead.
b. dividing unavoidable cost.
c. economics of scale
d. economies of scope
8 9. Cameron Hughes chose to organize his wine firm as a negociant. Which of the following best explains why Hughes chose this form of wine firm organization?
a. Cameron Hughes capabilities as an expert on the bulk wine market and wine sales
b. Cameron Hughes capabilities as an expert winemaker
c. Cameron Hughes capabilities as an expert grape grower
d. Cameron Hughes desires to live in New York and sell California wine
Which of the following is not an approach used to measure the quantity of sensory characteristics in wine products? a. Panel of trained wine consumers b. Panel of trained wine producers c. Panel of wine experts d. Wine critic scores
Hedonic price theory is used to: a. analyze the relationship between wine characteristics and price. b. measure the degree of hedonism of a typical wine drinker. c. specify criteria for the objective evaluation of wine quality. d. inform consumers about wine they should like independent of their tastes and preferences.
According to hedonic price theory, the implicit price of a characteristic of a good is: a. the change in the quantity of the characteristic that results from a one dollar change in the market
market price of the good. b. the change in the market price of the good that results from a one unit change in the characteristic. c. how much a consumer likes the characteristic measured by the Likert scale d. the intensity of the characteristic measured by an intensity scale.
9 To use hedonic price estimation to analyze the effect of wine quality on price, which of the following conditions must be satisfied? a. The quantities of the characteristics of wine must be measured by intensity scores b. The implicit prices of the characteristics of wine must measure producer cost of providing the
characteristics. c. The implicit prices of the characteristics of wine must measure consumer willingness to pay for the
characteristics. d. Both b and c.
Hedonic price estimation assumes: a. implicit prices of wine characteristics cannot be measured. b. implicit prices of quality indicators can be measured but implicit prices of sensory characteristics
cannot be measured. c. wine characteristics are constant parameters to be estimated using data on the market price of wine
and the implicit prices of wine characteristics. d. implicit prices of wine characteristics are constant parameters to be estimated using data on the market
price of wine and wine characteristics.
Four hedonic price studies of French wine consumers have analyzed the relationship between the appearance, smell, and taste of wine and wine price using a panel of wine experts to measure these sensory characteristics. In general, these studies conclude: a. smell and taste affect wine price, but appearance does not. b. taste affects wine price, but smell and appearance do not. c. sensory characteristics have little or no effect on wine price. d. sensory characteristics have a big effect on wine price.
Studies that analyze the effect on the futures price of scores assigned by Robert Parker while wine is maturing in the barrel find evidence that:
10 a. Parker scores have no effect on the futures price of wine. b. Parker scores have a big effect on the futures price of wine. c. Parker scores would have a big effect on the futures price, but consumers don’t use them as a quality
indicator. d. Parker scores have a small effect on the futures price of wine.
Which of the following is a reason why vintage may be related to wine quality? a. Vintage determines the age of a wine, and wine quality can change as a wine ages b. Weather conditions can vary from one vintage to the next, and weather may affect wine quality c. Vintage is another name for a wine’s bouquet, and bouquet affects wine quality d. Both a and b
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