Econ 1113 Exam 3
Mutual interdependence means that each firm in an oligopoly
considers the reactions of its rivals when it determines its pricing policy.
Due to retrictions requiring people to stay at home and avoid public gatherings, demand for restaurant food has decreased dramatically. Many restaurants have shut down while others have remained open for pick up, drive through or deliver. Some are doing all three. According to economic theory, the restaurants that are choosing to remain open meet which short-run condition?
Their current revenues must be more than the minimum of their average variable costs.
Suppose that Oscar sells pork in a perfectly competitive market. The market price of pork is $3 per pound. The marginal revenue generated by Oscar from selling the 12th pound of pork would be
$3
Use the following graph to answer the next question. What price will this pure monopoly charge?
$45
The following table shows cost data for a perfectly competitive firm. OutputAverage Fixed CostAverage Variable CostAverage Total CostMarginal Cost1$300$100$400$1002150752255031007017060475731488056080140110650901401407431031461808381191562309331381712901030160190360 If the market price for the firm's product is $180, the firm will produce
7 units and earn economic profits of $238.
What is one difference between a firm in a perfectly competitive industry and a firm in a monopolistically competitive industry?
A monopolistically competitive firm faces competition from firms producing close substitutes.
Which of the following statements is correct?
A perfectly competitive firm is a price taker, while a pure monopoly is a price maker.
n an duopoly setting, two firms compete for market share by setting a high or low price. Firm A's payoffs depend on what Firm B does and are as follows: Firm B sets High P Firm B sets Low P Firm A sets High P $20,000 $1,000 Firm A sets Low P $22,000 $5,000 What is Firm A's best strategy?
Firm A should set low price no matter what Firm B does.
In long-run equilibrium, a perfectly competitive firm will operate where price is
equal to MR, MC, and the minimum ATC.
In an oligopolistic market there are
few sellers
In perfect competition, if the market price of the product is initially higher than the minimum average total cost faced by the firms, then
other firms will enter the industry and the industry supply will increase.
Use the following graph showing short-run cost curves for a perfectly competitive firm to answer the next question. At what minimum price would the firm be willing to produce output in the short run?
p3
Use the following graph showing short-run cost curves for a perfectly competitive firm to answer the next question. At what price would the firm earn a normal profit and break even?
p4
Monopolistic competition is characterized by firms
producing differentiated products.
In which industry is monopolistic competition most likely to be found?
retail trade
Use the following graphs for a perfectly competitive market in the short run to answer the next question. The graphs suggest that in the long run, assuming no changes in the given information, the market
supply curve will shift to the right.
The representative firm in a perfectly competitive industry
will earn a normal profit in the long run.
Acme Anvils has a newly patented anvil that is ready for the market. While there are plenty of other anvil producers, Acme's anvils are unique. Past models have been featured in a number of animated short films over the years. The weekly demand and cost information for Acme Anvils are described in the graph below. a. To maximize its profits, Acme should produce ____ anvils and charge a price of ____ per anvil. b. At its profit-maximizing level, Acme's weekly profits are ____ per week. c. Even though Acme has a patent on its particular type of anvil, there are many other potential anvil makers out there. Which of the following is most likely to happen in the long run?
A. 100, $600 B. $10000 C. Other firms will look for other innovations to try to capture some of Acme's profits.
Why might it be a bad idea to engage in first-degree price discrimination?
The information needed can be costly and can lead to decreased profits for the company.
The goal of product differentiation and advertising in monopolistic competition is to make
price less of a factor and product differences more of a factor in consumer purchases.
Use the following graph to answer the next question. The short-run supply curve for this perfectly competitive firm is the
segment of the MC curve lying at and to the right of quantity h.
Use the following graph to answer the next question. If the industry were served by a pure monopoly, the deadweight loss would be the area _____.
ACE
Natural monopolies: Natural monopolies are most often:
Are rare are regulated by government
In an duopoly setting, two firms compete for market share by setting a high or low price. Firm A's payoffs depend on what Firm B does. The payoffs for Firm A and B and are as follows: Firm B sets High P Firm B sets Low P Firm A sets High P A: $20,000 B:20,000 A: $1,000 B:$22,000 Firm A sets Low P A: $22,000 B:$1,000 A: $5,000 B:$5,000 The expected equilibrium outcome is where ____________. This is a prisoner's dilemma situation because __________.
Both firms set a low price. Both firms could make more profit if they agreed to keep the price high.
Suppose there are five firms in an industry, each has 20% of the market. The four firm concentration ratio is ____ and the Hirshman-Herfindahl index is ____.
CR = 80; HHI = 2000
Consider a monopolist firm. Suppose that consumers will only buy ONE unit of the product per day. The marginal willingness to pay of the four customers is as follows: JO would be willing to pay $5 for one unit. Kai would be willing to pay $4 for one unit Lai would be willing to pay $3 for one unit Mai would be willing to pay $2 for one unit. The marginal cost of producing each unit of output is $2 no matter how many units are produced (constant marginal costs).To maximize profits, what price would the firm charge if it could not price discriminate? _____ How many units would is sell at the profit maximizing price? ___
P=4; Q=2
Dr. Rogers would wave a sparkly wand around when talking about perfect competition to make which point?
The conditions under which perfectly competitive markets would result are not realistic.
Suppose a new vaccine is discovered for the COVID 19 virus. The company that discovers it gets a patent which makes it a monopolist. Suppose that average total costs are falling due to large fixed costs and very low variable costs of production. Why might the federal government want choose to regulate the price of this vaccine rather then let the monopolist set its own profit maximizing price?
The patent holding firm would want to charge a price above the marginal cost which would lead to less quantity sold than if the firm faced competition. This would lead to more spread of the virus than under perfect competition.
Consider a monopolist firm. Suppose that consumers will only buy ONE unit of the product per day. The marginal willingness to pay of the four customers is as follows: JO would be willing to pay $5 for one unit. Kai would be willing to pay $4 for one unit Lai would be willing to pay $3 for one unit Mai would be willing to pay $2 for one unit. The marginal cost of producing each unit of output is $2 no matter how many units are produced (constant marginal costs).Suppose that Lai and Mai are students. There is no way for the students to resell the product after they purchase it.Would it make sense for the monopolist to offer a reduced price for students?
Yes, the firm could sell to the students at a price of $3 and increase profits by $1 instead of setting a single price.
A nondiscriminating pure monopoly must decrease the price on all units of a product to sell more units. This explains why _____.
a pure monopoly's marginal revenue curve is below its demand curve
Collusion refers to a situation where rival firms decide to
agree with each other to set prices and output.
Use the following graph to answer the next question. The perfectly competitive firm will maximize profits if it produces and sells output at
c
