econ exam 4
Imagine DeBeers is currently selling 200 diamonds at a price of $1,000. To sell 10 more diamonds, DeBeers has to lower the price (of each diamond) by $50. What is the marginal revenue from selling these additional 10 diamonds? (Remember to include a positive or negative symbol in your answer.)
-50
At the Fisherman's Wharf in San Francisco, there are a lot of seafood vendors. Suppose that there are twenty vendors selling steamed crab. If Tommy's crab shack sells 100 steamed crabs per day for $20 each, how much economic profit will Tommy earn in the long run? (Assume that the seafood vendors are operating in a monopolistically competitive market.)
0
In the long run, the firm will enjoy $________ economic profits.
0
Based on the table, the firm should produce at what quantity so that profits are maximized?
2 Marginal revenue is greater than marginal cost for output levels of one and two units. At an output of three units, marginal revenue is less than marginal cost. Thus, the firm should not produce more than two units. Once we calculate economic profits (by subtracting total cost from total revenue), we should see that profits are highest at an output of two units. See the table below. In this example, marginal cost does not equal marginal revenue at the profit-maximizing point. We are examining discrete quantities, so we will not always be able to find a point where marginal revenue just equals marginal cost. The firm should produce where marginal revenue and marginal cost are the closest and marginal revenue is still greater than marginal cost in order to maximize profits.
The table below shows a demand schedule and asks you to calculate marginal revenues. The table then shows total cost at each level of output. Calculate marginal revenue and then choose a profit-maximizing rate of output. Finally, calculate economic profits to prove that your choice is correct. The level of output where marginal revenue is less than marginal cost is at any quantity greater than or equal to _______.
3 At a quantity of three, the change in revenue from two to three units was $20 (so marginal revenue is $20), while the marginal cost is $50 ($175-$125).
What will be the profit maximizing quantity in units for this firm?
40 quints MR=MC= $10
What is the firm's profit or loss in dollars at the profit-maximizing quantity? $____
60 when Q= 40, profit=total revenue- total cost $640- $580= $60
Consider the following case: price is $100 and 20 units are sold, then price drops to $99 and 21 units are sold.Calculate the marginal revenue: $________.
79 Marginal revenue = change in revenue / change in quantity. Revenue increases from $2,000 ($10020) to $2,079 ($9921) and quantity changes by 1. The change in revenue can also be broken down into a decrease in revenue of $20 from reducing the price from $100 to $99 for the original 20 units, along with an increase in revenue of $99 from the additional unit sold at that price. Together, this means that the change in revenue is $79 ($99-$20) because the revenue gained from selling that additional good is greater than the loss in revenue from reducing the price.
Which situation would be labeled a "natural monopoly"?
A firm has large economies of scale, and is thus able to sell the good for a lower price than would if there were many firms.
What is a reason that monopolies exist?
A firm owns a resource that no one else has A firm is given legal protection that prevents another firm from entering A firm naturally drives out competitors through lower prices.
Natural monopoly:
A firm that can produce at a lower average cost per unit of output than a number of smaller firms producing a similar amount of total output.
Cartel:
A group of firms who have agreed formally or informally to work together in ways that will in essence, create the advantages of being a monopoly.
monopolistically competitive
A market with many producers of somewhat different products
The supply curve in a perfectly competitive market is the sum of all of the individual firm's marginal cost curves. What is the supply curve for a monopoly?
A monopoly does not have a supply curve
A park is in the center of town. What kind of good is a park? Should the park be managed by the city or should it be sold to a private company?
A park is a public good. Every has access to the park. The park should be managed by the city.
Payoff Matrix:
A payoff matrix is usually a two-by-two table with two actors or players. Each player will have a set of actions that will result in different payoffs. Each player's payoff is dependent on both players' course of action.
Price discrimination:
A producer charges different prices for different units of output of the same product for reasons other than differences in costs.
Monopoly:
A single firm in an industry with barriers to entry and no close substitute goods.
Given the following table, calculate total revenue.
A- 0 b- 9 c- 16 d- 21 e- 24 f- 25 g- 24 Multiply price times quantity.
In the figure below, the demand curve is represented by (1) ___ while the marginal revenue curve is represented by (2) ___ .
A- demand curve B-Marginal revenue curve The marginal revenue curve is always below the demand curve. To sell one more unit, the firm must lower the price for all goods. Thus, the marginal revenue < price.
Think back to our discussions of changes in total revenue and price and how the concept of elasticity was used. When a firm decreases price and demand is elastic, the percentage change in quantity demanded will be A) ______________ (greater than / less than) the percentage change in price. Therefore, revenue will B) ______________ (increase / decrease). If the demand is inelastic, total revenue will C) ______________ (increase / decrease) when price decreases.
A- greater than B- increase C- decrease A. When demand is elastic and the price is lowered, the increase in quantity sold will be greater than the decrease of the price (in terms of percentage changes). B. Thus, total revenue will increase. C. If demand is inelastic and the price is lowered, then increase in quantity will not offset the change in price, and total revenue will decrease.
As a result of the answers to the previous two questions, the cable company should a.) (increase / decrease) prices for individual customers and b.) (increase / decrease) prices for businesses in order to increase revenue
A- increase B- decrease Revenues will be increased if the firm lowers prices on businesses who are more responsive to prices (elastic) and raises prices on individuals who are less responsive (inelastic).
Compared to a perfectly competitive market, a natural monopoly will have a.) ______________ (higher / lower / either higher or lower) average costs and may charge a b.)______________ (higher / lower / either higher or lower) price.
A- lower B- either higher or lower The definition of a natural monopolist is that it can take advantage of economies of scale. That is average costs fall as the firm expands its size. A monopolist will decide to produce where marginal cost equals marginal revenue and set a price according to its demand. That price can be higher or lower than the perfectly competitive price.
Assume that the three are currently functioning as an effective cartel. Now suppose one of the firms has aggressive new stockholders who encourage the firm to increase its profits. The firm responds by lowering its price very quietly. Why would it follow that strategy?
After all, if all three together lower their prices, the quantity demanded will increase. They will end up producing where marginal cost is greater than marginal revenue, and thus they will not be maximizing industry profits.
Oligopoly:
An industry with few producers, high entry barriers, and each one has market power. They compete on either price or quantity and may charge the same or different prices.
Monopolistic competition:
An industry with many competitors, all producing slightly different products.
The six drug stores in town are discussing merging into two competing firms. How should she design an antitrust policy that will treat the potential mergers?
Antitrust laws are used to prevent monopolization, promote competition, and achieve allocative efficiency.
Entry Barriers:
Any impediment that makes it difficult or impossible for a new firm to enter and compete in a market when economic profits are being earned.
Monopolies will price discriminate if which of the following is true?
At the current price, one group of consumers is elastic while another group is not as responsive (inelastic)
What keeps firms from entering the market when a monopoly is able to produce where price is greater than average cost?
Barriers to Entry
A monopoly will not necessarily be technically efficient because which of the following is true?
Barriers to entry will keep firms from entering
If a firm faces increasing returns to scale, average costs will do which of the following?
Be above marginal costs
In the town are lots of small businesses, producing a wide variety of products in perfectly competitive environments. What does this mean for the consumers and the firms in this town?
Both the consumers and producers are price-takers. The decisions that they face do not affect the market price.
A monopoly will engage in price discrimination, if it can, in order to increase profits by doing which of the following?
By continuing to produce the same amount Price discrimination raises revenues when producing the same amount. If revenues increase and costs do not change, economic profits must increase.
Why do monopolistically competitive firms have some market power?
By producing differentiated products Since the products are differentiated the demand each firm faces is downward sloping rather than horizontal (these firms are not price takers the way a firm in perfect competition would be).
In the figure above, the quantity a monopoly would produce would be ___ (C / D).
C
Unlike a perfectly competitive firm, a monopolist can do what?
Can restrict output so as to charge a higher price A monopolist still faces a downward-sloping demand curve and thus cannot unilaterally dictate the price and quantity the will be exchanged in the market. It can raise the price, but still must restrict the quantity in order to do so. (However, a perfectly competitive firm cannot raise the price of the good it sells).
What do you think would happen in a commercial neighborhood near your home if a restaurant in that neighborhood were making a great deal of profit? Select all that apply.
Chipotle will open a new store next door. Domino's Pizza will move to this neighborhood from a rundown area of the town. In-and-Out burger will open a new franchise.
The Coca-Cola Company is the only producer of Coca-Cola. Is it considered a monopoly?
Coca-Cola is not considered a monopoly because there are many substitutes to producing Coke. For example, Pepsi and Dr. Pepper are close substitutes within the soft drink market. On top of that, there are many other beverages that are substitutes to soft drinks. So, while Coca-Cola is the only firm that can produce real Coke, it is not considered a pure monopoly. Coca-Cola is often considered to compete in monopolistic competition, which will be discussed in the next chapter [See chapter on Between Competition and Monopoly].
In the two-firm model, if the two firms collude and act like a cartel, then which of the following is true?
Combined they will produce that level of output consistent with what a monopoly would produce The monopoly level of output maximizes industry profits and thus the firms will collude to produce this output and split these profits.
When we say that the demand for a good has decreased, we mean that which of the following is true?
Consumers are now willing to purchase less of the product in question at every possible price "Demand" generally refers to the demand curve in general, with a decrease in demand represented by a shift left of the demand curve.
If a monopoly faces a demand curve that is entirely above the average cost function, in the long run they will likely do what?
Continue to operate
A monopolist deciding to engage in price discrimination wants to keep the quantity produced the same (or close to the same) because which of the following is true?
Costs will increase with an increase in quantity. Price discrimination raises revenues when producing the same amount. If revenues increase but costs increase by more, then profits would decrease.
An increase in product differentiation created by advertising in a market with many firms will the elasticity of demand facing the firm:
Decrease Advertising differentiates the product from others. The more devoted consumers are to one product, the less likely consumers are to switch products in response to a price change and the more likely demand is to be less elastic.
An increase in fixed costs for a monopoly will do which of the following?
Decrease the economic profits
A decrease in variable costs will cause the monopoly to do what?
Decrease the price
When we state that a firm's demand for labor is a derived demand, which of the following are we arguing?
Demand is derived from the demand for the outputs that the input produces. The demand for labor for a firm is dictated by the demand for the good that the labor produces. The firm chooses the amount of labor such that the marginal revenue product of labor is equal to the wage.
In the figure above, the price the monopoly would charge would be ___ (E / F).
E
In NASCAR racing, many races are decided by who has the good fortune of not running out of gas before they cross the finish line. At the Pocono Raceway in 2015, several leaders ran out of gas, resulting in Matt Kenseth winning the race. Evidently, the decision to refuel or not is an important one. The more a driver pushes his car, accelerating and decelerating, the more fuel is used. Use marginal analysis to describe how racing teams decide whether to refuel at the end of the race.
Each team compares the marginal benefit associated with taking the time to refuel one last time to the marginal cost associated with refueling. A major component of the marginal cost of refueling is the time lost on racing. The benefit to refueling is that the driver can drive more aggressively for a longer period of time without the risk of running out of fuel.
Tony's Gas Station and Robert's Gas Station are the only two gas stations in a small town of Westville. If Tony and Robert collude to earn more profits, which of the following would be true?
Each will limit the amount of gasoline available and raise prices
In the long run, perfectly competitive firms are doing which of the following?
Earning zero economic profits If there are profits (loses) in the short run, this will lead to entry (exit) of firms from the market until the level of economic profits is equal to 0 and the firms are producing at the minimum of the average cost curve.
In the above situation, is business demand is elastic or inelastic?
Elastic The percentage change in quantity from an increase in $1 is (100/1,000) x 100 = 10%. The percentage change in price is less than that: ($1/$15) x 100 = 6.7%. Elasticity (percentage change in quantity over percentage change in price) is, therefore, greater than 1.
If a monopoly is producing where price is greater than average cost (and thus making a profit), more firms will enter the market.
False In a monopoly market, it is difficult for other firms to enter the market. When a firm is making a profit, other firms will not be able to enter.
The monopoly and perfectly competitive firm are allocatively efficient.
False Society can be better off by producing more of the monopoly's good and less of the perfectly competitive good because MU/MC for the monopoly is greater than MU/MC for the perfectly competitive firm. However, nothing about the markets will result in that outcome
Suppose firms face increasing returns to scale throughout the range of possible firm sizes. Discuss the advantage and disadvantages, in terms of economic efficiency, of allowing a single firm to dominate the market.
Fewer resources will be used to produce the product if a single firm produces the good or service. Economic efficiency will be enhanced. However, the single firm will not produce an amount that is economically efficient because of its market power. Thus, the outcome will be less than economically efficient. The dilemma is how to take advantage of the economies of scale and at the same time end up with an economically efficient amount of output.
The lack of barriers to entry in a perfectly competitive market implies that which of the following is true?
Firms will break even in the long run equilibrium While both answers A and C are true, they are both related to other assumptions associated with perfect competition. Both relate to the fact that goods are homogeneous and that there are multiple firms in the market.
The price elasticity of demand is likely to be larger for which of the following?
For goods with a large number of close substitutes If there are a lot of close substitutes then even for a small percentage increase in price a lot of consumers will be able to satisfy their demand with other goods and thus there will be a large percentage change in quantity demanded representing elastic demand .
A monopoly facing a demand curve lower than the average cost curve over wide ranges of output will likely do what?
Go out of business
Regardless of the kind of firm, how would you make a decision about how much to spend on research and development? Or how much to spend on advertising?
I personally wouldn't spend that much money on research an development unless it contributed to how much profit that I was going to make. I would spend money on advertising because when you advertise, you are convincing more people why your product is good.
Why would you ever want to engage in a merger if you were in a perfectly competitive industry?
I would join a merge if the were many scare resources and I wanted to find a way to use them more efficiently.
Why would you ever want to engage in a merger?
I would join a merger if I wasn't able to gain something using other ways.
You own (or work for) a business in a perfectly competitive market. How do your respond if demand increases?
If the demand increases, I should increase the price of my goods.
Assume that a market is operating in equilibrium. What would happen if the monopoly increased quantity produced but the price did not change?
If the monopoly tried to increase quantity but the price did not change, then a surplus would occur (quantity supplied being greater than quantity demanded). The surplus would then result in a lowering of the price (as the monopoly wanted to sell the good they produced and consumers are willing to buy at a lower price).
Incentives can take any form and may lead to a variety of outcomes. In Jakarta Indonesia, the city government wished to alleviate traffic jams along many of the main city streets. Rather than charging a toll, city leaders passed a resolution that imposed a fine for driving with only one person in the car. The hope was that the same number of people could find a car ride to their destination but in fewer cars. In reality, the regulation reduced single driver cars on the streets but did nothing to reduce traffic congestion. How did the city of Jakarta get this outcome?
In Jakarta, the local government 's actions were incentives for the creation of a new market- young riders for hire. Young students chose to miss school to form a queue at various points of the city to sell their services as a rider to allow drivers to have access to certain streets without a fine. A student would accept a ride on one side of town, ride across the city, and wait for a ride back to where they started, allowing drivers to bypass the new regulation. The new driving law created an incentive to have more people in cars and not necessarily fewer cars on the road. The resolution generated unexpected and unintended outcomes without achieving the intended outcome of reducing traffic congestion. As city officials in Jakarta found out, policy makers must think carefully about the incentives that new policies create.
Based on the table, this firm cannot be a firm that is:
In perfect competition
Copyrights on movies, books, and music act as a barrier to entry in order to give people what?
Incentives to create
The long-run result of that advertising will be a(n) in the price of the good.
Increase More advertising increases costs. Thus the long-run price is likely to be higher. The less elastic the demand, the higher on the average cost function the firm is likely to be.
In the above situation, is individual demand is elastic or inelastic?
Inelastic The percentage change in quantity from the increase in $5 is (1,000/100,000)x100% = 1%. The percentage change in price is greater than that: ($5/$15) x 100% = 33%. Elasticity (percentage change in quantity over percentage change in price) is, therefore, less than one.
A monopoly producing where marginal revenue equals marginal cost will do which of the following? Select all that apply.
It cannot increase quantity and make a greater profit It is producing at the highest profit possible in their market It is producing where the additional revenue is just equal to the additional cost for each output
A natural monopolist will face which of the following?
Large economies of scale A natural monopolist will be able to produce more than competitive firms and force those firms out of business. The competitive firms will not be able to compete with the single large firm. It is "natural" because the situation will naturally (based on cost functions) result in a single firm operating in the market.
When comparing the long-run equilibrium of a monopoly market to a perfectly competitive market. The long-run monopoly equilibrium results in which of the following? Select all that apply.
Less output produced than the perfectly competitive market Higher price than the perfectly competitive market Less consumer surplus than the perfectly competitive market Since one of the defining features of a monopoly is barriers to entry, the monopoly firm can continue to earn profits in the long run. These profits are earned through supplying a lower quantity and charging a higher price compared to perfect competition, resulting in less consumer surplus.
Little Joe's Pizzeria competes in the monopolistically competitive pizza delivery industry in a city. The firm raises its prices by 10% while all other pizzerias keep their prices the same. Which of the following is most likely to occur? Little Joe's Pizzeria will do which of the following?
Lose some of its customers Since the product is differentiated, the firm faces a downward sloping demand curve. Thus an increase in price will lead to decrease in the quantity demanded but there will still be loyal customers that place a high value on this particular product and are willing to pay the higher price.
An oligopolistic industry with the same costs as a monopoly will have prices:
Lower than or equal to a monopoly price. The oligopolies will strive to set a price equal to the monopoly price in order to maximize profits. However, there will be incentives to cheat on that agreement. That cheating may result in a lower price than the monopoly price.
Suppose a single oligopolistic firm is charging a price where industry marginal revenue is equal to marginal cost. This firm will be tempted to prices, because it faces a more demand if it alone changes its price.
Lower; elastic The single firm will be able to gain customers if it lowers its price and hence attracts some customers away from other firms. Thus, demand will be more elastic than the market demand alone. If it were to raise prices, it would lose more revenue than it would save in costs.
In the case of perfect competition, we see that output is produced at point where
MC = MR = P. Therefore, allocative efficiency is achieved in perfect competition.
Which of the following is true for a profit-maximizing monopolistic competitor?
Marginal cost = marginal revenue For any firm with market power, output level should be set at the intersection of marginal revenue and marginal cost.
A monopoly would never produce where marginal revenue is negative because which of the following is true?
Marginal cost is always positive
All firms that are profit-maximizing, regardless of whether the demand curve is horizontal or downward-sloping, will produce where which of the following is true?
Marginal cost is equal to marginal revenue
If a monopoly is not producing at the profit-maximizing quantity, then it must be the case that which of the following is true?
Marginal cost is greater than marginal revenue Marginal revenue is greater than marginal cost Marginal revenue is negative
A profit-maximizing monopoly will produce where which of the following is true? Select all that apply.
Marginal revenue is less than the price Marginal revenue is equal to the marginal cost Marginal revenue is positive
If a monopoly increases the quantity above the profit-maximizing level which of the following will be true? Select all that apply.
Marginal revenue will be lower than before Marginal cost will be greater than marginal revenue Price would decrease
Markets of perfectly competitive firms and monopolies both _________.
Markets for monopolies and competitive firms face downward sloping demand curves. The downward slope of the demand curve in a market does not depend on the type of firms operating.
Monopolistically competitive firms earn economic profits in .
May; the short run only The firm will earn economic profits in the short run. In the long run, those profits will attract additional firms and be competed away
In San Francisco, there are many restaurants. Each restaurant is slightly different from every other restaurant. Restaurants are an example of which market structure?
Monopolistic competition Many differentiated products seems to best represent this industry, which is described as a monopolistically competitive industry.
In which of the following markets do sellers have the highest profit level?
Monopoly
Rank each type of market on their prices from highest to lowest. Assume that there is a bit of competition among the oligopolies.
Monopoly Oligopoly Monopolistic competition Perfect competition
Given the following data, what price will a monopolist most likely charge? Average cost and marginal cost are equal to $10 at all levels of output.
More than $12 A profit-maximizing firm will charge the highest price they can at the output level where MR = MC. Based on the graph, we can see that that price (which can be found by vertically extending a line from the MR = MC point to the demand curve and then horizontally to find the price) is greater than 12.
If a monopoly faces a demand curve that is downward-sloping, then marginal revenue will be which of the following?
Must be less than price
Suppose that the Peached Tortilla is one of ten food trucks in the town of Happyville, and every food truck is earning substantial economic profits. What is likely to happen in the long run?
New food trucks will enter the market and gradually all food trucks will earn zero economic profits.
Is the marginal utility / marginal cost = marginal utility / price for the monopoly?
No, marginal utility / marginal cost for the monopoly is 5 while marginal utility / price is 2.
In many parts of the world, people breathe as much clean air as they wish, every day. Clean air is, therefore, free and not scarce. Is this a true statement?
No. Clean air is not free, and can be scarce. The air we breathe is directly the result of choices made by the citizens, businesses, and governments. For example, when companies burn coal to produce electricity, costly regulations that require electric utilities to mitigate air pollution and improve air quality are imposed. We could have even cleaner air, but it would require less energy consumption, fewer miles driven, and more costly techniques for producing electricity. Or you can think of clean air as an individual choice. Suppose you are currently living in Los Angeles, a city with relatively high air pollution. You could breathe much cleaner air by moving to Fairbanks, Alaska. But is the frigid climate and other differences between these two cities worth enduring to breathe cleaner air?
Why do barriers to entry allow a monopolist to make positive economic profits?
Otherwise, firms would enter the market, resulting in a decrease in price and profits. Barriers prevent other firms from entering like they do in a perfectly competitive market.
Both the monopolist and the firm in monopolistic competition produce an output where
P > MC = MR.
In which of the following markets do sellers act as price takers?
Perfect competition
In which market will consumer surplus be maximized?
Perfect competition Consumer surplus will be maximized at the point where price is equal to the marginal cost and this only occurs in perfectly competitive markets.
Complete the "Economic profits in the long run" column by matching the market structure to the correct response. Assume that oligopolies are successful in cooperating with one another.
Perfect competition No Monopolistic competition No Oligopoly Yes Monopoly (unregulated) yes When other firms can freely enter the market, they will choose to do so when current firms are making economic profits, and will continue to enter until profits are zero. Perfect competition and monopolistic competition both have free entry, so this will drive profits to zero in the long run. For oligopolies and monopolies, there are barriers to entry, so firms can earn positive economic profits in the long run.
Match each type of market with whether or not their average costs are at a minimum at the profit-maximizing quantity in the long run.
Perfect competition Yes Monopolistic competition No Oligopoly No Monopoly No
Match each type of market with whether or not their price equals their marginal cost.
Perfect competition Yes Monopolistic competition No Oligopoly No Monopoly No
Match each type of market with whether or not they achieve economic efficiency.
Perfect competition Yes Monopolistic competition No Oligopoly No Monopoly No
Complete the "Price = marginal cost" column by matching the market structure to the correct response.
Perfect competition Yes Monopolistic competition No Oligopoly No Monopoly (unregulated) No When a firm has some degree of market power, it will charge a price that is higher than marginal cost. Thus, for monopolistic competition, oligopolies, and monopolies, the price is higher than marginal cost. Only for perfect competition will the price be equal to marginal cost.
Match each type of market with whether or not they can have economic profits in the short run.
Perfect competition Yes Monopolistic competition Yes Oligopoly Yes Monopoly Yes
Complete the "Average cost at a minimum in the long run" column by matching the market structure to the correct response.
Perfect competition yes Monopolistic competition No Oligopoly No Monopoly (unregulated) No In all types of markets, the firm produces where marginal revenue equals marginal cost. For the firm to produce at minimum average total cost, the point where marginal revenue equals marginal cost must be at the minimum of the average total cost curve. This will only occur for perfectly competitive firms where the marginal revenue is the price.
Assume that average costs are the same for all firm sizes and types of market structure. Assume that oligopolies compete a bit with one another. Which of the following represents the likely ranking of prices, from low to high, in the long run?
Perfect competition, monopolistic competition, oligopoly, monopoly.
Earlier in this course, we discussed a few different market types. For each of the following markets types, specify whether the firms produce at a point of allocative efficiency.
Perfectly competitive market Yes Monopoly No Monopolistically competitive market No Perfectly competitive firms will be allocatively efficient, while monopolistically competitive firms and monopolies firms will not. Fundamentally, the latter two types of firms have no motivations to produce where marginal costs are equal to prices.
A monopolistically competitive firm will incur loss if which of the following is true?
Price is lower than average total cost
A cable television/internet access company is moving to town. The costs of a single cable firm are lower than those of several smaller firms. How should she treat the cable company?
She should use the cable firm that has the lower costs.
Why does it make little sense to have many small firms when production is characterized by economies of scale?
Small firms will have relatively higher average costs, and larger firms will have relatively lower average costs. A group of small firms will not be able to compete with a single or a smaller number of larger firms because the larger firm or firms will have lower costs. If prices are lowered through competition, the prices may be below average cost for the small firms but at or above average cost for the large firms.
A good school system is a must. Are the families with children the only members of the town who benefit from good schooling? Does the government have any role here?
Teachers and the government also benefit from good schooling. Most schools are government funded. Schools increase the GDP, decrease crime and poverty, as well as create stability.
What is the opportunity cost of going to college? What are the explicit costs and the implicit costs?
The explicit costs of attending college are tuition, books, room, and board. The opportunity (or implicit) cost of attending college is the value of the next best alternative to attending college. For the sake of argument, let's try to come up with some reasonable numbers for these costs. Perhaps the explicit cost of attending college for four years is roughly $80,000. This varies a lot depending on where you go and whether you receive scholarships. If we assume a student's best alternative to college is a job paying $15,000 per year, the opportunity cost of attending college would be the forgone wages from the job they had to quit: $60,000 over four years. The total cost of attending college would include the explicit cost of $80,000 plus the $60,000 of lost income for a total of $140,000. The higher your wage is, the higher the opportunity cost of college is.
If the price of the output that labor produces rises, what will happen?
The marginal revenue product of labor to a firm will rise If the price of the output of labour increases this means that the same number of products being produced by each worker is now worth more, increasing the dollar value of each employee to the firm.
What is the effect of an increase in the marginal product of labor on the market for labor?
The marginal revenue product of labor will increase. Marginal revenue product is equal to marginal product of labor times the price of the good produced. If the marginal product of labor increases this means that each worker is now producing more of a given good. With the price of the good constant this will lead to higher revenue associated with the output of each worker.
Game Theory:
The mathematical study of strategic interactions between rational actors where the outcome of any actor's actions depends on the actions of others.
Imagine two firms with identical cost structures that do not exhibit economies of scale at high levels of production. One is competing in a perfectly competitive market and one is a monopoly. In the long run which of the following is true?
The monopoly will charge a higher price than the perfectly competitive firm
A monopoly price is higher than the price would be in competitive markets, and the quantities produced are lower.
The one exception to this is when there are significant economies of scale—large enough to bring price down below the competitive market price
If a product yields an external social benefit to society, which of the following is true?
The true value of the product produced is greater than the market price If there are external social benefits the marginal social benefit is greater than the private social benefit. Given that the private market equilibrium will be at the point where marginal private benefit equal marginal private cost, marginal social benefit will exceed the price.
In the long run, firms in a monopolistically competitive market will earn only normal profits (break even) due to which of the following?
There being no barriers to entry in the market If there are profits (loses) in the short run, this will lead to entry (exit) of firms from the market until the level of economic profits is equal to normal levels.
How do you as a monopolist respond if new cost-lowering technology is invented?
There would be an increase in supply
What is one of the goals of anti-trust policy?
To force the monopoly to more closely approximate the outcome of a perfectly competitive market The purpose of these laws is to bring the market closer to the point which maximizes economic efficiency. Perfectly competitive markets are more economically efficient than monopolies, hence the goal of approximating the competitive outcome.
If a good exhibits positive external benefits to society which of the following are true?
Too little of the good will be produced by the private market If there are external positive benefits the marginal social benefit is greater than the private social benefit. Given that the private market equilibrium will be at the point where marginal private benefit equal marginal private cost, marginal social benefit will exceed marginal private cost and thus more of the good being produced would increase total surplus. The Government does not need to take over the market, however a subsidy would provide incentive for suppliers to produce closer to the optimal level.
Due to barriers to entry, no firms can enter this industry:
True, if this is a monopoly
In the short run, the average cost curve will be
U-shaped
How does your firm decide how many workers to hire?
We hire workers until the marginal revenue product (MRP) is equal to the marginal wage rate (MRC) of the previous worker hired.
How do you as a monopolist respond if variable costs rise?
We will adjust our quantity to where marginal cost equals marginal revenue.
You own a business that is a monopoly. How do you respond if demand increases?
We will increase our price and quantity.
How will you and the rest of the market respond if new cost-lowering technology is invented?
We will increase our production.
Under which of the following conditions will a profit-maximizing perfectly competitive firm shut down in the short run?
When the price is less than its minimum average variable cost When the price is less than the minimum average variable cost the firm is increasing their total losses with each unit sold and thus the firm is best off producing 0 output (shutting down) in order to minimize their losses. Recall that in the short run a firm will operate at a loss if they are able to at least cover their variable costs.
How will you and the rest of the market respond if variable costs rise?
When variable costs increase, we will exit the market.
Is the marginal utility / marginal cost = marginal utility / price for the perfectly competitive firms?
Yes, marginal utility / marginal cost for the perfectly competitive firms is 2 and marginal utility / price is 2.
How do you act on an ongoing basis if you want to earn higher profits than most other competitors?
You need to find cheaper ways of producing the product.
Changes in fixed and variable costs and changes in demand have the same effects on
a monopolistically competitive firm that they had in the monopoly model.
Given the following table and your answers for total revenue in the previous question, calculate marginal revenue.
a- 9 b- 7 c- 5 d- 3 e- 4 f- -1 Find the change in revenue and divide it by the change in quantity (1 in this case).
Capacity refers to the
amount of production that could be produced if the firm were producing where average costs are at a minimum.
Scarcity implies that
an individual or group of individuals cannot have everything they want at any point in time.
allocative efficiency is defined as producing
an output at which the cost to society of producing that last unit of output (MC) is exactly equal to the value consumers place on that last unit of output (P).
There are no guarantees that production under a monopoly will be at the lowest possible
average cost.
Suppose that the graph below represents the cost function for the entire industry and that the demand curve and marginal revenue curve represent the entire market. If the oligopoly acted as a single decision maker, what quantity would it choose to maximize industry profit?
b At a level of output of "a," the firms would face a marginal revenue greater than the marginal cost. They can increase profits by increasing output. At output "c," the firms face a marginal cost greater than marginal revenue. (In fact, marginal revenue is negative at that level of output.) Thus, the firms should cut back if they are producing that much. The conclusion is that a small group of firms that is able to coordinate prices and quantities should charge the same price and produce the same quantity that a monopoly would.
If the marginal cost is the same for the monopolist and the competitive firm, the price in the monopoly must
be higher than the competitive price.
a company may become a resource monopoly by
being the only firm with access to a resource needed for the production process.
As a monopoly, DeBeers could make a profit in the ______ run.
both long and short run
Oligopolies
can produce differentiated products (automobile manufacturers are good examples) or identical products (like producers of crude oil).
A monopolistically competitive firm may have some market power in that it can raise its price, and because it produces a unique product some buyers will
continue to purchase the product at the higher price.
a firm may also gain monopoly power by
deliberately erecting barriers to entry
he firm in monopolistic competition has a much flatter
demand curve than that of the monopolist. many sellers of the good in the market, each seller has tried to make the product unique through differentiation.
Entry reduces the
demand for each existing firms' output.
economic profit per unit produced
difference between that price and average total cost.
Total economic profit
difference multiplied by the number produced
In the long run, the firm will leave the industry if average costs or demand
do not change, as they could do better in another market.
a huge difference between firms in a competitive market and monopolists is that the monopolist can continue to
earn economic profits.
A monopoly produces a level of output where demand is ______________ (elastic / inelastic / unit elastic)
elastic
A movie theater price discriminates by charging children and seniors lower prices than adults. The theater is assuming that children and seniors have a more ______________(elastic / inelastic) demand than adults.
elastic
Given your answers to the previous questions, a monopolist will produce on the portion of the demand curve that is _______.
elastic A monopolist will face a market demand curve and that curve will have elastic and inelastic portions. However, a monopolist will produce where marginal revenue equals marginal cost. Marginal revenue will only be positive where demand is elastic. If demand is inelastic, then a decrease in the price will cause a smaller percentage increase in quantity demanded and total revenue will decrease.
Marginal revenue is only positive when demand is _______.
elastic This concept takes a little bit more thought. We have established that marginal revenue is positive at the profit-maximizing quantity. That means that if the price was lowered, the increase in quantity would more than offset that decrease in price and there would be an increase in revenue. We established in previous chapters that when consumers are on the elastic portion of their demand curve, if the price is lowered, revenue would increase. So, if the firm is producing where marginal revenue is positive, it must be producing on the elastic portion of the demand curve.
If possible, the firm will also lower the price to the consumers who have a more
elastic demand. Total revenue for this group will also increase.
In monopoly, there are high barriers to
entry. other firms will not be able to enter this market to share in the profits and the monopolist will continue making the same profits as before!
In the long run, a monopolistically competitive firm will produce where price ___________.
equals average cost and is greater than the marginal cost
economic profits are maximized when marginal revenue
equals marginal cost, there is no guarantee that they will be positive.
Economic profits will increase if the firm
expands
If the products sold by all firms are close substitutes, and the firms in an oligopoly compete aggressively, we could see price
fall to the level we would see in a competitive market.
If we are on the frontier, then the economy is experiencing
full employment—it is employing all available resources. The economy is producing the most amount of output possible given all of its available resources and inputs.
when marginal revenue is greater than the marginal cost, the total revenue for the next unit of production would
go up by more than the cost increases, so profits will increase.
An allocatively efficient economy produces
goods that generate the greatest amount of welfare or value to society. the cost to society of producing the last unit of a good, its marginal cost, is just equal to the marginal value of that good to society.
In the diamond industry, the monopoly price is and the quantity is relative to the price and quantity if the market were perfectly competitive.
greater / lower
A monopoly will always charge a price that is ______________ (greater than / less than / equal to) marginal cost.
greater than
the industry marginal revenue was equal to marginal cost, the marginal revenue for the single firm is
greater than the marginal cost.
Describe the traits of an oligopoly.
high barriers to new entry, price-setting ability, the interdependence of firms, maximized revenues, product differentiation, and non-price competition
In the long run, the monopolist's economic profits will be ______________ than the total of the competitive firms' profits.
higher In a perfectly competitive market, firms will enter if there are potential profits, and this entry of new competitors will lower the price and firms' profits.. In a monopoly, however, barriers to entry prevent other firms from entering.
Those costs of innovation and advertising (or marketing) add to the costs of production, and average costs (in most cases, fixed costs) will be
higher than without those expenses.
In the long run, a monopolist facing the same cost curves as a perfectly competitive firm will charge a ______________ price than the competitive market and produce a ______________ output.
higher; lower The perfectly competitive firms, in the long run, will produce where marginal cost and average cost are just equal to the market price. The monopolist will find that at that level of production, marginal revenue will be much less than the marginal cost. Thus, the monopolist will raise the price and produce less.
The price will be the
highest price it can charge and still sell that amount. We find that price by looking at the demand curve
. If the price is lowered, the quantity demanded will
increase
Because the price (the marginal benefit to consumers) is greater than the marginal cost at a monopoly's level of production, society will benefit if production is
increased
The marginal cost curve may show a decline in marginal cost as the variable input
increases, but once the firm begins to experience diminishing marginal returns, it will find that marginal costs rise as output expands.
If the firm can, it will raise the price to the consumers with the
inelastic demand The result will be an increase in total revenue from those customers
Monopolistically competitive firms may spend money to differentiate themselves from competing firms, either by
investing in innovation to produce a differentiated product or by promoting, advertising, or otherwise marketing their goods.
oligopolistic industry has few producers because
it has some type of barrier to entry. that barrier consists of significant economies of scale.
The effect of the increased sales on revenues is the gain from the sale of one more good (the new price of the good times the quantity sold) minus the amount of revenue the monopoly loses because
it now sells the rest of its production at a lower price.
new entrant will not be able to effectively compete because
it will not be able to grow fast enough to take advantage of the economies of scale enjoyed by the firms already in the industry.
the marginal revenue is always going to be
less than the price.
If the market price is higher in the monopoly market, the quantity produced by the monopolist must be
less than the quantity produced in the competitive market.
A monopolistically competitive firm in the long run will produce an amount that is _______ the quantity where average cost is at a minimum and charge a price that is _______ marginal cost.
less than; greater than
When comparing a monopoly and a perfectly competitive market where the costs are the same, the monopoly will produce a ______________ (greater / lower / same) quantity.
lower
increase in quantity sold will be due to new consumers who are now willing to pay the
lower price offered by the more aggressive firm. This is movement along the market demand curve. the firm cutting its price sees a larger increase in quantity sold than this.
The new demand and marginal revenue curves result in
lower prices, lower quantity, and smaller economic profits.
To sell one more unit of a good, the monopolist must
lower the price.
In the long run Since there is free entry in the case of perfect competition, new firms will enter the market and therefore
lowering price until all firms just breakeven
The firm acting alone will also take some customers away resulting in the marginal revenue for the firm that
lowers its price will be greater than the marginal revenue if all firms lowered price.
If DeBeers is profit maximizing, they produce where marginal revenue is equal to . This point on the marginal revenue curve is the demand curve.
marginal cost / below
if a firm is profit maximizing, it will set marginal revenue equal to
marginal cost, and marginal cost has to be positive, so marginal revenue must be too.
the monopoly price must always be greater than the
marginal cost.
the profit-maximizing monopoly produces a level of output where marginal revenue equals
marginal cost.
A profit-maximizing monopolist produces where marginal cost is equal to ________.
marginal revenue If revenue is increasing by more than costs are increasing (marginal revenue > marginal cost), then profits are increasing. If the opposite is true, then profits are decreasing. Therefore, firms will want to produce where marginal revenue and marginal cost are equal.
It is only in perfect competition that output is being produced at the
minimum point of the ATC curve.
Where average cost equals marginal cost, average cost will be at a
minimum.
Game theory
modeling strategy that formalizes strategic behavior on the part of one or more players in some specified game.
here is no market supply curve for a
monopolist
A large number of firms in Biergarten sell flavored beer. However, each firm faces a downward-sloping demand curve. The market for flavored beer is ________.
monopolistically competitive
Given that consumers value the last unit of the good so much, and that the cost of producing the last unit of the good is relatively so low,
more of it should be produced for the market. However, it is not. Therefore, allocative efficiency is not achieved.
In the long run, the firm will have
no economic profits, as entry of new firms has caused demand to fall until the economic profits no longer exist. Price will still be higher than marginal cost. The firm will not be producing at the lowest average cost. that the firm will be producing a smaller quantity of output than the level of production where average cost is a minimum
In the long run, monopolies may earn economic profits while perfectly competitive firms earn
normal profits (i.e., zero economic profits).
If the firm has adjusted prices for both groups so that total amount demanded has not changed, then costs have
not changed, revenues have increased, and thus economic profits have gone up.
because of barriers to entry, new firms will
not enter to drive price to equal the minimum average total cost and eliminate economic profits.
the demand curve faced by a monopoly is not the same as its marginal revenue curve, so price will
not equal marginal revenue
The market demand in a monopoly market differs from the demand the monopoly itself faces by _________.
nothing; monopoly is the only firm in the market, so it does not differ.
When firms are making an economic profit,
other firms will enter. the demand for the existing firms' products will begin to diminish. Prices fall, and the incumbent firms reduce output.
legal protection
patents and copyright
technical efficiency is achieved in
perfect competition.
costs may be higher for monopolistically competitive firms than for
perfectly competitive firms.
The firm in the perfectly competitive market has a
perfectly horizontal (perfectly elastic) demand curve as it is one producer among many selling an identical product.
cost curves exhibit economies of scale that
permit large firms to operate more efficiently.
A monopoly will always be producing where marginal revenue is
positive
In the figure above, the firm's profit would be ______.
positive
Marginal cost is always positive; therefore, marginal revenue at the profit-maximizing output will have to be ________.
positive If firms are profit-maximizing, they set marginal revenue equal to marginal cost. If marginal cost is positive, then marginal revenue will be positive.
marginal revenue in a monopoly is always less than the
price
technical efficiency is
producing a given amount of output with the smallest amount of inputs.
A monopolistically competitive firm is going to maximize profits by
producing a quantity of output where marginal revenue equals marginal cost.
technical (or productive) efficiency is defined as
producing at the lowest possible cost in the long run.
The monopolist has a very steep demand curve denoting
relatively inelastic demand since no other firm produces this good. Since the demand curve is not horizontal, price and marginal revenue are not the same (P≠MR).
The new higher price will mean more
revenue gained from the higher price—but it means less revenue from the fall in the number of goods sold.
If one of the firms lowers its price, it will be able to
sell a lot more
Suppose that a local Italian restaurant is operating in a monopolistically competitive environment and is maximizing its profit. The price of spaghetti with meat sauce is $10 and the average total cost is $7. Based on this information, the firm is operating in the _______ and we can expect _______.
short run; firms to enter the market
In the figure above, if a monopoly charged the price of F and produced the monopoly quantity, then there would be a(n) ________.
shortage
The demand in the market is the demand that the
single individual firm faces.
An oligopoly is a firm producing in a market with a
small number of dominant firms, each producing similar or differentiated products and commonly experiencing significant barriers to entry.
The more differentiated the product, the
steeper the curve. Since the demand curve is not horizontal, price and marginal revenue are not the same (P≠MR).
If we cannot obtain something effortlessly, it is by definition scarce, and this means
that choices must be made about how scarce resources get allocated.
if the nature of the industry is such that a huge investment is required to enter the market,
that huge investment may indeed be a barrier to potential competition.
a firm establishes a monopoly through technical advances
that no other firm has matched.
If a single firm faces significant economies of scale (average costs of production decrease as they increase production), then
that single firm may drive out smaller competitors.
The marginal revenue
the additional income from selling one more unit of a good; sometimes equal to price
Higher costs of a monopolistically competitive firm benefit
the consumers
a monopoly decides what price to set, and all of the conditions that influence market demand determine
the corresponding quantity demanded.
Technical efficiency tells us that
the economy is producing on the production possibilities frontier.
if the marginal cost is less than the marginal benefit,
the firm should also expand its production.
The perfectly elastic demand curve means that
the firm's marginal revenue is the market price.
The point where output is being produced at the lowest possible cost in the graphs is
the minimum point of the ATC curve - the lowest cost per unit of production.
monopoly and monopolistic competition, due to the downward-sloping demand curve, output will not be at
the minimum point of the ATC curve. Therefore, technical efficiency is not achieved.
The payoffs or profits depend on not only one's own strategy but also
the other actor's strategy.
Allocative efficiency is about
the point on the production possibilities frontier that maximizes economic well-being.
A perfectly competitive firm faces a perfectly elastic demand at
the price that was determined by the market supply and demand. perfectly competitive firms have zero price-setting power.
Technical efficiency in production implies
the production of the maximum amount of output possible given a set of productive inputs.
if the monopolist increases prices,
the quantity demanded will fall, but not necessarily to zero
The allocative efficiency requirement
the right amount of a good or service is being produced—marginal utilities per dollar of resource used are all equal. prices are equal to marginal costs and consumers are maximizing their own satisfaction. We cannot be better off with different levels of production.
monopolistic competition- If existing firms are making profits, new firms will enter and shift the demand curve
to the left. This will continue until economic profits are zero or where P = ATC.
Profit
total revenue (price x quantity) minus total cost
If a monopoly increased the price above the profit maximizing level, __________.
total revenue would decrease
If each firm produces a standardized product, identical to all other producers, the individual firm demand curve
will be much more elastic, and at its extreme it will be identical to the perfectly elastic firm demand of a perfectly competitive market.
In the long run, the monopolist ______________ (will/will not) produce a quantity where average cost is at a minimum, whereas the perfectly competitive firm ______________ (will/will not) produce that quantity.
will not; will In a perfectly competitive market, firms will enter if there are potential profits, which will lower the price. This process will occur until the price equals to the marginal cost which is equal to average cost (at its minimum). At this point there will be no profits. In a monopoly, however, barriers to entry prevent other firms from entering. Nothing is forcing the monopoly to produce where average costs are at a minimum.
Compare the levels of economic profits in a long-run equilibrium for a perfectly competitive firm, a monopoly, a monopolistically competitive firm, and an oligopoly. Economic profits will most likely be:
zero in perfect competition and monopolistic competition, perhaps positive in a monopoly and perhaps positive in oligopoly
A market that is monopolistically competitive will have the following characteristics:
Many producers A variety of types of products, each one slightly different Freedom of entry and exit Lots of information about buyers and other sellers
