econ final
Does the market system result in productive efficiency? In the long run, perfect competition
results in productive efficiency because firms enter and exit until they break even where price equals minimum average cost.
How do network externalities affect barriers to entry? Network externalities
serve as barriers to entry because new products are less useful.
Suppose the market for cotton is perfectly competitive and that input prices decrease as the industry expands. Characterize the industry's long-run supply curve. The cotton industry's long-run supply curve will be
sloping because the long-run average cost of production will be decreasing.
Patents are granted for 20years, but pharmaceutical companiescan't use theirpatent-guaranteed monopoly powers for anywhere near this long because it takes several years to acquire FDA approval of drugs. Suppose it is proposed that the life of drug patents be extended to 20 years after FDA approval. What would be the costs and benefits of thisextension?
A and B. Firms could earn higher profits for a longer period of time, but consumers would lose because prices of drugs would stay higher longer. Firms would be more likely to develop more new products and consumers would gain from having a wider range of medicines.
A form of market structure studied by economists is monopoly. When is a firm a monopoly, or are monopolies only theoretical concepts that do not exist?
A firm is a monopoly if its economic profits are not competed away in the long run.
Why would a firm produce in the short run while experiencing losses?
A firm would not shut down if by producing it would lose an amount less than its total fixed costs.
What is the definition of monopoly?
A monopoly is a firm that is the only seller of a product in a given industry.
The government can block the entry to a market through Which of the following rights is given to the holder of a patent?
All of the above. the exclusive right to a new product for a limited period
What is "natural" about a natural monopoly? A natural monopoly
develops automatically due to economies of scale.
Which of the following best explains why firms don't maximize revenue rather than profit
At the point where revenue is maximized, the difference between total revenue and total cost may not be maximized. If a firm decided to maximize revenue, would it be likely to produce a smaller or a larger quantity than if it were maximizing profit? The firm would produce a LARGER quantity of output.
What is the relationship between a perfectly competitive firm's marginal cost curve and its supply curve?
A firm's marginal cost curve is equal to its supply curve for prices above average variable cost.
What is the relationship between a monopolist's demand curve and the market demand curve? What is the relationship between a monopolist's demand curve and its marginal revenue curve?
A monopolist's demand curve is the same as the market demand curve. A monopolist's marginal revenue curve has twice the slope of its demand curve, because to sell more output, a monopoly must lower price.
Why are consumers so powerful in a market system?
Because it is consumers' demand that influences the market price and dictates what producers will supply in the market.
Although New York State is second only to Washington State in production of apples, its production has been declining during the past 20 years. The decline has been particularly steep in counties close to New York City. In 1985, there were more than 11,000 acres of apple orchards in Ulster County, which is 75 miles north of New York City. Today, only about 6,000 acres remain. As it became difficult for apple growers in the county to compete with lower-cost producers elsewhere, the resources these entrepreneurs were using to produce apples—particularly land—became more valuable in other uses. Many farmers sold their land to housing developers. Suppose a revolutionary new diet is developed that involves eating 10 apples per day, and the new diet becomes wildly popular. Source: Lisa W. Foderaro, "Plenty of Apples, but a Possible Shortage of Immigrant Pickers," New York Times, August 21, 2007.
Because of the popularity of the diet, the number of apple orchards within 100 miles of New York City will likely INCREASE. Housing prices in the area will INCREASE because less land will be available for housing.
Which of the following statements is true when the difference between TR and TC is at its maximum positive value?
Both A and B are true. MR = MC & Slope of TR = Slope of TC
What trade-offs do consumers face when buying a product from a monopolistically competitive firm?
Consumers pay a price greater than marginal cost, but they also have choices more suited to their tastes.
Is the following statement correct or incorrect? "According to the model of perfectly competitive markets, the demand for wheat should be a horizontal line. But this can't be true: When the price of wheat rises, the quantity of wheat demanded falls, and when the price of wheat falls, the quantity of wheat demanded rises. Therefore, the demand for wheat is not a horizontal line."
Incorrect. The commentator is confusing the market demand for wheat with the demand line facing the representative firm.
When are firms likely to enter an industry? When are they likely to exit?
Economic profits attract firms to enter an industry, and economic losses cause firms to exit an industry.
A student argues: "To maximize profit., a firm should produce the quantity where the difference between marginal revenue and marginal cost is the greatest. If a firm produces more than this quantity, then the profit made on each additional unit will be falling." Is the above statement true or false?
False. Profit is maximized at the output level where marginal revenue equals marginal cost.
A monopolistically competitive firm produces where _________, while a perfectly competitive firm produces where _________.
price is greater than marginal cost; price is equal to marginal cost
Suppose you read the following item in a newspaper article, under the headline "Price Gouging Alleged in Pencil Market": Consumer advocacy groups charged at a press conference yesterday that there is widespread price gouging in the sale of pencils. They released a study showing that whereas the average retail price of pencils was $1.00, the average cost of producing pencils was only $0.50. "Pencils can be produced without complicated machinery or highly skilled workers, so there is no justification for companies charging a price that is twice what it costs them to produce the product. Pencils are too important in the life of every American for us to tolerate this sort of price gouging any longer," said George Grommet, chief spokesperson for the consumer groups. The consumer groups advocate passage of a law that would allow companies selling pencils to charge a price no more than 20 percent greater than their average cost of production. Which of the following is not likely to happen in the pencil market?
Firms will charge a price above marginal cost in the long run.
A student makes the following comment: I can understand why a perfectly competitive firm will not earn profits in the long run because a perfectly competitive firm charges a price equal to marginal cost. But a monopolistically competitive firm can charge a price greater than marginal cost, so why can't it continue to earn profits in the long run? How would you answer this question?
In the long run, competition shifts the firm's demand curve leftward until price equals average total cost at the quantity where marginal revenue equals marginal cost. At this quantity, price is greater than marginal cost.
Bob is a general contractor in the construction industry. Suppose the construction industry is perfectly competitive. In the short run, assume the marginal cost of building new homes equals the market price of a new home when Bob builds 10 new homes. At this level of output, Bob's average fixed cost of building a new home is $260,000 and his average variable cost is $200,000 per home (so his average total cost is $460,000 per home). If new homes are selling for $250,000, should he continue to produce 10 new homes in the short run or shut down?
In the short run, Bob should produce and lose $2,100,000
In a column in the Wall Street Journal, venture capitalist Peter Thiel described the difference between monopoly businesses and competitive ones: "Suppose you want to start a restaurant in Palo Alto that serves British food. 'No one else is doing it', you might reason. We'll own the entire market." Source: Peter Thiel, "Competition is for Losers," Wall Street Journal, September 12, 2014. Would the only restaurant that sells British food in Palo Alto, or any other city, be considered a monopoly? What criteria would you use to determine if the restaurant is a monopoly?
It could be according to the broad definition, but would not be according to the narrow definition. The ability to ignore the actions of other firms, the persistence of economic profits, and the availability of close substitutes.
When a firm's demand curve slopes downward and the firm decides to cut price, which of the following happens?
It sells more units but receives lower revenue per unit.
"In a perfectly competitive market, in the long run consumers benefit from reductions in costs, but firms don't." Don't firms also benefit from cost reductions because they are able to earn greater profits?
No. Because short-run profits encourage entry, firms earn zero economic profit in the long run.
The German company Koenig and Bauer has 90 percent of the world market for presses that print currency. Discuss the factors that would make it difficult for new companies to enter this market.
Only Koenig and Bauer has access to the technology necessary to produce presses for currency.
Which of the following is an expression of profit for a perfectly competitive firm? Profit for a perfectly competitive firm can be expressed as
Profit=(P×Q)−(ATC×Q), where P is price, Q is output, and ATC is average total cost.
Harvard Business School started using case studies—descriptions of strategic problems encountered at real companies—in their courses in 1912. Today, Harvard Business Publishing (HBP) sells its case studies to about 4,000 colleges worldwide. HBP is the sole publisher of the Harvard Business School's case studies. What criteria would you use to determine whether HBP has a monopoly on the sale of business case studies to be used in college courses?
The ability to ignore the actions of other firms, the persistence of economic profits, and the availability of close substitutes.
Refer to the graph of the demand curve facing a firm in the perfectly competitive market for wheat. The fact that the demand curve is horizontal implies which of the following?
The firm can sell any amount of output as long as it accepts the market price of $7.00.
The financial writer Andrew Tobias has described an incident when he was a student at Harvard Business School: Each student in the class was given large amounts of information about a particular firm and asked to determine a pricing strategy for the firm. Most of the students spent hours preparing their answers and came to class carrying many sheets of paper with their calculations. When his professor called on him in class for an answer, Tobias stated, "The case said the XYZ Company was in a very competitive industry . . . and the case said that the company had all the business it could handle." Source: Andrew Tobias, The Only Investment Guide You'll Ever Need, San Diego: Harcourt, 2005, pp. 6-8. Given this information, what price do you think Tobias argued the company should charge? (Tobias says the class greeted his answer with "thunderous applause.")
The market price.
A student in a principles of economics course makes the following remark: "The economic model of perfectly competitive markets is fine in theory but not very realistic. It predicts that in the long run, a firm in a perfectly competitive market will earn no profits. No firm in the real world would stay in business if it earned zero profits." Is this remark correct or incorrect?
The remark is incorrect because the student has confused accounting profit and economic profit. Firms in a perfectly competitive market earn accounting profit, but no economic profit.
Which of the following is a characteristic of perfectly competitive markets?
There will be no barriers to new firms entering the market.
One way for a firm to become a monopoly is by controlling a key resource.
True
The chapter states, "Firms will supply all those goods that provide consumers with a marginal benefit at least as great as the marginal cost of producing them." A student objects to this statement by making the following argument: "I doubt that firms will really do this. After all, firms are in business to make a profit; they don't care about what is best for consumers." After reminding the class that we are assuming a competitive market, your professor would most likely give the following reply.
While it's true that firms don't care about consumer welfare, they do maximize profits by producing the efficient level of output.
Why do single firms in perfectly competitive markets face horizontal demand curves?
With many firms selling an identical product, single firms have no effect on market price.
Suppose Amanda owns the only restaurant in town that serves pizza. Other restaurants serve hamburgers, tacos, and fried chicken. Suppose that in the long run, Amanda's restaurant continues to be the only one in town selling pizza. If Amanda is earning economic profits, then, under the broad definition, is Amanda's restaurant a monopoly?
YES
Are perfectly competitive markets productively efficient in the long run?
Yes, because firms produce at the lowest average cost possible.
If you own the only hardware store in a small town, do you have a monopoly?
Yes. You would have a monopoly if your profits are not competed away in the long run.
What is a public franchise? A public franchise is Are all public franchises natural monopolies?
a firm designated by the government as the only legal provider of a good or service. All public franchises are not natural monopolies, and all natural monopolies are not public franchises
What is a monopoly? A monopoly is
a firm that is the only seller of a good or service that does not have a close substitute
Give an example of a public franchise and an example of a public enterprise An example of a public franchise is
a firm that is the sole, government-designated provider of electricity, and an example of a public enterprise is the government directly providing water.
What is a price taker? A price taker is When are firms likely to be price takers? A firm is likely to be a price taker when
a firm that is unable to affect the market price it sells a product that is exactly the same as every other firm
A buyer or seller that is unable to affect the market price is called
a price taker.
A monopoly is a market structure that is characterized by Using the broader definition of monopoly, in which of the following cases could we argue that Microsoft has a monopoly in computer operating systems?
a single seller of a good or service that does not have a close substitute. If Apple's computer operating system and the Linux operating system were not considered close substitutes for Windows.
Which of the following terms best describes a state of the economy in which production reflects consumer preferences? Long-run equilibrium in perfect competition results in
allocative efficiency Both A and B. allocative & productive efficiency.
What is the difference between a firm's shutdown point in the short run and its exit point in the long run? In the short run, a firm's shutdown point is the minimum point on the Why are firms willing to accept losses in the short run but not in the long run?
average variable cost curve, while in the long run, a firm's exit point is the minimum point on the average total cost curve. There are sunk costs in the short run but not in the long run.
Suppose that the market for gluten-free spaghetti is in long-run equilibrium at a price of $3.50 per box and a quantity of 4 million boxes sold per year. Assume that the production of gluten-free spaghetti is a constant-cost industry. If the demand for gluten-free spaghetti increases permanently, which of the following combinations of equilibrium price and equilibrium quantity would you expect to see in the long run? a. A price of $3.50 per box and a quantity of 4 million boxes. b. A price of $3.50 per box and a quantity of more than 4 million boxes. c. A price of more than $3.50 per box and a quantity of more than 4 million boxes. d. A price of less than $3.50 per box and a quantity of less than 4 million boxes.
b. After demand increases, and supply increases, the quantity will be more than 4 million boxes, but the price will return to its initial level.
Substitutes exist for just about every product, so can a firm ever really be a monopoly? A firm can
be a monopoly if it can ignore the actions of other firms.
Which of the following terms best describes the result of the forces of competition driving the market price to the minimum average cost of the typical firm?
productive efficiency
A study analyzed a pharmaceutical firm's costs to develop a prescription drug and receive government approval. An article in the Wall Street Journal describing the study noted that included in the firm's costs was "the return that could be gained if the money [used to develop the drug] were invested elsewhere." Source: Ed Silverman, "Can It Really Cost $2.6 Billion to Develop a Drug?," Wall Street Journal, November 21, 2014. This return should
be included in the firm's costs because it is the opportunity cost of not investing those funds elsewhere.
How does perfect competition lead to allocative and productive efficiency? Perfect competition leads to allocative and productive efficiency
both a and b. because prices reflect consumer preferences. because firms are motivated by profit.
How is the market supply curve derived from the supply curves of individual firms? The market supply curve is derived
by horizontally adding the individual firms' supply curves.
Suppose Farmer Lane grows and sells cotton in a perfectly competitive industry. The market price of cotton is $1.62 per kilogram, and his marginal cost of production is $1.49 per kilogram, which increases with output. Assume Farmer Lane is currently earning a profit. Can Farmer Lane do anything to increase his profit in the short run? Farmer Lane...
can increase his profit by producing more output
What are the differences between the long-run equilibrium of a perfectly competitive firm and the long-run equilibrium of a monopolistically competitive firm? Unlike perfectly competitive firms, in the long run monopolistically competitive firms
charge a price greater than marginal cost and do not produce at minimum average total cost.
In 2017, Apple reported that since its iTunes App Store had opened in 2008, third-party app developers had earned more than $60 billion and currently employed 1.4 million people. Yet, as we've seen, because of intense competition, many game developers can only break even on the games they develop. Source: Tripp Mickle, "Apple's App Store Sales Top $28 Billion," Wall Street Journal, January 5, 2017. If game companies can only break even on the mobile games they develop, in the long run, we would expect them to
continue to develop mobile games because they can cover all costs of production if they break even.
An article in the Wall Street Journal discussing the financial results for bookstore chain Barnes & Noble during the first quarter of 2019 reported that, compared with the same quarter in the previous year, the firm's revenue was unchanged from $1.23 billion, while its profit had improved to $66.9 million from a loss of $63.5 million. Source: Allison Prang, "Barnes & Noble Lowers Earnings Forecast after Weak Postholiday Sales," Wall Street Journal, March 7, 2019. It is possible for profits to increase even if revenue remains unchanged if... Can Barnes & Noble maximize profit without maximizing revenue?
costs decrease. A firm will typically not maximize its revenue at the output level that maximizes its profit. It a firm were to maximize revenue, it would typically produce a larger quantity than it does when maximizing profit.
To have a monopoly, barriers to entering the market must be so high that no other firms can enter. Do network externalites create or remove barriers to entry? Explain. Network externalities
create barriers to entry because if a firm can attract enough customers initially, it can attract additional customers as its product's value increases by more people using it, which attracts even more customers.
Does a monopolist have a supply curve? Briefly explain. (Hint: Look again at the definition of a supply curve in Chapter 3 and consider whether this applies to a monopolist.) A monopolist
does not have a supply curve because it is a price maker with one profit-maximizing price-quantity combination.
Many firms might like to be monopolies because such firms earn economic profits in the long run. What might cause a monopoly? A firm is likely to be a monopoly if
economies of scale are so large that the firm has a natural monopoly.
Economists have debated the effects of monopolistically competitive market structures on the well-being of society. How do monopolistically competitive market structures affect consumers? Compared to perfect competition, consumer welfare with monopolistic competition is
enhanced by greater product variety.
According to an article in the Wall Street Journal, as a result of U.S. consumers increasing their demand for beef, in 2015 world beef prices increased. For example, according to the article, "Australian beef prices are up 40% this year, while New Zealand prices are 17% higher." The article observed, "The gains show no signs of stopping, given the [increasing] U.S. demand...." Source: Lucy Craymer, "Beef Prices Sizzle With U.S. Demand," Wall Street Journal, September 10, 2015. If U.S. demand for beef continues to increase, in the long run, beef prices will
fall because the supply of beef will increase as new firms enter the industry.
Explain why it is true that for a firm in a perfectly competitive market that P = MR = AR. In a perfectly competitive market, P = MR = AR because
firms can sell as much output as they want at the market price.
According to an article in the New York Times, interest payments on bank loans make up more than half the costs of the typical solar panel manufacturer. The owner of a firm that imports solar panels made this observation about solar panel manufacturers: "So as long as companies can cover their variable costs and earn at least some revenue to put toward interest payments, they will continue to operate even at a loss." Source: Diane Cardwell, "Solar Tariffs Upheld, but May Not Help in U.S.," New York Times, November 7, 2012. The interest payments these firms make are a The quote describes logical behavior of solar panel firms in the
fixed cost since they do not vary with output. short run.
Governments often have the potential to influence whether firms are monopolies How might the government affect whether a firm is a monopoly? The government could
grant a copyright to a firm, giving it the exclusive right to produce a product.
In China, the government owns many more firms than in the United States. A former Chinese government official argued that a number of government-run industries such as oil refining were natural monopolies. Source: Shen Hong, "Former State Assets Regulator: SOE Monopolies 'Natural'," Wall Street Journal, January 4, 2012. Oil refining would be a natural monopoly in a country if An industry is a natural monopoly when
having multiple firms would be highly inefficient. one firm can satisfy the entire market at the lowest cost.
In a perfectly competitive industry with constant costs, the long-run supply curve will be
horizontal
Will a monopoly that maximizes profit also be maximizing revenue? Briefly explain. A monopoly that maximizes profit Will it be maximizing production? Briefly explain. A monopoly that maximizes profit
is not also maximizing revenue because revenue is highest when marginal revenue equals zero. is not also maximizing production because price must be reduced to sell additional output.
The U.S. Postal Service (USPS) is a monopoly because the federal government has blocked entrinto the market for delivering first-class mail. Is it also a natury also a monopoly? How can we tell? The USPS What would happen if the law preventing competition in this market were removed? If the law preventing competition were removed, then
is probably not a natural monopoly because if it were, then a law blocking competition would not be necessary. new firms would likely enter the market.
What is meant by allocative efficiency? Allocative efficiency is when every good or service What is meant by productive efficiency? Productive efficiency is Briefly discuss the difference between these two concepts.
is produced up to the point where price equals marginal cost when a good or service is produced at lowest possible cost. Productive efficiency pertains to production within an industry while allocative efficiency pertains to production across all industries.
Describe a monopoly's demand curve. A monopoly's demand curve
is the same as the demand curve for the product.
One of the reasons why monopolies exist is because the government blocks the entry of more than one firm into a market. How might the government do this? The government could block entry by
issuing copyrights granting the exclusive right to use a creation during the creator's lifetime.
Economists have developed broad and narrow definitions to identify monopolies. What is a characteristic that supports a firm being classified as a monopoly? Economists could find that a firm is a monopoly if
it earns profits in the long run.
For many years, the International Nickel Company of Canada essentially operated as a monopoly. What made this company a monopoly? The International Nickel Company of Canada was essentially a monopoly because
it had almost exclusive control of the world's supply of nickel, used to make nickel products.
What conditions make a market perfectly competitive? A market is perfectly competitive if
it has many buyers and many sellers, all of whom are selling identical products, with no barriers to new firms entering the market.
The late Nobel Prize-winning economist George Stigler once wrote, "the most common and most important criticism of perfect competition... [is] that it is unrealistic." Source: George Stigler, "Perfect Competition, Historically Contemplated," Journal of Political Economy, Vol. 55, No. 1, (February 1957), pp. 1-17. Despite the fact that few firms sell identical products in markets where there are no barriers to entry, economists believe that the model of perfect competition is important because
it is a benchmark—a market with the maximum possible competition—that economists use to evaluate actual markets that are not perfectly competitive.
What are the three conditions for a market to be perfectly competitive? For a market to be perfectly competitive, there must be
many buyers and sellers, with all firms selling identical products, and no barriers to new firms entering the market.
The increase in total revenue that results from selling one more unit of output is What is the relationship between price, average revenue, and marginal revenue for a firm in a perfectly competitive market?
marginal revenue. Price is equal to both average revenue and marginal revenue.
Why was De Beers worried that people might resell their old diamonds? If people resell their old diamonds, then How did De Beers attempt to convince consumers that used diamonds were not good substitutes for new diamonds? How did De Beers' strategy affect the demand curve for new diamonds? How were De Beers' profits affected?
market competition would increase, decreasing profits. De Beers developed the slogan "a diamond is forever" to increase sentimental value. The demand for new diamonds has remained unchanged. De Beers has remained profitable.
Does the market system result in allocative efficiency? In the long run, perfect competition
results in allocative efficiency because firms produce where price equals marginal cost.
The following questions are about long-run equilibrium in the market for cage-free eggs. Source: Rachel Krantz, "'Wild-Caught,' 'Organic,' 'Grass-Fed': What Do All These Animal Welfare Labels Actually Mean?" vox.com, January 30, 2019. As described in the chapter opener, the market for cage-free eggs in 2019 was In the long run in the market for cage-free eggs, we would expect As of 2019, the U.S. Department of Agriculture (USDA) did not have detailed guidelines for egg farmers to follow before they could claim that the eggs they sell were laid by cage-free chickens. Some animal rights activists were pushing for the USDA to enact stricter guidelines than many egg farmers were following voluntarily. Such guidelines would be likely to significantly raise the cost of producing cage-free eggs. Suppose that the USDA begins to require these stricter guidelines. What effect will this increase in cost have on the long-run price of cage-free eggs? In the long run, will the quantity of cage-free eggs be larger, smaller, or the same as it would have been without the USDA adopting the guidelines? Briefly explain.
moving toward long-run equilibrium where cage-free chicken farmers would break even because the profitability of selling cage-free eggs was declining, but it was not yet at this point. the equilbrium price to decrease and the equilibrium quantity to increase, as more firms enter. With the stricter guidelines, other things equal, the market price of cage-free eggs would INCREASE as the minimum long-run average cost INCREASES. At the new market price, the long-run equilibrium quantity will be SMALLER.
The more cell phones in use, the more valuable they become to consumers. This is an example of
network externalities.
What determines entry and exit of firms in a perfectly competitive industry in the long run? In a perfectly competitive industry in the long run,
new firms will enter if existing firms are making a profit and existing firms will exit if they are experiencing losses.
What characterizes perfectly competitive markets? Perfectly competitive markets have
no barriers to new firms entering.
In 2018, a judge allowed a lawsuit alleging that Kona Brewing Company, which sells Kona beer, had misleadingly marketed Kona as if it were brewed in Hawaii, when it is actually brewed in Oregon, Washington, Tennessee, and New Hampshire. Source: Ross Todd, "Trouble Brewing: 'Kona' Beer-Maker Faces Certified Class of Consumers over Mainland Brewing," law.com, October 9, 2018. If the market for beer were perfectly competitive, the location of breweries would
not matter to consumers since the product would be homogeneous.
In a magazine article, a writer explained that the provision of electric power in the United States consists of two processes: the generation of electricity and the distribution of electricity. The writer argued that, "power distribution is a natural monopoly...But...there's...no reason why the people who generate the electricity...should be the same people who own the power lines." Source: Tim Worstall, "Which Should We Have: Public Utilities or Regulated Private Monopolies?" Forbes, March 24, 2013. The distribution of electric power might be a natural monopoly because The generation of electric power would not be a natural monopoly because
only one distribution network is needed to transmit the power. generation can be done in various ways and in various locations, so there are no inefficiencies associated with multiple providers.
A monopolistically competitive firm is not allocatively efficient because
price exceeds marginal cost.
Do consumers benefit in any way from monopolistic competition relative to perfect competition? Compared to perfect competition, when a consumer purchases a product from a monopolistically competitive firm, the consumer benefits from purchasing a product
that is appealing because it is differentiated.
What is the supply curve for a perfectly competitive firm in the short run? The supply curve for a firm in a perfectly competitive market in the short run is
that firm's marginal cost curve for prices at or above average variable cost.
How should firms in perfectly competitive markets decide how much to produce? Perfectly competitive firms should produce the quantity where
the difference between total revenue and total cost is as large as possible.
Why might a monopoly arise? One firm will be present when
the government blocks entry of more than one firm by granting a patent.
What are the four most important ways a firm becomes a monopoly? The four main reasons a firm becomes a monopoly are:
the government blocks entry, control of a key resource, network externalities, and economies of scale.
What is the government's policy on collusion in the United States? Explain the rationale for this policy. In the United States
the government makes collusion illegal with antitrust laws because monopolies reduce economic efficiency.
How are prices determined in perfectly competitive markets? In perfectly competitive markets, prices are determined by
the interaction of market demand and supply because firms and consumers are price takers.
Explain why it is true that for a firm in a perfectly competitive market, the profit-maximizing condition MR = MC is equivalent to the condition P = MC. When maximizing profits, MR = MC is equivalent to P = MC because
the marginal revenue curve for a perfectly competitive firm is the same as its demand curve.
If patents reduce competition, why does the federal government grant them? The federal government grants patents
to encourage firms to spend money on research to create new products.
Why does the government issue patents? The government issues patents How long do patents last?
to encourage firms to spend money on the research and development necessary to create new products. A patent is the exclusive right to a product for a period of 2020 years from the date the patent is filed with the government.
The great baseball player Ty Cobb was known for being very thrifty. Near the end of his life he was interviewed by a reporter who was surprised to find that Cobb used candles, rather than electricity, to light his home. From Ty Cobb's point of view, was the local electric company a monopoly? For Cobb, the local electric company
was not a monopoly because candles were a good substitute for electricity.
A monopolist is a price maker because
when a monpolist raises its prices, it loses some but not all customers.
Would a firm earning zero economic profit continue to produce, even in the long run? In long-run competitive equilibrium, a firm earning zero economic profit
will continue to produce because such profit is as high a return as could be earned elsewhere.
Assume the market for oranges is perfectly competitive. If the demand for oranges increases, will the market supply additional oranges? If the demand for oranges increases, then the market
will supply additional oranges because producers seek the highest return on their investments.
When home builders construct a new housing development, they will usually sell the rights to lay cable to a single cable television company. As a result, anyone buying a home in that development is not able to choose between competing cable companies. Some cities have begun to ban such exclusive agreements. Williams Township, Pennsylvania, decided to allow any cable company to lay cable in the utility trenches of new housing developments. The head of the township board of supervisors argued, "What I would like to see and do is give the consumers a choice. If there's no choice, then the price [of cable] is at the whim of the provider." Source: Sam Kennedy, "Williams Township May Ban Exclusive Cable Provider Pacts," (Allentown, Pennsylvania) Morning Call, November 5, 2004, p. D1. In a situation in which the consumers in a housing development have only one cable company available, is the price really at the whim of the company? Would a company in this situation be likely to charge, say, $500 per month for basic cable services? Explain why or why not. A cable company in this situation
would not be free to charge any price it chooses because it would still be constrained by consumer demand.
In perfect competition, long-run equilibrium occurs when the economic profit is
zero
Suppose you decide to open a copy store. You rent store space (signing a one-year lease), and you take out a loan at a local bank and use the money to purchase 10 copiers. Six months later, a large chain opens a copy store two blocks away from yours. As a result, the revenue you receive from your copy store, while sufficient to cover the wages of your employees and the costs of paper and utilities, doesn't cover all of your rent and the interest and repayment costs on the loan you took out to purchase the copiers. Should you continue operating your business?
Yes, because you are covering your variable costs.
An article in the Wall Street Journal discusses the visual effects industry, which is made up of firms that provide visual effects for films and television programs. The article notes that: "Blockbusters... often have thousands of visual effects shots. Even dramas and comedies today can include hundreds of them." But the article notes that the firms producing the effects have not been very profitable. Some firms have declared bankruptcy, and the former general manager of one firm was quoted as saying: "A good year for us was a 5% return." Source: Ben Fritz, "Visual Effects Industry Does a Disappearing Act," Wall Street Journal, February 22, 2013. What dynamics best describe the factors at play in this market? Market entry for visual effect companies is relatively
easy, so firms can expect to earn zero economic profit in the long run.