Market power questions

One of the market failures caused by market power is

Underproduction

which of the following graphs accurately depicts the demos curve in a perfectly competitive market

the perfectly elastic one

(Figure: Marginal Revenue) What is the marginal revenue of the fourth unit in the following example?

$2

Pamela sells 10 bottles of olive oil per week at $5 per bottle. She can sell 11 bottles per week if she lowers the price to $4.50 per bottle. The quantity effect would be:

$4.50

$0

(Figure: Marginal Revenue) What is the marginal revenue of the fifth unit in the following example?

Mr. Parker sells 10 bottles of wine per week at $50 per bottle. He can sell 11 bottles per week if he lowers the price to $45 per bottle. The quantity effect of the sale of an additional bottle would be _____, whereas the price effect of the sale of an additional bottle would be _____.

45 - 50

monopoly

A market in which there are many buyers but only one seller.

oligopoly

A market structure in which a few large firms dominate a market

two units $450

According to the Rational Rule for Sellers, the manager of this company should choose to produce _____ of output and charge a price of _____.

How does marginal revenue compare to price for a seller with market power?

Beyond the first unit sold, marginal revenue is below price.

If a firm faces a downward-sloping demand curve:

P > MR

How is the result of the Rational Rule for Sellers different for companies with market power versus companies with no market power?

The price is higher for companies with market power

The demand curve for a monopoly is:

above the MR curve

If Penelope, a monopolist, is producing a quantity where MC < MR, then profit:

can be increased by increasing production

market power leads to

higher equilibrium price inefficiently smaller quantity larger economic profits businesses w market power can survive even with inefficiently high cost

If a monopolist is producing a quantity that generates MC = MR, then profit:

is maximized

order from highest to lowest market power

monopoly oligopoly monopolistic competition perfect competition

In a perfectly competitive market, a company's marginal revenue equals _____. For a company with market power, marginal revenue is _____.

price less than price

60

(Figure: Pay Per View Movies on Xfinity Cable) Use Figure: Pay Per View Movies on Xfinity Cable. The figure shows the demand and marginal revenue curves for on-demand movie rentals on Xfinity. Assume that marginal cost and average cost are constant at $20. If the cable company has market power, what price will it charge?

8

(Figure: The Profit-Maximizing Output and Price in the Diamond Market) Use Figure: The Profit-Maximizing Output and Price in the Diamond Market. Assume that there are no fixed costs and that AC = MC = $200. The profit-maximizing output for a monopolist is:

(Figure: The Profit-Maximizing Output and Price in the Diamond Market) Use Figure: The Profit-Maximizing Output and Price in the Diamond Market. Assume that there are no fixed costs and that AC = MC = $200. Under perfect competition, the price of the good would be _____, and _____ units would be produced.

20 16

(Figure: A Fly Fishing Salmon Monopoly) Use Figure: A Fly Fishing Salmon Monopoly. Andrew is the only licensed fly-fishing guide in Matane, Quebec. If Andrew maximizes profit, then he will sell _____ guided tours at _____ each.

Q2 P 1

monopolistic competition

a market structure in which many companies sell products that are similar but not identical

perfect competition

a market structure in which a large number of firms all produce the same product

If Penelope, a monopolist, is producing a quantity where MC = P, then profit:

can be increase by decreasing production

If Penelope, a monopolist, is producing a quantity where MC > MR, then profit:

can be increased by decreasing production

If a monopolist produces a quantity that generates MC < MR, then profit:

can be increased by increasing output.

$40

(Figure: Demand, Revenue, and Cost Curves for Thneeds) Use Figure: Demand, Revenue, and Cost Curves for Thneeds. Thneeds and Things is a monopolist in the thneed ("things we need") market. If the government wants to regulate Thneeds so that an efficient outcome is reached, it would impose a price ceiling of:

If a monopolist produces a quantity that generates MC > MR, then profit:

can be increased by increasing price.