Micro Econ Exam 3 - Chapter 15, 16, & 17 (Monopoly, Monopolistic Competition, & Oligopoly)

Which of the following is a characteristic of monopolistic competition?

Free entry Has characteristic of both a monopoly and a competitive firm.

Which of the following is not a reason for the existence of a monopoly?

diseconomies of scale

The market demand curve for a monopolist is typically

downward sloping

Encouraging firms to invest in research and development and individuals to engage in creative endeavors such as writing novels is one justification for... Patent and Copyright laws are major sources of this too.

government-created monopolies.

When a single firm can supply a product to an entire market at a lower cost than could two or more firms, the industry is called a

natural monopoly

Marginal revenue can become negative for...

monopoly firms, but not for competitive firms

The simplest way for a monopoly to arise is for a single firm to...

own a key resource.

If a monopolist's marginal costs increase by $1 for all levels of output, then the monopoly price will

rise by less than $1.

A monopoly can...

set the price it charges for its output but faces a downward-sloping demand curve so it cannot earn unlimited profits.

When a firm experiences continually declining average total costs

society is better served by having one firm supply the product.

If government officials break a natural monopoly up into several smaller firms, then

the average costs of production will increase.

Monopolistic Competition

-Close substitutes, but not identical (ex: fine dining, designer clothes) -Price makers, they can charge any price they want -Demand DOES NOT equal MR -Low barriers so NO economic profit in long run, -More firms enter, more substitutes, demand shifts left and cause firm to be in Long Run

Monopoly characteristics

-Unique good with no close substitutes -Price maker -High barriers to entry - MR curve < Demand curve -Profit Maximizing Quantity is where MR = MC -Profit Maximizing Price is where Quantity = Demand Price -Revenue Maximizing Quantity is where MR = Price of 0 -Demand DOES NOT = MR

Lump Sum Tax

A one time tax that affects fixed cost, so marginal costs wouldn't change.

Which of the following is a characteristic of a natural monopoly?

Average total cost declines over large regions of output. Occurs when there are economies of scale over the relevant range of output

A monopolistically competitive market is like both a competitive market and a monopoly in that firms in all three market structures

Can earn economic profits in short run

Which of the following statements about oligopolies is not correct? a. An oligopolistic market has only a few sellers. b. The actions of any one seller can have a large impact on the profits of all other sellers. c. Oligopolistic firms are interdependent in a way that competitive firms are not. d. Unlike monopolies and monopolistically competitive markets, oligopolies prices do not exceed their marginal revenues.

D.

What area measures the monopolists profit on graph?

Demand price - ATC price (both meet MC = MR

Consumer surplus

Difference between what you're willing to pay and what you did pay..

Elastic and Inelastic range of demand curve

Elastic - MR is positive (greater than 0 Price falls, TR increases Inelastic - MR is negative (or below 0) Price Falls, TR

Deadweight Loss from exercise tax

Exercise tax would shift supply up (P goes up, Q goes down)

What price will the monopolists charge?

Find MC = MR and then find where it matches demand

Price Discriminating Monopoly

If you sell another unit you don't have to lower price of the other units they could've sold for a higher price. -Doesn't have a single price MR = Price

Socially Optimal Quantity/Allocatively Efficient Quantity

Is where PRICE = MC

Deadweight Loss in monopoly

Loss consumer and producer surplus that would exist

One difference between a perfectly competitive firm and a monopoly is that a perfectly competitive firm produces where

Marginal cost equals price, while a monopolist produces where price exceeds marginal cost.

If a monopoly lowers its price, its

Marginal revenue must decrease

When a firm's average total cost curve continually declines, the firm is a

Natural monopoly

When a natural monopoly exists, it is

Never cost effective for two or more private firms to produce the product.

Which of the following is NOT a characteristic of a monopoly? -barriers to entry -one seller -one buyer -a product without close substitutes

One buyer

Natural Monopoly

The idea that one firm should produce the product because they have the lowest cost, they have economies of scale. When ATC keeps falling

What happens to price and quantity when there is a per unit tax?

This will shift the MC up causing Price to increase and Quantity to decrease (Note: If it were a lump sum tax, MC would be unaffected, so P and Q wouldn't change)

As the number of firms in an oligopoly becomes very large, the price effect disappears. T or F?

True

If the output effect from increased production is larger than the price effect, then an oligopolist would increase production. T or F?

True

Monopolistic competition is characterized by many buyers and sellers, product differentiation, and free entry. T or F?

True

Monopolistically competitive firms, like monopoly firms, maximize their profits by charging a price that exceeds marginal cost T or F?

True

ALL types of firms produce where MR = MC. Use MC to find.. Use ATC to find... Use AVC to find..

Use MC to find output (how many units to produce) Use ATC to find profit. Use AVC to find the shutdown point.

How much output will the monopolist produce?

Where quantity meets MC = MR

The process of buying a good in one market at a low price and selling the good in another market for a higher price in order to profit from the price difference is known as... Also it is a market force that can prevent firms from price discriminating is

arbitrage

Natural monopolies differ from other forms of monopoly because they are

are generally not worried about competition eroding their monopoly position in the market.

Marginal revenue for a monopolist is computed as

change in total revenue per one unit increase in quantity sold.

When a firm operates under conditions of monopoly, its price is

constrained by demand

A natural monopolist's ability to price its product is...

constrained by the market demand curve.

Perfect price discrimination eliminates...

deadweight loss

When an industry is a natural monopoly a...

larger number of firms will lead to a higher average cost

When a monopoly increases its output and sales..

the output effect works to increase total revenue, and the price effect works to decrease total revenue.