Microeconomics Test 2
What are three effects of monopolies?
1. Cause a reduction in consumer surplus 2. Cause an increase in producer surplus 3. Cause a deadweight loss, which represents a reduction in economic efficiency
What makes up the five competitive forces model?
1. Existing firms 2. Threat from new entrants 3. Competition from substitutes 4. Bargaining power of buyers 5. Bargaining power of suppliers
Monopoly
A firm that is the only seller of a good or service that does not have a close substitute.
Price leadership
A form of implicit collusion in which one firm in an oligopoly announces a price change and the other firms in the industry match the change.
Prisoner's dilemma
A game in which pursuing dominant strategies results in noncooperation that leaves everyone worse off.
Public franchise
A government designation that a firm is the only legal provider of a good or service.
Copyright
A government-granted exclusive right to produce and sell a creation.
Cartel
A group of firms that collude by agreeing to restrict output to increase prices and profits.
Oligopoly
A market structure in which a small number of interdependent firms compete.
Vertical merger
A merger between firms at different stages of production of a good.
Horizontal merger
A merger between firms in the same industry.
Nash equilibrium
A situation in which each firm chooses the best strategy, given the strategies chosen by other firms.
Natural monopoly
A situation in which economies of scale are so large that one firm can supply the entire market at a lower average total cost than can two or more firms.
Network externalities
A situation in which the usefulness of a product increases with the number of consumers who use it.
Dominant strategy
A strategy that is the best for a firm, no matter what strategies other firms use.
Payoff matrix
A table that shows the payoffs that each firm earns from every combination of strategies by the firms.
Area B
According to the graph, a decrease in price from $3.50 to $3.00 per cup results in a gain and a loss of revenue. Which area represents the gain of revenue?
Area A
According to the graph, a decrease in price from $3.50 to $3.00 per cup results in a gain and a loss of revenue. Which area represents the loss of revenue?
$5.00
According to the graph, if the firm is maximizing profits what is the dollar value of the profit?
in long run eqiulibrium as indicated by the equality of price and average cost
According to the graph, the firm in question is a monopolistically competitive firm:
negative
According to the graph, the loss in revenue from decreasing price is greater than the gain in revenue from increasing price whenever marginal revenue is:
$15
According to the graph, what price should the firm charge to maximize profits?
$13,500
According to the graph, what will be the firm's total revenue if it is maximizing profits?
it will lose some but not all of its customers
According to the graph, what will happen if Starbucks increases the price of caffe lattes?
Business strategy
Actions that a firm takes to achieve a goal, such as maximizing profits.
Collusion
An agreement among firms to charge the same price or otherwise not to compete.
Cooperative equilibrium
An equilibrium in a game in which players cooperate to increase their mutual payoff.
Noncooperative equilibrium
An equilibrium in a game in which players do not cooperate but pursue their own self-interest.
Barrier to entry
Anything that keeps new firms from entering an industry in which firms are earning economic profits.
22 cases
Figure 13-8 shows cost and demand curves for a monopolistically competitive producer of iced tea. Refer to Figure 13-8. What is the profit-maximizing output level? Question options:
Antitrust laws
Laws aimed at eliminating collusion and promoting competition among firms.
a firm maximizes profit where ___________________
MR = MC
What three characteristics do games share?
Rules-determine what actions are allowable Strategies- players employ them to attain their objectives in the game Payoffs-the results of the interaction among the player's strategies
Market power
The ability of a firm to charge a price greater than marginal cost.
Patent
The exclusive right to a product for a period of 20 years from the date the patent is filed with the government.
Economies of scale
The situation when a firm's long-run average costs fall as the firm increases output.
Game theory
The study of how people make decisions in situations in which attaining their goals depends on their interactions with others; in economics, the study of the decisions of firms in industries where the profits of a firm depend on its interactions with other firms.
$3.00
Using the table data provided, what is the average revenue associated with the sixth unit of output produced and sold?
Brand management refers to
the efforts to maintain the differentiation of a product over time.
monopolistic competition
a market structure in which barriers to entry are low and many firms compete by selling similar but not identical products
The economic analysis of monopolistic competition shows that market forces eliminate profits in the long run. However, it is possible for a firm to continue to earn economic profits if the firm Question options:
adopts new technologies that enable it to its cost of production
marketing
all the activities necessary to sell a product to a consumer
when a firm has the ability to affect price, the marginal revenue is always ________________________
below the demand curve
Which of the following types of firms use the marginal revenue equals marginal cost approach to maximize profits?
both perfectively competitive and monopolistically competitive
Any action the firm takes to maintain product differentiation over time is known as:
brand management
examples of monopolistic competitions
coffee houses, restaurants
What trade-offs do consumers face when buying a product from a monopolistically competitive firm?
consumers pay a price greater than marginal cost but also have a wider array of choices
The monopolistically competitive firm sells a __________ product and faces a __________ demand curve.
differentiated, downward sloping
demand curve for monopolistically competititve firm is __________________
downward sloping
monopolistically competitive firms charge a price __________________
greater than marginal cost
demand curve for perfectively competitive firm is ______________
horizontal line
Assume price exceeds average variable cost over the relevant range of demand. If a monopolistically competitive firm is producing at an output where marginal revenue is $23 and marginal cost is $19, then to maximize profits the firm should
increase output
A monopolistically competitive firm in a long-run equilibrium produces where:
its demand curve is tangent to its average total cost curve
A monopolistically competitive firm is characterized by the existence of many firms in the market, differentiated products and:
low barriers to entry
in the long run, monopolisitc competitive markets ________________________________
make positive accounting profit but zero economic profit
charesteristics of monopolistic competition
many buyers and seller low barriers to entry differentiated products
allocative effiency occurs when
marginal benefit = marginal cost
The additional revenue associated with selling an additional unit of output
marginal revenue
A monopolistically competitive firm produces where:
marginal revenue = marginal cost
What is the term given to all the activities necessary for a firm to sell a product to a consumer?
marketing
Which type of efficiency is achieved by a monopolistically competitive firm in the long run?
neither allocative or productive effiency
If firms in a monopolistically competitive industry are making profits in the short run
new firms will enter the market.
For what type of market structure is the demand curve the same as marginal revenue?
perfect competition
If a monopolistically competitive firm's demand curve is above its average total cost curve, then this firm is making:
positive economic profit
monopolistically competitive firms do not ___________
produce at minimum average total cost
Which of the following best describes how the product differentiation of monopolistically competitive firms may benefit consumers?
product differentiation can locate firms more conveniently to consumers and offer versions of a product or service that better fit their needs
in a monopolistaclly competitive market. a firm is neither _______________________________ or ____________________________________
productively efficient or allocative efficient
A firm may opt to pay millions of dollars for celebrity endorsements in order to:
signal to consumers that the advertised product is appealing and likely to be popular
brand managment
the actions of a firm to maintain the differentiation of a product over time
Monopolistically competitive firms have some control over price because:
the products they produce are differentiated
productive efficiency
the situation where a good is produced at the lowest possible cost
allocative efficiency
the situation where every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it
the key to surviving in a monopolistic competition is _______________
to constantly innovate and offer differentiated products or lwer prices