Unit 7

When government sets price equal to average total cost for a natural monopoly:

economic profit is equal to zero.

At the profit-maximizing/loss-minimizing level of output, total revenue is _____ and total cost is _____.

$24,000; $24,000

This firm's total fixed costs (TFC) are equal to:

$4,000

The profit-maximizing output is _____ units and the profit-maximizing price is _____.

1,200; $20

The profit-maximizing output is _____ units, and the profit-maximizing price is _____.

1,700; $3.20

Following the profit-maximizing/loss-minimizing rule, this firm will produce _____ units of output and charge a price of _____.

800; $7.50

Which of the following events would cause this firm's profit to increase?

An increase in consumer demand.

Which strategy maximizes Rightway's and Leftway's profit?

Both airlines set a high price

All of the following markets fit the characteristics of an oligopoly except:

Fresh fruit

is a contestable market.

Fresh fruit

Which of the following is true for both monopoly firms that do not price discriminate and monopolistically competitive firms in long-run equilibrium?

P > MC

In the long run, it is true that monopolistically competitive firms produce where:

P > MC and P > minimum average cost.

Oligopolistic industries are characterized by:

a few dominant firms and interdependent decision making.

Firms in monopolisitcally competitive markets:

attempt to differentiate their products.

Firms in monopolistically competitive markets:

attempt to differentiate their products.

A firm in a monopolistically competitive market is similar to a monopoly firm in that:

both maximize profit by producing the quantity where marginal revenue equals marginal cost.

An individual firm in an oligopolistic industry in the US generally:

can earn positive economic profit in the long run due to the existence of barriers to entry such as economies of scale.

An arrangement where there is explicit collusion between competitors to set a common price and adhere to output quotas is referred to as:

cartel

Firms in oligopolistic markets:

consider the reaction of the other firms in the market when making a pricing and output decision.

The Sherman Act of 1890:

declared monopoly and unreasonable trade restrains illegal.

A monopolistically competitive firm's demand curve is:

downward-sloping and marginal revenue lies below demand.

Game theory assumes that:

firms anticipate rival firms' decisions when they make their own decisions.

A market is imperfectly competitive when the:

firms that make up the market have some control over the price of their products.

Historically, the success of cartels has been limited by:

incentives by members to cheat on the collusive agreement.

Once a cartel has successfully achieved a price and output level similar to what would prevail in a monopolized market, some members have an incentive to chat by:

increasing production, which causes the market price to fall.

Suppose Bobby's Bait Company is an oligopolistic producer of fishing lures. Bobby's produces at the profit-maximizing level of output, and the price it receives on all the items it produces is below average total cost of production, but above average variable cost. Bobby's is:

incurring a short-run economic loss, but is minimizing its losses by producing in the short run.

In the short run, this firm:

incurs an economic loss that is smaller than the amount it would lose if it shut down and paid fixed costs.

The characteristic that distinguishes oligopoly from the other market models is:

interdependence among firms in pricing and output decisions.

Industry profit is likely to be lowest in an industry that:

is a contestable market.

The typical firm in a monopolistically competitive market.

is small relative to the entire market for its general product.

As the market in which this firm operates adjusts to long-run equilibrium, it is most likely that some firms will _____ this market, causing a(n) _____ in the demand faced by a firm.

leave; increase

Suppose the Rightway must decide whether to charge a low price or a high price without knowing what Leftway will do. Rightway will set a _____ price based on the analysis of the payoff matrix which indicates that Leftway will set a _____ price.

low; low

Monopolistically competitive markets are comprised of:

many firms selling differentiated products.

Monopolistically competitive firms:

may earn either profits or losses in the short run, but tend to earn zero economic profits in the long run.

A monopolistically competitive firm is similar to a perfectly competitive firm in that:

neither is guaranteed to earn positive economic profit in the short run.

The graph illustrates a typical firm in a market that is in long-run equilibrium since:

price is equal to average total cost.

A monopolistically competitive firm:

produces where MR=MC to maximize profit.

Monopolistically competitive firms have some market power because of:

product differentiation.

Government addresses the inefficiency associated with monopoly by:

restricting market power through antitrust laws and regulation.

declared monopoly and unreasonable trade restrains illegal.

restricting market power through antitrust laws and regulation.

The Justice Department:

reviews proposed mergers to determine if the merger would create excessive market power.

Ceteris paribus, if a firm in a monopolistically competitive industry raises the price of its product:

sales may drop as consumers switch to the close substitutes that are offered by other firms in the industry.

Profit-maximizing firms in monopolistically competitive markets:

sell products that are very similar to each other.

Jane plans to open her own restaurant and wants to create a strong demand for her product as well as make it less price elastic. All of the following are methods of product differentiation that would help her accomplish her goals except:

setting the price of her meals well below the prices charged by her rivals.

If a monopolistically competitive firm is producing where marginal revenue is equal to marginal cost but price is greater than marginal cost, the firm:

should continue to produce at this point because it is already maximizing profit.

The demand curves of firms in monopolistically competitive markets are relatively elastic compared to market demand due to:

the existence of very close substitutes.

If firms in an oligopoly market are able to collude, then:

the market price is likely to be higher and the output is likely to be lower than they would be if firms could not collude.

Assuming government regulators are forcing a monopoly seller to charge a price equal to marginal cost:

the output level will be efficient but economic profit might be negative.

Game theory helps explain:

the strategic behavior of firms in oligopoly markets.

All of the following are true regarding monopolistically competitive markets except:

the typical firm earns positive economic profit in the long run.

All of the following are characteristics of a monopolistically competitive market except:

there are significant barriers to entry that prevent new firms from entering the market in the long run.

For monopolistically competitive firms in long-run equilibrium, economic profit is:

zero because there are no barriers to entry.