Adv. Micro Final Exam (CH. 8,9)

Barriers to entry:

- economies of scale - consumer switching costs - product differentiation - absolute cost advantages & control of inputs - government regulation

anti-competitive behaviors and practices:

- mergers or acquisitions that result in excessive market share \ - collusion/price fixing - product dumping (selling large quantities of goods below market price to drive out other competitors - dividing territories

behavior of an unregulated monopoly

- single firm that controls the entire market - the firm faces no regulation or other constraints on production or price - the firm's goal is to maximize profit

Conditions for perfect competition:

1. large number of firms 2. identical/perfectly substitutable goods 3. no barriers to entry 4. all firms have complete information

the lerner index is:

a measure of a firm's markup and thus market power

if firms are making long-run economic profits in an industry, other potential entrants see this as...

a signal to enter the market, they will continue to do so until there are negative economic profits

long-run equilibrium is when...

all firms are making zero economic profits

MR < P is true for...

any demand curve

Consumer surplus for a monopoly:

area below demand, above price, and out to quantity supplied

The perfect competition model is useful for...

being a benchmark that compares to real-world markets, despite there being no economies that exhibit perfect competition

producer surplus for monopoly:

below price, above MC, and out to quantity supplied

deadweight loss for monopoly:

below price, above marginal cost, from quantity supplied to where demand intersects marginal cost

a price setter...

chooses its output quantity and price jointly to maximize profit

profit is always maximized where...

marginal cost equals marginal revenue

in perfect competition, the market price is equal to...

marginal revenue

government promotes market power through...

patents, licenses, and copyright

the long-run market supply curve can be described as...

perfectly elastic and equal to all firms' minimum LATC

a firm breaks even when...

price equals average total cost

profit maximization occurs where...

price equals marginal cost

As more firms enter the market...

price rises briefly but then returns to LR equilibrium and quantity rises

regulators often allow firms to still receive returns and issue a __________________________ which sets price equal to ATC (with a reasonable rate of return included)

reasonable rate of return

when new firms enter a given market, the supply curve...

shifts outward (to the right)

perfect competition firms are price__________.

takers

market power is defined as:

the ability of a firm to influence the market price of its own output

When firms have fixed costs, producer surplus is equal to:

the firms' aggregate variable profit (revenues minus variable costs only)

marginal cost is equal to...

the first derivative of the total cost function

product differentiation is defined as:

the imperfect substitutability across varieties of a product

compare the marginal revenue curve for monopolies and the price

the intercepts are the same, but the slope of the marginal revenue curve is twice that of the inverse price function

the minimum price a seller is willing to accept is

the marginal cost of production

Why is the marginal revenue not equal to the market price in an unregulated monopoly?

the market demand curve is equal to the firm's demand curve so changing the price will result in more or less quantity sold

profit of output is equal to...

the price minus average total cost multiplied by the quantity sold

Over the long run, the firm's profit-maximizing quantity of output is

the quantity at which price equals LMC

a license is

the rights to produce/sell a product

There is a discontinuity in the perfect competition supply curve because...

the shutdown price is equal to the average variable cost which is greater than one and firms aren't willing to produce goods when the price is between AVC and zero

the closer the Lerner index is to 1...

the stronger the firm's market power is

a firm should shut down when...

variable costs exceed total revenue

absolute cost advantages are:

when a firm has gained all or nearly all control of access to a key input

steps to profit maximization under unregulated monopoly:

1. given the demand curve, find MR 2. then Q* is found where MR=MC 3. plug Q* into the inverse demand function to find Q*

market output rises as price rises because...

1. individual firms' supply curves are upward sloping, so the market supply curve is too 2. some firms have higher costs than others, so they only begin operating at higher price level

the firm's short-run supply curve is perfectly inelastic at...

Q=0 for any price greater than the shut-down price

a patent is

a document that grants an inventor the sole right to produce and sell a product

relatively elastic demand for a good produced by a monopoly firm leads to

a higher markup on the price

a copyright

grants rights over intellectual property

direct price regulation is:

in cases of natural monopoly, a single supplier is soially desirable, governments will issue a charter to a single firm in exchange for strict regulatory oversight