Chapter 12 : Between competition & Monopoly

True or False The demand curve for a monopolistic competitior is likely to be flatter than that of a monopolist

TRUE Demand tends to be more elastic, so more flat Long Run : Profit = 0 Each firm produces where P = AC. So firm's D curve must be tangent to its AC

In the cigarette industry either R.J. Reynolds or Phillip Morris, for a time, raised prices twice a year by about 50 cents per carton. The other firms in the industry raised their prices by the same amount. Economists call this _____. a. price leadership. b. a price war c. sales maximization d. predatory pricing.

a. price leadership

A market which firms can enter if they choose and exit without losing money invested is _____. a. contestable b. a market where there are kinked demand curves. c. pure monopoly. d. duopoly.

contestable

A monopolistically competitive firm in the long run will _____. a. operate where economic profit can be achieved. b. have a demand curve tangent to its AC. c. have a demand curve above its AC.

have a demand curve tangent to its AC

The excess capacity theorem implies that a. monopolistic competition wastes some of society's resources but the elimination of this waste does not necessarily benefit consumers b. consumers would be better off with more standardization of products c. Consumers would be better off it some monopolistically competitive firms left their markets

monopolistic competition wastes some of society's resources but the elimination of this waste does not necessarily benefit consumers

The excess capacity theorem implies that _____. a. monopolistic competition wastes some of society's resources but the elimination of this waste does not necessarily benefit consumers. b. consumers would be better off with more standardization of products. c. consumers would be better off if some monopolistically competitive firms left their markets. d. monopolistic competition benefits society by eliminating excess capacity in production.

monopolistic competition wastes some of society's resources but the elimination of this waste does not necessarily benefit consumers.

A firm now produces its sales-maximizing level of output. If the firm increased its output by one unit, its marginal revenue would become _____. a. smaller but still positive. b. negative c. larger but still negative d. larger but still positive

negative

True or False A monopolistic competitor can expect to earn economic profit in the long run.

False

True or False Firms in a perfectly contestable market will earn higher profits than firms that are not perfectly contestable.

False

True or False Monopolistic competition differs from perfect competition only in the number of firms participating in the market.

False

True or False The excess capacity theorem states that society would clearly benefit from a reduction in the number of monopolistic competitors.

False

True or False The maximin criterion seeks to minimize the maximum payoffs in order to win.

False

Sales Maximization

Firms may attempt to max revenue rather than profit if: 1. Control is separated from ownership 2. Compensation of managers is related to the size of the firm

Kinked Demand Curve why does Price in oligopolistic markets (cars or appliances) charge less often than Price of commodities (wheat or gold)?

Firms think that other firms will match any P cut, but not any P increase. If true, firms face an inelastic D curve with P cuts and an elastic curve with P increases.

All four types of market forms have firms that maximize profit by setting _____. a. AR = AC. b. P = MC. c. MR = MC.

MR = MC

Which of the following is NEVER true for a firm that maximizes sales revenue? a. MR = 0 b. MR = MC c. Economic profits are positive d. P = MC

MR = MC

True or False Firms that maximize sales always produce more than profit-maximizing firms.

True

True or False Game theory provides new tools for the analysis of business strategies under conditions of oligopoly.

True

True or False Oligopolists use advertising as a way of differentiating their products.

True

True or False The kinked demand curve model is based on the assumption that rival firms will match a price cut but ignore a price increase.

True

Oligopoly occurs when _____. a. a few firms sell to a few large buyers b. many firms dominate a single market. c. a few firms dominate a single market. d. a few firms sell many different products.

a few firms dominate a single market

According to the kinked demand model, an oligopolist may face _____. a. less elastic demand than a monopolistic competitor. b. more elastic demand if she raises her price than if she lowers her price. c. less elastic demand if she raises her price than if she lowers her price. d. more elastic demand than a monopolistic competitor.

b. more elastic demand if she raises her price than if she lowers her price.

Monopolistic competition is common in _____. a. basic manufacturing. b. retail selling. c. farming d. electric power generation.

b. retail selling

EXCESS CAPACITY

indicates that demand for a product is less than the amount that the business potentially could supply to the market. When a firm is producing at a lower scale of output than it has been designed for, it creates excess capacity. *Resolve puzzle 1 - abundance of retailers: intersection with 4 gas stations where 2 would suffice and operate at lower AC is a real world example of excess capacity.

The demand curve for a monopolistic competitor slopes downward because _____. a. demand drops to zero after a slight price increase b. customers have no loyalty to the product. c. there are close but not perfect substitutes for the product. d. the product is undifferentiated.

they are close but not perfect substitutes to the product

Prisoner's Dilemma

when two parties under threat have the option of protecting themselves at the expense of the other party