Econ 102 Final
Given the decision tree below, TruImage's profits are $1.5 million if the firm accepts Dell's contract offer of $20 per copy. Given the decision tree above, will Dell offer TruImage a contract of $20 per copy or a contract of $30 per copy?
$30
What is the definition of monopoly?
A monopoly is a firm that is the only seller of a product in a given industry.
An article in the Wall Street Journal quoted a business consultant as saying that, "Today, companies are trying to get bigger to get economies of scale." Source: Sharon Terlep, "Big Companies Face Period of Rising Growth and Turmoil," Wall Street Journal, January 22, 2018. a. What are economies of scale?
A situation in which a firm's long-run average costs fall as the firm increases output.
Shortly before the beginning of the Covid-19 pandemic, an article on forbes.com discussed one of the new Reserve Roastery coffeehouses that Starbucks has introduced: A "23,000-square-foot three-story emporium, where specialty coffee, pizza and pastries to be served in-house had all been roasted or baked on site and a cocktail bar on the top floor served coffee-infused alcohol." The article described the new coffeehouses as Starbucks's attempt to meet competition from Blue Bottle Coffee and other upscale coffeehouses. The new Reserve Roastery coffeehouses are larger and more costly to operate than are conventional Starbucks coffeehouses. We've seen that Blue Bottle Coffee and other third wave coffee houses also have higher costs than conventional second wave coffeehouses. Source: Andria Cheng, "How Starbucks Plans to Roast Its Coffeehouse Competition," forbes.com, January 25, 2019. Are the strategies used by Starbucks, Blue Bottle, and other chains likely to give them the ability to earn an economic profit in the long run? If not, why do they bother pursuing these strategies? Which of the following statements is true?
All of the above. A firm can't earn an economic profit in the long run using strategies that can be easily copied. Firms hope that they can earn short-run profits by periodically introducing new products or new ways of selling their existing products. As long as a firm can stay a step ahead of competitors, it can continue to earn an economic profit, even though those profits would eventually disappear if it were to stop innovating.
What is the relationship between a perfectly competitive firm's marginal cost curve and its supply curve?
A firm's marginal cost curve is equal to its supply curve for prices above average variable cost.
What trade-offs do consumers face when buying a product from a monopolistically competitive firm?
Consumers pay a price greater than marginal cost, but they also have choices more suited to their tastes
When are firms likely to enter an industry? When are they likely to exit?
Economic profits attract firms to enter an industry, and economic losses cause firms to exit an industry.
How does the entry of new coffeehouses affect the profits of existing coffeehouses?
Entry will decrease the profits of existing coffeehouses by shifting each of their individual demand curves to the left and making the demand curves more elastic.
A student argues: "To maximize profit., a firm should produce the quantity where the difference between marginal revenue and marginal cost is the greatest. If a firm produces more than this quantity, then the profit made on each additional unit will be falling." Is the above statement true or false?
False. Profit is maximized at the output level where marginal revenue equals marginal cost.
In 2021, Best Buy had the following price-matching policy posted to its website: We match local retail competitors (including their online prices) and these qualifying online retailers: Amazon.com, Crutchfield.com, Dell.com, HP.com, and TigerDirect.com. Source: "Price Match Guarantee," bestbuy.com, accessed on February 16, 2021. Is Best Buy's policy likely to result in lower prices or higher prices on televisions and other products it sells in competition with Amazon and local brick-and-mortar stores? Briefly explain.
Higher prices, since the other firms know they would end up in a prisoner's dilemma noncooperative equilibrium.
Is it possible for marginal revenue for a firm operating in a perfectly competitive industry to be negative? No Would a firm selling in a monopolistically competitive market ever produce where marginal revenue is negative?
No No because marginal cost cannot be negative.
Is zero economic profit inevitable in the long run for a monopolistically competitive firm?
No, a firm could try to continue making a profit in the long run by reducing production costs and improving its products.
A monopolistically competitive firm doesn't produce where P = MC like a perfectly competitive firm because
P exceeds MR for a monopolistically competitive firm, and it's MR that must equal MC for profit maximization.
TR
P*Q
What is the relationship between price, average revenue, and marginal revenue for a firm in a perfectly competitive market?
Price is equal to both average revenue and marginal revenue.
Which of the following is an expression of profit for a perfectly competitive firm? Profit for a perfectly competitive firm can be expressed as
Profit=(P−ATC)×Q, where P is price, Q isoutput, and ATC is average total cost.
Alfred Chandler, a professor at the Harvard Business School, has observed, "Imagine the diseconomies of scale—the great increase in unit costs—that would result from placing close to one-fourth of the world's production of shoes, or textiles, or lumber into three factories or mills!" The shoe, textiles, and lumber industries are very competitive with many firms producing each of these products. Source: Alfred D. Chandler, Jr., "The Emergence of Managerial Capitalism," in Alfred D. Chandler, Jr. and Richard S. Tedlow, The Coming of Managerial Capitalism, New York: Irwin, 1985, p. 406. What does Chandler's observation suggest?
Smaller firms can produce at a lower long-run average cost than larger firms.
AR
TR/Q
A startup firm in a perfectly competitive market finds that its average total cost is higher than the market price. Since the firm is incurring short-run losses, the management is debating whether to continue operations. Alex Ferguson, a senior manager, feels that this is a temporary phase and the firm should continue operations. Which of the following, if true, would support Alex's argument?
The current price of the product covers the variable cost of production.
How does collusion make firms better off?
The firms can act as a single entity, like a monopoly.
Give two examples of products sold in perfectly competitive markets and two examples of products sold in monopolistically competitive markets.
Wheat and corn are sold in perfectly competitive markets and Maybelline cosmetics and Ralph Lauren cologne are sold in monopolistically competitive markets.
There are many wheat farms in the United States, and there are also more than 14,000 Starbucks coffeehouses. Why, then, does a Starbucks coffeehouse face a downward-sloping demand curve when a wheat farmer faces a horizontal demand curve?
Wheat is a homogeneous good, while Starbucks is able to differentiate its coffee from other coffeehouses.
Consider the graph to the right. Is it possible to say whether this firm is a perfectly competitive firm or a monopolistically competitive firm?
Yes. This is a monopolistically competitive firm because its demand curve is downward sloping.
If you own the only hardware store in a small town, do you have a monopoly?
Yes. You would have a monopoly if your profits are not competed away in the long run.
What is the difference between zero accounting profit and zero economic profit?
Zero economic profit includes a firm's implicit costs but zero accounting profit does not. Zero economic profit includes a firm's opportunity costs but zero accounting profit does not
What is a monopoly? A monopoly is
a firm that is the only seller of a good or service that does not have a close substitute.
What is a price taker? A price taker is
a firm that is unable to affect the market price
A buyer or seller that is unable to affect the market price is called
a price taker
Refer to the graphs. What do you expect to happen in this market as it approaches long-run equilibrium?
a shift to the right of the market supply curve as new firms enter
An economist argues that "the purpose of the competitive market system is to destroy businesses. The competitive market system acts like the cyborg played by Arnold Schwarzenegger in the movie The Terminator, wiping out any firm that can't get out of its way. Without the destruction caused by competition, the economy could not achieve productive and allocative efficiency." a. Which of the following regarding the above statement is true? b. Do all firms lose as a result of the competitive market process? Do all consumers win?
a. all of the above; This is a fair analogy. The firms that survive are those that can produce at minimum long-run average cost while producing goods and services that consumers are willing and able to buy. In the long run, competition among firms in a competitive market forces firms that incur losses to shut down. b. Firms that are best able to respond to changing consumer tastes will win, and consumers generally win from competition because it forces firms to produce goods and services that match consumer wants at the lowest cost.
Give brief definitions of the following concepts: Game theory, cooperative equilibrium, noncooperative equilibrium, dominant strategy, and Nash equilibrium, and price leadership. To do this, identify the definition for each term from the following list. a. Game theory: 2 b. Cooperative equilibrium: c. Noncooperative equilibrium: d. Dominant strategy: e. Nash equilibrium: f. Price leadership:
a. Game theory: 2 b. Cooperative equilibrium: 7 c. Noncooperative equilibrium: 8 d. Dominant strategy: 5 e. Nash equilibrium: 6 f. Price leadership: 10
What is the definition of market power? Market power is the
ability of a firm to charge a price greater than marginal cost.
What is a key factor that determines a firm's profitability?
all of the above A firm's average cost of production relative to that of competing firms. Factors affecting a firm's entire market. Chance events. Differentiation of a firm's product from other products.
Given the incentives to collude, why doesn't every industry become a cartel?
all of the above High profits attract entry into the market. Collusion is illegal in the United States. Most firms that collude have an incentive to "cheat."
What is marketing to an economist?
all of the above Marketing is deciding how to distribute the product. Marketing is designing the product. Marketing is advertising the product. Marketing is determining which product to produce.
Why would the government be willing to erect barriers to entering an industry? The government would be willing to impose barriers to
all of the above encourage firms to carry out research and development of new and better products. protect the public from incompetent practitioners. protect U.S. firms from international competition. both a and b.
Why do economists refer to the methodology for analyzing oligopolies as game theory? Economists refer to their methodology for analyzing oligopolies as game theory because, as in games,
all of the above firms are governed by rules that determine what actions are allowable. interactions among firms, which are players, are crucial in determining outcomes. firms employ strategies to attain their objectives. firms seek profits, which are payoffs, that are the result of firm interaction.
Actions of firms that are aimed at deterring entry include
all of the above introducing new products to fill market niches. advertising to create product loyalty. setting lower prices to keep profits at a level that makes entry less attractive.
Which of the following terms is a barrier to entry?
all of the above patents economies of scale ownership of a key input
A monopolistically competitive firm is not productively efficient because it produces a level of output where A monopolistically competitive firm has excess capacity in the sense that if it increased output beyond the quantity associated with profit maximization, it could produce at a lower average cost.
average total cost is not at a minimum average cost
What is the difference between a firm's shutdown point in the short run and its exit point in the long run? In the short run, a firm's shutdown point is the minimum point on the
average variable cost curve, while in the long run, a firm's exit point is the minimum point on the average total cost curve
Which of the terms below is defined as "anything that keeps new firms from entering an industry in which firms are earning economic profits"?
barriers to entry
Why do oligopolies exist? Oligopolies exist due to
barriers to entry
What is the difference between a horizontal merger and a vertical merger? A horizontal merger is a merger
between firms in the same industry, while a vertical merger is a merger between firms at different stages of the production of a good.
Which of the following statements is true when the difference between TR and TC is at its maximum positive value?
both A and B are true MR=MC Slope of TR=Slope of TC
Patents are granted for 20 years, but pharmaceutical companiescan't use theirpatent-guaranteed monopoly powers for anywhere near this long because it takes several years to acquire FDA approval of drugs. Suppose it is proposed that the life of drug patents be extended to 20 years after FDA approval. What would be the costs and benefits of thisextension?
both a and b Firms could earn higher profits for a longer period of time, but consumers would lose because prices of drugs would stay higher longer. Firms would be more likely to develop more new products and consumers would gain from having a wider range of medicines.
Who is in charge of enforcing them?
both a and b The Federal Trade Commission. The Antitrust Division of the U.S. Department of Justice.
Give an example of a government-imposed barrier to entry. An example of a government-imposed barrier to entry is
both a and b a tariff on imports occupational licensing
There are about 400 wineries in California's Napa Valley. Suppose the owner of one of the wineries—Jerry's Wine Emporium—raises the price of his wine by $5.00 per bottle. If the industry is perfectly competitive, the reaction of consumers would be to If the industry is monopolistically competitive, the reaction of consumers
buy wine from another winery. could be to remain loyal to Jerry's and pay the higher price.
How is the market supply curve derived from the supply curves of individual firms? The market supply curve is derived
by horizontally adding the individual firms' supply curves.
TC
change in TC/change in Q
MR
change in TR/change in Q
What are the differences between the long-run equilibrium of a perfectly competitive firm and the long-run equilibrium of a monopolistically competitive firm? Unlike perfectly competitive firms, in the long run monopolistically competitive firms
charge a price greater than marginal cost and do not produce at minimum average total cost.
Explain why market power leads to deadweight loss. Firms with market power create deadweight loss because they The total deadweight loss from market power for the economy is
charge a price that is greater than marginal cost to maximize profits. small
List the competitive forces in the five competitive forces model. The five competitive forces are
competition from existing firms, the threat of potential entrants, competition from substitutes, the bargaining power of buyers, and the bargaining power of suppliers.
How are decision trees used to analyze sequential games? A decision tree
contains decision nodes where firms must make decisions, arrows illustrating the decisions, and terminal nodes showing the resulting rates of return.
In early 2021, Ford Motor Company reported that during the last quarter of 2020, its revenue had declined by $36 billion, while its profit had increased by $3.4 billion. Source: Mike Coltas, "Ford's Results Hindered by Lower Truck Output, Air Bag Recall," Wall Street Journal, February 4, 2021. It is possible for profits to increase even if revenue decreased if Can Ford maximize profit without maximizing revenue?
costs decrease A firm will typically not maximize its revenue at the output level that maximizes its profit. It a firm were to maximize revenue, it would typically produce a larger quantity than it does when maximizing profit.
Many firms advertise. What effect does advertising have on firm profits? One possible effect of advertising is to
decrease profits by increasing the cost of production. increase profits by shifting the demand curve for the product to the right. increase profits by making the demand curve for the product more inelastic
Suppose that a perfectly competitive industry becomes a monopoly. As a result, consumer surplus will, producer surplus will, and deadweight loss will
decrease, increase, increase
What is "natural" about a natural monopoly? A natural monopoly
develops automatically due to economies of scale.
During the Covid-19 pandemic, Starbucks announced that it would renovate 400 of its coffeehouses to permanently eliminate indoor dining. The coffeehouses would offer only drive-through, delivery, and pickup. The company expected that the changes to these coffeehouses would reduce the cost of selling coffee. Source: Heather Haddon, "Coronavirus Speeds Up Starbucks Shift to Takeout," Wall Street Journal, June 10, 2020. Explain the effect of this cost decline on the price of a Starbucks cappuccino, on the quantity of cappuccinos a representative Starbucks coffeehouse sells, and on the profit of this Starbucks coffeehouse. Assume that the demand for Starbucks cappuccinos is unchanged. When Starbucks reduces the cost of selling coffee, its MC curve shifts downward and its ATC curve shifts downward. The lower cost causes Starbucks to increase the quantity of cappuccinos that it sells and to decrease the price of cappuccinos. Starbucks's profit increases.
downward, downward, lower, increase, decrease, increases
Explain why it is true that for a firm in a perfectly competitive market that P = MR = AR. In a perfectly competitive market, P = MR = AR because
firms can sell as much output as they want at the market price.
What are the most important differences between perfectly competitive markets and monopolistically competitive markets? Unlike in perfectly competitive markets, in monopolistically competitive markets,
firms face downward-sloping demand curves, and the products competitors sell are differentiated.
n 2010, Domino's launched a new advertising campaign admitting that its pizzas had not tasted very good, but claiming that they had developed a new recipe that greatly improved the taste. If Domino's succeeded in convincing consumers that its pizza was significantly better than competing pizzas, would its demand curve become flatter or steeper? When a product becomes less differentiated from other products, its demand curve becomes flatter. This happens because the slope of the demand curve reflects buyer responsiveness to a price change, which is determined in part by the availability of substitutes. Thus, when a product becomes less differentiated from other products, buyers perceive it as having more good substitutes, and this altered perception induces buyers to be more responsive to price.
flatter, more, more
One measure of the extent of competition in an industry is the concentration ratio. What level of concentration indicates that an industry is an oligopoly? Most economists believe that a four-firm concentration ratio of greater than 40 percent indicates that an industry is an oligopoly.
greater than 40
The Aluminum Company of America (Alcoa) has faced limited competition in the market for aluminum. What barrier has kept new firms from entering the market for aluminum?
has had almost exclusive ownership of bauxite, which is a key input. has had almost exclusive ownership of cranberries, which is a key input.
In China, the government owns many more firms than in the United States. A former Chinese government official argued that a number of government-run industries such as oil refining were natural monopolies. Source: Shen Hong, "Former State Assets Regulator: SOE Monopolies 'Natural'," Wall Street Journal, January 4, 2012. Oil refining would be a natural monopoly in a country if An industry is a natural monopoly when
having multiple firms would be highly inefficient. one firm can satisfy the entire market at the lowest cost.
Which type of merger is more likely to increase the market power of a newly merged firm? mergers are more likely to increase market power.
horizontal
What effect might the government have on oligopolies? In oligopolies, the government might
impose barriers to entry with a tariff to limit foreign competition.
Suppose that a monopoly becomes a perfectly competitive industry. As a result, consumer surplus will, producer surplus will, and deadweight loss will
increase, decrease, decrease
Is the concentration ratio an accurate measure of the extent of competition? The four-firm concentration ratio
is flawed in that it does not measure competition between industries. is flawed in that it does not include sales in the U.S. by foreign firms is flawed in that it is calculated for the national market even though competition in some industries is local.
What is the difference between explicit collusion and implicit collusion? Unlike explicit collusion, implicit collusion
is where firms signal to each other without actually meeting and agreeing to charge the same price.
Economists have developed broad and narrow definitions to identify monopolies. What is a characteristic that supports a firm being classified as a monopoly? Economists could find that a firm is a monopoly if
it earns profits in the long run.
The late Nobel Prize-winning economist George Stigler once wrote, "the most common and most important criticism of perfect competition... [is] that it is unrealistic." Source: George Stigler, "Perfect Competition, Historically Contemplated," Journal of Political Economy, Vol. 55, No. 1, (February 1957), pp. 1-17. Despite the fact that few firms sell identical products in markets where there are no barriers to entry, economists believe that the model of perfect competition is important because
it is a benchmark—a market with the maximum possible competition—that economists use to evaluate actual markets that are not perfectly competitive.
When are firms likely to be price takers? A firm is likely to be a price taker when
it represents a small fraction of the total market it sells a product that is exactly the same as every other firm
A monopolistically competitive firm in a long-run equilibrium produces where
its demand curve is tangent to its average total cost curve.
Compare monopolistically competitive industries with perfectly competitive industries in the long run. Which industry structure is more efficient? Compared to perfect competition, monopolistically competitive industries are
less efficient because average cost is not minimized. less efficient because price is greater than marginal cost.
A business analyst gives the following advice to managers of firms: "If you continue to swim in a sea of sameness, you are going to drown." Source: Steve Dennis, "Macy's and JC Penney Earnings Offer Evidence of the Stall at the Mall; Here's How They Can Get on Track," forbes.com, February 28, 2019. Briefly explain what he means. Firms that fail to continually differentiate their products from the products of competitors will be unable to earn an economic profit in the long run.
long
Economies of scale exist when a firm's ___________ average costs fall as it __________ output.
long-run; increases
b. What benefits might a firm receive from attaining economies of scale before competing firms in the industry do? If a firm attains economies of scale, its average cost will be lower than its competitors. This means the firm can sell its product at a lower price than its competitors.
lower than lower
What is the purpose of the antitrust laws? Antitrust laws are intended to
make illegal any attempts to form a monopoly or to collude.
Why would a monopolistically competitive firm advertise? A monopolistically competitive firm would advertise to
make its demand curve more inelastic shift its demand curve to the right
What are the three conditions for a market to be perfectly competitive? For a market to be perfectly competitive, there must be
many buyers and sellers, with all firms selling identical products, and no barriers to new firms entering the market.
The increase in total revenue that results from selling one more unit of output is
marginal revenue
Is zero economic profit inevitable in the long run for monopolistically competitive firms? In the long run, monopolistically competitive firms
may continue to earn profit by convincing consumers their products are different. may continue to earn profit by improving their product. may continue by reducing costs
Oligopolies exist because of barriers to entry. One of the most important barriers to entry is due to economies of scale. Why is this true? It is more likely for an industry to be an oligopoly than competitive in the presence of economies of scale because
minimum average cost occurs when firm output is a large fraction of industry output.
A column in the Washington Post argues that "network externalities turn market forces on their head." Consider two new products—product A and product B—neither of which receives patent protection. Assume that there are no network externalities when consumers use product A, whereas there are very large network externalities when consumers use product B. Source: Daniel W. Drezner, "The Best Work on Political Economy in 2018," Washington Post, December 31, 2018. Briefly explain how market forces will determine the level of competition in equilibrium in industry A and in industry B. We would expect that, in equilibrium, the market for product A will be _______ competitive than the market for product B. This is because __________.
more; the very large network externalities in market B will make it difficult for new firms to enter the market
Which type of efficiency does a monopolistically competitive firm achieve in the long run?
neither allocative nor productive efficiency
An article in the Wall Street Journal noted that Google was planning on entering the market to provide wireless data services. According to the article, "Google has said it isn't looking to supplant the big carriers, and Verizon's and AT&T's enormous scale means they can't easily be dislodged." Source: Drew Fitzgerald, "Google Wants to Make Wireless Airwaves Less Exclusive, Cheaper," Wall Street Journal, March 3, 2015. When Google says that it was not trying to "supplant" the big wireless carriers, it means that it was
not trying to offer the same products or services.
A column on bloomberg.com argues that natural gas pipelines "are a natural monopoly. Almost all of the costs are the fixed ones involved in building them; as long as there's spare capacity, the incremental expense of moving an extra cubic meter of gas down the line is infinitesimal." Source: David Fickling, "China's Pipeline Champion Misses an Opportunity," bloomberg.com, June 12, 2018. Briefly explain why the cost structure of pipelines as the columnist describes it makes pipelines a natural monopoly. Be sure to define "natural monopoly" in your answer. A natural monopoly arises when
one firm can supply the entire market at a lower average total cost than can two or more firms.
Why might a monopoly arise? One firm will be present when
only one firm has control of a key raw material necessary to produce a good. wrong answers: the possibility for product differentiation is limited to only a couple of other firms. it can supply the entire market at lower marginal cost than can two or more firms. there exists no possibility for network externalities with other firms. All of the above.
A monopolistically competitive firm is not allocatively efficient because
price exceeds marginal cost
Which of the following terms is missing in the box on the right?
profitability
The government indirectly influences the level of industry competition with its own barriers to entry. How? The government can restrict entry by
requiring licenses for a firm to produce. granting patents to firms with new inventions
When a firm advertises a product, it is trying to shift the demand curve for the product to the ________ and make it more ________.
right; inelastic
How do network externalities affect barriers to entry? Network externalities
serve as barriers to entry because new products are less useful.
What effect does the entry of new firms have on the demand curve of an existing firm in a monopolistically competitive market? The entry of new firms cause the demand curve of an existing firm in a monopolistically competitive market to
shift to the left and become more elastic.
The graph shows a short-run equilibrium because the firm is making positive economic profits. What quantity on the graph represents long-run equilibrium if the firm were perfectly competitive? 6 burritos per week.
short-run, positive 6
A perfectly competitive firm is losing money in the short run, and its price is less than its average variable cost. In order to minimize its losses in the short run, this firm should
shut down
In the United States, the loss in economic efficiency due to market power is
small
In 2010, Domino's launched a new advertising campaign admitting that its pizzas had not tasted very good, but claiming that they had developed a new recipe that greatly improved the taste. If Domino's succeeded in convincing consumers that its pizza was significantly better than competing pizzas, would its demand curve become flatter or steeper? When a product becomes more differentiated from other products, its demand curve becomes steeper. This happens because the slope of the demand curve reflects buyer responsiveness to a price change, which is determined in part by the availability of substitutes. Thus, when a product becomes more differentiated from other products, buyers perceive it as having fewer good substitutes, and this altered perception induces buyers to be less responsive to price.
steeper, fewer, less
Many factors under a firm's control affect profitability. Do factors that are not under a firm's control also affect profitability? Factors not under a firm's control
such as sheer chance affect profitability. such as rising fuel prices affect profitability. such as terrorist events affect profitability.
Natural gas pipelines are a natural monopoly because
the average total cost curve for moving natural gas through a pipeline is still falling at the point where it crosses the demand curve.
If the market demand curve shifts to the right, how will a competitive firm's level of output change?
the firm will increase its output, and its profits will increase
What are the four most important ways a firm becomes a monopoly? The four main reasons a firm becomes a monopoly are:
the government blocks entry, control of a key resource, network externalities, and economies of scale.
How are prices determined in perfectly competitive markets? In perfectly competitive markets, prices are determined by
the interaction of market demand and supply because firms and consumers are price takers
Explain why it is true that for a firm in a perfectly competitive market, the profit-maximizing condition MR = MC is equivalent to the condition P = MC. When maximizing profits, MR = MC is equivalent to P = MC because
the marginal revenue curve for a perfectly competitive firm is the same as its demand curve
Why are firms willing to accept losses in the short run but not in the long run?
there are fixed costs in the short run but not in the long run.
Does the fact that monopolistically competitive markets are not allocatively or productively efficient mean that there is a significant loss in economic well-being to society in these markets? Though monopolistically competitive markets are not allocatively or productively efficient, consumers benefit in that
they are able to purchase a differentiated product that more closely suits their tastes.
If patents reduce competition, why does the federal government grant them? The federal government grants patents
to encourage firms to spend money on research to create new products.
The scale of Verizon and AT&T's operations make it difficult for Google, or another entrant, to supplant them because
to enter the market at such a large size could be financially prohibitive and it would be difficult to gain market share.
According to an article in the Wall Street Journal, in 2015 and 2016, Panera suffered from lower profits in part because of the costs of implementing its "clean food" strategy. Source: Maria Armental, "Panera's Quarterly Results Beat Projections," Wall Street Journal, February 7, 2017. Assuming that Panera's clean food strategy doesn't affect the demand for its turkey sandwiches, the increase in costs will shift up Panera's marginal and average cost curves. As a result, the price it charges for turkey sandwiches will increase and the quantity it sells will fall.
up, cost, increase, fall
What is an oligopoly? An oligopoly is a market structure Three examples of oligopolies in the United States are industries that produce or sell
where a small number of interdependent firms compete. automobiles, athleticfoot ware, and cigarettes.
Give an example of each. An example of explicit collusion is
where firms meet and agree to charge the same price, and an example of implicit collusion is price leadership.
Would a firm earning zero economic profit continue to produce, even in the long run? In long-run competitive equilibrium, a firm earning zero economic profit
will continue to produce because such profit corresponds with positive accounting profit. will continue to produce because such profit is as high a return as could be earned elsewhere.
In perfect competition, long-run equilibrium occurs when the economic profit is
zero
In the long run, the monopolist can earn Refer to the graph. What point represents the price and output level combination that a monopoly will choose?
zero or positive economic profit point B
c. Suppose you open a new restaurant in Los Angeles. Can you use economies of scale as a barrier to entry so that your restaurant will be profitable in the long run? Briefly explain.
No, because there are no significant economies of scale in the restaurant industry, except possibly at very low levels of output. Consequently, making your restaurant larger will not be effective in preventing other restaurants from entering the market and competing against you at about the same average cost.
An article in Forbes described these characteristics of the airline industry: "Airlines aren't like normal consumer businesses... Infrastructure including aircraft, gates and runways takes years to put in place. Capacity rebalancing in response to demand shifts isn't easy and idle infrastructure of this magnitude is very expensive." Source: Kevin O'Marah, "The Lesson of the Delta Disaster: Flying Is Too Cheap," Forbes, August 11, 2016. Do the characteristics referred to in the article help to explain why the airline industry is an oligopoly? Briefly explain.
Yes, since the characteristics described in the article serve as a barrier to entry, which is characteristic of oligopolies.
Consider the graph at right At the profit-maximizing level of output, how much economic profit is this firm earning? Which of the following statements is true? Which of the following statements is true?
Zero, because at the profit-maximizing output level, the price equals average total cost. The firm is not productively efficient because the profit-maximizing price is not at the minimum of average total cost. The firm is not allocatively efficient because the profit-maximizing price exceeds marginal cost.
