Econ Test 2 Ch 8 & 9

What are the necessary features of a prisoner's dilemma-type game?

- Two prisoners must be locked in separate jail cells - There must be a unique Nash equilibrium - The game must have a dominant strategy - The government must intervene to increase efficiency

confronted with a new entrant, the monopolist may "create and entry barrier" by:

- slashing up its price - stepping up its advertising or taking other strategic actions to make it difficult for the entrant to succeed.

Monopolistic Competition Characteristics

1. a relatively large number of sellers 2. differentiated products (often promoted by heavy advertising) 3. easy entry into, and exit from, the industry.

The world's nations have agreed on a uniform patent length of how many years?

20

a pure monopolist faces no immediate competition because certain barriers keep potential competitors from entering the industry. Those barriers may be economic, technological,legal, or some other type. But entry is totally blocked in pure monopoly

Blocked Entry

small market shares

Each firm has a comparatively small percentage of the total market and consequently has limited control over market price

Mutual interdependence means that:

Each firm must consider the possible reactions of rivals when establishing price policy

A pure monopoly's product is unique in there are no close substitutes. The consumer who chooses not to buy the monopolized product______

No close substitutes; must do without it

_________ is widely practiced in the U.S. economy

Price Discrimination

Which would be a characteristic of monopolistic competition

Relatively small market share for each firm

The relevant antitrust law is the Sherman Act of 1890, which has two main provisions:

Section 1: "Every contract, combination in the form of a trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations is declared to be illegal" Section 2: "Every person who shall monopolize, or attempt to monopolize or combine or conspire with any person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony.." (as later amended a misdemeanor"

no collusion

The presence of a relatively large number of firms ensures that collusion by a group of firms to restrict output and set prices is unlikely.

Independent action

With numerous firms in an industry, there is no feeling of interdependence among them; each firm can determine its own pricing policy without considering the possible reactions of rival firms. A single firm may realize a modest increase in sales by cutting its price, but the effect of that action on competitors' sales will be nearly imperceptible and will probably trigger no response.

The characteristic most closely related with oligopoly is:

a few large producers

product differentiation

a positioning strategy that some firms use to distinguish their products from those of competitors

Economies of scale are important entry barriers in a number of oligopolistic industries such as

aircraft, rubber, and copper industries

Monopoly yields neither productive nor _________ efficiency.

allocative

Government also creates legal barriers to entry by __________

awarding patents and licenses

The factors that prohibit firms from entering an industry are called _____

barriers to entry

The monopolist's MR curve lies ________ indicating that marginal revenue is less than price at every output quantity except the very first unit

below the demand curve

New cabs ________ to drive down prices and profits

cannot enter the industry

the most comprehensive form of collusion______ , a group of producers that typically creates a formal written agreement specifying how much each member will produce and charge.

cartel

Oligopolistic firms can increase their profits, and influence their rival's profits by_____

changing their pricing strategies

With a fixed downsloping demand curve, the pure monopolist can increase sales only by

charging a lower price

In the computers, ______ have served as entry barriers for oligopolies

chemicals, consumer electronics, and pharmaceutical industries

cooperation with rivals

collusion

A firm's long-run average-cost schedule will _______

decline over a wide range of outputs

The crucial difference between a pure monopolist and purely competitive seller lies on the __________ of the market.

demand side

Many consumer goods industries (automobiles, tires, household appliances, electronic equipment, breakfast cereals, cigarettes, and many sporting goods) are ________________.

differentiated oligopolies

All imperfect competitors, whether they are pure monopolists, oligopolists, or monopolistic competitiors, face_____

downsloping demand curves

Monopolistic competitive firms have a:

downward-sloping demand curve

The incentive to cheat is strong in a cartel because

each firm can increase its output and thus its profits by cutting price

In the long run, a representative firm in a monopolistically competitive industry will typically:

earn a normal profit, but not an economic profit

The consequent restriction of the supply of cabs creates ________ for cab owners and drivers

economic profit

In monopolistic competition, the gap between the minimum-ATC output and the profit-maximizing output identifies _______. plant and equipment that are underused because firms are producing less than the minimum-ATC output.

excess capacity

Modern technology in some industries is such that economies of scale - declining average total cost with added firm size are

extensive

Because a monopolist can manipulate output and price, people often believe it "will charge the highest price possible".

false

marginal revenue is less than price (average revenue) for every unit of output except the______. The reason is that the lower price of the extra unit of output also applies to all prior units of output.

first

the study of how people or firms behave in strategic situations

game theory

The ownership and control of raw materials help explain why oligopoly exists in many mining industries, including

gold, silver and copper

An oligopoly may be __________ or __________, depending on whether the firms in the oligopoly produce (Standardized (homogenous) or differentiated products.

homogeneous or a differentiated oligopoly

Examples of manufactured goods produced in monopolistically competitive industries are

jewlery, asphalt, wood pallets, commercial signs, leather goods , plastic pipes, textile bags, and kitchen cabinets

Identical costs, a purely monopolistic industry will charge a higher price, produce a smaller output and allocate economic resources________ than a purely competitive industry. These inferior results are rooted in the entry barriers present in monopoly

less efficiently

At relatively low cost to itself, the seller must be able to segregate buyers into distinct classes, each of which has a different willingness or ability to pay for the product. This separation of buyers is usually based on different price elasticities of demand.

market segregation

Because firms are few in oligopolistic industries, each price is a "price maker"; like the monopolist, it can set is price and output levels to________

maximize its profit

A major reason that firms form a cartel is to:

maximize joint profits

A monopolist seeking to _________will employ the same rationale as a profit-seeking firm in a competitive industry. If producing is preferable to shutting down, it will produce up to the the output at which marginal revenue exceeds marginal cost.

maximize total profit

Still weaker barriers may permit the entry of a fairly large number of competing firms, giving rise to

monopolistic competition

Patents provide the inventor with a(n) __________ position for the life of the patent.

monopoly

The seller must be a monopolist, or at least, must possess some degree of monopoly power, that is, some ability to control output and price

monopoly power

Price discrimination is possible when the following conditions are met:

monopoly power, market segregation, no resale

The monopolistic competitor's demand is ____ than the demand faced by a pure monopolist because the monopolistically competitive seller has many competitors producing closely substitutable goods.

more elastic

Any change in quantity produced causes a _______________ and a change in the price they can charge for their respective products.

movement along their respective demand curves

a situation in which each firm's profit depends not just on its own price and sales strategies but also on those of the other firms in its highly concentrated industry

mutual interdependence

In the extreme circumstance, in which the market demand curve cuts the long-run ATC curve where average total costs are still declining, the single firm is called a __________

natural monopoly

The original purchaser cannot resale the product or service

no resale

the goal of product differentiation and advertising -- so called __________ is to make price less of a factor in consumer purchases and make product differences a greater factor

non-price competition

Somewhat weaker barriers may permit _______, a market structure dominated by a few firms

oligopoly

a market dominated by a few large producers of a homogeneous or differentiated product

oligopoly

A ______ is the exclusive right of an inventor to use, or to allow another to use, her or his invention.

patent

research and development (R&D) is what leads to most _______

patentable inventions and products

If consumers prefer the products of specific sellers, then within limits they will ________ to satisfy their preferences

pay more

The purely competitive seller faces a _________ at the price determined by market supply and demand

perfectly elastic

In pure monopoly, strong barriers to entry effectively block all ______

potential competition

the practice of selling a specific product at more than one price when the price differences are not justified by the cost difference

price discrimination

The pure monopolist controls the total quantity supplied and thus has considerable control over price; it is a ____________ (unlike a pure competitor, which has no such control and therefore is a price taker). The pure monopolist confronts the usual downward-sloping product demand curve. It can change its product price by changing the quantity of the product it produces. The monopolist will use this power whenever it is advantageous to do so.

price maker

Economists summarize this fact by saying that firms with down sloping demand curves are

price makers

A monopolist can use __________ as an obstacle to potential rivals. For example, a firm that owns or controls a resource essential to the production process can prohibit the entry of rival firms.

private property

Monopolistic competition is characterized by firms:

producing differentiated products

Service and the conditions surrounding the sale of a product are forms of _______ too.

product differentiation

The monopoly price exceeds minimum average total cost, thereby demonstrating in another way that the monopoly will not be ______

productively efficient

The likelihood of economic profit is greater for a pure monopolist than for a

pure competitor

Price discrimination is a common business practice that _________ and therefore is rarely challenged by government.

rarely reduces competition

Any activity designed to transfer income or wealth to a particular individual, firm, or resource supplier at society's expense is called

rent-seeking behavior

Patents and patent laws aim to protect the inventor from __________ who would use the invention without having shared in the effort and expense of developing it.

rivals

Characteristics of Pure monopoly

single seller, no close substitutes, price maker, blocked entry, nonprice competition

A pure, or absolute, monopoly is an industry in which a single firm is the sole producer of a specific good or the sole supplier of a service; the firm and industry are________

single seller; synonymous

monopolistic competition involves

small market shares, no collusion, independent action

self-interested behavior that takes into account the reactions of others

strategic behavior

Oligopoly is thus characterized by __________________ and ____________

strategic behavior and mutual interdependence

A pure monopoly exists when a single firm is the sole producer of a product for which there are no close ___________.

substitutes

In many large cities, one of a limited number of municipal licenses is required to drive a

taxicab

a purely competitive firm will be willing to produce a loss in the short run provided:

the loss is no greater than its total fixed costs

A price-discriminating pure monopolist will attempt to charge each buyer (or group of buyers):

the maximum price each would be willing to pay