Econ Test 3
Which method of reducing pollution to a desired level does so more efficiently?
A pollution tax.
The profit for a monopolistic competitor equals?
(P - ATC) x Q
The profit for monopoly equals?
(P-ATC) x Q
The profit-maximization problem for a monopolist differs from that of a competitive firm how?
A competitive firm maximizes profit at the point where marginal revenue equals marginal cost; a monopolist maximizes profit at the point where marginal revenue exceeds marginal cost
Which of the following statements is true of both pollution permits and corrective taxes: Both policies internalize the externality of pollution, Both policies require firms to pay for their pollution, or Both policies lead to the establishment of an equilibrium price of pollution.
All are correct.
Why can economic profit persist in a monopoly market?
Because barriers to entry prevent new firms from entering the market.
Microsoft faces very little competition from other firms for its Windows software. Why isn't the price of the software $1,000 per copy?
because the company would sell so few copies that they would earn higher profits by selling at a lower price
An agreement among firms in a market about quantities to produce or prices to charge is called?
Collusion
What is the difference between command-and-control policies and market-based policies toward externalities?
Command-and-control policies regulate behavior directly, whereas market-based policies provide incentives for private decisionmakers to change their behavior.
What are sources of monopolies?
Control of an essential resource, government action, and economies of scale
If the government were to impose a fine of $1,000 for each unit of air-pollution released by a steel mill, the policy would be considered a?
Corrective tax.
The demand facing a monopoly is?
Downward Sloping
True or False? A monopoly produces more output than the equilibrium quantity in an otherwise similar competitive industry.
FALSE
True or False? When a monopoly maximizes profit, price equals marginal cost.
FALSE
In a monopoly price is?
Greater than marginal revenue
In order to sell more of its product, a monopolist must?
Lower its price.
How many sellers are in an industry when it is monopolistically competitive?
Many
Which of the following is a cartel: Pepsi and Coke, OPEC, US airlines, or Airbus and Boeing?
OPEC
The commercial jetliner industry consisting of Boeing and Airbus would best be described as a (an)?
Oligopoly.
How many sellers are in a perfect monopoly?
One
When comparing the advantages of monopolistic competition and perfect competition?
Perfect competition has less deadweight loss and excess capacity while monopolistic competition gives consumers greater ability to choose what they want from differentiated goods.
What generally happens to the price in the industry as the number of firms in an oligopoly increases?
Price Falls.
If the government were to limit the release of air-pollution produced by a steel mill to 75 parts per million, the policy would be considered a?
Regulation.
Internalizing a positive externality will cause the demand curve to?
Shift to the right.
True or False? A competitive firm is a price taker, whereas a monopolist is a price maker.
TRUE
True or False? Command-and-control government regulation can correct market failures resulting from externalities.
TRUE
True or False? Deadweight welfare loss occurs whenever price exceeds marginal cost.
TRUE
True or False? In long-run equilibrium and with similar costs, the output that maximizes profit for a perfect competitor is greater than the output that maximizes profit for a monopolistic competitor.
TRUE
True or False? Taxes provide incentives for firms to adopt new methods to reduce negative externalities.
TRUE
True or False? When a perfect competitor maximizes profit, price equals marginal cost.
TRUE
The difference between a corrective tax and a tradable pollution permit is that?
a corrective tax sets the price of pollution and a permit sets the quantity of pollution.
Monopoly pricing prevents some mutually beneficial trades from taking place. These unrealized, mutually beneficial trades are?
a deadweight loss to society.
Which would have more monopolist power: a local restaurant, an online bookstore, or a local electrical cooperative?
a local electrical cooperative
The term market failure refers to?
a market that fails to allocate resources efficiently.
When we compare economic welfare in a monopoly market to a competitive market, the profits earned by the monopolist represent?
a transfer of benefits from the consumer to the producer.
Monopolies are socially inefficient because the price they charge is?
above marginal cost.
In order to be successful, a cartel must?
agree on the total level of production and on the amount produced by each member.
Tradable pollution permits?
are widely viewed as a cost-effective way to reduce pollution, have helped reduce carbon emissions, and have helped reduce sulfur dioxide emissions.
When a monopoly earns a positive economic profit?
the difficulty of entering the market allows the positive economic profit to persist for a long time
What is a characteristic of a monopoly?
barriers to entry
The free entry and exit of firms in a monopolistically competitive market guarantees that?
both economic profits and economic losses disappear in the long run.
A group of firms that act in unison to maximize collective profits is called a
cartel.
As a group, oligopolists would always earn the highest profit if they would?
charge the same price that a monopolist would charge if the market were a monopoly.
A distinguishing feature of an oligopolistic industry is the tension between?
cooperation and self interest.
The difference between social cost and private cost is a measure of the?
cost of an externality.
The supply curve for a product reflects the?
cost to sellers of producing the product.
Critics of advertising argue that advertising?
creates desires that otherwise might not exist, hinders competition, and often fails to convey substantive information.
In an oligopoly, each firm knows that its profits?
depend on both how much output it produces and how much output its rival firms produce.
An agreement between two duopolists to function as a monopolist usually breaks down because?
each duopolist wants a larger share of the market in order to capture more profit.
When a monopolistic competitor earns a positive economic profit what happens?
entry occurs and drives profit to zero in the long run
In a duopoly situation, the logic of self-interest results in a total output level that?
exceeds the monopoly level of output, but falls short of the competitive level of output.
Market failure can be caused by?
externalities.
Once tradable pollution permits have been allocated to firms?
firms that can reduce pollution only at high cost will be willing to pay the most for the pollution permits.
What is a characteristic of monopolistic competition?
free entry.
In both perfect competition and monopolistic competition, each firm?
has many competitors.
To increase their individual profits, members of a cartel have an incentive to?
increase production above the level agreed upon.
In many cases selling pollution permits is a better method for reducing pollution than imposing a corrective tax because?
it is hard to estimate the market demand curve and thus charge the "right" corrective tax.
Suppose most people regard emeralds, rubies, and sapphires as close substitutes for diamonds. Then DeBeers, a large diamond company, has?
less market power than it would otherwise have.
A monopolist produces?
less than the socially efficient quantity of output but at a higher price than in a competitive market.
Evidence from the market for eyeglasses suggests that advertising leads to?
lower prices for consumers.
A monopolistically competitive industry is characterized by?
many firms selling products that are similar but not identical.
Because a monopolistically competitive firm has some market power, in the long-run the price of its product exceeds its?
marginal cost.
A monopoly maximizes profit by producing the quantity that makes?
marginal revenue equal to marginal cost
To maximize its profit, a monopolistically competitive firm chooses its level of output by looking for the level of output at which?
marginal revenue equals marginal cost.
If a profit-maximizing monopolist faces a downward-sloping market demand curve, its?
marginal revenue is less than the price of the product.
Deadweight loss measures?
monopoly inefficiency.
A cost imposed on someone who is neither the consumer nor the producer is called a?
negative externality.
An externality is the impact of?
one person's actions on the well-being of a bystander.
In the short run, a firm operating in a monopolistically competitive market can earn?
positive economic profits, economic losses, and zero economic profits are all possible.
The relationship between advertising and product differentiation is?
positive; the more differentiated the product, the more a firm is likely to spend on advertising.
Product differentiation in monopolistically competitive markets ensures that, for profit-maximizing firms?
price will exceed marginal cost.
A perfectly competitive market?
promotes general economic well-being, whereas a monopoly market may not be in the best interests of society.
Dioxin emission that results from the production of paper is a good example of a negative externality because?
self-interested paper producers will not consider the full cost of the dioxin pollution they create.
Negative externalities lead markets to produce?
smaller than efficient output levels and positive externalities lead markets to produce greater than efficient output levels.
A government-created monopoly arises when?
the government spending in a certain industry gives rise to monopoly power AND the government gives a firm the exclusive right to sell some good or service.
As the number of firms in an oligopoly market increases?
the market approaches the competitive market outcome.
In markets characterized by oligopoly?
the oligopolists earn the highest profit when they cooperate and behave like a monopolist.
A firm operating in a monopolistically competitive market can earn economic profits in
the short run but not in the long run.
Negative externalities in a market could be internalized if?
there were a tax on the product.
