Microeconomics Test 2

What are three effects of monopolies?

1. Cause a reduction in consumer surplus 2. Cause an increase in producer surplus 3. Cause a deadweight loss, which represents a reduction in economic efficiency

What makes up the five competitive forces model?

1. Existing firms 2. Threat from new entrants 3. Competition from substitutes 4. Bargaining power of buyers 5. Bargaining power of suppliers

Monopoly

A firm that is the only seller of a good or service that does not have a close substitute.

Price leadership

A form of implicit collusion in which one firm in an oligopoly announces a price change and the other firms in the industry match the change.

Prisoner's dilemma

A game in which pursuing dominant strategies results in noncooperation that leaves everyone worse off.

Public franchise

A government designation that a firm is the only legal provider of a good or service.

Copyright

A government-granted exclusive right to produce and sell a creation.

Cartel

A group of firms that collude by agreeing to restrict output to increase prices and profits.

Oligopoly

A market structure in which a small number of interdependent firms compete.

Vertical merger

A merger between firms at different stages of production of a good.

Horizontal merger

A merger between firms in the same industry.

Nash equilibrium

A situation in which each firm chooses the best strategy, given the strategies chosen by other firms.

Natural monopoly

A situation in which economies of scale are so large that one firm can supply the entire market at a lower average total cost than can two or more firms.

Network externalities

A situation in which the usefulness of a product increases with the number of consumers who use it.

Dominant strategy

A strategy that is the best for a firm, no matter what strategies other firms use.

Payoff matrix

A table that shows the payoffs that each firm earns from every combination of strategies by the firms.

Area B

According to the graph, a decrease in price from $3.50 to $3.00 per cup results in a gain and a loss of revenue. Which area represents the gain of revenue?

Area A

According to the graph, a decrease in price from $3.50 to $3.00 per cup results in a gain and a loss of revenue. Which area represents the loss of revenue?

$5.00

According to the graph, if the firm is maximizing profits what is the dollar value of the profit?

in long run eqiulibrium as indicated by the equality of price and average cost

According to the graph, the firm in question is a monopolistically competitive firm:

negative

According to the graph, the loss in revenue from decreasing price is greater than the gain in revenue from increasing price whenever marginal revenue is:

$15

According to the graph, what price should the firm charge to maximize profits?

$13,500

According to the graph, what will be the firm's total revenue if it is maximizing profits?

it will lose some but not all of its customers

According to the graph, what will happen if Starbucks increases the price of caffe lattes?

Business strategy

Actions that a firm takes to achieve a goal, such as maximizing profits.

Collusion

An agreement among firms to charge the same price or otherwise not to compete.

Cooperative equilibrium

An equilibrium in a game in which players cooperate to increase their mutual payoff.

Noncooperative equilibrium

An equilibrium in a game in which players do not cooperate but pursue their own self-interest.

Barrier to entry

Anything that keeps new firms from entering an industry in which firms are earning economic profits.

22 cases

Figure 13-8 shows cost and demand curves for a monopolistically competitive producer of iced tea. Refer to Figure 13-8. What is the profit-maximizing output level? Question options:

Antitrust laws

Laws aimed at eliminating collusion and promoting competition among firms.

a firm maximizes profit where ___________________

MR = MC

What three characteristics do games share?

Rules-determine what actions are allowable Strategies- players employ them to attain their objectives in the game Payoffs-the results of the interaction among the player's strategies

Market power

The ability of a firm to charge a price greater than marginal cost.

Patent

The exclusive right to a product for a period of 20 years from the date the patent is filed with the government.

Economies of scale

The situation when a firm's long-run average costs fall as the firm increases output.

Game theory

The study of how people make decisions in situations in which attaining their goals depends on their interactions with others; in economics, the study of the decisions of firms in industries where the profits of a firm depend on its interactions with other firms.

$3.00

Using the table data provided, what is the average revenue associated with the sixth unit of output produced and sold?

Brand management refers to

the efforts to maintain the differentiation of a product over time.

monopolistic competition

a market structure in which barriers to entry are low and many firms compete by selling similar but not identical products

The economic analysis of monopolistic competition shows that market forces eliminate profits in the long run. However, it is possible for a firm to continue to earn economic profits if the firm Question options:

adopts new technologies that enable it to its cost of production

marketing

all the activities necessary to sell a product to a consumer

when a firm has the ability to affect price, the marginal revenue is always ________________________

below the demand curve

Which of the following types of firms use the marginal revenue equals marginal cost approach to maximize profits?

both perfectively competitive and monopolistically competitive

Any action the firm takes to maintain product differentiation over time is known as:

brand management

examples of monopolistic competitions

coffee houses, restaurants

What trade-offs do consumers face when buying a product from a monopolistically competitive firm?

consumers pay a price greater than marginal cost but also have a wider array of choices

The monopolistically competitive firm sells a __________ product and faces a __________ demand curve.

differentiated, downward sloping

demand curve for monopolistically competititve firm is __________________

downward sloping

monopolistically competitive firms charge a price __________________

greater than marginal cost

demand curve for perfectively competitive firm is ______________

horizontal line

Assume price exceeds average variable cost over the relevant range of demand. If a monopolistically competitive firm is producing at an output where marginal revenue is $23 and marginal cost is $19, then to maximize profits the firm should

increase output

A monopolistically competitive firm in a long-run equilibrium produces where:

its demand curve is tangent to its average total cost curve

A monopolistically competitive firm is characterized by the existence of many firms in the market, differentiated products and:

low barriers to entry

in the long run, monopolisitc competitive markets ________________________________

make positive accounting profit but zero economic profit

charesteristics of monopolistic competition

many buyers and seller low barriers to entry differentiated products

allocative effiency occurs when

marginal benefit = marginal cost

The additional revenue associated with selling an additional unit of output

marginal revenue

A monopolistically competitive firm produces where:

marginal revenue = marginal cost

What is the term given to all the activities necessary for a firm to sell a product to a consumer?

marketing

Which type of efficiency is achieved by a monopolistically competitive firm in the long run?

neither allocative or productive effiency

If firms in a monopolistically competitive industry are making profits in the short run

new firms will enter the market.

For what type of market structure is the demand curve the same as marginal revenue?

perfect competition

If a monopolistically competitive firm's demand curve is above its average total cost curve, then this firm is making:

positive economic profit

monopolistically competitive firms do not ___________

produce at minimum average total cost

Which of the following best describes how the product differentiation of monopolistically competitive firms may benefit consumers?

product differentiation can locate firms more conveniently to consumers and offer versions of a product or service that better fit their needs

in a monopolistaclly competitive market. a firm is neither _______________________________ or ____________________________________

productively efficient or allocative efficient

A firm may opt to pay millions of dollars for celebrity endorsements in order to:

signal to consumers that the advertised product is appealing and likely to be popular

brand managment

the actions of a firm to maintain the differentiation of a product over time

Monopolistically competitive firms have some control over price because:

the products they produce are differentiated

productive efficiency

the situation where a good is produced at the lowest possible cost

allocative efficiency

the situation where every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it

the key to surviving in a monopolistic competition is _______________

to constantly innovate and offer differentiated products or lwer prices