AGB144 Exam 3

Profit Maximization in Monopoly

1. Set MC=MR 2. Set price (follow point upward to demand curve)

Ag Econ in Long Run

1. Technological progress 2. Demand increase

inelastic demand for ag products

- biological factors - diminishing marginal utility

free trade

- highest efficiency - more choice - promotes competition

If a regulatory commission wants to establish a socially optimal price for a natural monopoly, it should select a price: A. at which the marginal cost curve intersects the demand curve. B. at which marginal revenue is zero. C. at which the average total cost curve intersects the demand curve. D. which corresponds with the equality of marginal cost and marginal revenue.

A. at which the marginal cost curve intersects the demand curve.

At its profit-maximizing output, a pure nondiscriminating monopolist achieves: A. neither productive efficiency nor allocative efficiency. B. both productive efficiency and allocative efficiency. C. productive efficiency but not allocative efficiency. D. allocative efficiency but not productive efficiency.

A. neither productive efficiency nor allocative efficiency.

Refer to the above diagram. To maximize profits or minimize losses this firm should produce: A. E units and charge price C. B. E units and charge price A. C. M units and charge price N. D. L units and charge price LK.

B. E units and charge price A.

What do economies of scale, the ownership of essential raw materials, and patents have in common? Answers: A. They must all be present before price discrimination can be practiced. B. They are all barriers to entry. C. They all help explain why a monopolist's demand and marginal revenue curves coincide. D. They all help explain why the long-run average cost curve is U-shaped

B. They are all barriers to entry.

Which of the following is not a barrier to entry? A. patents B. X-inefficiency C. economies of scale D. ownership of essential resources

B. X-inefficiency

If a regulatory commission wants to provide a natural monopoly with a fair return, it should establish a price that is equal to: A. minimum average fixed cost. B. average total cost. C. marginal cost. D. marginal revenue.

B. average total cost.

Refer to the above diagram for a pure monopolist. Monopoly price will be: Answers: A. e. B. c. C. b. D. a.

B. c.

Economic profit in the long run is: A. possible for both a pure monopoly and a pure competitor. B. possible for a pure monopoly, but not for a pure competitor. C. impossible for both a pure monopolist and a pure competitor. D. only possible when barriers to entry are nonexistent.

B. possible for a pure monopoly, but not for a pure competitor.

Pure monopoly refers to: Answers: A. any market in which the demand curve to the firm is downsloping. B. a standardized product being produced by many firms. C. a single firm producing a product for which there are no close substitutes. D. a large number of firms producing a differentiated product.

C. a single firm producing a product for which there are no close substitutes.

Pure monopolists may obtain economic profits in the long run because: A. of advertising. B. marginal revenue is constant as sales increase. C. of barriers to entry. D. of rising average fixed costs.

C. of barriers to entry.

Which of the following best approximates a pure monopoly? A. the foreign exchange market B. the Kansas City wheat market C. the only bank in a small town D. the soft drink market

C. the only bank in a small town

Price discrimination refers to: A. selling a given product for different prices at two different points in time. B. any price above that which is equal to a minimum average total cost. C. the selling of a given product at different prices that do not reflect cost differences. D. the difference between the prices a purely competitive seller and a purely monopolistic seller would charge.

C. the selling of a given product at different prices that do not reflect cost differences.

The MR = MC rule: A. applies only to pure competition. B. applies only to pure monopoly. C. does not apply to pure monopoly because price exceeds marginal revenue. D. applies both to pure monopoly and pure competition.

D. applies both to pure monopoly and pure competition.

Refer to the above diagram for a pure monopolist. Monopoly output will be: A. between f and g. B. h. C. g. D. f.

D. f.

A dilemma of regulation is that: A. the regulated price that achieves allocative efficiency is also likely to result in persistent economic profits. B. the regulated price that results in a ""fair return"" restricts output by more than would unregulated monopoly. C. regulated pricing always conflicts with the "due process" provision of the Constitution. D. the regulated price that achieves allocative efficiency is also likely to result in losses.

D. the regulated price that achieves allocative efficiency is also likely to result in losses.

monopoly price

MR = MC (move up to demand line for price)

Profit in long run for mon. comp.

P = ATC profit = zero

Product Variety in Monop. Comp.

can help to increase profitability beneficial because: choice (variety could trump efficiency) and product improvements

Differences in production efficiencies among nations in producing a particular good result from: a. different endowments of fertile soil b. different amounts of skilled labor c. different levels of technological knowledge d. all of the above

d. all of the above

direct payments

fixed payments based on past production

trade agreements

goal is to lower barriers to trade

increased domestic employment

idea that cutting off imports will increase domestic employment

Monopolistic Competition is...

less elastic than pure competition more elastic than pure monopoly

MR in pure monopoly is:

less than price

import quota

limit on the amount or value of a product has been eliminated due to world negotiations

General Agreement on Tariffs and Trade (GATT)

lower and eliminate barriers to trade

absolute advantage

most efficient producer of the product

Military self-sufficiency

national security trumps efficiency

ag industry =

purely competitive

North American Free Trade Agreement (NAFTA)

reduced trade barriers Cananda, Mexico, and U.S.

marketing loans

set price, and if you lower retire debt and if above you pay the lender

collusive pricing

- cartels, groups that have formal agreements specifying how much each member will produce and charge

Complications in Monopolies

- costs (natural economies of scale) - X-Inefficiency - Preserving expenditures (patents, licensees, etc) - very long run

Oligopoly models

- kinked demand curve - collusive price - price leadership

Barriers to Entry in Monoplies

- prevent other firms from entering and sharing profits (economies of scale) - ownership/control of resources - patents - liscenses - price wars - advertising

differentiation in mon. comp.

- product attributes (Mac v. Dell) - Service (unique levels of service each company offers) - location - brand name and packaging (consumer can easily recognize certain brands based on packaging)

monopolistic competition characteristics

- relatively large number of sellers - differentiated products - easy entry and exit - some price control

Characteristics of Pure Monopoly:

- single seller - no close substitutes - price maker - blocked entry - non-price competition

shifts in demand curves for farm products

- small changes in demand can lead to large increases (or decreases) in farm income - demand varies due to dependency on world markets

price supports create

- surplus output - gain to farmers - lose to consumers - environmental costs - international costs

Fair return price

- this is because monopolies are in efficient - ATC = D - we over produce for the market with this price

Socially optimal price

- where we would produce if it was a purely competitive market - occurs where MC = D

Policy Options to Regulate Monopolies

1. Anti trust laws (make it illegal) 2. regulate prices and operations 3. ignore (sometimes monopoly is small)

reducing surpluses

1. Reduce supply: acreage allotments and CRP 2. Increase demand

Types of price discrimination

1. charging each consumer the max price they are willing to pay (auctions) 2. charging one price for the first unit then lower prices for additional units (tshirts) 3. charging some customers one price and other consumers another price

Oligopoly Characteristics

1. few sellers 2. either homogenous or differentiated products 3. control over price, but with mutual interdependence (strategic behavior too) 4. some barriers to entry

Managing Risk

1. future markets 2. contracting with processors 3. crop revenue insurance 4. leasing land 5. non farm income

Ag Industry in Short Run

1. inelastic demand for ag products 2. fluctuations in farm outputs 3. shifts in demand curves for farm products

Complications with deciding between Mon. Competition or Oligopoly

1. localized markets (national v. regional) 2. inter-industry competition (meat = cattle producers and meat packers) 3. world trade (int. trade not accounted for

Comparing a pure monopoly and a purely competitive firm with identical costs, we would find in long-run equilibrium that the pure monopolist's: A. price and output would be higher. B. price would be higher, but output would be lower. C. price and output would be lower. D. price and output would be the same.

B. price would be higher, but output would be lower.

Graph A shows a downward sloping line where demand and marginal revenue are equal. Graph B shows two downward sloping lines where marginal revenue is below demand. Graph C shows a horizontal line where demand and marginal revenue are equal. Graph D shows two downward sloping lines where marginal revenue is greater than demand Which of the above diagrams correctly portray the demand (D) and marginal revenue (MR) curves of a monopoly? A. where demand and marginal revenue are equal and downward sloping B. where demand is greater than marginal revenue and both are downward sloping C. where demand and marginal revenue are equal and represented by a horizontal line D. where marginal revenue is greater than demand and both are downward sloping.

B. where demand is greater than marginal revenue and both are downward sloping

Which of the following is correct? A. Both purely competitive and monopolistic firms are "price takers." B. Both purely competitive and monopolistic firms are "price makers." C. A purely competitive firm is a ""price taker,"" while a monopolist is a "price maker." D. A purely competitive firm is a ""price maker,"" while a monopolist is a "price taker."

C. A purely competitive firm is a ""price taker,"" while a monopolist is a "price maker."

An unregulated pure monopolist will maximize profits by producing that output at which: Answers: A. P = MC. B. P = ATC. C. MR = MC. D. MC = AC.

C. MR = MC.

protective tariffs

used to protect domestic industries

Which of the above diagrams correctly portray the demand (D) and marginal revenue (MR) curves of a purely competitive seller? Answers: A. where demand and marginal revenue are equal and downward sloping B. where demand is greater than marginal revenue and both are downward sloping C. where demand and marginal revenue are equal and represented by a horizontal line D. where marginal revenue is greater than demand and both are downward sloping.

C. where demand and marginal revenue are equal and represented by a horizontal line

farm commodities

wheat, soybeans, cattle, sheep, etc generally more competitive

When a monopolistically competitive firm is in long-run equilibrium: a. P=MC=ATC b. MR=MC and minimum ATC > P c. MR > MC and P = minimum ATC d. MR = MC and P < minimum ATC

a. P=MC=ATC

An extraordinarily small crop of farm products due to drought causes: a. a large increase in the price of farm products because the demand for farm products is price inelastic b. only a slight increase in the price of farm products because the for farm products is income elastic. c. only a slight increase in the price of farm products because the for farm products is income inelastic d. a large increase in the price of farm products because the demand for farm products is price elastic

a. a large increase in the price of farm products because the demand for farm products is price inelastic

Nonprice competition refers to: a. advertising, product promotion, and changes in the real or perceived characteristics of a product b. price increases by a firm that are ignored by its rivals c. competition between products of different industries, for example, competition between aluminum and steel in the manufacture of auto parts

a. advertising, product promotion, and changes in the real or perceived characteristics of a product

Which of the following strategies is unlikely to lead to long term profits for oligopolies? a. competing solely on price b. investing in product development c. investing in establishing barriers to entry d. investing in maintaining barriers to entry

a. competing solely on price

The demand for agricultural products: a. has a price elasticity coefficient of about .20 to .25 b. is elastic with respect to income but inelastic with respect to price. c. has been decreasing about 8 percent per year d. has been rising more rapidly than the national income

a. has a price elasticity coefficient of about .20 to .25

Because government price supports cause surplus production, government policies have been designed to: a. increase demand and decrease supply of farm products b. decrease demand and increase supply of farm products c. increase demand and increase supply of farm products d. decrease demand and decrease supply of farm products

a. increase demand and decrease supply of farm products

Game theory: a. is the analysis of how people (or firms) behave in strategic situations b. is best suited for analyzing purely competitive markets c. reveals that mergers between rival firms are self defeating d. reveals that price fixing among firms reduces profits

a. is the analysis of how people (or firms) behave in strategic situations

Which of the following is a unique feature of oligopoly? a. mutual interdependence b. advertising expenditures c. product differentiation d. nonprice competition

a. mutual interdependence

In a two-nation model, the equilibrium world price will occur where: a. one nation's export supply curve intersects the other nation's import demand curve b. exports are exactly twice the level of imports c. both nations' export supply curves are horizontal d. both nations' import demand curves are vertical

a. one nation's export supply curve intersects the other nation's import demand curve

Acreage allotment programs were designed to: a. reduce the supply of agricultural products b. make the demand for farm products more price elastic c. bolster the demand for agricultural commodities d. accelerate the movement of human resources out of farming

a. reduce the supply of agricultural products

European Union (EU)

abolished tariffs and quotas between member nations euro zone

oligopolies and advertising

advertising and product improvement increase demand and profits, which ensures long term profits

price leadership model

allows for coordinated prices without breaking laws one firm changes prices, the others will follow problems: leads to price wars

Refer to the above diagram for a monopolistically competitive firm in short-run equilibrium. The profit-maximizing price for this firm will be: a. $19 b. $16 c. $13 d. $10

b. $16

Refer to the above diagram for a monopolistically competitive firm in short-run equilibrium. The profit-maximizing output for this firm will be: a. 100 b. 160 c. 180 d. 210

b. 160

The term oligopoly indicates: a. a one firm industry b. a few firms producing either a differentiated or a homogenous product c. many producers of a differentiated product d. an industry whose four firm concentration ratio is low

b. a few firms producing either a differentiated or a homogenous product

A breakdown in price leadership leading to successive rounds of price cuts is known as: a. limit pricing b. a price war c. informal pricing d. price discrimination

b. a price war

Which of the following arguments is not generally made to justify farm subsidies? a. The family farm is an american institution that should be protected and nurtured b. agribusiness firms and subsidies to achieve economies of scale c. Farmers sell their output in purely competitive markets, but most buy inputs from imperfectly competitive firms d. Farmers cannot fully insure themselves against the risks unusual to farming, such as floods, drought, and pests.

b. agribusiness firms and subsidies to achieve economies of scale

Countries engaged in international trade specialize in production based on: a. relative levels of GDP b. comparative advantage c. relative exchange rates d. relative inflation rates

b. comparative advantage

Suppose the domestic price (no-international-trade price) of wheat is $3.50 a bushel in the United States while the world price is $4.00 a bushel. Assuming no transportation costs, the United States will: a. have a domestic surplus of copper b. export copper c. import copper d. neither export nor import copper

b. export copper

In the United States cartels are: a. quite common in industries that produce nondurable goods b. in violation of the antitrust laws c. concentrated in monopolistically competitive industries d. encouraged by government policy so firms can achieve economies of scale

b. in violation of the antitrust laws

Cartels are difficult to maintain in the long run because: a. they are illegal in all industrialized countries b. individual members may find it profitable to cheat on agreements c. it is more profitable for the industry to charge a lower price and produce more output d. entry barriers are insignificant in oligopolistic industries

b. individual members may find it profitable to cheat on agreements

The primary gain from international trade is: a. increased employment gain from international trade is: b. more goods that would be attainable through domestic production alone c. tariff revenue d. increased employment in the domestic import sector

b. more goods than would be attainable through domestic

Refer to the above diagram for a monopolistically competitive firm in short-run equilibrium. This firm will realize an economic: a. loss at $320 b. profit of $480 c. profit of $280 d. profit of $600

b. profit of $480

countercyclical payments

based on past production, but sets a target price, if the price is below the target price, you receive a payment for the difference

MR line in monopoly is:

below demand curve

Globalization

best illustrated in agriculture

What percentage of their spending do U.S. consumers allocate to food purchases? a. 1 percent b. 7 percent c. 12 percent d. 15 percent

c. 12 percent

Which of the following statements is correct? a. Purely competitive firms, monopolistically competitive firms, and pure monopolies all earn zero economic profits in the long run. b. Purely competitive firms, monopolistically competitive firms, and pure monopolies all earn positive economic profits in the long run c. In the long run purely competitive firms and monopolistically competitive firms earn zero economic profits, while pure monopolies may or may not earn economic profits d. Monopolistically competitive firms earn zero economic profits in both the short run and the long run.

c. In the long run purely competitive firms and monopolistically competitive firms earn zero economic profits, while pure monopolies may or may not earn economic profits

The United States is a member of which international trade agreements a. The EU b. TPP c. NAFTA d. all of the above

c. NAFTA

Check off programs were designed to: a. reduce the supply of agricultural products b. make the demand for farm products more price elastic c. bolster the demand for agricultural commodities d. accelerate the movement of human resources out of farming

c. bolster the demand for agricultural commodities

Other things equal, economists would prefer: a. import quotas to tariffs and tariffs to voluntary export restrictions b. free trade to import quotas and import quotas to tariffs c. free trade to tariffs and tariffs to import quotas d. import quotas to free trade and free trade to tariffs

c. free trade to tariffs and tariffs to import quotas

Suppose the domestic price (no-international-trade price) of copper is $1.20 a pound in the United States while the world price is $1.00 a pound. Assuming no transportation costs, the United States will: a. have a domestic surplus of copper b. export copper c. import copper d. neither export nor import copper

c. import copper

If the demand for an agricultural product is inelastic, a bumper crop will: a. raise price and decrease total revenues b. raise price and increase total revenues c. lower price and decrease total revenues d. lower price and increase total revenues

c. lower price and decrease total revenues

The monopolistically competitive seller maximizes profit by producing at the point where: a. total revenue is at a maximum b. average costs are at a minimum c. marginal revenue equals marginal cost d. price equals marginal revenue

c. marginal revenue equals marginal cost

Long-run equilibrium for a monopolistically competitive firm where economic profits are zero results from: a. rising marginal costs. b. a perfectly elastic product demand curve c. relatively easy entry d. product differentiation and development

c. relatively easy entry

Which of the following arguments for trade protection contends that countries should have a wide variety of product in order to succceed? a. the increase-domestic-employment argument b. the cheap-foreign-labor argument c. the diversification-for-stability argument d. the infant-industry argument

c. the diversification-for-stability argument

fluctuations in farm output

can't control weather and final output

price discrimination

capturing those sensitive to price, to decide how to charge/price

differentiated

cell phone service providers

Price discrimination, elastic

charge less

price discrimination, inelastic

charge more

Collusion

cooperate with your rivals in order to increase your profits

OPEC provides an example of: a. an unwritten, informal understanding b. noncollusive oligopoly c. a monopolistically competitive industry d. an international cartel

d. an international cartel

The kinked-demand curve of an oligopolist is based on the assumption that: a. there is no product differentiation b. competitors will match both price cuts and price increases c. competitors will ignore a price cut but follow a price increase d. competitors will follow a price cut but will ignore a price increase

d. competitors will follow a price cut but will ignore a price increase

The demand for most agricultural products is: a. elastic with respect to price, but inelastic with respect to income b. inelastic with respect to price, but elastic with respect to income c. elastic with respect to both price and income d. inelastic with respect to both price and income

d. inelastic with respect to both price and income

Monopolistic competition is characterized by a: a. few dominant firms and low entry barriers b. large number of firms and substantial entry barriers c. few dominant firms and substantial entry barriers d. large number of firms and low entry barriers

d. large number of firms and low entry barriers

Tariffs: a. are per unit subisidies designed to promote exports b. are also called import quotas c. are excise taxes on goods exported abroad d. may be imposed either to raise revenue (revenue tariffs) or to shield domestic foreign competition (protective tariffs)

d. may be imposed either to raise revenue (revenue tariffs) or to shield domestic foreign competition (protective tariffs)

Which of the following arguments for trade protection is based on the premise that a nation should have a wide enough range of domestic industries to be self-sufficient if necessary? a. the income domestic employment argument b. the cheap foreign labor argument c. the diversification for stability argument d. the infant industry argument

d. the infant-industry argument

Why do we trade?

distribution or resources is uneven - labor intensive goods - land intensive goods - capital intensive goods nations produce goods that they have the resources for

Monopoly demand slope is:

downward sloping because it's the only one in the game

protection against dumping

dumping: sale of products in foreign countries below cost or below prices charged domestically

mutual interdependence

firms profits depends on its own price and advertising as well as competitors price and advertising

parity

for any given year a fixed farm output should be able to purchase a specific total amount of other goods and services

Voluntary export restriction

foreign firms volunteer to restrict supply in order to reduce a tariff or stricter quota

diversification for stability

impose tariffs or quotas to encourage diversification

farm products

items sold through restaurants and grocery stores generally less competitive

cheap foreign labor

labor cost per hour is not important as labor cost per unit

export subsidy

money given to domestic producer to encourage exports

Effects of monopoly

monopolies are no efficient - they cannot have allocative because they underproducing - cannot have productive because there is no competition to drive them to do well Technology does not stay updated

infant industries

new industries should be protected to allow them to become competitive

Is there a supply curve in monopolies?

no

Monopolistic Comp. Efficiency

no allocative or productive efficiency

X-efficiency

not using least cost measures

homogeneous

oil production

World Trade Organization (WTO)

oversees trade agreements and helps to settle disputes

domestic price

price paid in a closed domestic market

World price

price paid on the open world market

comparative advantage

produce the product for the lowest opportunity cost

Properly place oligopoly in continuum of degree of competition. (highest to lowest)

pure competition, monopolistic competition, oligopoly, pure monopoly

kinked demand theory

rivals will either match your prices (cut prices so will they) or ignore them (raise prices, they won't)

Export when...

the world price is higher than domestic price

Import when...

the world price is lower than the domestic price

revenue tariffs

used on items not produced domestically