EC 201 - Exam #3 - Chapter 14

which of the following are factors that can create market power for a firm?

- having fewer competitors in the market - being able to differentiate one's product

which of the following types of activities between businesses would be considered legal in the United States?

Delta Airlines and Coca-Cola sign a contract to make Coca-Cola the exclusive provider of soft drinks on Delta flights

what of the following are examples of a natural monopoly?

a local utility company

a market with a large number of sellers and a high level of product differentiation is known as ...

a monopolistically competitive market

indicate which market structure characterizes each firm listed below by placing it under the correct label ; a local utility provider

a monopoly

what is collusion?

agreements between sellers to increase their market power

in a perfectly competitive market, firms do not have market power because

all of these are reasons why perfectly competitive firms do not have market power

according to the rational rule, what output and price should the firm choose on a graph?

look at where the marginal cost and marginal revenue curves cross, then look up to the firm's demand curve, to find the price, and look down to find the quantity

what is the relationship among marginal revenue, marginal cost, and price in a firm with market power?

marginal cost = marginal revenue < price

indicate which market structure most accurately characterizes ; Seattle City Light, the supplier of electricity to the Seattle metropolitan area ...

monopoly

which of the following has the most market power (monopoly, monopolistic competition, oligopoly, perfect competition)?

monopoly

in which market structure do the actions of a rival have a significant impact on your operations?

oligopoly

the market for a video game console would be best described as ...

oligopoly

indicate which market structure characterizes each firm listed below by placing it under the correct label ; a wheat farm

perfect competition

which of the following market structures has the flattest firm demand curve, all else equal (monopoly, monopolistic competition, oligopoly, perfect competition)?

perfect competition (you cannot charge any price above the market price or people will not buy it ; it is completely flat)

what type of relationship exists between the level of a company's market power and the price that its owner is able to charge for its product?

positive

when buyers in a market have market power, then the ...

product price is lower

currently, Coca-Cola sells 1 million cans of coke per year ; Coca-Cola raises its price by 1 cent ; if the market for cola is perfectly competitive, what happens to the number of Cokes sold?

quantity goes to zero

compare the buyers' marginal benefit and the seller's marginal cost at the firm's profit maximizing level of output. The marginal benefit is ...

reflected by the demand curve, so the marginal benefit is greater than the marginal cost. Society would benefit if more flu vaccines were produced

how would the discount effect on marginal revenue differ for a seller increasing sales from 100 units to 101 units compared to an increase in sales from 1,000 units to 1,001 units?

the discount effect would be smaller for a change from 100 to 101 units than 1,000 to 1,001 units

market power is

the extent to which a firm can charge a higher price without losing many customers

a demand curve (for sellers) has the most market power when the line is ...

vertical

to avoid harm to society, the government often becomes the supplier of a good or service when the respective market ...

would be a natural monopoly, and the good or service is considered essential

which of the following types of activities between businesses would be considered illegal in the United States?

- Delta, United, Southwest, and American airlines agree to restrict the number of flights they offer each day domestically in the United States - Archer Daniels Midland and the Japanese firm Ajinomoto agree to raise the price on lysine, an additive used in livestock feed - the cable television providers Comcast and Charter Communications agree not to compete in certain geographic regions of the country

a patent effectively allows a firm to operate as a monopoly while the patent is in effect. Some people argue that the market power created by patents harms consumers and shouldn't be granted. Others argue that patents are needed to encourage research and innovation. You can read the article from Forbes to learn more about the history and policy surrounding patents ; what would arguments against patents be?

- prevents competition in a market - encourages higher prices for consumers - leads to an inefficient level of production

a patent effectively allows a firm to operate as a monopoly while the patent is in effect. Some people argue that the market power created by patents harms consumers and shouldn't be granted. Others argue that patents are needed to encourage research and innovation. You can read the article from Forbes to learn more about the history and policy surrounding patents ; what would arguments for patents be?

- research results in a positive externality for society - prevents free-riding

indicate which market structure characterizes each firm listed below by placing it under the correct label ; Coca-Cola & Apple Inc.

an oligopoly

price ceilings tend to create shortages when used to ...

bring down price in a competitive market

price ceilings _________ economic surplus in perfectly competitive markets and _______ economic surplus in imperfectly competitive markets

decrease increase

on a marginal revenue, marginal cost, demand curve graph, look up from the equilibrium point to where it meets the ___________ curve and that is the producer's profit maximizing _____________ and ________

demand price output

the equilibrium price and quantity is located where the ...

demand curve crosses the marginal cost curve

the equilibrium price and quantity is the _____________ outcome in this market and the _________ ________ outcome

efficient socially optimal

consider the data the accompanying figure regarding the share of consumers who had a subscription to an on-demand video service in the United States in 2017 ; Netflix (50%), Amazon Prime (29%), and Hulu (14%) ; Netflix and Amazon have ______________ in this market ; in addition, both companies offer a ______________ ; these characteristics are a source of ____________ for both companies ...

limited competition differentiated product market power

sort the firms based on the source of their market power, either limited competitors, product differentiation, both, or neither. (Hint: neither would signify very little or no market power) ; (Toyota, maker of the Corolla, the bestselling passenger vehicle in the world in 2017 ; Heartland Mills, a grower of wheat in Wichita County, Kansas ; Archer Daniels Midland (ADM), the largest producer of Lysine, a standardized amino acid used by farmers as a feed additive. ADM faces competition from a few large corporations in Europe and Japan ; McDonald's, the most popular fast-food restaurant in the U.S. in 2015. ) ...

limited competitors : ADM product differentiation : McDonald's & Toyota neither : Heartland Mills

to find the profit maximizing quantity ...

look at where the marginal cost curve and the marginal revenue curves cross, and then look down to the x-axis and where it hits that line is the profit maximizing quantity

to find the profit maximizing price ...

look at where the marginal cost curve and the marginal revenue curves cross, and then look up to the demand curve and where it hits that line is the profit maximizing price

the price in perfect competition is _________ than the price under imperfect competition ; the quantity in perfect competition is _______ than the quantity under imperfect competition

lower higher

the higher the level of market power among the sellers in a market, the _____ when the Rational Rule for Sellers is applied ...

lower the market output

according to the Rational Rule for Sellers, a seller should choose the output level where _____ and the price level _____.

marginal cost equals marginal revenue; that is on the seller's demand curve at that output level

indicate which market structure characterizes each firm listed below by placing it under the correct label ; a clothing company

monopolistic competition

indicate which market structure most accurately characterizes ; the dry cleaning industry ...

monopolistic competition

indicate which market structure most accurately characterizes ; the hotel industry ...

monopolistic competition

_____ using specific business practices that increase a seller's market power and excludes other sellers is illegal under U.S. law ...

monopolizing

rank each of the following firms based on market power, from most market power to least market power ; (Toyota, maker of the Corolla, the bestselling passenger vehicle in the world in 2017 ; Heartland Mills, a grower of wheat in Wichita County, Kansas ; Archer Daniels Midland (ADM), the largest producer of Lysine, a standardized amino acid used by farmers as a feed additive. ADM faces competition from a few large corporations in Europe and Japan ; McDonald's, the most popular fast-food restaurant in the U.S. in 2015. ) ...

most market power - ADM - Toyota - McDonald's - Heartland Mills least market power

when a company has market power, it is _____ in its market

not a price-taker

consider the data the accompanying figure regarding the share of consumers who had a subscription to an on-demand video service in the United States in 2017 ; Netflix (50%), Amazon Prime (29%), and Hulu (14%) ; the on-demand video industry is most accurately described as which type of market structure?

oligopoly

indicate which market structure most accurately characterizes ; the market for smartphones ...

oligopoly

indicate which market structure most accurately characterizes ; the wide-body civilian aircraft manufacturing industry ...

oligopoly

total revenue equation =

price (p) x quantity sold (q) at quantity q, what is the price on the demand line, then multiply that p by the q

which of the following markets is an example of a perfectly competitive market?

shares of McDonald's stock

if the marginal cost exceeds the marginal revenue, then the firm ____________ produce the extra unit

should not the price and the quantity of the last marginal revenue and marginal cost that should be incurred is the profit maximizing price and output

patents on drugs to treat AIDS were removed in South Africa. How would the market for these drugs have been different if there had never been patents on drugs?

the drugs would not have been developed

according to the Rational Rule for Sellers, the manager of this company should choose to produce until ...

the marginal cost is greater than or equal to marginal revenue and where that is equal, that is the profit maximizing price and quantity

the marginal revenue curve of a firm with market power will always lie below its demand curve because of ...

the output effect and the discount effect

which of the following is a characteristic of monopoly that is not present in other market structures?

there is only one seller

in 1999, the Federal Trade Commission allowed Exxon and Mobil to merge. At the time, Exxon and Mobil were the top two firms in their industry, and their merger created the largest corporation in the world. To allow the merger, Exxon and Mobil agreed to sell 2,431 gas stations. Of these, 1,740 were in the mid-Atlantic states, 360 were in California, 319 were in Texas, and 12 were in Guam ; why would the U.S. government require Exxon and Mobil to divest themselves of so many gas stations in localized parts of the country to be willing to allow the merger to occur?

to ensure competition in these regions and protect consumers from unwarranted price increases

One of the market failures caused by market power is ...

underproduction

when, if ever, would a monopoly in a particular industry be preferred to competition within that industry?

when it would be less costly for one firm rather than many firms to provide a good, as in a natural monopoly

walmart has a large aisle that displays many different kinds of toothpastes. This observation indicates that the toothpaste market is ...

a monopolistically competitive market

what do you need to know in order to determine the profit-maximizing price?

a monopolist can determine its profit-maximizing price and quantity by analyzing the marginal revenue and marginal costs of producing an extra unit if the marginal revenue exceeds the marginal cost, then the firm should produce the extra unit