econ 212

Deadweight Loss and Monopoly

o The maximum amount of deadweight loss you could possibly have o Monopolies are the worst market system a society could have within a market system

Tying and Bundling

o Tying: base good and o Bundling: all goods can be whatever

The Backwards Bending Labor Supply Curve

o When we get paid enough money, we begin to buy back some of our leisure o Pay me enough, I'll work less attitude

Natural Monopolies

o is said to exist when a single firm can supply the entire market at a lower cost than two or more firms ♣ A natural monopoly can emerge when economies of scale are present over the relevant range of output ♣ The largest firm in this case will be able to produce its goods at a lower per unit cost than smaller firms, so only one firm tends to exist

Monopolistically competitive firms earn zero profits on average because

positive profits cause competitors to enter the market

In some cases cartels are successful because:

the cartel controls access to a key input.

The value of the marginal product of labor (also known as the marginal revenue product of labor) is:

the increase in firm revenue when an additional worker is employed

The market supply of labor is always upward sloping, but an individual's labor supply may not be upward sloping throughout its entire range.

true

Arbitrage

"the formal term for "buy low, sell high" o Market can be separated by geography, electronic market (ex: NY vs. London stock exchange), time (buying Christmas stuff on December 26th)

Informative advertising

. improves the competitive process by educating the consumer about prices and new products.

Cartels are not always successful because:

. the parties in the agreement have a tendency to cheat on the agreement because of profit motivations.

Profit is defined as:

. total revenue minus total cost.

Why is it important for firms practicing price discrimination to prevent arbitrage of their product?

Arbitrage reduces the profits from price discrimination for firms, and increases profits for smugglers.

Externalities of Monopolistic Competition

Both produce where P = AC (profit = 0) -Competition minimizes AC. -Monopolistic competition produces on the downward sloping part of the AC curve. -Product differentiation benefits consumers in the long run. -For a uniform product like water, MP raises prices but adds no benefits.

Second Degree Price Discrimination

Electric utilities, cable companies, water & sewage companies, trash collection. Companies are actually not able to differentiate between the different types of consumers. This practice creates a schedule of declining prices for different quantities. Using this strategy the company can extract some of the consumer surplus without knowing much about the individual consumer.

Firms in monopolistic competitive industries

I. sell their products at a higher price than if they were in a competitive industry. III. have a high incentive to innovate with new products and better quality.

Which of the following statements are correct? Once a patent expires:

II. deadweight loss is eliminated. III. generic equivalents appear quickly.

What is the profit maximization condition for a monopolist?

MR = MC

A firm should exit an industry in the long-run if:

P - AC < 0.

Stating that TR = TC is equivalent to stating that:

P = AC.

To maximize profit a firm in a competitive market increases output until:

P = MC.

Which of the following describes how cartel members cheat?

They produce more output than they promised.

The typical average cost curve in a competitive market is:

U-shaped because the firm's fixed costs are first spread over greater quantities, but then increasingly greater quantities will create production capacity constraints.

In a graph showing a straight-line market demand curve the marginal revenue curve is:

a straight line that begins at the same point as the demand curve on the y-axis but with twice the slope.

Dominant Strategy

a strategy that has a higher payoff than any other strategy no matter what the other player does

The elimination principle illustrates the idea that:

above normal profits will be eliminated by the entry of new firms into the industry.

Profit can be shown graphically by depicting a firm's costs and revenues, and is determined mathematically by calculating the:

area of the box that is (price minus average cost) times the quantity.

When the size of the production is the most efficient:

average cost is at the minimum.

Profit is positive whenever price is greater than:

average cost.

An industry is said to be perfectly competitive when:

each firm has virtually no influence over the price of its product.

Without competition, there is a tendency for a government-run or regulated monopoly to:

become inefficient by passing higher costs on to consumers.

Persuasive advertising

can create market power for firms by brand differentiation.

A strategy that has a higher payoff than any other strategy no matter what the other player does is called a:

dominant strategy.

lower price, higher revenue:

elastic

Which of the following is not a reason that monopolies arise?

excess competition

Natural monopolies:

exist when one firm can produce the market output at a lower cost than two or more firms.

In the long run, monopolistically competitive firms end up producing at a price equal to that of competitive markets.

false

Products are identical in the case of monopolistic competition.

false

Suppose there is a large and permanent increase in the demand for a good that is produced in a competitive industry. We should expect that:

firms will enter the industry because the market price will rise.

The high prices charged by cartels:

give an incentive for new firms to enter the industry, causing an expansion of industry output and lower prices.

A firm is willing to hire a worker when the marginal product of labor is:

greater than the wage

As compared to a competitive market, firms operating in a cartel will charge a price that is:

higher than the competitive price.

Third Degree Price Discrimination

idea that the firm sets prices that will accomodate the consumer.

The prisoner's dilemma describes situations where the pursuit of:

individual interest leads to a group outcome that is in the interest of no one.

higher price, higher revenue

inelastic

A firm would prefer that its product demand curve is:

inselastic

A monopolistically competitive firm produces where demand intersects with average costs.

many firms, downward-sloping demand curves, zero economic profit in the long run.

The market demand curve for labor is based on the:

marginal product of labor.

The increase in a firm's revenues created by hiring an additional worker is called:

marginal revenue product of labor.

Modern theories of economic growth emphasize that monopolies:

may sometimes be necessary for economic growth.

The pursuit of profits in a competitive market:

minimizes total costs.

When producers engage in cartel-like behavior, they attempt to mimic the behavior of:

monopoly

When comparing a monopoly with a competitive industry:

monopoly quantity will be lower, and monopoly price will be higher, than that of a competitive firm.

Why might an individual's labor supply curve bend backwards?

not by the skills of the worker alone, but also by the productivity of the entire economy.

Monopolistic Competition

o : a market with a large number of firms selling similar but not identical products ♣ Characteristics: • Like monopoly each firm faces a downward sloping demand curve o Each firm differentiates their product (branding) • Like competition each firm makes zero average profit o There are no barriers to entry

The Prisoner's Dilemma

o : situations where the pursuit of individual interest leads to a group outcome that is in the interest of no one

Cartels and Oligopolies

o Cartels: try to act like a monopoly, fails because of prisoner's dilemma ♣ Why do they fall apart? o Oligopolies: more efficient than monopoly, but not as efficient as perfect competition

Market demand vs. demand the firm faces

o Downward sloping o Firm faces a demand curve that is perfectly elastic (horizontal) ♣ No matter what the firm does, they can't change the price in perfect competition

First Degree (Perfect) Price Discrimination

o Everyone is being charged their maximum willingness to pay o Efficient because all of the consumer surplus is converted to producer surplus Car dealerships mechanics, doctors, and lawyers (service related business).

Homogeneous and Differentiated Goods

o Goods can be slightly different within a monopoly

Compensating Differentials

o If I make you work at the bottom of the well, I have to pay you more ♣ More risk = more money

Informational vs. Persuasive Advertising

o Informational: can make markets perform better o Persuasive: change allocation of market share for companies that exist in a monopolistically competitive market

The Supply of Labor

o Law of supply - supply curve slopes upward o Can bend backwards

Conditions of a Competitive Market

o Many buyers and sellers o Goods produced are essentially the same o There are few or no barriers to entry and exit ♣ In the long run it drives profits down to zero ♣ In the short run firms can make profit o Everyone has the same information (buyers and sellers) • No deadweight loss

The Marginal Product of Labor and the Demand for Labor

o Marginal product of labor becomes the demand for labor

Elasticity of Demand and Monopoly Markup

o Monopolies will charge a higher price in the market that is less sensitive to price ♣ Inelastic demand curve ♣ Inelasticity is expensive

Monopoly and Profit Maximization

o Monopoly sets marginal revenue=marginal cost ♣ Marginal revenue will vary o Demand curve shows what the monopoly charges

• Outwards shifts in the supply curve cause economic growth

o More goods for less amounts of money

Short Run vs. Long Run Profits

o Short run: make profits o Long run: zero profits

Human Capital

o Skills you build to allow you to produce more efficiently

If a monopolistically competitive firm raises price, it will

sell less output

Which of the following is an example of price discrimination?

senior citizen discounts

When a pharmaceutical company discovers a new drug, patent law gives the monopoly:

sole ownership of the right to sell the drug for a limited number of years.

Game theory is the study of:

strategic decision making.

Price discrimination is defined as selling:

the same product at different prices to different customers.

If all persons had the same preferences and productivity, then the highest paying jobs would be the most:

undesirable

On what point on the demand curve is total revenue maximized?

unit elastic

Perfect price discrimination results in:

zero dollars of consumer surplus.

In a competitive market, each firm earns ________, whereas firms in a successful cartel will earn ________.

zero profits; positive profits

Labor Market Discrimination

• (religion, age, race, sex, etc.) o More abundant under minimum wages - more discrimination when it's cheaper o Statistical discrimination o Preference-based discrimination

Monopoly Power Sources of Monopoly Power

• Government Action • Economies of Scale • Exclusive Access to an Important Input • Technological Innovation

Economies of scale

♣ Coke and Pepsi - you couldn't make another beverage similar to it and it be successful

Exclusive access to important input

♣ Key access to one input - ex: only one guy can import meat/cheese from Italy so Italian restaurants can only buy from him

Technological innovation

♣ When VCR first came out only Panasonic was making them and they were $2500