Econ final exam

Which of the following is not an example of a barrier to entry? a. Mighty Mitch's Mining Company owns a unique plot of land in Tanzania, under which lies the only large deposit of Tanzanite in the world. b. A pharmaceutical company obtains a patent for a specific high blood pressure medication. c. A musician obtains a copyright for her original song. d. An entrepreneur opens a popular new restaurant.

D. an entrepreneur opens a popular new restaurant.

Some firms have an incentive to advertise because they sell a A. similar product and charge a price equal to marginal cost. B. similar product and charge a price above marginal cost. C. differentiated product and charge a price equal to marginal cost. D. differentiated product and charge a price above marginal cost.

D. differentiated product and charge a price above marginal cost.

If a monopolist sells one more unit of output:

His total revenue will rise because Quantity is getting larger, called the Output effect

Even though MR = MC is the profit maximizing rule for both competitive firms and monopolies, there is one important difference...

In competitive firms, P=MR; at the profit-max level of output, P = MC. In a monopoly, P > MR; at the profit-max level of output, P > MC.

Which of the following statements is correct? a. If the monopolist's marginal revenue is greater than its marginal cost, the monopolist can increase profit by selling more units at a lower price per unit. b. If the monopolist's marginal revenue is greater than its marginal cost, the monopolist can increase profit by selling fewer units at a higher price per unit. c. When a monopolist produces where price equals the minimum of average total cost, it earns a positive economic profit. d. If the monopolist is earning a positive economic profit, it must be producing where MR = MC.

A. If the monopolist's marginal revenue is greater than its marginal cost, the monopolist can increase profit by selling more units at a lower price per unit.

One difference between a perfectly competitive firm and a monopoly is that a perfectly competitive firm produces where A. marginal cost = price, while monopolist produces where price exceeds marginal cost. B. marginal cost = price, while a monopolist produces where marginal cost exceeds price. C. price exceeds marginal cost, while a monopolist produces where marginal cost = price. D. marginal cost exceeds price, while a monopolist produces where marginal cost = price.

A. Marginal cost = price, while monopolist produces where price exceeds marginal cost.

In a monopolistically competitive industry, firms set price A. equal to marginal cost since each firm is a price taker. B. below marginal cost since each firm is a price taker. C. above marginal cost since each firm is a price setter. D. always a fraction of marginal cost since each firm is a price setter.

C. above marginal cost since each firm is a price taker.

With no price discrimination, the monopolist sells every unit at the same price. Therefore a. marginal revenue is equal to price. b. marginal revenue is equal to average revenue. c. price is greater than marginal revenue. d. Both a and b are correct.

C. price is greater than marginal revenue.

The relationship between advertising and product differentiation is a. positive; the more differentiated the product, the more a firm is likely to spend on advertising. b. negative; the more differentiated the product, the less a firm is likely to spend on advertising. c. zero; there is no relationship between product differentiation and advertising. d. irrelevant; firms with differentiated products do not need to advertise.

A. positive; the more differentiated the product, the more a firm is likely to spend on advertising.

For a monopolistically competitive firm, at the profit-maximizing quantity of output, a. price exceeds marginal cost. b. marginal revenue exceeds marginal cost. c. marginal cost exceeds average revenue. d. price equals marginal revenue.

A. price exceeds marginal cost.

Which of the following are necessary characteristics of a monopoly? (i) The firm is the sole seller of its product. (ii) The firm's product does not have substitutes. (iii) The firm generates a large economic profit. (iv) The firm is located in a small geographic market. a. (i) and (ii) only b. (i) and (iii) only c. (i), (ii), and (iii) only d. (i), (ii), (iii), and (iv)

A. (i) and (ii) only

What does a monopoly face?

a downward-sloping demand curve for its product.

As a result, monopolistically competitive firms face...

a downward-sloping demand curve while competitive firms face a horizontal demand curve at the market price.

To price discriminate,

a firm must be able to separate customers by their willingness to pay

Without price discrimination

a firm produces an output level that is lower than the socially efficient level.

What is a monopoly?

a firm that is the sole seller of a product without close substitutes

monopolistic competition

a market structure in which many companies sell products that are similar but not identical

Depending on which externality is larger,

a monopolistically competitive market could have too few or too many products.

Like a competitive firm...

a monopoly firm maximizes profit by producing the quantity a which marginal revenue equals marginal cost.

Unlike a competitive firm....

a monopoly firm's price exceeds its marginal revenue, so its price exceeds marginal cost.

A competitive firm faces...

a perfectly elastic demand at the market price. - the firm can sell all they want at this price.

What are the two characteristics that describe the long-run equilibrium in a monopolistically competitive market.

a. Price exceeds marginal cost (due to the fact that each firm faces a downward-sloping demand curve). b. Price equals average total cost (due to the freedom of entry and exit).

When a firm in monopolistic competition are making profit, new firms have an incentive to enter the market... what are they?

a. This increases the number of products from which consumers can choose. b. Thus, the demand curve faced by each firm shifts to the left. c. As the demand falls, these firms experience declining profit.

Antitrust laws

are a collection of statues that give the government the authority to control markets and promote competition.

A monopoly _______ when a single firm owns a key resource.

arises

The fundamental cause of monopoly is ___________.

barriers to entry.

A monopoly faces the market demand curve why?

because it is the only seller in the market. If a monopoly wants to sell more output, it must lower the price of its product.

This implies that monopolistic competition have excess capacity,

because the firm could increase its output and lower its average total cost of production.

why can monopolies arise?

because the government grants one person or one firm the exclusive right to sell some good or service.

How can we determine whether or not the monopolistically competitive firm is earning a profit or loss?

by comparing price and average total cost. If P > ATC, the firm is earning a profit. If P < ATC, the firm is earning a loss. If P = ATC, the firm is earning zero economic profit.

The monopolist's price is determined how?

by the demand curve. (this shows us how much buyers are willing to pay for the product)

A market is comprised of many firms as opposed to just one firm or a few firms a. only when it is perfectly competitive. b. only when it is perfectly competitive or oligopolistic. c. only when it is perfectly competitive or monopolistically competitive. d. when it is perfectly competitive, monopolistically competitive, or oligopolistic.

c. only when it is perfectly competitive or monopolistically competitive.

A monopolist often can raise its profit by

charging different prices for the same good based on the buyer's willingness to pay

If a monopolist can sell 7 units when the price is $4 and 8 units when the price is $3, then marginal revenue of selling the eighth unit is equal to a. $3. b. $4. c. $24. d. -$4.

d. $4

Firms in a monopolistically competitive market a. are price takers. b. produce an output level that minimizes average total cost in the long run. c. maximize profits by producing where price equals marginal cost. d. cannot earn economic profits in the long run.

d. cannot earn economic profits in the long run.

Suppose when a monopolist produces 75 units its average revenue is $10 per unit, its marginal revenue is $5 per unit, its marginal cost is $6 per unit, and its average total cost is $5 per unit. What can we conclude about this monopolist? a. The monopolist is currently maximizing profits, and its total profits are $375. b. The monopolist is currently maximizing profits, and its total profits are $300. c. The monopolist is not currently maximizing profits; it should produce more units and charge a lower price to maximize profits. d. The monopolist is not currently maximizing profits; it should produce fewer units and charge a higher price to maximize profits.

d. the monopolist is not currently maximizing profits; it should produce fewer units and charge a higher price to maximize profits.

Private owners have an incentive to keep the cost...

down to earn higher profits.

What happens if a firm perfectly price discriminates?

each customer who values the good at more than its marginal cost will purchase the good and be charged his or her willingness to pay.

monopolistic competition differs from perfect competition because

each of the many sellers offers a somewhat different product.

When the firms in monopolistic competition are incurring losses,

firms in the market will have an incentive to exit.

In the U.S. economy most industries have a _______ concentration ratio ______ _____%.

four-five concentration ratio under 50%

This practice of price discrimination can raise economic welfare by?

getting the good to some customers who otherwise would not buy it.

How do policymakers respond to the inefficiency of monopoly behavior?

in four ways; 1. use the antitrust laws to try to make industry more competitive. 2. regulate prices that the monopoly charges. 3. they can turn the monopolist into a government-run enterprise. 4. Or if the market failure is deemed small compared to the inevitable imperfections of policies, they can do nothing at all.

By charging different prices to different customers, a monopoly firm can ...

increase its profit

Oligopoly

is a market structure in which only a few sellers offer similar or identical products.

natural monolopy

is a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.

When a price discrimination is imperfect...

it can either raise or lower welfare compared to the outcome with a single monopoly price.

What happens when a monopoly increases production by one unit?

it causes the price of its good to fall, which then reduces the amount of revenue earned on all units produced. As a result, a monopoly's marginal revenue is always below the price of its good.

A monopoly's marginal revenue will always be...

less than the price of the good (other than at the 1st unit sold)

The Sherman Antritrust act was passed in 1890 to...

lower the market power of the large and powerful "trusts" that were viewed as dominating the economy at that time.

A monopolistically competitive market is characterized by three attributes:

many firms, differentiated products, and easy entry

When average total cost is falling...

marginal cost must be lower than average total cost.

Average-cost pricing also provides no incentive for the...

monopolist to reduce costs.

Firms in imperfect competition lie somewhere between the competitive model and the...

monopoly model

examples of price discrimination

movie tickets, airline prices, discount coupons, financial aid, quantity discounts

Economist usually prefer private ownership of..

natural monopolites

The product-variety externality

occurs because as new firms enter, consumers get some consumer surplus from the introduction of a new product. Note that this a positive externality.

The Business-stealing externality

occurs because as new firms enter, other firms lose customers and profit. Note that this is a negative externality.

Monopolist's profit-maximizing quantity of output

occurs when marginal revenue is equal to marginal cost.

In a perfectly competition,

price is equal to marginal cost.

In a monopolistic competition

price is greater than MC because the firm has some market power.

If marginal revenue is less than marginal cost,

profit can be increased by lowering the firm's level of output.

If marginal revenue is greater than marginal cost,

profit can be increased by raising the firm's level of output.

The quantity of output produced by a monopolistically competitive firm is...

smaller than the quantity that minimizes average total cost (the efficient scale).

A monopoly is the...

sole producer in its market.

In many markets, there are two types of firms;

some firms sell products with widely recognized brand names while others sell generic substitutes.

What does the marginal-cost curve represent?

the additional cost of producing each unit of a good or service.

Price discrimination:

the business practice of selling the same good at different prices to different customers

What would happen in the extreme case of perfect price discrimination?

the deadweight loss of monopoly is completely eliminated, and all the surplus in the market goes to the monopoly producer.

The deadweight loss can be seen on the graph as the area between...

the demand and marginal cost curves for the units between the monopoly quantity and the efficient quantity.

Rather than regulating a monopoly run by a private firm,

the government can run the monopoly itself.

What is the key difference between monopoly and competitive firm?

the monopoly's ability to influence the price of its output.

b. If government bureaucrats do a bad job running a monopoly,

the political system is the taxpayer's only resource.

Most often, regulation involves government limits on...

the price of the product.

If the government sets price equal to marginal cost...

the price will be below average total cost and the firm will earn a loss, causing the firm to eventually leave the market.

Arbitrage

the process of buying a good in one market at a low price and then selling it in another market at a higher price.

A monopoly could have sole ownership or control of a key resource that is used in ______

the production of the good.

What does the demand curve represent?

the value that buyers place on each additional unit of a good or service.

Concentration ratio

the way economists measure a market's domination by a small number of firms.

What do patents include?

they include tradeoffs; they restrict competition but encourage research and development.

What does monopoly causes in results of charging a price above marginal cost?

this causes deadweight losses similar to the deadweight losses caused by taxes.

The concentration ratio is the percentage of...

total output in the market supplied by the four largest firms.

When is regulation often used?

when the government is dealing with a natural monopoly.

When would a natural monopoly occur?

when there are economies of scale, implying that average total cost falls as the firm's scale becomes larger.

Where is the socially efficient quantity found?

where demand curve and marginal cost curve intersect; this is where the total surplus is maximized.

perfect price discrimination describes a situation where a monopolist knows exactly the ....

willingness to pay of each customer and can charge each customer different prices

Why a Monopoly Does Not Have a Supply Curve?

1. A supply curve tells us the quantity that a firm chooses to supply at any given price. 2. But a monopoly firm is a price maker; the firm sets the price at the same time it chooses the quantity to supply. 3. It is the market demand curve that tells us how much the monopolist will supply because the shape of the demand curve determines the shape of the marginal revenue curve (which in turn determines the profit-maximizing level of output).

Characteristics of Monopolistic competition:

1. Mant sellers 2. Product differentiation 3. free entry

If the monopolist sells one more unit, he must lower his price. why?

Because his total revenue will fall because P is getting smaller, called the Price effect.

Why have economists defended Brand names?

Brand names provide consumers with information about quality when quality can't be judged before purchase. And brand names give firms an incentive to maintain high quality, because firms have a financial stake in maintaining the reputation of their brand name.

A firm in a monopolistically competitive market is similar to a monopoly in the sense that (i) they both face downward-sloping demand curves. (ii) they both charge a price that exceeds marginal cost. (iii) free entry and exit determines the long-run equilibrium. a. (i) only b. (ii) only c. (i) and (ii) only d. (i), (ii), and (iii) only

C. (i) and (ii) only

A monopoly is an inefficient way to produce a product because a. it can earn both short-run and long-run profits. b. it faces a downward-sloping demand curve. c. the cost to the monopolist of producing one more unit exceeds the value of that unit to potential buyers. d. it produces a smaller level of output than would be produced in a competitive market.

D. it produces a smaller level of output than would be produced in a competitive market.

Which of the following is unique to a monopolistically competitive firm when compared to an oligopoly? a. The monopolistically competitive firm advertises. b. The monopolistically competitive firm produces a quantity of output that falls short of the socially optimal level. c. Monopolistic competition features many buyers. d. Monopolistic competition features many sellers.

D. monopolistic competition features many sellers.

The equilibrium in a monopolistically competitive market differs from that in a perfectly competitive market in two related ways.

First, each firm has excess capacity. That is, it operates on the downward-sloping portion of the average-total-cost curve. Second, each firm charges a price above the marginal cost.

Is there a price effect for a competitive firm?

No

can increase economic welfare

Price discrimination

Profit =

TR - TC