ECON TEST CH 12, 13, 14
Which of the following is NOT true for monopoly?
At the profit maximizing output, price equals marginal cost.
Which oligopoly model(s) have the same results as the competitive model?
Bertrand
Suppose Orange Inc. sells MP3 players and initially has monopoly power because there are only a few close substitutes available to consumers. As more types of MP3 players are introduced into the market, the demand facing Orange becomes ___________ elastic and the Lerner index achieved by the firm in this market ___________.
C. Because more competitors are entering the market, consumers have more options. Consequently, consumers are more sensitive to changes in price by Orange Inc., that is, the demand becomes more elastic. The more elastic demand implies that Orange Inc. has less market power, that is, a lower Lerner index.
A third-degree price discriminating monopolist can sell its output either in the local market or on an internet auction site (or both). The marginal cost to sell to either market is the same. After selling all of its output, the firm discovers that the marginal revenue earned in the local market was $20 while its marginal revenue on the internet auction site was $30. To maximize profits the firm should
C. By selling one less unit in the local market the firm loses $20 in revenues (since MRlocal = 20), and by selling one more unit in the internet the firm gains $30 in revenues (since MRinternet = 20). This shift of one unit from local market to internet increases total revenues by $10, while maintaining the total cost constant (the firm continues to produce the same total quantity, and the marginal cost is the same in both markets). Therefore, profits go up.
DVDs can be produced at a constant marginal cost of $10 per disk, and Roaring Lion Studios is releasing the DVDs for its last two major films. The DVD for Rambeau 17 is priced at $20 per disk, and the DVD for Schreck 10 is priced at $30 per disk. What are the Lerner indices for these two movies?
C. L = (P −MC)/P, therefore L1 = (20−10)/20 = 1/2 and L2 = (30−10)/30 = 2/3.
A firm sells an identical product to two groups of consumers, A and B. The firm has decided that third-degree price discrimination is feasible and wishes to set prices that maximize profits. Which of the following best describes the price and output strategy that will maximize profits?
C. The firm's profit equals the sum of the revenues in each market minus the total cost, Profit = REV1 + REV2 − Cost. The optimal quantities Q1 and Q2 are such that marginal profit equals zero. This implies marginal revenue equals marginal cost for both markets, MR1 = MC and MR2 = MC. Since the marginal cost is the same, we have MR1 = MR2 = MC. Note that this does not imply that PA = PB is true, and it does not imply that QA = QB is true. Also recall that for a monopolist P > MR.
A monopolist hired a consulting company to research the market demand for its product. The research results indicate that demand is linear in prices, and that at the current level of output the price elasticity of demand is - 1.4. Therefore, in order to increase its profits, the monopolist should:
E. Recall that the firm is looking for the output q ∗ such that MC = MR. The demand is elastic at the current level of output, so the marginal revenue is positive: if the firm increases its output (decreases price), then revenue will go up (see slides from Chapter 4). However, if the firm increases its output, then the total cost might go up faster or slower than revenue, depending on the marginal cost. Since we do not have information on the marginal cost, we cannot verify if the current output is optimal or not. we need more info
Which of the following statements about natural monopolies is true?
For natural monopolies, marginal cost is always below average cost average total costs (ATC) keep falling because of continuous economies of scale. In this case, marginal cost (MC) is always below average total cost (ATC) over the whole range of possible output.
Consider the following information about the market: Market Demand Function: QD(P) = 53 − P Cost Function of each Firm: C(Q) = 5Q Consider the four types of markets studied in class: Perfect Competition (PC), Bertrand duopoly (B), Cournot duopoly (C) and Monopoly (M). Rank these markets in terms of equilibrium prices, total quantity produced in the market, deadweight loss and Lerner Index of Market Power. Which of the following statements are true?
I - PPC = PB < PC < PM II - QPC = QB > QC > QM III - DWLPC = DWLB < DWLC < DWLM IV - LPC = LB < LC < LM I, II, III and IV are true Perfect competition results in the highest total quantity Q and the lowest market price P, with zero DWL (the market is efficient) and zero market power (Lerner index = 0 because P = MC) Bertrand duopoly results in the same outcomes as perfect competition. Moreover, the monopolist will choose the lowest quantity to induce the highest price out of these four markets The lowest quantity and highest price result in the highest DWL (very inefficient market) and the highest Lerner index (more market power is associated with a higher L) The degree of competition in the Cournot duopoly is somewhere between perfect competition (very competitive) and the monopoly (no competition). Therefore, the total quantity, price, DWL, and Lerner index of market power in Cournot are between PC and M
To find the profit maximizing level of output, a firm finds the output level where
MR = MC
Is there a first-mover advantage in the Bertrand duopoly model with homogeneous products?
No, the second-mover would be able to set a slightly lower price and capture the full market share.
Which of the following is true for both perfectly competitive and monopolistically competitive firms in the long-run?
P = AC MR = MC
Although firms earn zero profits in the long run, why is the outcome from monopolistic competition considered to be inefficient?
Price exceeds marginal cost & Quantity is lower than the perfectly competitive outcome. (deadweight loss)
Which of the following is true for both perfectly competitive and monopolistically competitive firms in the long run?
Profit equals zero For both perfect competition and monopolistic competition we have MC = MR (profit maximization condition) and P = AC (zero profit condition), since Profit = (P − AC)q. The major difference is that under perfect competition we have P = MR, while for the monopolistic competition P > MR. Together these conditions imply that for perfect competition P = AC = MR = MC, and for monopolistic competition P = AC > MR = MC
Suppose that the marginal cost of an additional ton of steel produced by a Japanese firm is the same whether the steel is set aside for domestic use or exported abroad. If the price elasticity of demand for steel is greater abroad than it is in Japan, which of the following will be correct?
The Japanese firm will sell steel at a lower price abroad than they will charge domestic users
A monopolist has determined that at the current level of output the price elasticity of demand is -0.15. Which of the following statements is true?
The firm should cut output.
Which of the following is true at the output level where P=MC?
The monopolist is not maximizing profit and should decrease output. At P = MC, the monopolist is producing the perfect competition output level. That does not maximize profits. It is better to decrease output and receive a higher price. MR = MC is when a monopolist is maximizing profit
The most important factor in determining the long-run profit potential in monopolistic competition is
There is free entry and exit: >> Consequently, in the long run, the firm earns zero profit P=AC
Which of the following is true for both perfect and monopolistic competition?
There is freedom of entry and exit in the long run
An amusement park charges an entrance fee of $75 per person plus $2.50 per ride. This is an example of
a two-part tariff.
Third-degree price discrimination involves
charging different prices to different groups based upon differences in elasticity of demand
A firm setting a two-part tariff with only one customer should set the entry fee equal to
consumer surplus. The firm maximizes profit by setting usage fee P equal to marginal cost and entry fee T* equal to the entire surplus of the consumer
Second-degree price discrimination is the practice of charging
different prices for different quantity blocks of the same good or service. such as quantity discounts for bulk purchases.
When a firm charges each customer the maximum price that the customer is willing to pay, the firm
engages in first-degree price discrimination.
Monopolistically competitive firms have monopoly power because they
face downward sloping demand curves If profits are positive in the short run, then profits attract new firms with competing brands. - The firm's market share falls, and its demand curve shifts downward. - Therefore, in the long run, the firm earns zero profit even though it has monopoly power
A monopsonist will buy ______ units of input than a competitor, and will pay _______ per unit
fewer; less
Assume that a profit maximizing monopolist is producing a quantity such that marginal revenue exceeds marginal cost. We can conclude that the
firm's output is smaller than the profit maximizing quantity. If a firm is producing at a level where marginal revenue is greater than marginal cost, then by producing one more unit the firm can gain more revenue than it loses in cost and thereby makes a marginal profit. This will be true up to the point that MR = MC. If a firm produces past that point, then marginal revenue is less than marginal cost. This means that the firm is losing profit with each additional unit of output and it should produce less.
Compared to the equilibrium price and quantity sold in a competitive market, a monopolist will charge ________ a price and sell a ________ quantity.
higher; smaller
When a company introduces new audio products, it often initially sets the price high and lowers the price about a year later. This is an example of
intertemporal price discrimination Practice of separating consumers with different demand functions into different groups by charging different prices at different points in time
When the demand curve is downward sloping, marginal revenue is
less than price
You produce stereo components for sale in two markets, foreign and domestic, and the two groups of consumers cannot trade with one another. You will charge the higher price in the market with the
lower own price elasticity of demand (more inelastic demand).
A market with few entry barriers and with many firms that sell differentiated products is
monopolistically competitive
A local theater charges $5.00 for every matinee (daytime) ticket, but the ticket prices are much higher during the evening. This is an example of
peak-load pricing Practice of charging higher prices during peak periods when capacity constraints cause marginal costs to be high
McDonald's restaurant located near the high school offered a Tuesday special for high school students. If high school students showed their student ID cards, they would be given 50 cents off any hamburger. This practice is an example of:
price discrimination
In comparing the Cournot equilibrium with the competitive equilibrium,
profit is higher, and output level is lower in Cournot
The maximum price that a consumer is willing to pay for each unit bought is the ________ price.
reservation
Discrimination based upon the quantity consumed is referred to as price discrimination.
second - degree
A tennis pro charges $15 per hour for tennis lessons for children and $30 per hour for tennis lessons for adults. The tennis pro is practicing
third-degree price discrimination.
A national chain of bookstores has initiated a frequent buyer program. If you buy a frequent buyer card for $10, you are entitled to a 10 percent discount on all purchases for 1 year. This practice is an example of
two-part tariff. The consumer has to pay an entry fee of $10, and then has to pay a usage fee for each unit consumed
A monopolistically competitive firm in short-run equilibrium:
will make negative profit (lose money). will make zero profit (break-even). will make positive profit. ALL OF THE ABOVE ARE POSSIBLE
A monopolistically competitive firm in long-run equilibrium:
will make zero profit
What is the value of the Lerner index under perfect competition?
0 Lerner index is L = (P −MC)/P Under perfect competition P = MC, therefore L = 0. More generally, note that L is a non-negative number between zero and 1. It is zero when P = MC, and it gets larger when the firm has a higher monopoly power. Note that as long as MC > 0, the index L is less than one, L < 1
