Micro: Ch. 7, 8, 9

marginal cost of the third unit of output is

$117 (for 3) - $94 (2) / 3-2 = $23

marginal revenue from the third unit of output is:

$120 Total Revenue / 3 = $40

two main provisions

(1) contracts or combinations in restraint of trade or commerce among the several states or with foreign nations is illegal (2) every person who tries to monopolize or attempt to monopolize any part of trade/commerce is deemed guilty of a felony

Pure Competition Characteristics

(1) demand is perfectly elastic (individual firm's perspective) (2) price is used to maximize/minimize profit/loss by adjusting output

marginal : profits increases

*also means losses decrease* so long as the last unit produced adds more to revenue than to costs

marginal : profit decreases

*also means losses increase* if the last unit produced adds more to costs than to revenue

ATC =

AVC + AFC

*As long as MR is greater than _____ the production of one more unit adds to profits (reduces losses)

MC

advertising is necessary in which models?

MPC and oligopoly to communicate a firm's differentiated products

How do you determine profit/loss based on output?

MR (Sales Price) - AVC - TFC *Remember it is on per unit basis*

pure monopoly revenue and costs

MR < SP produce output to MR = MC losses are possible

at what price would the firm break even?

P4

antitrust

Sherman Act (1890) two main provisions

which is true of price discrimination?

Successful price discrimination will provide the firm with more profit than if it did not discriminate.

x-inefficiency

TC per unit greater than needed --> change price

Total profit

TR - TC

which is most characteristic of a pure monopoly?

The firm produces a good or a service for which there are no close substitutes.

Could a firm remain in business despite losing money?

Yes, because is total fixed cost and average cost per unit and sales price based on a certain output have a total revenue larger than the total cost that would be paid then you would lessen your total loss *As long as price exceeds the average variable costs, the firm should produce in the short run given fixed costs are present*

the long-run supply curve would be downsloping in

a decreasing-cost industry

oligopoly characteristics

a few large firms homogeneous or differentiated products limits control over price entry barriers mergers

Given the same cost data, a pure monopolist producer will charge:

a higher price and produce a smaller output than a purely competitive industry

kinked demand curve

a perceived demand curve that arises when competing oligopoly firms commit to match price cuts, but not price increases

one feature of a pure monopoly is that the monopolist is

a price maker

price discrimination

a product is sold at more than one price and the price differences are not based on cost differences

rent-seeking

activities undertaken by individuals or firms to influence public policy in a way that will increase their incomes; lobbying

if economic profits exists

additional firms enter the industry, the demand curve shifts down (left) and economic profit decreasing for existing firms

what are the assumptions of a monopolistic competition?

advertising and specific differentiated product demand is highly elastic long run achieves break even short run gains profit efficiency means P > ATC and P > MC

what are assumptions for monopolistic competition?

advertising and specific differentiated products demand highly elastic

the long-run supply curve would be unsloping in

an increasing cost industry

a profit-maximizing firm in the short run will expand output:

as long as marginal revenue is greater than marginal cost

in long-run equilibrium under conditions of pure competition and productive efficiency, all firms produce at minimum

average total cost

price takers

buyers and sellers must accept the price the market determines

negatives of advertising

can be manipulative / confuse consumer consumers pay higher prices barrier to entry for new firms

economic effects of monopolies

charge higher prices but sell lower amounts efficiency is NOT achieved (types productive/allocative)

Mc = MR is the optimal output on a _______

demand curve

four things to cause change in cost monopolies

economies of scale x-inefficiency rent-seeking technology

a monopoly is most likely to emerge and be sustained when

economies of scale are large relative to market demand

If there is allocative efficiency in a purely competitive market for a product, the maximum price producers are willing to pay is:

equal to the minimum price producers are willing to accept

true or false: a monopolist seeks maximum profit per unit

false

true or false: a monopolist will always charge the highest price it can get

false

oligopoly

few firms standardized / differentiated products control prices by collusion many obstacles for entry

which is a barrier to entry

government licensing

DEMAND CURVE for monopolistic competition

highly elastic (not perfect) the monopolistically competitive seller has many competitions producing closely substitutable goods larger # of rivals and weaker product differentiation means the greater price elasticity of each sellers demand

suppose a monopolist calculates that at present output and sales levels, marginal revenue is $1 and marginal cost is $2. he could maximize profits for minimize losses by

increasing price and decreasing output

compared to the purely competitive firm, a pure monopoly

is able to use barriers to entry and maintain positive economic profits in the long run

pure competition

large # of firms standardized products no control; price-takers no obstacles on entry

when compared with the purely competitive industry with identical costs of production, a monopolist will produce

less output and charge a higher price

what are the positives of advertising?

low cost way of providing info to consumers enhances competition speeds up tech. progress can help firms obtain economies of scale

monopolistic competition

many firms differentiated products some control over price relatively easy entry

what type of market is a family's commercial bank industry?

monopolistic competition

consumer losses =

monopolists gains

assumptions of an oligopoly

no collusion / working together kinked demand

how to determine if output: loss minimization

occurs if MR > MC but ATC > MR > AVC

how to determine if output: profit maximization

occurs if MR(Sales Price) > MC (∆TC/ATC) & MR > ATC

what type of market is a hometown supermarket?

oligopoly

what type of market is the car industry?

oligopoly

what type of market is the steel industry?

oligopoly

pure monopoly

one firm product is unique, no close substitutes significant control over price entry is blocked

characteristics of a pure monopoly:

one firm, unique product, significant control over price (price maker), blocked entry

price discrimination is

only illegal if used to lessen or eliminate competition.

productive efficiency for a monopoly

output is less than output=min ATC

an exclusive right granted by government for a number of years to an inventor of a product is a

patent

Q2:

patent/license, ownership/control of resources, unfair competition

if a firm is a price taker, then the demand curve for the firm's product is

perfectly elastic

differentiated products:

physical or quality intangible aspects (service/location, branding/packaging, branding/packaging)

conditions

power to control price and output market segregation no resale ex: airlines, movie theaters, Disney tickets (FL res)

allocative efficiency for a monopoly

price is greater than MC

The data below relate to a pure monopolist and the product it produces. What is the profit-maximizing output and price for this monopolist?

price: $14 quantity: 4

unfair competition

pricing, advertising, anti-competition measures; could be illegal

A firm sells a product in a purely competitive market. The marginal cost of the product at the current output of 500 units is $1.50. The minimum possible average variable cost is $1.00. The market price of the product is $1.25. To maximize profit or minimize losses, the firm should:

produce less than 500 units

a firm sells products in a purely competitive market. the marginal cost of the product at the current output of 800 units is $3.50. the maximum profit or minimize losses the firm should

produce more than 800 units

output and profit/loss for MC

produce output where MC = MR short run can produce profits or losses long run will only achieve break even (TR = TC) product development, improvement, and variety

How does monopolistic competition gain an advantage in the market?

product differentiation

efficiency is not achieved - two types and reasoning

productive inefficiency: price > min ATC allocative: price > MC excess capacity

the market model with the largest number of firms is

pure competition

what type of market is a kansas wheat farm?

pure competition

which market model has the fewest number of firms?

pure monopoly

where are some areas the monopolistic competition can improve product?

quality, services, location, or in promotion / packaging

monopolistic competition characteristics

relatively large # of sellers small market share no collusion independent action easy entry and exit differentiated products nonprice competition

characteristics of a monopolistic competition

relatively large number of sellers small market share no collusion independent action easy entry and exit differentiated products non-price competition

which piece of federal legislation aims to prevent monopolization and restraint of trade

sherman act

Economies of scale for monopolies

simultaneous consumption; network effects

collusion

standard set by one company others follow

If firms are losing money in a purely competitive industry, then in the long run this situation will shift the industry:

supply curve to the left, and the market price will increases

If firms enter a purely competitive industry, then in the long run this change will shift the industry:

supply curve to the right and the market price will decrease

a purely competitive firm will be willing to produce at a loss in the short run provided

the loss is no greater than its total fixed costs

one defining characteristic of pure monopoly is that

the monopolist produces a product with no close substitutes

marginal

the revenue and the cost that each additional unit would add to total revenue and to total cost

What do economies of scale, the ownership of essential raw materials, and patents have in common?

they are all barriers to entry

Q1:

though it is true that "all firms compete for the price of consumers" a pure monopoly can exist

Line A represents

total revenue

true or false: price discrimination is not viable if consumers can resell the products they purchase

true

what are the assumptions of pure monopoly demand?

typical barriers to entry no government involvement same sales price (SP) competition for resources

pure monopoly demand

typical market demand structure curve is downward sloping (price impacts qty demanded)

ownership / control of resources

under contract / ownership of resource, yes sometimes

based on the graph above, what is the difference between the purely competitive equilibrium level of output and the pure monopolist equilibrium level of output?

where MC and industry cross vs. MC and MR cross

patents and licenses

yes justifiable bc you put in work to innovate