Microeconomics Unit 3 Exam

predicting oligopoly behavior

-cartel analysis (working together) -game theory -Use the supply and demand to model basics

cooperation possibilities for game theories

-collusion (formal and illegal) -tacit collusion (informally working together) -only possible if it is a repeated game

policy options for negative externalities

-command and control -taxes (charges) -permits

Regulatory options for natural economies

-cost plus regulation (cover cost and normal rate of return. no incentive to keep costs low) -price cap regulations (setting a price they cant go over. incentive to keep prices down. efficient as can be)

why do we expect corporations to externalize costs

-designed to maximize profits -promise to shareholders -if they don't have to pay for the cost why should they

Characterisitics of a private good

-excludable -rival

anit competitive practices

-exclusive dealing -tying sales (bundling) -predatory pricing

what makes cartels more stable

-few members with similar goals and cost structures -maintained with legal provisions -unable to differentiate their products -significant barriers to entry

natural monopoly

-high fixed costs (economies of scale) -don't want to break up natural economies because cost increase -problem with it is there isn't efficiency the lower costs wont be passes to the consumers

costs of market consolidation

-higher prices and lower quantity, deadweight loss -less variety -poor customer service -less incentive to innovate/maintain quality standards -layoffs and lower wages -small businesses are unable to compete

what does the kinked demand curve model assume

-if a firm raises it prices no one will follow them -if a firm lowers its prices it competitors will follow

potential benefits of market consolidation

-increased efficiency -product improvements

How do firms differentiate

-location -physical aspects (quality/features) -intangible aspects (reputation/guarantees) -perceptions (advertising)

How to increase profit in monopolistic competition

-make customers loyal -raise demand (inelastic)

Monopolistic competition characteristics

-many sellers with small share of overall market -easy entry and exit -product differentiation

causes of market failure

-market power -externalities -existence of public goods -common resources

monopolistic competition in the long run

-more product differentiation -entry and exit (shift demand to the left) -zero economic profit -productive and allocative inefficiency (getting variety instead)

why doesn't the market work for public goods

-no profit -free rider problem -no incentive for private corporations to pay for it

public goods

-nonrival and nonexcludable

common resources

-rival in consumption -nonexcludable

characteristic of an oligopoly

-small number of firms have most of the market share -substantial barriers to entry and exit -interdependent decision making (what decisions will affect the competitor)

what can be done to help free rider problem with public goods

-social norms impose a cost (free mugs/tshirt) -government provision (market cant do it)

Innovation for positive externalities

-technology -government incentives -cooperative research -spending on R and D -tax breaks for R and D

Under current U.S. copyright legislation, works produced on a for-hire basis and owned by companies enjoy monopoly protection for

95 years from the date of publication

Oligopoly

A market structure in which a few large firms dominate a market. Products may be the same or different

Which of the following characteristics does monopolistic competition NOT have in common with the model of perfect competition? A. Products of individual firms are different. B. Entry and exit are easy. C. Each firm has a small market share. D. Individual firms earn zero economic profits in the long run.

Products of individual firms are different

game theory

The study of how individuals and firms make strategic decisions to achieve their goals when other parties or factors can influence that outcome.

market failure

a market doesn't provide the socially optimal level of output (resources aren't allocated efficiently)

How do we expect cartels to behave like?

a monopoly

Which of the following would a market competition regulator be most likely to assign the maximum HHI valuation to? a perfect competitor a monopoly an oligopoly a monopolistic competitor

a monopoly

what does short run monopolistic competition look like?

a monopoly

The refundable charge of 5 or 10 cents for returning recyclable cans and bottles works like

a pollution tax incentive to avoid littering

concentration ratio

adding together the power if the top 4 or 8 firms in the market (cr-4 cr-8)

If a market for a product has no external impacts, then the market supply accounts for ___________ of the marginal costs to society of producing this product.

all

reasons for market failure include: common resources. public goods. products or services that create externalities. All of these are reasons for market failure.

all of these are reasons for market failure

Externality

an exchange that is affecting a third party who is outside it (spillover effect) -side effect -negative and positive

Nash Equilibrium

an outcome where all players choose their optimal strategy in response to all other player's strategies -no one can be made better off

_________give government the power to block certain mergers, and in some cases, to break up large firms into smaller ones.

antitrust laws

One of the similarities between monopolistic competition and oligopoly is that they both: A. have significant barriers to entry. B. set price equal to average total cost in the long run. C. are examples of imperfect competition. D. earn excess profits in the long run.

are examples of imperfect competition

A monopolistically competitive firm will produce its product as long as the marginal revenue is: A. at least as great as marginal costs. B. less than marginal cost. C. above price. D. less than price

at least as great as marginal costs.

why is the goal not zero pollution

because the cost of zero pollution is greater than the benefit of getting rid of all the pollution

Firms operating under cost-plus regulation have an incentive to generate high costs by building huge factories or employing lots of staff,

because what they can charge is linked to the costs they incur

The "dilemma" in the Prisoner's Dilemma is that: A. both players would be better off by not cooperating, but cooperating is a dominant strategy. B. one of the players cannot get to the best outcome. C. the player with first-mover advantage always gets the better outcome. D. both players would be better off by cooperating, but not cooperating is a dominant strategy.

both players would be better off by cooperating, but not cooperating is a dominant strategy.

New approaches to antitrust regulation

building statistical models to estimate outcomes for consumers if the merger is allowed -estimated the supply and demand curves

command and control regulation is a body of law that...

can both specify allowable quantities of pollution and detail which pollution-control technologies must be used

If a monopolistically competitive firm is earning zero economic profit, this firm: A. can expect to see more competitors in the future. B. can expect to see fewer competitors in the future. C. will probably exit from the market. D. can expect to see about the same amount of competition in the future.

can expect to see about the same amount of competitors in the future

The US Federal Trade Commission justifies their record of approval of most mergers by asserting that, even though competition is diminished by consolidating two firms into one, mergers actually benefit....

competition and consumers by allowing firms to operate more effciently

If a company's research and development project succeeds, then

competitors may find a way to adapt and copy the underlying idea without incurring R&D costs.

Regulations that permit a regulated firm to cover its costs and to make a normal level of profit are commonly referred to as

cost-plus regulation

Market-oriented environmental tools for firms to take the social costs of pollution into account _____________and _______________________in reacting to these incentives.

create incentives; allow firms some flexibility

When Doritos brand tortilla chips spends money for television commercials, it intends to shift the: A. demand curve to the right and make demand less elastic. B. supply curve to the right and make supply less elastic. C. demand curve to the right and make demand more elastic. D. supply curve to the right and make supply more elastic.

demand curve to the right and make demand less elastic

Prisoner's Dilemma

each player has a dominant strategy yet the payoff to each player is smaller than if they had each chosen the other strategy -conflict between self interest and broader interest

n competitive settings, profits will lead firms to ______ and losses will lead firms______ , so the incentives for producing at low cost and coming up with new ways of pleasing customers are strong. privatize; nationalize enter the market; to exit monopolize; to lower costs reduce output; increase price

enter the market; to exit

If the government decides to regulate a natural monopoly by forcing them to produce at the point where the demand curve intersects average cost, then compared to the unregulated (profit maximizing) natural monopoly, the price will________ and the quantity will____________ .

fall, rise

Which of the following will contribute to a cartel's stability? A. ease of entry into the industry B. a copyright C. few members with similar goals D. brand differentiation

few members with similar goals

Cartels

firms (or countries) formally collude on price and output to raise profits

Which of the following items would NOT be an example of a negative externality? A. air pollution B. litter C. going to college D. pesticide runoff

going to college

optimal provisions of public goods

government looks at demand (benefit to society) and supply (cost to society)

If a firm's efforts to be technologically innovative will create a positive externality, then that firm will likely

have less incentive to innovate to the extent that the whole of society desires

The coase theorem

if property rights are fully assigned and if people can negotiate costlessly with one another they will arrive at efficient solution to problems caused by externalities

A pollution charge gives the trucking industry an incentive to reduce its emissions, as long as the ___ of reducing the emissions is ___ .

marginal cost; less than the tax

The Herfindahl-hirschman index is calculated by taking___________, squaring it, and adding them up to get a total.

market share of each firm in the industry

The perceived demand curve for a group of oligopoly firms will appear kinked as a result of their commitment to: A. match price increases, but not price cuts. B. not match either price cuts or price increases C. match price cuts, but not price increases. D. match both price cuts and price increases

match price cuts, but not price increases

Which of the following is a valid criticism of the reduction of competition that results from corporate mergers? A. merged firms generally are as efficient and innovative as they can be B. consumers will have greater access to lower priced goods and services C. merged firms can increase price and maintain permanently higher profits D. merged firms are better positioned to take advantage of economies of scale

merged firms can increase price and maintain permanently higher profits

antitrust

monitor businesses practices so the consumers wont get hurt by higher prices

Shopping malls typically lease retail space to a large number of clothing stores. When this group of retailers competes to sell similar but not identical products, they engage in what economists call _____________.

monopolistic competition

Once its patent application has been accepted, a firm is able to earn__________on its product, which___________.

monopoly profits; offers an incentive for research and development to take place

solving the tragedy of the commons

need individual users of the resource to take into account cost they impose on other users -influence social norms -make excludable and assign property rights -ban or regulate use -charge (tax) use -create a system of tradable licenses for the right to use it

If a natural monopoly is not regulated in any way we should expect the market to have:

neither productive or allocative efficency

A public good is a good that is__________, and thus is difficult for market producers to sell to individual consumers.

nonexcludable and nonrivalrous

In order for a good to be classified as_____________, when one person uses the good, others are also able to use it.

nonrivalrous

rival

one person's consumption prevents/decreases other's ability to consume it

tragedy of the commons in common resources

people use up all the resources

What role does the US government play with respect to market competition?

policing anticompetitive behavior and prohibiting contracts that restrict competition

education creates ______ for a society

positive externalities

When the regulator sets a price that a firm cannot exceed over the next few years, the regulator is enforcing: deregulation. price cap regulation. cost-plus regulation regulatory capture rules.

price cap regulation

positive externality market failure

price is too low and the quantity is too low -missing out on market benefits

Splitting up a the natural monopoly held by a public utility that produces and provides electricity would

raise the average cost of production and force consumers to pay more

Market-based environmental policies include all of the following, EXCEPT: A. permits. B. regulations. C. taxes. D. pollution charges.

regulations

the tragedy of the commons applies to goods that are...

rival and nonexcludable

If the demand curve for air travel to London is kinked, and one firm reduces its price, then: A. rival firms will not react. B. rival firms will raise their prices. C. rival firms will reduce their prices. D. quantity demanded will decrease.

rival firms will reduce their prices

There is a skating rink in your city that is open to anybody to use at any time. They even provide skates for people who don't own any. This is an example of a good that is

rivalrous and nonexludable

Which of the following is a characteristic shared by both oligopoly and monopoly? A. significant barriers to entry into the market B. mutual interdependence C. zero economic profits in the long run D. a few dominant firms in the industry

significant barries to entry into the market

a highly innovative firm operating in a competitive market will usually have

some time before competitors catch up to its innovations

In which of the following situations does a free rider problem occur: Someone who benefits from a good does not have to pay for it. Production of a good generates pollution. Policymakers ignore opportunity costs in making decisions. A firm does not have to advertise, because its customers recommend its product to their friends.

someone who benefits from a good does not have to pay for it

Herfindahl-Hirschman Index (HHI)

sum of the squares of market share for all firms in the industry -can see who has the most power

If a government chooses a system of marketable permits as its environmental managing tool, the reduction in pollution will

take place in the firms where it is least expensive to do so

In oligopoly all the firms: A. Compete around advertising. B. take their competitors into account when they make decisions. C. compete around price and price alone. D. can enter and exit from the market with ease.

take their competitors into account when they make decisions

what has impacted how markets are defined

technology and globalization

Market failure occurs when:

the market does not provide the socially optimal amount of a good

If a metal stamping plant produces negative externalities, then who tends to benefit?

the metal stamping firm and its customers

If two companies are seeking regulatory approval to merge their respective businesses, which of the following will most likely be the focus of the arguments that they will present in favor of the merger? A. consumers can purchase better quality goods or services at a lower price B. the newly created firm is able to take advantage of economies of scale C. the newly created firm could eliminate duplicative investments D. the new firm will produce more efficiently and all of the above

the new firm will produce more efficiently and all of the above

what is wrong with the market equilibrium for a negative externality

the people are not being taken into account

if positive externalities exist for a good: the private market produces too much of the good. the private market produces too little of the good. the private market produces the efficient quantity of the good. taxes on firms are imposed to decrease production of the good.

the private market produces too little of the good

excludable

those who haven't paid for a good can be prevented from using it

A manufacturer that only allows a consumer to purchase one product if they also buy another product is using _________to increase its profits.

tie-in sales

Which of the following would most likely be identified as being the ultimate goal of public policies that pertain to technology? to help inventors earn the most profit possible to help inventors earn zero economic profit to encourage a stream of inventions that monetarily benefit the inventor. to encourage a stream of invention that benefits the whole of society.

to encourage a stream of invention that benefits the whole of society

When negative externalities exist, an unregulated market will produce ______ of the good and the price will be ______ when compared to the efficient level of production.

too much, too low

what is the most efficient way to control pollution

when the MC of getting rid of pollution is the same for each polluter

One difficulty with direct government support of R&D is that it inevitably involves government decisions about____________.

which of the proposed projects are most worthwhile