Part Three Micro Econ
Suppose there is a relatively large number of firms, a high degree of product differentiation, and free entry. What market structure is most likely to form?
A monopolistically competitive market
Which of the following is a means of detection and enforcement of cartel agreements?
A store guarantees to meet or beat any competitor's price. B. Firms include a most favored nation clause in their contracts. C. Firms agree to divide a market into exclusive territories.
Which of the following is true for firms considering the bundling of products?
A. If reservation prices differ substantially across consumers, a monopoly has to charge a relatively low price to make many sales. B. By bundling when demands are negatively correlated, the monopoly reduces the dispersion in reservation prices, so it can charge more and still sell to a large number of customers. C. When a good or service is sold to different people, the price is determined by the purchaser with the lowest reservation price.
The slope of the isoquant tells the firm how much
CAPITAL must decrease to keep output constant
What is the effect of a lump-sum tax (which is like an additional fixed cost) on a monopoly?
In the short run, a lump-sum tax does not affect the monopoly's profit-maximizing quantity if it produces and does not affect the monopoly's likelihood of shutting down. In the long run, a lump-sum tax does not affect the monopoly's profit max quantity if it produces and increases the monopoly's likelihood of shutting down
refer to the two graphs above
Refer to the market supply and demand models above. In which market would firms gain a greater benefit from cartelizing? Market B The benefits from cartelizing in this market would be greater because market demand is relatively less elastic so firms can charge a higher price .
Which of the following is true regarding product resales?
Which of the following is true regarding product resales? A. Warranties can be used to prevent resales. B. Some firms act to raise transaction costs or otherwise make resales difficult. C. Governments may take action to prevent resales. D. The biggest obstacle to price discrimination is a firm's inability to prevent resales. All of the above are true.
If the government regulates the price a monopoly can charge, and the price ceiling is set below what the competitive market price would be, then
a shortage will exist
A monopoly will set its price equal to marginal cost when
consumer demand is infinitely elastic
Holding the number of firms in the market fixed, what happens to the price as the number of noncartel members rises? Why? As firms switch from being cartel members to being noncartel members, the market price
decreases because cartels restrict output for member firms.
the firm can make the most profit if
different 2 part tariffs are charged to all non-identical customers * If the monopoly knows each customer's demand curve and can prevent resales, it can capture all the consumer surplus by varying its two-part tariffs across customers.
piracy of intellectual property
doesn't effect short run, but decreases innovation in the long run
Absent transaction and transportation costs, a Canadian would buy a T-Bird in Canada and then sell it in the U.S. to
earn profit
The possibility that a firm can earn positive long-run profits is determined by:
entry conditions
which situation is most likely to exhibit diminishing marginal returns to labor?
factory that hires more workers and never increases the amount of machinery
The 2002 production run of 25,000 new Thunderbirds included only 2,000 cars for Canada. Yet potential buyers besieged Ford dealers there. Many buyers hoped to make a quick profit by reselling the cars in the United States. Reselling was relatively easy, and shipping costs were comparatively low. When the Thunderbird with the optional hardtop first became available at the end of 2001, Canadians paid C$56,550 for the vehicle, while U.S. customers spent up to C$73,000 in the United States. Why? Ford provided Canadian markets only 2,000 Thunderbirds in order to practice
group price discrimination
Universities use scholarships, loans, and other programs to charge low-income students different prices (e.g., different tuition) than high-income students to increase profit with
group price discrimination
a monopoly cannot choose price and quantity because
has the power to set the price not the demand curve
A competitive firm observing a rival firm raising its price will:
ignore its rival's action
The price markup is higher when demand is relatively more
inelastic
a profit maximizing monopolist
is not guaranteed to make a positive profit
What are the main factors that increase the likelihood of a cartel being successful? A cartel is more likely to be successful if
its easy to punish firms who violate the cartel agreement
in the Cornet model, a firm maximizes profit by selecting
its output, assuming that other firms keep their output constant.
Reduced copyright and patent protection
lowers the drive to create or to innovate.
Optimal price regulation sets price equal to
marginal cost Optimal price = (MC=p)
a natural monopoly occurs when
marginal cost is constant. average cost is declining. marginal cost is below average cost.
A cartel is a group of firms that attempts to
maximize joint profit
Regardless of market structure, all firms
maximize profit by setting marginal revenue equal to marginal cost.
A monopoly will not be able to perfectly price discriminate if
obtaining information about each buyer's reservation price is too costly.
a firm is a natural monopoly if
one firm can produce the total output of the market at lower cost than two or more firms could.
The Bertrand model of price setting assumes that a firm chooses its price
subject to what price rival firms are charging.
Only Native American Indian tribes can run casinos in California. These casinos are spread around the state so that each one is a monopoly in its local community. California governor Arnold Schwarzenegger negotiated with the state's tribes, getting them to agree to transfer 10% of their profits to the state in exchange for concessions. How does a profit tax affect a monopoly's output and price? How would a monopoly change its behavior if the profit tax were 25% rather than 10%? (Hint: You may assume that the profit tax refers to the tribe's economic profit.)
tax has no effect on Q and P, therefore has no effects
Alexx's monopoly currently sells its product at a single price. What conditions must be met so that he can profitably price discriminate? The firm must have:
the ability to set price, consumers with different price elasticities, the ability to identify the different types of consumers, and the ability to prevent or limit resales.
If a cartel is unable to monitor its members and punish those firms that violate the agreement, then
the cartel will fall
for a monopoly, MR is less than price because
the firm must lower price if it wishes to sell more output
Limited government licenses that create a monopoly do so because
the license is a entry barrier
When a firm practices perfect price discrimination, it
the same quantity is produced as would be produced by a competitive market, and the last unit of output sells for the marginal cost; thus, perfect price discrimination is efficient. By selling each unit of its output to the customer who values it the most at the maximum price that person is willing to pay, the reservation price, the perfectly price-discriminating monopoly captures all possible consumer surplus. All the social gain from the extra output goes to the perfectly price-discriminating firm. ALL THE ABOVE
If a monopoly charges higher prices to consumers who buy smaller quantities than to consumers who buy larger quantities, then
the monopoly's profits are larger than under single-price monopoly.
Spenser's Superior Stoves advertises a one-day sale on electronic stoves. The ad specifies that the discount is only available to senior citizens aged over 65. Why does the firm include this restriction? Spenser's Superior Stoves uses this restriction
to practice group price discrimination
Ford required Canadian dealers to sign an agreement prohibiting moving vehicles south to the United States
to prevent resale between US and Canada
If a monopoly chooses the optimal price instead of the optimal quantity, then its profits will be
unchanged because the optimal price and quantity yield the same profit.
The Bertrand model is a more plausible model of firm behavior than the Cournot model
when firms sell a differentiated product.
When is a monopoly unlikely to be profitable in the long run?
when its average total cost curve is above the demand curve
Charging higher prices to residential customers than to industrial customers is an example of A.
third-degree price discrimination. (learn what all the degrees are)
