Chapter 15-17

What are the three sources of the barriers to entry that allow a monopoly to remain the sole seller of a product?

1- MONOPOLY RESOURCE (a key resource is owned by a single firm) 2- GOVERNMENT-CREATED MONOPOLY (the government gives a single firm the exclusive right to produce a good) 3- NATURAL MONOPOLY (the costs of production make a single producer more efficient)

For the economy as a whole, what percentage of firm revenue is spent on advertising?

2 percent

a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen

Nash equilibrium

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

Arbitrage

T or F: Antitrust laws require manufacturers to engage in resale price maintenance or fair trade.

False

T or F: Brand names allow firms to make economic profits in the long run because they are able to sell inferior products based on the apparent connection of those products to the firm's unrelated high-quality products.

False

T or F: Most economists argue that the most efficient solution to the problem of monopoly is that the monopoly should be publicly owned.

False

Does a monopolist charge the highest possible price for its output? Why? How does a monopolist choose the price it will charge for its product?

No. Even a monopolist is subject to the demand for its product, so a high price would cause buyers to buy very little of the good. The monopolist chooses its price by first choosing the optimal quantity based on the intersection of MR and MC and then charging the price consistent with that quantity.

Are the monopolist's profits part of the social cost of monopoly? Explain.

No. The monopolist's profits are a redistribution of consumer surplus to producer surplus. The social cost of monopoly is the deadweight loss associated with the reduced production of output.

What is the solution to the prisoners' dilemma?

The dominant strategy for each is to cheat and sell 20 units because each firm's profit is greater when it sells 20 units regardless of whether the other firm sells 15 or 20 units.

What is the necessary condition for a monopolist to be able to price discriminate?

The monopolist must be able to separate buyers according to their willingness to pay.

T or F: Critics of advertising argue that advertising decreases competition while defenders of advertising argue that advertising increases competition and reduces prices to consumers.

True

T or F: Firms that sell highly differentiated consumer products are more likely to spend a large percentage of their revenue on advertising.

True

T or F: Policymakers are starting to view restrictions on advertising by professionals such as doctors, lawyers, and pharmacists as anti-competitive.

True

T or F: Price discrimination is only possible if there is no arbitrage.

True

What are the four ways that policymakers can respond to the problem of monopoly?

Try to make monopolized industries more competitive, regulate the behavior of monopolies, turn private monopolies into public enterprise, or do nothing at all.

If a monopolist is able to costlessly and perfectly price discriminate, is the outcome efficient? Explain. What is the value of consumer surplus, producer surplus, and total surplus? Explain.

Yes, all units are produced where the value to buyers is greater than or is equal to the cost of production. Total surplus is now producer surplus, and there is no consumer surplus. Total surplus and producer surplus is the area under the demand curve and above the price.

the study of how people behave in strategic situations

game theory

The market structure that lies between competition and monopoly

imperfect competition

How does a monopolistically competitive firm choose the quantity and price that maximizes its profits?

match MC up with MR, then use the demand curve to find the price that is consistent with this quantity (same as a monopoly)

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

monopolistic competition

How does the long-run equilibrium in monopolistic competition differ from the long-run equilibrium in perfect competition?

monopolistic competition has excess capacity because it is producing at a less than efficient scale and they charge prices in excess of marginal cost

What are the two types of imperfect competition?

oligopoly and monopolistic competition