Econ 206

Which of the following conditions does NOT describe a firm in a monopolistically competitive market?

It takes its price as given by market conditions. A monopolistically competitive market makes a product different from its competitors, maximizes profit both in the short-run and in the long-run, freedom to enter/exit in the long-run.

output effect/price effect

MR = output effect + price effect output effect = Pnew x change in Q price effect = change in price x Qold

P<MC, P>ATC

Not profit-maximizing -> P<MC suggests MR<MC, but MR=MC in order to maximize profit ->must reduce output to increase profit -> monopolistic competition (P>MR), meaning P>MR>MC = profit-maximizing (case by case basis) Not long-run equilibrium (P=ATC where Profit = 0)

P=MC, P>ATC

Not profit-maximizing -> P=MC suggests the possibility that MR<MC, which is not profit-maximizing (MR=MC) -> monopolistic competition (P>MR), meaning P>MR>MC = profit-maximizing (case by case basis) Not long-run equilibrium (P=ATC where profit = 0)

A competitive firm maximizes profit by choosing the quantity at which

P = MC

For a profit-maximizing monopoly that charges the same price to all consumers, what is the relationship between price, marginal revenue, and marginal cost ?

P>MR and MR = MC Unlike a competitive firm where (P=MR), however, the monopolist's profit-maximizing price is greater than marginal revenue (P>MR )

What is true of a monopolistically competitive market in long-run equilibrium?

Price is greater than marginal cost.

average cost pricing policy

This is a policy of setting prices close to average cost.

P>MC, P = ATC

Yes, it may be profit maximizing -> P>MC may suggest MR=MC (maximizing profit) -> monopolistic competition (P>MR), meaning P>MR>MC = profit-maximizing (case by case basis) Yes, long-run equilibrium (P=ATC)

sunk cost

a cost that has already been committed and cannot be recovered

monopoly

a firm that is the sole seller of a product without close substitutes

oligopoly

a market structure in which only a few sellers offer similar or identical products

Monopolistic competition

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

competitive market

a market with many buyers and sellers trading identical products so that the buyer and seller (producers and consumers) are both price takers

Bottled water

a monopolistically competitive market. There are many sellers of bottled water, but each firm tries to differentiate its own brand from the rest.

Tap water

a monopoly because there is a single provider of tap water (typically the local government)

natural monopoly

a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms -> due to ATC decreasing as output increases ---> ATC = TC/output For any given amount of output, a larger amount of firms leads to less output and a higher ATC

Compared to the social optimum, a monopoly firm chooses

a quantity that is too low and a price that is too high. The monopolist chooses to produce/sell the quantity of output at which MR = MC, which is lower than the socially efficient quantity (DEMAND CURVE = MC). Furthermore, the price a monopolist charges is higher than the marginal cost (P>MC), meaning that there are some consumers who value the good more than the marginal cost (but less than the price) who do not receive the good. The price is therefore too high, compared to the social optimum.

Diminishing marginal product

as the inputs to production increase, the marginal product declines, causing the production function to get flatter as output increases

When a monopolist switches from charging a single price to perfect price discrimination, it reduces

consumer surplus.

If advertising makes consumers more loyal to particular brands, it could ________ the elasticity of demand and ________ the markup of price over marginal cost.

decrease, increase Advertising often tries to convince consumers that products are more different than they truly are. By increasing the perception of product differentiation and fostering brand loyalty, advertising makes buyers less concerned with price differences among similar goods, thereby decreasing the elasticity of demand for a particular brand. When a firm faces a less elastic demand curve, the firm can increase its profits by charging a larger markup over marginal cost.

A firm is a natural monopoly if it exhibits the following as its output increases:

decreasing average total cost.

diseconomies of scale

increasing average costs, production less than in proportion to inputs occurs when production is less than in proportion to inputs (How it should be: inputs should be directly correlated to production). What this means is that there are inefficiencies within the firm or industry resulting in rising average costs.

If a profit-maximizing, competitive firm is producing a quantity at which marginal cost is between average variable cost and average total cost, it will

keep producing in the short run but exit the market in the long run.

Monopolistic Competition

many firms sell products that are similar but not identical (branding or quality); not perfect substitutes has marginal revenue less than price = P>MR

A competitive firm's short-run supply curve is its ________ cost curve above its ________ cost curve.

marginal, average variable

local telephone service

monopolistic -> natural monopoly

Has marginal revenue less than price

monopolistically competitive

lipstick

monopolistically competitive lipstick from different firms differs slightly, but there are a large number of firms that can enter or exit without restriction

peanut butter

monopolistically competitive - different brand names exist with different quality characteristics

economies of scale

more production larger scale, with fewer input costs production increases, company grows, reduced costs efficiency

Earns economic profit in the long run

neither perfectly competitive nor monopolistically competitive since P=ATC, so profit = 0 in perfectly competitive market, P=ATC=MC

beer

oligopoly - only a few firms that control a large portion of the market and engage in strategic pricing behavior.

cola

oligopoly - only a few firms that control a large portion of the market and engage in strategic pricing behavior. This is different from the market for soft drinks, which includes flavored water, juices, coffee drinks = monopolistic competition.

Perfect competition

opposite of a monopoly, in which only a single firm supplies a particular good or service, and that firm can charge whatever price it wants because consumers have no alternatives and it is difficult for would-be competitors to enter the marketplace. all products are identical with many producers/manufacturers **Produces at the MINIMUM of ATC in the long run

Produces at the minimum of average total cost in the long run

perfectly competitive

wooden no. 2 pencils

perfectly competitive pencils by any manufacturer are identical and there are many manufacturers.

copper

perfectly competitive all copper is identical and there are many producers.

Equates marginal revenue and marginal cost

perfectly competitive and monopolistically competitive

New firms will enter a monopolistically competitive market if

price is greater than average total cost.

Deadweight loss

reduction in economic well-being that results from the monopoly's use of its market power. When a monopolist charges a price above marginal cost, some potential consumers value the good at more than its marginal cost but less than the monopolist's price. These consumers do not buy the good.

Profit maximization

requires marginal revenue to equal marginal cost; if marginal revenue is greater than marginal cost, then producing an additional unit will increase profit, and the firm will increase production.

Which of the following goods best fits the definition of monopolistic competition?

soda ______describes a market structure in which there are many firms selling products that are similar but not identical.

The deadweight loss from monopoly arises because

some potential consumers who forgo buying the good value it more than its marginal cost. When a monopolist charges a price above marginal cost, some potential consumers value the good at more than its marginal cost but less than the monopolist's price. These consumers do not buy the good.

If a monopoly's fixed costs increase, its price will _____, and its profit will _____.

stay the same, decrease An increase in fixed costs does not alter the marginal revenue or the marginal cost, therefore it does not affect the optimal level of output or the optimal price. It does, however, cause profit to decrease because PROFIT = TR-TC.

A perfectly competitive firm

takes its price as given by market conditions. meaning the price the firm receives for the output does not depend on the quantity the individual firm produces AKA a firm's output quantity does not affect the price

price discrimination

the business practice of selling the same good at different prices to different customers

marginal revenue

the change in total revenue from selling one more unit

Perfect price discrimination

the monopolist knows exactly each customer's willingness to pay and can charge each customer a different price. In this case, the monopolist charges each customer exactly his or her willingness to pay, and the monopolist gets the entire surplus in every transaction. When a monopolist charges a single price, some consumers get positive consumer surplus, therefore the switch to perfect price discrimination reduces consumer surplus.

Diminishing marginal product explains why, as a firm's output increases,

the production function gets flatter, while the total cost curve gets steeper.

P>MC, P<ATC

yes it may be profit-maximizing ->P>MC may suggest MR = MC -> monopolistic competition (P>MR), meaning P>MR>MC = profit-maximizing (case by case basis) Not long-run equilibrium (P=ATC where profit = 0)