Econ Ch. 15

Suppose a new product is developed and is supplied by a monopolist with a patent. Compared with the monopoly outcome, indicate whether consumer surplus, producer surplus, and total surplus increase, decrease, or remain the same under the following scenarios. a. Another producer creates a similar product and colludes with the original producer. b. Another producer creates a similar product and competes with the original producer. c. The patent expires.

R.S = Remains the same Scenario----------CS-----------PS---------TS a. -----------------R.S.----------R.S.--------R.S. b. ------------Increases----Decrease---Increase c. ------------Increases----Decrease---Increase

The Organization of the Petroleum Exporting Countries (OPEC) is a cartel of 12 countries that controls roughly two-thirds of the world's oil production. The cartel gives countries quotas for production. Which of the following statements are correctly describing a cartel such as OPEC?

The cartel benefits if everyone keeps their quota. If one member cheats on the agreement the others are also likely to increase their production. Each country has a dominant strategy to overproduce to increase profits.

Suppose Warner Music and UMG are in a duopoly and currently limit themselves to 10 new artists per year. Each artist sells 2 million songs at $1.25 per song. However, each label is capable of signing 20 artists per year. If one label increases the number of artists to 20 and the other stays the same, the price per song drops to $0.75, and each artist sells 3 million songs. If both labels increase the number of artists to 20, the price per song drops to $0.30, and each artist sells 4 million songs. a. Fill in the revenue payoffs for each scenario in the table above. b. If this game is played once, each producer will sign ___________ artists, and the price of a song will be $ ___________. c. If this game is played every year, each producer will sign ___________ artists, and the price of a song will be $ ___________.

UMG (1) and WM (2) Outcomes: Coll (1) x Coll (2) ------> Profit: $25m each Com (1) x Coll (2) ------> Profit: $45m (1) and $22.5m (2) Coll (1) x Com (2) ------> Profit: $22.5m (1) and $45m (2) Com (1) x Com (2) ------> Profit: $24m each b. 20 $0.30 c. 10 $1.25

The figure below shows a monopolistically competitive market for a fictional brand of shampoo called SqueakyKleen. a. In the short run, the price of SqueakyKleen is $___________ and the quantity is ___________. b. The efficient price of SqueakyKleen is $___________ and the efficient quantity is ___________. c. What is the deadweight loss? ___________

a. $2.00, 30 b. $1.50, 45 c. 7.5 million

Interscope sells the music of Lady Gaga, who promotes a unique public image and fashion style. Given her huge success, it is likely that by the end of the coming year, multiple performers will be imitating or borrowing heavily from her style. Suppose the current period's supply and demand for Lady Gaga MP3s is given in the figure below. a. Identify the profit-maximizing quantity and price on the graph. The profit-maximizing price for Lady Gaga MP3s in the short run is: ____________ The profit-maximizing quantity for Lady Gaga MP3s in the short run is: ____________ thousand MP3s. b. In the long run, the demand curve will ____________ c. In the long run, the profit-maximizing price will ____________

a. 50, 1.00 $1 50 b. shift left c. decrease

Identify whether each of the following markets has few or many producers, and uniform or differentiated products. a. The market for college education has ________ products. This market has ____________. b. The retail gas market has ___________ products. This market has _____________. Which market is an oligopoly? Which market is monopolistically competitive?

a. differentiated many producers and none dominate the market b. uniform ___________ (not "few producers and all are dominant") c. A retail gas market is an oligopoly. A college education market is monopolistically competitive.

Match the statement about goods sold in a market with the market type. a. There are imperfect substitutes for the goods: ____________ b. There are no substitutes for the goods: ____________ c. The goods may or may not be standardized: ____________

a. monopolistic competition b. monopoly c. oligopoly

The graph below shows the monopolistically competitive market for smartphones. (Profit-maximizing quantity and price under ATC) a. This producer is earning ___________ profits in the short run. b. In the long run, ___________ will ___________ , and economic profits will ___________ for this producer.

a. negative b. demand for the producer's good increase increase

Would Burger King hamburgers or Lady Gaga MP3s have a deadweight loss smaller relative to the total surplus in its market?

Burger King hamburgers because they are less differentiated.

Which of the following statements explains why the cost of advertising might be relevant to a consumer's decision about which brand of a product to purchase?

Costly advertising sends a credible signal of product quality.

A market has few barriers to entry and many firms. Which of the following is a strategy that a firm can use in this type of market to gain and maintain economic profits?

Create a sense of product uniqueness among consumers.

For which product would you expect producers to have a stronger reaction to a ban on advertising: music artists or fast-food burgers?

Fast-food burgers because the products are less differentiated

The figure below shows the monthly demand curve for a good in a duopoly market. There are no fixed costs. a. If the duopolists evenly split the quantity a monopolist would produce, the monthly profit for each duopolist is: $___________. b. If the duopolists evenly split the quantity a monopolist would produce, the deadweight loss is: $___________. c. If duopolist A decides to increase production by 10 units, the monthly profit for duopolist A is: $___________. The monthly profit for duopolist B is: $___________. d. If duopolist A increases production by 10 units, the deadweight loss is: $___________.

50 total units, 25 produced by each company a. 1250 ((Q x P) - (Q x MC)) -> ((25 units x $70) - (25 units x $20)) b. 1250 60 total units, 35 produced by A and 25 produced by B c. 1400 ((35 units x $60) - (35 units x $20)) d. 800

It is the case in both perfectly competitive and monopolistically competitive markets that other firms will enter when firms are making positive economic profits, until price eventually equals ATC and economic profits are zero. Despite these similarities, in a perfectly competitive market total surplus is maximized, while in a monopolistically competitive market surplus is not maximized. Which of the following statements explains this difference?

In perfectly competitive markets, firms operate where MR is equal to MC, which is where ATC is minimized.

Given the information that the market for smart phones is inefficient, which of the following statements explains why consumers of smartphones might still not want the price to be regulated?

It would reduce product variety.

Oil Giant and Local Oil are the only two producers in a market, as shown in the table below. They have an agreement to restrict oil output in order to keep prices high. a. The dominant strategy for Oil Giant is to ___________. The dominant strategy for Local Oil is to ___________. b. If this game is played once, the Nash equilibrium is for ___________. c. Now suppose that both players know that the game will be repeated many times. What outcome would we expect? ___________

Oil Giant (1) and Local Oil (2) Outputs: Collude - 3 million barrels Compete - 4 million barrels Outcomes: Coll (1) x Coll (2) ------> Profit: $270m each Com (1) x Coll (2) ------> Profit: $330m (1) and $225m (2) Coll (1) x Com (2) ------> Profit: $225m (1) and $330m (2) Com (1) x Com (2) ------> Profit: $240m each a. compete compete b. both firms to compete c. collusion

Which of the following statements explain why governments are usually more concerned about regulating an oligopoly than a monopolistically competitive market?

Oligopolies are always more inefficient than monopolistically competitive markets.

Compare perfectly competitive markets, monopoly markets, and oligopoly markets on the following economic behavior by indicting in which market structure the behavior is true: Producers maximize profit by producing where MR = MC in __________ The efficient outcome is to produce where P = MC in __________ The efficient outcome is achieved in __________ Market price is greater than marginal revenue (MR) in __________ Some form of barriers to entry exist in __________ If they collude, oligopolies will produce at the same level as __________

all three types of markets all three types of markets perfectly competitive markets only monopoly markets and oligopoly markets only monopoly markets and oligopoly markets only monopolies

Monopolistic competition is inefficient because firms maximize profits at a price that is:

higher than marginal cost.

Suppose a perfectly competitive market for hot dog stands in New York City becomes monopolistically competitive when gourmet, discount, and ethnic hot dog retailers show up, making each cart slightly different. If hot dogs from different stands are now imperfect substitutes and there are numerous carts in the city, compare the following measurements in the short run before and after the change: Producer surplus will ___________ after the change. Consumer surplus will ___________ after the change. Total social welfare or surplus will ___________ after the change. Price variance between different vendors will be ___________ after the change.

increase decrease decrease higher

An oligopolist (with few competitors) pays more attention to what her competitors are doing than a producer in a competitive market (with many competitors) does because:

oligopolists are not price takers perfect competitors have so many competitors that their revenues depend on the market as a whole rather then the actions of individual competitors the actions of one oligopolist impacts the revenue for all the other oligopolists

In oligopoly industries:

one firm's choice will affect profits of other firms.

Consider Jimmy Choo designer shoes. Jimmy Choo faces many competitors, while in another way Jimmy Choo faces no competitors. This contradiction can be explained by:

the substitutability between Jimmy Choo shoes and other shoes.

Governments do not usually regulate monopolistically competitive industries because:

welfare losses are relatively small. reducing welfare losses would also reduce the number of varieties in the market. a lower market price would drive firms out of the market.

The marginal costs (MC), average variable costs (AVC), and average total costs (ATC) for a monopolistically competitive firm are shown in the figure below. We know this firm is earning ___________ profits because ___________. This indicates that this firm ___________ in a long-run equilibrium.

zero P = ATC is

McDonald's, Burger King, and Wendy's all produce hamburgers, among other things. However, if you prefer burgers from McDonald's, you might consider other burgers an imperfect substitute. With this in mind, which of the following statements would be correct about McDonald's prices in the short run?

McDonald's will set its prices like a monopolist. McDonald's will charge a price higher than marginal revenue and marginal cost. McDonald's will maximize profits by producing where marginal revenue equals marginal cost. McDonald's consumers will pay a higher price as long as it is worth the value they place on their preference for McDonald's burgers.

Suppose you manage a firm in a monopolistically competitive market. Which of the following strategies will do a better job of helping you maintain economic profits: Option A: Obtaining a celebrity endorsement for your product. Option B: Supporting the entry of firms that will compete directly with your biggest rival.

Option A because consumers may have positive feelings about a good that is endorsed by a celebrity

Restaurants offer related but differentiated products to their consumers. In the long run, new restaurants enter the market and imitate the cuisine and atmosphere of successful competitors. With this in mind, which of the following statements would be correct about a restaurant's prices in the long run?

Price will be equal to ATC in the long run for firms in a monopolistically competitive market. In the long run, restaurants will enter the market as long as there are positive profits. In the long run, profits will be normal for the restaurants in a monopolistically competitive market.

Suppose that the market for e-readers is an oligopoly controlled by Amazon.com, Barnes & Noble, Sony, and Apple. Now, Barnes & Noble is considering increasing its output. Which of the following are likely outcomes of this decision?

Profit will decrease for the other oligopolists who did not increase quantity. Barnes & Noble would have to decrease price to increase output. Barnes & Noble would see an increase in their profits as long as the quantity effect outweighs the price effect.

The table below shows the monthly demand schedule for a good in a duopoly market. The two producers in this market each face $5,000 of fixed costs per month. There are no marginal costs. a. If they evenly split the quantity a monopolist would produce, the monthly profit for each duopolist is: $___________. b. Suppose duopolist A decides to increase production by 200 units. Duopolist A will now produce ___________ units and charge a price of $___________. Duopolist B wll now produce ___________ units and charge a price of $___________. The monthly profit for duopolist A is $___________. The monthly profit for duopolist B is $___________.

Q------P------TR------MR 0------40------0------N/A 200----35----7,000----35 400----30----12,000---25 600----25----15,000---15 800----20----16,000----5 1,000----15---15,000-- (-5) 1,200----10---12,000-- (-15) 1,400----5----7,000--- (-25) 1,600----0------0----- (-35) 800 total units, 400 produced by each company a. $3,000 -> (400 x 20) - 5,000 1,000 total units, 600 produced by A and 400 by B b. 600; $15 400; $15 $4,000 -> (600 x 15) - 5,000 $1,000 -> (400 x 15) - 5,000