ECON Chapter 12

Order the steps for the profit-maximizing output and pricing decision for the firm with market power.

1. estimate demand equation 2. find inverse demand function 3. solve for marginal revenue 4. estimate AVC and SMC 5. find output where MR=SMC 6. determine exit or stay

In the long run, a firm in monopolistic competition will produce where

LAC = P.

In the long run, the monopoly firm will choose plant size so that

LMC = MR.

The monopoly firm will never operate on the inelastic portion of the demand curve because

MR < 0.

A monopoly firm maximizes profit where MR = MC because

MR < P.

A firm in monopolistic competition will maximize profit where

MR = MC.

Profit for the monopoly firm is maximized where

MR = MC.

Marginal revenue product is calculated as _____ for the firm with market power.

MR x MP.

Marginal revenue product cannot be calculated as MP x P for the firm with market power because

MR ≠ P.

The firm with market power will employ all variable inputs at the level where

MRP = input price.

The firm with market power will hire variable input until

MRP = wage.

The monopoly firm will shut down in the short run when

P < AVC.

The monopoly firm will earn a profit in the short-run if

P > ATC.

______ cause(s) firms in monopolistic competition to have some market power.

Product differentiation

The Lerner Index is calculated

P−MCPP-MCP.

In the short run, a firm in monopolistic competition behaves like

a monopoly

Consumer lock-in occurs when switching costs

are high

Consumers may create a barrier to entry through always buying the same brand of a product. This is called

brand loyalty

If the MC of production from plant A is greater than the MC of production from plant B, the manager should

decrease production at plant A and increase production at plant B.

When one firm or a few firms controls all the known supply of an input, this

entry barrier

Examples of government-created barriers to entry include

exclusive franchises. patents. licenses.

True or false: Advertising does not contribute to brand loyalty.

false

True or false: Economies of scale is a barrier to entry in an industry with very high demand for product.

false

A firm wishing to enter an industry in which the long-run average costs curve continues to decline over ranges of output that are high relative to the market demand for the good would find entry prohibitive because of

government created entry barriers. economies of scale.

A low Lerner Index means that firms

have little market power

A strong barrier to entry

hinder the introduction of good to compete with those that already exist. protect the profits of existing firms. exists when it is difficult for new firms to enter a market

The monopoly firm's demand curve

is the same as the market demand.

Substitutes for a good can be identified by finding goods with ____ cross-price elasticities.

large positive

An inelastic demand curve indicates that as prices increase, consumers will decrease their quantity ____ they would if the demand curve were elastic.

less than

Elasticity of demand can measure market power because the ____ elastic is demand, the _____ competitors a firm has.

less; fewer

For the firm with market power, the marginal revenue curve _____ the demand curve.

lies below

A _____ identifies the producers and products or service types that compete in a particular geographic area that is large enough to include all competing sellers.

market definition

____ is the ability to raise prices without losing all their sales.

market power

Under _____, the market consists of a large number of relatively small firms that produce similar but differentiated products and have some market power.

monopolistic competition

An industry with a large number of firms who sell similar products and in which new firms can easily enter is

monopolistic competition.

A _____ firm produces a product for which there are no close substitutes.

monopoly

Industry and firm demand are the same for the _____ firm.

monopoly

When the value of a good is enhanced when many people use the good, that good is characterized by

network effects

A firm in monopolistic competition will have zero profits in the long run because

new firms will enter when profits are earned in the short run.

Monopolistic competition is similar to ______ because there are many small firms and easy entry and exit.

perfect competition

Firms with market power sell

products that are different from other firms' products.

A large, positive cross-price elasticity measures that consumers view the two goods as

readily substitutable

A firm in monopolistic competition faces a ______ demand curve.

relatively elastic

A monopolistic competitive firm is one that

sells a produce with similar, but not perfect, substitutes, but low entry barriers

A monopoly firm is one that

sells products with no close substitutes and barriers that prevent entry

Sunk costs:

should be ignored because they do not affect post-entry profit. can be a barrier to entry.

Costs of setup that can be so high that a manager may reasonably conclude that entering business may not be profitable are a barrier to entry called

sunk costs

When a firm produces output in two plants, the manager should allocate production between the two plants so that

the MCs of the last unit produced in each plant are equal.

The MR curve lies below the demand curve for the firm with market power because

the firm must lower prices to sell more output.

If the wage is greater than the average revenue product for the firm

the firm should shut down in the short-run.

The relevant portion of the MRP curve for hiring is

the portion below ARP.

A network effect occurs when

the value of a good increases as more people use the product

The slope of the linear MR curve is _____ the slope of the linear demand curve.

twice as steep as

The characteristics of monopolistic competition include

unrestricted entry and exit similar product large number of relatively small firms

In the long-run the monopoly firm

will adjust plant size as demand conditions warrant. can continue to earn a profit as no new firms can enter. may lease the industry if earning losses

A firm in monopolistic competition will have ______ profits in the long run.

zero