ECON TEST 2

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Compared to a perfectly competitive​ market, the price in a monopoly market is _____ and quantity is _____

-higher -lower

Which of the following describes a​ monopolist's demand​ curve?

A y​-intercept of​ $8 and​ downward-sloping with a slope of -1.

AFC

FC/Q

A monopolist stops increasing production when it reaches the point where

MC=MR

Edgar says that a single firm in the wind power industry is unlikely to have a significant degree of monopoly power for an extended period of time. Since the cost of producing an additional unit of wind energy is so​ low, a large number of firms can enter the market and compete away economic profits. Do you agree with this​ analysis?

No, Edgar's argument ignores potentially large fixed costs that will act as a barrier to entry.

TS

PS+CS

APL

Q/L

3 components of the seller's problem

part 1 - making the goods

Es = 0

perfectly inelastic

To say that a good has network effects means that the​ ____________.

value of the product increases as more people use it.

Exit point

where MC crosses ATC (min of ATC)

Es

% change in quantity/%change in price

The exclusivity laws in the form of patents and copyrights make ______ better off and consumers ______ worse off

-innovators -consumers

Assumptions of a perfectly competitive market

1. no buyer or seller is big enough to influence the market price 2. sellers in the market produce identical goods 3. firms have free entry and exit in the market

Both competitive firms and monopolies produce at the level where marginal cost equals marginal revenue. ​Then, other things remaining the​ same, why is price lower in a competitive market than in a​ monopoly?

Competitive markets face perfectly elastic demand and marginal​ revenue, while monopolies face​ downward-sloping demand and marginal revenue.

A monopoly chooses the optimal quantity for them to produce (Q*m) using the rule:

MC=MR

Which of the following equations calculates economic profits for a​ monopoly?

Profits= (P - ATC) x Q

Antitrust policy started with the​ ____________, which prohibited any agreements or actions that would put restraints on trade.

Sherman Act of 1890.

ATC

TC/Q or AFC+AVC

stay open in SR if

TR ≥ VC AR ≥ AVC MR=D=AR=P ≥ shut down point (min of ATC)

AR

TR/Q

TC

VC+FC

AVC

VC/Q

Which of the following is not likely covered by a​ copyright?

a new drug

MPL - slope of SR product function

change in Q/change in L

MC

change in TC/change in Q

MR

change in TR/change in Q

Eliminating a monopoly

increases market quantity

Es < 1

inelastic

Es=infinity

perfectly elastic

Legal market power is created by​ ___________, and arises due to​ ____________.

the government; patents

Stay open in LR if

π ≥ 0 TR ≥ TC AR ≥ ATC MR=D=AR=P ≥ exit point (min of ATC)

If a profit maximizing monopolist sells 100 paintings at a price of ​$1,300 ​each, having bought them from various artists for a total cost of ​$110,000​, the monopolist has a profit of

$20,000

Which of the following factors can be considered as a bright side to those types of​ laws?

-Such laws do not provide permanent protection to innovators. -Such laws offer incentives to innovators.

If a monopolist loses its monopoly​ power, what happens to price and​ surplus? If the monopolist loses its monopoly​ power, price _____ ​, consumer surplus _____ ​, producer surplus _____ ​, and social surplus _____ .

-decreases -increases -decreases -increases

According to the Copyright Act of​ 1790, a​ copyright's life was limited to 28​ years, including extensions.​ Today, copyrights are valid for the entire period of the​ author's life plus another 70 years. A copyright for a book that was published before 1923 is likely to have expired by​ now, but books published after 1923 are still under copyright protection. Research has shown​ that, of all the books that are in print​ today, a larger proportion were published before 1923. This is despite the fact that the number of books being published every year has been steadily increasing. What do you think could explain the fact that most of the books available today are from the period before​ 1923?

A copyright gives the owner an exclusive right to a piece of intellectual​ property, thus allowing them to act as a monopoly. Monopolists typically reduce quantity supplied to drive up the price of the good that they produce.

In a perfectly competitive market, the firm chooses the optimal quantity for them to produce (Q*) using the rule:

MC=MR -(P* comes from where S=D in the market)

When ____ the monopolist would decrease production.

MC>MR

Social surplus increases because​ ____________.

deadweight loss is eliminated

Some economists believe the threat of unfair monopolies is greater today than when the Sherman Act was first enacted. They argue that modern software can gain monopoly status and establish a barrier to entry through​ ____________.

network externalities.

Suppose the government grants an individual or company the sole right to produce and sell a good or service. In this​ case, the government is granting a _____.

patent

Market power relates to the ability of sellers to affect​ __________, and arises because of​ ____________.

prices;barrier to entry

Which of the following statements are true regarding the​ profit-maximizing price charged by a​ monopolist?

-It is greater than MC. -It occurs at the quantity where MR​ = MC. -It occurs along the elastic part of the demand curve. -It is greater than MR.

shut down if

TR<VC AR<AVC MR=D=AR=P < shut down point (min of AVC)

DWL

TS in efficient market - TS with market failure

Identify the legal source of market power for each of the following​ examples: Richard carves​ sculptures, for which he is granted an exclusive right. Lily is granted an exclusive right to the poems written by her late father. Mr.​ D'Souza invented product A and is granted an exclusive right to manufacture and sell it.

-copyright -copyright -patent

When compared to​ competition, monopoly prices are ______ and quantity produced is ______ . The purpose of antitrust policy is to ______ this situation.

-higher -lower -reverse

Compared to a perfectly competitive​ market, consumer surplus is _____ ​, producer surplus is _____​, and deadweight loss is _____

-lower -higher -higher

Which of the following are properties of a​ monopoly?

-price maker -there are high barriers to entry -there is only one seller

a monopoly has one ____ and ____ buyers. Price is ____ than marginal cost

-seller -many -greater

A social planner would choose the same outcome as that which results in ___________ ​equilibrium, because that outcome ___________ social surplus.

-the perfectly competitive -maximizes

A social planner would choose the same outcome as that which results in ___________ ​equilibrium, because that outcome maximizes social surplus.

-the perfectly competitive -maximizes

In a perfectly competitive market, the following equations all represent the same horizontal line, determined by the market price:

MR=D=AR=P

How does a natural monopoly differ from a firm that becomes a monopoly due to network​ effects?

Natural monopolies result from economies of​ scale, while network effects come from the benefits to consumers from having many people use a service.

Janet knows a lot of people who do not like​ Marmite®, a yeast extract that is used as a spread on toast. She says that Marmite is so unpopular that​ Unilever, the company that manufactures​ Marmite®, cannot possibly have any monopoly power. Do you agree with this​ analysis?

No, monopoly power is based on whether a good has any close​ substitutes, not whether your friends like the product.

π

TR-TC PxQ-ATCxQ (P-ATC)xQ

As this chapter​ explains, a monopoly is an industry structure where only one firm provides a good or service that has no close substitutes. This question explores the last part of this definition further. In​ 1947, the United States government charged the DuPont Company with a violation of the Sherman Act. The government argued that DuPont was monopolizing the cellophane market. At​ trial, the government showed that DuPont produced nearly 75 percent of all of the cellophane sold in the United States each year.​ Nonetheless, the U.S. Supreme Court ruled in favor of DuPont and dismissed the case. Which of the following is a likely argument used by DuPont to convince the Supreme Court that it did not violate the Sherman​ Act?

There are many close substitutes for cellophane such as aluminum foil and waxed​ paper, so DuPont did not have significant market power.

Sirius XM Satellite Radio and XM Satellite Radio were the only two satellite radio providers in the United States. The Department of Justice​ (DOJ) and the Federal Communications Commission​ (FCC) approved the merger of the two companies in 2008 even though​ Sirius-XM would then control 100 percent of the satellite radio market. Which of the following arguments do you think Sirius and XM used to convince the DOJ and the FCC to allow the merger to​ proceed?

There are many close substitutes for satellite​ radio; therefore,​ Sirius-XM would not exercise market power.

Consumer Surplus

area of the shape above the price and below the demand curve, out to the quantity produced

Producer Surplus

area of the shape below the price and above the MC/Supply curve, out to the quantity produced (usually a triangle, but not always)

People who need​ life-saving drugs cannot do without them and surely will be willing to pay very high prices for them. So why​ can't producers of​ life-saving drugs charge any price that they wish​ to?

a​ monopolist, such as one selling​ life-saving drugs, still faces​ downward-sloping demand curves.

A significant difference between monopolies and competitive firms is that

a​ monopoly's demand curve is the​ industry's demand​ curve, while the competitive​ firm's demand curve is perfectly elastic.

A monopolist should continue to increase production until marginal

cost is equal to marginal revenue.

When a firm exercises its monopoly​ power, the cost to society is the​ ____________.

deadweight loss

Es > 1

elastic

A monopoly is selling workbooks to students in a college town and is currently maximizing profits by charging ​$70.00 per book. The marginal cost of textbooks

is less than $70

The two types of market power that arise from barriers to entry are​ ____________.

legal market power and natural market power.

When a firm exercises its monopoly​ power, social surplus is _____ when compared to a perfectly competitive market.

lower

For a market to be characterized as perfectly competitive​, there must be​ __________

many sellers, where the price of the good is determined by the market.

Suppose you are an​ "all-knowing" government planner. Your goal is to regulate a​ monopolist's price and quantity in order to maximize social welfare but still allow the monopolist to produce. To accomplish your​ goal, you would have the monopoly produce where​ ____________. ​(Assume costs are such that the firm would not incur a​ loss)

marginal cost equals​ demand, and you would price the good at marginal cost.

Natural market power is created by​ ___________, and arises due to​ ____________.

market forces; controlling a key resource

The Department of Justice filed a lawsuit against Microsoft claiming it was engaging in unfair practices by​ ____________.

monopolizing the market by bundling its operating system with its Internet Explorer browser.

The corresponding optimal price (P*m) is given by:

the demand curve at Q*m

Shut down point

the point where MC crosses AVC (min of AVC)

Exit if

π < 0 TR < TC AR < ATC MR=D=AR=P < exit point (min of ATC)


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