ECON1010 Module 4
T or F The inefficiency of monopolistic competition is arguably a small price to pay for a wide range of product choices
"true"
Economic vs accounting profit
Economic: includes all costs Accounting: net income excluding costs such as materials and wages
The profit maximizing rule
MC = MR adhered to by monopolistically competitive and perfectly competitive markets
A monopolistic competitor wishing to maximize profit will select a quantity where - MR = MC - MR = Ac - MC = AC - MC = D
MR = MC
Excess capacity = _______ - _________
Minimum ATC output - Profit Maximizing Output
Which firm is most likely to be a natural monopoly - a firm that owns nearly all the diamond mines in the world - a pharmaceutical company that has the exclusive right to sell a patented drug - Municipal Power Light, the local supplier of electricity - a restaurant that is unable to practice price discrimination and must charge all consumers the same price
Municipal Power Light, the local supplier of electricity
A perfectly competitive industry is in a state of long run equilibrium, which statement must be true: - P = MR = MC > ATC - P > MR = MC = AVC - P = MR = MC = ATC - P = MR = MC < AVC
P = MR = MC = ATC
Which statement concerning monopoly is true? - monopoly firms are always larger than perfectly competitive firms - a monopoly has no rivals - monopolists produce more output than does a competitive market with the same demand and cost structure - barriers to entry do not prevent other firms from entering a monopolized industry
a monopoly has no rivals
What is a natural monopoly
a monopoly that results when one firm is able to produce at a lower cost than multiple firms, giving large firms with higher levels of output an advantage over smaller competitors
The demand curve for a monopoly is - infinitely elastic - above the marginal revenue curve - horizontal because of economies of scale - below the marginal revenue curve
above the marginal revenue curve
In pure competition
an efficient quantity is produced and firms have no market power
If a monopolist is producing a quantity where MC = P then profit: - can be increased by decreasing production - is maximized - can be increased by increasing production - is maximized only if MR = P
can be increased by decreasing production
Monopolistic Competition in an industry will result in ______ because firms produce _____
chronic excess capacity because firms produce less than the minimum cost output
If the government allowed only one airline to serve the entire US market there would be a: _______ loss associated with the _____ output in the airline industry
deadweight loss associated with reduced output in the airline industry
Average fixed cost is always ______ as the quantity produced increases
decreasing
A monopolist responds to a decrease in demand by: ______ price and ______ output
decreasing price and decreasing output
Which of the following makes monopolistic competition different than perfect competition? Monopolistically competitive firms: - participate in markets where barriers to entry are present - face competition from many other firms - differentiate their products
differentiate their products
Monopolistically competitive firms produce less than the output at which average total cost is minimized in the long run. As a result there is: - product differentiation - zero economic profit - excess capacity - irrational capacity
excess capacity
If a firm is producing a quantity where marginal revenue exceeds marginal costs, the firm should _____ existing levels of production in order to _____
expand existing levels of production in order to increase profitability
In comparison to oligopolies, firms in monopolistic competition - participate in markets where barriers to entry are present - face competition from many other firms - differentiate their products
face competition from many other firms
T or F Monopolies produce differentiated products
false
T or F Perfect (pure) competition is characterized by product differentiation
false
T or F Monopolistic competition is a market structure that consists of a small number of producers
false
Which industry is most likely to be monopolistically competitive? - automobile production - corn farming - fresh bagel shops - electric utility production
fresh bagel shops
In a monopolistically competitive firm, long run competition will shift the demand curve _____
left
When a perfectly competitive firm is in long run equilibrium, the firm is producing at _____ cost
minimum average total cost
Which market structure is described: A single firm produces a product with no close substitutes and control over the market price
monopoly
Goods that are subject to network externalities tend to be ones - that are land intensive - for which the value of the good to an individual is lower when more people use it - for which one person owning the good enhances its value because it's the only one - for which the value of the good to an individual is higher when more people use it
or which the value of the good to an individual is higher when more people use it
Monopolies and monopolistically competitive firms differ in that monopolies - participate in markets where barriers to entry are present - face competition from many other firms - differentiate their products
participate in markets where barriers to entry are present
Anytime fixed costs exist it is ________ run (short/long)
short
If some firms in a perfectly competitive industry are earning positive economic profits, then in the long run, the: - number of firms in the industry will decrease - number of firms in the industry will increase - short-run industry supply curve will shift to the right - industry is in equilibrium
short-run industry supply curve will shift to the right
Which of the markets is the best example of monopolistic competition? - the market for sugar snap peas - the market for cola - the fast food industry - your town's utilities distributor(s) of electricity and water
the fast food industry
In a monopoly
the price is higher, firms can earn positive economic profit in the long run, and there are significant barriers to entry
In a perfectly competitive market (compared to a monopolistically competitive one) the price of a good is _______ and the total output is ______
the price of a good is lower and the total output is higher
Profit = ______ - _______
total revenue - total cost
T or F Oligopolies exist in a market that has a small number of producers that may or may not exhibit product differentiation
true