ECP 6705 - Module 3
Determine a key difference between monopolistic competition and monopoly.
In monopolist competition, there are other firms that sell similar products.
If P is less than AVC, the firm _____.
should shut down is sustaining a loss
The inverse demand function for a monopolist is given by P = 50 - 4Q. If the profit-maximizing output level is 5 (Q^M = 5), the monopoly price is
$30
Inverse market demand is: P = 1000 - (Q1+ Q2). Costs for each firm are identical and given by: CiQi = 4Qi The profit earned by the follower in a Stackelberg oligopoly equals $
62,001
A firm should shut down when P ___ AVC.
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Which of the following is NOT a source of monopoly power?
Free entry and exit
Suppose the inverse demand function for two firms in a Cournot oligopoly is given by P = 100 - 2(Q1+ Q2). Which of the following represents MR1?
MR1= 100 - 2Q2 - 4Q1
Long-run properties of perfect competition include:
P = MC P = min AC
In perfect competition, profit equals
Revenues - Costs
Suppose a single firm (the leader) chooses output before all other firms (the followers). If the followers accept the leader's output and maximize profits based on the leader's given level of output, then this industry is characterized as a(n) ___ (one word) oligopoly.
Stackelberg
If firm 1 has first-mover advantage over firm 2 AND firm 2 maximizes profit given the output of firm 1, what type of industry is this?
Stackelberg oligopoly
A perfectly competitive firm's short-run supply curve is its marginal cost above the minimum point of the _______ curve.
average variable cost (AVC)
In the Sweezy model, pricing decisions are based on
beliefs about rivals' reactions to price changes. strategic interaction among firms.
If consumers are willing to pay more for "Roper's Rice" than they are for "Rice by Russell", then "Roper's Rice" is enjoying additional value due to _______.
brand equity
The products that each firm offers in an oligopolistic market
can be differentiated as in monopolistic competition. can be identical, as in perfect competition.
When a few firms with market power agree to restrict output and/or charge higher price, it is called
collusion
An industry is characterized as a Bertrand oligopoly if
consumers have perfect information and no transaction costs. firms produce identical products at constant marginal cost. firms engage in price competition.
A market where all producers have access to the same technology, consumers respond quickly to price changes, firms cannot quickly lower price, and there are no sunk costs is called a(n) ___ market.
contestable
When increasing the output of one product reduces the marginal cost of another product, it is called
cost complementarity.
The welfare loss to society due to the level of output produced by a monopolist is called the ___ loss of monopoly.
deadweight
If MR is less than MC, a profit-maximizing monopolist should:
decrease output to maximize profits
Demand for a firm's product in oligopoly
depends on how other firms react to pricing decisions.
When long-run average costs rise as output increases, we say that the firm experiences ___ of scale.
diseconomies
In a Cournot oligopoly, managers believe that their output decisions
do not affect their rivals' output decisions.
Isoprofit curves
do not intersect.
An oligopoly that contains only two firms is called a(n)
duopoly
Bertrand oligopoly and homogeneous products result in
economic profits equal to zero.
When long-run average costs fall as output increases, we say that the firm experiences ___ of scale.
economies
When the total cost of producing two goods within the same firm is less than the cost of producing them in separate firms, _________ exist.
economies of scope
When firms in monopolistic competition earn positive economic profits, other firms tend to ___ the market.
enter
At the point where the cost curve C(Q) and the revenue line R(Q) are the farthest vertical distance apart, the marginal cost (MC) is ________ marginal revenue (MR).
equal to
In order to maximize profits, a monopolist should produce where marginal revenue is ________ marginal cost.
equal to
A perfectly competitive firm maximizes profits at the level of output such that market price ___ marginal cost (MC)
equals
The profit-maximizing level of output occurs where marginal revenue (MR) ___ marginal cost (MC).
equals
A perfectly competitive firm maximizes profits at a point where P ___ MC over the range where MC is _________.
equals; increasing
When firms in a competitive industry sustain losses, they will ___ the industry in the long run.
exit
When firms in monopolistic competition sustain economic losses, firms tend to ___ (one word) the market.
exit
True or false: A perfectly competitive firm's short-run supply curve is its marginal cost above the minimum point of the average cost (AC) curve.
false
True or false: In the long-run, firms in a monopolistically competitive market earn positive economic profits.
false, Firms earn zero economic profits in the long-run.
In the short run, when a firm shuts down, losses equal ___ costs.
fixed
A monopolist charges a ________ price and produces ________ output than a perfectly competitive industry.
higher; less
The demand curve for a perfectly competitive firm is a ___ line at the ___ market .
horizontal, price
If MR is greater than MC, a profit-maximizing monopolist should:
increase output to maximize profits
When a monopolist increases output by one unit, total revenue
increases by less than price.
In monopolistic competition, each firm uses the ___________ demand curve and the marginal revenue curve to establish output and price. In monopoly, the firm uses the __________ demand curve and the marginal revenue curve to establish output and price.
individual; market
Economies of scope tend to encourage _________ firms.
larger
Multiproduct firms that have cost complementarities tend to have ______ marginal costs than firms producing a single product.
lower
Bertrand oligopoly and homogeneous products result in firms charging a price that equals
marginal cost
When many buyers and sellers freely enter and exit a market having similar, yet differentiated products, it is called ________.
monopolistic competition
For a perfectly competitive firm, marginal revenue is equal to the market
price
In a perfectly competitive market, the individual producer's demand curve is the market
price
Q2= r2(Q1) = a−c2/2b - 1/2Q1 describes
the Cournot reaction function of the follower in a Stackelberg model. the output of the follower in a Stackelberg oligopoly.
A market with many "small" buyers and sellers, identical products, no transaction costs, and free entry and exit where buyers and sellers have perfect information is called __________.
perfect competition
An individual firm in perfect competition has a price elasticity that is ________.
perfectly elastic
True or false: A Cournot equilibrium occurs at the intersection of firms' reaction functions.
true
True or false: A sunk cost is a cost that is forever lost after it has been paid.
true
In the long run, profits in a perfectly competitive industry are ________.
zero
Inverse market demand is: P = 1,000 - (Q1+ Q2). Costs for each firm are identical and given by: CiQi = 4Qi The profit earned by each firm in a Bertrand oligopoly equal $
zero
Suppose a spinach farmer operates in perfect competition. At the market price of $3.00 per bunch, the farmer sells 125 bunches per day. If the farmer increases her price to $3.01, she will sell ___ bunches.
zero
Inverse market demand is: P = 1,000 - (Q1+ Q2). Costs for each firm are identical and given by: CiQi = 4Qi Determine the profit function for a Cournot oligopolist.
πi=(1,000 - (Q1+ Q2))Qi - 4Qi
Rank output levels from highest to lowest of the following industry models:Collusion, Cournot, Bertrand, and Stackelberg.
1-Bertrand2-Stackelberg3-Cournot4-Collusion
For a given demand curve and cost function in a market with two firms, rank from highest to lowest the profit levels of the following firms: a Cournot duopolist, a Stackelberg leader, a Stackelberg follower, a Bertrand duopolist.
1-Stackelberg leader2-Cournot duopolist3- Stackleberg follower4-Bertrand duopolist
A firm in monopolistic competition faces a demand curve with own-price elasticity equal to -2 and an advertising elasticity equal to 0.2.This firm should devote ___ % of its revenues to advertising.
10
A firm in monopolistic competition faces a demand function equal to:P = 200 - 2Q,and a cost function equal toC(Q) = 10 + 4Q.The profit-maximizing price equals $
102
Inverse market demand is: P = 1,000 - (Q1+ Q2). Costs for each firm are identical and given by: CiQi = 4Qi The profit earned by a Cournot oligopolist equals $
110,224
Inverse market demand is: P = 1,000 - (Q1+ Q2). Costs for each firm are identical and given by: CiQi = 4Qi The profit earned by the leader in a Stackelberg oligopoly equals $
124002
The inverse demand function for two firms in a homogeneous-product, Stackelberg oligopoly is P = 60 - (Q1+ Q2) and costs for the two firms are C1(Q1) = 4Q1 AND, C2(Q2) = 4Q2. Under these conditions, the market price equals $
18
The inverse demand function for two firms in a homogeneous-product, Stackelberg oligopoly is P = 60 - (Q1+ Q2) and costs for the two firms are C1(Q1) = 4Q1 AND, C2(Q2) = 4Q2. Under these conditions, the leader's output equals
28
A firm in monopolistic competition faces a demand curve with own-price elasticity equal to -5 and an advertising elasticity equal to 0.15.This firm should devote ___ % of its revenues to advertising.
3
Inverse market demand is: P = 1000 - (Q1+ Q2). Costs for each firm are identical and given by: CiQi = 4Qi The price charged by each firm in a Bertrand oligopoly equals $
4.00
A firm in monopolistic competition faces a demand function equal to:P = 200 - 2Q,and a cost function equal toC(Q) = 10 + 4Q.The profit-maximizing level of output equals ___ units.
49
Inverse market demand is: P = 1,000 - (Q1+ Q2). Costs for each firm are identical and given by: CiQi = 4Qi Output under a collusive agreement equals
498
In general, in a market dominated by only a few firms, how do firms collude?
Agreeing to keep output low Agreeing to charge higher prices
Why do firms in a Sweezy oligopoly resist changing their prices so long as marginal cost remains within a certain range?
Because of the effect of price changes on the behavior of rival firms.
Suppose an industry contains a few firms, many consumers, differentiated or homogeneous products, barriers to entry, and a belief by firms that rivals will not change output if they change output. This is called a ___ oligopoly.
Cournot
Define the competitive firm's demand.
Df = P = MR
What does the free entry and exit assumption imply for a perfectly competitive market?
Firms will leave if they sustain losses. In the long run, economic profits are zero. Firms will enter when profits exist.
How does the U.S. patent system create monopolies?
Grants an inventor exclusive right to sell the product
In a multiplant setting, where (Q1) is output from plant 1, and (Q2) is output from plant 2, profits are maximized where
MC1(Q1) = MC2(Q2)
A monopolist's marginal revenue (MR) is given by:
MR = P(1 + E/E)
What is the marginal revenue (MR) of the inverse linear demand function, P(Q) = a + bQ?
MR = a + 2bQ
Given a revenue function, R = R(Q), what is the marginal revenue (MR)?
MR = dR/dQ
Given a revenue function: R(Q) = P(Q)Q The monopolist's marginal revenue (MR) is given by
MR = dR/dQ MR = P(1+E/E) MR = dP/dQ(Q + P)
Profit maximization for the two-plant monopolist occurs when the monopolist uses resources such that
MR(Q) = MC1(Q1) and MR(Q) = MC2(Q2) MC1(Q1) = MC2(Q2)
Inverse market demand is: P = 1,000 - (Q1+ Q2). Costs for each firm are identical and given by: CiQi = 4Qi Under collusion, what is the inverse market demand curve?
P = 1,000 - Q
In the long run, firms in monopolistic competition produce a level of output where
P = ATC > minimum average costs P > MC
To maximize profits, a perfectly competitive firm should produce in the range of increasing marginal cost where P = MC and
P ≥ AVC
Which of the following is a linear inverse demand curve?
P(Q) = 100 - 2Q
What is the fundamental difference between monopolistic competition and perfect competition?
Products in monopolistic competition are differentiated
Determine the reaction function for firm 1 in a Cournot duopoly with an inverse demand curve given by: P = 12 - (Q1+ Q2) and zero costs.
Q1= r1(Q2) = 6 - 1/2Q2
What is another name for a best-response function?
Reaction function
What happens to the industry supply as firms exit a perfectly competitive industry in the long run?
Supply decreases
An oligopoly where each firm believes that rivals will lower their prices in response to a price decrease, but will not change their prices in response to a price increase is called a ___ oligopoly.
Sweezy
In the ___ model of oligopoly, a decrease in marginal cost does not necessarily translate into an increase in output.
Sweezy
Suppose a market contains a few firms, many consumers, differentiated products, and a belief by firm managers that other firms will match price decreases, but not price increases. What type of market is this?
Sweezy oligopoly
What is true of market price and output under a collusive agreement among oligopolists?
The are the same as in monopoly.
What is true of the effect of a change in marginal cost (MC) as it applies to Cournot and Sweezy oligopoly models?
The effect of a change in MC generally is very different in each model.
What would happen to research and development of new products and technologies if the U.S. eliminated the current patent system?
Firms would have less incentive to develop new products.
A monopolist's linear inverse demand curve is P(Q) = 750 - 3Q. Which of the following is the monopolist's marginal revenue?
MR = 750 - 6Q
In oligopoly, a manager maximizes profits at the point where
MR = MC
What is the key difference in determining the profit-maximizing price and output under monopoly versus monopolistic competition?
There is no difference.
True or false: P(Q) = 1,000 - 6Q is a linear inverse demand curve.
True. It has a positive intercept and negative slope and is linear.
At what point does the price war in a Bertrand oligopoly with two firms end?
When P1= P2= MC
Do changes in marginal cost affect firms in Cournot oligopoly differently than in Sweezy oligopoly? Why or why not?
Yes. It is due to a firm's perception of how other firms will react to its decisions.
Given the following inverse market demand in a homogeneous-product Cournot duopoly, P = a - b(Q1+ Q2), the marginal revenue of firm 2 equals:
a - bQ1- 2bQ2
Given the following inverse market demand in a homogeneous-product Cournot duopoly: P = a - b(Q1+ Q2), the marginal revenue of firm 1 equals
a - bQ2- 2bQ1
Since each producer in a perfectly competitive market has no influence on market price, the demand curve for the individual firm is
a horizontal line equal to the market price.
Suppose an organic salad shop attempts to increase demand for its food by differentiating itself as a healthy alternative to fast-food hamburgers. This is an example of ___ advertising.
comparative
For a monopolist, it is necessary to _______ price to increase output by one unit. As a result, the price received from all previous units _________.
decrease, decreases
Given a profit-maximizing level of output, Q^M, the monopoly price is the price on the ___ curve that corresponds to Q^M units of output.
demand
From the point-of-view of the consumer, Bertrand oligopoly is ________ since it leads to an outcome similar to _______________.
desirable; perfect competition
The basic tool used to summarize profits in a Cournot oligopoly is a(n) ___ curve.
isoprofit
A monopolist faces a downward-sloping demand curve. As a result,
it can choose a price or a quantity, but not both.
In a perfectly competitive firm, in the short run, a firm will shut down to minimize losses when price is ______ average variable cost.
less than
For a monopolist, the marginal revenue curve has twice the slope of the demand curve. This implies
marginal revenue is less than price.
Fast-food hamburgers are characterized by a large group of sellers producing slightly different goods. What type of market is this?
monopolistically competitive
Suppose a market contains one supplier of a good that has no close, available substitutes. What type of market structure is this?
monopoly
The market structure where a firm has a large degree of market power is called
monopoly
In order to maximize profits in the short run, a manager must determine how much output should be produced, given
only variable inputs within his or her control.
A Cournot equilibrium occurs when neither firm has an incentive to change its ______ given the other firm's output.
output
If the market for corn contains many buyers and sellers (none of whom can influence price), a homogeneous product, and free entry in the market, we consider the market to be _________.
perfectly competitive
In general, agriculture is considered a ___________ market.
perfectly competitive
One criticism of the Sweezy model is that is gives no explanation of how the industry settles on the initial ___ that generates a kink in each firm's demand curve.
price
π = P(Q) - C(Q) defines
profits
In the Stackelberg model, the follower's profit-maximizing level of output is determined by its ___ function.
reaction
Given an inverse demand function, P = a - b(Q1+ Q2), and cost functions, C1(Q1)= c1Q1 C2(Q2)= c2Q2 then, a−c1/2b - 1/2Q2 is the
reaction function for firm 1.
Given an inverse demand function, P = a - b(Q1+ Q2), and cost functions, C1(Q1)= c1Q1 C2(Q2)= c2Q2 then, a−c^2/2b - 1/2Q1 is the
reaction function for firm 2.
A function that defines the profit-maximizing level of output given the output levels of another firm is called a(n) ___ (one word) function.
reaction or best-response
A period of time during which at least one input is fixed is called the ___ run.
short
A ___ cost is a cost that is forever lost after it has been paid.
sunk
In a monopoly, where the firm chooses output based on marginal revenue (which is less than price),
supply curves do not exist.
Marginal revenue is
the change in total revenue from a one-unit change in output.
The demand curve faced by a monopolist is
the same as the market demand curve.
If a market is perfectly contestable, existing firms are disciplined by
the threat of entry by new firms.
In perfect competition, profits are maximized at a level of output such that
the vertical distance between the revenue line and the cost curve is greatest.
In an oligopolistic market, the optimal decision of whether to raise or lower price will depend on how the manager believes other managers will change:
their prices as a result
True or false: There is no supply curve in markets served by firms with market power.
true
From the point of view of the manager, Bertrand oligopoly is _______ since it leads to ________ profits.
undesirable; zero
Due to the interdependent nature of an oligopolistic market, a firm manager who wishes to maximize profits must also consider
whether rival firms will match price changes.
Economies of scale and scope, cost complementarity, and patents are all sources of (one word) power.
monopoly
Collusion leads to
price that exceeds marginal cost.
