exam 4
One characteristic of an oligopoly market structure is
firms in the industry have some degree of market power
When deciding what price to charge consumers, the monopolist may choose to charge them different prices based on the customers'
geographical location
For a firm to price discriminate,
it must have some market power
In imperfectly competitive markets, increasing production will decrease the price of all units sold. This concept is known as the
price effect
A similarity between monopoly and monopolistic competition is that in both market structures
sellers are price makers rather than price takers
A monopolistically competitive firm chooses
the quantity of output to produce, but the price of its output is determined by demand
In a market that is characterized by imperfect competition,
there are at least a few firms that compete with another
A natural monopoly occurs when
there are economies of scale over the relevant range of output.
When the loss from a business-stealing externality exceeds the gain from a product-variety externality,
there are likely to be too many firms in a monopolistically competitive market
Price discrimination is a rational strategy for a profit-maximizing monopolist when
there is no opportunity for arbitrage across market segments
Figure 16-2. This figure depicts a situation in a monopolistically competitive market. Refer to figure 16-2. What price will the monopolistically competitive firm charge in this market?
$30
Which of the following is not an example of price discrimination by a firm?
A natural gas company charging all customers a higher rate in the winter than in the summer
Which of the following is not an example of a barrier to entry?
an entrepreneur opens a popular new hair salon
Which of the following is not an argument made by critics of advertising?
Advertising promotes economies of scale
Which of the following statements is not correct?
Antitrust laws automatically prevent mergers between companies that produce similar products
Which of the following can defeat the profit-maximizing strategy of price discriminatin?
Arbitrage
Which of the following statements is not correct?
Both monopolistic competition and perfect competition are characterized by product differentiation.
Firms in the industry are typically characterized by very diverse product lines.
Firms in the industry have some degree of market power
Which of the following industries has the highest concentration ratio?
Households appliances
Which of the following is true about a monopolistically competitive firm?
It can earn an economic profit in the short run, but not in the long run
Which of the following is unique to a monopolistically competitive firm when compared to an oligopoly?
Monopolistic competition features many sellers
Which of the following statements is correct?
Monopolistic competition is similar to monopoly because both market structures are characterized by firms being price makers rather than price takers
Hotels in New York City frequently experience an average vacancy rate of about 20 percent (i.e., on an average night, 80 percent of the hotel rooms are full). This kind of excess capacity is indicative of what kind of market?
Monopolistic competition only
Which of the following conditions is a characteristic of a monopolistically competitive firm in both the short run and the long run?
P > MC
Which of the following conditions is a characteristic of a monopolistically competitive firm in short-run equilibrium?
P > MC
Selling the same good at different prices to different customers is known as
Price discrimination
Which of the following can eliminate the inefficiency inherent in monopoly pricing?
Price discrimination
The law passed in 1914 that strengthened the government
The Clayton Antitrust Act
Which of the following is a necessary characteristic of a monopoly?
The firm is the sole seller of its product
Which of the following is an example of public ownership of a monopoly?
USPS
Which of the following is not an example of price discrimination?
a bakery charges a higher price for brownies than for cookies
When an industry is a natural monopoly,
a larger number of firms will lead to a higher average total cost
Which of the following would be most likely to have monopoly power?
a local cable TV provider
Granting a pharmaceutical company a patent for new medicine will lead to
a product that is priced higher than it would be without exclusive rights
Monopolies are socially inefficient because the price they charge is
above marginal cost
In monopolistically competitive markets, free entry and exit suggests that
all firms can earn zero economic profits in the long run
A market structure with only a few sellers, each offering similar or identical products, is known as
an oligopoly
The market for crude oil, which is primarily supplied to the world by a few Middle Eastern countries, would best be described as
an oligopoly
Critics of markets that are characterized by firms that sell brand-name products argue that brand names encourage consumers to pay more for branded products that
are indistinguishable from generic products
For a monopolistically competitive firm,
at the profit-maximizing quantity of output, marginal revenue equals marginal cost.
When a firm has a natural monopoly, the firm's
average total cost curve is downward sloping
The fundamental source of monopoly power is
barriers to entry
In order for antitrust laws to raise social welfare, the government must
be able to determine which mergers are desirable and which are not
If a firm in a monopolistically competitive market successfully use advertising to decrease the elasticity of demand for its product, the firm will
be able to increase its markup over marginal cost
Price discimination
can maximize profits if the seller can prevent the resale of goods between consumers
If a firm in a monopolistically competitive market successfully uses advertising to decrease the elasticity of demand for its product, the firm will
be able to increase its markup over marginal cost
Haidy consumes Pepsi exclusively. She claims that there is a clear taste difference and that competing brads of cola leave an unsavory taste in her mouth. In a blind taste test, Haidy is found to prefer Pepsi to store-brand cola nine out of ten times. The results of Haidy's taste test would refute claims by critics of brand names that
brand names cause consumers to perceive differences that do not really exist
When existing firms lose customers and profits due to entry of a new competitor, a
business-stealing externality occurs
A monopoly can earn positive profits because it
can maintain a price such that total revenues will exceed total costs
A movie theater can increase its profits through price discrimination by charging a higher price to adults and a lower price to children if it
can prevent children from buying the lower-priced tickets and selling them to adults
When a firm operates under conditions of monopoly, its price is
constrained by demand
if a monopolist is able to perfectly price discriminate,
consumer surplus and deadweight losses are transformed into monopoly profits
The product-variety externality is associated with the
consumer surplus that is generated from the introduction of a new product
The social cost of a monopoly is equal to its
deadweight loss
When a monopolist increases the amount of output that it produces and sells, average revenue
decreases, and marginal revenue decreases
Monopoly firms face
downward-sloping demand curves, so they can sell only the specific price-quantity combinations that lie on the demand curve
If a government regulation sets the maximum price for a natural monopoly equal to its marginal cost, then the natural monopolist will
earn economic losses
A benefit to society of the patent and copyright laws is that those laws
encourage creative activity
In both perfect competition and monopolistic competition, each firm
has many competitors
A monopolist's profits with price discrimination will be
higher than if the firm charged just one price because the firm will capture more consumer surplus
the equilibrium quantity in markets characterized by oligopoly is
higher than in monopoly markets and lower than in perfectly competitive markets
Reduced competition through merging of companies will raise social welfare
if the benefit from the synergies exceeds the social cost of increased market power
In a natural monopoly,
if the government requires marginal cost pricing, it will likely have to subsidize the firm
Price discrimination adds to social welfare in the form of
increased total surplus
A firm cannot price discriminate if it
it operates in a competitive market
Suppose most people regard emeralds, rubies, sapphires as close substitutes for diamonds. Then DeBeers, a large diamond company, has
less market power than it would otherwise have
In the long run, a monopolistically competitive firm produces a quantity that is
less than the efficient scale
In order to sell more of its product, a monopolist must
lower its price
A monopolistically competitive industry is characterized by
many firms, differentiated products, and free entry
A perfectly price-discriminating monopolist is able to
maximize profit and produce a socially optimal level of output
In the short run, a firm in a monopolistically competitive market operates much like a
monopolist
The two types of imperfectly competitive markets are
monopolistic competition and oligopoly
In which of the following market structures can firms earn economic profits in the long run?
monopoly only
If the distribution of water is a natural monopoly, then
multiple firms would likely each have to pay large fixed costs to develop their own network of pipes
Which of the following is not a key feature of monopolistic competition?
negative economic profits for firms in the long run
in a long-run equilibrium,
only a perfectly competitive firm operates at its efficient scale
When a market is monopolistically competitive, the typical firm in the market is likely to experience a
positive or negative profit in the short run and zero profit in the long run
The relationship between advertising and product differentiation is
positive; the more differentiated the product, the more a firm is likely to spend on advertising
Antitrust laws have economic benefits that outweigh the costs if they
prevent mergers that would decrease competition and raise the costs of production
For a monopoly, the socially efficient level of output occurs where
price equals marginal cost
Monopolistic competition is considered inefficient because
price exceeds marginal cost
Product differentiation in monopolistically competitive markets ensures that, for profit-maximizing firms,
price will exceed marginal cost
The deadweight loss associated with a monopoly occurs because the monopolist
produces an output level less than the socially optimal level
In the short run, a firm operating in a monopolistically competitive market
produces an output where marginal revenue equals marginal cost, and the price is determined by demand
Defenders of advertising argue that in some markets advertising may
provide information to customers about products, including prices and seller locations
When a monopolistically competitive firm raises its price,
quantity demanded declines but not to zero
A law that restricts the ability of hotels/motels to advertise on billboards outside of a resort community would likely lead to
reduced efficiency of local lodging markets
Professional organizations and producer groups have an incentive to
restrict advertising in order to reduce competition on the basis of price
If a pharmaceutical company discovers a new drug and successfully patents it, patent law gives the firm
sole ownership of the right to sell the drug for a limited number of years
In monopolistically competitive markets, economic losses
suggest that some existing firms will exit the market
According to one theory, advertising sends a signal to consumers about the quality of the product being offered. An implication oft his theory is that
the existence of an expensive advertisement is more important than the content of the advertisement
When a profit-maximizing firm in a monopolistically competitive market changes a price higher than marginal cost
the firm may be incurring economic losses
A government-created monopoly arises when...
the government gives a firm the exclusive right to sell some good or service
One problem with the government operation of monopolies is that
the government typically has little incentive to reduce costs
If we observe a great deal more advertising for Mucinex, an over-the-counter drug, than for a Grainger drill press, we can infer that
the market for Mucinex is more highly differentiated than the market for Grainger drill presses
Arbitrage is
the process of buying a good in one market a low price and selling the good in another market for a higher price in order to profit from the price difference
When regulators use a marginal-cost pricing strategy to regulate a natural monopoly, the regulated monopoly
will experience a loss