Intro to Micro Unit 2/Exam 2
What is a natural monopoly?
A monopoly that faces a high fixed cost and low marginal costs so that the average total cost curve slopes downward. Ex: Municipal Power Light, the local supplier of electricity
The price increase is a result of an increase in demand from younger generations, mainly millennials, to purchase real Christmas trees
The Christmas tree farm and the overall industry will: In the short run, produces earn profits and increase supply. Supply is less elastic in the short run than in the long run.
An oligopoly arises when _____ have all or most of the sales in an industry. If oligopolists with the same marginal costs and no fixed costs compete against each other in price, it leads to all firms ____
a few large firms; making zero profits.
An oligopoly consists of _____ seller(s) providing _____ goods in a market where barriers to entry are _____.
a few; differentiated; high
What factors increases the chance of a new firm securing capital?
a high chance of success
If oligopolists cooperate, they can act as _____ resulting in _____.
a monopoly; higher prices and profits.
An equilibrium in which both firms stick to the higher price to their mutual benefit
cooperative solution
Differentiated and frequently changing products _____ the likelihood of collusion
decrease
Oligopolistic firms with substantial excess production capacity _____ the likelihood of collusion.
decrease
US antitrust laws that prohibit cartels and price-fixing _____ the likelihood of collusion.
decrease
Easier entry into an oligopolistic industry _____ the likelihood of collusion.
decreases
Building a brewery is a high start-up cost operation
economies of scale
It is very expensive to build an amusement park but not that expensive to admit an additional customer is an example of what source barrier
economies of scales
Postage and package costs: Lease on building: Cost of wood used in manufacturing: Industrial equipment costs: Interest on current debt: Liability insurance costs: Cost of metal used in manufacturing: Annual salaries of top management:
fixed cost variable cost fixed cost fixed cost variable cost fixed cost fixed cost
A firm's ______ are costs that are incurred even if there is no output. In the short run, these costs ______ as production increases.
fixed costs; do not change
Do these items generate network externalities or not? a Facebook account steel production, which results in air pollution operating systems, such as Windows or Mac a power strip plastic grocery bags
generates network externalities does not generates network externalities generates network externalities does not generates network externalities does not generates network externalities
Drug companies obtain patents so that they can recover research and development costs by the exclusive sale of the drug for some number of years is an example of what source barrier
government-imposed
The government establishes a tariff on tea is an example of what source barrier
government-imposed
There are a limited number of licenses for taxi drivers in NYC is an example of what source barrier
government-imposed
The government establishes a quota on how much foreign oil can be imported
government-imposede
Profit-maximizing output
happens where price equals marginal cost
The ability to easily detect and punish cheating on collusive agreements _____ the likelihood of collusion.
increases
Very few firms in an industry _____ the likelihood of collusion
increases
Total Product Curve
increasing (IMR), diminishing (DMR), and negative marginal returns (NMR)
Which situations would most likely result in an oligopolistic market?
local market for internet services
Example of monopolistic competition
many firms that produce a differentiated product
The pricing choices of one firm have dramatic effect another firms in the market
oligopoly
Can earn economic profit in the long-run
oligopoly and monopoly
Typically protected by barriers to market entry
oligopoly and monopoly
Caribbean Cruz owns the only swimmable beach on an exclusive island in the Bahamas is an example of what source barrier
ownership of a key input
Produces at lowest possible average cost in the long-run
perfect competition
The relationship between the factors of production used by firm and the maximum output possible is called the
production function
Market structure examples
see pic
Example of oligopoly
there are a few firms and the ease of entry of new firms is low
A firm's ______ are costs that increase as quantity produced increases. These costs often show ______ by increasing at an increasing rate.
variable costs; diminishing marginal returns
total cost, total cost variable, and total fixed costs curves
(TC), (TVC), and (TFC)
Comparing monopoly to perfect competition, which statement is true?
- The monopoly's price is higher. - The consumer surplus is smaller with a monopoly.
Examples of monopoly
- a single firm that produces a unique product with no close substitutes - the single firm has considerable control over the price it charges, and the entry of new firms into the industry is blocked
Examples of perfect competition
- a very large number of firms that produce an identical product - individual firms are price takers, and firms can easily enter or exit the industry - the demand curve for an individual firm's output is a horizontal line
Correctly label the cost curves and marginal revenue of a price-taking firm
ATC at price-maximizing output, market price, profit-maximizing output, and loses
Faces a downward-sloping demand curve
Oligopoly, monopoly, and monopolistic competition
How is the issues of raising capital a natural barrier to entry for new firms seeking to enter a market?
Banks and venture capital companies are unlikely to lend to firms with little chance of competing against established businesses.
Identify which barrier to entry these monopolies possess
Coke's vast market structure in the soft drink market: brand loyalty China's control of the market for rare earth: control of a resource Pfizer's control of the production of Viagra: legal barrier The local utility company that can provide electricity to the entire market a lower average cost than other producers: economies of scale Facebook's position in social media: Network externalities
La Grande Jatte is a lawn mowing service. Thanks to new lawn mowers, their employees are very efficient and consequently the company charges $2 less per mowed lawn. They are unable to keep up with all of the customers requesting their services.
Competitive market
Le Moulin Rouge is one of many can-can show makers and they choose to increase the rice of their shoes $10. They don't understand why they can no longer sell any of their shoes
Competitive market
Water Lilies, one of many flower farming companies, decides to grow an extra acre of tulips.
Competitive market
A monopolistic competitors, much like a firm in perfect competition, sells its product at a point where the price is equal to the marginal cost
False
An individual firm in a perfectly competitive market can obtain a higher price for its product by reducing output
False
An individual firm in a perfectly competitive market must lower its price to sell more of its product
False
Average fixed cost is always higher than average variable cost
False
In general, the market demand curve in a perfectly competitive market is perfectly elastic
False
In the long run, monopolistic competitors make a similar amount of profit to monopolists, since, in both cases, the firm's demand curves are downward sloping, and at the profit maximizing point, the marginal cost is equal to the marginal revenue.
False
Monopolistic competition through the use of product differentiation promotes productive and allocative efficiency automatically since the market forces are at work
False
Monopolistically competitive firms will have positive profits even in the long run.
False
Monopolistically competitive firms will produce where price = marginal revenue = marginal cost in the short run
False
TC = FC + VC + MC
False
The ATC crosses the MC at the lowest point on the MC.
False
The ATC is increasing whenever the MC is increasing
False
The ATC is rising when the MC is below the ATC
False
Haystacks is a pharmaceutical giant. Haystacks chose to decrease the supply of its allergy medicines after conferring illegally with the other big producer in the market, Guernica.
Imperfect market
Mondrian House, one of only two construction firms operating in the region, decides not to change the price of its consultations.
Imperfect market
Persistence of Memory, one of a small handful of plastic providers, thinks it can change the market price by supplying more plastic from an influx of clocks it can melt.
Imperfect market
Starry Night, one of three companies that sells starts to the public, needs months for its board of directors to decide whether to auction more starts or not.
Imperfect market
A market structure marked by many sellers of a slightly differentiated product, and long-run economic profits are driven to zero due to free entry and exit in the industry.
Monopolistic competition
A market structure marked by a single seller of a product that does not have any close substitutes, barriers to entry are high, and long-run economic profits are possible but not guaranteed
Monopoly
Which industry is more or less competitive than the four-firm concentration ratio (4FCR) or the HHI International trade in the good or service Interindustry trade Localized markets Regulations and restrictions on trade
More competitive More competitive Less competitive Less competitive
A situation in which neither firm can do better with another strategy, considering the strategy used by the other firm
Nash Equilibrium
Accurate curve?
No
An equilibrium in which both firms act in self interest rather than sticking to the tacit or stated collusive agreement.
Noncooperative equilibrium
A market structure marked by a few interdependent sellers of products that are close substitutes, and long run economic profits are possible but not guaranteed
Oligopoly
Which are characteristics of oligopolies and not? A significant barrier to entry Large numbers of firms producing differentiated products Free entry and exit A large number of buyers and sellers Firms must consider competitors' reactions when making decisions
Oligopoly Not a oligopoly Not a oligopoly Not a oligopoly Oligopoly
A market structure marked by many sellers of an identical product, and long-run economic profits are driven to zero due to free entry and exit in the industry.
Perfect competition
Usually faces entry from new firms
Perfect competition and monopolistic competition
After demand decreases, arrange events in order that they occur after demand decreases until price returns to long-run equilibrium
Price decreases, firms exit, supply decreases, and price increases
Market structures are ordered from the level of prices and level of quantity (high to low)
Price: cartel, duopoly without collusion, entry deterrence, monopolistic competition Quantity: monopolistic competition, entry deterrence, duopoly without collusion, cartel
A situation in which the firms' dominant strategic result in an outcome that leaves everyone worse off.
Prisoner's Dilemma
A bumper crop results in a much higher supply of corn this year.
Results in an decrease of price.
Higher taxes, fuel prices, and wages are driving costs up for all corn farmers
Results in an increase of price.
Clark's wife wants to buy a new house. She argues that raising the price of his corn by a few cents per bushel would pay for it in no time
Results in no change of price.
The price increase is a result of fewer Christmas tree harvesting trees in response to consumers purchasing more artificial trees
The effect of the price increase on the Christmas tree industry will: In the short run, the increase in price leads to profits for tree farms.
Best example of monopolistic competition?
The fast food industry
Which factors have the potential to develop an oligopolistic market?
The granting of a limited number of patents; high economies of scale
Accurate curve?
Yes
ATC=(FC + VC) aka TC/Q
True
Advertising can play a role as an indirect signal of product quality to customers.
True
All costs are either fixed or variable
True
In a perfectly competitive market, average revenue is equal to the market price.
True
In a perfectly competitive market, marginal revenue is equal to the market price
True
In general, an individual firm in a perfectly competitive market faces a perfectly elastic demand curve
True
In the short term, a monopolistic competitor will make a profit if the demand curve is above the average total cost curve at some point
True
Marginal curve refers to the change in total cost associated with the production of another unit.
True
Monopolistically competitive firms are inefficient in their use of resources since they produce at the point where marginal revenue = marginal cost, which means that price > marginal cost in the short run
True
Monopolistically competitive firms will have demand curves tangent to the left of the minimum average total cost. This means that monopolistically competitive firms will not experience economies of scale in the long run
True
Monopolistically competitive industries are more likely to make use of advertising to create products that catch on in mainstream popularity than industries in perfect competition.
True
One of the problems of product differentiation is that the price of differentiated products is higher than they would otherwise be
True
Product differentiation can be include small physical changes to the product, physical location of where the product is sold, and perceptions about the product brought about by advertising.
True
The ATC is always greater than or equal to AVC.
True
The average fixed cost curve is downward-sloping.
True
In order to produce more cookies, Mrs. Meadows asks her third shift to work overtime. Newton Bros. Bagels opens a new store on the other side of town. Purpleberry Frozen Custard has $11,000 of fixed costs and $45,000 of variable costs. This is a period of time during which a firm is unable to increase or decrease its amount of capital. This lasts at least six months but no longer than one year. Because of dismal sales last year, half of the city's donut shops exit the industry.
short run long run short run short run neither long run
