AP Microeconomics Chapter 17
Since a firm in a monopolistically competitive market faces a downward-sloping demand curve, what does it always operate at?
excess capacity
What is the administrative burden of regulating price in a monopolistically competitive market?
large because of a large number of firms that produce differentiated products
The primary claim of defenders of advertising is that it what?
enhances the information available to consumers
What kinds of behavior do the antitrust laws prohibit?
Antitrust laws prohibit firms from attempting to monopolize a market. If they were allowed to do this, some markets would gain too much power and the markets wouldn't be as competitive.
When free entry is one of the attributes of a market structure, what are economic profits?
eventually driven to zero
How does the number of firms in an oligopoly affect the outcome in the market?
The number of firms affects the outcome in the market because the more firms there are, the more competitive the market becomes.
What is the prisoners' dilemma, and what does it have to do with oligopoly?
The prisoners' dilemma is a particular 'game' between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial. It has to do with an oligopoly because the market structure is mutually benefiting several groups because of the cooperation.
Compare the quantity and price of an oligopoly to those of a competitive market.
The quantity and price of an oligopoly is lower than perfect competition because their prices are higher. Competitive markets result in increase in quantity and price.
Compare the quantity and price of an oligopoly to those of a monopoly.
The quantity and price of an oligopoly is the same as a monopoly: where marginal cost equals marginal revenue, besides oligopolies sometimes have a higher quantity than that of a monopoly quantity.
If a group of sellers could form a cartel, what quantity and price would they try to set?
The quantity and price they would try to set is where marginal cost equals marginal revenue.
If firms in a monopolistically competitive market are earning economic profits, which of the following scenarios would best reflect the change facing incumbent firms as the market adjusts to its new equilibrium?
a decrease in demand
cartel
a group of firms acting in unison
prisoners' dilemma
a particular 'game' between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial
What happens when consumers are exposed to additional choices that result from the introduction of a new product?
a product-variety externality is said to occur
Firms that spend a large amount of money on advertising a particular product are likely to be providing consumers with what?
a signal of product quality
Nash equilibrium
a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen
In a monopolistically competitive market structure, what kind of good does each firm sell?
a slightly different good from goods sold by other firms
dominant strategy
a strategy that is best for a player in a game regardless of the strategies chosen by the other players
In a monopolistically competitive industry, what is the price?
above marginal cost since each firm is a price setter
When firms sell highly differentiated consumer goods, it is likely that one significant cost to all firms is what?
advertising
In the study done by Lee Benham on advertising for eyeglasses, what happens to the average price?
advertising reduced the average price by more than 20 percent
In monopolistically competitive markets, what does the attribute of free entry suggest?
all firms earn zero economic profits in the long run
collusion
an agreement among firms in a market about quantities to produce or prices to charge
Give two examples other than oligopoly that show how the prisoners' dilemma helps to explain behavior.
animals and US debt; some animals share the same habitat just because they can survive in the same environment. Cooperation may be difficult because of several animals going for the same source of food. US debt is difficult because money is being spent all of the time on necessities.
In the long run, a monopolistically competitive firm produces where?
at a quantity less than the efficient scale
Critics of advertising argue that in some markets, advertising may do what?
attract products of lower quality i the market
New firms will necessarily enter a monopolistically competitive market when price exceeds what cost?
average total cost
In the long run, what does a profit-maximizing firm in a monopolistically competitive market operate at?
efficient scale
Which of the following goods are sold in a monopolistically competitive market?
books
What is the entry of new firms into a monopolistically competitive market characterized by?
both positive and negative externalities
A recent outbreak of hepatitis was linked to a national fast-food restaurant chain. What is this an example of?
brand name identity, and can be detrimental to the probability of a firm
How would monopolistically competitive firms respond if regulators required firms to set price equal to marginal cost?
by lowering their costs
Critics claim that when advertising decreases the elasticity of demand, what are firms able to do?
charge a larger mark-up over marginal cost
Which of the following goods are not sold in monopolistically competitive markets?
corn
Which two curves are tangent in a monopolistically competitive market with zero economic profit?
demand and average total cost
Product differentiation causes the seller of a good to face what type of demand curve?
downward sloping
Regulation of a firm in a monopolistically competitive market is unlikely to do what?
improve market efficiency
What is one way in which monopolistic competition differs from oligopoly?
in oligopoly markets there are only a few sellers
Advertising in markets for professional services has done what in recent years?
increased in recent years and competition in these markets has been enhanced
Critics of markets which are characterized by firms that sell 'brand' name products argue that brand names encourage consumer to pay more for branded products that are what?
indistinguishable from generic products
Defenders of advertising argue that it is not rational for profit-maximizing firms to spend money on advertising for products that have what?
inferior quality
Advocates for advertising argue that the efficiency of markets is enhanced when advertising provides what?
information that is useful to consumers
When a profit-maximizing firm in a monopolistically competitive market charges a price higher than marginal cost, what happens to the deadweight loss?
it is dissipated by the excess capacity
What is the average revenue of a firm that operates at efficient scale?
it must be equal to the minimum of average total cost
What does excess capacity tell economists?
it tells them very little about the desirability of a market outcome
Long-run profit earned by a monopolistically competitive firm is driven to the competitive level due to a shift in which curve?
its demand curve
If a firm in a monopolistically competitive market uses advertising to decrease elasticity of demand for its product, it will be able to increase its mark-up over what cost?
marginal cost
Product differentiation in monopolistically competitive markets ensures that when equilibrium, price will exceed what cost?
marginal cost
A profit-maximizing firm in a monopolistically competitive market is characterized by which of the following?
marginal revenue exceeds average revenue
The profit-maximizing rule for a firm in a monopolistically competitive market is to select the quantity at which what?
marginal revenue is equal to marginal cost
In the short run, a firm in a monopolistically competitive market operates much like a what?
monopolist
Hotels in New York City frequently experience an average vacancy rate of about 20 percent. This kind of excess capacity is indicative of what kind of market?
monopolistically competitive
For profit-maximizing firms in a monopolistically competitive market, what does another customer mean?
more profit
If firms in a monpolistically competitive industry are making profits what happens in the market?
new firms will enter the market
Whenever a new firm considers entry into a monopolistically competitive market with a new product, what does it consider?
only the profit opportunities
Why is a monopolistically competitive market considered inefficient?
price exceeds marginal cost
The 'competition' in monopolistically competitive markets is most likely a result of what?
product differentiation
Advertising that uses celebrity endorsement is most likely intended to do what?
provide a signal for product quality
The 'monopoly' in monopolistically competitive markets is most likely a result of what?
sellers are price makers rather than price takers
In monopolistically competitive markets, economic profits do what?
signal new firms to enter the market
In monopolistically competitive markets, economic losses do what?
signal some incumbent firms to exit the market
When advertising is deceptive, what do critics claim?
that it makes buyers less sensitive to price differenes
What does one theory of advertising suggest?
the content of advertising may be irrelevant to product success in the market
What does a firm in a monopolistically competitive market operate on?
the declining portion of its average total cost curve
Long-run profit for a monopolistically competitive firm falls to the competitive level due to what?
the falling demand for its product
game theory
the study of how people behave in strategic situations
What happens 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
Which of the following is unique to a monoplistically competitive firm when compared to an oligopoly?
there are many sellers
As some incumbent firms exit a monopolistically competitive market, what happens to the profits of existing firms?
they rise and product diversity in the market increases
What do consumers do when advertising is cheap?
they would learn to ignore over time
Free entry into a market drives economic profit to what?
zero
When a firm's average revenue curve is tangent to its average total cost curve, what are the economic profits?
zero
As in a competitive market, monopolistically competitive firms earn what?
zero economic profit in the long run
