Chapter 9,10,12,13 Study Guide (FINAL)

Firms producing an identical product in a competitive market are producing at a level of output that maximizes profit. The current market price is $4.50 per unit and the firms are producing at a long-run average cost of $3.50 per unit. Over the long-run one should expect

entry of new firms into this market

Compare long-run equilibrium in a market with monopolistic competition and a competitive market. Long-run equilibrium under monopolistic competition results in __________ output and a ________ price.

less; higher

A good example of a monopolistically competitive market is

local restaurants.

Under monopolistic competition, a market has

many firms.

Based on the figure below, Firm A has _______ product differentiation than Firm B. (the U is the same for both but the \ is steeper on the left)

more

An outcome from a duopoly is ____________ efficient than a monopolistic outcome and ____________ efficient than a competitive market outcome.

more; less

Under monopolistic competition, there are:

no long-run barriers to entry of new firms.

A Nash equilibrium occurs when an economic decision maker has ______ to gain by changing strategy unless it can collude.

nothing

Rachel and Joey are playing racquetball. They are of equal ability, and each point comes down to whether the players guess correctly about the direction the other player will hit. Look at the payoff matrix provided below. The Nash equilibrium for Rachel and Joey is

There is no Nash equilibrium.

On the figure below, where does a monopoly operate to maximize profits?

Where MR = MC

Under monopolistic competition, firms produce

products that are somewhat differentiated

Monopolies lead to

both rent seeking and deadweight loss.

Over the long run, a monopolist

can continue to make economic profits if it can maintain a monopoly and keep competitors from entering the market

Suppose that at the current level of production, the price of a monopolist's product is equal to $15 per unit. Marginal revenue is equal to $10 per unit, and marginal cost is equal to $15 per unit. This monopoly

can increase its profit by producing and selling fewer units of its product.

Equation for: Marginal Revenue

changeTR/change in quantity sold

A monopolist is ______ likely to advertise than a monopolistically competitive firm.

less

In a perfectly competitive market, the price of the product is

set by market supply and demand

The price of a competitive firm's product is $50 per unit. The firm currently has marginal cost equal to $40. To maximize profits this firm

should increase its output

Converse, an apparel company, has been fairly successful selling denim-colored college sportswear. Lydia sees an opportunity for profit and enters the market. After producing her profit maximizing level of output, she finds that her average total cost per unit is $40, her average variable cost per unit is $30, and the market price is $35. In the short run, Lydia should

stay in business even though she is suffering a loss

For a perfectly competitive firm, marginal revenue is

equal to price

A duopoly is a market in which

there are two producers of a product.

Assume that a monopolist faces the demand schedule given below, and a constant marginal cost of $2 for each unit of output. To maximize profits, this monopolist would produce ____ units of output and charge a price of ____ per unit. Price Quantity Demanded $10 0 $8 1 $5 2 $3 3 $1 4

2 units; $5 per unit

A competitive firm maximizes profit at an output level of 500 units, market price is $24, and ATC is $24.50. At what range of AVC values for an output level of 500 would the firm choose not to shut down?

AVC < $24

A natural monopoly exists when a single seller experiences ____________ average total costs than any potential competitor.

Lower

Equation for: Marginal Cost

MC= changeTC/ changeQ

To maximize profits, firms expand output until

MR = MC

Oligopoly occurs in markets with

a small number of large firms.

Equation for: Change in Profit

= P - ATC

What is considered a natural barrier?

-control of resources -problems raising capital -economies of scale

Characteristics/features of a monopolistically competitve

-many sellers -differentiated products -low barriers to entry and exit

Features/characteristics of a competitive market

-many sellers -similar products -free entry and exist -price taking

Characteristics/features of a monopoly

-one seller -a unique product without close substitutes -high barriers to entry -price making

The Clayton Act of 1914 added to the list of activities that were deemed socially detrimental, including

-price discrimination. -exclusive dealings. -tying arrangements. -mergers and acquisitions.

Examples of a (perfectly) competitive market

-stock market -farmers market -online ticket action -currency trading

What firms best described as an oligopoly?

GM, Ford, Chrysler, Honda, and Toyota

The table provided below shows how to calculate a monopoly's total revenue and marginal revenue. As price falls, total revenue initially ____________ and then ______________.

Increases, decreases

Monopolies choose their profit maximizing:

Output level and Price

Monopoly power measures the ability to set the ________ for a good.

Price

Equation for: Profit

Profit= TR-TC

Equation for: Total Cost

TC= variable cost x fixed cost (vc x fc)

Equation for: Total Revenue

TR= price x quanity (p x q)

In monopolistic competition, demand for a single firm's product is

a fraction of overall market demand

Compared to perfect competition, monopolies charge

a higher price.

Firms producing an identical product in a perfectly competitive market are producing at a quantity that maximizes profit. The current market price is $4.50 per unit, and the firms are producing at a long-run average cost of $3.50 per unit. Firms in this market experience

a profit

What type of firm most closely fits the description of a competitive firm?

corn farmers

Profits when a competitive firm shuts down are -$7,250 and -$250 when the firm continues to produce. This firm will minimize losses by

continuing to produce

If competitive firms experience a loss, over the long run there will be a

decrease in market supply to increase the market price

Boeing and Rolls-Royce Holdings are the sole producers of a special jet engine. The two firms currently charge the same price for their products. If neither firm reduces the price of its engines, each firm earns $36 million in profit. If both firms reduce their prices, each firm will earn $10 million in profit. If one firm reduces the price and the other does not, the firm that reduces the price will earn a profit of $50 million while the other firm will earn a profit of $5 million. Assuming that collusion is not a possibility, the Nash equilibrium occurs when

each firm reduces its price.

Compared to perfect competition, monopoly results in

fewer units produced and sold.

Suppose there are two breakfast restaurants in your college town, Waffle Kingdom and Flip's Flapjacks, and they decide to operate collusively as a cartel. If both restaurants abide by the cartel's agreement, then each will earn $100,000 in profit. If both restaurants cheat on the cartel's agreement, then each will earn $25,000 in profit. If one restaurant cheats and the other abides by the agreement, then the cheater will earn a profit of $150,000 while the restaurant that abides will have a loss of $12,500. The Nash equilibrium for the two restaurants would be

for both restaurants cheat on the cartel's agreement.

Suppose there are two breakfast restaurants in your college town, Waffle Kingdom and Flip's Flapjacks, and they decide to operate collusively as a cartel. If both restaurants abide by the cartel's agreement, then each will earn $100,000 in profit. If both restaurants cheat on the cartel's agreement, then each will earn $25,000 in profit. If one restaurant cheats and the other abides by the agreement, then the cheater will earn a profit of $150,000 while the firm that abides will have a loss of $12,500. The most profitable combined outcome for the two restaurants would be

for both restaurants to abide by the cartel's agreement.

In monopolistic competition, the firm's optimal price is

greater than marginal cost.

The long-run market supply curve is

horizontal at the market price

Which of the following conditions must be met for a single seller to become a monopolist?

-The firm must have something unique to sell. -The firm must have a way to prevent potential competitors from entering the market.

What are ways monopolistically competitive firms can choose to differentiate?

-style or type -location -quality

Supply curve = MC when price is...

...above the minimum point on the average variable cost. Below that point, the firm shuts down and no supply exists

Assume that a monopolist faces the demand schedule given in the table below and a constant marginal cost of $50 for each unit of output. To maximize profits, the monopolist would produce ____ units of output at a price of ____ per unit.

3,000; $70

Based on the payoff matrix illustrated in Figure 13.1 on page 393, what is the Nash equilibrium for the two suspects?

Both suspects testify.

Based on the payoff matrix illustrated in Figure 13.1 on page 393, what is the dominant strategy for the two suspects?

Both suspects testify.

On the figure below, which demand curve represents a firm that has run a successful advertising campaign? (Da's \ is shorter and doesnt go as far; Db's \ is steeper and taller and loner)

Db

Suppose that Boeing and Rolls-Royce Holdings are the sole producers of a particular jet engine. The two firms currently charge the same price for their products. If neither firm reduces the price of its engine, each firm earns $36 million in profit. If both firms reduce their prices, then each firm will earn $10 million in profit. If one firm reduces its price and the other does not, then the firm that reduces price will earn a profit of $50 million while the other firm will earn a profit of $5 million. If the firms can operate as a cartel, then

each firm will maintain its current price.

Monopolistic competition

is a characterized by free entry, many different firms, and product