micro midterm #3

Pure monopoly

unique supplier of a unique product with no close substitute

PERFECLTY DISCRIMINATING MONOPOLIST

a firm that charges each buyer exactly his or her reservation price

Price setter

a firm that has at least some control over the market price of its product

MARKET POWER

a firm's ability to raise the price of a good without losing all its sales

MONOPOLISTIC COMPETITION

a large number of firms which produce slightly differentiated products that are reasonably close substitutes of one another

examples of monopolistic competition:

o Gas retailers o Convenience stores o Hotels in big cities

Difference between perfectly and imperfectly competitive markets

oFirms in a perfectly competitive market face a PERFECTLY ELASTIC demand curve for their product oFirms in an imperfectly competitive market face a DOWNWARD SLOPING demand curve for their product

A monopolistically competitive firm is one:

of many firms that sell products that are close but not perfect substitutes.

If a firm functions in an oligopoly, it is:

one of a small number of firms that produce goods that are either close or perfect substitutes.

The essential cause of the tragedy of the commons is the fact that:

one person's use of a commonly held resource imposes an external cost on others.

The tragedy of the commons refers to the:

overuse of resources that have no price.

The reason economists consider monopoly to be socially undesirable is that monopolists:

produce less than the socially optimal level of output.

If coal mining produces a negative externality because it leads to environmental damage, then the

quantity of coal produced at the market equilibrium will be greater than the socially optimal quantity

OLIGOPOLY

small number of large firms that produce products that are either close or perfect substitutes

Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed below. Customer Reservation Price ($/Rental) A 22 B 16 C 12 D 8 E 6 F 4 Suppose Island Bikes knows that customers whose reservation prices are at least $10 always rent bikes before noon, while those whose reservation prices are below $10 never do so. If Island bikes can charge a different price in the morning and in the afternoon, then in the afternoon, it will rent out ______ bike(s) and charge ______ per bike.

2;$6

Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed below. Customer Reservation Price ($/Rental) A 22 B 16 C 12 D 8 E 6 F 4 If Island Bikes charges a single price to all of its customers, then how many bikes will it rent out each day?

3

Price Quantity $10 1 $9 2 $8 3 $7 4 $6 5 $5 6 $4 7 The total revenue from selling 6 units is ______, and the marginal revenue of selling the 6th unit is ______.

30;0

Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed below. Customer Reservation Price ($/Rental) A 22 B 16 C 12 D 8 E 6 F 4 Suppose Island Bikes knows that customers whose reservation prices are at least $10 always rent bikes before noon, while those whose reservation prices are below $10 never do so. If Island bikes can charge a different price in the morning and in the afternoon, then in the morning, it will rent out ______ bike(s) and charge ______ per bike.

3;$12

Kate and Ali can live together a two-bedroom apartment for $600 per month, or they can each rent a one-bedroom apartment for $400 per month. Apart from the rent, they are indifferent between living together and living apart, except for one problem: Kate hates Ali's taste in music. Kate would be willing to pay up to $100 a month to avoid hearing Ali's music. Ali would give up listening to her music for no less than $300 per month. Which, if any, of the following ways of splitting the total monthly rent would induce them to live together?

Kate pays $250 per month and Ali pays $350 per month

Kate and Ali can live together a two-bedroom apartment for $600 per month, or they can each rent a one-bedroom apartment for $400 per month. Apart from the rent, they are indifferent between living together and living apart, except for one problem: Kate hates Ali's taste in music. Kate would be willing to pay up to $100 a month to avoid hearing Ali's music. Ali would give up listening to her music for no less than $300 per month. If Kate and Ali decide to live together, is it socially optimal for Ali play her music in the apartment?

Yes, because the benefit to Ali of listening to her music is greater than the cost to Kate.

Carmen listens to opera music every evening when she gets home from work. Carmen loves listening to opera, but her neighbor Paul, who can also hear the music, hates it. If Paul is the only person besides Carmen who can hear the music, then Carmen's music generates:

a negative externality

Given that most people like the smell of baking cinnamon rolls and dislike the smell of burning tires, baking cinnamon rolls generates ______ externality, and burning tires generates ______ externality.

a positive; a negative

EXTERNAL BENEFIT OR POSITIVE EXTERNALITY

an external benefit received by people other than those who pursue the activity

EXTERNALITY

an external cost or benefit of an activity received by people other than those who pursue the activity

EXTERNAL COST OR NEGATIVE EXTERNALITY

an external cost received by people other than those who pursue the activity

The Coase theorem states that if private parties can negotiate the purchase and sale of the right to perform activities that cause externalities, then they:

can always arrive at efficient solutions to the problems caused by externalities.

MARGINAL REVENUE

change in total revenue from a one-unit change in output

PRICE DISCRIMINATION

charging different buyers different prices for the same good or service

examples of oligopoly

o Car industry o Gaming consoles o Cell phone service providers

Price discrimination means charging:

different prices to different buyers for essentially the same good or service.

For perfectly competitive firms, marginal revenue ______ price; for monopolists marginal revenue ______ price.

equals; is less than

COASE THEOREM

if AT NO COST people can negotiate the purchase and sale of the right to perform activities that cause externalities, they can always arrive at efficient solutions to the problems caused by externalities

If a monopolist's marginal revenue exceeds its marginal cost at its current level of output, then to maximize its profit the monopolist should:

increase output until marginal revenue equals marginal cost.

Numerous studies have shown that breathing second-hand cigarette smoke is harmful to your health. This suggests that a tax on cigarettes will:

increase total economic surplus

Suppose the table below describes the demand for a good produced by monopolist. Price Quantity $10 1 $9 2 $8 3 $7 4 $6 5 $5 6 $4 7 The monopolist's marginal revenue from selling the 4th unit of output is less than $7 because:

it has to charge $1 less for each of the first 3 units of output.

An external benefit implies that private markets will provide ______ than the socially optimal quantity, and an external cost implies that private markets will provide ______ than the socially optimal quantity.

less;more

For all firms, the additional revenue collected from the sale of one additional unit of output is termed:

marginal revenue

If the demand curve facing a monopolist shifts, then the monopolist's:

marginal revenue curve and profit-maximizing level of output will change.

In many cities in the United States, a single firm provides electricity. Those firms are:

monopolists

Natural Monopoly

monopoly that results from economies of scale

If a firm's production process exhibits increasing returns to scale, then doubling all the firm's inputs will lead output

more than double

Relative to a single price monopolist, a price discriminating monopolist generates:

more total surplus

A cost of an activity that falls on people not engaged in the activity is call a(n):

negative externality

If an activity generates a positive externality, the government can increase total economic surplus by ______ the activity, and if an activity generates a negative externality, the government can increase total economic surplus by ______ the activity.

subsidizing; taxing

In order to achieve a socially optimal level of output, goods that entail negative externalities should be:

taxed

Economies of scale exist when:

the average cost of production falls as output rises.

If the marginal cost of reducing pollution is positive, then:

the optimal amount of pollution is greater than zero.

Lunch in Jamie's dorm is an all-you-can-eat buffet, served from 11 a.m. until 1 p.m. By noon, the buffet is picked over, and by 12:30, there are very few popular items left. The garbage bins, though, are full of food. The buffet in Jamie's dorm is an example of:

the tragedy of commons

If the market equilibrium quantity is greater than the socially optimal quantity, one can infer that:

there is a negative externality associated with this good.