Monopolistic Competition and Oligopoly Master

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Effective advertising has what effect on a firm's product?

It increases product differentiation.

Effective advertising has what effect on product differentiation?

It increases product differentiation.

A monopolistic competitor has the following information about cost and demand. What will this firm's profits equal in the short run?

Given the level of demand below, what is the marginal revenue of the fifth unit of production?

Assuming that the monopolistic competitor faces the demand and costs depicted below and finds the profit maximizing level of output, what will be the firm's revenue?

$0 because the firm will shut down

Given the level of demand below, what is the marginal revenue of the third unit of production?

$10

Assuming that the monopolistic competitor faces the demand and costs depicted below and finds the profit maximizing level of output, what will be the firm's total cost?

$128

Suppose P0 is $10 and P1 is $11. Suppose a new firm with the same LRAC curve as the incumbent tries to break into the market by selling 4,000 units of output. Estimate from the graph below what the new firm's average cost of producing output would be.

$13

Assuming that the monopolistic competitor faces the demand and costs depicted below and finds the profit maximizing level of output, what will be the firm's revenue?

$144

Using the costs and demand in the table below for a monopolistic competitor to find the level of output for maximizing its profit, what would the corresponding price be?

$18

Given the level of demand below, what is the marginal revenue of the first unit of production?

$25

Refer to the figure below. The total cost of production is:

$400

Assuming that the monopolistic competitor faces the demand and costs depicted below and finds the profit maximizing level of output, what will be the firm's profit?

$48

Refer to the figure below. Total revenue is:

$480

Given the level of demand below, what is the marginal revenue of the fourth unit of production?

Assuming that the monopolistic competitor faces the demand and costs depicted below and finds the profit maximizing level of output, what will be the firm's total cost?

$96

Total Cost can be expressed as:

(implicit cost + explicit cost) (average cost x quantity)

advertising causes demand for the firm's product to increase

(that is, it causes the firm's perceived demand curve to shift to the right).

advertising causes a firm's perceived demand curve to become more inelastic

(that is, it causes the perceived demand curve to become steeper);

A monopolistic competitor has the following information about cost and demand. What will this firm's profits equal in the short run?

The graph below shows the collusion model of oligopoly. What level of output corresponds to the profit maximizing level of output for the two firms combined?

1/2 Qm, where one firm maximizes profits and splits the market (wrong) Qm, where the two firms maximize total profit and split the market.

Assuming that the monopolistic competitor faces the demand and costs depicted below and finds the profit maximizing level of output, what will be the firm's revenue?

126 (wrong) 144 110 48

Assuming that the monopolistic competitor faces the demand and costs depicted below and finds the profit maximizing level of output, what will be the corresponding price?

Suppose the monopolistic competitor faces costs and demand as depicted in the table below. Given the goal of maximizing profit, what level of output would the firm choose?

Using the graph below, if Q = 5, Total Cost =

What does the demand curve look like for a monopoly?

It is downward-sloping. (A monopoly has a downward sloping demand curve because it is a price maker.)

Suppose a city releases 16 million gallons of raw sewage into a nearby lake. The table below shows the total costs of cleaning up the sewage to different levels, together with the total benefits of doing so. (Benefits include environmental, recreational, health, and industrial benefits.) Using the information in the table, calculate the marginal costs and marginal benefits of reducing sewage emissions for this city. What is the optimal level of sewage for this city?

4 million gallons

Assuming that the monopolistic competitor faces the demand and costs depicted below and finds the profit maximizing level of output, what will be the firm's profit?

Given the level of demand in the graph below, if Q = 10, total revenue =

Given the level of demand below, what is total revenue when the price is 18?

54 or more than 50

Given the level of demand in the graph below, if Q = 5, total revenue =

Using the graph below, if Q = 10, Total Cost =

Game Theory

A branch of mathematics that economists use to analyze situations in which players must make decisions and then receive payoffs based on what decisions the other players make

_________ arises when firms act together to reduce output and keep prices high.

A cartel

Prisoner's Dilemma

A game in which the gains from cooperation are larger than the rewards from pursuing self-interest

Cartel

A group of firms that collude to produce the monopoly output and sell at the monopoly price

Kinked Demand Curve

A perceived demand curve that arises when competing oligopoly firms commit to match price cuts, but not price increases

Which of the following are barriers to entry that are directly enforced by government?

A permit required to conduct business operations.

Which of the following are examples of market-based policies, rather than command-and-control policies?

A state charges an emissions tax on the quantity of carbon emitted by each firm. The federal government pays fishermen to preserve wild salmon.

________ plays a role in shaping preferences of consumers and working to differentiate between products within a monopolistically competitive market.

Advertising

For example, many people could not tell the difference in taste between common varieties of beer or cigarettes if they were blindfolded but, because of past habits and advertising, they have strong preferences for certain brands.

Advertising can play a role in shaping these intangible preferences.

________ is displayed with perfect competition because the social benefits of additional production (measured by the price that people are willing to pay) are in balance with the ________ to society of that production.

Allocative efficiency; marginal costs (When Price is equal to marginal cost, the value of the product to society represented by the price matches the economic cost of the product which shows that the proper amount of resources is allocated to this product to satisfy society's wants. This defines allocative efficiency.)

A cost imposed on others outside of any market exchange is:

An external cost not taken into account by those imposing the cost. leads to overproduction of the good/service in question.

After AT&T was split up by government litigation into a number of different entities (i.e., local phone companies, a long-distance phone company and a phone equipment manufacturer), what was the result on competition in the phone market?

An increase in competition leading to greater innovation, more services, and lower prices.

Suppose that, due to a successful advertising campaign, a monopolistic competitor experiences an increase in demand for its product. How will that affect the price it charges and the quantity it supplies?

An increase in demand will manifest itself as a rightward shift in the demand curve, and a rightward shift in marginal revenue. The shift in marginal revenue will cause a movement up the marginal cost curve to the new intersection between MR and MC at a higher level of output. The new price can be read by drawing a line up from the new output level to the new demand curve, and then over to the vertical axis. The new price should be higher. The increase in quantity will cause a movement along the average cost curve to a possibly higher level of average cost. The price, though, will increase more, causing an increase in total profits.

Which of the following market has negative externalities?

An oil spill off the coast of Alaska hurt the fish farming industry.

_____________ occurs when circumstances have allowed several large firms to have all or most of the sales in an industry.

An oligopoly

Duopoly:

An oligopoly with only two firms

The final columns of Table 1 show total cost, marginal cost, and average cost.

As always, marginal cost is calculated by dividing the change in total cost by the change in quantity, while average cost is calculated by dividing total cost by quantity.

The demand curve faced by a monopoly is:

Downward-Sloping-market demand

Continuing with the scenario outlined in question 1, in the long run, the positive economic profits earned by the monopolistic competitor will attract a response either from existing firms in the industry or firms outside. As those firms capture the original firm's profit, what will happen to the original firm's profit-maximizing price and output levels?

As long as the original firm is earning positive economic profits, other firms will respond in ways that take away the original firm's profits. This will manifest itself as a decrease in demand for the original firm's product, a decrease in the firm's profit-maximizing price and a decrease in the firm's profit-maximizing level of output, essentially unwinding the process described in the answer to question 1. In the long-run equilibrium, all firms in monopolistically competitive markets will earn zero economic profits.

Which is NOT a reason that oligopolies are inefficient?

Barriers to entry can allow them to earn sustained profits over long periods of time

Why are the underlying economic meanings of the perceived demand curves for a monopolist and monopolistic competitor different?

Because a monopolist faces the market demand curve and a monopolistic competitor does not.

Which of the following is NOT a correct step in computing profits or losses for a monopolistically competitive firm?

Calculate the area where MR > MC.

Which of the following is NOT a correct step in computing profits or losses for a monopolistically competitive firm?

Calculate the area where MR>MC. (Calculating the area where marginal revenue is greater than marginal cost does NOT help compute profits for a monopolistically competitive firms. Instead, identify the marginal principle where MR=MC, then use a chart or graph to identify the profit-maximizing level of output where MR=MC, then look for the profit margin (the difference between price and average cost) and multiply it by the quantity.

In 2007, five or six major pharmaceutical companies formed a group in order to control the price of vitamins and adjust their production. Such an arrangement is called a ________. Dominant strategy Duopoly Cartel Monopoly

Cartel

_______ arises when firms act together to reduce output and keep prices high. Oligopoly Cartel Monopoly

Cartel

________ arises when firms act together to reduce output and keep prices high.

Cartel

________ arises when firms act together to reduce output and keep prices high. Oligopoly Cartel Monopoly

Cartel

Which of the following would be classified as a differentiated product produced by a monopolistic competitor?

Chanel No. 5 (perfume)

Which of the following would be classified as a differentiated product produced by a monopolistic competitor?

Channel No. 5

Which of the following would be classified as a differentiated product produced by a monopolistic competitor?

Channel No. 5 perfume

Firms in an oligopoly typically acts more like ______. Competitors Business partners Shareholders

Competitors

ow do oligopolies cause market inefficiency?

Creates more deadweight loss for society.

In the context of a monopolistic competitive market, which of these actions would lead to creating the best product differentiation?

Creating a unique concept for a good or service. (The goal is to differentiate products.)

How do oligopolies influence market inefficiencies? Deadweight loss for society is increased. The industry produces less output. The industry makes higher profits. Prices for these goods are artificially high.

Deadweight loss for society is increased. The industry produces less output. The industry makes higher profits. Prices for these goods are artificially high.

Why does cut-throat competition happen between oligopolistic firms?

Each firm is tempted to increase production to raise their revenue and profit which leads to lower prices and profits for all firms. (Competition hardly leads to higher profit; Firms always have the incentive to produce more and raise revenue but if they all behave the same way, it will lead to cut throat competition as prices fall as well as profit.)

Which of the following is the most accurate statement about collusion by oligopolies?

Each oligopolies' revenue, cost, and demand curves can influence the others. (It complicates matters within oligopolistic industries that one firm's demand and marginal revenue curves can be influenced by what the other oligopolistic firms are doing.)

Which of the following is the most accurate statement about collusion by oligopolies?

Each oligopolist's revenue, cost, and demand curves can influence the others.

As the degree of product differentiation increases among the products sold in a monopolistically competitive industry, which of the following occurs? A) The cost of production falls. B) The amount of marketing expenditures decreases for each firm. C) The demand curve for each seller's product becomes more horizontal. D) Each seller's demand becomes more inelastic.

Each seller's demand becomes more inelastic.

What type of characteristic listed below would be the best at creating product differentiation in a monopolistically competitive environment?

Emphasize the product's unique qualities.

Collusion is legal in the United States?

False

Monopolistically Competitive firms' optimal quantity (Q*)always intersects the ATC curve at the minimum point of ATC?

False

In the market structure Oligopoly, there is only one firm that produces the product with no close substitutes?

False ( In the market structure monopoly, there is only one firm that produces products with no close substitutes).

Why did fast food restaurants start offering salads?

Fast food restaurants added salads to their menus to differentiate their product by appealing to health conscious diners.

Monopolistic competition is different from perfect competition in that monopolistically competitive markets:

Feature competition based upon things other than price

Sometimes oligopolies in the same industry are very different in size. Suppose we have a duopoly where one firm (Firm A) is large and the other firm (Firm B) is small, as shown in the prisoner's dilemma box in Table. Firm B colludes with Firm A Firm B cheats by selling more output Firm A colludes with Firm B A gets $1,000, B gets $100 A gets $800, B gets $200 Firm A cheats by selling more output A gets $1,050, B gets $50 A gets $500, B gets $20 Assuming that the payoffs are known to both firms, what is the likely outcome in this case?

Firm B reasons that if it cheats and Firm A does not notice, it will double its money. Since Firm A's profits will decline substantially, however, it is likely that Firm A will notice and if so, Firm A will cheat also, with the result that Firm B will lose 90% of what it gained by cheating. Firm A will reason that Firm B is unlikely to risk cheating. If neither firm cheats, Firm A earns $1000. If Firm A cheats, assuming Firm B does not cheat, A can boost its profits only a little, since Firm B is so small. If both firms cheat, then Firm A loses at least 50% of what it could have earned. The possibility of a small gain ($50) is probably not enough to induce Firm A to cheat, so in this case it is likely that both firms will collude.

Since there is not a generally-accepted theory of how oligopolies behave (in the same way that we have theories for all the other market structures), game theory is often used by economist because it models different situations. Which is a truer statement regarding the use of game theory due to the complexity of oligopolies?

Game theory is the study of conflict and cooperation within a competitive environment. (It is a branch of mathematics that analyzes situations in which players must make decisions and then receive payoffs based on what other players decide to do. It is used extensively in the study of oligopolies as a result of mutual interdependence among firms and has found widespread applications in the social sciences, as well as in business, law, and military strategy.)

Which of the following are advantages that firms could gain by working together as if they were a monopoly? Firms can hold down industry output. Firms can increase industry productivity. Firms can charge a higher price.

Firms can hold down industry output. Firms can charge a higher price.

What does the demand curve look like for a perfectly competitive firm?

Flat and perfectly elastic (The demand curve for a perfectly competitive firm is horizontal and perfectly elastic because each firm is a price taker.)

When we analyze situations in which players must make decisions and then receive payoffs, the general term used by economists is:

Game Theory

Game theory is the study of conflict and cooperation within a competitive environment.

Which of the following is most accurate regarding monopolistic competition?

Has no perfect substitutes, incur large expenditures on advertising of its product, and relies heavily on product variation to drive sales (Because there are no perfect substitutes for monopolistically competitive products, efforts must be made for firms to distinguish between variations in similar products, at least in the minds of buyers. The concept of differentiated products is closely related to the degree of variety that is available to consumers. Variety can include different of styles, flavors, locations, and characteristics to creates products differentiation and monopolistic competition.)

Which of the following is most accurate regarding monopolistic competition?

Has no perfect substitutes, incur large expenditures on advertising of its product, and relies heavily on products variation to drive sales.

Which of the following market has positive externalities?

Honey production because bees also help pollinate fruits trees and increase fruit crop yield.

Mary and Raj are the only two growers who provide organically grown corn to a local grocery store. They know that if they cooperated and produced less corn, they could raise the price of the corn. If they work independently, they will each earn $100. If they decide to work together and both lower their output, they can each earn $150. If one person lowers output and the other does not, the person who lowers output will earn $0 and the other person will capture the entire market and will earn $200. The table represents the choices available to Mary and Raj. What is the best choice for Raj if he is sure that Mary will cooperate?

If Raj is sure Mary will cooperate, he should cheat

If Raj is sure Mary will cooperate, he should cheat.

Which of the following statement(s) accurately describe(s) a monopolistically competitive firm?

It competes against a large number of firms selling slightly different products.

Consider the curve shown in Figure, which shows the market demand, marginal cost, and marginal revenue curve for firms in an oligopolistic industry. In this example, we assume firms have zero fixed costs. The graph shows a downward sloping demand curve, a downward sloping marginal revenue curve, and a horizontal, straight marginal cost line. Suppose the firms collude to form a cartel. What price will the cartel charge? What quantity will the cartel supply? How much profit will the cartel earn? Suppose now that the cartel breaks up and the oligopolistic firms compete as vigorously as possible by cutting the price and increasing sales. What will the industry quantity and price be? What will the collective profits be of all firms in the industry? Compare the equilibrium price, quantity, and profit for the cartel and cutthroat competition outcomes.

If the firms form a cartel, they will act like a monopoly, choosing the quantity of output where MR = MC. Drawing a line from the monopoly quantity up to the demand curve shows the monopoly price. Assuming that fixed costs are zero, and with an understanding of cost and profit, we can infer that when the marginal cost curve is horizontal, average cost is the same as marginal cost. Thus, the cartel will earn positive economic profits equal to the area of the rectangle, with a base equal to the monopoly quantity and a height equal to the difference between price (on the demand above the monopoly quantity) and average cost, as shown in the following figure. The graph shows three solid lines: a downward sloping demand curve, a downward sloping marginal revenue curve, and a horizontal, straight marginal cost line. The graph also shows two dashed lines that meet at the demand curve and identify the profit-maximizing price and quantity. The firms will expand output and cut price as long as there are profits remaining. The long-run equilibrium will occur at the point where average cost equals demand. As a result, the oligopoly will earn zero economic profits due to "cutthroat competition," as shown in the next figure. The graph shows three solid lines: a downward sloping demand curve, a downward sloping marginal revenue curve, and a horizontal, straight marginal cost line. The graph also shows one dashed line that extends from the x-axis and ends at the demand curve/marginal cost intersection. Pc > Pcc. Qc < Qcc. Profit for the cartel is positive and large. Profit for cutthroat competition is zero.

Which of the following reasons is the biggest incentive to create an oligopoly?

In order to earn higher profits. (An oligopoly has more market power than a competitive firm and greater chances to earn an economic profit.)

What is the difference between perfect competition and monopolistic competition? A) Perfect competition has a large number of small firms while monopolistic competition does not. B) In perfect competition, firms produce identical goods, while in monopolistic competition, firms produce slightly different goods. C) Perfect competition has no barriers to entry, while monopolistic competition does. D) Perfect competition has barriers to entry while monopolistic competition does not.

In perfect competition, firms produce identical goods, while in monopolistic competition, firms produce slightly different goods.

Which of the following statements accurately describes a monopolistically competitive firm?

It competes against a large number of firms selling slightly different products. (Monopolistically competitive markets are characterized by a large number of firms.)

What benefits would businesses gain if they worked with each other like they were a monopoly?

Industry output could be depressed by the firms. (It is likely that firms would produce less if they are able to collude and behave as a monopoly in the market. Monopolies tend to produce less to charge a higher price.)

A perfectly competitive firm has a perfectly elastic demand curve while a monopolistically competitive firm has a downward sloping demand curve because ________.

It can sell any quantity it wishes at the prevailing market price (This is true because perfect information exists for a perfectly competitive firm but not for a monopolistically competitive firm that can convince consumers that products are different or have more appealing features.)

Select the statement which describes a monopolistically competitive business with the most accuracy.

It uses advertising to change public perception of its similar products in order to differentiate from competitors.

If Congress reduced the period of patent protection from 20 years to 10 years, what would likely happen to the amount of private research and development?

It would make innovation less lucrative, so the amount of research and development would likely decline.

When analyzing a monopolistically competitive business, how would you say it is inefficient?

Its production is not at the minimum of its average cost curve. (Average cost are not being minimized and productive efficiency is not achieved.)

For a monopolistically competitive firm, ________ is calculated by calculated by dividing total cost by quantity.

Marginal (wrong)

Instead, many economists use game theory,

a branch of mathematics that analyzes situations in which players must make decisions and then receive payoffs based on what other players decide to do.

Why did McDonalds come up with the Big Mac sandwich?

McDonalds invented the Big Mac because its competitors offered similar enough regular burgers that McDonalds lost its monopoly profits. The Big Mac restored those profits, at least until Burger King came up with the Whopper and other fast food restaurants developed their own special burgers.

Shopping malls typically lease retail space to a large number of clothing stores. When this group of retailers competes to sell similar but not identical products, they engage in what economists call ________.

Monopolistic Competition

The new profit-maximizing output is Q1, because the intersection of the MR1 and MC now occurs at point U.

Moving vertically up from that quantity on the new demand curve, the optimal price is at P1.

Assuming that the monopolistic competitor faces the demand and costs depicted below and finds the profit maximizing level of output, what will be the corresponding price?

NOT $15, less than $12

Pure price competition within some industry means that there must be:

NOT zero economic profit in the short-run.

Why do economists use game theory to explain oligopolies?

Oligopolies are complex and varied and game theory allows economists to model different variations of competition and cooperation. (Correct. Oligopolies are complex and varied and game theory allows economists to model different scenarios.)

Cut-throat Competition

Oligopolistic outcome when firms decide to cut prices to capture market share; in the limit, this leads to zero economic profits

Following the assumption that firms maximize profits, how will the price and output policy of an unregulated monopolist compare with ideal market efficiency?

Output will be too small and its price too high

What does it mean in a monopolistically competitive market, when the rule for maximizing profit is to set MR = MC?

Price is higher than marginal revenue. (For a monopolistically competitive firm, price is not equal to marginal cost.)

Which of the following statements are true?

Profit is not maximized when marginal revenue is greater than marginal cost

What happens if either formally or informally, oligopoly firms work together and hold to their agreements?

Profits can be maximized by decreasing output and increasing the price of goods and services. (Decreasing output would lead to higher prices and profit.)

The data below relate to a monopolist and the product it produces. What is the profit-maximizing output and price for this monopolist?

Q=4 : P=$14

The graph below shows the collusion model of oligopoly. What level of output corresponds to allocative efficiency in the market?

Qc where P=MC for the market as a whole

Refer to the graph below. In the collusion model of oligopoly, the efficient level of output is at:

Qc, where P=MC for the market as a whole.

Many purchases that individuals make at the retail level are produced in markets that are neither perfectly competitive, monopolies, nor monopolistically competitive.

Rather, they are oligopolies.

When entry occurs in a monopolistically competitive industry,

a smaller quantity will be demanded at any given price.

Nash Equilibrium

Solution to a game-theoretic scenario when no player has an incentive to change their decision, taking into account what the players have decided and assuming the other players don't change their decisions.

Why do gas stations charge different prices for a gallon of gasoline?

Some gasoline companies use different additives to make their products at least appear different. This allows them to charge higher prices than companies that don't make as good a case for their product. Location also matters. A gas station just off the highway can charge higher prices than stations further away, because travelers perceive and are willing to pay for the convenience of the former.

The Brock and Stack families live by the river and their homes are protected by a levee or dam built and maintained by the local government. What best describes their situation?

The Brock family are free riders because they benefit from the levee but did not pay their property.

What determines how far apart the prices of Colgate and Crest toothpaste can be?

The answer is brand name loyalty. To the extent that Colgate users believe Colgate is superior to Crest, they will be willing to pay more for Colgate than for Crest. By contrast, if the two products are perceived to be close substitutes, the prices should be similar.

After determining its profit-maximizing quantity of output, how does a monopolistic competitor choose its price?

The firm will look at the demand curve to find out what it could charge for that quantity of output. (The demand curve will provide the profit maximizing quantity and price combination.)

If a business is producing where the marginal revenue is less than marginal cost?

The firm's production should be reduced.

Take what you've learned from game theory and apply it to the framework of an oligopoly. Which of these strategies can work like a silent form of cooperation?

The firms always match other cartel firms' price cuts, but don't match price increases. (The dominant strategy for firms is to maintain or gain market share and so they will match price cuts and not match price increases,)

Monopolistically competitive industries are those that contain more than a few firms,

each of which offers a similar but not identical product.

What are the typical results from a successful advertising campaign?

The perceived demand curve becomes more inelastic or it increases. (Advertising is designed to emphasize product differentiation and increase firms' market power and would cause the demand curve to be more inelastic. Advertising can also result in a greater demand for the advertised product.)

What is the effect of advertising when it comes to a business's product?

The product is more clearly differentiated. (Advertising is designed to emphasize product differentiation.)

As a firm's perceived demand curve shifts to the left, its marginal revenue curve will shift to the left, too.

The shift in marginal revenue will change the profit-maximizing quantity that the firm chooses to produce, since marginal revenue will then equal marginal cost at a lower quantity.

Which scenario below is an example of an Oligopoly?

The soda industry with very few large firms that have a lot of control over the market, such as Pepsi and Coke

Which of the following do firms in an oligopoly tend to operate more like?

They can operate like competitors or monopolies. (In some cases, they do operate like monopolies, in others, more like competitors.)

Which of the following is not true about oligopolies?

They exist as a large number of firms that have all or most of the market share.

Which of the following is not true about oligopolies?

They exist as a large number of firms that have all or most of the market share. (This is not true. An oligopoly arises when a small number of large firms have all or most of the sales in an industry.)

What characterizes oligopolistic markets?

They have a small number of sellers. (A market where a small number of large firms to dominate most or all of the sales would be known as an oligopoly market.)

For which of the following reason(s) are oligopolies inefficient? They may lack incentives to provide innovative products and high-quality service. Typically they do not produce at the minimum of their average cost curves. Barriers to entry can allow them to earn sustained profits over long periods of time.

They may lack incentives to provide innovative products and high-quality service. Typically they do not produce at the minimum of their average cost curves.

If you recall, price takers are firms that have no market power.

They simply have to take the market price as given.

If each of two monopolistic competitors undertakes equally successful advertising efforts to attract consumers away from the other, the total result is ________.

They will simply neutralize one another's efforts

What is the greatest incentive for creating a oligopoly?

earn higher profits

In monopolistic competition, the products are differentiated?

True

The prisoner's dilemma shows that when each individual pursues his or her own self-interest, the outcome is worse than if they had both cooperated?

True

There are "Many" firms in Monopolistic Competition?

True

The game theory (Prisoners Dilemma)

Two co-conspiratorial criminals are arrested. When they are taken to the police station, they refuse to say anything and are put in separate interrogation rooms. Eventually, a police officer enters the room where Prisoner A is being held and says: "You know what? Your partner in the other room is confessing. So your partner is going to get a light prison sentence of just one year, and because you're remaining silent, the judge is going to stick you with eight years in prison. Why don't you get smart? If you confess, too, we'll cut your jail time down to five years, and your partner will get five years, also." Over in the next room, another police officer is giving exactly the same speech to Prisoner B. What the police officers do not say is that if both prisoners remain silent, the evidence against them is not especially strong, and the prisoners will end up with only two years in jail each.

Within a monopolistically competitive industry, it would be expected that:

economic profits are zero in the long run.

For which of the following reason(s) are oligopolies inefficient? Barriers to entry can allow them to earn sustained profits over long periods of time. Typically they do not produce at the minimum of their average cost curves. They may lack incentives to provide innovative products and high-quality service.

Typically they do not produce at the minimum of their average cost curves. They may lack incentives to provide innovative products and high-quality service.

Collusion

When firms act together to reduce output and keep prices high

Monopolistic competition is ________ and a good example would be ________.

When many firms compete with distinctive products; toothpaste Monopolistic competition is what economists call industries that consist of many firms competing against each other, but selling products that are distinctive in some way. When products are distinctive such as various forms of toothpastes with a large breadth and depth, each firm has a mini-monopoly on its particular style or flavor or brand name.

Select the statement that is most accurate.

When marginal revenue is greater than marginal cost profit is not maximized. (When marginal revenue is greater than marginal cost, profit is not maximized, the firms should produce more output and will increase profit as long as marginal revenue is higher than marginal cost.)

When does cut-throat competition happen with oligopolistic firms?

When the firms push each other with stiff competition acting like perfect competitors driving down prices, which in the long-run leads to zero profits.

Which of the following is a question economists have struggled to address with only partial success?

Whether a market-oriented economy produces the optimal amount of variety?

Consider the following questions:

Why do gas stations charge different prices for a gallon of gasoline? What determines how far apart the prices of Colgate and Crest toothpaste can be? Why did fast food restaurants start offering salads? Why are fast food chicken sandwich prices different from burger prices? Why did McDonalds come up with the Big Mac sandwich?

When oligopoly firms engage in cut-throat competition it tends to result in ________.

ZERO economic profits

game theory:

a branch of mathematics that economists use to analyze situations in which players must make decisions and then receive payoffs based on what decisions the other players make

Saudi Arabia, Venezuela, Qatar and others, are members of OPEC, which is best described as which of the following?

a cartel

Saudi Arabia, Venezuela, Qatar and others, are members of OPEC, which is best described as which of the following? an oligopoly a monopoly a cartel

a cartel

When firms act together, such as O.P.E.C. does, to reduce output and keep prices high, we call these firms:

a cartel

When firms act together, such as O.P.E.C. does, to reduce output and keep prices high, we call these firms:

a cartel.

What is the relationship between product differentiation and monopolistic competition?

a firm selling a differentiated product is essentially a monopolist for that product, and so is able to exercise some market power

In the framework of monopolistic competition, the way advertising works can be perceived as:

a firms perceived demand curve to become more inelastic.

prisoner's dilemma:

a game in which the gains from cooperation are larger than the rewards from pursuing self-interest

non-rivalrous:

a good that does not get used up, meaning that if one person uses the public good, another can also use it

non-excludable goods:

a good that no one is excluded from using

cartel:

a group of firms that collude to produce the monopoly output and sell at the monopoly price

Another way of interpreting this shift in demand is to notice that, for each quantity sold,

a lower price will be charged.

Let's pretend we are in a monopolistically competitive industry where P > MC. Then we should expect that this industry will most likely produce ______________________ than in a perfectly competitive industry.

a lower quantity of a good and charge a higher price

benefits to society of providing additional quantity as measured by the price that people are willing to pay exceeds the marginal costs to society of producing those units.

a lower quantity of a good and charge a higher price

externality:

a market exchange that affects a third party who is outside or "external" to the exchange; sometimes called a "spillover"

Why are the underlying economic meanings of the perceived demand curves for a monopolist and monopolistic competitor different?

a monopolist faces the market demand curve and a monopolist competitor does not

But the underlying economic meaning of these perceived demand curves is different, because

a monopolist faces the market demand curve and a monopolistic competitor does not.

Which of the following represents a difference in the process by which a monopolistic competitor and a monopolist make their respective decisions about quantity and price?

a monopolist need not fear entry and also selection b above

Second, a monopolist is surrounded by barriers to entry and need not fear entry, but

a monopolistic competitor who earns profits must expect the entry of firms with similar, but differentiated, products.

In monopolistic competition, each firm's marginal revenue curve has A) a negative slope, and so does its demand curve. B) a slope equal to zero, but its demand curve has a negative slope. C) a slope equal to zero, and so does its demand curve. D) a negative slope, but its demand curve has zero slope.

a negative slope, and so does its demand curve.

kinked demand curve:

a perceived demand curve that arises when competing oligopoly firms commit to match price cuts, but not price increases

differentiated product:

a product that is consumers perceive as distinctive in some way

differentiated product:

a product that its consumers perceive as distinctive in some way

positive externality:

a situation where a third party, outside the transaction, benefits from a market transaction by others

negative externality:

a situation where a third party, outside the transaction, suffers from a market transaction by others

Oligopoly arises when

a small number of large firms have all or most of the sales in an industry.

free ride:

a song written by Dan Hartman and performed by The Edgar Winter Group. The single, engineered by Jim Reeves, was a top 20 U.S. hit in 1973, hitting number 14 on the Billboard Hot 100 Chart.

In the framework of monopolistic competition, advertising works because it causes:

a steeper demand curve

In the framework of monopolistic competition, advertising works because it causes

a steeper perceived demand curve, as well as c above.

In the framework of monopolistic competition, advertising works because it causes:

a steeper perceived demand curve.

When price is equal to average cost,

economic profits are zero.

Firms in monopolistic competition can achieve product differentiation by A) exploiting economies of scale in production. B) advertising special characteristics. C) expanding plant size. D) setting the price equal to average revenue.

advertising special characteristics.

Perfect competition displays _____________________ because the social benefits of additional production, as measured by the price that people are willing to pay, are in balance with the ____________ to society of that production.

allocative efficiency; marginal costs

A monopolistically competitive industry does not display ________ in either the short-run, when firms are making economic profits and losses, nor in the long-run, when firms are earning ________ .

allocative efficiency; zero economic profits

In the framework of an oligopoly, what strategy can work like a silent form of cooperation?

always match other cartel firms' price cuts, but don't match price increases

In the framework of an oligopoly, what strategy can work like a silent form of cooperation? immediately match price increases always match other cartel firms' price increases, but don't match price cuts legally enforceable agreements always match other cartel firms' price cuts, but don't match price increases

always match other cartel firms' price cuts, but don't match price increases

In the framework of an oligopoly, what strategy can work like a silent form of cooperation? legally enforceable agreements always match other cartel firms' price cuts, but don't match price increases always match other cartel firms' price increases, but don't match price cuts immediately match price increases

always match other cartel firms' price cuts, but don't match price increases

In the framework of an oligopoly, what strategy can work like a silent form of cooperation?

always match other firms' price cuts, but don't match price increases

Using the term "spillover" is a less formal means of describing

an externality.

A monopolistically competitive firm perceives a demand for its goods that is

an intermediate case between monopoly and competition. Figure

When a few large firms legally have all or most of the sales in an industry, we call this:

an oligopoly

duopoly:

an oligopoly with only two firms

A monopolistic competitor, like a monopolist, faces a downward-sloping demand curve,

and so it will choose some combination of price and quantity along its perceived demand curve.

If the firm is producing at a quantity where marginal costs exceed marginal revenue, then each marginal unit is costing more than the revenue it brings in,

and the firm will increase its profits by reducing the quantity of output until MR = MC.

As more firms enter the market, the quantity demanded at a given price for any particular firm will decline,

and the firm's perceived demand curve will shift to the left.

product differentiation:

any action that firms do to make consumers think their products are different from their competitors'

If oligopolists compete hard against each other,

approaching zero profits will result for all.

Oligopolistic markets:

are characterized as having a small number of sellers

Oligopolistic markets:

are characterized as having a small number of sellers. typically have higher barriers to entry.

While monopolistically competitive firms may earn losses in the short run, in the long run after the losses cause some firms to exit, the firms that remain in the market

are no longer earning losses will each have ongoing negative earnings (wrong) are no longer earning zero economic profits have positive earnings

Through the process of exit, monopolistically competitive firms remaining in the market

are no longer earning losses.

Through the process of exit, monopolistically competitive firms remaining in the market

are no longer earning zero economic profits

A small handful of oligopoly firms may end up competing so fiercely that they all find themselves earning zero economic profits—

as if they were perfect competitors.

The fourth column, marginal revenue, is calculated

as the change in total revenue divided by the change in quantity.

For a firm in monopolistic competition, the marginal cost curve intersects the average total cost curve A) at no point. B) at the minimum average total cost. C) to the left of the minimum average total cost. D) to the right of the minimum average total cost.

at the minimum average total cost.

Unlike a monopoly, with its high barriers to entry, a monopolistically competitive firm with positive economic profits will

attract competition.

Examples of oligopoly abound and include the

auto industry, cable television, and commercial air travel.

The long-term result of entry and exit in a perfectly competitive market is that all firms end up selling at the price level determined by the lowest point on the

average cost curve.

Total cost is

average cost times quantity (This is the area of the rectangle that starts at the origin, goes up the vertical axis to an average cost of $14.50, goes over to the average cost curve, down to the quantity of 40 and back to the origin.)

The desire of businesses to ____________, so that they can raise the prices that they charge and earn higher profits, has been well-understood by economists for a long time.

avoid competing with each other

The desire of businesses to __________________________, so that they can raise the prices that they charge and earn higher profits, has been well-understood by economists for a long time.

avoid competing with each other

The desire of businesses to __________________________, so that they can raise the prices that they charge and earn higher profits, is a reason why oligopolies are ripe for collusion.

avoid competing with each other

Thus, when entry occurs in a monopolistically competitive industry, the perceived demand curve for each firm will shift to the left,

because a smaller quantity will be demanded at any given price.

If the firm is producing at a quantity of output where marginal revenue exceeds marginal cost, then the firm should keep expanding production,

because each marginal unit is adding to profit by bringing in more revenue than its cost. In this way, the firm will produce up to the quantity where MR = MC.

In such a setting, the market has room for only one firm,

because no smaller firm can operate at a low enough average cost to compete, and no larger firm could sell what it produced given the quantity demanded in the market.

external benefits (or positive externalities):

beneficial spillovers to a third party of parties, who did not purchase the good or service that provided the externalities

positive externalities:

beneficial spillovers to a third party or parties

A positive externality arises when a third party, outside the transaction, ________.

benefits from a market transaction

Which of the following would be classified as a differentiated product produced by a monopolistic competitor?

big mac sandwiches

Thus, if oligopolists always match price cuts by other firms in the cartel,

but do not match price increases, then none of the oligopolists will have a strong incentive to change prices, since the potential gains are minimal.

Monopolistic competitors can make an economic profit or loss in the short run,

but in the long run, entry and exit will drive these firms toward a zero economic profit outcome.

Monopolistically competitive markets feature a large number of competing firms,

but the products that they sell are not identical.

If a monopolist raises its price, some consumers will choose not to purchase its product—

but they will then need to buy a completely different product.

Oligopoly firms acting individually may seek to gain profits ____________.

by expanding levels of output and cutting prices

Oligopoly firms acting individually may seek to gain profits ___________________________ .

by expanding levels of output and cutting prices

Oligopoly firms acting individually may seek to gain profits:

by expanding levels of output and cutting prices.

How can forms who find themselves in a prisoner's dilemma situation avoid the undesired outcome and cooperate with each other?

by finding effective ways to penalize firms who do not cooperate

The long-term result of entry and exit in a perfectly competitive market is that all firms end up selling at the price level determined

by the lowest point on the average cost curve.

A price-taking firm A) cannot influence the price of the product it sells. B) talks to rival firms to determine the best price for all of them to charge. C) sets the product's price to whatever level the owner decides upon. D) asks the government to set the price of its product.

cannot influence the price of the product it sells.

In 2007, five or six major pharmaceutical companies formed a group in order to control the price of vitamins and adjust their production. Such an arrangement is called a ________.

cartel

a group of firms that collude to produce the monopoly output and sell at the monopoly price

cartel

In 2007, five or six major pharmaceutical companies formed a group in order to control the price of vitamins and adjust their production. Such an arrangement is called a ________.

cartel (A dominant strategy would not require control of price and production by the firms in the market.)

In the framework of monopolistic competition, the way advertising works can be perceived as:

causing a firm's perceived demand curve to become more inelastic.

In the framework of monopolistic competition, the way advertising works can be perceived as

causing a firm's perceived demand curve to become more inelastic. (Advertising is designed to emphasize product differentiation and increase a firm's market power which would be a move away from the perfect competition model.)

In the framework of monopolistic competition, the way advertising works can be perceived as

causing both b and c to occur.

In what way(s) is a monopolistically competitive firm inefficient?

charges price higher than marginal cost doesn't produce at the minimum of its avg cost curve

If the firms decide to collude, they

choose to produce the monopoly output, Qc, and charge a corresponding price, Pc, which can be read off the market demand curve.

Which of the following is an example of a monopolistically competitive industry? A) wheat farming B) colleges and universities C) the local electricity producer D) the domestic automobile producing industry

colleges and universities

when firms act together to reduce output and keep prices high

collusion

Cut-throat competition happens when oligopolistic firms ________.

compete hard and end up acting very much like perfect competitors, driving down costs and leading to zero profits in the long run

Cut-throat competition happens when oligopolistic firms ________.

compete hard and end up acting very much like perfect competitors, driving down costs and leading to zero profits in the long run (This oligopolistic outcome is when firms decide to cut prices to capture market share; in the limit, this leads to zero economic profits.)

Cut-throat competition happens when oligopolistic firms ________.

compete hard and end up acting very much like perfect competitors, driving down costs and leading to zero profits in the long run.

The desire of businesses to __________________________, so that they can raise the prices that they charge and earn higher profits, is a reason why oligopolies are ripe for collusion.

compete with each other

Firms in an oligopoly typically act more like ________. shareholders business partners competitors

competitors and monopolies

In a prisoner's dilemma, assuming the individuals can't communicate, what type of behavior provides the most benefit for each of them?

confess

In a prisoner's dilemma, what type of behavior provides the most benefit for each individual?

confess

In a prisoner's dilemma, what type of behavior provides the most benefit for each individual? remain silent confess cooperate

confess

Analyzing the choices of oligopolistic firms about pricing and quantity produced involves

considering the pros and cons of competition versus collusion at a given point in time.

Monopolistic competition is what economists call industries that

consist of many firms competing against each other, but selling products that are distinctive in some way.

Sometimes oligopolies in the same industry are very different in size. Suppose we have a duopoly where one firm (Firm A) is large and the other firm (Firm B) is small, as shown in the prisoner's dilemma box: What is Firm B's most likely choice? Firm B colludes with Firm AFirm B cheats by selling more outputFirm A colludes with Firm BA gets $1,000,B gets $100A gets $800,B gets $200Firm A cheats by selling more outputA gets $1,050,B gets $50A gets $500,B gets $2 cooperate with Firm A work independently cheat

cooperate with Firm A

cooperate with firm A

Oligopolies cause market inefficiency by

creating more deadweight loss in society

If a monopoly or a monopolistic competitor raises their prices, then

decline in quantity demanded will be larger for the monopolistic competitor.

The best way to explain the concept of differentiated products is:

describing the degree of product variety that is available.

market failure:

efficiently in a way that balances social costs and benefits; externalities are one example of a market failure

The location of a firm can also create a

difference between producers.

Intangible aspects can

differentiate a product, too.

Monopolistic competitors in the food industry will often include a recyclable symbol on packaging used for their product as a means to

differentiate their product.

Monopolistic competitors in the food industry will often include a recyclable symbol on packaging used for their product as a means to:

differentiate their product.

a product that is perceived by consumers as distinctive in some way?

differentiated product

Many residents of a particular town enjoy taking their dogs with them when they go to their local park for recreation and picnics. Everybody enjoys the park more when each group cleans up after themselves and their pets, but nobody enjoys the act of cleaning up after themselves or their dogs. We can expect the park to be ________, due to a ________.

dirty : prisoner's dilemma

In the competitive market for figure skate blades, manufacturers offer an array of products that are

distinctly different in a particular way.

If oligopolistic firms banded together with the intention of acting like a monopoly, it would likely result in their being able to

divide up the monopoly level of profit amongst themselves.

A successful advertising campaign may allow competing monopolists to

do all of the above.

Oligopolistic markets are those

dominated by a small number of firms.

The demand curve faced by a monopoly is ________ and relatively inelastic.

downward sloping

Monopolistic competition is faces a ________ demand curve, and will choose a combination of ________ and quantity in order to maximize profit.

downward sloping; price

The demand curve as perceived by a monopolistic competitor is ______________ .

downward-sloping

Let's pretend we are a monopolistic competitor. Then our demand curve is:

downward-sloping left to right.

In a monopolistically competitive industry, when a business faces a ________ demand curve, it will choose a combination of quantity and ________ to maximize its profit.

downward-sloping; price

In a monopolistically competitive industry, when a business faces a ________ demand curve, it will choose a combination of quantity and ________ to maximize its profit.

downward-sloping; price (If the demand curve is downward sloping, the firm has some control over the price and can choose the quantity it will produce as well as the price.)

A monopolistically competitive firm and a monopoly both have a ________ demand curve and can therefore charge ________.

downwardly sloping curves; a price that is greater than the marginal cost Since there are substitutes, the demand curve facing a monopolistically competitive firm is more elastic than that of a monopoly where there are no close substitutes. However, a monopolist faces the market demand curve and a monopolistic competitor does not. The marginal revenue always less than the price of the good because they both must lower the price in order to sell additional ones.

A monopolistically competitive firm and a monopoly both have a ________ demand curve and can therefore charge ________.

downwardly sloping demand curves; a price that is greater than the marginal cost (Since there are substitutes, the demand curve facing a monopolistically competitive firm is more elastic than that of a monopoly where there are no close substitutes. However, a monopolist faces the market demand curve and a monopolistic competitor does not, The marginal revenue always less than the prices of the good because they both must lower the price in order to sell additional ones.)

Let's pretend we are in a monopolistic competitive industry, Then firms in this industry can try to differentiate their products by all of the following except:

drastically raising the price.

If oligopolists compete hard, they may end up acting very much like perfect competitors,

driving down costs and leading to zero profits for all.

an oligopoly with only two firms

duopoly

When products are distinctive,

each firm has a mini-monopoly on its particular style or flavor or brand name.

Does each individual in a prisoner's dilemma benefit more from cooperation or from pursuing self-interest? Explain briefly.

each individual benefits more from pursuing self interest, because the self interested option is better for him regardless of what the other participant does

If a perfectly competitive market involves many firms selling identical products, then, in the face of such competition,

each of these firms must act as a price-taker.

In the framework of monopolistic competition, there are two ways to conceive of how advertising works:

either advertising causes a firm's perceived demand curve to become more inelastic (that is, it causes the perceived demand curve to become steeper); or advertising causes demand for the firm's product to increase (that is, it causes the firm's perceived demand curve to shift to the right).

Select all of the following examples that are considered monopolies:

electric utility companies U.S. postal service

The task of public policy with regard to competition is to sort through these multiple realities, attempting to

encourage behavior that is beneficial to the broader society and to discourage behavior that only adds to the profits of a few large companies, with no corresponding benefit to consumers.

In a monopolistic competitive industry, firms can try to differentiate their products by

enhancing product's physical aspects and all of the above.

In a perfectly competitive market, each firm produces at a quantity where price is set

equal to marginal cost, both in the short run and in the long run.

A zero economic profit means the firm's accounting profit is

equal to what its resources could earn in their next best use

When P > MC, which is the outcome in a monopolistically competitive market, the benefits to society of providing additional quantity, as measured by the price that people are willing to pay,

exceed the marginal costs to society of producing those units.

A characteristic of monopolistic competition is that each firm A) faces perfectly elastic demand. B) faces a downward-sloping demand curve. C) has a perfectly inelastic supply. D) has a perfectly elastic supply.

faces a downward-sloping demand curve.

If a perfectly competitive firm raises its price, the quantity demanded of its product ____________.

falls to zero

If a perfectly competitive firm raises its price, the quantity demanded of its product _____________.

falls to zero

How can parties who find themselves in a prisoner's dilemma situation avoid the undesired outcome and cooperate with each other?

find effective ways to penalize firms who do not cooperate

Sometimes oligopolies in the same industry are very different in size. Suppose we have a duopoly where one firm (Firm A) is large and the other firm (Firm B) is small, as shown in the prisoner's dilemma box: What is Firm B's dominant strategy? Should it collude or cheat? Firm B colludes with Firm A Firm B cheats by selling more output Firm A colludes with Firm B A gets $1,000, B gets $100 A gets $800, B gets $200 Firm A cheats by selling more output A gets $1,050, B gets $50 A gets $500, B gets $200

firm b should cheat

imperfectly competitive:

firms and organizations that fall between the extremes of monopoly and perfect competition

Which of the following are advantages that firms could gain by working together as if they were a monopoly?

firms can hold down industry output

Which best describes an oligopoly?

firms must make decisions based on the behavior or expected behavior of their competitors

Most of the firms that get talked about as "monopolies" today or that regulatory authorities pursue antitrust activities against are actually oligopolies,

firms that have only a limited number of competitors.

The tragedy of the commons refers to the fact that

fish in common water areas tend to be overfished.

The demand curve as perceived by a perfectly competitive firm is __________ .

flat

The demand curve faced by a perfectly competitive firm is:

flat and perfectly elastic

Firms exit up to the point where there are no more losses in this market,

for example when the demand curve touches the average cost curve,

Cartels are

formal agreements to collude.

The branch of mathematics that analyzes situations in which players must make decisions and then receive payoffs most often used by economists is

game theory

a branch of mathematics often used by economists that analyzes situations in which players must make decisions and then receive payoffs based on what decisions the other players make

game theory

The branch of mathematics that analyzes situations in which players must make decisions and then receive payoffs most often used by economists is

game theory.

Thus, all players have made an optimal decision,

given the decisions of the other players.

This outcome is why perfect competition displays productive efficiency:

goods are being produced at the lowest possible average cost.

Which of the following would most likely create the setting for an oligopoly?

government grants Alex, Trent, and Alyse each a patent for their respective molybdenum based electric car batteries

Government policies in addition to patent protection that can spur innovation include:

government regulations that require innovative products. direct government investment in research and development.

We characterize oligopolies by

high barriers to entry with firms choosing output, pricing, and other decisions strategically based on the decisions of the other firms in the market.

Oligopolies are characterized by

high barriers to entry with firms strategically choosing output, pricing, and other decisions based on the decisions of the other firms in the market.

By acting together, oligopolistic firms can

hold down industry output, charge a higher price, and divide the profit among themselves.

The reason that the firm faces a kink in its demand curve is because of

how the other oligopolists react to changes in the firm's price.

How can a monopolistic competitor tell whether the price it is charging will cause the firm to earn profits or experience losses?

if the price it changes is above the average cost of production, the firm will experience profits. if the price is lower than average cost, the firm will experience losses

firms and organizations that fall between the extremes of monopoly and perfect competition

imperfectly competitive

Which of the following refers to firms' ability to make the same pricing decisions without consulting each other?

implicit collusion

Which of the following refers to firms' ability to make the same pricing decisions without consulting each other? malfeasance implicit collusion price fixing

implicit collusion

Which of the following refers to firms' ability to make the same pricing decisions without consulting each other? malfeasance price fixing implicit collusion

implicit collusion

________ refers to firms' ability to make the same pricing decisions without consulting each other.

implicit collusion

Which is the correct calculation for total cost?

implicit cost + explicit cost (Total cost would be equal to fixed cost + variable cost or average cost x quantity.)

Which is the correct calculation for total cost?

implicit cost + explicit cost / avg cost + quantity

Oligopolies are inefficient for the same reasons that monopolies are—

in order to reap economic profits, they produce too little output so they create deadweight losses to society.

Within a monopolistically competitive industry, it would be expected that

in the short-run, an innovative firm's price can be greater than their average cost. (In the short run, a firm can earn economic profit when price is greater than average cost.)

Within a monopolistically competitive industry, it would be expected that:

in the short-run, an innovative firm's price is greater than their average cost.

One example of the pressure these firms can exert on one another is the kinked demand curve,

in which competing oligopoly firms commit to match price cuts, but not price increases.

This strategy can work like a silent form of cooperation,

in which the cartel successfully manages to hold down output, increase price, and share a monopoly level of profits even without any legally enforceable agreement.

Monopolistic competition is different from perfect competition in that monopolistically competitive markets

involves non-price competition in the form of differentiated products.

A group of firms that have a formal agreement to collude to produce the monopoly output and sell at the monopoly price

is called a cartel.

The other type of imperfectly competitive market

is oligopoly.

A perfectly competitive firm has a perfectly elastic demand curve while a monopolistically competitive firm has a downward sloping demand curve because ________.

it can sell any quantity it wishes at the prevailing market price.

A monopolistically competitive firm is considered inefficient in the short and long run because ________.

it has deadweight loss

A monopolistically competitive firm is considered inefficient in the short and long run because ________.

it has deadweight loss. (A monopolistically competitive firm does not produce more, which means that society loses the net benefit of those extra units and therefore deadweight loss. This is the same argument we made about monopoly, but in this case to a lesser degree. Thus, a monopolistically competitive industry will produce a lower quantity of a good and charge a higher price for it than would a perfectly competitive industry.)

Effective advertising has what effect on a firm's product?

it increases product differentiation

When firms act together in this way to reduce output and keep prices high,

it is called collusion.

In many parts of the world, including the European Union and the United States,

it is illegal for firms to divide up markets and set prices collaboratively.

How is the perceived demand curve for a monopolistically competitive firm different from the perceived demand curve for a monopoly or a perfectly competitive firm?

it will be relatively elastic compared to that of the monopolist, since there are a large number of similar substitutes for the product, bus less elastic for that of the perfectly competitive firm, since products are differentiated

If a monopolistic competitor raises its price, it will not lose as many customers as would a perfectly competitive firm, but

it will lose more customers than would a monopoly that raised its prices.

Like firms in any market structure, if a monopolistically competitive firm wishes to maximize profits,

it will supply the quantity of output where marginal revenue equals marginal cost.

a perceived demand curve that arises when competing oligopoly firms commit to match price cuts, but not price increases

kinked demand curve

If the CEO of I'MaBigBank is playing prisoner's dilemma then, from his perspective, the gains to be had from cooperation are

larger than the rewards from pursuing self-interest.

When another competitor enters the market, the original firm's perceived demand curve shifts to the

left, from D0 to D1, and the associated marginal revenue curve shifts from MR0 to MR1

All of the following are examples of product differentiation in monopolistic competition EXCEPT A) new and improved packaging. B) lower price. C) acceptance of more credit cards than the competition. D) location of the retail store.

lower price.

Firms in an oligopoly often:

make decisions based on the behavior or expected behavior of their competitors.

Firms in an oligopoly often: face perfectly elastic demand curves. make decisions based on the behavior or expected behavior of their competitors. have no incentive to collude.

make decisions based on the behavior or expected behavior of their competitors.

Firms in an oligopoly often: have no incentive to collude. make decisions based on the behavior or expected behavior of their competitors. face perfectly elastic demand curves.

make decisions based on the behavior or expected behavior of their competitors.

Firms in an oligopoly often

make decisions based on the behavior or expected behavior of their competitors. (Firms in oligopoly markets are mutually interdependent and make decisions based on the behavior or expected behavior of their competitors.)

monopolistic competition:

many firms competing to sell similar but differentiated products

For a monopolistically competitive firm, ________ is calculated by dividing the change in total cost by the change in quantity.

marginal cost (Marginal cost = Change in total cost / change in quantity)

Perfect competition displays allocative efficiency because the social benefits of additional production, as measured by the price that people are willing to pay, are in balance with the ________ to society of that production.

marginal costs

Advertising spent on differentiated products for monopolistically competitive firms is considered controversial in ________.

market-oriented economies

Advertising spent on differentiated products for monopolistically competitive firms is considered controversial in ________.

market-oriented economies (Economists have struggled, with only partial success, to address the question of whether a market-oriented economy produces the optimal amount of variety. Critics of market-oriented economies argue that society does not really need dozens of different athletic shoe or breakfast cereals or automobiles. they argue that much of the costs of creating such a high degree of product differentiation, is societally wasteful. defenders of a market-oriented economy response that if people do not want to buy differentiated products or highly advertised brand names, no one is forcing them to do so, Moreover, they argue that consumers benefit substantially when firms seek short-term profits by providing differentiated products.)

The perceived demand curve for a group of competing oligopoly firms will appear kinked as a result of their commitment to

match price cuts, but not price increases.

The perceived demand curve for a group of competing oligopoly firms will appear kinked as a result of their commitment to:

match price cuts, but not price increases.

By agreeing to work together, either formally or informally, oligopolies in a market can ________ profits by reducing output and charging a ________ price which is much like a monopoly.

maximize; higher

By agreeing to work together, either formally or informally, oligopolies in a market can ________ profits by reducing output and charging a ________ price which is much like a monopoly.

maximize; higher (Economists have understood for a long time the desire of businesses to avoid competing so that they can instead raise the prices that they charge and earn higher profits. If oligopolists collude with each other, they may effectively act like a monopoly and succeed in pushing up prices and earning consistently high levels of profit. Oligopolies are typically characterized by mutual interdependence where various decision such as output, price, advertising, and so on, depend on the decision of the other firm(s). Analyzing the choices of oligopolistic firms about pricing and quantity produced involves considering the pros and cons of competition versus collusion at a given point in time.)

Is a monopolistically competitive firm productively efficient? Is it allocatively efficient? Why or why not?

no, because it does not produce at the minimum of its average cost curve

A clothing store has a wide selection of clothing for women. Within the clothing racks are shirts, pants, dresses, skirts, blouses, etc. Clothing manufacturers such as Guess, Donna Karan, Levi, Calvin Klein, etc. have build up their brand names through marketing and advertising to differentiate their clothes in the mind of the consumer. This group of clothing manufacturers competes to sell similar but not identical products, they are engaging in ________.

monopolistic competition

Which of the following market types has a large number of firms that sell similar but slightly different products? A) perfect competition B) oligopoly C) monopolistic competition D) monopoly

monopolistic competition

many firms competing to sell similar but differentiated products

monopolistic competition

monopolistic competition (Monopolistically competitive markets are characterized by a large number of firms with differentiated products.)

The single most common form of competition in the U.S. is:

monopolistic competition among firms with different products

The single most common form of competition in the U.S. is

monopolistic competition among firms with differentiated products.

An industry with a large number of firms, differentiated products, and free entry and exit is called A) oligopoly. B) monopoly. C) monopolistic competition. D) perfect competition.

monopolistic competition.

A monopolistically competitive firm will profit maximize using the marginal principle much like a(n) ________.

monopoly

The largest cattle rancher in a given region will be unable to have a ________ when sufficient numbers of smaller cattle ranchers provide sources of competition.

monopoly

A monopolistically competitive firm will profit maximize using the marginal principle much like a(n) ________.

monopoly (The monopolistically competitive firm decides on its profit-maximizing quantity and price in much the same was as a monopolist. To maximize profits, it will choose a quantity and price based on the marginal principle where MR=MC.)

As the name monopolistic competition implies, a firm's decisions in this setting will in certain ways resemble ______________ and in other ways resemble________________ .

monopoly; perfect competition

Even though it seems to be an oxymoron, the name monopolistic competition implies that a firm's decisions in this setting will in certain ways resemble ______________ and in other ways resemble________________ .

monopoly; perfect competition

Since there are substitutes, the demand curve facing a monopolistically competitive firm is

more elastic than that of a monopoly where there are no close substitutes.

Will the firms in an oligopoly act more like a monopoly or more like competitors? Briefly explain.

more like competitors, because although their products are somewhat different, there are still plenty of substitutes for consumers to choose if prices get too high

The combinations of price and quantity at each point on the demand curve can be

multiplied to calculate the total revenue that the firm would receive, which is shown in the third column of Table 1.

In comparison with perfect competition that spawns allocative and productive efficiencies, monopolistic competition creates ________.

neither productive efficiency nor allocative efficiency. (Monopolistic competition does not minimize average cost and price is greater than marginal cost and therefore achieves neither productive efficiency nor allocative efficiency.)

As long as the firm is earning positive economic profits,

new competitors will continue to enter the market, reducing the original firm's demand and marginal revenue curves.

If firms in a monopolistically competitive industry are earning an economic profit, then A) some workers will leave the industry's labor force. B) new firms will enter the industry. C) some firms will leave the industry. D) some customers will exit the market.

new firms will enter the industry.

In the short-run, the firm will operate (not shut down) as long as revenue is more than enough to cover ________.

variable costs

A public good is a good that is ________, and thus is difficult for market producers to sell to individual consumers.

nonexcludable and nonrivalrous

However, in monopolistic competition, the end result of entry and exit is that firms end up with a price that lies on the downward-sloping portion of the average cost curve,

not at the very bottom of the AC curve. (Thus, monopolistic competition will not be productively efficient.)

Many people would prefer to live in an economy with many kinds of clothes, foods, and car styles;

not in a world of perfect competition where everyone will always wear blue jeans and white shirts, eat only spaghetti with plain red sauce, and drive an identical model of car.

Critics of market-oriented economies argue that society does

not really need dozens of different athletic shoes or breakfast cereals or automobiles.

However, when a monopolistic competitor raises its price, some consumers will choose

not to purchase the product at all, but others will choose to buy a similar product from another firm.

cut-throat competition:

oligopolistic outcome when firms decide to cut prices to capture market share; in the limit, this leads to zero economic profits

when a few large firms have all or most of the sales in an industry

oligopoly

Suppose circumstances have allowed several large firms to have all or most of the sales in an industry. Which of the following may be happening? oligopoly cartel perfect competition

oligopoly cartel

When firms act in overt collusion to reduce output and keep prices high, they are considered

oligopoly (wrong) cartel

In principle, one can calculate and graph an

oligopoly's cost and revenue curves, and determine its profit maximizing level of output and price in the same way as we did with monopoly.

A combination of the barriers to entry that create monopolies and the product differentiation that characterizes monopolistic competition can create the setting for an

oligopoly.

In monopolistic competition, the end result of entry and exist is that firms end up with a price that lies

on the downward-sloping portion of the average cost curve.

In monopolistic competition, the result of entry and exit in the long run is that firms end up with a price that lies

on the downward-sloping portion of the average cost curve.

In monopolistic competition, the result of entry and exit in the long run is that firms end up with a price that lies

on the downward-sloping portion of the average cost curve. (In the long run, economic profit is zero for monopolistic competition and the price is equal to the average cost. The point where price is equal to average cost happens to be on the downward-sloping portion of the average cost curve.)

Perfect competition and monopoly stand at _____________ of the spectrum of competition.

opposite ends

If one monopolistic competitor earns positive economic profits,

other firms will be tempted to enter the market.

Flood control is a good example of a public good because

people who did not pay cannot be prevented from receiving the good.

When exit occurs in a monopolistically competitive industry the

perceived demand and marginal revenue curves will shift to the right.

Figure 1 offers a reminder that the demand curve as faced by a perfectly competitive firm is

perfectly elastic or flat, because the perfectly competitive firm can sell any quantity it wishes at the prevailing market price.

A firm can try to make its products different from those of its competitors in several ways:

physical characteristics of the product, location from which the product is sold, intangible aspects of the product, and perceptions of the product.

Scotty invents a new technology to teleport objects that revolutionizes the transportation industry. This technology has

positive externalities because the benefits of this new technology for society are greater than the private benefit of Scotty

Assuming economies of scale exist, within a monopolistically competitive industry in the long-run, it would be expected that:

price is greater than marginal cost

Assuming economies of scale exist, within a monopolistically competitive industry in the long-run, it would be expected that

price is greater than marginal cost. (Price is greater than marginal cost in the long run in monopolistically competitive industries because at profit maximizing output, marginal cost is equal to marginal revenue but price is greater than marginal revenue, therefore price will be greater than marginal cost.)

In a monopolistically competitive market, the rule for maximizing profit is to set MR = MC, which means

price is higher than marginal revenue.

Let's pretend we are in a monopolistically competitive market. Then the rule for maximizing profit is to set MR = MC, which means

price is higher than marginal revenue.

In a perfectly competitive market, each firm produces at a quantity where

price is set equal to marginal cost, both in the short run and in the long run.

A perfectly competitive market has many firms selling identical products, who all act as

price takers in the face of the competition.

Total revenue is

price times quantity (This is the area of the rectangle that starts at the origin, goes up to a price of $16, goes over to the demand curve, down to the quantity of 40 and back to the origin.)

The sales of firms within a monopolistically competitive industry can depend upon:

price. advertising for substitute products. intangibles like warrantees or return policies.

A _________ refers to a group of firms colluding with one another to produce at the monopoly output and sell at the monopoly price.

prisoner's dilemma

a game in which the gains from cooperation are larger than the rewards from pursuing self-interest

prisoner's dilemma

Many real-world oligopolies,

prodded by economic changes, legal and political pressures, and the egos of their top executives, go through episodes of cooperation and competition.

Unlike in the simple example in Figure 1, oligopolists also do not typically

produce at the minimum of their average cost curves, so they are not productively efficient.

private costs:

production costs incurred by a company

A monopolistically competitive industry does not display ____________ in either the short-run, when firms are making ____________, nor in the long-run, when firms are earning ____________.

productive and allocative efficiency; profits and losses; zero profits

A monopolistically competitive industry does not display ____________________ in either the short-run, when firms are making _______________, nor in the long-run, when firms are earning ________________ .

productive and allocative efficiency; profits and losses; zero profits

What does a monopolistically competitive industry fail to display in either the short-run making profits/losses or in the long-run when earning zero economic profit?

productive efficiency and allocative efficiency (Average cost is not minimized so productive efficiency is not achieved. Price is greater than marginal cost and so allocative efficiency is not achieved either.)

Monopolistic competitors can make a _____________ in the short-run, but in the long run, ______________ will drive these firms toward _______________________ .

profit or loss; entry and exit; a zero-profit outcome

Some intangible aspects may be

promises like a guarantee of satisfaction or money back, a reputation for high quality, services like free delivery, or offering a loan to purchase the product.

If oligopolists collude with each other, they may effectively act like a monopoly and succeed in

pushing up prices and earning consistently high levels of profit.

The typical slope of the demand curve as perceived by a monopolistic competitor will

reflect that firm's ability raise its price without losing all of its customers.

However, the zero economic profit outcome in monopolistic competition looks different from the zero economic profit outcome in perfect competition in several ways

relating both to efficiency and to variety in the market.

Both the Antitrust Division of the Justice Department and the Federal Trade Commission have

responsibilities for preventing collusion in the United States.

Perfect competition results in productive efficiency and allocative efficiency, while monopolistic competition results in ________.

results in neither productive nor allocative efficiency.

spillover:

see externality

The first step to be undertaken by a profit-maximizing monopolistic competitor wanting to decide what price to charge is to

select the profit maximizing quantity to produce

Let's pretend we are a profit-maximizing monopolistic competitor. Then our first step when wanting to decide what price to charge is to:

select the profit maximizing quantity to produce.

The shape of the perceived demand curve for a perfectly competitive firm reflects that firm's ability to

sell any quantity it wishes at the prevailing market price.

In either case, a successful advertising campaign may allow a firm to

sell either a greater quantity or to charge a higher price, or both, and thus increase its profits.

Given that Hardie Inc. is a monopolistically competitive firm, the other competitors in the market do which of the following? A) set their prices according to their respective demand curves. B) match their price decreases. C) agree on a common price. D) match their price increases.

set their prices according to their respective demand curves.

What role can advertising play with respect to differentiated products?

shapes consumers intangible preferences

Consequently, the marginal revenue will be lower for each quantity sold—and the marginal revenue curve will

shift to the left as well.

Conversely, exit causes the perceived demand curve for a monopolistically competitive firm to

shift to the right and the corresponding marginal revenue curve to shift right, too.

The entry of other firms into the same general market (like gas, restaurants, or detergent)

shifts the demand curve faced by a monopolistically competitive firm.

A monopolistically competitive industry does not display productive and allocative efficiency in either the

short run, when firms are making economic profits and losses, nor in the long run, when firms are earning zero profits.

A monopolistically competitive firm may earn abnormally high profits in the

short term, but the process of entry will drive those profits to zero in the long run.

Firms may earn profits in the ________ run while in the ________ run equilibrium profits will equal zero.

short; long

Firms may earn profits in the ________ run while in the ________ run equilibrium profits will equal zero.

short; long (The entry of other firms into the same general market shifts the demand curve faced by a monopolistically competitive firm. As more firms enter the market, the quantity demanded at a given price for any particular firm will decline, and the firm's perceived demand curve will shift to the left. AS a firm's perceived demand curve shifts to the left, its marginal revenue curve will shift to the left, too. This shift in marginal revenue will change the profit-maximizing quantity that the firm choose to produce, since marginal revenue will then equal marginal cost at a lower quantity)

Let's pretend a firm is producing at a quantity of output where marginal revenue exceeds marginal cost. IN order to maximize profit, this firm:

should keep expanding production.

In monopolistic competition, the products of different sellers are assumed to be A) similar but slightly different. B) identical perfect substitutes. C) either identical or differentiated. D) unique without any close or perfect substitutes.

similar but slightly different.

The demand curve faced by a monopolistically competitive firm is:

slightly downward and somewhat elastic

A monopolistically competitive firm has a ________ demand curve.

slightly downward-sloping and somewhat elastic

Oligopolistic markets are those which a

small number of firms dominate.

Foreign cartels with a ________ number of firms have a higher chance of monopolistic power than those with a ________ number of firms.

small; large

Foreign cartels with a ________ number of firms have a higher chance of monopolistic power than those with a ________ number of firms.

small; large (Economists have understood for a long time the desire of businesses to avoid competing so that they can instead raise the prices that they charge and earn higher profits. Cartels are illegal in the U.S. under antitrust laws so exists primarily in Europe. These foreign cartels have a greater probability of reaching monopoly power where there are fewer it is easier to act in unison, decision can be made quicker, and less self-interest to consider.)

Which of these choices is an example of a differentiated product produced by a monopolistic competitor?

smart mobile phone

They typically operate at a level of output where price is greater than marginal cost,

so oligopolistic industries are not allocatively efficient.

Nash equilibrium:

solution to a game-theoretic scenario when no player has an incentive to change their decision, taking into account what the players have decided and assuming the other players don't change their decisions.

A monopolistically competitive firm has ________ power to set the price of its product because ________. A) no; there are no barriers to entry B) some; there are barriers to entry C) some; of product differentiation D) no; of product differentiation

some; of product differentiation

In the competitive market for figure skate blades, manufacturers offer an array of products that are

somewhat different in a particular way.

In the short-run, the firm will operate (not shut down) as long as revenue is more than enough to cover:

variable costs

Alternatively, oligopolists may choose to act in a way that generates pressure on each firm to

stick to its agreed quantity of output.

Examples include

stores that sell different styles of clothing; restaurants or grocery stores that sell different kinds of food; and even products like golf balls or beer that may be at least somewhat similar but differ in public perception because of advertising and brand names.

Many people would prefer to live in an economy where firms are

struggling to figure out ways of attracting customers by methods like friendlier service, free delivery, guarantees of quality, variations on existing products, and a better shopping experience.

The perceived demand for a monopolistic competitor

takes competitors into account.

In some cases oligopolies can benefit society by:

taking advantage of scale economies to produce at low average cost

In some cases oligopolies can benefit society by: earning abnormal profits. raising prices and reducing output. taking advantage of scale economies to produce at low average cost.

taking advantage of scale economies to produce at low average cost.

Thus, a monopolistically competitive industry will produce a lower quantity of a good and charge a higher price for it

than would a perfectly competitive industry.

They argue that much of the cost of creating such a high degree of product differentiation, and then of advertising and marketing this differentiation, is socially wasteful—

that is, most people would be just as happy with a smaller range of differentiated products produced and sold at a lower price.

Advertising is all about explaining to people, or making people believe,

that the products of one firm are differentiated from the products of another firm.

The Kim family had to close their trout fish farm because a recent chemical spill in the river killed all the fish. The market of this chemical product represents a market failure because

the activity in the chemical product market generated cost for third parties.

private benefits:

the benefits a person who consumes a good or service receives, or a new product's benefits or process that a company invents that the company captures

marginal private benefits (MPB):

the benefits obtained by consumers from purchasing additional units of some product; shown by the market demand curve

Monopolistic competition is different from perfect competition in that, in the long-run:

the characteristics of items sold will be more dynamic within monopolistic competition.

Monopolistic competition is different from perfect competition in that

the characteristics of items sold will be more varied within monopolistic competition.

If a company produces at a quantity of output where marginal revenue exceeds marginal cost, it means that ________.

the company should keep expanding production

social costs:

the costs of production plus the external costs that are passed on to society

Which of the following best identifies what the concept of differentiated products is closely related to?

the degree of product variety that is available.

The break-even point occurs where

the demand curve intersects with average cost, so P = AC.

In a monopolistically competitive market, the rule for maximizing profit is to set MR = MC—and price is higher than marginal revenue, not equal to it because

the demand curve is downward sloping.

Similarly, a natural monopoly will arise when

the demand in a market is only large enough for a single firm to operate at the minimum of the long-run average cost curve.

Next, look for the profit margin,

the difference between price and average cost.

Profit is

the difference between the two areas, (This is shown graphically as the area of the rectangle on top of total cost, or the price minus average cost, times quantity.)

Product differentiation is based on

variety and innovation.

If an industry is perfectly competitive or monopolistically competitive, then the government has relatively little reason for concern about:

the extent of competition.

Considering Figure 1 above, if the average cost curve is above the demand curve then that means ________.

the firm has no profit

Considering Figure 1 above, if the average cost curve is above the demand curve then that means ________.

the firm has no profit (To show economic loss or no profit, the average total cost (ATC) curve will be above the demand curve at the price point and the per unit loss will be ATC minus the price.)

If the firm is producing at a quantity of output where marginal revenue exceeds marginal cost, then ________.

the firm should keep expanding production

If the firm is producing at a quantity of output where marginal revenue exceeds marginal cost, then ________.

the firm should keep expanding production the excess profit would attract additional competition

If the firm is producing at a quantity of output where marginal revenue exceeds marginal cost, then,

the firm should keep expanding production.

If the firm is producing at a quantity of output where marginal cost exceeds marginal revenue, then ________.

the firm should reduce production

If the firm is producing at a quantity of output where marginal cost exceeds marginal revenue, then ________.

the firm should reduce production each marginal unit adds profit by bringing in more revenue than its cost

If the firm is producing at a quantity of output where marginal cost exceeds marginal revenue, then ________.

the firm should reduce production (If marginal revenue is less than marginal cost, each additional unit will add more cost than revenue and will reduce profit. Because at lower output levels, marginal revenue tends to be higher than marginal cost, reducing production can help the firm reach output levels where marginal cost is no longer greater than marginal revenue.)

If the firm is producing at a quantity of output where marginal revenue is less than marginal cost, then,

the firm should reduce production.

How does a monopolistic competitor choose its profit-maximizing quantity of output and price?

the firm will produce at a level of output where marginal revenue equals marginal cost, and charges the highest price it can to sell that quantity based on perceived demand

A successful advertising campaign results in ________.

the firm's perceived demand curve to become more inelastic, so demand increases

Because oligopolists cannot sign a legally enforceable contract to act like a monopoly,

the firms may instead keep close tabs on what other firms are producing and charging.

The prisoner's dilemma is a scenario in which

the gains from cooperation are larger than the rewards from pursuing self-interest. It applies well to oligopoly.

The more like a monopoly a given oligopoly is,

the higher their profits and the greater the deadweight loss.

While oligopoly is defined as an industry consisting of, or dominated by a small number of firms,

the key characteristic is interdependence among firms.

In contrast, the demand curve, as faced by a monopolist, is

the market demand curve, since a monopolist is the only firm in the market, and hence is downward sloping.

Product differentiation may occur in _______________ because ____________________ created strong preferences for certain brands.

the minds of buyers; past habits and advertising

Note also that if the firm was making a loss,

the negative profit (i.e. loss) would be the rectangle on top of total revenue.

If the oligopoly decides to produce more and cut its price,

the other members of the cartel will immediately match any price cuts—and therefore, a lower price brings very little increase in quantity sold.

However, if the airline seeks to raise prices,

the other oligopolists will not raise their prices, and so the firm that raised prices will lose a considerable share of sales.

When entry occurs in a monopolistically competitive industry,

the perceived demand and marginal revenue curves for each firm will shift to the left.

When a new firm enters a monopolistically competitive market,

the perceived demand and marginal revenue curves for each preexisting firm will shift to the left.

Thus, although a monopolistically competitive firm may earn positive economic profits in the short term,

the process of new entry will drive down economic profits to zero in the long run.

Total profit is

the profit margin times the quantity

Firm X competes in a monopolistically competitive market. Suddenly, new firms enter the market, causing X's perceived demand curve to shift. The following tables show X's original and new demand curves and X's cost information. If X can only choose from the quantities of output given in the table, by how much will the quantity that it produces change after the new firms enter the market?

the profit-maximizing quantity of output will fall by 10 units

A pollution charge is a form of tax imposed on

the quantity of pollution that a firm emits.

Note that if the firm was earning zero economic profits,

the rectangles of total revenue and total cost would be the same—there would be no profit rectangle

If one firm operating in an oligopoly raises its price and other firms do not do so,

the sales of the firm that increased its price will decline sharply.

Let's pretend one firm operating in an oligopoly raises its price and other firms do not do so. Then we should expect that:

the sales of the firm that increased its price will decline sharply.

In monopolistic competition, firms can earn an economic profit in A) the short run but not in the long run. B) the short run and in the long run. C) the long run but not in the short run. D) neither the long run nor the short run.

the short run but not in the long run.

This outcome is why perfect competition displays allocative efficiency:

the social benefits of additional production, as measured by the marginal benefit, which is the same as the price, equal the marginal costs to society of that production

The population in a 20 mile radius from the chemical plant of ChemIndustry Inc. experience higher than average upper respiratory diseases and therefore higher medical expenses. In the chemical product market

the social cost of the chemical product would be higher than the private cost of the product and the market would be inefficient.

Confess is considered the dominant strategy or

the strategy an individual (or firm) will pursue regardless of the other individual's (or firm's) decision.

social benefits:

the sum of private benefits and external benefits

marginal social benefits (MSP):

the sum of the private and external benefits when additional units of some product are purchased; also known as the social demand curve

the supply curve for chemical products is higher than it should be because external costs are not included and is therefore resulting in overproduction of chemical product compared to the optimal production level.

The result of this prisoner's dilemma is often that even though A and B could make the highest combined profits by cooperating in producing a lower level of output and acting like a monopolist,

the two firms may well end up in a situation where they each increase output and earn only $400 each in profits.

If each of the oligopolists cooperates in holding down output,

then high monopoly profits are possible.

If at least some oligopolists give in to this temptation and start producing more,

then the market price will fall.

In monopolistic competition, each firm supplies a small part of the market. This occurs because A) there are barriers to entry. B) firms produce differentiated products. C) there are no barriers to entry. D) there are a large number of firms.

there are a large number of firms.

What stops oligopolists from acting together as a monopolist and earning the highest possible level of profits?

there is an incentive for members of a cartel to cheat in order to gain more profits for the individual firm, so such arrangements tend to be unstable

For example, firms may need to reach a certain minimum size before

they are able to spend enough on advertising and marketing to create a recognizable brand name.

Because cartel agreements provide evidence of collusion,

they are rare in the United States.

If the firms in a monopolistically competitive market are earning economic profits or losses in the short run, would you expect them to continue doing so in the long run? Why?

they earn profits in the short run, and will continue doing so in the long run since entry cannot completely erase the differentiation in their product

When they lack vibrant competition,

they may lack incentives to provide innovative products and high-quality service.

When oligopolies result from patented innovations or from taking advantage of economies of scale to produce at low average cost,

they may provide considerable benefit to consumers.

Markets fail when

they reach an equilibrium that is inefficient

Oligopolists are allocatively and productively inefficient in the markets because ________.

they typically operate at a level of output where price is greater than marginal cost and do not produce at the minimum point on their average cost curves (Oligopoly is probably the second most common market structure (monopolistic competition being the first). Oligopolies are often protected by significant barriers to entry, which enable the oligopolists to earn sustained profits over long periods of time. They typically operate at a level of output where price is greater than marginal cost, so oligopolistic industries are not allocatively efficient. Further, oligopolists also do not typically produce at the minimum of their average cost curves, so they are not productively efficient. When they lack vibrant competition, they may lack incentives to provide innovative products and high-quality service.)

Oligopolists are allocatively and productively inefficient in the markets because ________.

they typically operate at a level of output where price is greater than marginal cost and do not produce at the minimum point on their average cost curves.

Oligopolists are allocatively and productively inefficient in the markets because ________.

they typically operate at a level of output where price is greater than, marginal cost and do not produce at the minimum point on their average cost curves.

If monopolistic competitors must expect a process of entry and exit like perfectly competitive firms,

they will be unable to earn higher-than-normal profits in the long run.

Since they produce together where MR = MC,

they will maximize industry profits, just like an actual monopoly would.

If each of two competing monopolists undertakes equally successful advertising efforts to attract consumers away from the other, the total result is ________.

they will simply neutralize one another's efforts

If each of two competing monopolists undertakes equal advertising efforts to attract consumers away from the other, the total result is

they will simply neutralize one another's efforts.

Again, smaller firms would have higher average costs and be unable to compete, while additional large firms would produce such a high quantity that

they would not be able to sell it at a profitable price.

When the government grants patents to, for example, three different pharmaceutical companies that each has its own drug for reducing high blood pressure,

those three firms may become an oligopoly

free rider:

those who want others to pay for the public good and then plan to use the good themselves; if many people act as free riders, the public good may never be provided

We will then discuss oligopolistic firms, which face two conflicting temptations:

to collaborate as if they were a single monopoly, or to individually compete to gain profits by expanding output levels and cutting prices.

In the highly competitive setting in which oligopoly firms operate, which of the following are considered to be typical temptations each may face?

to cooperate to act as a single monopoly and all of the above

In the highly competitive setting in which oligopoly firms operate, which of the following are considered to be typical temptations each may face?

to cooperate to generate and then divide up monopoly-like profits to cooperate to mutually decide what price to charge to cooperate to make decisions about what quantity to produce to cooperate to act as a single monopoly and all of the above

Alternatively, we can compute profit as

total revenue minus total cost.

Oligopolistic markets: are usually thought of as the most efficient market structures. typically have higher barriers to entry. are characterized as having a small number of sellers.

typically have higher barriers to entry. are characterized as having a small number of sellers.

Physical characteristics of a product include all the phrases you hear in advertisements:

unbreakable bottle, nonstick surface, freezer-to-microwave, non-shrink, extra spicy, newly redesigned for your comfort.

Like perfectly competitive firms, competition prevents monopolistically competitive firms from earning positive economic profits in the long run,

unless those firms create innovative new products and/or use advertising to convince customers they have done so.

Oligopolies are typically characterized by mutual interdependence where

various decisions such as output, price, advertising, and so on, depend on the decisions of the other firm(s).

What complicates matters with oligopolistic industries is that any one firm's demand and marginal revenue curves are influenced by

what the other oligopolistic firms are doing.

collusion:

when firms act together to reduce output and keep prices high

Moreover, they argue that consumers benefit substantially

when firms seek short-term profits by providing differentiated products.

However, each firm in an oligopoly has an incentive to produce more and grab a bigger share of the overall market;

when firms start behaving in this way, the market outcome in terms of prices and quantity can be similar to that of a highly competitive market.

Monopolistic competition is ________ and a good example would be ________.

when many firms compete with distinctive products; toothpaste (Monopolistic competition is what economists call industries that consist of many firms competing against each other, but selling products that are distinctive in some way. When products are distinctive such as various forms of toothpastes with a large breadth and depth, each firm has a mini-monopoly on its particular style or flavor or brand name.)

A Nash equilibrium occurs

when no player has an incentive to change their decision, taking into account what the players have decided and assuming the other players don't change their decisions.

private rates of return:

when the estimated rates of return go primarily to an individual; for example, earning interest on a savings account

social rate of return:

when the estimated rates of return go primarily to society; for example, providing free education

Oligopolies can be characterized by collusion,

where firms act jointly like a monopolist to share industry profits,

Oligopolies can be characterized by competition,

where firms compete aggressively for individual profits, or something in between.

In order for a monopolistic competitor to produce at a level of output that is profit-maximizing, it will select an output level

where marginal revenue equals marginal cost.

We start by identifying the profit-maximizing level of output,

where marginal revenue equals marginal cost.

In order for a monopolistic competitor to produce at the level of output which maximizes profits, it will select an output level

where marginal revenue equals marginal cost. (Profit is maximized at the output where marginal revenue equals marginal cost.)

Monopolistically competitive industries consist of a significant number of firms,

which each produce a differentiated (or heterogeneous) production.

Oligopolies are often protected by significant barriers to entry,

which enable the oligopolists to earn sustained profits over long periods of time.

In the United States, as well as many other countries, it is illegal for firms to collude since collusion is anti-competitive behavior,

which is a violation of antitrust law.

Because of the complexity of oligopoly,

which is the result of mutual interdependence among firms, there is no single, generally-accepted theory of how oligopolies behave, in the same way that we have theories for all the other market structures.

A monopolistically competitive firm does not produce more,

which means that society loses the net benefit of those extra units.

The demand may also only be limited to two or three times the quantity needed to produce at the minimum of the average cost curve—

which means that the market would have room for only two or three oligopoly firms (and they need not produce differentiated products).

The demand curve as faced by a monopolistic competitor is not flat, but rather downward-sloping,

which means that the monopolistic competitor can raise its price without losing all of its customers or lower the price and gain more customers.

In the long run, however, firms will enter the industry and cause the demand curve to shift to the left,

which results in no economic profit.

The combination of price P0 and quantity Q0 lies above the average cost curve,

which shows that the firm is earning positive economic profits.

Monopoly arises when a single firm sells a product for

which there are no close substitutes.

The economic losses lead to firms exiting,

which will result in increased demand for this particular firm, and consequently lower losses.

Even when oligopolists recognize that they would benefit as a group by acting like a monopoly, each individual oligopoly faces a private temptation to produce just a slightly higher quantity and earn slightly higher profit—

while still counting on the other oligopolists to hold down their production and keep prices high.

First, although both a monopolist and a monopolistic competitor face downward-sloping demand curves, the monopolist's perceived demand curve is the market demand curve,

while the perceived demand curve for a monopolistic competitor is based on the extent of its product differentiation and how many competitors it faces.

If a monopoly or a monopolistic competitor raises their prices, the quantity demanded ____________.

will decline

If a monopoly or a monopolistic competitor raises their prices, the quantity demanded:

will decrease.

If a monopoly or a monopolistic competitor lowers their prices, then

will increase.

If a monopolistic competitor raises its price, it _________ customers than a perfectly competitive firm, but ________________ customers compared to the number that a monopoly that raised its prices would.

will lose fewer; it will lose more

If a monopolistic competitor raises its price, it ____________ customers than a perfectly competitive firm, but ____________ that raised its prices would.

will lose fewer; it will lose more

In the short run, the graph looks like just like the graph for a monopoly,

with the firm making an economic profit.

Each oligopolist, however, must

worry that while it is holding down output, other firms are taking advantage of the high price by raising output and earning higher profits.

Perhaps the easiest approach for colluding oligopolists, as you might imagine,

would be to sign a contract with each other that they will hold output low and keep prices high.

Would raising the price for a product create a larger decline in quantity demanded for a monopolistic competitor's than it would for a monopoly?

yes; consumers will buy from competitors offering lower priced substitutes

If oligopolists compete hard against each other,

zero profits result for all.

At a glance, the demand curves faced by a monopoly and by a monopolistic competitor look similar

Monopolistic Competition and Oligopoly Master

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