ch 13, 14, 15, 16 17, economics review 221
And their profits will be
$0
What are the profits for Dumphy and Funke at the equilibrium price?
$0
Iz, Lauren, Odd, and Ralph started a T‑shirt company. They can produce any number of T‑shirts at a cost of $2 per T‑shirt, both marginal and average. They are the only producers of T‑shirts. As monopolists, they charge $20 per T‑shirt and obtain total profits of $10,000. Now assume there are creative differences and they split the company in two. Lauren and Ralph join together and compete against Iz and Odd. If they compete on quantity, each company would produce 50 T‑shirts and charge $12 a T‑shirt. For technical reasons, assume that the quantity demanded is greater than zero for all prices greater than $0. If, however, Ralph and Lauren compete directly against Iz and Odd in prices, the market price for T‑shirts will be
$2
Suppose you are a manager of a firm that operates in a duopoly. Recently, the state attorney general fined you and your competitor for price fixing. In your market, firms only set prices, not total quantities to sell. From previous experience, you know your competitor has a marginal cost of $2.76. Further, your marginal costs are $2.74. The previous cartel price was $10.00, when you and your competitor were price fixing. What price level do you now choose to maximize profits?
$2.75
What will be the equilibrium price that Dumphy and Funke will charge?
$30
Technology Superiority
A firm that maintains a consistent technological advantage over potential competitors can establish itself as a monopolist. For example, from the 1970s through the 1990s the chip manufacturer Intel was able to maintain a consistent advantage over potential competitors in both the design and production of microprocessors, the chips that run computers.
Control of a scarce resource or input
A monopolist that controls a resource or input crucial to an industry can prevent other firms from entering its market. Cecil Rhodes created the De Beers monopoly by establishing control over the mines that produced the great bulk of the world's diamonds.
Nola and Charles both own party planning firms in the small town of Trident, IA. Because they are the only party planners in town, they want to collude to make the price of party planning high. Classify the scenarios according to whether they are more likely to aid or impede Nola and Charles in colluding.
A party planning school opens and the new graduates are ready to plan. This will impede Nola's and Charles' efforts to collude.
Which statement describes a monopoly?
A single firm produces a product with no close substitutes and control over the market price.
Which of the statements is true regarding advertising?
Advertising is only potentially effective if a firm has some market power.
Nola and Charles both own party planning firms in the small town of Trident, IA. Because they are the only party planners in town, they want to collude to make the price of party planning high. Classify the scenarios according to whether they are more likely to aid or impede Nola and Charles in colluding.
Charles and Nola both charge a fixed price per person for a party. This will aid Nola's and Charles' efforts to collude.
Nola and Charles both own party planning firms in the small town of Trident, IA. Because they are the only party planners in town, they want to collude to make the price of party planning high. Classify the scenarios according to whether they are more likely to aid or impede Nola and Charles in colluding.
Charles develops a signature appetizer that becomes the must-have appetizer in Trident. This will impede Nola's and Charles' efforts to collude.
Which of the statements is true of the prisoner's dilemma?
In the prisoner's dilemma, firms could do better if they both did exactly the opposite of what they ultimately choose to do.
What are antitrust laws?
Laws meant to eliminate collusion and promote competition among firms.
Nola and Charles both own party planning firms in the small town of Trident, IA. Because they are the only party planners in town, they want to collude to make the price of party planning high. Classify the scenarios according to whether they are more likely to aid or impede Nola and Charles in colluding.
Most of the parties are given by Trident's largest employer, a water bottling plant. This will impede Nola's and Charles' efforts to collude.
Which firm is most likely to be a natural monopoly?
Municipal Power Light, the local supplier of electricity
Nola and Charles both own party planning firms in the small town of Trident, IA. Because they are the only party planners in town, they want to collude to make the price of party planning high. Classify the scenarios according to whether they are more likely to aid or impede Nola and Charles in colluding.
Nola and Charles are regulars at the same coffee house. They talk regularly. This will aid Nola's and Charles' efforts to collude.
Nola and Charles both own party planning firms in the small town of Trident, IA. Because they are the only party planners in town, they want to collude to make the price of party planning high. Classify the scenarios according to whether they are more likely to aid or impede Nola and Charles in colluding.
Nola lowers her price on national television. This will impede Nola's and Charles' efforts to collude.
Nola and Charles both own party planning firms in the small town of Trident, IA. Because they are the only party planners in town, they want to collude to make the price of party planning high. Classify the scenarios according to whether they are more likely to aid or impede Nola and Charles in colluding.
Nola's marginal cost is lower than Charles's. This will impede Nola's and Charles' efforts to collude.
Identify the first antitrust law and its purpose.
The Sherman Act of 1890 prohibits price fixing, collusion, and monopolization.
The Environmental Protection Agency is attempting to rule on whether pollution from greenhouse gas emissions endangers public safety. Among the many greenhouse gas polluters are cows emitting methane. Economists have devised a theory to help address this issue. Identify the statement that is true according to economic theory.
The efficient level of pollution removal occurs where the marginal benefit of pollution removal equals the marginal cost of pollution removal; i.e., some pollution could be allowed.
Which scenario is an example of an industry in monopolistic competition?
Within walking distance from your home, there are a plethora of fast-food restaurants including Koala Express, Cabo Bob's Burritos, Oodles of Noodles, and Hanz's Hearty Hamburgers.
Oligopoly
a few producers—more than one but not a large number—sell products that may be either identical or differentiated.
oligopolist
a firm in an industry with only a small number of producers.
Monopolist
a firm that is the only producer of a good that has no close substitutes
Monopsonist
a firm that is the sole buyer in a market
Prisoner's Dilemma
a game based on two premises: (1) each player has an incentive to choose an action that benefits itself at the other player's expense; and (2) both players are then worse off than if they had acted cooperatively.
price regulation
a limitation on the price a monopolist is allowed to charge.
Monopsony
a market in which there is only one buyer but many sellers.
imperfect competition
a market structure in which no firm is a monopolist, but producers nonetheless have market power they can use to affect market prices.
Monopolstic Competition
a market structure in which there are many competing producers in an industry, each producer sells a differentiated product, and there is free entry and exit into and from the industry in the long run.
single-price monopolist
a monopolist that offers its product to all consumers at the same price.
natural monopoly
a monopoly that exists when increasing returns to scale provide a large cost advantage to having all output produced by a single firm.
What is a natural monopoly?
a monopoly that results when one firm is able to produce at a lower cost than multiple firms, giving large firms with higher levels of output an advantage over smaller competitors
price leadership
a pattern of behavior in which one firm sets its price and other firms in the industry follow.
piguovian subsidy
a payment designed to encourage activities that yield external benefits.
Monopoly
a single producer sells a single, undifferentiated product
Suppose the government is interested in moving the market closer to the socially optimal quantity. Which policy would likely result in the desired outcome? An effective option is
a subsidy to consumers who choose to purchase solar-powered vehicles.
Patent
a temporary monopoly given by the government to an inventor for the use or sale of an invention.
strategic behavior
actions taken by a firm that attempt to influence the future behavior of other firms.
Cartel
an agreement among several producers to obey output restrictions in order to increase their joint profits.
zero-profit equilibrium
an economic balance in which each firm makes zero profit at its profit-maximizing quantity.
technology spillover
an external benefit that results when knowledge spreads among individuals and firms.
Suppose Jeremy, Francis, and Andrew are part of Mu Epsilon Nu, a college fraternity known for its very loud, rambunctious weekend parties. The parties annoy many of the residents in nearby apartment complexes due to the loud music and blaring neon lights. This is an example of
an external cost
Duopoly
an oligopoly consisting of only two firms.
external benefits
an uncompensated benefit that an individual or firm confers on others; also known as positive externality.
external cost
an uncompensated cost that an individual or firm imposes on others; also known as negative externality.
Unilever and Proctor & Gamble are fined 315 millions euros for price fixing the washing detergent market in Europe
antitrust policy
Boeing already serves a large fraction of the jumbo jet market and is able to produce at a lower average cost than any potential competitors.
barrier to entry
DeBeers owns nearly all of the world's diamond mines.
barrier to entry
Pfizer is the only firm that is legally allowed to produce and sell Lipitor, a best‑selling cholesterol drug.
barrier to entry
Firms maximize profits by operating where marginal revenue equals marginal cost.
both monopoly and perfect competition
A group of sellers who agree to restrict their collective output in order to drive up prices above marginal costs is a
cartel
price discrimination
charging different prices to different consumers for the same good.
nonprice competition
competition in areas other than price to increase sales, such as new product features and advertising; especially engaged in by firms that have a tacit understanding not to compete on price.
collusion
cooperation among producers to limit production and raise prices so as to raise one another's profits.
tacit collusion
cooperation among producers, without a formal agreement, to limit production and raise prices so as to raise one another's profits.
If a firm is producing a quantity where marginal cost exceeds marginal revenue, the firm should ____ existing levels of production in order to ____.
decrease ; increase profitability
Which of the following makes monopolistic competition different than perfect competition? Monopolistically competitive firms
differentiate their products
Jay is a Korean pop star, and as such, he has long, flowing hair. One day, he decides to retire from the singing industry and walks to the local Procuts right outside his apartment, despite it being more expensive than the Supercuts 10 minutes away.
differentiated by location
Wayne is a beginning photographer. He is in the market to buy a new camera lens and notes that certain lenses take clearer pictures but they become exponentially more expensive to purchase as the sharpness of the image increases. He chooses to start with the lowest grade lens (i.e., the cheapest).
differentiated by quality
GrrrArg! Productions attempts to carve out a niche in the crowded zombie film industry by specializing in movies featuring only finger-puppet zombies.
differentiated by style/type
The video game industry caters to a wide array of people, with games like Final Fantasy to appeal to the role playing type, Tekken for those who like fighting games, Halo for the first person shooters, and Super Mario for the adventurous.
differentiated by style/type
Suppose that in the small town, Prairie, there are only two cable providers. What type of market structure does the local cable market have?
duopoly
An auto manufacturer is charged a fee per unit of pollution emitted into a river.
emission taxes
renewable energy sources
energy sources that are inexhaustible, unlike fossil fuel sources, which are exhaustible.
clean energy sources
energy sources that do not emit greenhouse gases. Renewable energy sources are also clean energy sources.
The government requires that auto manufacturers limit pollution to a specified threshold.
environmental standards
The government requires that auto manufacturers use a new, cleaner technology in producing cars.
environmental standards
If a firm is producing a quantity where marginal revenue exceeds marginal costs, the firm should ____ existing levels of production in order to ____.
expand ; increase profitability
The lease on Allison's apartment will expire next month, and she wants to move closer to campus. There are two apartments that she likes. Both are close to campus and in her price range. The first one is next door to a garage where local bands often practice late at night. The second one is next door to a donut shop that opens at 5 a.m. If she is a morning person and loves the smell of donuts, she will view the donut shop as a(n)
external benefit
The lease on Allison's apartment will expire next month, and she wants to move closer to campus. There are two apartments that she likes. Both are close to campus and in her price range. The first one is next door to a garage where local bands often practice late at night. The second one is next door to a donut shop that opens at 5 a.m. If she likes to stay up late and loves listening to all kinds of music, she will view the bands practicing as a(n)
external benefit.
The lease on Allison's apartment will expire next month, and she wants to move closer to campus. There are two apartments that she likes. Both are close to campus and in her price range. The first one is next door to a garage where local bands often practice late at night. The second one is next door to a donut shop that opens at 5 a.m. If her roommate hates loud music, and the smell of donuts makes her sick, she will reject both apartments due to what she sees as
external cost
In comparison to oligopolies, firms in monopolistic competition
face competition from many other firms.
A monopolistic competitor, much like a firm in perfect competition, sells its product at a point where the price is equal to the marginal cost.
false
Environmental standards are typically more efficient than emissions taxes
false
Firms do not have an incentive to price discriminate because it results in some groups paying a lower price than others.
false
Firms generate the same level of pollution regardless of any emissions taxes that are imposed
false
In the long run, monopolistic competitors make a similar amount of profit to monopolists, since, in both cases, the firm's demand curves are downward sloping, and at the profit maximizing point, the marginal cost is equal to the marginal revenue.
false
Monopolistic competition is a market structure that consists of a small number of producers.
false
Perfect (pure) competition is characterized by product differentiation.
false
Perfect price discrimination occurs when perfectly competitive firms charge some people higher prices than others.
false
Price discrimination is illegal under all circumstances.
false
Price discrimination only occurs with natural monopolies.
false
With an emissions tax, firms must pay a fine if they pollute more than the legally specified amount
false
monopolies produces differentiated products
false
Which of the markets is the best example of monopolistic competition?
fast food industry
fossil fuels
fuel derived from fossil sources such as coal and oil.
Dominant Stragety
game theory, an action that is a player's best action regardless of the action taken by the other player.
greenhouse gases
gases that trap heat in Earth's atmosphere.
payoff matrix
in game theory, a diagram that shows how the payoffs to each of the participants in a two-player game depend on the actions of both; a tool in analyzing interdependence.
tit for tat
in game theory, a strategy that involves playing cooperatively at first, then doing whatever the other player did in the previous period.
noncooperative equilibrium
in game theory, the equilibrium that results when all players choose the action that maximizes their payoffs given the actions of other players, ignoring the effect of that action on the payoffs of other players; also known as Nash equilibrium.
Nash Equilibrium
in game theory, the equilibrium that results when all players choose the action that maximizes their payoffs given the actions of other players, ignoring the effect of that action on the payoffs of other players; also known as noncooperative equilibrium.
payoff
in game theory, the reward received by a player (for example, the profit earned by an oligopolist).
What economic reason is likely to have caused Iz and Odd put an iguana on their T‑shirts?
increase profits
antitrust policy
legislative and regulatory efforts undertaken by the government to prevent oligopolistic industries from becoming or behaving like monopolies.
traceable emissions permits
licenses to emit limited quantities of pollutants that can be bought and sold by polluters.
Monopolistic competition
many producers each sell a differentiated product
perfect competition
many producers each sell an identical product.
A monopolistic competitor wishing to maximize profit will select a quantity where
marginal revenue equals marginal cost.
Firms can earn positive economic profit in the long run.
monopoly
The price is higher than in other market structures.
monopoly
There are significant barriers to entry.
monopoly
Cigarette smoking in a non-smoking section results in ___ externalities.
negative
Eating a delicious cookie results in ___ externalities.
no
The local city government sends the police to break up the parties.
non private solution to externality
Zyrtec, Allegra, and Claritin, antihistamines used frequently for allergies, places ads on tv promoting the superiority of their drug
non-price competition
Bauer and CMM are duopolist in the hockey skate market. suppose every year Bauer produces one million pair of skates. CMM produced one million skates the first year but has since chosen to produce 1.5 million pairs of skate each year.
none of these terms
Tinseltown Theaters shows almost all the most popular newly‑released movies
not a barrier to entry
Duopolist
one of the two firms in a duopoly.
Monopolies and monopolistically competitive firms differ in that monopolies
participate in markets where barriers to entry are present.
An efficient quantity is produced.
perfect competition
Firms have no market power
perfect competition
Developing a productivity-enhancing technology results in _____ externalities.
positive
Enhancing the aesthetic appeal of a property in a residential neighborhood results in ____ externalities.
positive
Receiving a flu vaccine results in ____ externalities.
positive
Reducing pollution results in ____ externalities.
positive
This example of the spreading of knowledge is also a
positive externality
Suppose that solar-powered car technology advances to the point that solar-powered cars become affordable for the average consumer. Which type of externality is likely to result from a consumer's decision to purchase a solar-powered vehicle instead of a gas-powered vehicle, and how does it arise? This decision generates a
positive externality because the replacement of gas-powered vehicles with solar-powered vehicles will result in less environmental pollution.
Dumphy and Funke are rival tattoo artists in the small town of Feline. There are no other tattoo artists in town. It costs $30 to produce a Tweety Bird tattoo. Assume for simplicity that fixed costs are zero and that Dumphy and Funke perform identical work. For a while, there was too much demand for Funke and Dumphy to handle and they both charged $200 for a tattoo. But recently, demand has dropped significantly and there is not enough work for both to fill their days at any price. However, there is some demand at all prices. What type of competition would Funke and Dumphy likely engage in after the decrease in demand?
price
at the beginning of the new year, canon displays the prices for its newest lines of camera lenses. Nikon, Sigma, and Tamaron, other camera makers, follow with their prices soon after, set near Canon prices
price leadership
Sprint, AT&T, and T-mobile keep undercutting each other prices in order to gain a larger customer base
price war
The fraternity pays the local community to compensate for the noise pollution.
private solution to externality
The residents of the apartment complexes pay Mu Epsilon Nu not to have loud parties.
private solution to externality
In response to the price war, Iz and Odd decide to put an iguana on the chest of their T‑shirt. They convince the world that the iguana is necessary for coolness.
product differentiation.
positive feedback
put simply, success breeds success, failure breeds failure; the effect is seen with goods that are subject to network externalities.
barrier to entry
something that prevents other firms from entering the industry
Montgomery owns a nuclear power plant in the town of Springfield. His power plant dumps substantial quantities of radioactive waste into the local pond, which has given rise to a mutant guppy fish population with three eyes. The town decides to have Montgomery do something about the externality. Which method would NOT result in Montgomery accounting for the social cost of running the power plant? It would not work to
subsidize Montgomery for every three‑eyed fish found in the pond.
difference between a firm with market power
such as a monopolist, and a firm in a perfectly competitive industry is that perfectly competitive firms are price-takers that face horizontal demand curves, but a firm with market power faces a downward sloping demand curve.
Suppose Turing Inc. creates the first ever solar powered cell phone battery that absorbs ambient light and converts it into electrical power. Furthermore, the battery stores excess absorbed light as an internal battery that lasts up to 10 hours in the dark. At a conference, a Turing Inc. representative presents the battery to representatives from many other companies, proclaiming the invention will revolutionize the cell phone industry. A few months later, Algos creates a solar powered cell phone battery that lasts 12 hours in the dark. This example of the spreading of knowledge is known as [a(n)]
technology spillover
market power
the ability of a monopolist to raise its price above the competitive level by reducing output
marginal social cost of pollution
the additional cost imposed on society as a whole by an additional unit of pollution.
marginal social benefit of pollution
the additional gain to society as a whole from an additional unit of pollution.
product differentiation
the attempt by firms to convince buyers that their products are different from those of other firms in the industry. If firms can so convince buyers, they can charge a higher price.
In game theory, a dominant strategy is
the best strategy to pick, no matter which moves are chosen by the other player.
public ownership
the case in which goods are supplied by the government or by a firm owned by the government to protect the interests of the consumer in response to natural monopoly.
Copyright
the exclusive legal right of the creator of a literary or artistic work to profit from that work; like a patent, it is a temporary monopoly.
excess capacity
the failure to produce enough to minimize average total cost; characteristic of monopolistically competitive firms.
network externality
the increase in the value of a good or service to an individual is greater when a large number of others own or use the same good or service.
climate change
the man-made change in Earth's climate from the accumulation of greenhouse gases caused by the use of fossil fuels.
perfect price discrimination
the price discrimination that results when a monopolist charges each consumer the maximum that the consumer is willing to pay.
Coase Theorem
the proposition that even in the presence of externalities an economy can always reach an efficient solution as long as transaction costs are sufficiently low.
socially optimal quantity of pollution
the quantity of pollution that society would choose if all the costs and benefits of pollution were fully accounted for.
game theory
the study of behavior in situations of interdependence. Used to explain the behavior of an oligopoly.
great energy transition
the transition from a heavy reliance on fossil fuels to a heavy reliance on clean energy sources in order to avert catastrophic climate change.
Auto manufacturers are allowed to pollute as much as they wish, provided that they have purchased a sufficient number of pollution licenses.
tradable emission permits
According to the Coase theorem, private parties can negotiate to an efficient solution in the presence of externalities if the _____ is (are) relatively low.
transaction
Advertising can play a role as an indirect signal of product quality to customers.
true
Airlines are often able to price discriminate.
true
All else being equal, single price monopolists earn lower profits than firms that can price discriminate.
true
An emissions tax is a type of Pigouvian tax.
true
Emissions taxes encourage firms to find innovative ways to remove pollution.
true
In the short term, a monopolistic competitor will make a profit if the demand curve is above the average total cost curve at some point.
true
Monopolistically competitive industries are more likely to make use of advertising to create products that catch on in mainstream popularity than industries in perfect competition.
true
Oligopolies exist in a market that has a small number of producers that may or may not exhibit product differentiation.
true
increasing returns to scale
when average total cost falls as output increases, firms tend to grow larger.
Making ice cream using fresh organic milk and fruit, something none of the other competitors are doing, _____ help Robert differentiate his ice cream.
will
Opening JubJub's next to "The Triangle," an area with an elementary school, a middle school, and a high school less than 5 minutes away ____ help Robert differentiate his ice cream.
will
Pricing JubJub's ice cream at $100 a scoop to appeal to the luxury crowd ____ help Robert differentiate his ice cream.
will
Carrying only the exact same flavors, with the same names, as his competitors ____ help Robert differentiate his ice cream.
will not
