ECO 146

Which of the following conditions must hold in the equilibrium of a competitive market where the government puts a specific tax on​ consumers?

A. The quantity sold and the​ seller's price must lie on the supply curve. B. The quantity sold and the price paid by the buyer must lie on the demand curve. C. the difference between the price the buyer pays and the price the seller receives must equal the specific tax. D. The quantity demanded must equal the quantity supplied. E. ******* All of the above.

For the​ profit-maximizing monopolist,

P-MC/P =-1/ED will​ hold, implying that as the price elasticity of demand​ increases, market power decreases.

Marginal Revenue, graphically is

The slope of the total revenue curve t a given point

Social Cost of monopoly

The social cost of monopoly power is the deadweight loss that results from the firm producing less than the competitive quantity and charging a price above marginal cost.

At the​ profit-maximizing level of​ output, what is the relationship between the total revenue​ (TR) and total cost​ (TC) curves?

They must have the same slope.

A monopolist firm faces a demand with constant elasticity of -2.5. It has a constant marginal cost of ​$15 per unit and sets a price to maximize profit. If marginal cost should increase by 25 ​percent, would the price charged also rise by 25 ​percent?

Yes. Since the price elasticity of demand is​ constant, P = 1.67. ​Thus, if MC increases by 25 ​percent, price also increases by 25 percent.

In an​ unregulated, competitive market consumer surplus exists because some

consumers are willing to pay more than the equilibrium price.

In a Nash​ equilibrium,

each firm does the best it can given what the other firms are doing.

At the Cournot​ equilibrium, firms have no incentive to change their output levels because

each firm is producing the amount that maximizes its profit given what its competitors are producing.

Even if they​ can't collude, why​ don't firms set their outputs at the joint​ profit-maximizing levels​ (i.e., the levels they would have chosen had they​ colluded)? Firms do not set their outputs at the joint​ profit-maximizing levels because

each firm would have an incentive to increase output to increase profits at the expense of the other firm.

A specific tax will be imposed on a good. The supply and demand curves for the good are shown in the figure at right. Given this​ information, the burden of the tax

falls mostly on consumers.

What general conclusions can you reach about the effects of fixed costs on the​ firm's output​ choice? The​ firm's output choice

is unaffected by fixed costs because such costs leave marginal costs unchanged. Your answer is correct.E.

At the​ profit-maximizing level of​ output, marginal profit

is zero.

A​ price-discriminating monopolist will charge a higher price to consumers whose demand is

less elastic.

When the demand curve is downward​ sloping, marginal revenue is

less than price.

A firm maximizes profit by operating at the level of output where

marginal revenue equals marginal cost.

A perfectly competitive firm should shut down in the short run if

price is below minimum average variable cost.

Comparing the Cournot equilibrium to the perfectly competitive equilibrium​ (assuming the same demand and production​ costs),

profits are higher and total output is lower in the Cournot equilibrium.

Monopoly power results from the ability to:

set price above marginal cost.

If a graph of a perfectly competitive firm shows that the MR​ = MC point occurs where MR is above AVC but below​ ATC,

the firm is earning negative​ profit, but will continue to produce where MR​ = MC in the short run.

When the government imposes a specific tax per unit on a​ product, changes in consumer surplus are​ ___________ and changes in producer surplus are​ ____________.

​negative; negative

The​ ________ elastic a​ firm's demand​ curve, the greater its​ ________.

​less; monopoly power

A monopolist has set her level of output to maximize profit. The​ firm's marginal revenue is​ $20, and the price elasticity of demand is minus−2.0. The​ firm's profit maximizing price is​ approximately:

$40

Your local grocery store offers a coupon that reduces the price of milk during the coming week. The regular retail price of milk in the store is​ $3.00 per​ gallon, and the coupon price is​ $2.00 per gallon for the next week. If the store maximizes profits and the price elasticity of demand for milk is minus−2 for coupon​ users, what is the price elasticity of demand for​ non-users?

-1.5

Consider a good whose demand curve is​ horizontal, and its price elasticity of supply is 1. The fraction of a specific tax that will be passed through to consumers​ is:

0

What is the value of the Lerner index under perfect​ competition?

0

Consider the following statements when answering this​ question: I. ​ Overall, the sick will always gain from a price ceiling on prescription drugs. II. The reduction of supply caused by the imposition of a price ceiling is greater the more inelastic the market supply curve.

I and II are false

The burden of a tax is shared by producers and consumers. Under what conditions will consumers pay most of the​ tax? Under what conditions will producers pay most of​ it?

If demand is relatively more elastic than​ supply, producers will pay more of the tax

The Lerner Index of Monopoly Power is

L= (P-MC)/P

When pricing​ automobiles, American car companies typically charge a much higher percentage markup over cost for​ "luxury option" items​ (such as leather​ trim, etc.) than for the car itself or for more​ "basic" options such as power steering and automatic transmission. Explain why.

Luxury options have a lower price elasticity of demand than basic options.

We write the percentage markup of price over marginal cost as P-MC/P For a​ profit-maximizing monopolist, how does this markup depend on the elasticity of​ demand? Why can this markup be viewed as a measure of monopoly​ power?

Market power is the ability to charge a price ABOVE marginal cost.

A situation in which each firm selects its best​ action, given what its rivals are​ doing, is called a

Nash equilibrium.

Currently, the social security payroll tax in the United States is evenly divided between employers and employees. Employers must pay the government a tax of 6.2 percent of the wages they​ pay, and employees must pay 6.2 percent of the wages they receive. Suppose the tax were changed so that employers paid the full 12.4 percent and employees paid nothing. Would employees be better​ off? ​(Assume the labor market is perfectly competitive.​)

No. As long as the total tax does not​ change, there will be no change in the wage employees receive or the equilibrium quantity of labor employed.

Suppose the supply curve for a good is completely inelastic. If the government imposed a price ceiling below the​ market-clearing price, would a deadweight loss​ result? Explain.

No. Since the supply curve is​ vertical, the​ market-clearing quantity supplied and the​ price-ceiling quantity supplied are the same.​ Thus, the entire loss of producer surplus is transferred to consumers and there is no deadweight loss.

MNO Limited publishes a magazine targeted at urban professionals who live on the east and west coasts of the​ U.S., and all of the magazines are printed at a marginal cost of​ $0.50 per copy at a publishing plant in Kansas. If the East Coast elasticity of demand for the magazine is minus−1.25 and the West Coast elasticity of demand is minus−​1.50, what prices should MNO Limited charge for the magazines in these two markets in order to maximize​ profits?

Price should be​ $1.50 on the West Coast and​ $2.50 on the East Coast.

In a Cournot​ duopoly, we find that Firm​ 1's reaction function is Q1​ = 50−0.5Q2​, and Firm​ 2's reaction function is Q2​ = 75−0.75Q1. What is the Cournot equilibrium outcome in this​ market?

Q1​ = 20 and Q2​ = 60.

A price ceiling set below the equilibrium price in a perfectly competitive market

always reduces producer surplus and may or may not increase consumer surplus.

If demand in a perfectly competitive market is perfectly inelastic and supply is upward​ sloping, a specific tax placed on suppliers will

be paid entirely by​ consumers, and there will be no deadweight loss.

A monopolist is producing at a point at which marginal cost exceeds marginal revenue. How should it adjust its output to increase​ profit? The monopolist should

decrease output until marginal revenue equals marginal cost.

The more elastic the demand facing a​ firm,

the lower the value of the Lerner index.

In the Cournot duopoly​ model, each firm assumes that

the output level of its rival is fixed.

The Cournot equilibrium can be found by treating​ __________ as a pair of simultaneous equations and by finding the combination of Q1 and Q2 that satisfy both equations.

the reaction curves for firms 1 and 2

The demand curve facing a perfectly competitive firm is

the same as its average revenue curve and its marginal revenue curve.

Comparing the Cournot equilibrium to a​ monopolist's profit-maximizing​ choices,

total profits are lower and total output is higher in the Cournot equilibrium.

At the​ profit-maximizing level of​ output, demand is

​elastic, but not infinitely elastic.

The burden of a tax per unit of output will fall heavily on consumers when demand is relatively​ _____________ and supply is relatively​ ____________.

​inelastic; elastic