ECON Exam 3 Final Review
A barrier to entry is:
An obstacle that makes it difficult for new firms to enter a market
Any firm that has economies of scale will:
Be able to produce at a lower unit cost as it increases production
Why do firms in monopolistic competition engage in nonprice competition:
Because their profit margins are low
Firms in monopolistic competition make products that are:
Close but not perfect substitutes
Market power is the ability of a firm to
Control the price and quantity supplied
What characterize firm-level demand curves in monopolistic competition:
Downward sloping
What characterizes allocative efficiency?
Excess capacity
To maintain brand loyalty, a firm must:
Expand services or product offerings
What is a characteristic of an oligopoly but not of monopolistic competition:
Firms engage in price wars
One difference between perfect competition and monopolistic competition is that:
Firms in monopolistic competition face a downward-sloping demand curve and firms in perfect competition face a horizontal demand curve
If a monopolist is producing output where MR > MC, it should:
Increase its output
The goal of a company in an oligopoly industry is to:
Increase market share and profits
What type of dependency characterizes the actions of firms in an oligopolistic market?
Interdependent
Product differentiation:
Involves advertising unique product features
If the entire output of a market is produced by a single seller, the firm:
Is a monopoly
What is true about a government set up natural monopoly?
It is set up to earn a normal profit
What is true about price fixing:
It occurs when firms explicitly agree to charge the same price
If an oligopolistic firm is producing at the kink in its demand curve and it decides to increase its price, according to the kinked demand model;
It will lose market share to the firms that do not follow the price increase
Assume a monopoly confronts the same costs and demand as a competitive industry. In this case, the monopolist produces:
Less output and charges a higher price than the competitive industry
A monopolist will find that its marginal revenue curve (in terms of location and slope)
Lies below its demand curve and is steeper than its demand curve
If a firm in an oligopoly expands its market share without changing price, its competitors:
Lose market share
Brand loyalty implies (in terms of price elasticity):
Low cross-price elasticity
A profit-maximizing monopolist produces the rate of output where
MR = MC and determines price based on the demand curve
What would not be used by an unregulated monopolist?
Marginal cost pricing
What is a benefit of a competitive market structure rather than a monopoly?
Monopolies produce less at a higher price than competitive markets
A market concentration ratio of 30% would indicate:
Monopolistic competition
Which types of industries have lowest concentration ratios:
Monopolistic competition
Selling costs, such as advertising, are likely to be a large share of total cost in an industry that is:
Monopolistically competitive
Which type of firm generally has the most market power?
Monopoly
According to the kinked demand curve theory of oligopoly, each firm believes that if it raises its price:
Other firms will not raise their price
How might an oligopolist increase total revenue without changing price:
Promote brand loyalty
The concentration ratio measures the:
Proportion of total output produced by the four largest producers in a specific market
The kinked demand curve explains the observation that in oligopoly markets:
Rivals match price reductions
For a monopolist, marginal revenue equals (formula):
The change in total revenue divided by the change in quantity
What is a difference between perfect competition and monopolistic competition:
The demand curve in monopolistic competition will touch the ATC curve on the left side
What is likely to occur if a monopoly suddenly loses its ability to deny potential competitors entry into the market
The market price of the product will fall
T/F: Economies of scale is a barrier to entry for a monopoly market.
True
When will a profit-maximizing monopolist shut down?
When P < AVC
Price discrimination occurs when:
When a firm sets different prices for different consumers for the same product
Once a cartel determines the profit-maximizing price:
each firm faces the temptation to cheat by lowering their price
What three things characterize an oligopoly (in terms of quantity of firms, price control, barriers to entry):
few firms, substantial control over price, high barriers to entry
