econ final ting levy
Advanced Printing Systems is a firm in a monopolistically competitive market. If it is selling its product at $12 at the equilibrium quantity and earning normal profit, what is its long-run average total cost?
$12 If a firm is earning normal profit in the long run, then the equilibrium price equals the firm's long-run average total cost.
Suppose that a monopolist decides to produce and sell 10 units that can be sold in the market for $150 each. If the firm wishes to sell 11 units, it must charge $149 each. The marginal revenue from selling the 11th unit is:
$139. When the firm sold 10 units at $150 each, total revenue was $1,500. To sell 11 units it must lower the price on all units to $149 each. Total revenue is now: 11 × $149 = $1,639. The firm has increased its total revenue by $139.
Suppose that a monopolist is selling 35 units of a product at a price of $30 each. If the average variable cost at this level of output is $5 and the average fixed cost at this level of output is $5, how much total economic profit is the firm earning?
$700 Total profit is the difference between price and ATC multiplied by quantity. Since price is greater than ATC, this is economic profit, and in total it is $20 per unit times 35 units, or $700
Trigger strategies
-GRIM TRIGGER: RETALIATION IS PERMANENT. -TREMBLING HAND TRIGGER: RETALIATION IS DELAYED. -TIT-FOR-TAT: COOPERATION IS REWARDED AND DEFECTION IS PUNISHED.
Characteristics of a monopoly
-one firm. -no close substitutes for product. -significant barriers to entry. -potential long-run economic profit. -substantial market power and control over price (monopolists are price makers).
If everybody in a country made the exact same amount of money, the Gini coefficient would equal
0
Sources of Market power
1. control of a key input of production 2. economies of scale (large fixed costs) 3. government protection (patent and copyright)
Different forms of price discrimination
1st degree - FIRMS CAPTURE ALL OF CONSUMER SURPLUS BY CHARGING EACH CONSUMER HIS OR HER MAXIMUM WILLINGNESS-TO-PAY. 2nd degree - PRICE DISCRIMINATION CHARGING DIFFERENT PRICES BASED ON THE QUANTITY PURCHASED (E.G., BLOCK PRICING) 3rd degree - PRICE DISCRIMINATION: CHARGING DIFFERENT PRICES TO DIFFERENT GROUPS OF CONSUMERS WITH VARYING ELASTICITIES
Natural monopoly/ regulation
A MONOPOLY WITH LARGE ECONOMIES OF SCALE, OFTEN PROTECTED BY THE GOVERNMENT, SUCH AS THE U.S. POSTAL SERVICE regulating; -A natural monopoly has significant economies of scale, such that one firm is more cost efficient than two or more. - To prevent a natural monopolist fromexploiting its market power, government uses regulation such as: - Average cost pricing. - rate of return regulation. - price cap regulation.
grim trigger strategy.
A grim trigger strategy is a permanent retaliatory decision that is based on an opponent's past decisions.
Simultaneous game
ACTIONS OCCUR AT THE SAME TIME, SUCH AS OFFENSE AND DEFENSE IN A FOOTBALL GAME.
Cartel
AN AGREEMENT BETWEEN FIRMS (OR COUNTRIES) IN AN INDUSTRY TO FORMALLY COLLUDE ON PRICE AND OUTPUT AND THEN AGREE ON THE DISTRIBUTION OF PRODUCTION. CARTELS REDUCE OVERALL SUPPLY TO RAISE PRICES AND PROFITS.
Cartel Stability
Cartels are more stable when: -they have few members and each member has similar goals. -they are maintained with legal provisions. -they are unable to differentiate their products. -each firm has a similar cost structure. -there are significant barriers to entry.
Oligopoly
Characteristics of oligopoly include: - relatively few firms. - interdependent decision making. - substantial barriers to market entry. - potential for long-run economic profit. - shared market power and considerable control over price.
1. _____ in an industry can be so large that demand is able to support only one firm.
Economies of scale
Fat's Meats is part of the cartel that controls the kielbasa industry. Which of the following would cause instability in this cartel? Please choose the correct answer from the following choices, and then select the submit answer button.
Fat's Meats cheats and sells more kielbasa than it agreed..
Fat's Meats is part of the cartel that controls the kielbasa industry. Which of the following would cause instability in this cartel?
Fat's Meats could engage in non-price competition. Non-price competition between cartel members, such as enhanced service, creates instability in the cartel.
__________ is most difficult to implement.
First-degree price discrimination First-degree price discrimination is based on willingness to pay. It is the most difficult to implement.
What happens to consumer surplus when a firm engages in perfect price discrimination?
It is reduced to zero. The monopolist keeps the entire consumer surplus when it engages in perfect price discrimination, which means that consumer surplus is reduced to zero.
The market price in a perfectly competitive market is $15 and 2,000 units are bought and sold. Assume the market becomes monopolized. What would you expect to happen to the number of units bought and sold?
It would fall below 2,000 units.
The market price in a perfectly competitive market is $11 and 1,250 units are bought and sold. Assume the market becomes monopolized. What would you expect to happen to the market price?
It would rise above $11. Market price is expected to rise.
How does a monopoly maximize profit: find equilibrium level of output and price
Monopolies maximize profit the same way that competitive firms do, by using the profit-maximization rule: PROFIT IS MAXIMIZED AT THE QUANTITY AT WHICH MR = MC.
Nash equilibrium
OCCURS WHEN ALL PLAYERS IN A GAME USE AN OPTIMAL STRATEGY IN RESPONSE TO ALL OTHER PLAYERS' STRATEGIES. - Once a Nash equilibrium is achieved,no individual player can do better by changing his or her mind unilaterally. -A Nash equilibrium maximizes the expected payoff given all possible scenarios.
sequential game
ONE PLAYER AT A TIME MAKES A MOVE.
Prisoner's Dilemma
Occurs in noncooperative games. The Nash equilibrium outcome is inferior to another outcome that can be achieved with cooperation. Many examples of Prisoner's Dilemma outcomes: Trade barriers Political campaigns Legal disputes Competitive business pricing
Product differentiation
PRODUCT DIFFERENTIATION IS THE KEY TO MONOPOLISTIC COMPETITION: IT GIVES THE FIRM SOME CONTROL OVER PRICE (MARKET POWER)
rent seeking
Rent seeking occurs when a monopoly uses its resources to protect its position. This includes such activities as lobbying, extending patents, and restricting the number of licenses permitted.
Which of the following is a requirement for successful price discrimination?
Sellers must be able to separate the market into different consumer groups based on their elasticities of demand.
Which of the following is NOT a requirement for successful price discrimination?
Sellers must have higher price elasticities than buyers.
Which of the following is NOT a requirement for successful price discrimination?
Sellers must sell a product that has many substitutes. This is not required for successful price discrimination.
Concentration ratio/ Herfindahl-Hirschman Index
THE MAIN MEASURE OF MARKET CONCENTRATION USED TO EVALUATE MERGERS AND JUDGE MONOPOLY POWER CHAPTER 9 SLIDE 32 HHI IS THE SUM OF THE SQUARES OF MARKET SHARE HELD BY EACH FIRM. HHI RANGES FROM 0 TO 10,000
How does the equilibrium in a monopolistically competitive market compare to the equilibrium in a perfectly competitive market?
The equilibrium price is higher and the equilibrium output is lower in a monopolistically competitive market.
How are monopolistically competitive and perfectly competitive firms SIMILAR?
They can both earn positive economic profits in the short run.
How are monopolistically competitive and perfectly competitive firms SIMILAR?
They can both easily enter and exit the market.
most common type of price discrimination.
Third-degree price discrimination
__________ is the most common type of price discrimination. Please choose the correct answer from the following choices, and then select the submit answer button.
Third-degree price discrimination Third-degree price discrimination charges different groups of people different prices and is the most common.
The differences between monopoly and competition
Under conditions of monopoly, the price will be higher and output will be lower than under conditions of competition. -This creates inefficiency in the market known as deadweight loss.
When a company charges more for higher-quality products, which type of price discrimination is it practicing?
When a company charges more for higher-quality products, which type of price discrimination is it practicing?
x-inefficiency.
X-inefficiency means that monopolies do not have to act efficiently since they are protected from competitive pressures.
_____ exists when economies of scale are so large that the minimum efficient scale of operation is roughly equal to market demand
a natural monopoly
Kip invents a device that extracts water from a tuna fish can after it is opened. Kip most likely has a monopoly on this invention because he has:
a patent. Patents are extended to firms and individuals who invent new products and processes. The patent protects the patent holder from product competition for a limited time.
Dominant strategy
a strategy that is best for a player in a game regardless of the strategies chosen by the other players -When all players have a dominant strategy, a single Nash equilibrium will result.
Amco Airlines decides to spend money on a customer service system that reduces wait times in response to UN Airlines' expenditure on a similar system. In game theory, this response is:
a strategy. Players base strategies on the information they have and the information they suspect other players hold.
In the fictitious country of Amelia, the wage earners in each quintile earn 20% of total income. What would be the shape of the Lorenz curve for Amelia?
an upward-sloping straight line
Economies of scale occur when a firm expands in size and __________ decline(s).
average total costs Economies of scale occur when a firm expands in size and average total costs decline.
are(is) any obstacle that makes it more difficult for a firm to enter an industry, and includes prohibitive fixed costs, control of a key resource, and government protection
barriers to entry
Assume a perfectly competitive market becomes monopolized. What would you expect to occur? Please choose the correct answer from the following choices, and then select the submit answer button.
deadweight loss Deadweight loss is composed of consumer surplus and producer surplus that is lost from producing less than the efficient output.
Fat's Meats is in an oligopoly market. According to the kinked demand curve model, if it raises its prices to increase profit, its competitors will: Please choose the correct answer from the following choices, and then select the submit answer button.
do nothing.
The demand curve for a monopolistically competitive firm is:
downward sloping.
Which of the following would ENHANCE a cartel's stability?
fewer members
When a company is able to secure all the total surplus in a market for itself, which type of price discrimination is it practicing?
first-degree First-degree price discrimination, also known as perfect price discrimination, involves charging each customer the maximum price he or she is willing to pay.
Those on the political right would argue that:
implementing policies that increase economic growth is the best way to reduce poverty.
Contestable market
industries in which the threat of competition keeps prices low
For regulating a natural monopoly, the marginal cost pricing rule:
is not often used in the United States. For regulating a natural monopoly, the marginal cost pricing rule is not often used in the United States. One notable exception is its use with Amtrak.
Product differentiation can be the result of all of the following EXCEPT:
lower prices.
A firm in an industry with many sellers and a differentiated product is:
monopolistically competitive.
Which of the following makes a cartel unstable?
no barriers to entry
Basic components of a game
players, strategies, payoffs, information, outcomes
In game theory, two warring countries are an example of:
players. Players can be firms competing for customers, a plaintiff and a defendant in a courtroom, two or more countries at war, or players in a sporting match or card game.
The demand curve for a monopolistically competitive firm is less elastic than the demand curve for a perfectly competitive firm because of:
product differentiation.
All of these are barriers to entry into an industry, EXCEPT: relatively low marginal tax rates. economies of scale. a patent. governmental restrictions.
relatively low marginal tax rates.
Which act amended the Clayton Act in order to close a loophole that allowed anticompetitive mergers?
the Celler-Kefauver Act The Celler-Kefauver Act prohibits anticompetitive mergers through asset acquisition. This is enforced through elaborate premerger notification requirements for mergers exceeding a certain size.
Which act forbids a company from holding the stock of its competitors?
the Clayton Act The Clayton Act forbids one company from holding the stock of its competitors.
Which of the following acts is a corporation in violation of if it practices price discrimination and the discrimination's effect is to substantially lessen competition or create a monopoly?
the Clayton Act The Clayton Act forbids price discrimination where its effect is to substantially lessen competition or create a monopoly.
The Supreme Court has given _____ the power to enforce all antitrust laws, except the Sherman Act.
the Federal Trade Commission
Which of the following has had the effect of making income distribution less equal in the United States?
the decline of the manufacturing sector
For a monopolistically competitive firm, if marginal revenue equals marginal cost:
the firm should continue to produce at the current level. The firm is operating at profit maximization.
For a monopolistically competitive firm, if marginal revenue is less than marginal cost:
the firm should decrease production.
For a monopolistically competitive firm, if marginal revenue is greater than marginal cost:
the firm should increase production. The firm should increase production until marginal revenue equals marginal cost.
Which one of the following makes a cartel UNSTABLE?
the incentive to cheat
Monopolistically competitive firms have market power because:
they engage in product differentiation. The market power in monopolistic competition arises from product differentiation; the monopolistically competitive industry is otherwise very similar to competition.
Because monopolistically competitive firms sell differentiated goods:
they have some market power.
When a company is able to charge different groups of people different prices, which type of price discrimination is it practicing?
third-degree Third-degree price discrimination involves charging different groups of people different prices.
a deadweight loss is the same as
welfare loss
For regulating a natural monopoly, the marginal cost pricing rule:
would force the firm to sustain losses. For regulating a natural monopoly, the marginal cost pricing rule would force the firm to sustain losses, since price would be below average total cost.
