Monopolist Competition, Oligopoly and Externalities (FINAL)
A situation in which firms choose their best strategy, not best in general but best given the strategies chosen by the other firms in the market, is called
a Nash equilibrium.
One difference between a corrective tax and a tradable pollution permit is that
a corrective tax sets the price of pollution and a permit sets the quantity of pollution.
When a strategy is always inferior for a player to choose, it is called
a dominated strategy.
Once a cartel is formed, the market is in effect served by
a monopoly.
When the marginal social cost curve is located above a product's marginal curve,
a negative externality exists in the market.
An externality exists whenever
a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives payment for that effect.
Nancy loves to landscape her yard, but her neighbor Lee places a low value on his landscaping. When Lee's grass is neglected and gets long, Nancy will mow it for Lee. This is an example of
a private solution to a negative externality problem
If only a few people are affected by an externality, then it is more likely that
a private solution to the inefficiency will occur
A major distinction between a monopolistically-competitive firm and an oligopolistic firm is that
a recognized interdependence exists between firms in one industry but not the other.
Automobile emission controls are an example of a
a standards-based approach to increasing social efficiency.
In the long run, a monopolistically-competitive firm sells at a price that is
equal to average total cost, but higher than marginal cost.
Once tradable pollution permits have been allocated to firms,
firms that can only reduce pollution at high cost will be willing to pay the most for the pollution permits
Martha and Stewart are competitors in a local market and each is trying to decide if it is worthwhile to advertise. If both of them advertise, each will earn a profit of $5,000. If neither of them advertise, each will earn a profit of $10,000. If one advertises and the other doesn't, then the one who advertises will earn a profit of $15,000 and the other will earn $7,000. Martha
has no strategy she should definitely pursue — that is, she has no dominant strategy (or dominated one, for that matter).
Advertising can enhance economic efficiency when it
increases consumer awareness of substitute products.
As the number of firms in an oligopolized market
increases, and provided the firms do not successfully collude, the market approaches the competitive market outcome
As the number of firms in an oligopolized market
increases, and provided the firms do not successfully collude, the market approaches the competitive market outcome.
When an externality is present, the market equilibrium is
inefficient, and the equilibrium does not maximize the total net benefit to society as a whole.
Using quotas (or standards) to reduce pollution
is a more costly solution to society than a corrective tax
A successfully colluding oligopoly
is as efficient as a monopolist.
A failure of cooperation among oligopolists trying to secure monopoly profits
is desirable for society as a whole
Since externalities tend to keep markets from reaching socially optimal equilibria, government action
is needed when private solutions fail to arise
The prisoners' dilemma game
provides insight into why cooperation is difficult.
Monopolistic competition is characterized by which of the following attributes?
(i) free entry (ii) product differentiation (iii) many sellers
Individual profit earned by Dave, the oligopolist, depends on which of the following?(i) The quantity of output that Dave produces(ii) The quantities of output that the other firms in the market produce(iii) The extent of collusion between Dave and the other firms in the market
(i), (ii), and (iii)
Which of the following illustrates the concept of a negative externality?
A college student in his dorm room plays loud music on his new speakers at 2:00 a.m.
Which of the following statements about a wellmaintained yard best describes the externality?
A well-maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighborhood.
Suppose two companies own adjacent oil fields, beneath which is a common pool of oil worth $30 million. For each well that is drilled, the company that drills the well incurs a cost of $3 million. Each company can drill one or two wells. Firms' revenues are proportional to their share of the total number of wells drilled; for example, if three wells have been drilled total of which one firm has two, it gets two-thirds of the oil revenues, or $20 million (gross). What is the likely outcome of this game if each company pursues its own self-interest? (Hint: create the payoff matrix for yourself.)
Each company drills two wells and experiences a profit of $9 million.
Which of the following is a positive effect of advertising?
It provides information for reducing search costs.
Which of the following is an example of a positive externality?
Mary not catching the flu from Sue because Sue got a flu vaccine.
Mary and Cathy are roommates. Mary assigns a $30 value to smoking cigarettes. Cathy values smoke-free air at $15. Which of the following scenarios is a successful example of a Coasean bargain?
Mary pays Cathy $16 so that Mary can smoke.
Suppose that each of two firms has the independent choice of advertising its product or not advertising. If neither advertises, each gets $10 million in profit; if both advertise, their profits will be $5 million each; and if one advertises while the other does not, the advertiser gets profit of $15 million while the other gets profit of $2 million. What is the likely outcome if the firms could successfully collude? (Hint: create the payoff matrix for yourself.)
Neither firm will advertise.
Which of the following statements is not correct?
Private parties are usually more successful in achieving efficient outcomes than government policies.
Which of the following is not a characteristic of pollution permits?
Real-world markets for pollution permits include those for U.S. sulfur dioxide and U.S. carbon emissions
University researchers create a positive externality because what they discover in their research labs can easily be learned by others who haven't contributed to the research costs. If there are no subsidies, what is the relationship between the equilibrium quantity of university research and the optimal quantity of university research produced?
The equilibrium quantity is less than the socially optimal quantity.
Suppose that an MBA degree creates no externality because the benefits of an MBA are completely internalized by the student in the form of higher wages. If there are no government subsidies for MBAs, then which of the following statements is correct?
The equilibrium quantity of MBAs will equal the socially optimal quantity of MBAs.
Suppose that Company A's railroad cars pass through Farmer B's corn fields. The railroad causes an externality to the farmer because the railroad cars emit sparks that cause $1,500 in damage to the farmer's crops. There is a special grease that the railroad could purchase that would eliminate the damaging sparks. The grease costs $1,200. Suppose that the railroad is not liable for any damage caused to the crops. That is, the railroad has the property right to emit sparks as it likes. Assume that there are no transaction costs. Which of the following characterizes the efficient outcome?
The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur.
Which of these situations produces the largest collective profits for oligopolists?
The firms reach a Nash equilibrium
Which of the following is not a necessary condition for the Coase theorem?
The government intervenes to internalize the externality
Suppose that Company A's railroad cars pass through Farmer B's corn fields. The railroad causes an externality to the farmer because the railroad cars emit sparks that cause $1,500 in damage to the farmer's crops. There is a special grease that the railroad could purchase that would eliminate the damaging sparks. The grease costs $1,200. Suppose that the farmer has the right to compensation for any damage that his crops suffer. Assume that there are no transaction costs. Which of the following characterizes the efficient outcome?
The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will occur.
In which of the following games is it clearly the case that the game's cooperative outcome is good for the two players and also good for society?
Two oil companies own adjacent oil fields over a common pool of oil, and each company decides whether to drill one well or two wells.
As a group, oligopolists would always be better off if they would collectively act
as a single monopolist.
As a group, oligopolists would always be better off if they would act collectively
as if they were each seeking to maximize their own individual profits.
The free entry and exit of firms in a monopolistically-competitive market guarantees that
both economic profits and economic losses disappear in the long run.
A monopolistically-competitive market is like a competitive market in that
both market structures feature easy entry by new firms.
The economic inefficiencies of monopolistic competition may be offset by the fact that
consumers have a number of variations of products from which to choose.
Just like a monopolist, a monopolistically-competitive firm
can raise its price without losing all sales. is a price maker. produces the quantity at which marginal revenue equals marginal cost
The practice of firms working together to make coordinated decisions about price and quantity is called
collusion.
Cecilia's Café operates in a monopolistically competitive market. Cecilia's is currently producing where its average total cost is minimized. In the long run, we would expect Cecilia's output to
decrease and average total cost to increase
The prisoners' dilemma provides insights into the
difficulty of maintaining cooperation.
Product differentiation causes the seller of a good to face what type of demand curve?
downward sloping
Corrective taxes differ from most taxes in that corrective taxes
enhance economic efficiency.
The equilibrium price in a market characterized by a competitive oligopoly is
lower than in monopoly markets and higher than in perfectly competitive markets.
The total quantity of output produced in a (noncollusive) oligopoly market is
lower than the total quantity of output that would be produced if the market were a monopoly, but higher than the total quantity of output that would be produced if the market were perfectly competitive.
Dog owners do not bear the full cost of the noise their barking dogs create and often take too few precautions to prevent their dogs from barking. Local governments address this problem by
making it illegal to "disturb the peace".
As the number of firms in an oligopoly increases, and provided the firms do not successfully collude, the price approaches
marginal cost.
Monopolistically-competitive firms behave like _____, but in the long run, the profit of a monopolistically-competitive firm is similar to that of _____.
monopolies; a perfectly-competitive firm
Product variety is likely to be greater in
monopolistic competition than in pure competition.
Corrective taxes are unlike most other taxes because they
move the allocation of resources closer to the social optimum
All remedies for externalities share the goal of
moving the allocation of resources toward the socially optimal equilibrium.
Long-run economic profits are possible in which of the following market structures?
oligopoly and monopoly
Game theory is necessary for understanding
oligopoly, but not monopoly or perfect competition.
A firm is a price taker
only when the market is perfectly competitive
Which of the following is an example of a monopolistically-competitive industry?
pizza restaurants in New York City
Internalizing a positive externality will cause the demand curve to
shift upward.
The welfare loss in a competitive oligopoly is
smaller than that of a monopoly.
Which of the following policies is the government most inclined to use when faced with a positive externality?
subsidies
The proposition that if private parties can bargain without cost (or with only minimum cost) that they can solve externalities problems on their own without government is called
the Coase theorem
What economic argument suggests that if transactions costs are sufficiently low, the equilibrium is economically efficient regardless of how property rights are distributed?
the Coase theorem
The idea that spending a lot of money on advertising would be a credible signal of high product quality hinges upon
the belief that a firm which spent a lot of money advertising a product that was actually of low quality would end up having wasted that money (or worse, its reputation) if the public found out the product was actually of low quality. the idea that advertising is expensive in the first place. the public being aware that the advertising in question cost a lot of money.
Suppose that preschool education creates a positive externality. If the government does not intervene, then most likely
the equilibrium quantity of preschool education will be less than the socially-optimal quantity.
In oligopolized markets,
the oligopolists earn the highest profit when they cooperate and behave like a monopolist.
Suppose that a firm produces electricity by burning coal. The production process creates a negative externality of air pollution. If the firm does not internalize the cost of the externality, it will produce where
the value of electricity to consumers equals the private cost of producing electricity
An oligopoly is a market in which
there are only a few sellers, each offering a product similar or identical to the products offered by other firms in the market.
Cartels are difficult to maintain because
there is always tension between cooperation and self-interest in a cartel.
If producers strongly object to a ban on their advertising, it is a good clue that
they believe the advertising in question persuades customers that products are more different than they really are.
Because each oligopolist cares about its own profit rather than the collective profit of all the oligopolists together,
they fail to achieve the same price and quantity as a monopolist.
The paradoxical nature of oligopoly can be demonstrated by the fact that, even though the monopoly outcome is best for the oligopolists,
they have private incentives to increase production above the monopoly outcome.
The Coase theorem suggests that private solutions to externalities problems may be impossible
when the number of interested parties is large and bargaining costs are high.
