QUIZ 5CHAPTER 15: MONOPOLIES Recall:TR= P X QTC= FC + VCProfit= TR- TC AR= TC/ Q, MR= change in TC/ change in Q Monopoly- firm is sole seller with 100% market share; price maker; arises due to barriers to entry such as monopolization of a key resource, government support through copyrights and patents and natural monopolies (economies of scale- cheaper to produce on large scale). Output effect- higher output raises revenue.Price effect- lower price reduces revenue. Profit maximization occurs at MR=MC (at which Q, sets highest price consumers are willing to pay- determined by demand curve). 1. Profit maximizing Q is where MR=MC (P>MC). 2. Find P from demand curve at this Q. 3. Results in DWL. 4. Profit= (P-ATC) X Q Price discrimination- selling a good at different prices to different buyers based on WTP; monopolists theoretically captures all consumer surplus as profit but not possible because consumers due not reveal their WTP to sellers. Ex. movie tickets, discounts, financial aid. Monopsony- one buyer. Ex. one company is the only buyer of labor in a certain town. ** Monopoly must reduce price to sell a greater quantity which causes MR to fall below price. Profit maximized where MC=MR, MR<P, P>MCDWL. Long run economic profits positive. CHAPTER 16: MONOPOLISTIC COMPETITION Monopolistic competition- many sellers offer similar but not identical products; product differentiation, free entry and exit into and out of the market. Ex. Apartments, food, clothing. - Long run economic profits 0 (like perfect competition), market power, downward sloping demand curve (perfect competition is horizontal). - Maximize profits at MC=MR (all firms), MR<P, P>MC (Q set by MR=MC, P set by demand curve and Q- same strategy as monopoly). - Losses in the short run when P<ATC at output where MR=MC.- In the short run it behaves as a monopoly (positive economic profits) but in the long run entryand exit drive economic profit to zero (perfect competition). Entry and exit occurs until P=ATC and Profit=0. - Less efficient due to excess capacity (produces less than cost minimizing output which is the Q that minimizes ATC), markup over marginal cost (perfect competition P=MC but monopolistic competition P>MC-DWL). - Product variety externality- surplus consumers get from introduction of new products. Business stealing externality- losses incurred by existing firms when new firms enter market (lose positive economic profits). - Product differentiation and markup pricing lead to advertising (perceived or real) and brand names. Critics claim they are used to reduce competition and take advantage of the consumer by portraying perceived differences that don’t actually exist but defenders hold that they are ameans of informing the consumer and incentives for lowering costs. **Price set by Q at which MR=MC and where (up to) D intersects ATC (efficient scale where MC intersects ATC). Difference between P and MC is markup. CHAPTER 17: OLIGOPOLIES Oligopoly- market structure in which only a few sellers offer similar or identical products; high concentration ratios (% of markets total output supplied by its 4 largest firms, higher less comp.). Strategy: firm’s decisions about P or Q affect other firms and cause them to react (game theory). Duopoly- oligopoly made up of two firms. Collusion- agreement among firms in a market about quantities to produce or prices to charge. Cartel- a group of firms acting in unison. Nash equilibrium- economic participants interacting with one another each chose their best strategies that all others have chosen (oligopoly equilibrium condition). - If output effect > price effect, firm increases production.- If price effect> output effect, firm reduces production. - As the number of firms in the market increases, the price effect becomes smaller and it becomes more like a perfectly competitive market (P approaches MC, Q approaches socially efficient Q). Dominant Strategy- strategy that is best for a player regardless of those chosen by other players. Prisoner’s Dilemma- game between 2 captured criminals that illustrates that cooperation is difficult even when mutually beneficial. - Prevents oligopoly firms from achieving monopoly profits but good for society because Q is closer to socially efficient output and P is closer to MC (perfect competition). However, inability to cooperate may reduce social welfare. **Profit maximization when oligopolists form a cartel and act like monopolists (monopoly profits) but self-interest leads to higher Q and lower
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