ECON 2023: TEST 5
42 Cards in this Set
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Monopolistic competition differs from perfect competition because in monopolistically competitive markets
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each of the sellers offers a somewhat different product.
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If regulators required firms in monopolistically competitive firms to set price equal to marginal cost
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firms would require a subsidy to stay in business
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A firm maximizes its profit by producing output up to the point where marginal revenue equals marginal cost
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when the market is perfectly competitive, monopolistically competitive, or monopolistic
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The deadweight loss that is associated with a monopolistically competitive market is a result of
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price exceeding marginal cost.
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What market are strategic interactions among firms most likely to occur in?
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the market for tennis balls
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What is not a barrier to entry?
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An entrepeneur opens a popular new restaurant
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In monopolistically competitive markets, free entry and exit suggests that
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all firms earn zero economic profits (break even) in the long run.
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Price discrimination adds to social welfare in the form of:
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increased total surplus
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The fundamental source of monopoly power is
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barriers to entry
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Which of the following situations produces the largest profits for oligopolists?
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The firms reach the monopoly outcome.
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Which of the following statements is not correct?
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Monopolists typically produce larger quantities of output than competitive firms
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Because monopolistically competitive firms produce differentiated products, each firm
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has some control over product price
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Which of the following correctly lists the products in order from most advertised to least advertised?
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dog food, communication satellites, corn
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If a monopolist can sell 7 units when the price is $4 and 8 units when the price is $3, then marginal revenue of selling the eighth unit is equal to
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-$4
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A monopolistically competitive firm chooses the quantity to produce where
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marginal revenue equals marginal cost
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In the game where two oil companies own adjacent oil fields, the companies will not use the oil efficiently because
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the pool from which they recover the oil is a common resource
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For a monopolist,
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MR < price of good
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In order to sell more of its product, a monopolist must
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lower its price
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Some prescription drugs sell more locally than in other countries. Which of the following statements about this issue is likely to be true?
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Drug companies are engaging in price discrimination, but this might improve global social welfare if it gives more people access to the drugs.
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Each firm in a monopolistically competitive market
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faces a downward-sloping demand curve.
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What happens to the price and quantity of a drug when its patent runs out?
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The price will fall
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Cartels are difficult to maintain because
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there is always tension between cooperation and self-interest in a cartel.
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The Sherman Antitrust Act
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elevated agreements among conspiring oligopolists from an unenforceable contract to a criminal conspiracy
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Which of the following statements is correct for both a monopolist and a perfectly competitive firm?
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1. The firm maximizes profit by equating MR with MC.
2. Average revenue = price
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Monopolistic competitive market attributes
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-many sellers
-product differentiation
-free entry/exit
-Demand curve downward sloping
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In a monopolistic competitive firm, when price > ATC
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the firm makes a profit
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In a monopolistic competitive firm, when price < ATC,
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it is unable to make a positive profit so the best the firm can do is minimize losses
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price discrimination
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selling the same good at different prices to different people
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Concentration Ratio
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The percentage of the market's total output supplied by its four largest firms
>>>>the higher the ratio, the less competition
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Three sources of barriers to entry
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1. A single firm owns a key resource
2. The govt gives a single firm the exclusive right to produce the good
3. Natural monopoly (single firm can produce the entire market Q at lower cost than could several firms)
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Increasing Q has two effects on revenue:
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-Output effect: higher output raises revenue
-Price effect: lower price reduces revenue
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Why are airline tickets discounted for people who stay over Saturday nights?
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They distinguish business travelers, who usually have higher WTP, from more price-sensitive leisure travelers.
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In perfect price discrimination at each Q, the height of the demand curve shows...
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the marginal buyer's WTP, which is the price the monopolist charges that buyer under perfect price discrimination.
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What is public policy towards monopolies?
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-Increase competition with antitrust laws (prevent mergers that limit competition, break up companies)
-Regulation (govt sets the monopolist's price)
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Monopoly firms maximize profits by
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producing the Q where MR = MC.
(since MR < P, the monopoly P > MC, leading to a DWL)
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Why is monopolistic competition less efficient than perfect competition?
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1. excess capacity
2. markup over marginal cost
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Critique of advertising
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1. manipulate people's taste
2. impedes competition - promotes higher markups
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Defense of Advertising
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1. provides useful info to buyers
2. informed buyers can find/exploit price differences more easily
3. promotes competition/reduces market power
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Oligopoly
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a market structure where only a few sellers offer similar or identical products
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Game theory
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study of how people behave in strategic situations
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collusion
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an agreement among firms in a market about quantities to produce or prices to charge
(ex. Verizon and AT&T agree to produce half of the monopoly output)
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Nash equilibrium
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situation where firms interacting with one another each choose their best strategy given the strategies that all the others have chosen
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ECON 2023: TEST 2