Micro Chapter 9

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elizabethsanchez_1025
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242901
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Micro Chapter 9
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2013-10-30 23:18:54
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Monopoly
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  1. What is a monopoly?
    market structure characterized by:

    • 1. Single seller2.
    • Unique product3. Impossible entry into the market
  2. What does it mean to have a unique product?
    •There are no close substitutes for the monopolist’s product
  3. What are some examples ofimpossible entry?
    •Owner of a vital resource•Legal barriers•Economies of scale
  4. What are major barriers that prevent new firms from entering and competing with a monopolist?
    •Ownership of a Vital Resource•Legal Barriers•Economies of Scale
  5. What is the advantage ofeconomies of scale?
    •Because of economies of scale, a single firm in an industry will produce output at a lower per-unit cost than two or more firms
  6. What is anatural monopoly?
    •An industry in which the long-run average cost of production declines throughout the entire market
  7. What is unique about a naturalmonopoly?
    •A single firm will produce output at a lower per-unit cost than two or more firms in the industry
  8. What is a network good?
    A good that increases in value to each user as the total number of users increase. As a result, a firm can achieve economies of scale. Examples include Facebook and Match.com.
  9. What is a price maker?
    •A firm that faces a downward-sloping demand curve•As a result, a monopolist can choose its price along the demand curve.
  10. What is the difference betweenmonopoly and perfect competition?
    •The D and MR curves of the monopolist are downward sloping; in perfect competition they are equal and horizontal
  11. What is unique about the demandcurve for a monopolist?
    •The monopolist demand curve and the industry demand curve are one in the same
  12. Why is MR < P for all but thefirst unit of output?
    •Observe the relationship between P and MR in Exhibit 2.•To sell 1 unit, P=$138 and TR=$138.•To sell 2 units, P=$125 and TR=$250.•Compute that TR increases $112 ($250-$125), which means MR=$112.•Notice that at 2 units P=$125>$112 and this gap widens as the units increase.
  13. What two methods  does a monopolist use to maximize profit orminimize losses?
    • Total revenue method• MR = MC method
  14. Can a monopolist make a profit inthe long-run?
    •If the positions of a monopolist’s demand and cost curves give it a profit and nothing changes these curves, it can make a profit in the long-run
  15. What isprice discrimination?
    •The practice of a seller charging different prices for the same product not justified by cost differences
  16. What is arbitrage?
    •The practice of earning a profit by buying a good at a low price and reselling the good at a higher price
  17. Is price discrimination unfair?
    •At the lower price, many buyers benefit from the discrimination by not being  excluded from purchasing the product if a higher price were charged.
  18. Is pricediscrimination unfair?
    •At the lower price, many buyers benefit from the discrimination by not being  excluded from purchasing the product if a higher price were charged.
  19. Is perfectcompetition efficient?
    •A perfectly competitive firm that produces where P = MC achieves an efficient allocation of resources. Thus, the marginal benefit equals the marginal cost of resources to produce it.
  20. Is perfect competition efficient?
    •A perfectly competitive firm that produces where P = MC achieves an efficient allocation of resources. Thus, the marginal benefit equals the marginal cost of resources to produce it.
  21. Is monopoly efficient?
    •A monopolist is inefficient because it sets P>MR=MC and resources are underallocated to the production of its product
  22. How does monopoly harm consumers?
    •It charges a higher price and produces a lower quantity than would be the case in a perfectly competitive situation
  23. What is the case againstmonopoly?
    •Higher price•Charges a Price > MC•Long-run economic profit•Alters the distribution of income to favor monopolist
  24. If a firm is currently equating MR and MC and product price = $24, AVC = $22, and ATC = $26, then in the long run this firm:
    will go out of business
  25. If a firm reacts to other firms' market decisions by anticipating how the other will then react, this is:
    mutual interdependence
  26. A monopolist will earn economic profits as long as his price exceeds:
    average total cost
  27. Suppose an oil cartel has an agreement to restrict members' production in order to maintain a price of $30 per barrel. A single cartel member may want to cheat and exceed its quota so that it can:
    earn a bigger profit
  28. In the long run, marginal cost must equal marginal revenue for a monopolistic competitive firm, but not at the minimum point of the long-run average cost curve.
    T/F
    true
  29. Cartels are legal in the United States? T/F
    False
  30. A competitive firm maximizes its profits (or minimizes is losses) by producing the quantity where the market price equals the firm's:
    marginal cost
  31. In the short run, the profit maximizing (or minimizing) quantity of output for any firm to produce exists at that output level at which marginal revenue equals marginal cost. T/F
    True
  32. A monopolist that maximizes total revenue earns maximum economic profit. T/F
    False
  33. Which of the following best explains why a firm in a perfectly competitive market must take the price determined in the market?

    ) The short-run average total costs of firms that are price takers will be constant. B) If a price taker increased its price, consumers would buy from other suppliers. C) Firms in a price-taker market will have to advertise in order to increase sales. D) There are no good substitutes for the product supplied by a firm that is a price taker.
    B
  34. If the market price is $5 and you are currently producing at a level where average total cost is $3 and falling, you should:

    A) b or c, it doesn't matter. B) shut down. C) produce only enough to cover variable costs. D) produce where MR = MC. E) produce until the average total cost and average revenue are equal.
    D
  35. To maximize long-run profits, the monopolistically competitive firm shown in Exhibit 10-2 will charge a price per unit of: A) zero. B) $5. C) $10. D) $15. E) $20.
    D because at 10 it will opportate at a shortrun mr=mc but at d=lrac is 15
  36. Monopolistic competitive firms in the long run earn:
    zero pure economic profit
  37. A market situation where a small number of sellers dominate the entire industry is called:
    oligopoly
  38. Which of the following is a necessary condition for price discrimination?

    A) The seller must be able to divide the markets according to the different price elasticities of demand. B) It must be difficult for one buyer to resell to another buyer. C) Both a and b. D) Neither a nor b.
    C both a and b
  39. In the perfectly competitive market, all firms in the market are assumed to be producing:
    identical product
  40. A major characteristic of the theory of oligopoly is that:

    A) there are no real-world examples. B) the reactions of each firm depends on how the firm believes rivals will react. C) in reality few oligopolies survive more than 10 years. D) none of these.
    B
  41. A competitive firm maximizes its profits (or minimizes is losses) by producing the quantity where the market price equals the firm's:
    marginal cost
  42. If pizza used to be produced in a perfectly competitive market, and now the pizza market has become a monopoly, we can expect:

    A) less pizza to be sold at a higher price. B) more pizza to be sold at a higher price. C) less pizza to be sold at a lower price. D) more pizza to be sold at a lower price. E) the same amount of pizza to be sold at the same price.
    A
  43. A monopoly:

    A) can increase price and increase output at the same time. B) can charge any price it wants and still sell all of its output. C) can sell any output it produces provided it accepts the market price. D) must lower price in order to increase output. E) faces a perfectly elastic demand curve.
    D
  44. Regardless of the demand for its product, a monopolist will be able to earn positive economic profits T/f.
    False
  45. An industry is said to be a natural monopoly when:

    A) legal barriers limit entry into the market. B) diseconomies of scale are present in the market. C) the market demand for the product supplied by a firm is inelastic. D) long-run average cost continues to decline as the quantity of output increases.
    D
  46. As new firms enter a monopolistic competitive industry, it can be expected that:

    A) market price will increase. B) the output of existing firms will increase. C) profits of existing firms will increase. D) market demand should decrease. E) profits of existing firms will decrease.
    E
  47. A monopolist faces a downward-sloping demand curve because: A) the demand for its product is inelastic. B) the industry demand curve is horizontal. C) resource prices increase as the monopolist expands output. D) the entire market demand curve is the monopolist's demand curve
    d
  48. Under monopoly, a firm:

    A) is a price taker. B) maximizes profit by setting marginal cost equal to marginal revenue. C) will shut down in the short-run if price falls short of average total cost. D) always earns a pure economic profit.
    B
  49. For a monopolist to practice price discrimination, one necessary condition is that the product offered for sale must be:

    A) high quality. B) expensive. C) cheap. D) impossible or difficult to resell.
    impossible or difficult to resell
  50. Compared to the perfectly competitive outcome, monopolistically competitive markets will result in:
    A) a wider variety of products and higher prices. B) too little output and higher prices. C) a wider variety of products and lower prices. D) less product variety and lower prices.
    B
  51. If a monopolistically competitive firm can earn a profit, it will increase production until:

    A) MR > AVC. B) MR = ATC. C) MC > MR. D) MR = AR. E) MR = MC.
    E
  52. Which of the following is a market structure of monopoly? A) Few firms operating as price takers. B) Single firm operating as a price taker. C) Single firm that is a price maker. D) All of these are true.
    c
  53. Because a competitive firm is a price taker, it faces a demand curve that is: A) perfectly inelastic. B) relatively inelastic. C) relatively elastic. D) perfectly elastic.
    d
  54. If a potato farmer expands output, he finds that the increase in total revenue is less than the increase in total costs. This means that:

    A) profit is being maximized. B) he should not have expanded output. C) he should produce even more output. D) the firm is wasting resources. E) the farmer should go out of business.
    B
  55. If marginal revenue equals marginal cost in the short run, the perfectly competitive firm earns zero profits. T/F
    B

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