11.2 Market Structures Flashcards
Which type of market structure is most apt to demonstrate “price leadership” by a major firm followed by other firms in the industry?
A. Monopoly.
B. Monopolistic competition.
C. Pure competition.
D. Oligopoly
D. Oligopoly.
Price leadership is typical in oligopolistic industries. Under price leadership, price changes are announced by a major firm in the industry. Once the leader has spoken, everyone else in the industry matches the price charged by the leader.
In markets that are imperfectly competitive, such as monopoly and monopolistic competition, firms produce at an output at which
A. Price equals marginal cost.
B. Price equals average cost.
C. Average costs are minimized.
D. Marginal cost equals marginal revenue.
D. Marginal cost equals marginal revenue.
Whether a market is competitive or noncompetitive, a firm should produce at the level at which marginal cost equals marginal revenue. The difference between monopoly and perfect competition is reflected in the marginal revenue curve. In perfect competition, the price is a constant and therefore equals marginal revenue, which is represented by a horizontal line. In a monopoly (or in monopolistic competition), the price declines as output increases, resulting in a line of negative slope.
Mr. Smith is hired as a consultant to a firm in a perfectly competitive industry. At the current output level the price is $20, the average variable cost is $15, average total cost is $22, and marginal cost is $20. In order to maximize profits in the short-run, Mr. Smith will recommend that the firm should
A. Decrease production.
D. Increase production.
C. Not change output.
D. Shut down.
C. Not change output.
For profit maximization, a firm operating under pure competition should produce the level of output at which price is equal to marginal cost. Since price and marginal cost are both $20, the firm is already at its profit-maximizing position.
The distinguishing characteristic of oligopolistic markets is
A. A single seller of a heterogeneous product with no close substitute.
B. Mutual interdependence of firm pricing and output decisions.
C. Lack of entry and exit barriers in the industry.
D. A single seller of a homogeneous product with no close substitute.
B. Mutual interdependence of firm pricing and output decisions.
The oligopoly model is less specific than the other market structures, but there are typically few firms in the industry. Thus, the decisions of rival firms do not go unnoticed. Products can be either differentiated or standardized. Prices tend to be rigid (sticky) because of the interdependence among firms. Entry is difficult because of either natural or created barriers. Price leadership is typical in oligopolistic industries. Under price leadership, price changes are announced first by a major firm. Once the industry leader has spoken, other firms in the industry match the price charged by the leader. The mutual independence of the firms influences both pricing and output decisions.
Monopolistic competition is characterized by a
A. Monopolistic market where the consumer is persuaded that there is perfect competition.
B. Relatively small group of sellers who produce differentiated products.
C. Relatively large group of sellers who produce differentiated products.
D. Relatively large group of sellers who produce a homogeneous product.
C. Relatively large group of sellers who produce differentiated products.
Monopolistic competition is characterized by a large number of firms offering differentiated products. Entry into the market is relatively easy, firms have some price control, and substantial nonprice competition exists, such as advertising.
As of December 31 of the year just ended, a monopolist was producing at a level where the selling price was $18, it had an average total cost of $15, an average variable cost of $12, marginal revenue of $13, and a marginal cost of $14. To maximize profits in the new year, the monopolist should
A. Not change the output level because the monopolist is currently at the profit-maximizing output level.
B. Shut down.
C. Increase production.
D. Decrease production.
D. Decrease production.
A monopolist should not continue producing at the current level when marginal revenue is less than marginal cost. Decreasing output will result in increased profits.
A company that operates within an oligopolistic industry decides to lower its prices. Assuming industry demand levels remain constant, as a result of the decrease in price, total expected profits among all companies within the industry are expected to
A. Remain unchanged.
B. Increase.
C. Decrease.
D. Cannot be determined.
C. Decrease.
An oligopolistic industry is one with only a few large firms. These firms are mutually aware and interdependent. Thus, each firm sets price and production levels after considering mutual interdependence. Accordingly, when one firm lowers its prices, so do the other firms. Given that industry demand remains constant, this results in a decrease in overall industry profits.
A characteristic of a monopoly is that
A. There is a unique relationship between the market price and the quantity supplied.
B. In optimizing profits, a monopoly will increase its supply curve to where the demand curve becomes inelastic.
C. There are multiple prices for the product to the consumer.
D. A monopoly will produce when marginal revenue is equal to marginal cost.
D. A monopoly will produce when marginal revenue is equal to marginal cost.
A monopoly consists of a single firm with a unique product. Such a firm has significant price control. For profit maximization, it increases production until its marginal revenue equals its marginal cost (unless marginal revenue is less than average variable cost, which will cause the firm to shut down). When a monopoly exists, consumers will face higher prices and lower output than in perfect competition.
Which of the following is an assumption in a perfectly competitive financial market?
A. Information about borrowing/lending activities is only available to those willing to pay market prices.
B. No single trader or traders can have a significant impact on market prices.
C. Some traders can impact market prices more than others.
D. Trading prices vary based on supply only.
B. No single trader or traders can have a significant impact on market prices.
For any normal good, the demand curve for the product of an industry in perfect competition is downward sloping. However, each seller can supply only a small part of the total demand and must accept the market price.
A profit-maximizing monopolist will produce at an output level where
A. Marginal revenue equals marginal cost.
B. Marginal cost equals average total cost.
C. Marginal revenue equals average total cost.
D. Demand equals average total cost.
A. Marginal revenue equals marginal cost.
A monopolist maximizes profits by producing the output at which marginal revenue (MR) equals marginal cost (MC).
Which one of the following is not a key assumption of perfect competition?
A. Customers are indifferent about which firm they buy from.
B. Firms sell a homogeneous product.
C. Each firm can price its product above the industry price.
D. The level of a firm’s output is small relative to the industry’s total output.
C. Each firm can price its product above the industry price.
Perfect competition is characterized by a market structure with many buyers and sellers acting independently, a homogeneous or standardized product, free entry into and exit from the market, perfect information, no control over the industry price, and the absence of nonprice competition. Moreover, customers are indifferent about which firm they buy from because price is the only difference between one seller and the next.
An industry that is oligopolistic would be best characterized by
A. One firm selling a product with no close substitutes.
B. The absence of the profit-maximizing goal.
C. Horizontal or flat demand curves for the output of individual firms.
D. Significant barriers to entry.
D. Significant barriers to entry.
An oligopolistic industry is characterized by only a few firms. Usually there are significant barriers to entry, such as high capital requirements, which prevent new firms from entering the industry. The automobile industry is an example.
In the short run in perfect competition, a firm maximizes profit by producing the rate of output at which the price is equal to
A. Average fixed costs.
B. Total variable cost.
C. Marginal cost.
D. Total cost
C. Marginal cost.
A firm should increase production until marginal revenue equals marginal cost. In the short run, this is the same as saying a firm in perfect competition will increase production until marginal cost equals price. The result is the short-run maximization of profits. As long as selling price exceeds marginal cost, a firm should continue producing. In the short run in perfect competition, the market price equals marginal revenue because no firm can affect price by its production decisions.
