3101 pt 2

Question 1

monopoly

Answer 1

Market with only one seller.

Question 2

monopsony

Answer 2

Market with only one buyer.

Question 3

market power

Answer 3

Ability of a seller or buyer to affect the price of a good

Question 4

Lerner Index of

Monopoly Power

Answer 4

Measure of monopoly power calculated as excess of
price over marginal cost as a fraction of price.

L= P-MC/P = -1/Ed

Question 5

What 3 factors determine a firm’s monopoly power/ elasticity of demand?

Answer 5

1. The elasticity of market demand. Because the firm’s own demand will be at least as elastic as market demand, the elasticity of market demand limits the potential for monopoly power.
2. The number of firms in the market.
3. The interaction among firms - Even if only two or three firms are in the market, each firm will be unable to profitably raise price very much if the rivalry among them is aggressive, with each firm trying to capture as much of the market as it can.

Question 6

If there is only one firm—a pure monopolist—its demand curve is…

Answer 6

…it is the market demand curve.

Question 7

barriers to entry

Answer 7

Condition that impedes entry by new competitors.

• Patents, copyrights, and licenses
• Economies of scale may make it too costly for more than a few firms to supply the entire market.

Question 8

rent seeking

Answer 8

Spending money in socially unproductive efforts to

acquire, maintain, or exercise monopoly

Question 9

natural monopoly

Answer 9

Firm that can produce the entire output of the market at a

cost lower than what it would be if there were several firms

Question 10

monopsony power

Answer 10

Buyer’s ability to affect the price of a good.

Question 11

oligopsony

Answer 11

Market with only a few buyers.

Question 12

antitrust laws

Answer 12

Rules and regulations prohibiting actions that restrain, or are likely to restrain, competition.

Question 13

parallel conduct

Answer 13

Form of implicit collusion in which one firm consistently

follows actions of another.

Question 14

predatory pricing

Answer 14

Practice of pricing to drive current competitors out of business and to discourage new entrants in a market so that a firm can enjoy higher future profits.

Question 15

price discrimination

Answer 15

Practice of charging different prices to different
consumers for similar goods.

-used for vapturing even more of the CS

Question 16

reservation price

Answer 16

Maximum price that a customer is willing to pay for a good.

Question 17

first degree price discrimination

Answer 17

Practice of charging each customer her reservation price.

Question 18

second-degree price

discrimination

Answer 18

Practice of charging different prices per unit for different

quantities of the same good or service.

Question 19

third-degree price discrimination

Answer 19

Practice of dividing consumers into two or more groups with separate
demand curves and charging different prices to each group.

Question 20

Perfect price discrimination:

Answer 20

profit from producing and selling an incremental unit is the difference between demand and marginal cost. pg 17

Question 21

block pricing

Answer 21

Practice of charging different prices for different quantities or “blocks” of a good.

Question 22

variable profit

Answer 22

Sum of profits on each incremental unit produced by a firm; i.e., profit ignoring fixed costs.

Question 23

If third-degree price discrimination is feasible, what price should the firm charge each group of consumers?

Answer 23

1. Total output should be divided between the groups so that the MR is the same for each group
2. Total output must be such that the MR for each group of consumers is equal to the marginal cost of production.

pg 34 example
-the higher price will be charge to the people with the lower price elasticity!

Question 24

What is monopolistic competition, and what are 2 key features?

Answer 24

Market in which firms can enter freely, each producing its
own brand or version of a differentiated product.

1. product differentiation - sell products that are highly substitutable for one another but not perfect substitutes.
2. There is free entry and exit (no barriers to entry/exit)

Question 25

oligopoly

Answer 25

Market in which only a few firms compete with one another, and entry by new firms is impeded(barriers).
- strategic behavior (how do I think the other firms
will behave?)
- Nash equilibrium

Question 26

cartel

Answer 26

Market in which some or all firms explicitly collude, coordinating prices and output levels to maximize joint profits.

Question 27

Nash equilibrium

Answer 27

Set of strategies or actions in which each firm does the best it can given its competitors’ actions.

or

Each firm is doing the best it can given what its competitors are doing.

Question 28

duopoly

Answer 28

Market in which two firms compete with each other

Question 29

Cournot model

Answer 29

Oligopoly model in which firms produce a homogeneous good, each firm treats the output of its competitors as fixed, and all firms decide simultaneously how much to produce.

Question 30

reaction curve

Answer 30

Relationship between a firm’s profit-maximizing
output and the amount it thinks its competitor will
produce.

Question 31

Cournot equilibrium

Answer 31

Equilibrium in the Cournot model in which each firm correctly assumes how much its competitor will produce and sets its own production level accordingly.

Question 32

Stackelberg model

Answer 32

Oligopoly model in which one firm sets its output before

other firms do

Question 33

Bertrand model

Answer 33

Oligopoly model in which firms produce a homogeneous
good, each firm treats the price of its competitors as
fixed, and all firms decide simultaneously what price to
charge.

Question 34

payoff matrix

Answer 34

Table showing profit (or payoff) to each firm given its

decision and the decision of its competitor

Question 35

noncooperative game

Answer 35

Game in which negotiation and enforcement of binding

contracts are not possible.

Question 36

prisoners’ dilemma

Answer 36

Game theory example in which two prisoners must
decide separately whether to confess to a crime; if a
prisoner confesses, he will receive a lighter sentence and his accomplice will receive a heavier one, but if neither confesses, sentences will be lighter than if both confess.

Question 37

externality

Answer 37

Action by either a producer or a consumer which affects other producers or consumers, but is not accounted for in the market price. (exhaust emissions, vaccinations)

Question 38

marginal social cost/benefit

Answer 38

Sum of the marginal cost of production and the

marginal external cost(from externalities).

Question 39

Coase theorem

Answer 39

Principle that when parties can bargain without cost and to their mutual advantage, the resulting outcome will be efficient regardless of how property rights are specified.

Question 40

nonrival good - nonexclusive good - public good

Answer 40

nonrival good:Good for which the marginal cost of its provision to an additional consumer is zero

nonexclusive good:Good that people cannot be excluded from consuming, so that it is difficult or impossible to charge for its use.

public good:Nonexclusive and nonrival good: The marginal cost of provision to an additional consumer is zero and people cannot be excluded from consuming it.

Question 41

adverse selection

Answer 41

Form of market failure resulting when products of different qualities are sold at a single price because of asymmetric information

Question 42

moral hazard

Answer 42

When a party whose actions are unobserved can affect the probability or magnitude of a payment associated with an event.

(Examples:

• insurance fraud
• shirking on the job when employer cannot monitor workers)

Question 43

market signaling

Answer 43

Process by which sellers send signals to buyers conveying information about product quality.

Example: education for employers

Question 44

Which formula can we use as a rule of thumb for pricing by a monopolist?

Answer 44

MC/1+(1/Ed)