4. Monopoly & Monopolistic Competition; Price Discrimination Flashcards
If the price of a major input for a monopolist falls, what happens to the equilibrium level of output?
a. Decreases.
b. Remains constant.
c. Increases.
d. Will depend on the amount that demand for the product changes due to the input price change.
c. Increases.
* Cost Reduction:
When the price of a major input for a monopolist falls, the cost of production decreases. This is because the input cost is a significant factor in determining the overall cost structure for a firm.
- Profit Maximization:
The monopolist seeks to maximize profit by equating marginal cost (MC) with marginal revenue (MR). If the cost of production decreases, the monopolist can increase output to align the new, lower marginal cost with the existing marginal revenue. - Output Expansion:
Due to the lower input cost, the monopolist will find it more profitable to produce more units of output. This output expansion will continue until the point where the new, lower marginal cost intersects with the marginal revenue.
In summary, a fall in the price of a major input for a monopolist generally leads to a reduction in production costs and an increase in the equilibrium level of output. This is because the firm can now produce more units while maintaining profitability, as long as the marginal cost remains below the marginal revenue.
When firms in an industry that is monopolistically competitive incur an economic profit, firms will
a. enter the industry, and demand will increase for the original firms.
b. enter the industry, and demand will decrease for the original firms.
c. exit the industry, and demand will increase for the remaining firms.
d. exit the industry, and demand will decrease for the remaining firms.
b. enter the industry, and demand will decrease for the original firms.
In monopolistically competitive industries, the presence of economic profit triggers entry and increased competition. Over time, this process leads to a situation where firms in the industry earn only normal profits, and the industry settles into a state of long-run equilibrium.
Economic Profit:
If firms in a monopolistically competitive industry are earning economic profit, it means that they are making more revenue than the total costs, including both explicit (e.g., production costs) and implicit (e.g., opportunity costs) costs.
Attracting New Firms:
When economic profit exists in a monopolistically competitive industry, it acts as a signal for potential entrants. New firms see the opportunity for profit and are attracted to the industry.
Increased Competition:
As new firms enter the market, the overall supply of goods or services increases. This heightened competition puts downward pressure on prices as consumers are presented with more choices.
Shift in Demand Curves:
With more firms offering similar but differentiated products, each firm’s demand curve becomes more elastic. This is because consumers have more options, and a small price increase by one firm may lead consumers to switch to a competitor’s product.
Reduction in Economic Profit:
The entry of new firms and increased competition result in a reduction of economic profit for existing firms. As prices fall due to increased supply, each firm’s profit margin decreases.
Long-Run Equilibrium:
In the long run, the entry of new firms will continue until economic profit is eliminated. Firms that were initially making economic profit will see a decline in profit margins, and the industry will reach a point where firms are earning only normal, competitive returns.
Referencing the attached table, if the market price of the good created by the firm is $10, then what is the maximum amount that the firm is willing to pay the 5th worker?
a. $10
b. $20
c. $50
d. $190
e. $200
e. $200
To find the maximum amount that the firm is willing to pay the 5th worker, we need to calculate the marginal revenue product of labor (MRP) and compare it to the market price.
The MRP is the additional revenue generated by hiring one more unit of labor. It is calculated as the product of the marginal product of labor (MP) and the marginal revenue (MR).
The formula for MRP is:
MRP=MP×MR
Given that the market price (MR) is $10 and the fourth worker’s output (MP) is 170 products, we can calculate the MRP:
MRP4=MP4×MR
MRP4=170×10=1700
Now, for the fifth worker, whose output (MP5) is 190 products, we can calculate the MRP:
MRP5=MP5×MR
MRP5=190×10=1900
The maximum amount is the difference between the MRP of the 5th worker and the 4th worker: MRP5-MRP4 = 1900-1700 = 200
Which of the following is not a necessary condition for a firm to practice price discrimination?
a. The firm must be able to separate consumers into various groups based on elasticity.
b. The firm must have market power.
c. The firm must be a pure monopolist, that is, the only seller in a market.
d. The firm must be able to prevent resale.
c. The firm must be a pure monopolist, that is, the only seller in a market.
Price discrimination occurs when a firm charges different prices to different groups of consumers for the same product or service. Let’s analyze each option:
a. The firm must be able to separate consumers into various groups based on elasticity.
This is a necessary condition for price discrimination. To practice price discrimination effectively, a firm needs to identify and segregate different consumer groups with different elasticities of demand.
b. The firm must have market power.
Market power, the ability of a firm to influence prices, is a necessary condition for price discrimination. If a firm has no control over the price, it cannot set different prices for different consumer groups.
c. The firm must be a pure monopolist, that is, the only seller in a market.
This statement is not correct. While a monopolist can engage in price discrimination, it is not a necessary condition. Price discrimination can also occur in markets where there is some degree of monopoly power, such as oligopolies or monopolistic competition.
d. The firm must be able to prevent resale.
This is another necessary condition for effective price discrimination. If consumers can easily resell the product between different groups, the firm’s efforts to set different prices for different groups might be undermined.
Under perfect price discrimination,
a. the total gains from trade are equal to the competitive result.
b. the total gains from trade are less than the competitive result.
c. the total gains from trade are more than the competitive result.
d. the total gains from trade cannot be compared to the competitive result.
a. the total gains from trade are equal to the competitive result.
Perfect price discrimination, also known as first-degree price discrimination, occurs when a firm charges each consumer the maximum price they are willing to pay for a good or service. In a scenario of perfect price discrimination:
Individualized Pricing:
Each consumer pays a price equal to their willingness to pay, also known as their reservation price. The firm captures the entire consumer surplus.
Efficiency:
Perfect price discrimination leads to an efficient allocation of resources because consumers who value the good or service the most are the ones who end up purchasing it.
Comparison to Competitive Result:
The total gains from trade under perfect price discrimination are more than the competitive result. In a perfectly competitive market, prices are driven down to marginal cost, and consumer surplus is maximized. However, in perfect price discrimination, the firm captures all the consumer surplus, resulting in a higher total revenue and, consequently, more gains from trade.
Consumer Surplus:
Under perfect competition, some consumer surplus exists because prices are set at the level of marginal cost, allowing consumers to pay less than their maximum willingness to pay. In contrast, perfect price discrimination eliminates consumer surplus as each consumer pays exactly what they are willing to pay.
So, option c is the correct choice. Perfect price discrimination leads to higher total gains from trade compared to the competitive result, but it does so by extracting more value from consumers and eliminating consumer surplus.
