Assessment 2

Question 1

How do firms with market power restrict their competition?

Answer 1

Keep their prices above marginal cost

Question 2

Four market strategies to restrict competition

Answer 2

1. Guarding trade secrets
2. Control of an essential resource
3. Exclusive contracts and customer lock-in (coke not pepsi on campus)
4. Collusion (form cartel and act as monopoly)

Question 3

Four non-market strategies to restrict competition

Answer 3

1. Patent protection
2. Trade regulations
3. Gov’t licensing
4. Gov’t or NGO certification

Question 4

How does a firm with market power set their prices and output?

Answer 4

Prices higher and output lower than efficient levels

Question 5

Economic efficiency

Answer 5

When too few units are produced and sold, you give up some that have value > cost

Question 6

True or false: Fixed cost for market power companies never changes.

Answer 6

True

Question 7

4 things to remember for perfect price discrimination

Answer 7

1. No inefficiency occurs, all surplus goes to producer
2. Profits increased relative to using a single price (Dutch Auction)
3. Difference between demand curve and market price = 0

Question 8

Dominant strategy

Answer 8

Strategy that results in the highest payoff for a player regardless of what their rival plays

Question 9

Secure strategy/risk adverse

Answer 9

In absence of a dominant strategy, play the strategy that guarantees the highest payoff, given the worst payoff. Find the worst outcome and avoid it at all costs.

Question 10

Laws that encourage competition

Answer 10

Sherman Act (1890) - makes monopolizing, forming cartels, and other collusive arrangements illegal 
Clayton Act (1914) - makes price discrimination illegal, and targets M&A activity based on its effects on competition

Question 11

4-firm concentration ratio

Answer 11

Taking the top four companies in an industry and ranging the sum of their market shares on a scale of 0-1 (Closer to 1 signals noncompetitive)

Question 12

Herfindahl-Hirshman Index (HHI)

Answer 12

Sum of the squared market shares of firms in an industry times 10,000. HHI above 2500 signals noncompetitive (monopoly-like)

Question 13

Exports and their impact on domestic welfare

Answer 13

When the world price is above domestic price… Exports enhance the welfare of the domestic country because producer surplus increases more than consumer surplus decreases (overall gain). Domestic producer raises prices to world market because they are PRICE TAKERS.

Question 14

What are imports and exports impact on producers and consumers?

Answer 14

Exports hurt the consumer (not a cohesive unit) and help the producers (well concentrated group). Imports are the exact opposite

Question 15

What are the results of tariffs?

Answer 15

Higher domestic prices, under-consumption and over-production of domestic consumers and producers, less imports

Question 16

What are the results of quotas?

Answer 16

Similar to tariffs, but domestic production will also increase to offset the decrease in imports

Question 17

3 causes of inefficiency

Answer 17

1. Over production - (quota and tariff) Less imports = more efficiency…. we want as many imports as possible!
2. Under-consumption - (quota and tariff) “ “
3. Lobbying - (quota) more foreign gains = more inefficiency… higher licensing fee the better for revenue

Question 18

Tariffs vs. Quotas

Answer 18

Tariffs raise revenue, while quotas don’t unless they combine it with a licensing fee. Quotas can create more inefficiency from LOBBYING. If licensing fee doesn’t take away from premium, foreign producers will have incentive to lobby to enter domestic market