ch 8:

Question 1

1. There are many buyers and sellers in the market, each of which is “small” relative to the market.

Answer 1

PERFECT COMPETITION

Question 2

2. Each firm in the market produces a homogeneous (identical) product.

Answer 2

PERFECT COMPETITION

Question 3

3. Buyers and sellers have perfect information.

Answer 3

PERFECT COMPETITION

Question 4

4. There are no transaction costs.

Answer 4

PERFECT COMPETITION

Question 5

5. There is free entry into and exit from the market.

Answer 5

PERFECT COMPETITION

Question 6

To maximize profits, a perfectly competitive firm?

Answer 6

produces the output at which price equals marginal cost in the range over which marginal cost is increasing (P = MC(Q))

Question 7

Short-Run Operating Losses.

Answer 7

Suppose the market price, Pe , lies below the average total cost curve but above the average variable cost curve. In this instance, if the firm produces the out- put Q*, where Pe = MC, a loss of the shaded area will result. However, since the price exceeds the average variable cost, each unit sold generates more revenue than the cost per unit of the variable inputs. Thus, the firm should continue to produce in the short run, even though it is incurring losses.

Question 8

The Decision to Shut Down

Answer 8

Now suppose the market price is so low that it lies below the average variable cost, as in Figure 8–5. If the firm produced Q*, where Pe = MC in the range of increasing marginal cost, it would incur a loss equal to the sum of the two shaded rectangles in Figure 8–5. In other words, for each unit sold, the firm would lose

Question 9

PRINCIPLE: Short-Run Output Decision under Perfect Competition

Answer 9

Short-Run Output Decision under Perfect Competition To maximize short-run profits, a perfectly competitive firm should produce in the range of increasing marginal cost where P = MC, provided that P ≥ AVC. If P < AVC, the firm should shut down its plant to minimize its losses.

Answer 10

In short, while the firm in
Figure 8–4 suffers a short-run loss by operating, this loss is less than the loss that would result
if the firm completely shut down its operation.

Question 11

The short-run supply curve for a perfectly competitive firm is its?

Answer 11

marginal cost curve above the minimum point on the AVC curve,

Question 12

PRINCIPLE: Long-Run Decisions under Perfect Competition

Answer 12

In the long run, perfectly competitive firms produce a level of output such that
1. P = MC
2. P = minimum of AC

Question 13

Long-Run under Perfect Competition

Answer 13

in the long run there is no distinction between fixed and variable costs), and economic profits are zero.

Question 14

If economic profits were positive, entry would occur and the market price would fall until the demand curve for an individual firm’s product was just tangent to the AC curve. If economic profits were negative, exit would occur, increasing the market price until the firm demand curve was tangent to the AC curve.

Answer 14

perfect competition in the long run

Question 15

A market structure in which a single firm serves an entire market for a good that has no close substitutes.

Answer 15

MONOPOLY

Question 16

Exist whenever long-run average costs decline as output increases.

Answer 16

economies of scale

Question 17

Exist whenever long-run average costs increase as output increases.

Answer 17

diseconomies of scale

Question 18

ATC is declining in this range

Answer 18

economies of scale

Question 19

ATC is increasing in this range

Answer 19

diseconomies of scale

Question 20

Exist when the total cost of producing two products within the same firm is lower than when the products are produced by separate firms.

Answer 20

economies of scope

Question 21

Exist when the marginal cost of producing one output is reduced when the output of another product is increased.

Answer 21

cost complementarities

Question 22

The consumer and producer surplus
that is lost due to the monopolist charging
a price in excess of marginal cost.

Answer 22

deadweight loss of monopoly

Question 23

Conditions for Monopolistic Competition

Answer 23

1. There are many buyers and sellers.
2. Each firm in the industry produces a differentiated product.
3. There is free entry into and exit from the industry.

Question 24

1. There are many buyers and sellers.
2. Each firm in the industry produces a differentiated product.

Answer 24

Conditions for Monopolistic Competition

Question 25

3. There is free entry into and exit from the industry.

Answer 25

Conditions for Monopolistic Competition

Question 26

A monopoly is a firm that is the sole producer of a good or service in the relevant market. For instance, most local utility companies are the sole providers of electricity and natural gas in a given city. Some towns have a single gasoline station or movie theater that serves the entire local market. All of these constitute local monopolies. When there is a single provider of a good or service in a market, there is a tendency for the seller to capitalize on the monopoly position by restricting output and charging a price above marginal cost. Because there are no other firms in the market, consumers cannot switch to another producer in the face of higher prices. Consequently, consumers either buy some of the product at the higher price or go without it. In monopolistic markets, there is extreme concentration and the Rothschild index is unity.

Question 27

In a market characterized by monopolistic competition, there are many firms and consumers,
just as in perfect competition. Thus, concentration measures are close to zero. Unlike in perfect
competition, however, each firm produces a product that is slightly different from the products produced by other firms; Rothschild indexes are greater than zero. Those who manage restau-
rants in a city containing numerous food establishments operate in a monopolistically competi-
tive industry.

A firm in a monopolistically competitive market has some control over the price charged
for the product. By raising the price, some consumers will remain loyal to the firm due to a
preference for the particular characteristics of its product. But some consumers will switch
to other brands. For this reason, firms in monopolistically competitive industries often spend
considerable sums on advertising in an attempt to convince consumers that their brands are
“better” than other brands. This reduces the number of customers who switch to other brands
when a firm raises the price for its product.

Question 28

Marginal Revenue = Price

Answer 28

Perfect competition

Question 29

Marginal Revenue > Price

Answer 29

Monopoly

marginal revenue is always lower than price

Question 30

In an oligopolistic market, a few large firms tend to dominate the market. Firms in highly
concentrated industries such as the airline, automobile, and aerospace industries operate in an
oligopolistic market.
When one firm in an oligopolistic market changes its price or marketing strategy, not only
its own profits but the profits of the other firms in the industry are affected. Consequently,

when one firm in an oligopoly changes its conduct, other firms in the industry have an incen-
tive to react to the change by altering their own conduct. Thus, the distinguishing feature of an

oligopolistic market is mutual interdependence among firms in the industry.
The interdependence of profits in an oligopoly gives rise to strategic interaction among
firms. For example, suppose the manager of an oligopoly is considering increasing the price
charged for the firm’s product. To determine the impact of the price increase on profits, the
manager must consider how rival firms in the industry will respond to the price increase.
Thus, the strategic plans of one firm in an oligopoly depend on how that firm expects other
firms in the industry to respond to the plans, if they are adopted. For this reason, it is very
difficult to manage a firm that operates in an oligopoly. Because large rewards are paid to
managers who know how to operate in oligopolistic markets, we will devote two chapters to
an analysis of managerial decisions in such markets.

Question 31

Thus, in a perfectly competitive market, the
demand curve for an individual firm’s product is?

Answer 31

simply the market price.

Question 32

the demand curve for an individual perfectly competitive firm’s product is perfectly elastic, the pricing decision of the individual firm is?

Answer 32

trivial

Question 33

To maximize profits in the short run, the manager must take as given the fixed inputs (and thus the fixed costs) and determine how much output to produce given the variable inputs that are within his or her control.

Question 34

the change in revenue attributable to the last unit of output. for a competitive firm, it is the market price.

Answer 34

Marginal revenue

Question 35

The consumer and producer surplus that is lost due to the monopolist charging a price in excess of marginal cost.

Answer 35

deadweight loss
of monopoly

Question 36

To maximize profits, a monopolistically competitive firm produces where its marginal revenue equals marginal cost. The profit-maximizing price is the maximum price per unit that consumers are willing to pay for the profit-maximizing level of output. In other words, the profit-maximizing output, Q*, is such that

Question 37

The Long Run and Monopolistic Competition In the long run, monopolistically competitive firms produce a level of output such that
1. P > MC.
2. P = ATC > minimum of average costs.

Question 38

The key difference between perfect competition and monopolistic competition is the assumption that firms produce?

Answer 38

differentiated products.

Question 39

A form of advertising where a firm attempts to increase the demand for its brand by differentiating its product from competing brands.

Answer 39

comparative advertising `

Question 40

The additional value added to a product because of its brand.

Answer 40

brand equity

Question 41

A manager or company that rests on a brand’s past laurels instead of focusing on emerging industry trends or changes in consumer preferences.

Answer 41

brand myopic

Question 41

A marketing strategy where goods and services are tailored to meet the needs of a particular segment of the market.

Answer 41

niche marketing

Question 41

A form of niche marketing where firms target products toward consumers who are concerned about environmental issues.

Answer 41

green marketing

Question 42

is satisfied with an existing brand, is slow to launch new products, and is not aware of emerging industry trends or changes in consumer prefer- ences.

Answer 42

brand myopic