chapter 10

Question 1

Firms in competitive industries

Answer 1

do not have market power. They are price-takers.

Question 2

In imperfect competition,

Answer 2

firms have market power. They have the ability to

affect prices.

Question 3

The larger the market share of a firm

Answer 3

(the proportion of total sales in a market accounted for by a particular firm), the more market power the firm has.

Question 4

A monopoly is a firm

Answer 4

• that is the sole seller of a product without close substitutes
• A monopoly arises if a single firm owns a key resource.

Question 5

Network externalities occur

Answer 5

when a product’s value increases as more consumers begin to use it.

Question 6

Patents:

Answer 6

The right conferred on the owner to prevent anyone else making or using an invention of manufacturing process without permission.

Question 7

Copyrights:

Answer 7

The right of an individual or organization to own things they create to prevent others from copying or reproducing the creation.

Question 8

A natural monopoly arises when

Answer 8

increasing returns to scale provide a large cost advantage to a single firm that produces all of an industry’s output.

Question 9

Increasing output has two effects on revenue:

Answer 9

1. The output effect: More output is sold, which raises revenue.
2. The price effect: To sell the last unit, the monopolist must cut the market price on all units sold.

Question 10

Price discrimination is

Answer 10

the business practice of selling the same good at different prices to different buyers.

Question 11

First-degree or perfect price discrimination:

Answer 11

• Consumers are charged the maximum price that they are willing to pay. A firm is able to sell each unit of output for the highest price someone is willing to pay.

Question 12

Third-degree price discrimination:

Answer 12

• Different groups of consumers are charged different prices based on their own attributes (gender, age, location, student,…)

Question 13

Market segmentation is

Answer 13

the process of dividing a target market into smaller, more defined segments.

Question 14

arbitrage

Answer 14

Price discrimination is not possible if people can buy a good in a market with a low price and sell it in another market at a higher price

Question 15

Second-degree price discrimination:

Answer 15

• Consumers are charged different prices based on the characteristics of their purchase, such as the quantity they purchase.

Question 16

Competition policy aims at

Answer 16

ensuring that competition is not restricted or undermined in ways that are detrimental to the economy and society.

Question 17

The benefits from synergies.

Answer 17

Companies sometimes merge not to reduce competition but to lower costs through more efficient joint production.

Question 18

Natural monopolies have

Answer 18

have declining average total costs. Regulating the
behavior of monopolists is common in the case of natural monopolies, such as utility companies providing water, gas and electricity.

Question 19

nationalized industry

Answer 19

An industry owned by the government.