Chapter 10 MIDTERM 2

Question 1

What is the difference between a perfectly competitive demand curve and a monopolistic demand curve?

Answer 1

monopolistic demand curve is negatively sloped;

sales can only increase if price is reduced and vice versa

Question 2

Where is a monopolists marginal revenue curve situated?

Why?

How is this different from a perfectly competative market?

Answer 2

MR curve is below the demand curve;

bc mono marginal revenue is less than price at which it sells its output.
MR < p

in a PFM:
MR = price at which unit is sold bc they are price takers

Question 3

what are the 2 rules of monopolistic short run profit maximization (same as chapter 7 rules but downward sloping demand curve )

Answer 3

1) firm should only produce if price (average revenue) > AVC

2) if firm does produce, it should produce at a level of output so that MR = MC

Question 4

Nothing guarantees that a monopolist will make positive profits in the short run, but if it suffers persistent losses ______

Answer 4

it will eventually go out of business

Question 5

What maximizes profit in a monopolistic firm

Answer 5

MR < p

Question 6

which kind of firm does not have a supply curve?

Why?

Answer 6

• monopolistic

-because they are not price takers, they choose their own profit maximization price:quantity combination based on the market demand curve

Question 7

Are monopolistic markets less or more efficient than perfectly competative markets? Why?

Answer 7

Less bc the restricitions of a monopoly reduces the economic surplus potentially generated within the market.

Question 8

when are entry barriers used

Answer 8

Monopolies use entry barriers to prevent competition from leaking into the market: some natural and some created

Question 9

3 types of natural entry barriers

Answer 9

1) NATURAL MONOPOLY no demand conditions would allow for another firm to be successful in the market

2) LIMITED ACCESS TO NATURAL RESOURCES: ie diamond mines, oil deposits , requires luck and insane market power

3) NETWORK EFFECTS
company requires a large amount of users to be successful and thats why first movers of such or those with significant improvements hold all the market power and few can match them : microsoft word, youtube, etc

Question 10

what is a created entry barrier (examples)

Answer 10

federal regulations, patents, etc

Question 11

how do you beat a monopoly ?

Answer 11

create an low MES product/service that beats out he industry

ex: facetime is better than cell phones is better than home phones

Question 12

what is a cartel?

Answer 12

an organizaion of producers who agree to act as a single seller in order to maximize joing profits

ex: maple syrup produced in quebec, all producers collab together

Question 13

What kind of firms have a downward sloping demand curve?

Answer 13

Cartels and monopolies

Question 14

how does cartelization of a competitive industry lead to more profits ?

Answer 14

proits can be increased by REDUCING outputs and RAISING prices from the perfectly competative levels

Question 15

What are the issues that cartels can face? (2)

Answer 15

1) firms within the cartel that cheat (produce too much output and sell it at the high monopoly prices)

2) the entry of new firms that refuse to join the cartel (competition)

Question 16

Cartels tend to be unstable because of the incentives for individual firms to violate the output restrictions needed to sustain the joint-profit-maximizing (monopoly) price.

Answer 16

yup

Question 17

Cooperation leads to the ______ _____, but individual self-interest can lead to production in excess of the ______ ______

Answer 17

a) monopoly price,

b) monopoly output.

Question 18

What is PRICE DISCRIMINATION?

Answer 18

the sale by one firm of different units of a product at two or more different prices (unrelated to its cost)

Ex) senior/student discounts on certain goods/services because they assume they value the product at less and its better to sell some at a reduced price then none at all yk.

Question 19

when is PRICE DISCRIMINATION POSSIBLE? WHAT ARE THE 3 CONDITIONS?

Answer 19

1) MARKET POWER
price takers cannot price discriminate, monopolies and cartels only

2)DIFFERENT VALUATIONS OF THE PRODUCT
willingness of consumers to pay; segmentation of the market

3) PREVENT ARBITRAGE(reselling)
price discrimination is done to prevent this.

Question 20

what are the two types of price discrimination? what do they entail

Answer 20

1) PD AMONG UNITS OF OUTPUT
adjusting based on rates consumers are willing to pay (profit maximizes) or even loyalty cards (8th coffee free)

2) PD AMONG MARKET SEGMENTS
charging a higher price in the market segment with the LESSER ELASTIC DEMAND (lack of subsititutes) -senior discounts

Question 21

Price discrimination is easier for _____ than for tangible goods because for most services the firms transact directly with the final customer and thus can more easily prevent ______.

Answer 21

1) services

2) arbitrage

Question 22

What is hurdle pricing

Answer 22

setting the initial price higher then offering discounts later on

ex: iphone 15 those dumb mfs man

Question 23

Consequences of price discrimination?

Answer 23

price discrimination by a firm will provide higher profits than the profit maximizing single price at any level of output (IN MONOPOLIES AND CARTELS)

Question 24

when should a firm implement PRICE DISCRIMINATION?

what is the gain?

Answer 24

when they are a cartel or a monopoly looking to maximize profits

PD generates higher profits at a level of output than a single price monopolist.

The gain is total economic surplus will increase.