Chapter 12

Question 1

Market power

Answer 1

ability possessed by price-setters to raise prices without losing all sales (causes D to be downward sloping)

Question 2

Monopoly

Answer 2

one firm producing a good with no close substitutes, other firms are not able to enter the market

Question 3

Monopolistic competition

Answer 3

market with a large number of firms selling differentiated products, low barriers to entry

Question 4

Market definition

Answer 4

indentification of the producers and products that compete for consumers in a particular geographical region

Question 5

What other concept is market power related to? How?

Answer 5

Elasticity of demand, inversely correlated

Question 6

Lerner index + formula

Answer 6

ratio that measures the proportionate amount by which price exceeds marginal cost
Lerner index= (P-MC)/P= 1- (1+1/E)= -1/E

Question 7

What is the Lerner index equal to under perfect conditions?

Answer 7

0
The lower E is, the greater the Lerner index/ degree of market power

Question 8

Cross-price elasticity of demand+ its signs

Answer 8

measures the sensitivity of all quantities purchased of one good to change the price of another good
Substitutes: Exy is positive
Complements: Exy is negative

Question 9

Switching costs

Answer 9

costs consumers incur when they switch to a different product or service

Question 10

Consumer lock-in

Answer 10

high switching costs to make previous consumption decisions costly to change

Question 11

Network externalities

Answer 11

when the benefit or utility a consumer derives from consuming a good depends positively on the number of other consumers who are also using a good (ex. phones, email)

Question 12

Where do monopolists produce to maximize profit (both SR and LR)? How do we calculate profit?

Answer 12

SR: where MR=SMC as long as TR is greater/ equal to TVC, otherwise shut down
LR: MR=LMC unless P is less than LAC (they will shut down), profit=PQ-LACQ= Q(P-LAC)

Question 13

Implementing the profit maximizing P and Q general rules (2)

Answer 13

1. produce as long as P is greater than/ equal to AVCmin, otherwise shut down
2. Produce at MR=SMC and charge the price from the demand curve for the profit maximizing output

Question 14

Is market demand different from a monopolist’s demand curve? What does the MR curve look like?

Answer 14

No
MR has the same y-intercept as demand but the slope is twice as steep