Econ Exam 4 May 1 Flashcards
What is one example of a discriminating monopoly?
AT&T, long distance phone company, charge people more who use more long distance minutes
What is special about discriminating monopolies and the buyer’s reservation price?
the company wants to try to charge each consumer this amount
How often do discriminating monopolies occur?
Not often, only in special circumstances
What are the 4 conditions that must be met for a discriminating monopoly to occur?
1) the firm will face multiple elasticities for its product
2) the firm must be able to segment the market
3) the firm has to be able to seal the market
4) firm has to have market power
What does it mean to “seal the market”?
prevent customers from reselling the product
What is the area of excess profits?
the area between the dff and the bottom of the AFC
what does tapping the demand curve mean?
finding each buyer’s reservation price
Is there one equilibrium price for a discriminating monopoly?
no. the monopoly will charge each customer a different price
What is the quantity that they sell at?
when MC=demand
Does the firm capture all consumer surplus?
yes!
Do consumers get the lowest price possible?
no!
Are discriminating monopolies Technically Efficient?
We do not know
Are discriminating monopolies Allocatively Efficient?
Yes they are allocatively efficient!
What are the first two assumptions about monopolistic competition?
1) Rational Agents
2) Large # of sellers (25-75)
Do firms in Monopolistic Competition have a lot of control over price?
no, each has a small market share, so they have little control over price
What is the four firm concentration ratio?
Output of 4 largest firms / total output in their industry
What is the dividing line?
40%
more than 40% is an oligopoly
less than 40% is monopolistic competition
What are some examples of MC industries?
plastic bags, quick printing, jewelry, curtains and draperies, women’s dresses, stone products, wood pallets
Do these MC industries practice collusion?
no. collusion is working together to make an agreement to reduce supply
What is the best example of collusion?
OPEC
What are the third and fourth assumptions about MC?
- ) product differentiation
4. ) easy entrance and exit
What is significant about the angle of the MC DFF?
the more flat the dff
1) the greater the # of competitors in the market
2) the weaker the product differentiation
What is significant about MC in the long run?
the firm will earn normal profits only, which are incorporated into their average total cost
What is significant about the DFF and ATC?
the ATC is tangent to the DFF at the selling price
What happens to the MC DFF when more firms enter the market?
the DFF will shift to the left until it touches the ATC (excess profits shifts it to the left)
What happens to the MC DFF when firms leave the market or there are less firms in the market?
the DFF will shift to the right
Do consumers get the lowest price possible in MC?
No! They do not get the lowest price possible
Are MC firms technically efficient?
no, because ATC is not @ bottom when price is determined (ATC will still be falling after price)
Are MC firms allocatively efficient?
No, because P>MC (not P=MC), so consumers wish the firm would make more and use our resources in a more appropriate manner
What are the assumptions about oligopoly?
- ) Rational Agents
- )Few and large producers over 40% FCC
- ) Products homogeneous or differentiated
- ) price makers
- ) barriers to entry: cost of capital (auto and airline), ownership or control of raw materials, economies of scale
What are some examples of oligopoly?
beer, electric light bulbs, household fridges, computers, motor vehicles, aircraft, breakfast cereal, tires
What must differentiated oligopolies do?
they must do a lot of advertising! (consumer goods, autos, tires, computers, cereal, cigarettes)
What are examples of homogeneous oligopolies?
steel, copper, alumnium
What is the goal of collusion?
raise prices
do oligopolies worry about competitors?
yes!
If an oligopoly were to raise their price for a good, what would happen?
no other firms would join them and firm will lose customers
if the firm lowers price what happens?
all firms will lower the price?
how can oligopolies increase revenue?
they can’t unless there is a shift in demand to raise revenue
What is significant about the MR curve for oligopolies?
it is broken. quantity is determine where MR=MC price determined from DFF curve (also broken)
What is price rigidity?
through collusion, all firms agree to stay at same price
Do consumers receive low prices from oligopoly? Are they allocatively efficient?
No and NO
