Econ Exam 4 May 1

Question 1

What is one example of a discriminating monopoly?

Answer 1

AT&T, long distance phone company, charge people more who use more long distance minutes

Question 2

What is special about discriminating monopolies and the buyer’s reservation price?

Answer 2

the company wants to try to charge each consumer this amount

Question 3

How often do discriminating monopolies occur?

Answer 3

Not often, only in special circumstances

Question 4

What are the 4 conditions that must be met for a discriminating monopoly to occur?

Answer 4

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

Question 5

What does it mean to “seal the market”?

Answer 5

prevent customers from reselling the product

Question 6

What is the area of excess profits?

Answer 6

the area between the dff and the bottom of the AFC

Question 7

what does tapping the demand curve mean?

Answer 7

finding each buyer’s reservation price

Question 8

Is there one equilibrium price for a discriminating monopoly?

Answer 8

no. the monopoly will charge each customer a different price

Question 9

What is the quantity that they sell at?

Answer 9

when MC=demand

Question 10

Does the firm capture all consumer surplus?

Answer 10

yes!

Question 11

Do consumers get the lowest price possible?

Answer 11

no!

Question 12

Are discriminating monopolies Technically Efficient?

Answer 12

We do not know

Question 13

Are discriminating monopolies Allocatively Efficient?

Answer 13

Yes they are allocatively efficient!

Question 14

What are the first two assumptions about monopolistic competition?

Answer 14

1) Rational Agents

2) Large # of sellers (25-75)

Question 15

Do firms in Monopolistic Competition have a lot of control over price?

Answer 15

no, each has a small market share, so they have little control over price

Question 16

What is the four firm concentration ratio?

Answer 16

Output of 4 largest firms / total output in their industry

Question 17

What is the dividing line?

Answer 17

40%
more than 40% is an oligopoly
less than 40% is monopolistic competition

Question 18

What are some examples of MC industries?

Answer 18

plastic bags, quick printing, jewelry, curtains and draperies, women’s dresses, stone products, wood pallets

Question 19

Do these MC industries practice collusion?

Answer 19

no. collusion is working together to make an agreement to reduce supply

Question 20

What is the best example of collusion?

Answer 20

OPEC

Question 21

What are the third and fourth assumptions about MC?

Answer 21

3. ) product differentiation

4. ) easy entrance and exit

Question 22

What is significant about the angle of the MC DFF?

Answer 22

the more flat the dff

1) the greater the # of competitors in the market
2) the weaker the product differentiation

Question 23

What is significant about MC in the long run?

Answer 23

the firm will earn normal profits only, which are incorporated into their average total cost

Question 24

What is significant about the DFF and ATC?

Answer 24

the ATC is tangent to the DFF at the selling price

Question 25

What happens to the MC DFF when more firms enter the market?

Answer 25

the DFF will shift to the left until it touches the ATC (excess profits shifts it to the left)

Question 26

What happens to the MC DFF when firms leave the market or there are less firms in the market?

Answer 26

the DFF will shift to the right

Question 27

Do consumers get the lowest price possible in MC?

Answer 27

No! They do not get the lowest price possible

Question 28

Are MC firms technically efficient?

Answer 28

no, because ATC is not @ bottom when price is determined (ATC will still be falling after price)

Question 29

Are MC firms allocatively efficient?

Answer 29

No, because P>MC (not P=MC), so consumers wish the firm would make more and use our resources in a more appropriate manner

Question 30

What are the assumptions about oligopoly?

Answer 30

1. ) Rational Agents
2. )Few and large producers over 40% FCC
3. ) Products homogeneous or differentiated
4. ) price makers
5. ) barriers to entry: cost of capital (auto and airline), ownership or control of raw materials, economies of scale

Question 31

What are some examples of oligopoly?

Answer 31

beer, electric light bulbs, household fridges, computers, motor vehicles, aircraft, breakfast cereal, tires

Question 32

What must differentiated oligopolies do?

Answer 32

they must do a lot of advertising! (consumer goods, autos, tires, computers, cereal, cigarettes)

Question 33

What are examples of homogeneous oligopolies?

Answer 33

steel, copper, alumnium

Question 34

What is the goal of collusion?

Answer 34

raise prices

Question 35

do oligopolies worry about competitors?

Answer 35

yes!

Question 36

If an oligopoly were to raise their price for a good, what would happen?

Answer 36

no other firms would join them and firm will lose customers

Question 37

if the firm lowers price what happens?

Answer 37

all firms will lower the price?

Question 38

how can oligopolies increase revenue?

Answer 38

they can’t unless there is a shift in demand to raise revenue

Question 39

What is significant about the MR curve for oligopolies?

Answer 39

it is broken. quantity is determine where MR=MC price determined from DFF curve (also broken)

Question 40

What is price rigidity?

Answer 40

through collusion, all firms agree to stay at same price

Question 41

Do consumers receive low prices from oligopoly? Are they allocatively efficient?

Answer 41

No and NO