Micro Unit 4

Question 1

Characteristics of perfect competition

Answer 1

• many small firms (thousands)
• identical products
• price takers
• no need to advertise
• very low barriers to entry

Question 2

Characteristics of monopolistic competition

Answer 2

• large number of sellers (hundreds)
• differentiated products
• price maker
• lots of ads
• low barriers to entry

Question 3

Characteristics of oligopolies

Answer 3

• few large producers (less than 10)
• either identical or different products
• high barriers to entry
• price maker
• uses strategic pricing

Question 4

Characteristics of monopolies

Answer 4

• one large firm
• very little advertising
• unique product with no close substitutes
• impossibly high barriers to entry
• price makers

Question 5

why is demand greater than marginal revenue for all imperfectly competitive firms?

Answer 5

since price discrimination is not allowed, the additional revenue received for each product will be less because of it have to drop the price for those willing to pay more

Question 6

why are monopolies inefficient (3 reasons)

Answer 6

1. they charge higher prices
2. they don’t produce enough (not allocatively efficiently)
3. they produce at higher costs (not productively efficient)

Question 7

elastic vs inelastic range for monopolies

Answer 7

elastic range is the section of the graph where MR is positive and the inelastic range is where MR is negative

monopolies only produce in the elastic range
Total revenue peaks when MR=0

Question 8

What are four common barriers that allow companies to gain and maintain market power?

Answer 8

1. economies of scale
2. high start up costs
3. ownership of raw materials
4. technological superiority

Question 9

what is a natural monopoly?

Answer 9

natural monopolies are legal monopolies; exists because sometimes it’s more efficient for only one firm to produce because they can produce at the lowest cost. (ex. water companies)

Question 10

Monopoly regulation:
identify unregulated, socially optimal, and fair return points

Answer 10

• unregulated point is where MR=MC
• fair return point is where ATC=D
• socially optimal point is where supply equals demand (aka MC=D)

Question 11

how can governments regulate monopolies?

Answer 11

Price ceilings; the government can either set price ceiling at the socially optimal price (the price society wants) or at the fair return price (where the firm breaks even)

taxes don’t work to regulate monopolies because it will decrease supply and increase price making things worse

Question 12

price discrimination

Answer 12

selling the same product to different people for different prices

Question 13

what three conditions must a firm meet in order to price discriminate?

Answer 13

1. must be a price maker
2. must be able to segregate the market
3. consumers can’t resell

Question 14

perfectly price discriminating monopolies

Answer 14

• MR equals the demand curve (disappears on graph)
• no DWL (allocatively efficient)
• 100% producer surplus, 0% consumer surplus
• no price point because everyone is paying a different price

Question 15

why don’t perfectly price discriminating monopolies have dead weight loss?

Answer 15

Because since the firm is charging each consumer the maximum amount they are willing and able to pay for the product, the supply of the product is equal to the demand of the produce and all surplus is maximized.

Question 16

Long run monopolistic competition graph

Answer 16

• breaking even
• ATC curve hits demand curve then continues sloping downward until it hits the MC curve
• Excess capacity is represented by the distance between the normal quantity and the quantity at ATCs lowest point

Question 17

Excess capacity

Answer 17

given the current resources, the firm could produce at the lowest costs (productively efficient) but they choose not to

Question 18

non price competition

Answer 18

• brand names and packaging
• advertising
• customer service
• product quality

Question 19

what are the two goals of advertising?

Answer 19

1. increase demand
2. make demand more inelastic

Question 20

nash equilibrium

Answer 20

the optimal outcome that occurs when all firms make decisions simultaneously and have no incentive to change (colluding oligopoly)

Question 21

Dominant strategy

Answer 21

the best move to make regardless of what your opponent does

Question 22

colluding oligopoly

Answer 22

• cartel: group of producers that create an agreement to fix prices high
• cartels set price and output at an agreed upon level
• firms require identical or highly similar demand and costs
• must have a way to punish cheaters (pablo escobar)
• acts as a monopoly (monopoly graph)

Question 23

non colluding oligopoly

Answer 23

• react to competitor price change in one of two ways:
  
  1. match price (inelastic demand)
  2. ignore price (elastic demand)

graph is linked demand curve

Question 24

price leadership oligopoly

Answer 24

a strategy used by oligopolistic firms to coordinate prices without outright collusion

general process: dominant firm initiated a price change and other firms follow