Microeconomics II Midterm 1 Flashcards
For a monopoly, marginal revenue is less than price because?
If it wants to sell an additional unit, the monopolist must drop the price for all units, and not just for the additional unit.
If a firm is able to set prices, …
It faces a downward-sloping demand curve.
The monopoly maximizes profit by setting?
A price equal to marginal cost.
The more elastic the demand curve, a monopoly…
will have a smaller Lerner Index.
The loss associated with the fact that at the profit-maximizing quantity consumers value the goods more than it cost to produce them is called?
Deadweight loss.
Which of the following would be most able to act like a monopsonist?
- a hospital in a small, isolated town
- a hospital in a very big city
- a law firm in Toronto, a large city
- a computer software firm in Silicon Valley
A hospital in a small, isolated town.
Which of the following conditions must be true so that a firm can price discriminate?
- There are no other firms in the market.
- The good is a nondurable.
- The good cannot be easily resold.
- All of the above.
The good cannot be easily resold.
When firms price discriminate, they turn ________ into ________.
consumer surplus, profit
The deadweight loss generated by a 1st degree price-discriminating monopoly…
equals 0.
Pizza joints often offer substantially lower prices for pizza picked up at the shop compared to delivered pizza prices. This may be an attempt at….
group (3rd degree) price discrimination.
If a monopoly charges higher prices to consumers who buy smaller quantities than to consumers who buy larger quantities, then…
the monopoly’s profits are larger than under single-price monopoly.
2-part pricing is a mechanism whereby the firm can…
capture more of the potential surplus.
A photograph processing machine company requiring customers that buy a processing machine to purchase chemicals and photographic paper from them is an example of…
a requirement tie-in-sale.
Regardless of market structure, all firms…
maximize profit by setting marginal revenue equal to marginal cost.
The Coournot model of oligopoly assumes that :
- firms decide what quantity to produce.
- firms make their decisions simultaneously.
- firms do not cooperate.
- All of the above.
All of the above.
Compared to a monopoly, firms in a Cournot oligopoly….
- make more joint profit.
- sell less total (joint) output.
- make less joint profit.
- act independently.
make less joint profit.
Which of the following is not an assumption of the Cournot oligopoly model?
- There are a few large firms.
- Firms act simultaneously.
- Consumers have no market power.
- There are no barriers to entry.
There are no barriers to entry.
Discuss the validity of the following statement.
At the equilibrium quantity, the monopolist charges a price that is clearly above the extra cost of making an extra unit. As such it can increase its profits by selling an extra unit at a slightly lower price.
No, this statement is incorrect. If the monopolist wants to sell an extra unit it would have to charge a lower for the extra unit and for all previous units (recall all units must be sold at the same price). At equilibrium the firm is already producing where the extra revenue equals the extra cost, so producing and selling an extra unit would reduce profits.
As shown with the minimum wage, different models can make very different predictions. Does this mean that economic models have little public policy relevance? Briefly explain your answer in words only.
No. The appropriateness of a model depends on the appropriateness of the assumptions. Perfect competition may not be a rich enough model when looking at the labour market. As such, a model where the firm faces an upward sloping labour supply curve (such as a monopsony) may be more appropriate.
Why does the monopsonist face an upward sloping labour supply curve, while a perfectly competitive firm faces a horizontal labour supply curve? And why does it matter when evaluating the impact of the minimum wage? Answer in words only.
A perfectly competitive firm is very small compared to the size of the market it has no market power. The wage is determined by the interaction of labour supply and labour demand. As such, It can hire as many workers as it wants at the going wage. In the case of the monopsony, it is the only buyer of labour, and as such, faces the market labour supply. If it wants to hire an additional worker it has to pay a higher wage to this additional worker and all previous workers it hired.
It was argued in class that the introduction of a minimum wage could lead to increased employment in a monopsony model. Explain (in words) why this is the case.
In a monopsony, the extra cost of hiring an extra worker is twofold: it must pay for the extra worker and must raise the wage of all previous workers it hired (because it had to pay the extra worker a higher wage). With the introduction of the minimum wage, all the initial workers are paid the minimum wage, so when it hires an extra worker it must only pay the extra wage it pays for the extra worker (which is the minimum wage).
Evaluate the following statement
Given a choice, a monopolist who can price discriminate will be indifferent between two-part tariffs and first-degree price discrimination.
This statement is only true if all consumers are identical as the firm gets the whole potential surplus in both cases. However, This statement does not hold true when consumers are not identical. The firm will still get the whole potential surplus under first degree price discrimination, but not under two part tariff. That is because the firm must charge both types of consumers the same menu of prices.
Evaluate the following statement
A firm that carries out block pricing will generate more producer surplus if it can break off the demand into more blocks.
