Reading 9: the firm and market structures Flashcards
When a firm operates under conditions of pure competition, marginal revenue always equals:
price.
average cost.
marginal cost.
When a firm operates under conditions of pure competition, MR always equals price. This is because, in pure competition, demand is perfectly elastic (a horizontal line), so MR is constant and equal to price. (LOS 9.a)
In which market structure(s) can a firm’s supply function be described as its marginal cost curve above its average variable cost curve?
Oligopoly or monopoly.
Perfect competition only.
Perfect competition or monopolistic competition.
The supply function is not well-defined in markets other than those that can be characterized as perfect competition. (LOS 9.c)
In a purely competitive market, economic losses indicate that:
price is below average total costs.
collusion is occurring in the market place.
firms need to expand output to reduce costs.
In a purely competitive market, economic losses indicate that firms are overproducing, causing prices to fall below average total costs. This can occur in the short run. In the long run, however, market supply will decrease as firms exit the industry, and prices will rise to the point where economic profits are zero. (LOS 9.b)
A purely competitive firm will tend to expand its output so long as:
marginal revenue is positive.
marginal revenue is greater than price.
market price is greater than marginal cost.
A purely competitive firm will tend to expand its output so long as the market price is greater than MC. In the short run and long run, profit is maximized when P = MC. (LOS 9.d)
A firm is likely to operate in the short run as long as price is at least as great as:
marginal cost.
average total cost.
average variable cost.
If price is greater than average variable cost, a firm will continue to operate in the short run because it is covering at least some of its fixed costs. (LOS 9.d)
The demand for products from monopolistic competitors is relatively elastic due to:
high barriers to entry.
the availability of many close substitutes.
the availability of many complementary goods.
The demand for products from firms competing in monopolistic competition is relatively elastic due to the availability of many close substitutes. If a firm increases its product price, it will lose customers to firms selling substitute products at lower prices. (LOS 9.b)
Compared to a perfectly competitive industry, in an industry characterized by monopolistic competition:
both price and quantity are likely to be lower.
price is likely to be higher and quantity is likely to be lower.
quantity is likely to be higher and price is likely to be lower.
Monopolistic competition is likely to result in a higher price and lower quantity of output compared to perfect competition. (LOS 9.d)
A firm will most likely maximize profits at the quantity of output for which:
price equals marginal cost.
price equals marginal revenue.
marginal cost equals marginal revenue.
The profit-maximizing output is the quantity at which marginal revenue equals marginal cost. In a price-searcher industry structure (i.e., any structure that is not perfect competition), price is greater than marginal revenue. (LOS 9.d, 9.e, 9.f)
An oligopolistic industry has:
few barriers to entry.
few economies of scale.
a great deal of interdependence among firms.
An oligopolistic industry has a great deal of interdependence among firms. One firm’s pricing decisions or advertising activities will affect the other firms. (LOS 9.a)
Consider a firm in an oligopoly market that believes the demand curve for its product is more elastic above a certain price than below this price. This belief fits most closely to which of the following models?
Cournot model.
Dominant firm model.
Kinked demand model.
The kinked demand model assumes that each firm in a market believes that at some price, demand is more elastic for a price increase than for a price decrease. (LOS 9.b)
Consider an agreement between France and Germany that will restrict wine production so that maximum economic profit can be realized. The possible outcomes of the agreement are presented in the table below.
Based on the concept of a Nash equilibrium, the most likely strategy followed by the two countries with respect to whether they comply with or default on the agreement will be:
both countries will default.
both countries will comply.
one country will default and the other will comply.
The Nash equilibrium results when each nation pursues the strategy that is best, given the strategy that is pursued by the other nation.
Given that Germany complies with the agreement: France will get €8 billion if it complies, but €10 billion if it defaults. Therefore, France should default.
Given that Germany defaults: France will get €2 billion if it complies, but €4 billion if it defaults. Therefore, France should default.
Because France is better off in either case by defaulting, France will default.
Germany will follow the same logic and reach the same conclusion.
(LOS 9.f)
Which of the following statements most accurately describes a significant difference between a monopoly firm and a perfectly competitive firm? A perfectly competitive firm:
minimizes costs; a monopolistic firm maximizes profit.
maximizes profit; a monopolistic firm maximizes price.
takes price as given; a monopolistic firm must search for the best price.
Monopolists must search for the profit maximizing price (and output) because they do not have perfect information regarding demand. Firms under perfect competition take the market price as given and only determine the profit maximizing quantity. (LOS 9.b)
A monopolist will expand production until MR = MC and charge a price determined by:
the demand curve.
the marginal cost curve.
the average total cost curve.
A monopolist will expand production until MR = MC, and the price of the product will be determined by the demand curve. (LOS 9.d)
When a regulatory agency requires a monopolist to use average cost pricing, the intent is to price the product where:
the ATC curve intersects the MR curve.
the MR curve intersects the demand curve.
the ATC curve intersects the demand curve.
When a regulatory agency requires a monopolist to use average cost pricing, the intent is to price the product where the ATC curve intersects the market demand curve. A problem in using this method is actually determining exactly what the ATC is. (LOS 9.f)
Which of the following is most likely an advantage of the Herfindahl-Hirschman Index relative to the N-firm concentration ratio? The Herfindahl-Hirschman Index:
is simpler to calculate.
considers barriers to entry.
is more sensitive to mergers.
Although the N-firm concentration ratio is simple to calculate, it can be relatively insensitive to mergers between companies with large market shares. Neither the HHI nor the N-firm concentration ratio consider barriers to entry. (LOS 9.g)
