Section 11

Question 1

Monopolistic Competition

Answer 1

Large number of firms with low barriers to entry.
Each product is unique, but very similar to others.
Limited degree of market power, no mutual interdependence among firms, so each acts independently.
Highly elastic demand curve due to close substitutes, but not perfectly elastic due to product differentiation.
Non-price competition and advertising, compete on features, not just price.

Question 2

Niche Market

Answer 2

Appealing to a small segment of the market, generally done as differentiation.
Focus on meeting the needs of a particular market segment.

Question 3

Product Differentiation

Answer 3

Can be real or perceived.
Used to set price above marginal cost.
Focuses customer on features instead of price.

Question 4

Real Product Differentiation

Answer 4

1. Physical characteristics such as liquid gel tablets.
2. Location product, like close to freeway, etc.
3. Features it provides, like free delivery or setup.
4. Method of production, recycled goods

Question 5

Perceived Product Differentiation

Answer 5

1. Advertising

2. Celebrity endorsement

Question 6

Trick of Advertising

Answer 6

Tells you the opposite of what the advertiser thinks.

Question 7

Monopolistic Competition in the Short Run

Answer 7

May earn profit or losses.
MR = MC (if price is above average variable cost)
Entry will shift the demand left and become more elastic.
MR will be less than demand

Question 8

Monopolistic Competition in the Long Run

Answer 8

Not perfectly elastic so long-run will not equal minimum average total cost.
Will have a normal profit.
MR will be less then demand

Question 9

Productively Efficient

Answer 9

Not productively efficient since they produce less product at a higher price and they are not producing at minimum average cost.
Have excess capacity which is the difference between profit maximizing quantity and productively efficient quantity.

Question 10

Allocatively Efficient

Answer 10

Not efficient since price is greater than the marginal cost on the last unit produced.

Question 11

Law of One Price

Answer 11

Says that there should be one price for a commodity if transaction costs were zero.

Question 12

Perfect Information

Answer 12

You know exactly what the price is everywhere.

Question 13

High-Lo Pricing

Answer 13

A firm lowers the price of certain goods for a period of time to attract customers.
Can be a loss leader for a group of products, in hopes to get market share or to get them to buy higher priced goods.

Question 14

Every-day Low Prices

Answer 14

Keep prices slightly above wholesale cost, rarely have sales.

Question 15

Price Discrimination

Answer 15

Charging different prices to different consumers based on their willingness to pay.
Conditions:
1.  Must be able to set price
2. Must be able to segment market
3. Prevent resale of product

Question 16

Surplus

Answer 16

Firms extracts all consumer surplus, remove all deadweight loss for profit.

Question 17

First Degree Price Discrimination

Answer 17

AKA - Perfect Price Discrimination
Firm charges each consumer their maximum willingness to pay.
Output is MR = MC, and charge MR = Price for each consumer.
Will be allocatively efficient because price equals marginal cost at the last unit.
Firm extracts all surplus, no consumer surplus.
Very difficult to implement, examples are lawyers, auctions.

Question 18

Second Degree Price Discrimination

Answer 18

AKA Block Pricing
Can’t perfectly identify segment of consumers, but he knows two more more groups with different willingness to pay. Don’t know who belongs to what group.
Different prices are charged based on quantity consumed. Willing to buy more for a lower price, even though it might be more then they need, because it looks like a good deal.

Question 19

Third Degree Price Discrimination

Answer 19

Can’t perfectly identify segment of consumers, but he can identify groups that have similar demands and can segment them based on characteristics such as age, location, etc.
Most common.
Charge a higher price to consumers with the most inelastic demand, while elastic consumers get the lower price.

Question 20

Two-Part Tariff

Answer 20

Charges individuals upfront membership fee and then charges a per-use fee.
Can allow for price discrimination as well.
Per-use fees covers marginal cost.
Membership fee extracts all consumer surplus.

Question 21

Product Differentiation Examples

Answer 21

1. Product Attributes
2. Service
3. Location
4. Brand name and packaging
5. Control over price

Question 22

Four-firm concentration Ratio

Answer 22

Output of four largest firms divided by total output of industry.
Low in competitive industries.
High in oligopoly or monopoly.

Question 23

Herfindahl Index

Answer 23

Sum of the squared market percentage share of all firms.

Single firm industry is 10,000

Question 24

Excess Capacity

Answer 24

Plant and equipment is underutilized because they are producing less then minimum atc.

Question 25

Product Variety

Answer 25

The greater the product differentiation the greater the excess capacity and the greater the productive inefficiency.