unit 4 Flashcards
revenue maximizing quantity for a monopoly or monopolistically competitive firm is when
MR = 0
where is the collusion outcome in a payoff matrix
the quadrant where both firms decide to do the same thing
how would you explain that a firm has a dominant strategy
Firm A would chose to do X no matter what Firm B does
what is collusion in a oligopoly
when producers secretly set production low and prices high
when imperfectly competitive firms produce more output, what must happen to the price they charge
price decreases (MR below D)
what is the profit like in the long run for a monopolistically competitive firm
in the long run, they break even so P = ATC
where is allocatively efficient point
where P = MC
Why does an oligopoly not have a dominant strategy
Firm A’s best choice depends on what Firm B does
Nash equilibrium is
outcome where each player has made the best decision possible, given the actions of others
- likely choice for both firms
why are monopolies and monopolistically competitive firms not allocatively effiecint
because they will price above marginal cost, P > MC
if a monopoly engages in perfect price discrimination, what happens to the MR curve
- merges with demand curve
- No DWL
- firm is allocatively efficient if a monopoly perfectly price discriminates
if a monopoly is producing at profit maximizing point, what is true
Marginal Revenue = Marginal cost < price
why are oligopolies not allocatively efficient
- they charge price above MC, P > MC
- higher price, lower quantity ( creates DWL)
why are oligopolies not productively efficient
- they operate on the downward sloping portion of the ATC curve
what do the numbers in a pay off matrix represent
the amount of economic profit the firm could earn depending on the outcomes
how do you solve for the collusion outcome, the best outcome fir both businesses
just find the highest combined profit, add up the two numbers in the squares and the highest is the collusion outcome
a firm does not have a dominant strategy when
the firm has two different things they would decide to do when taking into consideration what the other firm might do
if a firm is in Long run equilibrium, the ATC is
tangent to the Qf, PF point on the demand curve
firms must lower their product prices to sell additional sells in what market structure
Monopolistically competitive
in perfect price discrimination, price is equal to
P =MR
a monopoly is allocatively efficient when
they perfectly price discriminate
why do firms engage in perfect price discrimination
creates more profit opportunity than any other pricing mechanism
why doesn’t every firm perfectly price discriminate?
1) you need to know a lot about your customer
2) if there is competition, it prevents competing firms from charging the highest price
where is allocative efficiency on a graph
where MC intersects Demand
what is excess capacity
when demand for a product is less than the amount of product that a business could potentially supply to the market
amount by which actual production falls short of the minimum ATC output
When a monopolistically competitive firm is in long-run equilibrium
marginal revenue equals marginal cost and price equals average total cost
Advertising can hinder economic efficiency in an industry when it
increases entry barriers
pure monopolists obtain profits in the long run because
of high barriers to entry in a monopoly
a pure monopolists demand curve is relatively elastic where
in the price range where Marginal revenue is positive
if the price of your product is less than min AVC, you should
close down because, by producing, your losses will exceed your total fixed costs
if the price is lower than AVC in a perfectly competitive firm, what should the firm do
shut down
do all firms maximize where MR = MC
yes
where do imperfectly competitive firms price
above MC, which is why they are not allocatively efficeint and there is a DWL
where is the ATC curve in a monopoly graph when the firm is breaking even
the ATC curve is tangent to the Pe, Qe point intersection on the demand curve
ATC = P –> zero economic profit
where is the ATC curve in a monopoly graph when the firm is making a profit
the min ATC would be in between the MR = MC and MC = D point
ATC < Demand –> Profit
where is the ATC curve in a monopoly graph if the firm is earning a loss
the ATC graph is higher from the breaking even curve so not touching any curve besides MC
where is the socially optimal point on a graph
at the intersection of MC and D curve
where is productively efficient on a graph
where P = min ATC
what type of imperfect competition always captures economies of scale
a natural monopoly
what does price discriminating do to the consumer surplus
it turns into profit
what does perfect price discrimination do to the firm
- no DWL
- consumer surplus into profit
- MR = MC is the allocatively efficient point because Price of the last unit produced = MC
what market structure has excess capacity
a monopolistically competitive market
what does a monopolistically competitive firm have for profits in the long run
zero economic profits
how would you find out the quantity of where a firm is earn zero economic profit
find the point where ATC equals demand, and drop down to the x axis
if the firm is experiencing economies of scale, the LRATC curve will be like what at that quantity
it will be downward sloping as output increases
which market structure is prone to collusion or the formation of cartels
Oligopolies, they can do these and form a monopoly outcome
When a perfectly competitive firm sells additional units of output, its total revenue will
increase at a constant rate
The condition for allocative efficiency is violated when
firms have price setting power
Which of the following statements is true for a monopolist at the profit-maximizing output level?
price exceeds marginal revenue
if LRATC is upward sloping, the firm is experiencing
diseconomies of scale
if LRATC is downward sloping, the firm is experiencing
economies of scale
in cross price elasticity, if the value is negative the good is a
complement
in income elasticity, if the value is negative the good is
an inferior good
where is the unit elastic point on a graph
where MR = 0
if cross price elasticity of demand is positive it is what type of good
substitutes
if you have less time for a good, is it elastic or inelastic
its more einelastic
if P goes up and TR goes up, the good is
inelastic
if P goes up and TR goes down, the good is
elastic
if a monopolist is producing in the inelastic region of the demand curve, they will increase profits if they do what
decrease quantity and increase price
what is P equal to for a monopolistically competitive firm in the long run
P = ATC
what are the characteristics of a perfectly price discriminating monopoly
MR=D
CS and profit all become PS
Why does the monopolist not want to produce in the inelastic section of its demand curve?
because MR is negative
if the monopolist raises its prices in the elastic portion of the curve, what will happen to its total revenue
decrease
price discriminating monopolies charge multiple different prices and convert what into what
CS into profit
if consumers demand is more elastic (sensitive to changes in price) the firm will charge them
less because they are price discriminating
if consumers demand is more inelastic (not sensitive to changes in price) the firm will charge them
more because they will pay that price
