week 5

Question 1

market failure

Answer 1

a situation defined by an inefficient distribution of goods and dervices in the free market

Question 2

monopoly

Answer 2

no competition: a single firm supplies the entire market

Question 3

price makers

Answer 3

in conditions of limited competition, firms do not simply take the price but they make the price

Question 4

maximizing profit

Answer 4

the marginal revenue (MR) is equal to the marginal cost (MC)

Question 5

unit elasticity

Answer 5

a situation in which a change in one variable results in an equally proportional change in another variable

Question 6

optimal pricing policy

Answer 6

the market price is a markup over marginal cost, where the amount of the markup depends on the elasticity of demand

Question 7

natural monopolies

Answer 7

a monopoly that occurs through natural conditions in a free market (gas, water, telephone, electricity)

Question 8

reasonable pricing policy

Answer 8

just allows the firm to break even

Question 9

minimum efficient scale

Answer 9

level of output that minimizes average cost, relative to the size of demand

Question 10

collusion

Answer 10

the collaboration between companies that seek to gain an extensive competitive advantage in the marketplace

Question 11

cartel

Answer 11

an agreement or relationship formed between two or more corporations trying to increase their profits

Question 12

externalities

Answer 12

rise whenever an individual or firm can take an action that directly affects others without paying for a harmful outcome or being paid for a beneficial one

Question 13

consumption externality

Answer 13

if one consumer cares directly about another agent’s consumption

Question 14

production externality

Answer 14

if the production possibilities of one firm are influenced by the choices of another firm

Question 15

crucial features of externalities

Answer 15

there are goods people care
about that are not sold on markets

Question 16

public goods

Answer 16

have instead the following properties:
1 Non-rival consumption: one person’s consumption does not detract from or prevent another person’s consumption
2 Non-excludabity: individuals cannot be effectively excluded from use

Question 17

private goods

Answer 17

have the following property:
1 Rival consumption: if a good is used by one person, it cannot be used by another person
2 Excludability: individuals can be excluded from enjoying a good unless they pay for it

Question 18

under-consumption

Answer 18

Charging a price for a non-rival good prevents some people from enjoying the good

Question 19

under-supply

Answer 19

if there is no charge for a non-rival good, there will be no incentive for supplying the good ⇒ no market

Question 20

non-excludability

Answer 20

public goods that cannot exclude a certain individual or group of individuals from using them

Question 21

free-rider problem

Answer 21

since it is difficult to preclude anyone from using them, those who benefit from the goods have an incentive to avoid paying