Week 7: market structures

Question 1

Breakeven point

Answer 1

• where a business breaks even while maximizing profit
• or a perfect competitor this occurs where price equals minimum average cost

Question 2

Shutdown point

Answer 2

• lowest price at which a business will choose to operate in the short run
• when P = minimum AVC

Question 3

The Profit-Maximizing Output Rule

Answer 3

• MC = MR is the main goal (profit-maximizing output rule states that profit is maximized when marginal cost equals marginal revenue)

Question 4

PMO Rule: output should be increased…

Answer 4

if marginal revenue exceeds marginal cost

Question 5

PMO Rule: output should be decreased…

Answer 5

if marginal cost exceeds marginal revenue

Question 6

Supply Curves

Answer 6

• when MC = MR intersects (amount on the x-axis: ex. output of 180)
• businesses should stop when they reach the max bc going over will be a loss

Question 7

Calculating Profit Maximization for a Perfect Competitor

Answer 7

1. Find when MC intersects MR
2. Draw a straight line down (ex. output = 270)
3. Repeat step 1 and find when the straight line intersects AC
4. Go left to find price (ex. $5.04)
5. Find area of triangle (l x w) (answer: 259.20)

Question 8

Graphing profit maximization for monopolistic competition and oligopoly

Answer 8

check week 7 slides

Question 9

A Perfect Competitor’s Supply Curve

Answer 9

• is its marginal cost curve above the shutdown point
• the market supply curve can be found by horizontally adding the supply curves for all the businesses in the industry

Question 10

Supply Curve for Pure ‘n’ Simple T-Shirts Example

Answer 10

• point C: day-to-day expenses (MC = AVC)
• if a firm can afford their day-to-day expenses in the short run then they should stay open

Question 11

Perfect Competition in the Long Run

Answer 11

• if there is healthy competiton then the price will go down to cost

Question 12

The Benefits of Perfect Competition

Answer 12

• perfectly competitive markets in long-run equilibrium meet two conditions that benefit consumers:
• minimum-cost pricing
• marginal-cost pricing

Question 13

minimum-cost pricing

Answer 13

• price = minimum average cost
• firms competiting with each other

Question 14

marginal-cost pricing

Answer 14

• price = marginal cost
• firms finding cheapest way to produce a product

Question 15

Monopolist’s Demand

Answer 15

same as for the entire market (downward sloping)

Question 16

Monopolistic Competitor’s Demand

Answer 16

elastic because of many substitutes for the business’s product

Question 17

Oligopolist’s Demand

Answer 17

• characterized by mutual interdependence
• actions of each firm affects the other firms
• can operate in 2 ways: rivalry (market share) and cooperation

Question 18

Mutual interdependence

Answer 18

a situation in which a change in price strategy (or in some other strategy) by one firm will affect the sales and profits of another firm (or other firms)

Question 19

Rival Oligopolists

Answer 19

• face a kinked demand curve

Question 20

Kinked demand curve

Answer 20

when the demand curve is not a straight line but has a different elasticity for higher and lower prices

Question 21

When a business raises their price…

Answer 21

rivals keep theirs constant, so demand is relatively flat

Question 22

When a business reduces their price…

Answer 22

rivals reduce theirs as well, so demand is relatively steep

Question 23

Cooperative Oligopolies

Answer 23

• price leadership
• collusion
• cartel

Question 24

Price leadership

Answer 24

leader in market making price changes (oligopolies)

Question 25

Collusion

Answer 25

combinations, conspiracies or agreements among sellers to raise or fix prices and to reduce output in order to increase profits

Question 26

Cartel

Answer 26

a collection of independent businesses or organizations that collude in order to manipulate the price of a product or service

Question 27

Revenue Conditions for a Monopolist

Answer 27

• same as the downward-sloping market demand curve
• marginal revenue is below its demand curve because demand (average revenue) falls as quantity increases

Question 28

Profit Maximization for a Monopolist

Answer 28

• maximizes profit at the quantity where marginal revenue and marginal cost are equal (MR = MC)

Question 29

Average-cost pricing

Answer 29

a policy used by regulators to set prices of goods and services equal or close to the average cost of manufacturing the product

Question 30

Fair rate of return

Answer 30

• how much regulated companies may lawfully earn on their investments and expenditures
• markup percentage

ex. utility companies

Question 31

Profit Maximization for a Monopolist Output

Answer 31

the monopolist charges the highest possible price, as found using the demand curve

Question 32

Monopolists meeting conditions

Answer 32

• they neither meet the minimum-cost pricing nor the marginal-cost pricing conditions
• bc they set their prices too high with low production

Question 33

Monopoly vs Perfect Competition Example

Answer 33

• monopolist produces 200 airliners at $100m per bc they can
• perfect competitors produce 300 airlines at $60m bc thats when MC intersects D