Week 8: decision-making for firms

Question 1

Revenues for Monopolistic Competitor

Answer 1

• D = AR downward slope the MR is always below it bringing it down
• same as its downward-sloping demand curve
• marginal revenue is below its demand curve because demand (average revenue) falls as quantity increases

Question 2

Profit-Maximization for a Monopolistic Competitor

Answer 2

• found where marginal revenue and marginal cost are equal
• price is found with the business’s demand curve
• may make a profit or a loss at its profit-maximizing point in the short run

Question 3

Profit-Maximization for a Monopolistic Competitor In the long run

Answer 3

• breaks even (profits (losses) are being made in the short run, new businesses enter (leave) the industry, pushing businesses’ demand curves leftward (rightward) and making them more (less) elastic)
• business meets neither the minimum-cost pricing nor the marginal-cost pricing rules, since too few units of output are produced

Question 4

Revenue Conditions for an Oligopolist

Answer 4

• in a market characterized by rivalry, average revenue is identical with its kinked demand curve
• this business’s marginal revenue curve has two linear segments which are below its kinked demand curve
• difficult to enter and leave

Question 5

Profit-Maximization for an Oligopolist

Answer 5

• profit-maximizing quantity for a rivalrous oligopolist is found where marginal revenue and marginal cost are equal
• price is found using the business’s kinked demand curve
• neither meet the minimum-cost pricing nor the
  marginal-cost pricing rules

Question 6

Game Theory

Answer 6

• the analysis of how mutually interdependent actors try to achieve their goals through the use of strategy
• in mathematics, game theory has become a set of concepts whose use has spread to all social sciences, especially economics
• uses mathematical models to study conflict and cooperation
• assumes rational actors

Question 7

The Prisoner’s Dilemma

Answer 7

• a classic example of how players’ self-interested actions can be self-defeating
• each prisoner has an incentive to confess, even though the best possible result would be if both stayed silent
• sub optimizing

ex. both get 1 year

Question 8

The Case of Oligopoly Example

Answer 8

• optimal profit

ex. both get $20k

Question 9

Anti-Combines Legislation

Answer 9

• represents laws aimed at preventing industrial concentration and abuses of market power
• The Competition Act of 1986 was a major reform of Canada’s anti-combines legislation

Question 10

Criminal offences under the Competition Act

Answer 10

• conspiracy
• bid-rigging
• predatory pricing
• abuse of dominant position

Question 11

Conspiracy

Answer 11

a secret plan by a group to do something unlawful or harmful

Question 12

Bid-rigging

Answer 12

a particular form of collusive price-fixing behaviour by which firms coordinate their bids on procurement or project contracts

Question 13

Predatory pricing

Answer 13

the illegal act of setting prices low to attempt to eliminate the competition

Question 14

Abuse of dominant position

Answer 14

when a dominant business (or group of businesses) engages in activity that stops or substantially reduces competition in a market

Question 15

Civil matters reviewed by the Competition Tribunal

Answer 15

• abuse of dominant position
• mergers: horizontal, vertical, and conglomerate

Question 16

Nonprice Competition

Answer 16

• by monopolistic competitors and oligopolists includes: product differentiation and advertising
• raises a business’s revenue and costs
• may or may not be beneficial to businesses and consumers

Question 17

Product differentiation

Answer 17

the characteristic or characteristics that make your product or service stand out to your target audience

Question 18

Advertising

Answer 18

a strategy that involves a company creating marketing campaigns that appeal to two or more segments of their target audience

Question 19

Concentration Ratios

Answer 19

• how industrial concentration is measured
• the four-firm concentration ratio

Question 20

The four-firm concentration ratio

Answer 20

• shows the percentage of total sales revenue in a market earned by the four largest business firms
• 30% okay, 50% is bad

ex. tobacco products highest, contruction lowest

Question 21

Industrial Concentration

Answer 21

• refers to market domination by a few large businesses
• can provide the consumer with benefits due to increasing returns to scale
• can impose costs on the consumer due to market power
• may or may not encourage technical innovation

Question 22

Marginal benefit

Answer 22

• the extra satisfaction, expressed in dollar terms, from consuming a certain unit of a product
• it’s the max price that a customer will pay for a certain unit of a product

Question 23

Total benefit

Answer 23

• the total satisfaction, expressed in dollar terms, from consuming a product
• it can be found by adding together the marginal benefits of all units consumed during a given time period

Question 24

Consumer surplus

Answer 24

• shows the extent to which consumers pay a lower price than the highest one they are willing to pay
• defined as the net benefit, expressed in dollar terms, from buying a product at its market price
• found, either for an individual or in an entire market, by subtracting total expenditure from total benefit

Question 25

Producer surplus

Answer 25

• shows the extent to which producers receive a price that is different from the lowest one they are willing to accept
• defined as the difference between the price received from selling each unit of a product and the marginal cost of producing it

Question 26

When a Market Becomes Uncompetitive

Answer 26

• a portion of the consumer surplus becomes producer surplus
• deadweight loss

Question 27

Deadweight loss

Answer 27

a net reduction in both the consumer surplus and producer surplus due to the reduction in market output

Question 28

Spillover costs

Answer 28

• are the negative external effects of producing or consuming a product

Question 29

Adding Spillover costs to private costs…

Answer 29

vertically raises the supply curve

Question 30

Preferred outcome of Spillover costs

Answer 30

is at a lower quantity than in a perfectly competitive market

Question 31

Spillover cost examples

Answer 31

• Government intervention (excise tax: carbon tax used to counteract spillover costs associated with pollution)

Question 32

Spillover benefits

Answer 32

are the positive external effects of producing or consuming a product

Question 33

Adding Spillover benefits to private benefits…

Answer 33

raises the demand curve

Question 34

Preferred outcome of Spillover benefits

Answer 34

is at a higher quantity than occurs in a perfectly competitive market

Question 35

Spillover benefits examples

Answer 35

• Government intervention (ex. a consumer subsidy: education)