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Microeconomics test 4

Terms in this set (90)

what market structures have the goal to maximize profits?
perfect competition, monopolistic competition, monopoly
the market structures: perfect competition, monopolistic competition, and monopoly all have what rule for maximizing profit?
MR = MC
which market structures can earn economic profits in the short run?
perfect competition, monopolistic competition, and a monopoly
what market structure(s) are price takers?
perfect competition
what market structure(s) are price makers?
Monopolistic competition, monopoly
for a perfect competition, price is what?
P = MC
for a monopolistic competition, price is what?
P > MC
for a monopoly, price is what?
P > MC
which of the market structures produces welfare-maximizing level of output?
perfect competition
number of firms in a perfect competition
many
number of firms in a monopolistic competition
many
number of firms in a monopoly
one
does a perfect competition market structure have entry in the long run?
yes
does a monopolistic competition market structure have entry in the long run?
yes
does a monopoly have entry in the long run?
no
can a perfect competition earn economic profit in the long run?
no
can a monopolistic competition make an economic profit in the long run?
no
can a monopoly make an economic profit in the long run?
yes
what characterizes a monopolistically competitive industry?
many firms
differentiated products
free entry
a similarity between monopoly and monopolistic competition market structure is that sellers are
price makers rather than takers
Product differentiation causes the seller to face what kind of demand curve?
down-ward sloping
A firm in a monopolistically competitive market is similar to a monopoly in the sense that they both have
down-ward facing demand curves and they both charge a price that exceeds marginal value or cost
what is the profit-maximizing rule for a firm in a monopolistically competitive market?
Marginal revenue = Marginal Cost
Whats a condition that is a characteristic of a monopolistically competitive firm in short-run equilibrium?
P > MC
what is a typical firm in a monopolistically competitive market likely to experience?
a positive or negative profit in the short run and zero profit in the long run.
When a monopolistically competitive firm is in long-run equilibrium, price is what?
price = average total cost (ATC)
In the long run, a firm in a perfectly competitive market operates how?
at its efficient scale
In the long run, a firm in a monopolistically competitive firm operates how?
with excess capacity
in a monopolistic competition, a business-stealing externality and a product-variety externality is what?
a business stealing externality is a negative externality and a product-variety externality is a positive externality
what kind of entry is a monopolistic competition?
free entry
do firms in a monopolistic competition have ownership of a key resource by a single firm?
no
do firms in a monopolistic competition have identical products?
no
do firms in a monopolistic competition have patents?
no
what is an example of a good that is not likely to be sold in a monopolistically competitive market?
tap water
what are some examples of goods that are likely to be sold in a monopolistically competitive market?
jeans
books
clocks
what characterizes a monopolistically competitive market?
many firms selling products that are similar but not identical
is a firm in a monopolistic competition a price taker?
no, they are price makers
what are 3 characteristics of a monopolistic competition?
a large number of sellers, free entry into market, differentiated products
how do monopolistically competitive markets differ from perfectly competitive markets?
the product differentiation among the sellers
monopolistic competition is similar to monopoly because
both market structure's firms are price makers rather than takers.
in a monopolistic competition as well as in monopoly, what does price do?
price exceeds marginal revenue for each firm
why do each firm in a monopolistically competitive industry face a downward-sloping demand curve?
the firm's product is different from those offered by other firms in the market
for a monopolistically competitive firm, what are the same?
average revenue and price
for a monopolistically competitive firm, at the profit-maximizing quantity of output,
price exceeds marginal cost
in the short run, a firm in a monopolistically competitive market operates much like a
monopolist
A profit-maximizing firm in a monopolistically competitive market differs from a firm in a perfectly competitive market because the firm in the monopolistically competitive market
faces a downward sloping demand curve
a monopolistically competitive market chooses the quantity to produce where
marginal revenue = marginal cost
a monopolistically competitive firm is currently producing 20 units of output. At this level of output, the firm is charging a price equal to $20, has a marginal revenue equal to $12, has a marginal cost equal to $12, and has average total cost equal to $18. From this information we can infer that
the firm is currently maximizing profits (to maximize profits in a monopolistically competitive market, marginal revenue = marginal cost; $12 and $12)
in the short run, a firm operating in a monopolistically competitive market can earn
positive economic profit, economic losses, zero economic profits (all of these are possible)
what are some conditions (3) that are characteristics of a monopolistically competitive firm in short-run equilibrium?
P = AR
MR = MC
P > MC
A firm operating in a monopolistically competitive market can earn economic profits in
the short run but not the long run
what is not a key feature of monopolistic competition?
positive economic profits for firms in the long run
what are some key features of monopolistic competition? (3)
-excess capacity
-a markup of price over marginal cost
-differentiated products among firms in the market
monopolistic competition has what capacity?
excess capacity
monopolistic competition has a markup of what?
price over marginal cost
in monopolistically competitive markets, positive economic profits suggest
new firms will enter the market
in monopolistically competitive markets, economic loss suggests that
some existing firms will exit the market
As new firms enter a monopolistically competitive market, profits and product diversity in existing firms do what?
profits decline and product diversity in the market increases
A profit-maximizing firm operating in a monopolistically competitive market that is in a long-run equilibrium has chosen a quantity of output where
average revenue = average total cost (ATC)
in the long-run equilibrium, a firm in a monopolistically competitive market operates
on the declining portion of its average total cost curve
what is not likely to apply to a monopolistic competitive firm?
profit is positive in the long run
when a monopolistically competitive firm is in long-run equilibrium, what does price do?
P = ATC
consider monopoly, monopolistic competition, and perfect competition. in which of these three market structures does a profit maximizing firm charge a price that exceeds marginal cost?
monopoly and monopolistic competition only
under which of the following market structures would consumers likely pay the highest price for a product?
monopoly
under which market structure would the highest output of a particular good be produced?
perfect competition
in the long run, how do firms in a perfectly competitive market and a monopolistically competitive firm operate?
perfectly competitive markets operate at its efficient scale, and a monopolistically competitive firm operates with excess capacity.
in which market structure do firms produce the welfare-maximizing level of output?
perfect competition
monopolistic competition is considered inefficient because
P exceeds Marginal Cost
the product-variety externality is associated with the
consumer surplus that is generated from the introduction of a new product
a business-stealing externality is
the negative externality associated with entry of new firms in a monopolistically competitive market.
with respect to monopolistic competition, the business-stealing externality and the product-variety externality are
the business-stealing externality is a negative externality, while the product-variety externally is a positive externality.
what is not true about oligopolies?
unlike oligopolies and monopolistically competitive markets, oligopolies prices do not exceed their marginal revenue
what is true about oligopolies? (3 things)
-only a few sellers
-the actions of any one seller can have a large impact on the other sellers
-interdependent in a way that competitive firms are not
in an oligopoly, each firm knows that its profits depend on
how much output it produces and how much output its rival firms produce.
because oligopoly markets have only a few sellers, the actions of any one seller can
have a large impact on the profits of the other sellers in the market
because oligopoly markets have only a few sellers, the actions of any one seller will
affect how other firms behave in the market.
an example that illustrates an oligopoly market is
a city with two firms who are licensed to sell school uniforms for the local schools.
not examples of oligopolies
a farmer's market with many individuals selling sweet corn and tomatoes
a city with electrical service is provided by one co-operative
a city with many independently-owned hair styling salons.
a distinguishing feature of an oligopolistic industry is the tension between
cooperation and self-interest
an agreement between two duopolists to function as a monopolist usually breaks down because
each duopolist wants a larger share of the market to capture more profit
an agreement among firms in a market about quantities to produce or prices to charge
collusion
as the number of sellers in an oligopoly becomes very large, what 3 things happen
-the quantity of output approaches the socially efficient quantity.
-the price approaches marginal cost.
-the price effect is diminished.
a situation in which firms chose their best strategy given the strategies chased by the other firms in the market
A Nash Equilibrium
In a duopoly situation, the logic of self-interest results in a total output level that
exceeds the monopoly level of output, but falls short of the competitive output
what is a situation that would produce the largest profits for oligopolists?
the firms reach the monopoly outcome.
when firms have agreements among themselves on the quantity to produce and the price at which to sell output, we refer to their form of organization as a
cartel
the equilibrium quantity in a market characterized by oligopoly is
higher than in monopoly markets and lower than in perfectly competitive markets.
the equilibrium price in a market characterized by oligopoly is lower than and higher than what?
lower than in monopoly markets and higher than in perfectly competitive markets.
cartels are difficult to maintain because
they always have tension between cooperation and self-interest.
an oligopolist will increase production if the output effect is
greater than the price effect.
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