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micro test 3

Terms in this set (75)

monopolistic competition
a market structure in which barriers to entry are low and many firms compete by selling similar, but not identical, products
Perfectly competitive
firms in long-run equilibrium produces at productively efficient, where price equals marginal cost, and average total cost is at a minimum. both allocatively efficient and productively efficient.
monopolistic competition
produces where price is greater than marginal cost, and average total cost is not at a minimum. neither allocatively efficient nor productively efficient. has excess capacity equal to the difference between its profit-maximizing level of output and the productively efficient level of output
defending a brand name
•Differentiate their products through marketing, referring to all the activites necessary for a firm to sell a product to a consumer
•Determining which product to sell, designing the product, advertising, deciding how to distribute the product
•Brand management: actions of a firm intended to maintain the differentiation of a product over time
•Defending a brand name: establishing a successful brand name is a strong incentive to defend it.
Trademarks
grants legal protection against other firms using its product's name
oligopoly
a market structure in which a small number of interdependent firms compete
barier to entry
anything that keeps new firms from entering an industry in which firms are earning economic profits
economies of scale
the situation when a firm's long-run average costs fall as the firm increases output
government imposed barriers
larger firms hire lobbyist to persuade the government to impose barriers
patent
the exclusive right to a product for a period o 20 years from the date the patent applications is file with the government
tariff
a tax or duty to be paid on a particular class of imports or exports
four firm concentration ratio
greater than 40% indicates that an industry is an oligopoly
game theory
the study of how people make decisions in situation in which attaining their goals depends on their interactions with others; in economics, the study of the decisions of firms in industries where the profits of a firm depend on its interactions with other firms
prisoner's dilemma
a game in which pursuing dominant strategies results in noncooperation that leaves everyone worse off
dominate strategy
confess to the crime, they both will confess and serve a jail term, even though they would have gone free if they both had remained silent
Nash equilibrium
both companies offering same day delivery is a Nash equilibrium
cartel
a group of firms that collude by agreeing to restrict output to increase prices and profits
monopoly
a firm that is the only seller of a good or service that does not have a close substititue
copyright
a government-granted exclusive rights to produce and sell a creation
where does a monopoly maximize profits
...
merger guidlines main points
market definition, measure of concentration, merger standards
market definition
...
measure of concentration
relatively small number of firms have a large share of total sales in the market
herfindahl Hirschmann index (HHI)
squares the market shares of each firm in the industry and adds up the values of the squares
merger standards
...
monopolistically competitive markets,
firms face downward-sloping demand curves, and the products competitors sell are differentiated
two examples of products sold in monopolistically competitive markets
apples and oranges are sold in perfectly competitive markets and Starbucks coffee and gap clothing are sold in monopolistically competitive markets
why does a local McDonald's face a downward-sloping demand curve for its quarter pounder?
in a monopolistically competitive markets, changing the price affects the quantity sold because firms sell differentiated products
If​ McDonald's raises the price it charges for Quarter Pounders above the prices charged by other​ fast-food restaurants,​ won't it lose all its​ customers?
no
With a​ downward-sloping demand​ curve, average revenue is equal to price
actually, average revenue is always equal to​ price, whether demand is downward sloping or not
With a​ downward-sloping demand​ curve, marginal revenue is below price
because the firm must lower its price to sell additional units
There are about 400 wineries in​ California's Napa Valley. Suppose the owner of one of the winerieslong dash—​Jerry's Wine Emporiumlong dash—raises the price of his wine by​ $5.00 per bottle.
If the industry is perfectly​ competitive, the reaction of consumers would be to
buy wine from another winery
If the industry is monopolistically​ competitive, the reaction of consumers
could be to remain loyal to​ Jerry's and pay the higher price.
the monopolistically competitive firm sells _____ product and faces _____ demand curve
a differentiated; a downward-sloping
if marginal revenue slopes downward, which of the following is true?
the firm must decrease its price to sell a larger quantity
an increase in the price of cappuccino will increase the quantity of cappuccinos demanded
false
is it possible for marginal revenue for a firm operating in a perfectly competitive industry to be negative
no
would a firm selling in a monopolistically competitive market ever produce where marginal revenue is negative?
no because marginal cost cannot be negative
There are many wheat farms in the United​ States, and there are also more than​ 1,800 Chipotle restaurants.
​Why, then, does a Chipotle restaurant face a​ downward-sloping demand curve when a wheat farmer faces a horizontal demand​ curve?
Wheat is a homogeneous​ good, while Chipotle is able to differentiate its food from other restaurants
A monopolistically competitive firm​ doesn't produce where P​ = MC like a perfectly competitive firm because
P exceeds MR for a monopolistically competitive​ firm, and​ it's MR that must equal MC for profit maximization.
If a publisher does not raise the price of a book following an increase in its production​ cost, the result will be
less than maximum profit
The ability of a publishing company to raise book prices when costs increase would be​ greater, the ______
is the elasticity of demand for published books
lower
What effect does the entry of new firms have on the economic profits of existing​ firms?
When new firms enter a monopolistically competitive​ market, the economic profits of existing firms
will decrease because their demand curves will shift to the left
The entry of new firms cause the demand curve of an existing firm in a monopolistically competitive market to shift to the left because​ ______ and become more elastic since​ ______.
each will have a smaller share of the market; consumers will have additional choices
What is the difference between zero accounting profit and zero economic​ profit?
Zero economic profit includes a​ firm's implicit costsimplicit costs but zero accounting profit does not.
As new firms enter the​ market, a monopolistically competitive firm can maintain profits by
discovering new ways of differentiating its product
finding new ways of lowering the cost of producing its product
A monopolistically competitive firm is not allocatively efficient because
price exceeds marginal cost
A monopolistically competitive firm produces where​ _________, while a perfectly competitive firm produces where​ _________
price is greater than marginal​ cost; price is equal to marginal cost
Which type of efficiency does a monopolistically competitive firm achieve in the long​ run?
neither allocative nor productive efficiency
marketing
all the activities necessary for a firm to sell a product including​ advertising, product​ design, and product distribution
What​ trade-offs do consumers face when buying a product from a monopolistically competitive​ firm?
Consumers pay a price greater than marginal​ cost, but they also have choices more suited to their tastes.
Companies use brand management
to maintain product differentiation and earn economic profits in the short run
What term describes the actions of a firm intended to maintain the differentiation of a product over​ time?
brand management
When a firm advertises a​ product, it is trying to shift the demand curve for the product to the​ ________ and make it more​ ________.
right, inelastic
Which of the following statements is​ correct?
Legally enforcing trademarks can be difficult
Monopolistically competitive firms will be profitable to the extent that they
differentiate their product and produce at lower average cost than competitors.
To earn economic profit greater than​ zero, a monopolistically competitive firm must
differentiate its products and produce at lower average cost than competitors
An oligopoly is a market structure
where a small number of interdependent firms compete
three examples of oligopolies in the United States are industries that produce or sell
automobiles​, athletic​ footware, and cigarettes.
Without barriers to​ entry,
new firms will enter industries where firms are earning economic profits.
The most important barriers to entry are
economies of​ scale, ownership of a key​ input, and government imposed barriers
Economists refer to their methodology for analyzing oligopolies as game theory​ because, as in​ games,
-firms seek​ profits, which are​ payoffs, that are the result of firm interaction.
-firms are governed by rules that determine what actions are allowable.
-firms employ strategies to attain their objectives.
-interactions among​ firms, which are​ players, are crucial in determining outcomes.
implicit collusion
is where firms signal to each other without actually meeting and agreeing to not compete
example of explicit collusion is
where firms meet and agree to not competenot compete​, and an example of implicit collusion is price leadership
In a repeated​ game
players can employ retaliation strategies
How does collusion make firms better​ off?
the firm can act as a single entity, like a monopoly
Given the incentives to​ collude, why​ doesn't every industry become a cartel?
-Most firms that collude have an incentive to​ "cheat."
-High profits attract entry into the market.
-Collusion is illegal in the United States.
"A situation where each firm chooses the best​ strategy, given the strategies chosen by other​ firms."
Nash equilibrium
A group of firms that colludes by agreeing to restrict output to increase prices and profits is called
a cartel
A sequential game is a game
where one firm acts first and then the other firms respond
A decision tree
contains decision modes where firms must make decisions , arrows illustrating the decisions, and terminal nodes showing the result rates of return
The five competitive forces are
competition from existing​ firms
the threat of potential​ entrants
competition from​ substitutes
the bargaining power of​ buyers
the bargaining power of suppliers.
The strength of the five competitive forces
does not remain constant over time. For​ example, existing firms may advertise to create product loyaltyadvertise to create product loyalty to make entry less​ attractive, reducing the threat from additional potential entrants
A monopoly is
a firm that is the only seller of a good or service that does not have a close substitute
A natural monopoly
develops automatically due to economies of scale
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