Market Structure Exam

question

2 questions every firm must answer

answer

1. What price to charge?
2. How many units to produce?

question

Perfect Competition

answer

many different sellers, nearly identical products, no barriers to entry

question

4 conditions of PC

answer

numerous participants, homogeneous product, freedom of exit and entry, perfect information

question

Numerous participants

answer

many buyers and many sellers, small.ij relation to total sales, no single buyer or seller can affect prices

question

Homogeneous product

answer

no product differentiation exists, buyers indifferent to sellers

question

Freedom of Exit and Entry

answer

new firms can enter the market easily, no unusual expenditures, legal impediments

question

Perfect Information

answer

well-informed buyers and sellers (prices, quality, sources of supply)

question

pricetakers

answer

no control over price charged

question

Total Revenue

answer

Price x Quantity

question

Marginal Revenue

answer

the change in total revenue from an additional unit sold

question

Profit Maximizing Rule

answer

MR=MC

question

Resource Allocative Efficiency (RAE)

answer

efficiently dividing resources (land, labor, capital, entrepreneurship) (P=MC)

question

price

answer

value buyers place on g/s produced by firm

question

marginal cost

answer

value of resources (L, L, K) used in production

question

3 Conditions of Firm

answer

normal Profit/break even, positive economic profit, negative economic profit/economic loss)

question

Normal Profit/breakeven

answer

P=ATC, TR-TC=0

question

Positive Economic Profit

answer

P>ATC, TR>TC

question

Negative Economic Profit

answer

P<ATC, TR<TC

question

Stay Open and Operate at Loss

answer

when TR>TVC or P>AVC

question

Shut Down

answer

if TR<TVC or P<AVC

question

Shut Down Loss

answer

AFC x Q

question

Operating Loss

answer

(ATC - P) x Q

question

Short Run

answer

firms will produce as long as price (MR) is greater than AVC

question

Long Run

answer

number of firms isn't fixed

question

If Economic Profit in Long Run

answer

firms will enter an industry, output will increase, shifting industry supply curve outward

question

Conditions of Long-Run Perfectly Competitive Equilibrium

answer

must be maximizing profit, economic profit is zero, don't change amount of capital used in production

question

Long-Run Perfectly Competitive Equilibrium

answer

Q*= (MR = MC) = P = SRATC = LRATC

question

Monopolies

answer

one firm producing goods, no close substitutes, significant barriers to entry exist

question

Public Franchise

answer

right granted to firm by government that permits the firm to produce a g/s and excludes all others from doing the same

question

Licensing

answer

radio and tv stations, physicians, dentists, lawyers

question

Patents and Copyrights

answer

encourages invention and innovation, exclusive right to produce a g/s or by means of a specific process for a specific period of time

question

Control over Resource

answer

ALCOA owned every bauxite in US and gained monopoly over aluminum

question

Profit Maximization in Pure Monopoly

answer

monopolists are price searchers, more discretion and control over pricing

question

Single-Price Monopolist

answer

all buyers pay the same price

question

First Case Against Monopolies

answer

monopolies don't achieve RAE

question

Second Case Against Monopolies

answer

price charged by monopolies is greater than PC firms and they produce less than PC firms

question

Consumer Surplus (CS)

answer

difference between max price buyers are willing to pay and what they actually paid

question

Deadweight Loss (DWL)

answer

amount buyers value the additional output over and above the costs of producing the additional output

question

Price Discrimination

answer

charge different prices to different people and price differences do not reflect cost differences

question

Perfect Price Discrimination

answer

seller charges the highest price each consumer would be willing to pay for the product

question

Second Degree Price Discrimination

answer

seller charges a uniform price per unit for one specific quantity and lower price per unit for and additional quantity

question

Third Degree Price Discrimination

answer

seller charges different prices in different markets or charges a different price to different groups of buyers

question

Under perfect price discrimination:

answer

there's no consumer surplus and no deadweight loss because firms achieve RAE

question

Conditions of Price Discrimination

answer

seller must exercise some control over price, distinguishment of buyers, reselling goods must be impossible or too costly

question

Theory of Oligopolies

answer

smallish number of firms, many buyers, take into account expected reaction of other firms, significant barriers to entry

question

mutually interdependent

answer

actions of one firm influence the actions of others

question

collusion

answer

cooperation towards a fraudulent end

question

Cartel Model

answer

act as if they were one monopolist that have assigned output quotas to each individual firm

question

Cartels do 2 things

answer

1. restrict output
2. increase prices (price-fixing)

question

Problem with Cartels

answer

illegal, deciding output, and difficult to sustain

question

Incentive to Cheat

answer

by breaking the agreement, a firm captures a larger share of the market and a higher profit

question

Game Theory Model

answer

reach an optimal decision through strategic behavior, including awareness of interdependence and anticipating moves of other firms

question

Explicit Price Collusion

answer

conspiracy in restraint of trade under US Antitrust law

question

Implicit Price Collusion

answer

multiple firms make the same pricing decisions without explicitly contacting each other

question

Monopolistic Competition Characteristics

answer

many sellers, product differentiation, free entry and exit, collusion is difficult, downward-sloping demand curve, advertising, more substitutes

question

Goals of Advertising

answer

shift demand curve to the right and convince buyers that no other substitute is as good (more inelastic demand curve)

question

PC and MC Comparisons

answer

zero economic profit in the long run due to barriers of entry

question

Societal Gains

answer

differentiation of products (variety)

1 of 58

question

2 questions every firm must answer

answer

1. What price to charge?
2. How many units to produce?

question

Perfect Competition

answer

many different sellers, nearly identical products, no barriers to entry

question

4 conditions of PC

answer

numerous participants, homogeneous product, freedom of exit and entry, perfect information

question

Numerous participants

answer

many buyers and many sellers, small.ij relation to total sales, no single buyer or seller can affect prices

question

Homogeneous product

answer

no product differentiation exists, buyers indifferent to sellers

question

Freedom of Exit and Entry

answer

new firms can enter the market easily, no unusual expenditures, legal impediments

question

Perfect Information

answer

well-informed buyers and sellers (prices, quality, sources of supply)

question

pricetakers

answer

no control over price charged

question

Total Revenue

answer

Price x Quantity

question

Marginal Revenue

answer

the change in total revenue from an additional unit sold

question

Profit Maximizing Rule

answer

MR=MC

question

Resource Allocative Efficiency (RAE)

answer

efficiently dividing resources (land, labor, capital, entrepreneurship) (P=MC)

question

price

answer

value buyers place on g/s produced by firm

question

marginal cost

answer

value of resources (L, L, K) used in production

question

3 Conditions of Firm

answer

normal Profit/break even, positive economic profit, negative economic profit/economic loss)

question

Normal Profit/breakeven

answer

P=ATC, TR-TC=0

question

Positive Economic Profit

answer

P>ATC, TR>TC

question

Negative Economic Profit

answer

P<ATC, TR<TC

question

Stay Open and Operate at Loss

answer

when TR>TVC or P>AVC

question

Shut Down

answer

if TR<TVC or P<AVC

question

Shut Down Loss

answer

AFC x Q

question

Operating Loss

answer

(ATC - P) x Q

question

Short Run

answer

firms will produce as long as price (MR) is greater than AVC

question

Long Run

answer

number of firms isn't fixed

question

If Economic Profit in Long Run

answer

firms will enter an industry, output will increase, shifting industry supply curve outward

question

Conditions of Long-Run Perfectly Competitive Equilibrium

answer

must be maximizing profit, economic profit is zero, don't change amount of capital used in production

question

Long-Run Perfectly Competitive Equilibrium

answer

Q*= (MR = MC) = P = SRATC = LRATC

question

Monopolies

answer

one firm producing goods, no close substitutes, significant barriers to entry exist

question

Public Franchise

answer

right granted to firm by government that permits the firm to produce a g/s and excludes all others from doing the same

question

Licensing

answer

radio and tv stations, physicians, dentists, lawyers

question

Patents and Copyrights

answer

encourages invention and innovation, exclusive right to produce a g/s or by means of a specific process for a specific period of time

question

Control over Resource

answer

ALCOA owned every bauxite in US and gained monopoly over aluminum

question

Profit Maximization in Pure Monopoly

answer

monopolists are price searchers, more discretion and control over pricing

question

Single-Price Monopolist

answer

all buyers pay the same price

question

First Case Against Monopolies

answer

monopolies don't achieve RAE

question

Second Case Against Monopolies

answer

price charged by monopolies is greater than PC firms and they produce less than PC firms

question

Consumer Surplus (CS)

answer

difference between max price buyers are willing to pay and what they actually paid

question

Deadweight Loss (DWL)

answer

amount buyers value the additional output over and above the costs of producing the additional output

question

Price Discrimination

answer

charge different prices to different people and price differences do not reflect cost differences

question

Perfect Price Discrimination

answer

seller charges the highest price each consumer would be willing to pay for the product

question

Second Degree Price Discrimination

answer

seller charges a uniform price per unit for one specific quantity and lower price per unit for and additional quantity

question

Third Degree Price Discrimination

answer

seller charges different prices in different markets or charges a different price to different groups of buyers

question

Under perfect price discrimination:

answer

there's no consumer surplus and no deadweight loss because firms achieve RAE

question

Conditions of Price Discrimination

answer

seller must exercise some control over price, distinguishment of buyers, reselling goods must be impossible or too costly

question

Theory of Oligopolies

answer

smallish number of firms, many buyers, take into account expected reaction of other firms, significant barriers to entry

question

mutually interdependent

answer

actions of one firm influence the actions of others

question

collusion

answer

cooperation towards a fraudulent end

question

Cartel Model

answer

act as if they were one monopolist that have assigned output quotas to each individual firm

question

Cartels do 2 things

answer

1. restrict output
2. increase prices (price-fixing)

question

Problem with Cartels

answer

illegal, deciding output, and difficult to sustain

question

Incentive to Cheat

answer

by breaking the agreement, a firm captures a larger share of the market and a higher profit

question

Game Theory Model

answer

reach an optimal decision through strategic behavior, including awareness of interdependence and anticipating moves of other firms

question

Explicit Price Collusion

answer

conspiracy in restraint of trade under US Antitrust law

question

Implicit Price Collusion

answer

multiple firms make the same pricing decisions without explicitly contacting each other

question

Monopolistic Competition Characteristics

answer

many sellers, product differentiation, free entry and exit, collusion is difficult, downward-sloping demand curve, advertising, more substitutes

question

Goals of Advertising

answer

shift demand curve to the right and convince buyers that no other substitute is as good (more inelastic demand curve)

question

PC and MC Comparisons

answer

zero economic profit in the long run due to barriers of entry

question

Societal Gains

answer

differentiation of products (variety)

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Market Structure Exam

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