Sample Questions for Exam 3

Chapters 12,13,14,15

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Define Different Market Structures

MARKET STRUCTURE

CHARACTERISTICPERFECT COMPETITION

MONOPOLISTIC COMPETITION OLIGOPOLY MONOPOLY

Number of firms

Type of product

Ease of entry

Examples of industries

Many

Identical

Easy

• Wheat• Apples

Many

Differentiated

Easy

• Selling DVDs• Restaurants

Few

Identical or differentiated

Difficult

• Manufacturing computers• Manufacturing automobiles

One

Unique

Entry blocked

• First-class mail delivery• Tap water

The Four Market Structures11 – 1

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Perfectly Competitive Markets

Perfectly competitive market(1) many buyers and sellers, (2) firms selling identical products, (3) no barriers to new firms entering the market.

Why are these firms price-takers?(1) many buyers and sellers (2) firms sell identical products

Perfectly Competitive Market

On the graphs, find the output quantity that maximizes profit for a perfectly competitive firm.

Find the amount of profit at the optimum quantity on the TR and TC graph.

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Find the profit maximizing quantity for a perfectly competitive firm on the graph.

What defines the profit maximizing quantity?(P = MR = MC)

If P > ATC, then profit is which one of the following?

= 0, zero> 0, positive< 0, negativecan’t tell

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Illustrating Profit or Losson the Cost Curve Graph

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Illustrating When a Firm Is Breaking Even or Operating at a Loss P > ATC, which means the firm makes a profit P = ATC, which means the firm breaks even (its total cost equals it total revenue) P < ATC, which means the firm experiences losses

Illustrating Profit or Loss on the Cost Curve Graph

Deciding Whether to Produceor to Shut Down in the Short RunWhat quantity should a perfectly competitive firm produce if ATC > P > AVC?

Why stay in business if ATC > P > AVC?(cover some fixed cost)

What is the minimum price a perfectly competitive firm needs to produce output?(find on graph)

Perfectly competitive firm with P < AVC produces:(nothing, shutdown)

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Economic Profit Leads to Entry of New Firms

How does a perfectly competitive market with π > 0 transition to Long Run Equilibrium? (entry shifts supply) What is profit in Long Run Equilibrium? (π = 0)

• Define Productive efficiency: a good is produced at the lowest possible cost.

• Perfect Competition achieves Allocative Efficiency because: marginal benefit (price) is equal to marginal cost on the last unit produced.

Perfect Competition and Efficiency

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Define Monopoly?Monopoly The only seller of a good or service that does not have a close substitute.

The most common barriers to entry areeconomies of scale, ownership of a key

input, and government imposed barriers

A monopolist faces which of the following:a) horizontal demandb) downward sloping demandc) perfectly elastic demandd) perfectly inelastic demand

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Where Do Monopolies Come From?Maintaining a monopoly requires

a) perfectly inelastic demandb) an insurmountable barrier to entryc) few competitorsd) MD = D

Governments grant patents to encouragea) low prices on existing productsb) competition for natural monopoliesc) research and development on new productsd) firms to form corporations

Compared to perfect competition, consumer surplus in monopoly isa) higherb) lowerc) eliminatedd) unchanged

Monopoly Profit MaximizationLearning Objective 14.3

Identify the profit maximizing price and quantity for a monopolist on a graph. (MR = MC)

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Does Monopoly Reduce Economic Efficiency?

Measuring the Efficiency Losses from Monopoly

Find the area representing the deadweight loss due to monopoly on a graph.

MARKET POWER, PROFITS, AND EFFCIENCY

Economic Efficiency occurs whena) consumer surplus is maximizedb) producer surplus is minimizedc) the price is lowd) the sum of producer and consumer surplus is maximized

Long run economic profits are most likely ina) monopoly onlyb) monopoly and monopolistic competitionc) monopoly and oligopolyd) none of the above

Market power is defined as the ability to set pricea) above ATCb) above AVCc) above MCd) above MR

Policy Toward Monopoly

The first U.S. antitrust law was thea) Clayton Actb) Sherman Actc) FTC Actd) Cellar-Kefauver Act

In the U.S., natural monopolies are most often regulated bya) Department of Justiceb) Federal Trade Commissionc) state or local regulatory commissionsd) Federal Communications Commission

The U.S. antitrust laws are enforced by thea) Department of Justiceb) Federal Trade Commissionc) Department of Commerced) both a and b

Antitrust• The purpose of the antitrust laws is

– To make illegal attempts to monopolize or collude

• Calculate HHI from market shares: 60%, 20%, 9%, 1%– 602 + 202 + 92 + 12 = 3600 + 400 + 81 + 1 = 4082

• If the firms with 9% and 1% merge, what is the HHI– 3600 + 400 + 100 = 4100

• Will the Government challenge this merger?

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Government Policy toward MonopolyThe Department of Justice and the Federal Trade

Commission Merger Guidelines

MERGER STANDARDS

Post-Merger HHI Below 1,000. These markets are not concentrated, so mergers in them are not challenged.

Post-Merger HHI Between 1,000 and 1,800. These markets are moderately concentrated. Mergers that raise the HHI by less than 100 will probably not be challenged. Mergers that raise the HHI by more than 100 may be challenged.

Post-Merger HHI Above 1,800. These markets are highly concentrated. Mergers that increase the HHI by less than 50 points will not be challenged. Mergers that increase the HHI by 50 to 100 points may be challenged. Mergers that increase the HHI by more than 100 points will be challenged.

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Define Monopolistic Competition

Monopolistic competition barriers to entry are lowmany firms compete similar, but not identical, (differentiated)

products.

Many sellers facing downward sloping demand curves.

Positive profits in monopolistic competition will attract entry in the long run.

Monopolistic Competition

Find the profit maximizing price and quantity on a graph (MR=MC).Identify long run equilibrium (zero profit) on a graph.

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Comparing Perfect Competition and Monopolistic Competition 12 - 6

Comparing Long-Run Equilibrium under Perfect Competition and Monopolistic Competition

Is monopolistic competitiona) productively efficient?

no – not at min ATCb) allocatively efficient?

no – P > MC

Consumers benefit from monopolistic competition because

a) price is lower than in perfect competitionb) price is the same as in perfect

competitionc) high quality products are available at low

pricesd) consumers can choose products closer

to their tastes

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Oligopoly

•Oligopoly A market structure in which a small number of interdependent firms compete.

•Which of the following are true in oligopolya) firms pay no attention to rivals

b) advertising has no effect on rivals

c) one firm’s pricing decision affects all other firms

d) pricing decisions have no effect on other firms

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Using Game Theory to Analyze Oligopoly

•Find Nash Equilibrium given the payoff table below•Do these firms have dominant strategies?•If the firms collude, can they increase their payoffs?

Nash equilibrium A situation where each firm chooses the best strategy, given the strategies chosen by other firms.

Definitions

Dominant strategy A strategy that is the best for a firm, no matter what strategies other firms use.

Collusion An agreement among firms to charge the same price or otherwise not to compete.

Cooperative equilibrium An equilibrium in a game in which players cooperate to increase their mutual payoff.

Noncooperative equilibrium An equilibrium in a game in which players do not cooperate but pursue their own self-interest.

Prisoners’ dilemma A game in which pursuing dominant strategies results in noncooperation that leaves everyone worse off.

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Sequential Games

• Find Nash Equilibrium

Which of the following is most likely to have bargaining power as a buyer?

a) an online store purchases books from publishers

b) a small ice cream producer seeks milk supplies from dairy farms

c) a pork barbecue producer buying pigs from farmers

d) the world’s largest discount store buys products made exclusively for its stores