ECON 201 Lecture Notes - Lecture 13: Market Power, Marginal Cost

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7 Dec 2015

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Hiv medicine: market power, the you can"t take it with you effect, the other people"s money effect. Market power: the power to raise the price above marginal cost without fear that other firms will enter the market. Costs of monopoly: deadweight loss, corruption & inefficiency. Economies of scale: the advantages of large-scale production that reduce advantages of large-scale production that reduce average cost as quantity increases. Natural monopoly: said to exist when a single firm can supply the entire market at a lower cost than two or more firms. Barriers to entry: factors that increase the cost to new firms of entering an industry. Monopoly: single firm that sells product with few substitutes, high barriers to entry, market power, firm had ability to set price > marginal cost (p > mc) Price change is larger in % to increase quantity. Natural monopoly: comes from price to enter (ex. One firm can supply the entire industry at lower average cost.

Related Questions

1. A reason why there is more competition in the restaurant industry than in the music streaming industry is that restaurants

A.unlike music streaming? companies, have to abide by government sanitation rules.

B.have to cater to a variety of consumer tastes while music streaming companies do not.

C.have more elastic demand for their product compared to music streaming companies.

D.unlike music streaming? companies, do not have significant economies of scale.

2. Why would a government use a patent to block entry to some markets if this hinders competition especially when governments generally promote? competition?

A.Patents are justified because they are an important means for creating network externalities.

B.Patents encourage firms to spend money on research necessary to create new products.

C.Politicians sometimes succumb to pressure from lobbyists to grant favors to businesses for political reasons.

D.Patents are an important source of government revenue.

3.Suppose we can divide all the goods produced by an economy into two? types: consumption goods and capital goods. Capital? goods, such as? machinery, equipment, and? computers, are goods used to produce other goods.

Suppose a technological advance occurs that affects the production of consumption goods but not capital goods.

If a technological advance occurs that affects the production of consumption goods but not capital?goods, then the production possibilities frontier will

A.remain unchanged.

B.shift outward along the consumption goods axis.

C. shift outward along the capital goods axis.

D. shift outward along both axes.

The new production possibilities frontier will indicate that with the technological? advance, more (CAPITAL GOODS /// CONSUMPTION GOODS /// OF BOTH GOODS) can be produced.

4. Market failure is best described as

A.All of the above.

B.when consumption occurs at low social benefit.

C.when the market fails to produce the efficient level of output.

D.when the market fails to produce deadweight loss.

E.when production occurs at high social cost.

The market will fail when which of the following? happen????(Check all that? apply.)

A.When property rights are incomplete.

B.When there is a market surplus.

C.When there is scarcity.

D.When it is difficult to enforce property rights.

E.When there is a market shortage

5.In which of the following market structures is price discrimination? possible?

??????a. perfect competition

??????b. monopoly

??????c. oligopoly

??????d. monopolistic competition

A.?b, c, and d only

B.?a, b,? c, and d

C.c and d only

D.b and c only

6. How do market economies ultimately determine what goods and services are? produced, how the goods and services will be? produced, and who will receive the goods and? services?

A.The government determines what goods and services are? produced, how to produce? them, and who will receive them.

B.Firms determine what goods and services are produced and how to produce? them, and markets determine who will receive them.

C.Consumers determine what goods and services are? produced, firms determine how to produce? them, and equity determines who will receive them.

D.Consumers determine what goods and services are? produced, firms determine how to produce? them, and markets determine who will receive them.

E.Firms determine what goods and services are? produced,technology determines how to produce? them, and consumers determine who will receive them.

7. For monopolistically competitive firms is it always likely in the? long-run to have? zero-economic profit?

Monopolistically competitive firms in the? long-run

A.may continue to earn profit by convincing consumers their products are differentconvincing consumers their products are different.

B.will not continue to earn profit because the cost of production will rise as new firms enter the market.

C.will not continue to earn profit because monopolistically competitive firms produce identical products.

D.will continue to earn profit due to barriers to new firms entering the market.

E.may continue to earn profit by instead beginning to produce a product identical to competitors.

8. In monopolistically competitive? markets, what is a factor under a? firm's control that determines whether it will be? successful?

A. Upper A firm's ability to differentiate its productA firm's ability to differentiate its product.

B.Consumer preferences.

C.Factors that affect all firms in a market.

D.Chance events.

E.Both a and b.

9. From the list? below, select the necessary condition in order to achieve successsful price discrimination.

A. The seller must possess market power.

B. Buyers must have identical inelastic demands.

C. Transactions costs must be zero.

D.The buyer must possess market power.??

10.Suppose Dell is currently selling 3,000,000 computers per year. However, managers at Dell are considering whether to increase production by 300,000 computers. One manager explains that after increasing production by this? amount, total profit would be? $100 million. Given this? information, should Dell increase production by 300,000 computers??

A.?Yes, because Dell would earn a profit.

B.Information about the additional cost incurred from producing 300,000additional computers is required to answer this question.

C.?No, because increasing production by 300,000 computers would decrease the price of computers.

D.Information about the additional revenue earned and the additional cost incurred from producing 300,000 additional computers is required to answer this question.

E. Information about the total revenue earned and the total cost incurred from producing 3,300,000 computers is required to answer this question.

11. The Majestic box office sells tickets for the same play at different? prices: a lower price to those who opt for the seats at the back of the theatre and a higher price for those who purchase seats in the? front, around the stage. Which of the following statements is? true?

A. This is an example of product differentiation not price discrimination.

B. The theatre practices first degree price discrimination by setting prices based on willingness to pay.

C. Charging two different prices is an effective way to avoid an excess demand for play? tickets; the higher price lowers quantity demanded to some extent.

D. Since the cost of producing the play does not change with the seating? configuration, this is evidence of price discrimination based on market segmentation.

1. Another term for an investment good is

A) interest
B) savings
C) capital
D) rent
E) production

2. The opportunity cost of producing capital is

A) decreased current production of consumption goods
B) increased future production of consumption goods
C) the amount of roundabout production
D) abundant capital accumulation
E) the decreased amount of future capital available

A marginal revenue product curve shows the change in

A) total revenue caused by a one-unit change in output, other things constant
B) total revenue caused by a one-unit change in an input, other things constant
C) total product caused by a one-unit change in output, other things constant
D) total product caused by a one-unit change in an input, other things constant
E) total revenue product caused by a one-unit change in the price of the output, other things constant

Marginal revenue product for a price taker equals

A) MP x P
B) MP/MRC
C) MP x MRC
D) MRC/MP
E) MP/P

Interest provides an incentive for households to defer current consumption

A) True
B) False

An increase in the interest rate tends to increase the demand for loanable funds.

A) True
B) False

Generally, the longer the maturity on a bond, the lower the interest rate.

A) True
B) False

Corporations can obtain investment funds by

A) buying government securities
B) selling stock
C) increasing dividends
D) purchasing more capital
E) buying back stock

Vertical integration has no effect on the internal organization of a firm; it only affects the outside markets.

A) True
B) False

10.

One reason a computer manufacturer may produce its own microchips rather than buy them is that it can maintain control over production quality.

A) True
B) False

11.

When a firm is no longer able to reduce its long-run average cost by expanding, it has achieved its minimum efficient scale of production.

A) True
B) False

12.

If a firm experiences economies of scope, per unit production costs fall as it produces more than one kind of product.

A) True
B) False

13.

Publications such as Consumer Reports magazine

A) increase the optimal amount of information gathered
B) reduce the optimal amount of information gathered
C) reduce the amount of common knowledge
D) raise the marginal benefit of information curve
E) make consumers perfectly informed

14.

The winner's curse is more likely when the value of a good at auction is uncertain.

A) True
B) False

15.

When a seller knows more about the condition of a used car than the buyer does, the information is said to be asymmetric.

A) True
B) False

16.

The three kinds of government regulation designed to alter or control firm behavior are:

A) Antitrust policy, lobbying, and social regulation
B) Economic regulation, antitrust policy, and lobbying
C) Social regulation, lobbying, economic regulation
D) Social regulation, economic regulation, and antitrust policy
E) Social regulation, antitrust policy, fiscal policy

17.

A monopoly is likely to charge a higher price than an otherwise similar competitive industry would be.

A) True
B) False

18.

Public policy can help achieve more efficient use of an economy's resources by eliminating all monopolies.

A) True
B) False

19.

Government attempts to prohibit monopolization of a market are known as

A) antitrust regulation
B) economic regulation
C) social regulation
D) anticompetitive regulation
E) Herfindahl regulation

20.

If the electric company is allowed by regulators to earn only a normal profit, it will produce at the point where

A) MR = MC
B) P = MC
C) MC = quantity demanded
D) P = AC
E) MR = AC

apricotworm832

1. Suppose that there is a tax of $1 per unit, and the elasticity of supply is 3 and the elasticity of demand is 2 (in absolute value). How much of the $1 tax is paid by sellers?

		$0.60
		$0.40
		$0.75
		$0.67

2. In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by:

		a tax of $5 in Market X and a subsidy of $10 in Market Y.
		subsidizing both markets.
		taxing Market Y and subsidizing Market X.
		taxing both markets.

3.Economic theory suggests that a natural monopoly should be:

		eliminated whenever it arises.
		regulated to take advantage of economies of scale.
		left alone to operate with excess capacity.
		taken over by the government.

4.When the size of the production is the most efficient:

		total cost is at the minimum.
		average cost is at the minimum.
		marginal cost is at the minimum.
		fixed cost is at the minimum.

5.A firm should exit the industry if which of the following conditions apply?

		TR > TC
		P < AC
		Lifetime expected profit is positive.
		Prices are low now but expected to rise.

6.Figure: Costs

Reference: Ref 11-6

(Figure: Costs) Use the figure. At a price of $20, the firm earns profit of:

		$75.
		$300.
		$225.
		$0, because P = MC at P = $20.

7.When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.

		too low; too high
		equal to the efficient price; too low
		too high; too low
		equal to the efficient price; too high

8.Which of the following statements is TRUE?

I. The EPA's tradeable allowances program for sulfur dioxide establishes property rights to pollute and helps reduce transaction costs by distributing allowances, maintaining databases, and monitoring emissions.

II. One criticism of tradeable allowances is that they prohibit non-businesses and environmental groups from purchasing the allowances.

III. The tradeable allowances for sulfur dioxide have performed poorly because electricity output has increased, causing a rise in sulfur dioxide levels.

		I only
		II and III only
		I, II, and III
		III only

9.Price floors make it illegal to compete for more customers by lowering prices, so firms compete by offering customers:

		various options.
		more quantity.
		more discount.
		higher quality.

10.Figure: Government Price Controls

Reference: Ref 8-3

(Figure: Government Price Controls) Refer to the figure. If the government sets the price ceiling at $31, there will be:

		a shortage of 15 units.
		a surplus of 15 units.
		a supply of 20 units.
		no effect on the market.

11.In which of these instances does price function as a signal in the market?

		Suppliers invest more in exploration when the price of oil increases.
		Consumers complain of price gouging as the price of oil skyrockets.
		Government imposes price controls on the skyrocketing price of oil.
		All of the answers are correct.

12.Ethanol and sugar are both made from sugar cane, and ethanol can be used as substitute fuel for oil. Increasing oil prices cause the demand for ethanol to increase. This will cause the ______ sugar to ______ and its price to ______.

		demand for; decrease; decrease
		supply of; increase; increase
		supply of; decrease; increase
		demand for; increase; increase

13.Why do cotton growers spend billions of dollars to dam rivers and transport water hundreds of miles to grow cotton in California deserts?

		Cotton growers in California don't pay payroll taxes.
		The water used to grow California cotton is highly subsidized by the government.
		Cotton growers in California are mostly operated as nonprofit enterprises.
		The water used to grow California cotton is high in mineral contents, making for a bigger cotton yield.

14.Suppose that the equilibrium price in the market is $10. If the current market price is $7.50:

		the equilibrium price will fall to $7.50.
		competition among buyers will increase the current price.
		the current price will fall below $7.50 as sellers compete for market share.
		There is not enough information provided to answer the question.

15.Which of the following would increase the demand for beef?

		lower pork prices
		higher consumer income
		higher prices of feed grains used to feed beef cattle
		an increase in the price of beef

16.A change in quantity supplied is reflected by a movement along the same supply curve while a change in supply refers to a shift in the entire supply curve.

True

False

17.Table: Production in the United States and Germany

Labor units required to produce:

One Clock

One Sofa

United States		2	5
Germany		3	9

Reference: Ref 2-8

(Table: Production in the United States and Germany) According to the table, the opportunity cost of producing one sofa in the United States is _________, and the opportunity cost of producing one sofa in Germany is _______.

		two clocks; three clocks
		10 clocks; 27 clocks
		0.4 clocks; 0.33 clocks
		2.5 clocks; three clocks

18.Mark values his drum set at $800 and Ella values her guitar at $1,000. Suppose that Mark trades his drum set for Ella's guitar.

		This trade makes Ella worse off by $200.
		This trade makes Mark better off by $200.
		Mark must value Ella's guitar for at least $1,000, and Ella must value Mark's drum set for at least $800.
		This trade creates value by moving the guitar and drum set to people who value them more.

ECON 201 Lecture Notes - Lecture 13: Market Power, Marginal Cost

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