ECONOM 1014 Chapter Notes - Chapter 13: Natural Monopoly, Rolex, Price Controls

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ceruleanwhale326

8 Apr 2016

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13. 1 market power: the power to raise price above marginal cost without fear that other firms will enter the market. Patents issued by the government are often a source of market power. Also, economies of scale, exclusive access to an important input, and technological innovation can all create firms with market power. 13. 2 how a firm uses market power to maximize profit. To maximize profit, a firm should produce until marginal revenue equals marginal cost (mr =mc). To understand how a firm with market power will price its product, we need to calculate marginal revenue for a firm that is large enough to influence the price of its product. Graph comparing marginal revenue when different prices (p) are set. Notice, that when lowering from to , there"s a revenue loss of but a revenue gain of as well so it has no effect on the seller.

Related Questions

1. Which of the following is a difference between a perfectly competitive market and a monopoly?

A. There are huge barriers to entry in a perfectly competitive market, while there are no barriers to entry in a monopoly.

B. The market demand curve faced by a perfectly competitive firm is horizontal, while the market demand curve in a monopoly is downward-sloping.

C. The sellers in a perfectly competitive market are price-makers, while a seller in a monopoly market is a price-taker.

D. The equilibrium price in a perfectly competitive market exceeds marginal revenue, while the equilibrium price in a monopoly equals marginal revenue.

2. Which of the following firms is likely to have the highest market power?

A. An oligopoly with homogeneous products

B. A monopoly

C. A monopolistic competitor

D. A perfectly competitive firm

graygrasshopper945

1. All of the following are characteristics of long-run equilibrium for firms in a monopolistically competitive market except:

A. price equals marginal cost.

B. price equals average total cost.

C. price exceeds the minimum of the average total cost.

D. marginal cost equals marginal revenue.

2. All of the following are strategies a firm with market power can adopt to increase its profits over time except:

A. erecting barriers to entry.

B. setting price equal to the marginal costs of production.

C. mergers with, and acquisitions of, competing firms.

D. influencing the regulatory process.

3. Assume that for a particular firm's output price = $80, marginal cost = $30, average total cost = $25. Based on this information, the firm's Lerner Index is equal to:

A. 0.313.

B. 0.625.

C. 0.6.

D. 0.375.

4. Assume that when the price is $20, the quantity demanded is 9 units, and when the price is $19, the quantity demanded is 10 units. Based on this information, what is the marginal revenue resulting from an increase in output from 9 units to 10 units?

A. $10

B. $1

C. $19

D. $20

5. Because firms produce a differentiated product, each of the firms in a monopolistically competitive market faces a demand curve that is:

A. perfectly elastic.

B. downward sloping.

C. perfectly inelastic.

D. perfectly elastic or perfectly inelastic depending on whether the firm's output is a luxury or a necessity.

6. Suppose a monopolist is producing a level of output such that MR > MC. What should the firm do to maximize its profits?

A. The firm should increase output.

B. The firm should increase the price.

C. The firm should do nothing - it wants to maximize the difference between MR and MC in order to maximize its profits.

D. The firm should hire less labor.

7. Suppose the firms in a monopolistically competitive market are earning positive economic profits. What will happen to move the market to its long-run equilibrium?

A. The demand curves faced by firms in the market will shift to the right.

B. The firms' demand curves will become less elastic.

C. More close substitutes will appear in the market.

D. Some firms will exit the market if they can't cover all of their fixed and variable costs.

8. The Lerner Index is a measure of market power that focuses on:

A. the difference between a firm's product price and its marginal costs of production.

B. the share of the market controlled by the X largest firms in the market.

C. the ratio of the price of a firm's product to the price elasticity of demand for the product.

D. the sum of the squares of the market share of each firm in an industry.

9. The measure of market power that focuses on the share of the market controlled by the X largest firms in the market is known as:

A. the Lerner Index.

B. the Herfindahl-Hirschman Index.

C. the Minimum-Efficient Scale Index.

D. a concentration ratio.

10. The monopoly characteristic of monopolistically competitive firms ensures that such firms will earn positive economic profits over the long-run.

a. True

b. False

ivoryguinea-pig63

Profit maximization and loss minimization

BYOB is a monopolist in beer production and distribution in the imaginary economy of Hopsville. Suppose that BYOB cannot price discriminate; that is, it sells its beer at the same price per can to all customers. The following graph shows the marginal cost (MC), marginal revenue (MR), average total cost (ATC), and demand (D) for beer in this market.

Suppose that BYOB charges $2.50 per can. Your friend Bob says that since BYOB is a monopoly with market power, it should charge a higher price of $3.00 per can because this will increase BYOB's profit.

A. Complete the following table to determine whether Bob is correct.

Price

(Dollar per can)

Quantity Demanded

(Cans)

Total Revenue

(Dollars)

Total Cost

(Dollars)

Profits

(Dollars)

2.50

3.00

B. Given the earlier information, Antonio ___________ (is/is not) correct in his assertion that BYOB should charge $3.00 per can.

Suppose that a technological innovation decreases BYOB's costs so that it now faces the marginal cost (MC) and average total cost (ATC) given on the following graph. Specifically, technological innovation causes a decrease in average fixed costs, thereby lowering the ATC curve and moving the MC curve.