ECON-101 Lecture Notes - Lecture 12: Market Power, Perfect Competition, Demand Curve

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18 Jan 2016

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Monopolisitc competitive markets: many buyers and sellers, homogenous product (does not hold in the mc market, perfect information, free entry and exit. Can exercise market power by increasing price. This is similar to perfect competition long run, Restaurants try to act as monopolies by selling at higher costs, but end up making money like in a perfect competition and not charging at mc. This demand curve does not include the whole market, only those who are interested in the product sold by the monopoly. Producing to the left of ac, therefore have excess capacity. Short term profits (ex: 1st bubble tea place opened in edmonton, unique, popular but then other similar stores will open) Restaurants excessively try to promote/ advertise to get more customers (important in mc markets) However, in perfectly competitive markets, advertisement is not important (ex, it doesn"t matter where you get your wheat from)

Related Questions

Please If you can highlight or mark the correct answer

Activity : 2 point(s)

If P = $8 and MC = $5 + 0. 2Q, the competitive firm's profit-maximizing level of output is:

0.2

Activity : 2 point(s)

In the long run, firms will exit a perfectly competitive industry if:

excess profits exceed zero.

excess profits are less than zero.

total profit equals zero.

excess profits equal zero.

Activity : 2 point(s)

In long-run equilibrium, monopoly prices are set at a level where:

price exceeds marginal revenue.

industry demand equals industry supply.

industry demand is less than industry supply.

price exceeds average revenue.

Activity : 1 point(s)

The kinked demand curve theory of oligopoly assumes that rival firms:

react to price increases.

react to price increases and decreases.

do not react to price changes.

react to price decreases.

Activity : 1 point(s)

In oligopoly markets, the market demand curve is:

upward sloping.

downward sloping.

horizontal.

vertical.

Activity : 2 point(s)

The level of competition in a given market tends to increase if:

minimum efficient scale of firms increases.

the number of substitutes increases.

significant barriers to exit are imposed.

the number of potential entrants decreases.

Activity : 2 point(s)

In the short run, the:

firm has complete flexibility with respect to input use.

availability of all inputs is fixed.

operating period is longer than the planning period.

availability of at least one input is fixed.

Activity : 1 point(s)

In both monopolistic competition and oligopoly markets:

there is easy entry and exit.

consumers perceive differences among the products of various competitors.

economic profits may be earned in the long run.

there are many sellers.

Activity : 1 point(s)

In oligopoly equilibrium:

MC = AC

MC > AC

MR = MC

MC < AC

Activity : 2 point(s)

A firm will earn normal profits when price:

equals average total cost.

equals average variable cost.

equals marginal cost.

exceeds minimum average total cost.

Activity : 2 point(s)

Economic costs include both explicit and implicit cost. When analyzing costs the next-best use of a given asset is called:

current cost.

replacement cost.

historical cost

opportunity cost.

Activity : 2 point(s)

In a perfectly competitive market:

sellers and buyers have perfect information.

entry and exit are difficult.

c. sellers produce similar, but not identical products.

each seller can affect the market price by changing output.

Activity : 2 point(s)

In competitive market equilibrium, the firm's:

MR = MC and P > AR

MR = MC and P > AC

AR = AC and MR > MC

P = MR = AR = AC = MC

Activity : 1 point(s)

A firm should increase advertising if the net marginal revenue derived is:

equal to the marginal cost of advertising.

greater than the marginal cost of advertising.

greater than zero.

less than the marginal cost of advertising.

Activity : 2 point(s)

For a firm in perfectly competitive market equilibrium:

a replacement cost.

an implicit cost.

an explicit cost.

an opportunity cost.

Activity : 1 point(s)

In a monopolistically competitive industry, firms:

offer products that are not perfect substitutes.

make decisions in light of expected reactions from other firms.

set price equal to marginal cost.

are price takers.

Activity : 2 point(s)

Fixed costs include:

variable labor expenses.

output-related energy costs.

output-related raw material costs.

variable interest costs for borrowed capital.

Activity : 2 point(s)

A monopolist maximizes profits by producing a level of output when:

P = AC

P > MC

P < MC

P = MC

Activity : 2 point(s)

The demand curve for a unique product without substitutes is:

upward sloping.

downward sloping.

horizontal.

vertical.

Activity : 2 point(s)

At the point of minimum Average Variable Cost:

historical cost.

incremental cost.

current cost.

Activity : 2 point(s)

In the decision process, management should ignore:

implicit costs.

historical costs.

sunk costs.

incremental costs.

Activity : 1 point(s)

At the profit maximizing level of output for a monopolist:

P = AR and AR = AC

P = MC and MR > MC

P = MR and AC = MC

P > MC and MR = MC

Activity : 2 point(s)

In perfectly competitive markets, profits are maximized when:

MC=AC

P>AC

MR=MC

MR=P

Activity : 2 point(s)

Graphically, competitive market supply is measured by the:

vertical difference of competitor demand curves.

vertical sum of competitor demand curves.

horizontal difference of competitor MC curves.

horizontal sum of competitor MC curves.

Activity : 2 point(s)

For a firm in perfectly competitive market equilibrium:

MR < AR

P > AC

P > MR

P = MC

Activity : 2 point(s)

In the long run, firms will offer supply at the point where P = MR = MC if:

MC is rising.

MC is falling.

MC is constant.

P > AC

Activity : 2 point(s)

The firm demand curve in a competitive market is:

upward sloping.

downward sloping.

horizontal.

vertical.

Activity : 1 point(s)

Monopolistic competition is characterized by:

homogeneous products.

barriers to entry and exit.

perfect dissemination of information.

few buyers and sellers.

Activity : 2 point(s)

Marginal cost equals:

average variable cost at its maximum point.

the change in total fixed cost divided by the change in quantity.

the change in total variable cost divided by the change in quantity.

total cost divided by quantity.

Activity : 2 point(s)

In the short run, a perfectly competitive firm will shut down and produce nothing if:

excess profits equal zero.

total cost exceeds total revenue.

total variable cost exceeds total revenue.

the market price falls below the minimum average total cost.

Activity : 2 point(s)

For a monopoly in equilibrium:

MR = MC

MC â¤ AC

MR â¤ AC

P â¥ AC

Activity : 2 point(s)

When profits are maximized in a competitive market, average cost is always:

rising.

falling.

constant.

none of these.

Activity : 2 point(s)

So long as P > AVC, the competitive firm's short-run supply curve is equal to:

AVC

none of these.

Activity : 1 point(s)

The four-firm concentration ratio will rise following:

a rise in imports.

a fall in imports.

a merger between the two largest firms in the industry.

small firm entry.

Activity : 2 point(s)

In oligopoly markets, the market demand curve is:

point on the short-run marginal cost curve.

short-run average cost of production.

long-run average cost of production.

point on the short-run average cost curve.

Activity : 2 point(s)

The following market cannot be described as perfectly competitive:

the unskilled labor market.

the milk market.

discount retailing.

the agricultural grain markets.

Activity : 2 point(s)

In the long run, the:

availability of at least one input is fixed.

firm's operating decisions are typically constrained by prior capital expenditures.

availability of all but one input is fixed.

firm has complete flexibility with respect to input use.

Activity : 1 point(s)

The industry supply curve is derived through the horizontal summation of firm:

average cost curves.

marginal revenue curves.

marginal cost curves.

demand curves.

Activity : 2 point(s)

Price and product quality competition tends to be vigorous when:

entry barriers are low.

potential entrants are few.

product quality information is scarce.

the number of active sellers is few.

Activity : 1 point(s)

A perfectly functioning cartel results in:

oligopoly.

monopoly.

perfect competition.

monopolistic competition.

Activity : 1 point(s)

When prices in monopolistically competitive markets exceed those in a perfectly competitive equilibrium, this difference is the cost of:

information.

market power.

inefficiency.

product differentiation.

Activity : 1 point(s)

In the short run, a monopolist will:

shut down if price equals average total cost.

shut down if price is less than average total cost.

shut down if price is less than average variable cost.

never shut down.

Activity : 2 point(s)

In the short run, a perfectly competitive firm will shut down and produce nothing if:

typically involve multiple units of output.

do not vary across decision alternatives.

come into play when judging the costs of adding a new product line, advertising campaign, production shift, or organization structure.

play a role in determining the optimal course of action.

Activity : 2 point(s)

At the point of minimum AVC:

MC is falling.

MC is constant.

MC is rising.

MC = AVC.

Activity : 2 point(s)

A monopsony is a market with:

many sellers.

one buyer.

many buyers.

one seller.

Activity : 1 point(s)

The demand curve faced by a firm in a monopolistically competitive industry is:

the downward sloping industry demand curve.

downward sloping.

more elastic than the perfectly competitive firm's demand curve.

horizontal.

Activity : 2 point(s)

Perfect competition always prevails in markets with:

few buyers and sellers.

many buyers and sellers.

an even balance of power between sellers and buyers.

a single buyer.

Activity : 2 point(s)

If the slope of a long-run total cost function decreases as output increases, the firm's underlying production function exhibits:

constant returns to scale.

decreasing returns to scale.

decreasing returns to a factor input.

increasing returns to scale.

Activity : 2 point(s)

Average cost declines as output expands in a production process with:

constant returns to scale.

decreasing returns to scale.

decreasing returns to a factor input.

increasing returns to scale.

Activity : 2 point(s)

If the productivity of variable factors is decreasing in the short-run:

marginal cost must increase as output increases.

average cost must decrease as output increases.

average cost must increase as output increases.

marginal cost must decrease as output increases.

See the question and two answers, give brief your own opinion for each answer( are you agree on disagree with the answer, why?)

Q:This week, we are discussing market types. In this forum, please pick one of the market types that are presented in your textbook and provide your own definition (use your own words) and example. What do you think are the benefits vs. deficiencies of your chosen market type?

Answer 1)

Perfect Competition

This kind of market type stipulates the overall advantage that a market has. In this market, there are many sellers and buyers.These players do not control the price of commodities or services but the prices are controlled by the demand and supply of goods and services. As a result of this, no one can determine the market price of commodities because customers will switch to the next best alternative. All the market players in this sense are price takers and the customers that subscribe to these goods have a lot of experience about the goods offered. It means therefore that they have adequate information about the goods available, which means, therefore, they are aware of the prices that are being charged. All the firms that exist in this kind of market type have a relatively small market share because of the existence of so many of them. The market is also characterized by free entry and exit of firms. New firms can enter the market if they so wish and create competition to the existing firms. Due to this nature of many firms, most of them only earn enough to keep them on the market and nothing more for these firms (Makowski & Ostroy, 2001).

Answer 2)

The Oligopoly; best recognized by few sellers, identical (or similar) products, and its difficult entryinto the market. A good way to determine if a market has an oligopoly is if the change in one seller, causes its "competition" to change likewise. Automotive, cell phone industries, and aviation are some examples of markets that have an oligopoly. In the automotive industry, if one vehicle producer (lets say Chevrolet) changes the body style of its line up, other "completion" is soon to follow. Notice how cars these days are getting nicer and nicer for the base model? Research and Development is greatly valued in an industry that has an oligopoly. This is because if a seller lowers prices, they understand that its competitors will soon follow with ease. But, if they develop a better improvement over its last model in technology, it is much harder to follow than just a reduction in price.

The advantage of an oiligolpoly is that the leaders can set prices instead of take them. Which leads to those that are in charge having the ability to increase profit margins above what they would be in a truly free market.

The disadvantage is that for those looking to try to get into the market will have much difficulty because of the common huge capitol expenditures required to actually compete with the big boys.

Question 1

Which compensation method helps to explain the large difference between the salaries of top-level managers and mid-level managers in a firm?

	A.	Tournaments
	B.	New blood
	C.	Piece rate
	D.	Backloaded compensation

3 points

Question 2

Please consider the information provided under Question 19 in Chapter 3 (page 54). Based on the stated information, the optimal number of bees kept if the externality is ignored by Yung is 5,000. Is the socially optimal number of bees higher or lower than 5,000?

	A.	We do not have enough information to answer this question
	B.	Same
	C.	Lower
	D.	Higher

3 points

Question 3

Which of the following factors contribute to the existence of firms?

	A.	All of these factors contribute to firm existence
	B.	Risks associated with specialization
	C.	Incomplete contracts
	D.	Willingness of some people to take on risk in exchange for residual income

3 points

Question 4

Public goods are often subject to free-rider problems because these goods are:

	A.	Non-rival and non-excludable
	B.	Rival and non-excludable
	C.	Non-rival and excludable
	D.	Rival and excludable

3 points

Question 5

Which of the following is the most efficient mechanism for allocating scarce goods?

	A.	Government allocation system
	B.	First-come-first-served system
	C.	Market system
	D.	Random allocation system

3 points

Question 6

Many years ago, most of the major Hollywood movie studios also owned chains of local movie theaters across the US. Today, most of the local movie theaters are owned by other companies. What has happened to the degree of integration in the movie industry over time?

	A.	Less horizontally integrated
	B.	Less vertically integrated
	C.	More horizontally integrated
	D.	More vertically integrated

3 points

Question 7

Your firm produces replacement parts for the nuclear submarines operated by the US Navy. Which one of Porter's Five Forces will be most prominent in determining your strategies and profitability?

	A.	Bargaining Power of Suppliers
	B.	Bargaining Power of Customers
	C.	Threat of New Entrants
	D.	Threat of Substitutes

3 points

Question 8

Which of the following statements is NOT true?

	A.	The market mechanism for allocating resources is most efficient due to the incentives it creates.
	B.	Markets are always the most efficient way to allocate goods, even if the market is not perfectly competitive.
	C.	The random allocation mechanism provides no incentives at all.
	D.	The government allocation mechanism provides no incentive for the economy to grow.

3 points

Question 9

Suppose a firm's cost structure exhibits economies of scope. Which of the following actions is compatible with this cost structure?

Diversify into other product lines

Focus on core competencies and reduce production

Focus on core competencies and maintain constant production

Focus on core competencies and expand production

Question 10

Please refer to Table 8.3 on page 132 in the book. Suppose we change the payoffs in the "low price, low price" cell to 0, 25 from 0, 0. Does this change the Nash equilibrium for the game, and is the game still a Prisoner's Dilemma?

	A.	Equilibrium changes, still a Prisoner's Dilemma
	B.	Equilibrium changes, no longer a Prisoner's Dilemma
	C.	Same equilibrium, no longer a Prisoner's Dilemma
	D.	Same equilibrium, still a Prisoner's Dilemma

3 points

Question 11

Which of the following statements about restricting entry to markets is NOT true?

	A.	Brand identity and logos are expensive to establish, and entrants may find it very expensive to establish comparable position in the market.
	B.	Predatory pricing is illegal but very difficult to prove in court
	C.	Branded products tend to have more elastic demand, which makes it more difficult for entrants to charge high prices and they must stay out of the market.
	D.	A low-quality seller cannot effectively use a warranty program to keep other firms out of its market

3 points

Question 12

Your firm earns $2 million per quarter in total revenue, and your accounting profits are $100,000 per quarter. You do not charge the firm for the use of an old building that you own because it is 50 years old and fully depreciated. However, another firm has offered you $200,000 per quarter to use the facility, and this is the market rental rate for similar facilities. In this case, we know that your:

	A.	Opportunity costs are positive and economic profits are negative
	B.	Opportunity costs and economic profits are positive
	C.	Opportunity costs are negative and economic profits are positive
	D.	Opportunity costs and economic profits are negative

3 points

Question 13

Please refer to Question 13 in Chapter 1 (page 17). What is the marginal cost of reducing global warming by 0.017 degrees?

	A.	MC = 60
	B.	MC = 5
	C.	We do not have enough information to answer this question
	D.	MC = 50

3 points

Question 14

In Chapter 6, Boyes focuses on negative externalities such as the various types of pollution. However, as we discussed during our online session, we can also observe positive externalities in which external benefits are generated for people. Which of the following is NOT an example of a positive externality?

	A.	Workers can help one another to "cover the phones" and make sure that someone is always available to help clients
	B.	Workers can provide ideas to one another about how to solve problems
	C.	All of these cases are examples of positive externalities
	D.	Workers can form carpools and use other means to reduce commuting costs

3 points

Question 15

Common property resources are:

	A.	Non-rival and non-excludable
	B.	Non-rival and excludable
	C.	Rival and non-excludable
	D.	Rival and excludable

3 points

Question 16

The free-rider problem arises in markets for common property resources.

	A.	False
	B.	True

3 points

Question 17

Firms that set their product price below the actual cost of production may be engaging in:

	A.	Predatory pricing
	B.	Monopoly pricing
	C.	Moral hazard
	D.	Dollar-cost averaging

3 points

Question 18

Under a cap-and-trade mechanism to control air pollution, what happens to the price of pollution rights if the supply of righs is reduced (i.e., the supply of rights is reduced)?

Increases

Decreases

No change

Question 19

The key method for a manufacturing firm to avoid hold-up problems is to have another source of inputs.

	A.	False
	B.	True

3 points

Question 20

Your firm sells luxury autos, and you have asked the marketing department to develop and stronger brand identity through a new ad campaign. After the campaign has run for 6 months, you hire an economic consultant to study the impact of the campaign on the demand for your autos. The consultant reports that the demand for your cars is now more elastic than it was 6 months ago. Was the new ad campaign successful?

	A.	Yes
	B.	No

ECON-101 Lecture Notes - Lecture 12: Market Power, Perfect Competition, Demand Curve

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