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ECO204Y5 Lecture Notes - Lecture 31: Natural Monopoly, Market Power, Demand Curve

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14 Mar 2017

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Sources of market power: monopoly, oligopoly: elasticity of demand (% q / % p(cid:895) Recall markup rate = = 1 (pricing rule of thumb) Example: duopoly: ed : refers to i(cid:374)dividual fir(cid:373)"s de(cid:373)a(cid:374)d (cid:272)urve, example: cola ed. = -1. 5 cola: mark-up for coke: 1/3 ed, mark-up for pepso: ed coke = -3 pepsi. = -2 conclude: pepsi has a higher markup rate and a larger learner index (l) . } |ed coke,pepsi| > |ed cola: number of firms. As n (number of competing firms) , the fir(cid:373)"s (cid:373)arket share decreases increases price competition. Interaction amongst firms level of respo(cid:374)se to (cid:272)o(cid:373)peti(cid:374)g fir(cid:373)s" (cid:271)ehaviour. 1st option: aggressive competition price gets driven very low because of under-cutting behaviour. 2nd option: ignore each other do(cid:374)"t i(cid:374)(cid:272)orporate (cid:272)o(cid:373)petitor"s (cid:271)ehaviour (cid:894)pri(cid:272)i(cid:374)g(cid:895) a(cid:374)d prices stay relatively high. 3rd option: collusive behaviour agree to secretly fix prices at a very high level. Evaluate how going from pc-industry to monopoly impacts efficiency.

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Related Questions

1. In the market structure called monopolistic competition (Points : 1.25)

a) Very little advertising will occur
b) There are only a few companies in the industry
c) These industries offer only few products
d) None of the above

Question 2.2. In a purely competitive industry (Points : 1.25)

a) Products are differentiated
b) A large amount of advertising occurs
c) Price will be higher than in other market structure
d) None of the above

Question 3.3. A used lawn mower is an example of (Points : 1.25)

a) a search good
b) an experience good
c) a homogenous good
d) None of the above

Question 4.4. The problem of asymmetric can be overcome by (Points : 1.25)

a) Reputation
b) Brand name
c) Warranties
d) All of the above
e) None of the above

Question 5.5. A monopolist will always charge a higher price than a purely competitive industry (Points : 1.25)

Question 6.6. Given TC = 10 + 5Q, Ed = -2, what price will be a monopolist charge? (Points : 1.25)

a) 5
b) 12
c) 8
d) 10
e) None of the above

Question 7.7. The monopolist determines optimal output the same way as does a purely competitive industry (Points : 1.25)

Question 8.8. Given a company with some monopoly power and Ed=3, the optimal markup is (Points : 1.25)

a) 33%
b) 50%
c) 72%
d) None of the above

Question 9.9. Given the information given in 8 above and MC=6, gross margin is (Points : 1.25)

a) 50%
b) 42%
c) 33%
d) 38%
e) None of the above

Question 10.10. You would expect gross margin in a store brand to be higher than gross margin in a brand name product (Points : 1.25)

Question 11.11. You expect products that are less price elastic to have lower gross margins than products with greater price elasticity (Points : 1.25)

Question 12.12. A company with large gross margins will have large profits (Points : 1.25)

Question 13.13. If a company is incurring losses, it should stop operating (Points : 1.25)

a) Yes
b) No
c) Not enough information

Question 14.14. A monopolist may not charge the highest price they could get (at MR=MC) in the short run (Points : 1.25)

Question 15.15. All price discrimination is illegal (Points : 1.25)

Question 16.16. A company that faces different levels of demand (different price elasticities) (Points : 1.25)

a) Must charge the same price to all customers
b) is violating the law
c) Can charge different price to customers

Question 17.17. Patents allow a company the exclusive right to act as a monopolist (Points : 1.25)

a) This is not justified economically
b) It is justified economically

Question 18.18. The kinked demand curve model was developed to help explain: (Points : 1.25)

a) fluctuations of prices in pure competition
b) rigidities observed in prices in oligopolistic industries
c) fluctuations observed in prices in oligopolistic industries
d) all of the above
e) none of the above

Question 19.19. If a cartel seeks to maximize profits, the market share (or quota) for each firm should be set at a level such that the _____ of all firms is identical. (Points : 1.25)

a) average total cost
b) average profit
c) marginal profit
d) marginal cost
e)marginal revenue

Question 20.20. Factors that affect the ability of oligopolistic firms to successfully engage in cooperation include_________________. (Points : 1.25)

a) number and size distribution of sellers
b) size and frequency of orders
c) product heterogeneity
d) a and b only
e) a, b, and c