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ECO101H1 Lecture Notes - Lecture 7: Market Power, Perfect Competition, Organic Food

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School
UTSG
Department
Economics
Course
ECO101H1
Professor
Jack Carr

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ECO101H1 Full Course Notes
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ECO101H1 Full Course Notes
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Document Summary

Supply curve: exists only in perfect competition, reflects profit-maximizing behaviour. There is a sharp increase in the demand for organic foods. Answers: yes, no (as other farmers switch to organic crops, until the economic profits are competed away) For economic profits to persist over the long run, there must be obstacles (barriers to entry) that prevent new firms from entering and competing. Key features: each firm is a price taker and faces a perfectly elastic demand curve at market price, the number of firms is fixed in the short run, but can vary in the long run. The price elasticity of demand faced by an individual coffee grower is closest to: 0. 01, 0. 10, 1. 0, 10. 0, 1,000. **in a perfectly competitive market, the price elasticity is infinity** **for a perfectly competitive firm, the average revenue is equal to the price** Profit maximization: insight: firms are price takers (cannot influence price, must choose level of output that maximizes profits, given market price.

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Related Questions


1.
If firms in a monopolistically competitive market are earningpositive profits,
A) firms will likely be subject to regulation.
B) barriers to entry will be strengthened.
C) some firms must exit the market.
D) new firms will enter the market.
2.

Panel c in the set of figures shown is consistent with a firm in amonopolistically competitive market that is


A) earning profit and is in both short-run and long-runequilibrium.
B) earning economic profit and is in short-run equilibrium, but notlong-run equilibrium.
C) earning profit and is in long-run equilibrium, but not short-runequilibrium.
D) earning a negative profit and is not in equilibrium.
3.
When a profit-maximizing firm in a monopolistically competitivemarket is producing the long-run equilibrium quantity,
A) its marginal revenue will exceed its marginal cost.
B) its average revenue will equal its marginal cost.
C) it will be earning positive economic profits.
D) its demand curve will be tangent to its average-total-costcurve.
4.
Monopolistic competition differs from perfect competition becausein monopolistically competitive markets
A) each of the sellers offers a somewhat different product.
B) strategic interactions between firms is vitally important.
C) there are barriers to entry.
D) all firms can eventually earn economic profits.
5.
The free entry and exit of firms in a monopolistically competitivemarket guarantees that
A) economic losses can persist into the long run, but not economicprofits.
B) both economic profits and economic losses can persist into thelong run.
C) economic profits can persist into the long run, but not economiclosses.
D) both economic profits and economic losses disappear in the longrun.
6.


Panel (a) shows a profit-maximizing monopolistically competitivefirm that is

A) All answers are correct
B) earning a zero profit.
C) charging a price that is equal to average total cost.
D) in long-run equilibrium.
7.
Since a firm in a monopolistically competitive market faces a
A) perfectly elastic demand curve, it will always operate withexcess capacity.
B) downward-sloping demand curve, it will always operate atefficient scale.
C) perfectly inelastic demand curve, it will always operate atefficient scale.
D) downward-sloping demand curve, it will always operate withexcess capacity.
8.
In a monopolistically competitive market,
A) firms can enter or exit the market without restriction.
B) each firm takes the price of its product as given.
C) each firm produces a product that is essentially identical tothe products of other firms in the market.
D) there are only a few sellers.
9.
The fact that there is a great deal of advertising of menĆ¢Ā€Ā™s shavingproducts indicates that
A) it costs firms very little to produce those products.
B) the market for those products is perfectly competitive.
C) those products are highly differentiated.
D) All answers are correct
10.
A profit-maximizing firm in a monopolistically competitive marketdiffers from a firm in a perfectly competitive market because thefirm in the monopolistically competitive market
A) has no barriers to entry.
B) faces a downward-sloping demand curve for its product.
C) faces a horizontal demand curve at the market clearingprice.
D) is characterized by market share maximization.

1) A natural monopoly exists when:

a. A few firms collude to make one large firm

b. Firms enter the industry as a result of profit incentives

c. Economies of scale provide large cost advantages to having one firm produce the industry's output

d. Firms naturally maximize regardless of market structure

Ā 

2) A(n) ____ is a single firm with ___, whereas a(n) ___ implies an industry with ____ firm(s) and ____ .

a. Monopoly; barriers to entry; oligopoly; few; no barriers to entry

b. Oligopoly; no barriers to entry; monopoly; many; easy entry and exit

c. Monopoly; barriers to entry; monopolistic competition; many; easy entry and exit

d. Monopolistic competitor; barriers to entry; monopoly; one; barriers to entry

Ā 

3) In monopolistic competition:

a. Each firm produces a product identical to that of every other firm in the industry

b. Firms are aware of their strategic interdependence

c. Firms earn large economic profits in the long run

d. Firms earn zero economic profits in the long run

Ā 

4) A monopolistically competitive industry, such as corn snack chips, and a perfectly competitive industry, like wheat farming, are alike in that:

a. There are many firms in each industry

b. Firms in both types of industries produce similar but not identical products

c. Barriers to entry in both industries are large

d. Firms in both types of industries produce identical products

11)

A constant-cost, perfectly competitive industry experiences a permanent increase in demand. In adjusting to this change, what will happen to the price of the product?

Ā 

It will increase in the short-run and then decrease in the long-run, but end up above its original level in the long-run.
Ā 

It will increase in the short-run and then increase further in the long-run.
Ā 

It will increase in the short-run and then decrease back to its original level in the long-run.
Ā 

It will increase in the short-run and then decrease below its original level in the long-run.
Ā 

It will decrease in the short-run but return to its original level in the long-run.

12)

Assume that a perfectly competitive firm owns or rents a higher-quality resource that results in lower average total costs and higher economic profits in the short run. What will happen in the long-run?

Ā 

The price of the higher-quality resource will be bid upward resulting in economic rents and equalizing costs across firms.
Ā 

New firms will enter and compete with any excess profits away.
Ā 

None of the other answers is correct.
Ā 

The government will tax away any excess profits.
Ā 

The firm with the higher-quality resource will earn positive economic profits in the long run.

13)

Which of the following are characteristics of long-run equilibrium?

Ā 

No firm has an incentive to change its level of output.
Ā 

No firm has an incentive to change its plant size.
Ā 

Economic profit is zero
Ā 

All of the above
Ā 

None of the above

14)

Which of the following statements is consistent with the textbookĆ¢Ā€Ā™s analysis of perfect competition?

Ā 

Although individual perfectly competitive firms wonĆ¢Ā€Ā™t pay to advertise, the industry as a whole may well advertise.
Ā 

Higher costs for one firm in the industry will result in that firm charging a higher price than the other firms in the industry.
Ā 

If all the firms in an industry charge an identical price for their products, this is clear evidence of collusive behavior.
Ā 

All of the above
Ā 

None of the above

15)

The assumptions that define the market structure known as monopoly include which of the following?

Ā 

High barriers to entry.
Ā 

There is one seller.
Ā 

There are no close substitutes available.
Ā 

All of the above
Ā 

None of the above