ECO101H1 Lecture Notes - Lecture 10: Oligopoly, Nash Equilibrium, Marginal Cost

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Oligopolistic market has only a small group of sellers. Key feature is the tension between cooperation and self-interest. Auto manufacturers (north america: few firms (gm, chrysler, ford, face downward-sloping demand curves. Should gm raise price of its compact cars: mutual interdependence. If compete with one another, industry profits may fall to competitive level (zero economic profits) If form a successful cartel, industry profits may equal monopoly profits. Insights: most oligopolists compete with one another, cartels are illegal, cartels if formed, may breakdown for incentive reasons (text: the conflict between cooperation and self-interest) Oligopolists may try to collude (form of cartel) rather than to compete with one another: forming a cartel ( price-fixing ) is illegal, economic analysis draws attention to incentives (which may cause a cartel to break down) Numerical example: purpose: what output would a profit-maximizing monopoly produce in special case where. Duopoly an oligopoly with only members. Total revenue of the two producers equals their total profit.

Related Questions

Please answer the following questions. Show your work and then select A, B, C or D as your final answer. Thanks.

Barbershops in a large city would seem to be an example of competitive markets since there are many sellers operating relatively small shops, each seller takes the price of haircuts as given, and the products (haircuts) are very similar between different shops.

Question 1

How could you argue that the barbershop market is not competitive?

Select one:
a. Many barbershops may be locally-owned but are franchises of a single major corporation. Thus, the market is not competitive since it is ultimately only served by one supplier.
b. Each barbershop sells a very differentiated product to its clients since it is rare that two clients receive the exact same haircut (perfect substitute).
c. Since barbershops do not sell any physical or tangible items to customers, the prices charged are not constrained by market forces and can be unusually high or low.
d. Most barbershops only serve clients who live relatively close by. A barbershop on one side of town usually does not attract clients who live or work many miles away on the other side of town. Thus, barber shops tend to only compete with the relatively few other barbershops that are nearby.

Question 2

Is it possible that each barbershop could face a demand curve that is not perfectly elastic?

Select one:
a. No; each barbershop in a large city is indistinguishable from the others (i.e., they are perfect substitutes), and so the demand for any individual barbershop is perfectly elastic.
b. No; since clients are not willing to accept price changes for their haircuts from one month to the next (e.g., $15 haircut this month, $20 haircut next month, etc.), the price will remain constant in the long run and thus demand is perfectly elastic.
c. Yes; if they have some degree of market power (e.g., they can charge slightly higher prices since clients will not stop at every barbershop in the city to find the cheapest price), then they will not face perfectly elastic demand.
d. Yes; demand is only perfectly elastic if the demand curve is upward-sloping, and barbershop demand is downward-sloping.

Question 3

How profitable do you expect barbershops to be in the long run?

Select one:
a. Since they are usually very small, most barbershops will be unable to compete with larger firms with higher fixed and variable costs. Barbershops should expect losses in the long run.
b. Barbershops have the ability to set their own price above the market equilibrium price for a considerable length of time given their small size and the sheer number of other barbershops. Most individual barbershops will enjoy positive economic profit in the long run.
c. Improvements in hair-cutting technology, and the difficulty of new entrepreneurs entering this market, will guarantee above-normal profits for barbershops for the next few decades.
d. Even with a small amount of market power due to attracting only local clients, it is still relatively easy to enter and exit the barbershop industry. Long-run profits will likely be driven down close to zero.

brownreindeer527

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)

True
False

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)

True
False

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)

True
False

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)

True
False

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

True
False

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)

True
False

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

True
False

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

skydolphin584

Which statement is true?

The minimum point on the firm's marginal cost curve is the shutdown point.

The minimum point on the firm's average variable cost curve is the shutdown point.

The minimum point on the firm's average total cost curve is the shutdown point.

The minimum point on the firm's marginal cost curve is the break-even point.

As output expands beyond the break-even point, the vertical distance between the AVC and ATC will

remain constant.

get smaller.

get larger.

Total revenue divided by output equals

average variable cost.

marginal cost.

price.

average total cost.

A monopoly firm selling mustache wax to vain men in a small town is currently maximizing profits by charging a price of $5. It follows that the marginal cost of mustache wax

is equal to $5.

is greater than $5.

is less than $5.

None of these choices are true.

A firm can sell 14 units at $18, but to sell 15 units, the firm must cut the price to $17. The marginal revenue derived from selling the 15th unit is

-$18

$17

If total revenue is increasing as output is rising, then

marginal revenue must be greater than zero.

marginal revenue must be less than zero.

marginal revenue must be equal to zero.

price must be increasing.

Firms that had virtual monopolies, that is control over at least 80 percent of industry production, because of control over an essential resource include all of the following except

the DeBeers Diamond Company.

the Standard Oil Company.

the Ford Motor Company.

the International Nickel Company.

10.

Which statement is true?

None of these statements are true.

Most natural monopolies are government regulated or government owned.

All monopolies are bad.

All monopolies are good.

11.

Which is the most accurate statement?

There are virtually no oligopolies in the U.S.

The most important aspect of oligopoly is product differentiation.

There are a whole range of oligopolistic models, from a cartel to cutthroat competition.

An oligopolistic industry cannot have more than five firms

12.

Oligopolists have more control over prices than monopolistic competitors because

their prices are always set by the government.

since an oligopolist is the only competitor in the market, setting prices is no problem.

they can legally collude whereas monopolistic competitors may not.

with fewer competitors, they are able to monitor and determine their own prices much easier.

13.

The definition of monopolistic competition differs from that of perfect competition

in neither the number of firms nor the type of product.

in both the number of firms and the type of product.

with respect to the type of product.

with respect to the number of firms in the industry.

14.

The typical monopolistic competitor

may compete on the basis of physical differences, convenience, service, and ambience.

always competes on the basis of producing a product that is physically different from those of its competitors.

never uses price discrimination.

is a large firm.

15.

Which statement is true?

The monopolistic competitor may make a profit in the long run.

The monopolistic competitor has a perfectly elastic demand curve.

None of these statements are true.

The monopolistic competitor operates at the minimum point of her ATC curve.

16.

Which statement is true about the monopolistic competitor in the long run?

It will be breaking even.

It will be making a profit.

It may be making a profit or taking a loss.

It will be taking a loss.

17.

Which statement is true?

Most monopolistic competitors are large firms.

Monopolistic competitors produce goods or services for which there are no close substitutes.

None of these statements are true.

Monopolistic competitors usually operate at the minimum point of their average total cost curves.

18.

Which statement is false?

As the price of a good rises the consumer surplus decreases.

A person would maximize her total utility when she had no consumer surplus.

We will consume a service when its marginal utility is equal to its price.

A product's utility to a buyer is measured by how much the buyer is willing to pay for it.

ECO101H1 Lecture Notes - Lecture 10: Oligopoly, Nash Equilibrium, Marginal Cost

ECO101H1 Full Course Notes

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