ECO200Y1 Lecture Notes - Lecture 8: Oligopoly, Market Power, Marginal Revenue
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1. Characteristics of competitive markets
The model of competitive markets relies on these three core assumptions:
| 1. | There must be many buyers and sellers a few players can't dominate the market. |
| 2. | Firms must produce identical products buyers must regard all sellers' products as equivalent. |
| 3. | Firms and resources must be fully mobile, allowing free entry into and exit from the industry. |
The first two conditions imply that all consumers and firms are price takers. While the third is not necessary for price-taking behavior, assume for this problem that a market cannot maintain competition in the long run without free entry.
Identify whether or not each of the following scenarios describes a competitive market, along with the correct explanation of why or why not.
|
Scenario |
Competitive? |
|---|---|
| The government has granted the U.S. Postal Service the exclusive right to deliver mail. | ________________ |
| Several stores in the mall sell hooded sweatshirts. Each store's sweatshirts reflect the style of that particular store. Additionally, some makers use higher-quality cotton than others, which is reflected in the apparel's prices. | |
| Two taxi companies serve most of the market in a big city. Consumers don't care about which taxi company they take if they decide it's worth taking a taxi, they flag down the nearest one. | _________________ |
| There are dozens of pasta producers that sell pasta to hundreds of Italian restaurants nationwide. The restaurant owners buy from the cheapest pasta producer available to |
Question 26 pts
Which of the following is not a reason why specialization and trade are beneficial to society?
| Specialization fosters learning by doing, thus lowering the unit-costs of products | |
| Firms and workers become less dependent on others for producing goods and services |
| The total output of economic goods may be increased even without any increase in resources | |
| Scarce resources are utilized more efficiently by exploiting differences among them |
Question 27 pts
Laissez-faire capitalism limits the government's economic functions to the following, except:
| Protecting private property rights | |
| Establishing a legal environment to enforce contracts among individuals |
| Setting prices of individual goods and services | |
| Preventing individuals and firms from coercing others |
Question 28 pts
A production system where various workers concentrate on different specialized tasks to contribute towards a whole product is referred to as:
| Roundabout production | |
| A coincidence of wants |
| Freedom of enterprise | |
| Division of labor |
Question 29 pts
The market system is said to be characterized by "consumer sovereignty." This is because:
| A sovereign government determines which consumer goods will be produced | |
| Firms must match their production decisions to the consumers' choices |
| The prices of consumer goods are regulated by a sovereign government | |
| Consumer goods are considered to be more important than capital goods |
Question 30 pts
Consumers express self-interest when they:
| Seek the lowest price for a product | |
| Reduce business losses |
| Exclude others in their thinking | |
| Collect economic profits |
Question 311 pts
Refer to the above graph with three demand curves. An "increase in quantity demanded" would be illustrated by a change from:
| Point 5 to point 1 | |
| Point 4 to point 1 |
| Point 2 to point 5 | |
| Point 4 to point 6 |
Question 32 pts
The table below shows the weekly demand for hamburger in a market where there are just three buyers.
Refer to the above table. At a price of $6, the weekly market quantity demanded for hamburger is:
| 17 | |
| 23 |
| 24 | |
| 18 |
Question 33pts
If farmers withhold some of their current corn harvest from the market because they anticipate a higher price of corn in the near future, then this would cause a(n):
| Movement up along the current supply curve of corn | |
| Movement down along the current supply curve of corn |
| Leftward shift in the current supply of corn | |
| Rightward shift in the current supply of corn |
Question 34 pts
Which of the following will not cause the supply curve to shift?
| A technological change in the production of the good | |
| A change in the prices of other goods that producers could be producing |
| A change in the costs of resources needed to produce the good | |
| A change in the price of the good |
Question 35 pts
All of the following would affect the position of the supply curve for cranberries, except the:
| Price of agricultural land for cranberries | |
| Cost of fertilizers for cranberry production |
| Popularity of cranberry drinks | |
| Development of a new pest control for cranberries |
Question 36 pts
When high-school and college graduates apply for jobs in the labor markets,
| Job applicants and employers are both "buyers". | |
| Job applicants are the "sellers" while employers are the "buyers". |
| Job applicants and employers are both "sellers". | |
| Job applicants are the "buyers" while employers are the "sellers". |
Question 37 pts
Refer to the figure above, which shows three supply curves for corn. Which of the following would cause the supply of corn to shift from S1 to S2?
| A decrease in consumer incomes, assuming corn is a normal good | |
| The development of a more effective insecticide against corn rootworm |
| An increase in the price of fertilizer | |
| A change in consumer tastes away from cornbread |
Question 38 pts
Which is of the following statements is correct?
| If demand increases, then price will decrease | |
| If demand decreases, then price will decrease |
| If price decreases, then demand will decrease | |
| If price increases, then demand will decrease |
Question 39 pts
Which would be a likely cause of an increase in the demand for pizza?
| A decrease in the price of hamburger sandwiches | |
| A health report showing eating pizza reduces stress |
| A reduced desire for take-out and fast-food dining | |
| A decrease in the prices of cheese, pepperoni, and mushrooms |
Question 40 pts
A market for a product reaches equilibrium when:
| Price falls further after there is a shortage | |
| The price rises further after there is a surplus |
| Buyers intend to buy a quantity equal to the quantity that sellers intend to sell | |
| The actual quantity bought by buyers equals actual quantity sold by sellers |
Question 41 pts
A higher price reduces the quantity demanded for a product because:
| Individuals can afford less of the product and will switch to substitutes | |
| The financial assets of individuals increase |
| Individuals will buy more of the product and less of its substitutes | |
| The purchasing power of individuals increases |
Question 42 pts
The idea of the Law of Demand, as applied to electric cars, assumes which of the following to be constant?
| Price of electric cars | |
| How much sellers are charging customers for electric cars |
| Price of gasoline cars | |
| Quantity of electric cars demanded by buyers |
Question 43 pts
Use the following graph of the demand for coffee:
Refer to the above diagram of three demand curves for coffee. An increase in the price of coffee, other factors constant, would cause a:
| Movement from point a to point b | |
| Movement from point b to point a |
| Shift from D1 to D2 | |
| Shift from D1 to D3 |
Question 44 pts
Which of the following factors will decrease the current demand for a product?
| A decrease in the current price of a complementary product | |
| A decrease in the current price of a substitute product |
| An increase in the current price of a substitute product | |
| An expected increase in the future price of the product |
Question 45pts
In competitive markets, a surplus or shortage will:
| Cause shifts in the demand and supply curves that tend to eliminate the surplus or shortage | |
| Cause changes in the quantities demanded and supplied that tend to intensify the surplus or shortage |
| Cause changes in the quantities demanded and supplied that tend to eliminate the surplus or shortage | |
| Never exist because the markets are always at equilibrium |
Question 46 pts
Which of the following would cause a leftward shift in the supply curve for car washes?
| A decrease in taxes on car washes | |
| An increase in the price of car washing equipment |
| A decrease in the price of water | |
| An increase in the number of cars in the city |
Question 47pts
The market system automatically corrects a surplus condition in a competitive market by:
| Raising the price of the commodity in question while decreasing the quantity demanded | |
| Raising the price of the commodity in question while increasing the quantity demanded |
| Reducing the price of the commodity in question while increasing the quantity demanded | |
| Reducing the price of the commodity in question while decreasing the quantity demanded |
Question 48 pts
A leftward shift of the supply curve for oil in the United States is most likely to result from:
| A decrease in the world price of oil | |
| An increase in the costs of exploration and drilling for oil |
| An increase in the subsidy for oil exploration and drilling | |
| A decrease in the fees that oil companies must pay for drilling licenses |
Question 49 pts
A fall in the price of milk, used in the production of ice cream, will:
| Decrease the supply of ice cream | |
| Have no effect on the supply of ice cream |
| Increase the supply of ice cream | |
| Cause a movement along the supply curve of ice cream |
Question 50 pts
Refer to the above graph, which shows the market for beef where demand shifted from D1 and D2. The change in equilibrium from E1 to E2 is most likely to result from:
| An increase in the cost of cattle feed | |
| A decrease in consumer incomes |
| A decrease in the tax on beef products | |
| An increase in the price of pork |