ECON2209 Lecture Notes - Lecture 9: Deadweight Loss, Marginal Cost, Oligopoly

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8 Jun 2018

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February 13th, 2018

● If accounting profits are positive and economic profits are negative over the long haul, it

is proper strategy to

○ Answer: D. Close down business

● If a competitive firm hopes to make continuous economic profit it will have to

○ continually innovate to stay ahead of the competition.

● Natura. Monopoly is characterized by:

○ marginal costs that are lower than average cost for large quantities of output.

● (Continuing from public policy)

○ Public Policy:

■ Anti Trust laws

■ Regulations and limits on output and price

● 3. Monopolistic Competition:

○ Definition:

■ Many buyers and sellers

■ Firms produce the product that is differentiated

■ Information is easily obtained

■ Low barriers to entry

■ Firms do have market power, but they do not have effective market power

■ Part monopoly - part competitive

● Why part monopoly? What part?

○ They have some market power because of differentiated

products

○ Examples:

■ Restaurants, books, clothing

○ Output and Price determination in the short run

■ Product differentiation, → market power → downward sloping demand

curve

■ BUT, a quite elastic demand curve

■ Identical analysis as monopolistic competition in the short run

■ Firms are going to produce where MR = MC

● To maximize profit, produce q where MR=MC

● Charge highest price at QM → PM

● Produce in the short run as long as the Price PM is at least

Average Variable Cost (AVCM)

● Total revenue is at least total variable cost

● Loss is AT MOST less than Total Fixed Cost

■ Scenarios for the short run output and price decisions: (same as above)

● 1. P > ATC

● 2. P = ATC

● 3. AVC<P<ATC

● 4. ...

● 5.

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Document Summary

If accounting profits are positive and economic profits are negative over the long haul, it is proper strategy to. If a competitive firm hopes to make continuous economic profit it will have to. Continually innovate to stay ahead of the competition. Marginal costs that are lower than average cost for large quantities of output. (continuing from public policy) Regulations and limits on output and price. Firms produce the product that is differentiated. Firms do have market power, but they do not have effective market power. They have some market power because of differentiated products. Product differentiation, market power downward sloping demand curve. Firms are going to produce where mr = mc. Identical analysis as monopolistic competition in the short run. To maximize profit, produce q where mr=mc. Charge highest price at qm pm. Produce in the short run as long as the price pm is at least. Total revenue is at least total variable cost.

Related Questions

21)

Compared to the results in a perfectly competitive market, a monopoly does which of the following?

	It charges a higher price.
	It charges a price greater than the marginal cost.
	It produces less output.
	All of the above
	None of the above

22)

"X-inefficiency" refers to the idea that

	government restrictions on competition create a monopoly, which results in inefficiency.
	the cost of rent-seeking activity should be added to the welfare cost of monopoly.
	Generation X is less efficient due to a lack of competitive spirit.
	a lack of competitive pressure results in a monopoly not keeping its costs down to the lowest possible level.
	price discrimination results in inefficiently low cross-elasticities of demand.

23)

Firms in which of the following market structures can engage in price discrimination?

	monopoly
	oligopoly
	monopolistic competition
	All of the above
	None of the above

24)

Monopolistic competition and perfect competition are in all of the following ways except

	Barriers to entry are low in both
	There are many firms in both
	Firms in both produce the output level where MR=MC
	Nonprice competition is important in both

25)

To get rid of excess capacity from the monopolistic competition in the long run, what would have to be given up?

	Free entry and exit.
	economic rent
	resource allocative efficiency
	differentiated product
	productive efficiency

taupeant454

If I were to open a business, I would choose the monopolistic competitive market.

Under monopolistic competition, with low barriers to entry and low capital requirements, firms are free to enter into or exit from the industry at any time. In addition, in monopolistic competition, large numbers of sellers offer closely related but not homogeneous products. This is the reason why each firm has a limited share of the market and has limited control over the market price. Thus, changes in one firmâs output have only a slight impact on market price or it also means that firms in monopolistic competition are price setters rather than price takers. In the short run, firms can make excess economic profits. However, as barriers to entry are low, other firms have an incentive to enter the market, increasing the competition, until overall economic profit is zero.

In order to yield the greatest profit, a firm engaged in monopolistic competition will focus on product quality, location, service, and advertising, since the major tool of competition is product differentiation. For example, if I opened a restaurant, the restaurant would have a menu with different dishes and different prices to other restaurants nearby and the prices of the dishes also would depend on its location, the food ingredients, the food quality, and the speed of service. With the purpose of gaining profit for the restaurant, I would try to be dynamically efficient, innovative and develop new ways to attract and retain local custom as well as maintain cost efficiency, which could keep the cost below the average profit.

I need a peer reply for this discussion and it should be 250 at least

bronzefrog162

1. All of the following are characteristics of long-run equilibrium for firms in a monopolistically competitive market except:

A. price equals marginal cost.

B. price equals average total cost.

C. price exceeds the minimum of the average total cost.

D. marginal cost equals marginal revenue.

2. All of the following are strategies a firm with market power can adopt to increase its profits over time except:

A. erecting barriers to entry.

B. setting price equal to the marginal costs of production.

C. mergers with, and acquisitions of, competing firms.

D. influencing the regulatory process.

3. Assume that for a particular firm's output price = $80, marginal cost = $30, average total cost = $25. Based on this information, the firm's Lerner Index is equal to:

A. 0.313.

B. 0.625.

C. 0.6.

D. 0.375.

4. Assume that when the price is $20, the quantity demanded is 9 units, and when the price is $19, the quantity demanded is 10 units. Based on this information, what is the marginal revenue resulting from an increase in output from 9 units to 10 units?

A. $10

B. $1

C. $19

D. $20

5. Because firms produce a differentiated product, each of the firms in a monopolistically competitive market faces a demand curve that is:

A. perfectly elastic.

B. downward sloping.

C. perfectly inelastic.

D. perfectly elastic or perfectly inelastic depending on whether the firm's output is a luxury or a necessity.

6. Suppose a monopolist is producing a level of output such that MR > MC. What should the firm do to maximize its profits?

A. The firm should increase output.

B. The firm should increase the price.

C. The firm should do nothing - it wants to maximize the difference between MR and MC in order to maximize its profits.

D. The firm should hire less labor.

7. Suppose the firms in a monopolistically competitive market are earning positive economic profits. What will happen to move the market to its long-run equilibrium?

A. The demand curves faced by firms in the market will shift to the right.

B. The firms' demand curves will become less elastic.

C. More close substitutes will appear in the market.

D. Some firms will exit the market if they can't cover all of their fixed and variable costs.

8. The Lerner Index is a measure of market power that focuses on:

A. the difference between a firm's product price and its marginal costs of production.

B. the share of the market controlled by the X largest firms in the market.

C. the ratio of the price of a firm's product to the price elasticity of demand for the product.

D. the sum of the squares of the market share of each firm in an industry.

9. The measure of market power that focuses on the share of the market controlled by the X largest firms in the market is known as:

A. the Lerner Index.

B. the Herfindahl-Hirschman Index.

C. the Minimum-Efficient Scale Index.

D. a concentration ratio.

10. The monopoly characteristic of monopolistically competitive firms ensures that such firms will earn positive economic profits over the long-run.

a. True

b. False

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ECON2209 Lecture Notes - Lecture 9: Deadweight Loss, Marginal Cost, Oligopoly

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