ECON 040 Lecture Notes - Lecture 30: Oligopoly, Strategic Dominance, Perfect Competition

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bronzegrasshopper664

22 Oct 2020

School

College of The Sequoias

Department

Economics (ECON)

Course

ECON 040

Professor

Kasun

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Document Summary

Cartels: cartels represent private agreements aimed at increasing the profit of the cartel members by reducing competition in the market. This is because since the market is made up of small number of firms, collusion can result leading to private and secret agreements among these firms. Private cartels are illegal nearly everywhere in the world and are prohibited under the competition law. Suppose a cartel is established to keep the market price above a certain level. The members of this cartel are instructed to avoid price cuts. Suppose there are only two firms in the market (a and b) and they both only have two strategies: price cut and no price cut. In this game, choosing no price cut would be the cooperative behaviour prescribed by the cartel. Choosing price cut would be the non-cooperative behaviour and would violate the agreement.

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)

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

A consultant has advised Consolidated Fish, Inc., a perfectly competitive firm, that it should cut back its production in order to increase its profits. We can conclude from this that

CF's total costs must be greater than its total revenues.

CF's marginal cost must be greater than the price of its product.

CF's costs are increasing at a rate less than its revenues.

fixed costs are not being covered and CF should shut down.

If marginal cost is equal to marginal revenue

the firm should hold output constant.

the firm should expand output.

there is no way to determine if the firm should expand output, contract output, or hold output constant.

the firm should contract output.

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.

(Please show as much work as possible)

1. You are bidding in a second-price auction for a painting that you value at $800. You estimate that other bidders are most likely to value the painting at between $200 and $600. Which of these is likely to be your best bid?

a. $1,000

b. $800

c. $600

d. $400

2. Which of the following is true about different ways of conducting a private-value auction?

a. A first-price auction is strategically equivalent to a second-price auction.

b. A first-price auction is strategically equivalent to an English auction.

c. A second-price auction is strategically equivalent to an English auction.

d. None of the above

3. Suppose that five bidders with values of $500, $400, $300, $200, and $100 attend an oral auction. Which of these is closest to the winning price?

a. $500

b. $400

c. $300

d. $200

4. In the above auction, if the bidders with the first- and third-highest values ($500 and

$300) collude, which of these is closest to the winning price?

a. $500

b. $400

c. $300

d. $200

5. If a seller is concerned about collusion among bidders, which of the following changes to the auction, should the seller make?

a. Hold frequent, small auctions instead of infrequent large auctions.

b. Conceal the amount of winning bids.

c. Publically announce the name of each auction's winner.

d. Hold a second-price instead of a first-price auction.

6. You're holding an auction to license a new technology that your company has developed. One of your assistants raises a concern that bidders' fear of the winner's curse may encourage them to shade their bids. How might you address this concern?

a. Release your analyst's positive scenario for the technology's future profitability.

b. Release your analyst's negative scenario for the technology's future profitability.

c. Use an oral auction.

d. All of the above

7. In a first-price auction, you bid ________ your value, and in a second-price auction you bid _________ your value.

a. at; above

b. below; above

c. below; at

d. below; below

8. You hold an auction among three bidders. You estimate that each bidder has a value of either $16 or $20 for the item, and you attach probabilities to each value of 50%. What is the expected price? If two of the three bidders collude, what is the price?

9. In Sweden, firms that fail to meet their debt obligations are immediately auctioned off to the highest bidder. (There is no reorganization through Chapter 11 bankruptcy.) The current managers are often high bidders for the company. Why?

10. When a famous painting becomes available for sale, it is often known which museum or collector will be the likely winner. Yet, representatives of other museums that have no chance of winning are actively wooed by the auctioneer to attend anyway. Why?

11. The deities Mars and Venus often do battle to create the weather conditions on Earth. Venus prefers extreme temperatures (especially heat), while Mars prefers temperate conditions. The payoffs (expressed in Points of Wrath) are given below.

		Venus
		Warm	Chill
Mars	Warm	20 , 0	0 , 10
Chill	0 , 90	20 , 0

What is the unique mixed-strategy equilibrium of the above game?

(Let p be the probability of "Warm" for Mars, and q the probability of "Warm" for Venus.)

a) p=9/10, q=1/2

b) p=1/2, q=1/10

c) p=1/2, q=1/2

d) p=1/10, q=1/10

Player 2

		H	D
Player 1	H	0 , 0	4 , 1
D	1 , 4	2 , 2

12. The above game is the title of the hawk-dove game and used by evolutionary biologists to describe evolutionary processes. It is also used to model how a business should grow. In the above game, what is the Nash equilibrium in pure strategies and mixed strategies.?

Assume the cost of producing the goods is zero and that each consumer will purchase each good as long as the price is less than or equal to value. Consumer values are the entries in the table.

	Good 1	Good 2
Consumer A	$2,300	$1,700
Consumer B	$2,800	$1,200

13. Suppose the monopolist only sold the goods separately. What price will the monopolist charge for good 1 to maximize revenues for good 1?

a. $2,300

b. $2,800

c. $1,200

d. $1,700

14. What is the total profit to the monopolist from selling the goods separately?

a. $4,500

b. $6,300

c. $7,000

d. $6,000

15. What is a better pricing strategy for the monopolist? At this price, what are the total profits to the monopolist?

a. Bundle the goods at $2,800; Profits = $5,600

b. Bundle the goods at $4,000; Profits = $8,000

c. Charge $2,800 for good 1 and charge $1,700 for good 2; Profits = $4,500

d. Charging the lowest price for each good individually is the best pricing strategy; Profits = $7,000

16. The prisoners' dilemma is an example of

a. a sequential game.

b. a simultaneous game.

c.a shirking game.

d. a dating game

17. Nash equilibrium

a. is where one player maximizes his payoff, and the other doesn't.

b. is where each player maximizes his own payoff given the action of the other player.

c.is where both players are maximizing their total payoff.

d. is a unique prediction of the likely outcome of a game.

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ECON 040 Lecture Notes - Lecture 30: Oligopoly, Strategic Dominance, Perfect Competition

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