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ECON 1 Lecture Notes - Lecture 17: Market Power, W. M. Keck Observatory, Demand Curve

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School
Irvine Valley College
Department
Economics
Course
ECON 1
Professor
Collinson

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Document Summary

Marginal revenue- the change in total revenue (tr) associated with a one unit change in output is less than price (average revenue) for every unit of output except the first. Firms with down sloping demand curves are price makers. As a result any change in quantity produced causes a movement along their respective demand curves and a change in price. The tr test for price elasticity of demand is the basis for the monopolist will never choose a price-quantity combination where price reductions cause total revenue to decrease ( marginal revenue to be negative). They avoid the inelastic segment of its demand curve in favor of some elastic region. The reason is to be in the inelastic region, the monopolist must lower price and increase output. In the inelastic region a lower price means less total revenue (tr) and increased output always means increased total cost (tc), less tr and higher tc yield lower profit.

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Related Questions

1. Assume a monopoly has the following demand schedule:

Price (P) Quantity (Q)

$20            200

15              300

10              500

5                700

(a) Calculate total revenue (TR) at each P and Q combination.

(b) Calculate marginal revenue per unit for each decrease in price.

(c) For the change in price from $20 to $15, calculate the interval elasticity of demand. Is demand elastic or inelastic?

(d) For the change in price from $20 to $15, obtain the Lerner index.

1. For a single-price monopoly, marginal revenue is

a. equal to the price for the first unit of output.

b. less than the price for all units of output after the first unit.

c. greater than price. horizontal.

d. a and b

 

 

2. The demand curve facing a monopolist is:

a) horizontal, the same as that facing a perfectly competitive firm.

b) upward sloping, the same as that facing a perfectly competitive firm.

c) downward sloping, unlike the horizontal demand curve facing a perfectly competitive firm.

d) downward sloping, the same as that facing a perfectly competitive firm.

A. A competitive firm

  1. can consider only its location in setting the price.
  2. must base its competitive price on product differentiation.
  3. has the ability to set its own price.
  4. must accept the price determined by the intersection of the market supply and demand curves.
  5. has no supply curve.

B. If a firm is making an economic profit, then

  1. the factors of production are being paid their opportunity costs.
  2. there will be no change in the number of firms if the industry is perfectly competitive.
  3. the factors of production are being paid less than their opportunity costs.
  4. the factors of production are being paid more than their opportunity costs.
  5. the firm will exit the industry

C. Along a downward-sloping monopoly demand curve,

  1. marginal revenue is greater than price.
  2. the elasticity of demand is constant.
  3. marginal revenue decreases when the price decreases.
  4. marginal revenue is equal to zero when the price is equal to zero

D. If, in the short run, a perfectly competitive firm is producing at a point where the total cost is greater than total revenue, then the firm should

  1. shut down because economic profits are negative.
  2. continue to produce as long as P > AVC.
  3. continue to produce because accounting profits are positive.
  4. set a higher price for its output.
  5. set a lower price for its output

E. For a perfectly competitive firm, the demand curve is

  1. the marginal revenue curve.
  2. perfectly inelastic.
  3. always equal to marginal cost.
  4. the same as the market demand curve

F. A firm in a(n) industry will have the most elastic demand curve

  1. monopolistic
  2. oligopolistic
  3. monopolistically competitive
  4. perfectly competitive

G. If the demand curve of a monopolist is in the inelastic range, then

  1. total revenue will fall if the price increases.
  2. total revenue will be unchanged if the price increases.
  3. total revenue will rise if the price increases.
  4. the total supply will increase by an equal amount if demand increases.
  5. the price will be unchanged if total revenue increases

H. Monopolistic competition and oligopoly are examples of

  1. monopoly.
  2. perfect competition.
  3. theories of consumer behavior.
  4. imperfect competition.
  5. the extreme cases on the market structure continuum

I. Under which market structure do firms face the flattest (most elastic) demand curve?

  1. perfect competition
  2. monopolistic competition
  3. oligopoly
  4. monopoly

J. At the point of long-run equilibrium for a perfectly competitive firm,

  1. economic profits are zero.
  2. TR > TC.
  3. TR < TC.
  4. P = AVC.
  5. normal profits are zero.