ECON1131 Lecture Notes - Profit Motive, Price Discrimination, Deadweight Loss

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1 Apr 2014

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Market power (monopoly power): a market situation in which an individual firm faces a downward-sloping demand curve for its product. Pure monopoly: a market situation in which an individual firm faces a downward- sloping demand curve for its product. Pure monopoly exists when the industry consists of a single firm. The model of pure monopoly allows us to explore the effects of market power in and of itself without having to consider the endless possibilities associated with strategic interaction among firms. All firms, whether they have market power or not, maximize profit by following the same general principle: produce the output at which marginal revenue equals marginal cost. 1: q1 is the maximum quantity the firm can sell if it sets price at p1 or, 2: p1 is the maximum price the firm can charge it if chooses to sell output q1.

Related Questions

In which of the following ways is a monopoly beneficial to an economy?

A. Monopoly profits give firms more reason to invest in the creation of new products through research and development.

B. Firms that are allowed monopoly profits search out innovative technologies that they can bring to market.

C. With natural monopolies, costs may be lower than those that would exist in competitive markets with many producers.

D. All of the above.

Which of the following is a difference between a perfectly competitive market and a monopoly?

A. The market demand curve faced by a perfectly competitive firm is horizontal, while the market demand curve in a monopoly is downward-sloping.

B. The equilibrium price in a perfectly competitive market exceeds marginal revenue, while the equilibrium price in a monopoly equals marginal revenue.

C. The sellers in a perfectly competitive market are price-makers, while a seller in a monopoly market is a price-taker.

D. There are huge barriers to entry in a perfectly competitive market, while there are no barriers to entry in a monopoly.

In the United States in 2011, there were 104 fatalities per 100,000 workers in the logging industry. This is the second-highest rate after the fisheries industry. Although the fatality rate in this industry is so high, many workers still choose to work as loggers.

What could explain this?

A. Workers choose these high-risk jobs because they are willing to bear an occupational risk to earn a higher wage.

B. Low-risk jobs are already taken, so workers must choose their next-best alternative, which in this case is logging.

C. Workers in these industries lack human capital and must choose to work as loggers.

D. Loggers must be indifferent between low-risk and high-risk jobs.

In the case of a decrease in product prices:

A. the quantity effect always dominates the price effect.

B. the price effect always dominates the quantity effect.

C. when the price effect dominates the quantity effect, total revenue decreases.

D. when the quantity effect dominates the price effect, total revenue decreases

rubywalrus122

One of the conditions under which price discrimination is profitable is:

ability to identify consumer types.

inability to resell the good.

differences in demand elasticities.

all of the statements associated with this question are correct.

Suppose that the demand in a particular industry is given by Q^d = 500 - 2P. When the market price in the industry is $50 per unit, total demand in the industry is _________. Furthermore, assume that the entire market consists of four firms that share the market equally. The HHI under these conditions is then

		225 units and 1,600.
		400 units and 2,500.
		225 units and 3,333.33.
		400 units and 10,000.

The industry elasticity of demand for gadgets is -2, while the elasticity of demand for an individual gadget manufacturer's product is -2. Based on the Rothschild approach to measuring market power, we conclude that

there is little monopoly power in this industry.

there is significant monopoly power in this industry.

the Herfindahl index for this industry is -2.

the Herfindahl index for this industry is 2.

The number of efficient plants compatible with domestic consumption of the refrigerator industry in Sweden is 0.7. Which of the following implications is (are) correct?

		In the absence of imports, the refrigerator industry in Sweden is monopolistic.
		The refrigerator industry in Sweden is perfectly competitive.
		The refrigerator industry in Sweden is monopolistically competitive.
		None of the statements associated with this question are correct.

The peak of the isoprofit curve has which of the following characteristics?

It is the point at which Monopoly profits are always achieved.

It is the point at which the isoprofit curve crosses the reaction function.

It is the point on the isoprofit curves associated with the highest profit.

It is the point on the isoprofit curves Cournot competitors can efficiently achieve collusion profits.

The ranking of industries by the four-firm concentration ratio usually, but not always, reveals the same pattern as ranking by HHI. When a discrepancy is found it is usually due to the following:

		The four-firm concentration indices contain data on only the largest four-firms, while the HHI are based on data for all firms in the industry.
		The HHI is based on squared market shares, while the four-firm concentration ratio is not.
		The four-firm concentration indices contain data on only the largest four-firms, while the HHI are based on data for all firms in the industry and the HHI is based on squared market shares, while the four-firm concentration ratio is not.
		The two indices are designed to measure two different attributes of markets

graykoala798

6. The Herfindahl index is calculated by (Points: 5)
a. adding the squared value of the market shares of all the firms in the industry.
b. multiplying the squared value of the market shares of all the firms in the industry.
c. adding the percentage of industry output produced by the largest four firms.
d. adding the percentage of industry output produced by the largest eight firms.

7. In December 2004, the oil-producing nations of OPEC began reducing output to keep prices above $40 per barrel. In doing this, OPEC was acting as a monopoly even though there was more than one producer. OPEC is a: (Points: 5)
a. cartel.
b. price taker.
c. producer in a contestable market.
d. producer in a monopolistically competitive market.

8. The difference between a perfectly competitive firm and a monopolistically competitive firm is that a monopolistically competitive firm faces a: (Points: 5)
a. horizontal demand curve and price equal the marginal cost in equilibrium.
b. horizontal demand curve and price exceeds the marginal cost in equilibrium.
c. downward-sloping demand curve and price equal the marginal cost in equilibrium.
d. downward-sloping demand curve and price exceeds the marginal cost in equilibrium.

9. Suppose an industry only has four firms and they each have 10 percent, 8 percent, 8 percent, and 6 percent of the market. The Herfindahl index of this market is closest to which of the following? (Points: 5)
a. 8
b. 32
c. 66
d. 264

10. A good which if supplied to one person is supplied to all and whose consumption by one individual does not prevent its consumption by another individual is known as (Points: 5)
a. a private good.
b. a public good.
c. an external good.
d. an internal good.

11. An effluent fee is: (Points: 5)
a. a fee requiring market participants to certify they have reduced total consumption-not necessarily their own individual consumption.
b. charges imposed by the government on the level of pollution created.
c. a fee paid by users of a public good.
d. charges imposed on the wealthy of our society to help pay for those less fortunate.

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ECON1131 Lecture Notes - Profit Motive, Price Discrimination, Deadweight Loss

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