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MGEA01H3 Chapter Notes - Chapter 14: Imperfect Competition, Marginal Revenue, Marginal Cost

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erinllama288
31 Aug 2015
School
UTSC
Department
Economics for Management Studies
Course
MGEA01H3
Professor
Michael H O

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MGEA01H3 Full Course Notes
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MGEA01H3 Full Course Notes
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Document Summary

Oligopoly: is an industry with only a small number of producers. Oligopolist: is a producer in an oligopoly. Imperfect competition: is when no one firm has a monopoly but producers nonetheless realize that they can affect the market prices, this industry is characterized as being imperfect. Duopoly: is an oligopoly consisting of only two firms. Collusion: is when sellers cooperate to raise their joint profit. Cartel: is an agreement among several producers to obey output restrictions in order to increase their joint profits. In a duopolistic industry, both firms will make a cartel to maximize profit by producing a quantity that maximizes marginal revenue which increases combined profit due to marginal cost being assumed to be at zero. Non-cooperative behaviour: is when firms ignore the effects of their action on each other"s profits. Bid-rigging occurs when two or more firms work together to fix their bids for contracts so as to set prices and allocate the market amongst the group.

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Related Questions

2. Deviating from the collusive outcome

Mays and McCovey are beer-brewing companies that operate in a duopoly (two-firm oligopoly). The daily marginal cost (MC) of producing a can of beer is constant and equals $0.80 per can. Assume that neither firm had any startup costs, so marginal cost equals average total cost (ATC) for each firm.

Suppose that Mays and McCovey form a cartel, and the firms divide the output evenly. (Note: This is only for convenience; nothing in this model requires that the two companies must equally share the output.)

Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and combined quantity of output if Mays and McCovey choose to work together.

Monopoly Outcome PRICE (Dollars per can)QUANTITY (Thousands of cans of beer)DemandMRMC = ATC

When they act as a profit-maximizing cartel, each company will producecans and chargeper can. Given this information, each firm earns a daily profit of, so the daily total industry profit in the beer market is.

Oligopolists often behave noncooperatively and act in their own self-interest even though this decreases total profit in the market. Again, assume the two companies form a cartel and decide to work together. Both firms initially agree to produce half the quantity that maximizes total industry profit. Now, suppose that Mays decides to break the collusion and increase its output by 50%, while McCovey continues to produce the amount set under the collusive agreement.

MaysĆ¢Ā€Ā™s deviation from the collusive agreement causes the price of a can of beer to toper can. Mays's profit is now, while McCoveyĆ¢Ā€Ā™s profit is now. Therefore, you can conclude that total industry profit when Mays increases its output beyond the collusive quantity.

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

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

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

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

J.Ā 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.
1. True or false? Actions that allow oligopoly firms to coordinate their pricing behavior are called facilitating practices.
Ā 
2. In the long run, if a perfectly competitive firm is incurring an economic loss, the firm
Ā 
A. Will leave the industry
B. Is earning greater than normal profit but not an economic profit
C. Will minimize opportunity costs by staying in business
D. Will produce as long as total revenue exceeds the total fixed cost
E. Will have some long-run fixed costs
Ā 
3. Which of the following is NOT one of the problems associated with common ownership of resources and a job that needed to be done?
Ā 
A. Zimbody paid big body to do the antibody's job
B. Anybody could have done it, but nobody did it
C. Everybody was sure somebody would do it
D. Everybody blamed somebody
E. Nobody realized that everybody wouldn't do it
Ā 
4. A negative externality related to a product
Ā 
A. Results in an overallocation of resources to that product
B. Can be corrected by government subsidies
C. Is an example of government failure
D. Results in under allocation of resources to that product
E. Can be corrected by lowering the cost of production
Ā 
5. A primary cause of inefficiency in government is that
Ā 
A. Antitrust is applied to government policies as well as market situations
B. Government employees tend to be lazier than private-sector employees
C. The gains from government projects are often concentrated, while the costs are dispersed among all taxpayers
D. Markets interfere with governments
E. All of these are true
Ā 
6. According to the survey reported in the text, most people believe that health-related goods and services should be allocated by the ___ allocation mechanism.
Ā 
A. First come, first served
B. Random
C. Government
D. Price
E. Private
Ā 
7. It is ___ that transfer(s) consumer surplus to producers and creates (s) deadweight losses.
Ā 
A. The commodity market
B. Restrictions to entry
C. The allocation mechanism
D. Government
E. Perfect competition
Ā 
8. The practice of legislators supporting one another's projects in order to ensure support for their own is called
Ā 
A. Social regulation
B. Partisanship
C. Democracy
D. Logrolling
E. Wasteful
Ā 
9. When shopping in some countries, bargaining is standard. The sellers ask for a high price to start and then decrease the price until the sale is made. This is due to
Ā 
A. Producers trying to gain as much consumer surplus as they can
B. Prices changing so quickly that it doesn't make sense to make price tags
C. No government control
D. The market unable to reach equilibrium
E. Consumers trying to gain as much consumer surplus as they can
Ā 
10. All of the following are examples of a first-come, first-served system of allocation EXCEPT
Ā 
A. Classes at school
B. Tickets to concerts
C. Medical care
D. Access to highways
E. All of these are examples allocated by a first-come, first-served system