ECON 2000 Chapter Notes - Chapter 7: Perfect Competition, Diminishing Returns, Marginal Product

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24 Jun 2014

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Chapter 7 summary: firms vary in size & internal organization, but they all take inputs & transform them into outputs through a process called production, in perfect competition, no single firm has any control over prices. If a single firm p above the market price, it will sell nothing. B/c is can sell all it produces at the market price, a firm has no incentive to reduce price. Tc includes: 1) out-of-pocket costs (explicit costs or accounting costs) If you start a business or buy a share of stock in a corporation, you do so b/c you expect to make a normal rate of return. In the long run: available (no: firms can choose any scale of production techniques that are. Fixed scale or factor of production: firms can enter & leave the industry, to make decisions, firms need to know 3 things, market price of their output, production techniques that are available, prices of inputs.

Related Questions

1. Patent laws:
reduce incentive to innovate by restricting market entry
reduce incentive to innovate by making it difficult to use thepatented innovation
increase incentive to innovate by restricting entry into amarket
increase incentive to innovate by giving a firm permanent andexclusive production rights

2. Which of the following is true of marginal revenue for amonopolist that charges a single price?
P = MR because there are no close substitutes for the monopolist'sproduct.
P > MR because the monopolist must decrease price on all unitssold in order to sell an additional unit.
P < MR because the monopolist must decrease price on all unitssold in order to sell an additional unit.
AR = MR because there are no close substitutes for the monopolist'sproduct.

3. Negative marginal revenue means that
total revenue is decreasing as output increases
the firm is maximizing its total revenue
the firm is maximizing its economic profit
total revenue is increasing at a decreasing rate as outputincreases

4. A profit-maximizing monopolist produces an output level atwhich
marginal revenue is the greatest distance from marginal cost
price is less than marginal cost
the value to society of the last unit produced equals marginalcost
marginal revenue equals marginal cost

5. Compared to a perfectly competitive market, a monopoly tends toproduce
more output and charge a higher price
the same amount of output, but charge a higher price
less output and charge a higher price
less output and charge the same price

6. Monopolistic competition is best described as
many firms with some control over price, and some productdifferentiation
many firms with no control over price, producing identicalproducts
a few firms with some control over price, producing highlydifferentiated products
a few firms with no control over price, producing similarproducts

7. Which of the following characteristics does perfect competitionshare with monopolistic competition?
price-taking firms
zero long-run economic profit
homogeneous product
some barriers to entry

8. Monopolistically competitive firms do not achieve productiveefficiency because
entry of firms raises production costs in the long run
barriers to entry allow profit to be earned in the long run
price is greater than marginal cost at the profit maximizing outputlevel
profit is maximized at a quantity where average total cost is notminimized

9. There are multiple models of pricing behavior in oligopolisticmarkets because
it is difficult to predict how rival firms will react to anypricing decision
the demand curve slopes upward for these firms
firms could earn profit in the long run unlike other markets
price has a direct impact on profit for a firm in oligopoly

10. Which of the following is likely to occur when a two-persongame can be played repeatedly?
Collusion and cooperation among the players
The prisoner's dilemma
The industry demand curve will become perfectly elastic
The industry demand curve will become perfectly inelastic

1. (12 points) Suppose a typical used car buyer is willing to pay $6000 dollars for a low-quality used car (Lemon), and $14,000 for a high-quality car (Plum). Also, suppose the market supply of Plums is given by QP = -60 +.01P and the market supply of Lemons is given by QL = -20 +.01 P. Let the typical buyerâs belief that a car of unknown quality is a Plum = z, so (1-z) is the probability that a car of unknown quality is a Lemon.

Assume that buyers are risk-neutral so that the price a buyer will offer for a car of unknown quality is given by:

P = z($14,000) + (1-z)($6000). Therefore P = $6000 + $8000z.

a) (8 points) State the equilibrium condition in this market.

z = QP/(QP + QL)

b) (4 points) Determine the two values of z that lead to a market equilibrium. .

z = 0

z = .252. (16 pointsSuppose a manufacturer is a monopoly. This manufacturer produces a good at MC = 8 and sells it to a retailer. The retailer is also a monopoly, and it sells the good bought from the manufacturer to consumers. The retailer has no additional costs other than the price they pay to the manufacturer. The retailer faces a demand curve P = 200 â4Q, where Q is the number of units sold.

a) What price will the manufacturer charge to the retailer?

PM = 104

b) What price will the retailer charge to the consumers?

PR = 152

c) If the two firms merged, what would be the price charged?

P = 104

d) If the two firms merged into a single firm, how much profit would the firm make?

Î = 2304

e) How much profit would the two firms make if they do not merge?

Î M = 1152

Î R = 576

Total Î = 1728

3. (8 points) Consider the case of a manufacturer (upstream firm) who sells a product to a retailer (downstream firm). For each of the following four possible situations carefully explain under which circumstances there is an incentive for the firms to vertically integrate. (You may assume the cost of vertical integration is zero).

Both firms are perfectly competitive

Both firms are monopolies

YES

The manufacturer is perfectly competitive and the retailer is a monopoly

The manufacturer is a monopoly and the retailer is perfectly competitive.

YES If the Retailer has a variable proportions production function. Otherwise, NO.

orangedog100

11-Short-run costs which increase and decrease as an output increases or decreases are called: a.Variable costs b.Secondary costs c.Derived costs d.Partial costs e.Potential costs 12.The addition to total cost resulting from the addition of the last unit of output is called the: a.Total variable cost b.Average variable cost c.Fixed cost d.Implicit cost e.Marginal cost 13.The fact that a single large factory may be more efficient than several smaller factories of the same total capacity is a reflection of: a.Increasing returns of scale. b.The law of diminishing marginal returns c.Comparative advantage d.The crowding-out effect e.Reproduction cost of assets 14.A possible reason for the existence of increasing return to scale is: a.The inability of a firm to increase all inputs proportionally b.Problems of coordination and control c.Higher input prices d.Larger fixed costs with a larger plant size. e.Greater specialization 15.The model of perfect competition is useful because: a.Most firms in the real world are perfectly competitive b.Perfectly competitive firms exert significant perfect competition. c.Government regulation is designed to eliminate perfect competition. d.It is a model of an ideal world which sheds much light on a market structureâs effects on resources allocation e.Advertising agencies are heavily dependent on the advertising dollars of perfectly competitive firms 16.A market consisting of many firms producing homogeneous products, having complete knowledge of relevant information, no power over the productâs market price, and low barriers to entry is characteristic of: a.Perfect competition b.Monopoly c.Monopolistic competition d.Oligopoly e.None of the above markets 17.A market consisting of many firms, low barriers to entry, some control over price, but considerable non-price competition is characteristic of: a.Perfect competition b.Monopoly c.Monopolistic competition d.Oligopoly e.None of the above. 18.A market consisting of a few firms producing similar products with significant barriers to entry is characteristic of: a.Perfect completion. b.Monopoly c.Monopolistic competition. d.Oligopoly e.None of the above

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ECON 2000 Chapter Notes - Chapter 7: Perfect Competition, Diminishing Returns, Marginal Product

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