Micro Exam 3

  1. Which of the following is necessary for a monopoly to continue earning economic profits in the long run?  

    D. at least one barrier to entry: the barrier to entry is what keeps rivals from entering and competing away positive economic profits
  2. To maximize its profits, a monopoly should produce the quantity where its marginal cost equals its   

    A.   marginal revenue marginal revenue : Like all firms, monopolies make the most profit they can if the produce to the very point at which marginal revenue equals marginal cost.
  3. If a monopoly wants to increase its sales, then it must reduce the price it charges on all the units it sells. Consequently, a monopoly's marginal revenue must be smaller than   

    C.   the price it can charge for its product the price it can charge for its product : the monopoly's need to reduce price to add sales is the reason marginal revenue is below product price
  4. A monopoly should shut down in the short run if the price it can charge is less than its   

    B.  average variable cost average variable cost : The short-run shut-down rule for a monopoly is the same as the rule for a competitive firm: shut down if price falls below average variable cost.
  5. For a monopoly to successfully price discriminate, its customers must  

    D. be unable to resell the product be unable to resell the product : If people who bought at the lower price could resell it at a higher price (engage in "arbitrage," as such profiting from price differences is called) then the price discrimination would not be profitable to the firm
  6. A price-discriminating monopoly charges the lowest price to the group that   

    D. has the most elastic demand has the most elastic demand : the people with the most elastic demand are the people who are most responsive to price changes -- firm's strategy is to charge them a low price and get many customers that way.
  7. In the long run, both monopolistic competition and perfect competition result in   

    A. zero economic profit for firms zero economic profit for firms : Since neither kind of industry has substantial barriers to entry, positive economic profit will be competed away by the entry of rivals in both industries.
  8. Which of the following is the best example of a monopolistically competitive market?   

    D. Retail Sales: : In retail sales many small shops, each slightly different from the other (different location, etc.), with easy exit and entry, compete with one another under monopolistically competitive conditions
  9. In the long run, monopolistically competitive firms tend to have   

    D. Excess capacity: : This is illustrated for example in the graph on page 230 of the textbook. which shows the level of output the firm operates at as 5, although its average total costs don't reach a minimum until output level 8. The firm could easily and efficiently produce much more than it does - it has "excess capacity" it is not using.
  10. A "kinked" demand curve reflects a tendency on the part of an oligopolist to:  

    B. following price reductions but not price increases.
  11. A characteristic of an oligopoly is:  

    A.  mutual interdependence in pricing decisions
  12. Which antitrust law clarified the Sherman Act by prohibiting specific business practices like exclusive dealing and tying contracts? 

    A. The Clayton Act: this act (1914) tried to remedy the vagueness of the Sherman Act (1890) by explicitly defining certain illegal business practices
  13. The Sherman Act of 1890 is the federal antitrust law that prohibits   

    D. unfair methods of competition in commerce
    A.    monopolization and conspiracies to restrain trade. monopolization and conspiracies to restrain trade. : Section One prohibits price-fixing, or conspiracy to restrain trade. Section Two outlaws monopolization. (and that's all there is to the Sherman Act)
  14. Which of the following antitrust laws broadened the list of illegal price discrimination practices and is often called the "Chain Store Act"?   

    A.  The Robinson-Patman Act : passed in the middle of the 1930s Depression, this act tried to outlaw price discrimination of the kind that offers large department and chain stores a lower wholesale price than small local shops are offered for the same products.
  15. A merger between two breakfast cereal producers such as General Mills and Post would be called a   

    D.  horizontal merger. : horizontal mergers join rivals in the same industry
  16. A merger between a leather supplier and a shoe manufacturer would be classified as a   

    C. Vertical merger
  17. Monopolist's Firm Demand Curve
    (a monopoly faces the entire industry demnad curve as its own firm demand curve;therefore its firm demand curve isdownward sloping [as price increases, quantity demanded decreases])
  18. Monopolist's Marginal Revenue
    is not equal to the price they charge; that's because to increase their sales by one unit they must lower the price they charge on all the units they sell.
  19. "price makers"
    monopolists are "price makers" in that they choose the price [and corresponding output level] which makes them the most profit possible. They must choose from only the P and Q combinations given by their firm demand curve, however
  20. natural monopoly
    a firm in an industry in whicheconomies of scalecontinue to increase as firm size grows; in these industries one large firm produces more efficiently [lower ATC] than several smaller firms would
  21. price discrimination
    charging different customers different prices, not based on any cost of production differences;general idea: charge inelastic-demand types a high price; charge elastic-demand people a lower price
  22. necessary conditions for price discrimination
    firm must be able toseparate customers into groups based on their differing elasticities of demandprevent customers who buy at a low price from selling to other, high-price, customers [that is, prevent "arbitrage
  23. Effects of monopoly (judging monopoly from society's point of view
    compared to perfect competitors with the same cost curves, monopolistsproduce less output (Q) andcharge a higher price (P)
  24. monopolistic competition
    market structure in whichmany small firms producedifferentiated output, andthere are little or no barriers to entry
  25. differentiated output
    when each firm's output is a bit different, in the buyers' eyes, than other firms' output)
  26. product differentiation
    firms' efforts to make customers think their particular product [restaurant, cam-corder, etc.] is special and different. Efforts can involve styling, features, service, advertising, etc.
  27. monopolistic competitor'sfirm demand curve
    slopes down, like a monopolists; though not as steeply
  28. The reason monopolistic competitors' have downward-sloping firm demand curves
    because they sell a differentiated product
  29. long-run profit for a monopolistic competitor
    In long run monopolistic competitors earnzero profit
  30. oligopoly
    a market structure in whicha few firms produce most of the output;output is differentiated ORhomogeneous; andsubstantial barriers to entry exist
  31. mutual interdependence
    the characteristic of oligopolies that each firm's best pricing strategy depends on the actions and reactions of rival firms;oligopolies must always be guessing and predicting what their rivals are going to do)
  32. price fixing
    (defined as getting together with rivals in the same industry to discuss or plan pricing strategies; illegal under any circumstances in the U.S
  33. price leadership
    when one firm acts as industry leader by initiating price changes, which other firms then follow.
  34. kinked demand curve
    (graph representing an oligopolist's demand curve under assumption thatrivals will match any price cut, butrivals will NOT follow a price increase.The graph has an elastic demand curve to the left of the firm's current output level, and inelastic demand curve to the right of the current output level
  35. do oligopolies compete with each other?
    yes - always.Sometimes by price competition; always by non-price competition, including product innovation, advertising, technical change, and so on
  36. antitrust law
    laws intending to promote competition
  37. horizontal mergers
    when a firm merges with a rival in the same industry
  38. vertical mergers
    when a firm merges with one of its suppliers or distributors
  39. conglomerate mergers
    when a firm merges with a firm in an unrelated industry
  40. rule of reason (legal status)
    under rule of reason status an activity or action is only illegal under certain circumstances; the firm's particular behaviors must be found "unreasonable"--not explainable as normal business practice -- in order to convict.
  41. Exclusive Dealing
    when a manufacturer won't let a retailer sell its product unless it stops selling a competitor's product;an unfair business practice listed by the Clayton Act:
  42. Tying
    when a firm won't sell product A unless the buyer also buys product B. The firm "ties" B to A;an unfair business practice listed by the Clayton Act; now considered illegal if the firm has substantial market power in product A
  43. A monopoly will be maximizing profits if it is operating at the point where
    marginal revenue = marginal cost
  44. One of the necessary conditions for price discrimination to occur is that:
    buyers in different markets have different elasticities of demand
  45. If a monopolist finds that at the present level of output marginal revenue exceeds marginal cost, the firm should
    expand output (Since marginal revenue is greater than marginal cost, it'd raise profit if the firm increased its output level)
  46. Oligopoly is a market structure in which:
    there are few firms selling either a homogeneous or differentiated product
  47. The monopolistic competition market structure is characterized by:
    many firms and differentiated products
  48. The demand curve any monopolist uses in making output decision is
    the same as the market demand curve (Since the firm has the entire market to itself, it faces the market demand curve as its firm demand curve)
  49. For a monopolist, marginal revenue is always:
    below market price
  50. The problem for firms in an oligopoly is that
    one firm's profits are affected by other firms' actions
  51. Which of the following is true for a monopolist?
    • All of the Above
    • Marginal revenue is less than the price charged   
    • Economic profit is possible in the long run Profit maximizing or loss minimizing occurs when marginal revenue equals marginal cost  
    • All of the above
  52. Suppose a monopolist's demand curve lies below its average variable cost curve. The firm will
    shut down (Like other firms, monopolies are better off shutting down if the price they are able to charge (given by the height of the demand firm) is lower than their average variable costs)
  53. In order to make oil profits as large as possible, OPEC meets to set oil production quotas for its members. OPEC is best classified as:
  54. In contrast to a perfectly competitive firm, a monopolist may earn
    positive economic profit in the long run (Since monopolists are protected by barriers to entry, it is possible for them to make positive economic profit in the long run, where perfectly competitive firms cannot.)
  55. Firms in a monopolistically competitive industry produce
    differentiated products
  56. Both a perfectly competitive firm and a monopolist
    maximize profit by setting marginal cost equal to marginal revenue
  57. Compared to a perfectly competitive industry, a monopolist with the same marginal cost and demand curve will charge:
    a higher price and produce a lower volume of output
  58. A monopolized market is characterized by
    • All of the Above:
    • a sole seller of a product for which there are few suitable substitutes  
    • strong barriers to entry
    • a single firm facing the market demand curve  
    • all of the above
  59. Which barrier to entry results in the creation of a natural monopoly?
    economies of scale
  60. Suppose a monopolist charges a price corresponding to the intersection of marginal cost and marginal revenue. If the price is between its average variable cost and average total cost curves, the firm will:
    stay in operation in the short run, but shut down in the long run if demand remains the same
  61. Which of the following is a necessary condition for price discrimination?
    • the seller must be able to divide the markets according to the different price elasticities of demand  
    • it must be difficult for one buyer to resell to another
  62. The act of buying a commodity in one market at a lower price and selling it in another market at a higher price is known as:
  63. A cartel:
    • is a group of firms formally agreeing to control the price and the output of a product 
    • has as its primary goal to reap monopoly profits by replacing competition with cooperation 
    • is illegal in the United States, but not in some other nations
  64. Mutual interdependence among firms in an oligopoly means that
    firms are always concerned about predicting the reactions of rivals
  65. Costume jewelry is produced in a monopolistically competitive market. One producer finds the MR=MC=$3 when output is 700 necklaces. An economist studying this information can conclude that:
    the producer charges a price greater than $3
  66. An oligopolist operating with a kinked demand curve would expect rivals to match its price:
  67. When new firms enter a monopolistically competitive market, the existing firms'
    demand curves shift to the left
  68. As new firms enter a monopolistically competitive industry, it can be expected that:
    profits of existing firms will decrease
  69. When a perfectly competitive firm or a monopolistically competitive firm is making zero economic profit
    no firms will want to enter or exit
  70. The demand curve in monopolistic competition slopes downward because of:
    product differentiation
  71. A monopolistically competitive firm will
    • maximize profits by producing where MR = MC   
    • not likely earn an economic profit in the long run   
    • shut down if the price is less than average variable cost
  72. Suppose an oligopoly has a dominant firm that sets the price for the entire industry. In this situation, the oligopoly has:
    price leadership
  73. Monopolistic competitive firms in the long run earn:
    zero economic profits
  74. In a price leadership oligopoly model:
    one firm is the price leader and all other follows
  75. Dry cleaners in cities are an example of
    monopolistic competition
  76. Cartel agreements are difficult to maintain because
    each member firm can increase its own profits by cutting its price and selling more
  77. An industry made up of 8 national firms producing differentiated products would best be classified as:
  78. For many years, AT&T required customers to rent telephones from AT&T in order to receive phone service. This is an example of
    a tying contract
  79. Campbell Soup agrees to sell its brand to a grocery chain only if the chain also agrees to buy a minimum of cases of its V-8 Juice. This is an example of
    a tying agreement
  80. The Cellar-Kefauver Act is primarily concerned with prohibiting
    anticompetitive mergers
  81. Which of the following was NOT illegal under the original Clayton Act?
    Competition-reducing merger between rivals by purchase of assets with cash
  82. The Clayton Act was passed in
  83. An exclusive contract
    requires a buyer not to purchase any competing product for a competitor firm
  84. An important aspect of the Federal Trade Commission Act of 1914 is that it
    set up an independent antitrust agency with the power to bring court cases
  85. The first federal antitrust law was the
    Sherman Antitrust Act
  86. The primary purpose of antitrust legislation is to
    protect the competitiveness of U.S. business
  87. A merger between firms that compete in the same market is called a:
    horizontal merger
  88. Which of the following mergers would result from the purchae of a computer chip company by IBM (a computer maker)?
    a vertical merger
  89. If two or more firms collude to fix prices, this would be illegal under the
    Sherman Antitrust Act
Card Set
Micro Exam 3