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
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.
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
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.
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
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.
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.
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
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.
A "kinked" demand curve reflects a tendency on the part of an oligopolist to:
B. following price reductions but not price increases.
A characteristic of an oligopoly is:
A. mutual interdependence in pricing decisions
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
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)
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.
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
A merger between a leather supplier and a shoe manufacturer would be classified as a
C. Vertical merger
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])
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.
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
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
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
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
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)
market structure in whichmany small firms producedifferentiated output, andthere are little or no barriers to entry
when each firm's output is a bit different, in the buyers' eyes, than other firms' output)
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.
monopolistic competitor'sfirm demand curve
slopes down, like a monopolists; though not as steeply
The reason monopolistic competitors' have downward-sloping firm demand curves
because they sell a differentiated product
long-run profit for a monopolistic competitor
In long run monopolistic competitors earnzero profit
a market structure in whicha few firms produce most of the output;output is differentiated ORhomogeneous; andsubstantial barriers to entry exist
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)
(defined as getting together with rivals in the same industry to discuss or plan pricing strategies; illegal under any circumstances in the U.S
when one firm acts as industry leader by initiating price changes, which other firms then follow.
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
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
laws intending to promote competition
when a firm merges with a rival in the same industry
when a firm merges with one of its suppliers or distributors
when a firm merges with a firm in an unrelated industry
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.
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:
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
A monopoly will be maximizing profits if it is operating at the point where
marginal revenue = marginal cost
One of the necessary conditions for price discrimination to occur is that:
buyers in different markets have different elasticities of demand
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)
Oligopoly is a market structure in which:
there are few firms selling either a homogeneous or differentiated product
The monopolistic competition market structure is characterized by:
many firms and differentiated products
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)
For a monopolist, marginal revenue is always:
below market price
The problem for firms in an oligopoly is that
one firm's profits are affected by other firms' actions
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
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)
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:
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.)
Firms in a monopolistically competitive industry produce
Both a perfectly competitive firm and a monopolist
maximize profit by setting marginal cost equal to marginal revenue
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
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
Which barrier to entry results in the creation of a natural monopoly?
economies of scale
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
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
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:
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
Mutual interdependence among firms in an oligopoly means that
firms are always concerned about predicting the reactions of rivals
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
An oligopolist operating with a kinked demand curve would expect rivals to match its price:
When new firms enter a monopolistically competitive market, the existing firms'
demand curves shift to the left
As new firms enter a monopolistically competitive industry, it can be expected that:
profits of existing firms will decrease
When a perfectly competitive firm or a monopolistically competitive firm is making zero economic profit
no firms will want to enter or exit
The demand curve in monopolistic competition slopes downward because of:
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
Suppose an oligopoly has a dominant firm that sets the price for the entire industry. In this situation, the oligopoly has:
Monopolistic competitive firms in the long run earn:
zero economic profits
In a price leadership oligopoly model:
one firm is the price leader and all other follows
Dry cleaners in cities are an example of
Cartel agreements are difficult to maintain because
each member firm can increase its own profits by cutting its price and selling more
An industry made up of 8 national firms producing differentiated products would best be classified as:
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
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
The Cellar-Kefauver Act is primarily concerned with prohibiting
Which of the following was NOT illegal under the original Clayton Act?
Competition-reducing merger between rivals by purchase of assets with cash
The Clayton Act was passed in
An exclusive contract
requires a buyer not to purchase any competing product for a competitor firm
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
The first federal antitrust law was the
Sherman Antitrust Act
The primary purpose of antitrust legislation is to
protect the competitiveness of U.S. business
A merger between firms that compete in the same market is called a:
Which of the following mergers would result from the purchae of a computer chip company by IBM (a computer maker)?
a vertical merger
If two or more firms collude to fix prices, this would be illegal under the