Economics Chapter: Market Power vs. Competitive Market

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Questions and Answers

Under what price should the firm shut down in the short run?

$16

$14 (correct)

$11

$20

What is the minimum price at which the firm can earn a positive profit given its fixed costs?

$14

$20

$11

$16 (correct)

If there are 100 identical firms in the market, what is the value of Q2?

40,000 (correct)

10,000

80,000

20,000

What is the marginal revenue from selling the 8th pair of shoes?

$90 Signup and view all the answers

Which situation represents a point on the long-run supply curve?

P=$5, Q=1,500 Signup and view all the answers

What is total profit at the profit-maximizing quantity?

$265 Signup and view all the answers

What tends to happen when new firms enter a perfectly competitive market?

Short-run market supply shifts right. Signup and view all the answers

At what quantity does Sally maximize her profit?

7 Signup and view all the answers

What are Sally's fixed costs?

$100 Signup and view all the answers

In the long run, if Willie’s Wading Adventures is making a profit, what is likely to occur?

Some firms will enter the market. Signup and view all the answers

What is the total revenue from selling 5 pairs of shoes?

$620 Signup and view all the answers

What would happen to the market price of products if safety laws were relaxed and production costs decreased?

Market prices would decrease in the long run. Signup and view all the answers

What is the marginal cost of producing the 6th pair of shoes?

$70 Signup and view all the answers

How would the entry of firms affect the equilibrium in a perfectly competitive market?

It would lead to a higher equilibrium quantity. Signup and view all the answers

How much revenue does Sally earn from the sale of her 4th pair of shoes?

$480 Signup and view all the answers

What is the total cost when producing 3 pairs of shoes?

$230 Signup and view all the answers

What is Bill's economic profit at the profit-maximizing output level?

$115 Signup and view all the answers

If marginal cost exceeds marginal revenue, what is the most appropriate action for the firm?

Decrease the level of production. Signup and view all the answers

How is total profit for a firm calculated?

(Price minus average cost) times quantity of output. Signup and view all the answers

Which principle is best demonstrated when a restaurant remains open for lunch despite few customers?

Only fixed costs affect the decision to stay open. Signup and view all the answers

What happens when a firm sets its output level where marginal cost equals marginal revenue?

The firm maximizes its profits. Signup and view all the answers

What characterizes a firm's decision-making in the short run?

Fixed costs should be ignored. Signup and view all the answers

If a firm is operating at a loss, what critical assessment should be made about its variable costs?

Revenue must still exceed variable costs to avoid further losses. Signup and view all the answers

What is implied by the phrase 'marginal revenue'?

The additional revenue from selling one more unit. Signup and view all the answers

What is the expected outcome when sellers leave an industry that is suffering economic losses?

The market supply will decline and prices will rise. Signup and view all the answers

In a perfectly competitive market, if firms have the same costs, they will operate at which point in the long run?

At their efficient scale. Signup and view all the answers

What happens to firms in a competitive industry if the price is $3.50 in the short run?

Firms will earn positive economic profits. Signup and view all the answers

In the long run, what will the long-run supply curve for a competitive market look like if there are barriers to entry?

It may be upward sloping. Signup and view all the answers

What occurs in a competitive market in the short-run following a decrease in demand, assuming the market was in long-run equilibrium?

Firms will respond to economic losses. Signup and view all the answers

What condition must be satisfied for a firm in long-run equilibrium?

Total revenue must equal total cost. Signup and view all the answers

Which of these factors can cause the long-run supply curve for a competitive industry to be upward sloping?

Limited resources are available. Signup and view all the answers

What is likely to happen to the number of firms in a competitive industry during the transition from short run to long run?

The number will decrease if firms are suffering losses. Signup and view all the answers

What is the primary reason monopolies are considered socially inefficient?

They charge a price above marginal cost. Signup and view all the answers

At what output level would a benevolent social planner prefer a monopoly to operate compared to its profit-maximizing output?

More than the monopoly's profit-maximizing output. Signup and view all the answers

How should a monopolist determine the price-quantity combination that maximizes profit?

By equating marginal revenue with marginal cost. Signup and view all the answers

What is the function of deadweight loss in a monopoly market?

It quantifies the welfare loss to society from pricing above marginal cost. Signup and view all the answers

If a monopolist has a demand function represented by $P = 90 - Q$, what is the marginal revenue function expressed as?

MR = 90 - 2Q Signup and view all the answers

Which price-quantity outcome would a monopolist choose to maximize total revenue given certain conditions?

Q = 30 and P = 60 Signup and view all the answers

Which of the following is an example of price discrimination by a firm?

Offering discounts to students and seniors. Signup and view all the answers

What happens to the total costs for Bearclaws when it maximizes profits?

$980 Signup and view all the answers

What is the total revenue when 3 units are sold under perfect price discrimination?

$420 Signup and view all the answers

What issue arises with government-operated monopolies?

Government has no motivation to minimize costs. Signup and view all the answers

If a natural monopoly is regulated to charge a price equal to its marginal cost, what will result?

The firm will incur loss leading it to exit. Signup and view all the answers

How does the government typically handle natural monopolies in the US?

By enforcing strict regulations. Signup and view all the answers

Which of the following correctly differentiates monopolistic competition from monopoly?

Free entry is a characteristic of monopolistic competition. Signup and view all the answers

What is true about the marginal revenue for each additional unit sold in a monopolistic setting?

Marginal revenue typically decreases as quantity increases. Signup and view all the answers

Which of the following strategies might a monopolist use to optimize profits?

Using price discrimination to differentially charge customers. Signup and view all the answers

What is a common characteristic of monopolies regarding pricing strategies?

They must set their prices higher than marginal cost. Signup and view all the answers

Study Notes

Market Power

A firm has market power if it can influence the market price of the good it sells.
This is opposed to a competitive market where a firm cannot influence the market price.
Maximizing profits and minimizing costs are not indicators of market power.

Competitive Market

In a competitive market, an increase in a firm's output will not change the market price.
The market price does not change because other firms in the market are producing a similar good or service.
A competitive market is characterised by many sellers and buyers of similar goods or services.

Marginal Revenue (MR)

Marginal revenue is the change in total revenue for each additional unit of output sold.
In a competitive market, Marginal revenue is constant, and equal to the market price
In a market with market power, MR is declining.

Average Revenue (AR)

Average revenue is the total revenue divided by the quantity sold.
In a competitive market, AR is constant and equal to the market price.

Profit Maximization Output

Firms in competitive markets maximize profit by producing at the level where marginal revenue equals marginal cost (MR=MC).
The firm will increase its production as long as MR is greater than MC (MR>MC), and when MR falls below MC (MR<MC) it will reduce its production.
The firm will break even when the price is equal to the average total cost (P=ATC).

Economic Profit

Total profit is the difference between total revenue and total costs.
In a competitive market, the firm will earn zero economic profits in the long run, which means total revenue is equal to total costs.
If the price is above the minimum average total cost (P>ATC) the firm will earn an economic profit.
If the price is below the minimum average total cost (P<ATC) the firm will earn an economic loss.

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Description

This quiz explores the concepts of market power and competitive markets, focusing on how firms influence prices and the characteristics of both market types. It also delves into the concepts of marginal revenue and average revenue, illustrating how they differ in various market structures. Test your understanding of these fundamental economics principles!