Microeconomics Chapter on Competition and Monopoly
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Questions and Answers

Which of the following are characteristics of a perfectly competitive market?

  • Barriers to entry
  • Perfect information (correct)
  • Many buyers and sellers (correct)
  • Homogeneous product (correct)

    • Which of the following conditions are necessary for a monopoly to exist?

  • Single seller (correct)
  • Price discrimination
  • Perfect substitutes
  • High barriers to entry (correct)

    • What is the formula for the total cost (TC) in a perfect competition scenario?

  • $120 + 30Q + Q^2$
  • $100 + 20Q + Q^2$ (correct)
  • $50 + 10Q + 2Q^2$
  • $100 + 15Q + Q^2$

    • In the short run, a perfectly competitive firm will produce as long as:

    <p>Marginal revenue equals marginal cost</p> Signup and view all the answers

    In a monopoly market, how is marginal revenue (MR) expressed in terms of quantity (Q)?

    <p>$200 - 8Q$</p> Signup and view all the answers

    Which of the following can lead to a natural monopoly?

    <p>High fixed costs</p> Signup and view all the answers

    Which of the following is true about a monopolist's marginal revenue?

    <p>Marginal revenue equals average revenue</p> Signup and view all the answers

    What price would a monopoly set when the profit-maximizing quantity is 22.5?

    <p>$110$</p> Signup and view all the answers

    What is the long-run outcome for firms in a perfectly competitive market?

    <p>Zero economic profits</p> Signup and view all the answers

    What is the profit calculation for the monopoly given that total revenue (TR) is 2475 and total cost (TC) is 500?

    <p>$1975$</p> Signup and view all the answers

    In terms of price discrimination, what is the relationship used to find the quantity sold at different price levels?

    <p>Set MR1 = MC and MR2 = MC.</p> Signup and view all the answers

    Which outcome is associated with a monopoly compared to perfect competition?

    <p>Higher producer surplus</p> Signup and view all the answers

    What enables a monopolist to practice price discrimination?

    <p>Ability to segment markets</p> Signup and view all the answers

    What is the deadweight loss (DWL) when the profit-maximizing quantity (Q) is 20?

    <p>$400$</p> Signup and view all the answers

    In market supply analysis, how is the individual supply represented?

    <p>$MC = 10 + 2Q$</p> Signup and view all the answers

    At equilibrium, what is the demand equation set to equal market supply?

    <p>$P = 100 - 5Q$</p> Signup and view all the answers

    Which of the following characteristics is essential for a monopoly?

    <p>High barriers to entry</p> Signup and view all the answers

    What does the demand curve for a monopolist reflect?

    <p>Price as a function of quantity sold</p> Signup and view all the answers

    In the context of perfectly competitive markets, when does a firm decide to shut down in the short run?

    <p>When price is below average variable cost</p> Signup and view all the answers

    What is the relationship between marginal cost and marginal revenue for a monopolist to maximize profit?

    <p>Marginal revenue equals marginal cost</p> Signup and view all the answers

    What effect does a monopolistic market typically have on consumer surplus compared to a perfectly competitive market?

    <p>It reduces consumer surplus</p> Signup and view all the answers

    How does price discrimination benefit a monopolist?

    <p>By capturing additional consumer surplus</p> Signup and view all the answers

    What defines the long-run equilibrium for a perfectly competitive firm?

    <p>Price equals average total cost</p> Signup and view all the answers

    What is a common consequence of the monopolistic market structure compared to perfect competition?

    <p>Higher prices for consumers</p> Signup and view all the answers

    What's the likely outcome of deadweight loss in a monopoly market?

    <p>Inefficient resource allocation</p> Signup and view all the answers

    If a monopolist faces a constant marginal cost, how would this affect price setting?

    <p>Price exceeds marginal cost linked to output level</p> Signup and view all the answers

    During price discrimination, which factor is crucial for the monopolist?

    <p>Segregation of consumer types</p> Signup and view all the answers

    In perfect competition, what is true about the firm's demand curve?

    <p>It is perfectly elastic</p> Signup and view all the answers

    What happens to producer surplus in the presence of a monopoly?

    <p>It increases at the expense of consumer surplus</p> Signup and view all the answers

    In a monopoly, what best describes the profit-maximizing output level?

    <p>Where marginal revenue equals marginal cost</p> Signup and view all the answers

    Study Notes

    Perfect Competition

    • Characteristics:

      • Many buyers and sellers
      • Homogenous product
      • Perfect information
      • Free entry and exit
      • No individual firm can influence price (price takers).

    • Short-run production:

      • Firms produce as long as price exceeds variable cost.
      • Marginal revenue equals marginal cost.

    • Long-run equilibrium:

      • Economic profits are zero. Firms earn only normal profits. Free entry and exit of firms drives economic profits to zero.

    • Supply curve: The firm's supply curve is its marginal cost curve above the average variable cost curve in the short run.

    • Market response to demand increase: Increased demand leads to higher equilibrium price and quantity.

    Monopoly

    • Characteristics:

      • Single seller
      • High barriers to entry (e.g., patents, high fixed costs, control of resources).
      • No close substitutes.

    • Profit maximization:

      • Monopolists maximize profit where marginal revenue equals marginal cost.
      • Price is higher than marginal cost.

    • Comparison to perfect competition:

      • Less consumer surplus, more producer surplus.
      • Deadweight loss due to reduced output compared to the socially optimal level.

    • Price discrimination:

      • Charging different prices for the same product to different customers based on willingness to pay.
      • Resale must be prevented for price discrimination to work.

    Cost Concepts

    • Total cost (TC): The sum of fixed costs and variable costs.
    • Marginal cost (MC): The change in total cost associated with producing one more unit of output.
    • Average total cost (ATC): Total cost divided by the quantity of output.
    • Average variable cost (AVC): Variable cost divided by the quantity of output.

    Calculations (Examples)

    • Perfect competition: A firm with a given total cost function, calculate profit maximizing quantity, price , and profit or loss.
    • Monopoly: A firm with a given demand and cost curves. Calculate profit maximizing quantity, price, and profit.
    • Price discrimination: A monopolist segmenting markets for different prices. Calculate profit maximizing quantities, prices, and profit.
    • Deadweight loss: Calculate consumer surplus, producer surplus, and deadweight loss in a monopoly market and compare it to outcomes under perfect competition.

    Market Supply Analysis

    • Derivation of individual firm supply curve and market supply curve.
    • Determination of market equilibrium price and quantity when the market demand and supply curves.

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    Description

    Explore the key concepts of perfect competition and monopoly in microeconomics. Understand their characteristics, production decisions, and market behaviors. This quiz will test your knowledge on how these market structures function and their implications for firms and consumers.

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