Microeconomics: Monopolistic Competition and Oligopoly

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Questions and Answers

Draw a Monopolistic firm in the long-run. Show CS, PS, Markup, Excess Capacity. Explain why ㅠ = 0.

A monopolistic firm in the long-run will produce where MR=MC, which is less than the socially optimal quantity. When a monopolistic firm produces less than the socially optimal quantity there is a deadweight loss. This deadweight loss arises from the potential gains from trade that don't occur because the price is set higher. The profit maximizing quantity will occur where the price is higher than marginal costs. The difference between price and marginal cost is the markup. Because the firm produces less than the socially optimal quantity, this is Excess Capacity. This means there is an opportunity for the firm to produce more goods but they choose not to produce the socially optimal quantity. A perfectly competitive firm will earn 0 profit in the long-run because in the long-run all firms can freely enter the market and compete away any profits. The perfectly competitive firm will find their losses minimized at the minimal point of the ATC curve. For a monopolistic firm, if the price is set above the minimal point of the ATC curve, the firm can continue to produce at a positive profit.

How are monopolistic firms different and similar from perfect competition?

A monopolistic firm has a product that is sufficiently differentiated to create a downward sloping demand curve, unlike a perfectly competitive firm whose demand is perfectly elastic. This means the monopolistic firm can raise the price above marginal cost while still selling positive units. The monopolistic firm has market power. A firm with market power can increase its price above marginal cost without losing all of its customers. A perfectly competitive firm cannot do this. Both the monopolistic firm and the perfectly competitive firm will achieve the same goal, maximizing profits in the long-run. Both firms will charge a price equal to their average total cost. Both firms will allocate resources to the production of goods where the marginal benefit equals the marginal cost.

Explain why a public good is different from a private good when it comes to excludability and rivalry.

A public good is non-excludable, meaning it is difficult or impossible to prevent individuals from consuming the good even if they don't pay for it. It is also non-rivalrous, meaning that one person's consumption of the good does not diminish another person's ability to consume it. A private good, on the other hand, is both excludable and rivalrous, meaning that individuals who don't pay for the good cannot consume it, and one person's consumption of the good prevents another person from consuming it.

Explain why public goods often have a "free rider problem"

The free-rider problem occurs because people can benefit from a public good without contributing to its provision. This is because public goods are non-excludable, meaning it's difficult to prevent people from using them, even if they don't pay. Signup and view all the answers

Explain Coase Theorem and how it relates to externalities.

The Coase Theorem states that, under certain conditions, private parties can bargain to reach an efficient solution to an externality problem, even if the government does not intervene. The theorem assumes that property rights are clearly defined and transaction costs are low. Signup and view all the answers

Draw 4 separate graphs and provide an example of each one. Show DWL and Q social optimum.

The four graphs would depict a negative production externality, a positive production externality, a negative consumption externality, and a positive consumption externality. Each graph would include the supply curve, the demand curve, and the social cost or social benefit curve. The DWL, a triangular area formed by the market equilibrium, represents the loss in total welfare due to the externality. Signup and view all the answers

Explain how a per-unit tax or a per-unit subsidy can help minimize DWL and bring us closer to Qso.

A per-unit tax on a good with a negative externality will shift the supply curve to the left, raising the market price and reducing the quantity consumed. This move helps to reduce the negative externality and bring the market closer to the socially optimal output. A per-unit subsidy on a good with a positive externality will shift the supply curve to the right, lowering the market price and increasing the quantity consumed, encouraging the consumption of the positive externality and bringing the market closer to the socially optimal output. Signup and view all the answers

Draw the Lorenz Curve for both income and wealth distribution.

The Lorenz curve is a graphical representation of income or wealth inequality. It plots the cumulative percentage of income or wealth against the cumulative percentage of the population, ranked from lowest to highest income or wealth. A perfectly equal distribution of income or wealth would result in a straight diagonal line, while a more unequal distribution would result in a curve that lies further below the diagonal line. Signup and view all the answers

Show what happens to gini-coefficient when there are:

The Gini coefficient is a measure of income inequality. It ranges from 0 to 1, where 0 represents perfect equality and 1 represents perfect inequality. A progressive tax system reduces income inequality and lowers the Gini coefficient. A regressive tax system increases income inequality and raises the Gini coefficient. A proportional tax system has no impact on income inequality. Signup and view all the answers

Show CS, PS, Profit, PMO, DWL.

CS is represented by the area above the price line and below the demand curve. PS is represented by the area below the price line and above the supply curve. Profit is the area between the demand curve and the average total cost curve, excluding the excess capacity segment. PMO represents the output level at which the MR = MC equilibrium is attained. DWL is the loss in total welfare caused by the oligopoly's pricing decisions, represented by a triangle above the supply curve and below the demand curve. Signup and view all the answers

Draw an Oligopoly graph assuming the Kinked Demand Curve.

The Kinked Demand Curve model, unique to oligopolies, depicts a situation where firms face a steep demand curve for price reductions and a flatter demand curve for price increases. The firms are in mutual interdependence, where if one firm lowers its price, it risks sparking a price war, causing a significant drop in demand while competitors also lower their prices. However, if one firm raises its price, it risks losing market share as competitors maintain their prices. This creates a kink in the demand curve and leads to a relatively stable price point in the market. Signup and view all the answers

When a monopolistic firm advertises, what happens to: D, AR, MR, AFC, ATC, AVC, MC, PMO?

Advertising can shift the demand curve to the right, leading to an increase in the quantity demanded at each price point. As a result, the average revenue (AR) curve and the marginal revenue (MR) curve will shift to the right as well. However, the advertising costs would impact the total cost (TC), potentially raising AFC, ATC, and AVC. However, MC, which is the cost of producing one more unit, is expected to remain unchanged. PMO, producer's surplus maximization point, may shift as well to reflect the change due to the demand curve shift. Signup and view all the answers

Flashcards

Production Possibilities Curve (PPC)

The maximum output a firm can produce with its available resources, assuming the firm can produce only two goods.

Productive Efficiency

The point on the PPC where all resources are fully employed and producing the maximum amount of goods and services the economy can produce.

Law of Increasing Opportunity Costs

The increase in opportunity cost as a society produces more of one good. This is due to the fact that resources are not perfectly adaptable.

Economic Growth

The ability to produce more goods and services, often due to technological advancements, increased resources, or a more skilled workforce.