Microeconomics: Monopoly and Oligopoly Concepts
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Questions and Answers

Which scenario would cause Firm A to gain the most from a cartel agreement?

  • All firms, except Firm A, cooperate and restrict output. (correct)
  • Firm A restricts output, while the other firms do not.
  • All firms revert back to their competitive outputs.
  • All firms, including A, cooperate and restrict output.
  • No firms restrict output.

A cartel can enforce output restrictions effectively and is likely to last long.

False (B)

What are the three conditions required for price discrimination to be possible?

  1. Firms have market power, 2) Consumers differ in their valuations of the product, 3) Firms can prevent arbitrage.

A monopoly is a market containing ________.

<p>a single firm</p> Signup and view all the answers

What type of demand curve does a monopoly firm face?

<p>Downward sloping (A)</p> Signup and view all the answers

For a monopolist, marginal revenue is greater than price.

<p>False (B)</p> Signup and view all the answers

Price discrimination increases firms' profits because it allows them to charge ________ prices to different consumers.

<p>different</p> Signup and view all the answers

Match the definition with the corresponding economic term.

<p>Market Power = The ability of a firm to influence the price of its product. Arbitrage = The practice of taking advantage of price differences. Consumer Surplus = The difference between what consumers are willing to pay and what they actually pay. Hurdle Pricing = Creating obstacles for consumers to get lower prices.</p> Signup and view all the answers

What is the total costs for the family-owned firm?

<p>$605,000 (C)</p> Signup and view all the answers

What are the implicit costs for the family-owned firm?

<p>$80,000 (B)</p> Signup and view all the answers

A firm's economic profit is calculated by subtracting explicit costs from total revenues.

<p>False (B)</p> Signup and view all the answers

What is the primary strategy for a monopolistically competitive firm to maximize its profits in the short run?

<p>By equating MC with MR (A)</p> Signup and view all the answers

Define total product (TP).

<p>Total product (TP) is the total amount of output produced during a given period of time.</p> Signup and view all the answers

Oligopolistic firms will always make more joint profits if they choose to cheat on a cooperative agreement.

<p>False (B)</p> Signup and view all the answers

The law of diminishing returns states that as more workers are added, each worker's _______ product initially rises.

<p>marginal</p> Signup and view all the answers

For which of the following is the implicit cost potentially different from the explicit cost?

<p>The use of firm-owned assets. (D)</p> Signup and view all the answers

What is collusion in the context of oligopoly?

<p>Collusion is when firms agree to cooperate in order to restrict output and raise prices.</p> Signup and view all the answers

Match the following concepts with their definitions:

<p>Total Product (TP) = Total amount of output produced during a specific time Average Product (AP) = Total product divided by the number of units of input Marginal Product (MP) = Additional output generated from an additional unit of input Diminishing Returns = Decrease in the incremental output from an additional input after a certain point</p> Signup and view all the answers

The strategic dilemma faced by oligopolistic firms revolves around whether to cooperate or __________.

<p>compete</p> Signup and view all the answers

Which of the following can create entry barriers for new firms in an oligopolistic market?

<p>All of the above (D)</p> Signup and view all the answers

What characterizes the short run in production?

<p>In the short run, some factors of production are fixed, typically capital, while others can be variable.</p> Signup and view all the answers

Match the following types of collusion with their definitions:

<p>Explicit collusion = Firms formally agree to restrict output Tacit collusion = Firms cooperate without formal agreements</p> Signup and view all the answers

Which of the following best describes a differentiated product?

<p>A group of products that are similar but can have different prices. (C)</p> Signup and view all the answers

Firms in perfectly competitive markets are price setters.

<p>False (B)</p> Signup and view all the answers

Predatory pricing is a strategy intended to deter new firms from entering a market.

<p>True (A)</p> Signup and view all the answers

What do firms in monopolistic competition ignore when making pricing decisions?

<p>Competitors</p> Signup and view all the answers

In a simplified duopoly scenario, what is the output produced when firms choose to cooperate?

<p>1/2 of the monopoly output</p> Signup and view all the answers

In monopolistic competition, firms face a ___________ demand curve due to the differentiation of their products.

<p>negatively sloped</p> Signup and view all the answers

Match the following market characteristics with their respective market structures:

<p>Monopolistic Competition = Many small firms with differentiated products Oligopoly = Few large firms with strategic interdependence Perfect Competition = Many firms with identical products Monopoly = One firm dominates the market</p> Signup and view all the answers

What is a primary reason firms in imperfectly competitive markets engage in non-price competition?

<p>To differentiate their products and attract customers. (B)</p> Signup and view all the answers

A firm’s economic profit includes:

<p>Both explicit and implicit costs (C)</p> Signup and view all the answers

Under monopolistic competition, firms minimize average total costs (ATC) in the long run.

<p>False (B)</p> Signup and view all the answers

Name three industries commonly associated with monopolistic competition.

<p>Restaurants, clothing, hair stylists</p> Signup and view all the answers

In the short run, all factors of production are variable.

<p>False (B)</p> Signup and view all the answers

What is the minimum point of the average total cost (ATC) curve associated with?

<p>The intersection with the marginal cost (MC) curve.</p> Signup and view all the answers

In a perfectly competitive market, firms are __________.

<p>price takers</p> Signup and view all the answers

Diminishing marginal returns occur when:

<p>Each additional worker increases output at a decreasing rate (A)</p> Signup and view all the answers

Explicit costs can be calculated by adding __________, __________, and __________.

<p>wages, rent, depreciation</p> Signup and view all the answers

Calculate the explicit costs if the total revenue is $500,000 and the wages amount to $200,000, rent to $105,000, and depreciation to $25,000.

<p>$330,000</p> Signup and view all the answers

The fraction of total market sales controlled by a specified number of the industry’s largest firms is known as ________.

<p>the concentration ratio (B)</p> Signup and view all the answers

Advertising is more prevalent in monopolistic competition than it is in a monopoly.

<p>True (A)</p> Signup and view all the answers

What market structure is characterized by many firms, freedom of entry and exit, and somewhat differentiated products?

<p>monopolistic competition</p> Signup and view all the answers

Differentiated products refer to a group of commodities that are similar enough to be called the same product, but dissimilar enough to be ________.

<p>easily identified as different</p> Signup and view all the answers

A firm’s ability to raise price without losing all of its sales refers to its ________.

<p>market power (B)</p> Signup and view all the answers

An industry that contains two or more firms, at least one of which produces a significant portion of the industry’s total output, is known as ________.

<p>an oligopoly (B)</p> Signup and view all the answers

What is the theory that studies decision-making in situations where one player anticipates the reaction of other players to its own action?

<p>game theory</p> Signup and view all the answers

Match the following market structures with their characteristics:

<p>Perfect Competition = Many firms, identical products, no barriers Monopoly = Single firm dominates, very high barriers Monopolistic Competition = Many firms, differentiated products Oligopoly = Few firms, significant control over prices</p> Signup and view all the answers

Flashcards

Economic Profit

Economic profit considers both explicit and implicit costs, representing the difference between total revenue and all costs.

Explicit Costs

Explicit costs are the direct payments made to other factors of production, such as wages, rent, or materials.

Implicit Costs

Implicit costs are the opportunity costs of using resources that a firm already owns or controls. These include, for example, the owner’s time or lost opportunities

Fixed Input (Short Run)

In the short run, some inputs, like capital, cannot be easily changed in quantity.

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Marginal Cost (MC)

Marginal cost is the additional cost a firm incurs by producing one additional unit of output.

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Average Total Cost (ATC)

The average total cost is the total cost divided by the quantity produced.

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Perfect Competition (Market Structure)

A market structure where firms are price takers, and many buyers and sellers exist with similar products.

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Diminishing Marginal Returns

When adding more of a variable input to fixed input factors causes decreasing increases in total output.

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Short Run

Time period where some factors of production are fixed.

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Long Run

Time period where all factors of production can be varied.

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Total Product (TP)

Total output produced during a specific time period.

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Average Product (AP)

Total product divided by the number of variable inputs (usually labor).

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Diminishing Marginal Product

When adding more of a variable input (like workers), output increases initially, then eventually slows down and decreases per unit of input.

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Cartel Incentive to Cheat

An individual firm in a cartel has an incentive to cheat on agreed output restrictions to increase its own profits, even if it harms the overall cartel profits.

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Cartel Sustainability

Cartels are difficult to sustain because enforcing output restrictions and preventing new entrants is challenging. Ultimately the cartel often collapses due to participants' incentives to cheat.

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Price Discrimination

Charging different prices for the same product with the same cost, based on differences in consumers' willingness to pay.

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Price Discrimination Conditions

Price discrimination is possible when firms have market power, consumers have differing valuations of the product, and firms can prevent arbitrage.

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Hurdle Pricing

Creating obstacles for consumers to overcome to get a reduced price.

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Monopoly Structure

A market with a single firm.

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Monopoly Demand Curve

Downward-sloping, implying the firm must lower price to sell more.

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Monopoly Marginal Revenue

Always below price, a result of the firm needing to decrease price to attract more customers.

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Differentiated Product

A group of similar products with slight differences, allowing for different prices.

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Imperfect Competition

Market structure where firms have some control over prices, due to differentiated products.

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Monopolistic Competition

Many firms selling slightly different products; firms have some control over price, but are not monopolies.

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Excess Capacity

In monopolistic competition, firms produce less than the minimum efficient scale; this is not necessarily a waste.

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Price Setter

A firm that can influence the price of its product due to a differentiated product

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Non-price Competition

Competition among firms in markets that differentiate their products and don't just compete on price.

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Oligopoly

Market structure with a small number of large firms.

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Concentration Ratio

Percentage of total industry sales controlled by a given number of the largest firms.

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Why is Advertising More Prevalent in Monopolistic Competition?

Firms in monopolistic competition need to advertise more to attract consumers from other firms because their products are differentiated, unlike monopolies who have no competition.

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Market Power

A firm's ability to raise price without losing all of its sales.

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Game Theory

The theory that studies decision-making in situations where one player anticipates the reaction of other players to its own action.

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MES (Minimum Efficient Scale)

The level of output where a firm can minimize its average total cost of production.

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Collusion

When firms in an oligopoly secretly agree to cooperate, restricting output and raising prices. Think of OPEC setting oil production targets.

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Tacit Collusion

Firms in an oligopoly cooperate without explicit agreements, but by observing each other's actions and reacting accordingly. Think of airlines adjusting prices based on competitors' moves.

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Entry Barriers

Obstacles that make it difficult for new firms to enter a market, allowing existing firms to maintain market power. Think of high startup costs or brand loyalty.

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Brand Proliferation

A strategy where firms create a wide variety of products to limit space for new entrants, making it harder to gain market share. Think of a company having many different brands of shampoo.

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Advertising as an Entry Barrier

Using heavy advertising to create brand loyalty and discourage new entrants, as potential competitors would need to spend heavily on advertising. Think of Coke and Pepsi.

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Predatory Pricing

A strategy where an established firm temporarily lowers prices below cost to drive out competitors, making entry less attractive. Think of Amazon offering deep discounts.

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Study Notes

Microeconomics Study Notes

  • Microeconomics is the study of individual economic agents such as households and firms.
  • It analyses how these agents make decisions in markets.
  • It examines how different market structures affect firms' behaviors and product prices.

Firm's Costs and Profits

  • Explicit costs are the direct monetary payments a firm makes for inputs (e.g. wages, rent).
  • Implicit costs are the opportunity costs of using resources that the firm already owns (e.g., owner's forgone salary).
  • Economic profit considers both explicit and implicit costs, while accounting profit only considers explicit costs.

Short-Run Costs

  • Total cost (TC): the sum of fixed and variable costs.
  • Fixed cost (FC): costs that do not vary with output in the short run (e.g., rent).
  • Variable cost (VC): costs that vary with output in the short run (e.g., labor costs).
  • Average total cost (ATC): total cost divided by output.
  • Average fixed cost (AFC): fixed cost divided by output.
  • Average variable cost (AVC): variable cost divided by output.
  • Marginal cost (MC): the change in total cost from producing one more unit of output.

Long-Run Costs

  • All inputs are variable in the long run.
  • Firms can adjust to various levels of output in the long run.
  • The long-run average cost (LRAC), curve shows the lowest cost at which a firm can produce any output level.
  • The LRAC curve is usually U-shaped.
  • Increasing returns to scale, constant returns to scale, and decreasing returns to scale explain the shape of the LRAC curve.

Market Structures

  • Perfect competition: many firms, identical products, free entry/exit. Firms are price takers (take prevailing market price).
  • Monopoly: one firm, no close substitutes, significant barriers to entry. Firms are price setters (set their own price).
  • Monopolistic competition: many firms, differentiated products, relatively easy entry/exit. Firms are price setters (but not as much as in monopoly).
  • Oligopoly: a few firms, significant strategic interaction, substantial barriers to entry. All firms must consider how their decisions affect others.

Short-Run Profit Maximization

  • In perfect competition, produce where price equals marginal cost (P = MC).
  • In monopoly, produce where marginal revenue equals marginal cost (MR = MC).
  • In monopolistic competition and oligopoly, equate marginal revenue (MR) to marginal cost (MC).
  • Firms will keep operating as long as price exceeds average variable cost (P > AVC). If price falls below this level, firms shut down to minimize losses.
  • Firms in general will produce where marginal revenue equals marginal cost (MC = MR).

Long-Run Profit Maximization

  • In perfect competition, firms will operate at the minimum average total cost (ATC) and earn normal profits.
  • In monopoly and monopolistic competition, firms may earn economic profits. The existence of economic profits drives new firms into the market. This reduces the market price and eventually eliminates economic profit.
  • Firms in general will produce where price equals average total cost (P=ATC) in the long run to have zero economic profit.

Price Discrimination

  • Firms practicing price discrimination can sell goods or services at different prices to different consumer segments. Often done to extract surplus.

Cartels

  • Cartels are groups of firms who come together and agree to act like a monopoly in order to gain higher profit.
  • They can raise prices and reduce output.
  • These cartels are susceptible to member firms' incentives to cheat and undercut the group output agreement. This often leads to the cartel's dissolution.

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Description

Test your understanding of key concepts in microeconomics, focusing on monopolies, oligopolies, and price discrimination. Explore scenarios involving cartel agreements and calculate economic profits for family-owned firms. This quiz is ideal for students studying microeconomic theory.

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