Market Structure: Perfect Competition and Monopoly

Size: px
Start display at page:

Download "Market Structure: Perfect Competition and Monopoly"

Transcription

1 WSG8 7/7/03 4:34 PM Page Market Structure: Perfect Competition and Monopoly OVERVIEW One of the most important decisions made by a manager is how to price the firm s product. If the firm is a profit maximizer, the price charged must be consistent with the realities of the market and economic environment within which the firm operates. Remember, price is determined through the interaction of supply and demand. A firm s ability to influence the selling price of its product stems from its ability to influence the market supply and, to a lesser extent, on its ability to influence consumer demand. One important element in the firm s ability to influence the economic environment within which it operates is the nature and degree of competition. A firm operating in an industry with many competitors may have little control over the selling price of its product because its ability to influence overall industry output is limited. In this case, the manager will attempt to maximize the firm s profit by minimizing the cost of production by employing the most efficient mix of productive resources. On the other hand, if the firm has the ability to significantly influence overall industry output, or if the firm faces a downward-sloping demand curve for its product, then the manager will attempt to maximize profit by employing an efficient input mix and by selecting an optimal selling price. Market structure refers to the competitive environment within which a firm operates. Economists divide market structure into four basic types: Perfect competition, monopolistic competition, oligopoly, and monopoly. Perfect competition and monopoly represent opposite ends of the competitive spectrum. Managerial Economics: Theory and Practice 113 Copyright 2003 by Academic Press. All rights of reproduction in any form reserved.

2 WSG8 7/7/03 4:34 PM Page Market Structure: Perfect Competition and Monopoly The characteristics of a perfectly competitive industry are a large number of sellers and buyers, a standardized product, complete information about market prices, and complete freedom of entry into and exit from the industry. A perfectly competitive firm produces a minuscule proportion of the total industry output. Thus, although the market demand curve is downward sloping, the demand curve from the perspective of the individual firm is perfectly elastic (horizontal). A perfectly competitive firm can sell as much as it wants at an unchanged price. A perfectly competitive firm has no market power, and is said to be a price taker. Total revenue is defined as price (P) times output. Marginal revenue (MR) is defined as the increase (decrease) in total revenue given an increase (decrease) in output. For a perfectly competitive firm, marginal revenue is identically equal to the selling price. Since, MR = P, then MR = ATR (average total revenue). All profit-maximizing firms produce at an output level where marginal revenue equals marginal cost (MC), i.e., MR = MC. Since MR = P 0,the profit-maximizing condition for a perfectly competitive firm is P 0 = MC. If price is greater than average total cost, then a perfectly competitive firm earns positive economic profits, which will attract new firms into the industry and shifts the market supply curve to the right and drives down the selling price. If price is less than average total cost, then the firm generates economic losses, which cause firms to exit the industry and shift the market supply curve to the left and drive up the selling price. When P 0 = ATC, then a perfectly-competitive firm breaks even, i.e., earns zero economic profits. At this break-even price, the industry is in long-run competitive equilibrium, which implies that P 0 = MC = ATC. Finally, since MC = ATC per unit costs is minimized, i.e., perfectly competitive firms produce efficiently in the long run. In the short run, a perfectly competitive firm earning an economic loss will remain in business as long as price is greater than average variable cost (AVC). This is because the firm s revenues cover all of its fixed cost and part of its variable cost. When P 0 < AVC, the firm will shut down because revenues cover only part of its variable cost and none of its fixed cost.when P 0 = AVC, then the firm is indifferent between shutting down and remaining in business. This is because in either case the firm s economic loss is equivalent to its total fixed cost. This price is called the shutdown price. The characteristics of a monopolistic industry are a single firm, a unique product, absolute control over supply within a price range, and highly restrictive entry into or exit from the industry. Unlike the perfectly competitive firm, a monopoly faces the downward sloping market demand curve, which implies that the selling price is negatively related to the output of the firm. A monopolist has market power and is said to be a price maker.

3 WSG8 7/7/03 4:34 PM Page 115 Multiple Choice Questions 115 A profit-maximizing monopolist will produce at an output level where MR = MC. Unlike a perfectly competitive firm, selling price is always greater than the marginal revenue, i.e., P > MR. Like a perfectly competitive firm, the monopolist earns an economic profit when P > ATC. Unlike a perfectly competitive firm, this condition is both a short-run and a longrun competitive equilibrium since new firms are unable to enter the industry to increase supply, lower selling price, and compete away the monopolist s economic profits. Finally, since MC < ATC, per unit costs are not minimized, i.e., monopolists produce inefficiently in the long run. A natural monopoly is a firm that is able to satisfy total market demand at a per unit cost of production that is less than an industry comprising two or more firms. Collusion refers to a formal agreement among producers in an industry to coordinate pricing and output decisions to limit competition and maximize collective profits. MULTIPLE CHOICE QUESTIONS 8.1 Perfect competition is characterized by: A. Large number of firms; heterogeneous product; easy entry and exit. B. Large number of firms; homogeneous product; incomplete information. C. Large number of firms; homogeneous product; easy entry and exit. D. Few firms; homogeneous product; difficult entry and exit. E. Few firms; differentiated product; easy entry and exit. 8.2 Firms in perfectly-competitive industries may be characterized as: A. Price takers. B. Price creators. C. Price makers. D. Price setters. E. Price negotiators. 8.3 A firm operating in a perfectly-competitive industry faces a demand that is: A. Vertical. B. Horizontal. C. Downward sloping. D. Upward sloping.

4 WSG8 7/7/03 4:34 PM Page Market Structure: Perfect Competition and Monopoly 8.4 In the short run, perfectly-competitive firms may earn: A. Positive economic profit. B. Positive accounting profit. C. Normal profit. D. Negative economic profit. E. All of the above. 8.5 To maximize profit, a perfectly-competitive firm should produce up to the output level where: A. MR = MC. B. P = MR. C. P = MC. D. P = ATC. E. A and C are correct. 8.6 To maximize profit, a perfectly-competitive firm should produce up to the output level where: I. The addition to total cost is equal to the selling price of the product. II. The cost of producing the last unit of output is equal to the selling price of the product. III. Marginal profit is zero. Which of the following is correct? A. I only. B. II only. C. III only. D. I and II only. E. I and III are correct. 8.7 In the short run, a profit-maximizing perfectly-competitive firm will definitely earn positive economic profits when: A. P = MC. B. MR = MC. C. P > ATC. D. P > AVC. E. A and B are correct. 8.8 A profit-maximizing perfectly-competitive firm will break even when: A. P = MC. B. MR = MC. C. AVC = ATC. D. P = ATC.

5 WSG8 7/7/03 4:34 PM Page 117 Multiple Choice Questions A profit-maximizing perfectly-competitive firm will shut down when: A. p < 0. B. P < MC. C. P < ATC. D. P < AVC If P < MC, then a profit-maximizing perfectly-competitive firm can increase its economic profit by: A. Increasing output. B. Decreasing output. C. Reducing total fixed cost. D. Lowering wage rates. E. B, C, and D are correct Suppose that a profit-maximizing perfectly-competitive firm is able to sell all of its output for $10 per unit. If the firm total cost equation is TC = Q + 0.5Q 2, then this firm: A. Is earning positive economic profit. B. Is earning negative economic profit. C. Should increase the selling price of its product. D. Should shut down. E. Both B and D are correct In the short run, the supply curve of a profit-maximizing perfectlycompetitive firm is: A. The MC curve above the ATC curve. B. The MC curve above the AVC curve. C. The ATC curve above the MC curve. D. The AVC curve above the MC curve. E. The ATC curve If a typical firm in a perfectly-competitive industry is earning a negative economic profit, then we can expect: A. Some firms to exit the industry. B. The market price of the product to rise. C. The market supply curve to shift to the left. D. Industry supply to fall. E. All of the above Suppose that a profit-maximizing, perfectly-competitive firm can sell its entire output for $30. The firm s marginal cost, average variable cost, and average total cost are $20, $25, and $35, respectively.

6 WSG8 7/7/03 4:34 PM Page Market Structure: Perfect Competition and Monopoly I. This firm should shut down. II. This firm should continue to produce. III. This firm should increase its output. IV. This firm is earning an economic loss. Which of the following is correct? A. I and IV only. B. III only. C. IV only. D. II and III only In the long run, a profit-maximizing, perfectly-competitive firm will product at an output level where: A. P = MC = ATC. B. P = MC > ATC. C. MR > MC > ATC. D. P > ATC In the long run, a profit-maximizing, perfectly-competitive firm will earn: A. A normal rate of return. B. Positive economic profit. C. Negative economic profit. D. Accounting profit that is greater than economic profit The function form of the total revenue equation for a perfectlycompetitive firm: A. Is quadratic. B. Is cubic. C. Is logarithmic. D. Is linear. E. Varies from firm to firm A profit-maximizing firm produces at an output level where the: A. Slope of the total revenue curve is greater than the slope of the total cost curve. B. Slope of the total revenue curve is less than the slope of the total cost curve. C. Slope of the total revenue curve is the same as the slope of the total cost curve. D. Slope of the marginal revenue curve is the same as the slope of the marginal cost curve.

7 WSG8 7/7/03 4:34 PM Page 119 Multiple Choice Questions Monopolies are often referred to as: A. Price takers. B. Price creators. C. Price makers. D. Price setters. E. Price negotiators To maximize profit, a profit-maximizing monopolist should produce at an output level where: A. MR = MC. B. P = MR. C. P = MC. D. P = ATC. E. A and C are correct For a profit-maximizing monopolist: A. P > MR. B. P = MR. C. P > MC. D. P = ATC. E. Both A and C are correct Monopolies may derive their market power from: A. Patent rights. B. Control of productive resources. C. Economies of scale. D. Government franchise. E. All of the above Natural monopolies exist because: A. The marginal revenue curve intersects the average total cost curve at its minimum point. B. A single firm is able to satisfy market demand at lower per unit cost than several firms. C. They earn substantial economics profits, which enable them buy out competitors. D. They own the patent rights to a product Consider Figure 1, which depicts an industry that is dominated by a single firm. The profit maximizing price and output level are: A. $10 and 50 units. B. $20 and 60 units. C. $22 and 50 units. D. $25 and 50 units.

8 WSG8 7/7/03 4:34 PM Page Market Structure: Perfect Competition and Monopoly 8.25 Consider Figure 1, which depicts an industry that is dominated by a single firm. At the profit-maximizing level of output, the firm s total cost is: A. $500. B. $1,000. C. $1,100. D. $1,200. E. None of the above. FIGURE Consider Figure 1, which depicts an industry that is dominated by a single firm. At the profit-maximizing level of output, the firm s total profit is: A. $150. B. $250. C. $750. D. $1,250. E. None of the above Consider Figure 1, which depicts a perfectly competitive industry comprised of 20 perfectly identical firms. The total output of each firm in the industry is: A. 2 units. B. 3 units. C. 4 units. D. 5 units. E. None of the above Consider Figure 1, which depicts a perfectly competitive industry comprise of 20 perfectly identical firms. Each firm in the industry is earning an economic profit of: A. $0. B. $7.50. C. $ D. $ E. $ Consider Figure 1, which depicts a perfectly competitive industry comprise of 20 perfectly identical firms. This industry is in:

9 WSG8 7/7/03 4:34 PM Page 121 Multiple Choice Questions 121 A. Short-run competitive equilibrium. New firm s will enter the industry, which will result in a decline in the market price and an increase in the output level. B. Short-run competitive equilibrium. Some firm s will exit the industry, which will result in an increase in the market price and an decline in the output level. C. Long-run competitive equilibrium. Firms will neither enter nor exit the industry and the market price and output level will remain unchanged. D. Long-run competitive equilibrium. Each firm in the industry will earn above normal profits The demand curve for a product produced by a monopolist is most likely: A. Vertical. B. Horizontal. C. Downward sloping. D. The monopolist does not face a demand curve since price is a function of the number of units produced The demand equation for a product sold by a profit-maximizing monopolist is Q = P. If the monopolist s total cost equation is TC = Q + 0.5Q 2, then the firm s profit-maximizing price is: A. $ B. $ C. $ D. $ E. None of the above The market demand for the output of a monopoly is Q = P. The monopolist s total cost of production is TC = Q + 2.5Q 2. The monopolist s maximum profit is: A. $50. B. $100. C. $250. D. $400. E. None of the above In the long run, monopolies generally: A. Earn an economic profit. B. Earn a normal rate of return. C. Earn zero economic profit. D. Break even.

10 WSG8 7/7/03 4:34 PM Page Market Structure: Perfect Competition and Monopoly 8.34 A monopolist is currently maximizing its profits. An increase in total fixed cost will cause the monopolist to: A. Increase output. B. Decrease output. C. Lower total variable cost. D. Do nothing. E. This question cannot be answered with the information provided The Lerner index is a: A. Measure of monopoly power. B. Measure of industrial concentration. C. Measure of total deadweight loss. D. None of the above The Lerner index is: A. Always equal to unity for a monopolist. B. Always equal to zero for a perfectly-competitive firm. C. The negative inverse of the price elasticity of demand. D. Both B and C are correct At the profit-maximizing level of output a firm s marginal cost is $8. If the selling price is $16, then the price elasticity of demand for the firm s product is: A B C D At the profit-maximizing level of output a firm s marginal cost is $8. If the selling price is $16, then measure of the firm s monopoly power as measured by the Lerner index is: A B C D Suppose that a group of venture capitalists organize a syndicate to acquire every firm in a perfectly competitive industry. The most likely result will be: A. A higher price and greater output. B. A higher price and lower output. C. No change in price or output. D. A lower price and greater output. E. A lower price and lower output.

11 WSG8 7/7/03 4:34 PM Page 123 Shorter Problems Suppose that a group of venture capitalists organize a syndicate to acquire every firm in a perfectly competitive industry. The most likely result will be: A. An increase in consumer surplus. B. A decrease in consumer surplus. C. A decrease in consumer deadweight loss. D. A decrease in producer deadweight loss. E. A decline in per unit cost of production. SHORTER PROBLEMS 8.1 The Safari Company produces a line lightweight hiking boots. Safari s total monthly cost equation is TC = 1, Q Q 2 where Q represents a pair of hiking boots. Suppose that Safari can sell as many pair of hiking boots that it produces for $100. A. Determine Safari s profit-maximizing monthly production of hiking boots. B. What is Safari s monthly profit? 8.2 The supply and demand curves for a perfectly-competitive market are: Q D = 32,500-25P Q S = P A. What are the market-equilibrium price and quantity? B. Suppose that the firms in this industry enter into a collusive agreement to form a monopoly. If the monopolist is a profit maximizer, then what is the new price and industry output? 8.3 A perfectly-competitive firm s total cost function is TC = 4, Q - 25Q Q 3 where Q represents units of output produced. Below what price should the firm shut down its operations? 8.4 The market-determined price in a perfectly competitive industry is P = $5. The total cost equation of an individual firm in this industry is TC = Q + 0.1Q 2 Calculate the value of the Lerner index for this firm.

12 WSG8 7/7/03 4:34 PM Page Market Structure: Perfect Competition and Monopoly 8.5 The demand equation for a product sold by a monopolist is P = Q The total cost equation of the firm is TC = Q + 0.5Q 2 Calculate the value of the Lerner index for this firm. 8.6 Suppose that a firm s long-run average total cost curve is: LRATC = Q + 0.5Q 2 Determine the long-run, profit-maximizing price and output level for a perfectly-competitive firm. 8.7 The demand equation confronting a profit-maximizing monopolist is Q = P A. Calculate the monopolist s total-revenue-maximizing price and output level. At this output level, calculate the price-elasticity of demand. What is the value of the Lerner index? B. Suppose that the monopolist s total cost equation is TC = Q. Calculate the monopolist s profit-maximizing price and output level. At this output level, calculate the price-elasticity of demand. What is the value of the Lerner index? LONGER PROBLEMS 8.1 Suppose that the supply and demand equations for a perfectlycompetitive market are: Q D = P Q S = P A. Calculate the market-equilibrium price and quantity. B. Suppose that there are 25 firms in the industry. How much does each firm in the industry produce? C. Suppose that the total cost equation of each firm in the industry is TC = Q + 0.2Q 2. Is each firm producing at its profitmaximizing level of output? If not, when how should each firm alter its production? D. Is each firm in the industry in long-run competitive equilibrium?

13 WSG8 7/7/03 4:34 PM Page 125 Answers to Multiple Choice Questions A monopolist that faces the following market demand and total cost functions: Q = P TC = Q + 2.5Q 2 A. What is the profit-maximizing price (P m ) and output (Q m ) for this firm? B. At this price and quantity combination, how much is consumer surplus? C. How much economic profit is the monopolist earning? D. Suppose that government regulators require that the monopolist set the selling price of their product at the long-run perfectlycompetitive rate. At this price, what is consumer surplus? ANSWERS TO MULTIPLE CHOICE QUESTIONS 8.1 C. 8.2 A. 8.3 B. 8.4 E. 8.5 E. 8.6 E. 8.7 C. 8.8 D. 8.9 D B B B E D A A D C C A E E B D C A B A C C C D A D A D C B B B.

14 WSG8 7/7/03 4:34 PM Page Market Structure: Perfect Competition and Monopoly SOLUTIONS TO SHORTER PROBLEMS 8.1 A. p=tr - TC = 100Q - 1,250-10Q Q 2 =-1, Q Q 2 dp/dq = Q = 0, i.e., the first-order condition for p maximization. Q* = 900 pair of hiking boots per month. d 2 p/dq 2 =-0.1 < 0, i.e., the second-order condition for p maximization is satisfied. B. p=-1, (900) (900) 2 = $39,250 per month 8.2 A. Q D = Q S 32,500-25P = P 60P = 33,000 P* = $550 Q* = 32,500-25(550) = (550) = 18,750 B. P = 1, Q TR = PQ = (1, Q)Q = 1,300Q Q 2 MR = 1, Q The industry supply curve is the sum of the individual firms marginal cost curves. P = (500/35) + (1/35)Q = MC To maximize profit, the monopolist will produce where MR = MC. 1, Q = 500/35 + 1/35Q Q* = 1, P* = 1, (1,285.71) = $1, TVC = 800Q - 25Q Q 3 AVC = TVC/Q = Q + 0.2Q 2 davc/dq = Q = 0, i.e., the first-order condition for AVC minimization. d 2 AVC/dQ 2 = 0.4 > 0, i.e., the second-order condition for AVC minimization is verified. Q* = 62.5

15 WSG8 7/7/03 4:34 PM Page 127 Solutions to Shorter Problems 127 A profit-maximizing firm produces at the output level where P = MC. P = MC = dtvc/dq = Q + 0.6Q 2 = (62.5) + 0.6(62.5) 2 = $18.75 If the price falls below $18.75 per unit, then the firm should shut down. 8.4 p=tr - TC = 5Q - (10 + 2Q + 0.1Q 2 ) = Q - 0.1Q 2 The profit-maximizing output level is dp/dq = 3-0.2Q = 0 i.e., the first-order condition for p maximization. d 2 p/dq 2 = 0.2 > 0, i.e., the second-order condition for p maximization is verified. Q* = 15 MC = dtc/dq = Q = (15) = 5 The value of the Lerner index is -1/e P = (P - MC)/P = (5-5)/5 = 0/5 = 0 Thus, this perfectly-competitive firm has no monopoly power. The firm s proportional markup over marginal cost is zero, i.e., the firm is earning zero economic profit. 8.5 p=tr - TC = PQ - TC = (75-4.5Q)Q - ( Q + 0.5Q 2 ) = Q - 5Q 2 dp/dq = 50-10Q = 0, i.e., the first-order condition for p maximization. d 2 p/dq 2 =-10 < 0, i.e., the second-order condition for p maximization is satisfied. Q* = 5 P* = (5) = $52.5 MC = dtc/dq = 25 + Q = = 30 The value of the Lerner index is -1/e P = (P - MC)/P = ( )/52.5 = 9/16 = This firm enjoys monopoly power. The firm s proportional markup over marginal cost is 52.9 percent, i.e., the firm is earning positive economic profit.

16 WSG8 7/7/03 4:34 PM Page Market Structure: Perfect Competition and Monopoly 8.6 In the long run, perfectly competitive firms will produce at the minimum point on the LRATC curve. dlratc/dq = Q = 0, i.e., the first-order condition for LRATC minimization. d 2 LRATC/dQ 2 = 1 > 0, i.e., the second-order condition for LRATC minimization is verified. Q* = 20 Since the demand curve is horizontal and tangent to LRATC, then the selling price is equal to the minimum value of LRATC, i.e., LRATC = (20) + 0.5(20) 2 = 50 = P* 8.7 A. P = 50-2Q TR = 50Q - 2Q 2 dtr/dq = 50-4Q = 0, i.e., the first-order condition for TR maximization. d 2 TR/dQ 2 =-4 < 0, i.e., the second-order condition for TR maximization is satisfied. Q* = 12.5 P* = 50-2(12.5) = $25 e P = (dq/dp)(p/q) = -0.5(25/12.5) = -1 Lerner index = 1/-e P = 1 B. p=tr - TC TR = PQ = (50-2Q)Q = 50Q - 2Q 2 p=(50q - 2Q 2 ) - ( Q) = Q - 2Q 2 dp/dq = 30-4Q = 0, i.e., the first-order condition for p maximization. d 2 p/dq 2 =-4 < 0, i.e., the second-order condition for p maximization is satisfied. Q* = 7.5 P* = 50-2(7.5) = $35 e P = (dq/dp)(p/q) = -0.5(35/7.5) = Lerner index = 1/-e P = SOLUTIONS TO LONGER PROBLEMS 8.1 A. Q D = Q S P = P 80P = 1,600 P* = $20 Q* = (20) = (20) = 625

17 WSG8 7/7/03 4:34 PM Page 129 Solutions to Longer Problems 129 B. 625/25 = 25, i.e., each firm in the industry produces 25 units of output. C. TR = PQ = 20Q p=tr - TC = 20Q - (5 + 10Q + 0.2Q 2 ) = Q - 0.2Q 2 dp/dq = Q = 0, i.e., the first-order condition for p maximization. Q* = 25 d 2 p/dq 2 =-0.4 < 0, i.e., the second-order condition for p maximization is verified. Since each firm in the industry is producing at the profitmaximizing level of output then there is currently no reason to alter the current level of production. D. If a perfectly-competitive firm is in long-run competitive equilibrium then P = ATC at the profit-maximizing level of output. ATC = TC/Q = (5 + 10Q + 0.2Q 2 )/Q = 5Q Q = 5(25) (25) = 15.2 π 20 = P* Alternatively, an individual firm in a perfectly-competitive industry is in long-run competitive equilibrium when p = 0.At the current level of output, the profit of each firm is p* = (25) - 0.2(25) 2 = $120 Since each firm is earning a positive economic profit, then new firms will enter the industry, which will increase industry supply and result in lower prices. This process will continue until each firm earns zero economic profit. Since the MC curve of each firm is upward sloping, then as total industry output increases, the output of each individual firm declines. 8.2 A. P = Q TR = PQ = 125Q Q 2 p=tr - TC = (125Q Q 2 ) - (500-55Q + 2.5Q 2 ) = Q - 15Q 2 dp/dq = Q = 0, i.e., the first-order condition for p maximization. d 2 p/dq 2 =-30 < 0, i.e., the second-order condition for p maximization is satisfied.

18 WSG8 7/7/03 4:34 PM Page Market Structure: Perfect Competition and Monopoly Q m * = 6 P m * = (6) = $50 B. Consumer Surplus = 0.5(125 - P m )Q m = 0.5(125-50)6 = $225 C. p* = (6) - 15(6) 2 = $40 D. The perfectly-competitive, long-run equilibrium price is P = MC = ATC minimum ATC = TC/Q = (500-55Q + 2.5Q 2 )/Q = 500Q Q datc/dq = -500Q = 0, i.e., the first-order condition for ATC minimization. Q* = d 2 p/dq 2 = 1,000Q -3 = 1,000/(14.14) 3 > 0, i.e., the second-order condition for ATC minimization is satisfied. P pc * = 500Q Q = 500(14.14) (14.14) = $15.71 Q pc = (15.71) = 8.74 Consumer Surplus = 0.5(125 - P pc )Q pc = 0.5( )8.74 = $477.60

Cost OVERVIEW. WSG6 7/7/03 4:36 PM Page 79. Copyright 2003 by Academic Press. All rights of reproduction in any form reserved.

Cost OVERVIEW. WSG6 7/7/03 4:36 PM Page 79. Copyright 2003 by Academic Press. All rights of reproduction in any form reserved. WSG6 7/7/03 4:36 PM Page 79 6 Cost OVERVIEW The previous chapter reviewed the theoretical implications of the technological process whereby factors of production are efficiently transformed into goods

More information

Profit and Revenue Maximization

Profit and Revenue Maximization WSG7 7/7/03 4:36 PM Page 95 7 Profit and Revenue Maximization OVERVIEW The purpose of this chapter is to develop a general framework for finding optimal solutions to managerial decision-making problems.

More information

Managerial Economics & Business Strategy Chapter 8. Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

Managerial Economics & Business Strategy Chapter 8. Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets Managerial Economics & Business Strategy Chapter 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets I. Perfect Competition Overview Characteristics and profit outlook. Effect

More information

Practice Questions Week 8 Day 1

Practice Questions Week 8 Day 1 Practice Questions Week 8 Day 1 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The characteristics of a market that influence the behavior of market participants

More information

Learning Objectives. Chapter 6. Market Structures. Market Structures (cont.) The Two Extremes: Perfect Competition and Pure Monopoly

Learning Objectives. Chapter 6. Market Structures. Market Structures (cont.) The Two Extremes: Perfect Competition and Pure Monopoly Chapter 6 The Two Extremes: Perfect Competition and Pure Monopoly Learning Objectives List the four characteristics of a perfectly competitive market. Describe how a perfect competitor makes the decision

More information

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY EXERCISES 3. A monopolist firm faces a demand with constant elasticity of -.0. It has a constant marginal cost of $0 per unit and sets a price to maximize

More information

Market Structure: Duopoly and Oligopoly

Market Structure: Duopoly and Oligopoly WSG10 7/7/03 4:24 PM Page 145 10 Market Structure: Duopoly and Oligopoly OVERVIEW An oligopoly is an industry comprising a few firms. A duopoly, which is a special case of oligopoly, is an industry consisting

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Chapter 11 Perfect Competition - Sample Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Perfect competition is an industry with A) a

More information

Pricing and Output Decisions: i Perfect. Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young

Pricing and Output Decisions: i Perfect. Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young Chapter 9 Pricing and Output Decisions: i Perfect Competition and Monopoly M i l E i E i Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young Pricing and

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. MBA 640 Survey of Microeconomics Fall 2006, Quiz 6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly is best defined as a firm that

More information

Learning Objectives. After reading Chapter 11 and working the problems for Chapter 11 in the textbook and in this Workbook, you should be able to:

Learning Objectives. After reading Chapter 11 and working the problems for Chapter 11 in the textbook and in this Workbook, you should be able to: Learning Objectives After reading Chapter 11 and working the problems for Chapter 11 in the textbook and in this Workbook, you should be able to: Discuss three characteristics of perfectly competitive

More information

Profit Maximization. 2. product homogeneity

Profit Maximization. 2. product homogeneity Perfectly Competitive Markets It is essentially a market in which there is enough competition that it doesn t make sense to identify your rivals. There are so many competitors that you cannot single out

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Practice for Perfect Competition Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following is a defining characteristic of a

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. Principles of Microeconomics, Quiz #5 Fall 2007 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. 1) Perfect competition

More information

Chapter 6 Competitive Markets

Chapter 6 Competitive Markets Chapter 6 Competitive Markets After reading Chapter 6, COMPETITIVE MARKETS, you should be able to: List and explain the characteristics of Perfect Competition and Monopolistic Competition Explain why a

More information

MPP 801 Monopoly Kevin Wainwright Study Questions

MPP 801 Monopoly Kevin Wainwright Study Questions MPP 801 Monopoly Kevin Wainwright Study Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The marginal revenue facing a monopolist A) is

More information

11 PERFECT COMPETITION. Chapter. Competition

11 PERFECT COMPETITION. Chapter. Competition Chapter 11 PERFECT COMPETITION Competition Topic: Perfect Competition 1) Perfect competition is an industry with A) a few firms producing identical goods B) a few firms producing goods that differ somewhat

More information

Understanding Economics 2nd edition by Mark Lovewell and Khoa Nguyen

Understanding Economics 2nd edition by Mark Lovewell and Khoa Nguyen Understanding Economics 2nd edition by Mark Lovewell and Khoa Nguyen Chapter 5 Perfect Competition Chapter Objectives! In this chapter you will: " Consider the four market structures, and the main differences

More information

Chapter. Perfect Competition CHAPTER IN PERSPECTIVE

Chapter. Perfect Competition CHAPTER IN PERSPECTIVE Perfect Competition Chapter 10 CHAPTER IN PERSPECTIVE In Chapter 10 we study perfect competition, the market that arises when the demand for a product is large relative to the output of a single producer.

More information

Pure Competition urely competitive markets are used as the benchmark to evaluate market

Pure Competition urely competitive markets are used as the benchmark to evaluate market R. Larry Reynolds Pure Competition urely competitive markets are used as the benchmark to evaluate market P performance. It is generally believed that market structure influences the behavior and performance

More information

Monopoly WHY MONOPOLIES ARISE

Monopoly WHY MONOPOLIES ARISE In this chapter, look for the answers to these questions: Why do monopolies arise? Why is MR < P for a monopolist? How do monopolies choose their P and Q? How do monopolies affect society s well-being?

More information

Final Exam (Version 1) Answers

Final Exam (Version 1) Answers Final Exam Economics 101 Fall 2003 Wallace Final Exam (Version 1) Answers 1. The marginal revenue product equals A) total revenue divided by total product (output). B) marginal revenue divided by marginal

More information

Monopolistic Competition

Monopolistic Competition In this chapter, look for the answers to these questions: How is similar to perfect? How is it similar to monopoly? How do ally competitive firms choose price and? Do they earn economic profit? In what

More information

Chapter 15: Monopoly WHY MONOPOLIES ARISE HOW MONOPOLIES MAKE PRODUCTION AND PRICING DECISIONS

Chapter 15: Monopoly WHY MONOPOLIES ARISE HOW MONOPOLIES MAKE PRODUCTION AND PRICING DECISIONS Chapter 15: While a competitive firm is a taker, a monopoly firm is a maker. A firm is considered a monopoly if... it is the sole seller of its product. its product does not have close substitutes. The

More information

Chapter 8. Competitive Firms and Markets

Chapter 8. Competitive Firms and Markets Chapter 8. Competitive Firms and Markets We have learned the production function and cost function, the question now is: how much to produce such that firm can maximize his profit? To solve this question,

More information

An increase in the number of students attending college. shifts to the left. An increase in the wage rate of refinery workers.

An increase in the number of students attending college. shifts to the left. An increase in the wage rate of refinery workers. 1. Which of the following would shift the demand curve for new textbooks to the right? a. A fall in the price of paper used in publishing texts. b. A fall in the price of equivalent used text books. c.

More information

D) Marginal revenue is the rate at which total revenue changes with respect to changes in output.

D) Marginal revenue is the rate at which total revenue changes with respect to changes in output. Ch. 9 1. Which of the following is not an assumption of a perfectly competitive market? A) Fragmented industry B) Differentiated product C) Perfect information D) Equal access to resources 2. Which of

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. Principles of Microeconomics Fall 2007, Quiz #6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. 1) A monopoly is

More information

c. Given your answer in part (b), what do you anticipate will happen in this market in the long-run?

c. Given your answer in part (b), what do you anticipate will happen in this market in the long-run? Perfect Competition Questions Question 1 Suppose there is a perfectly competitive industry where all the firms are identical with identical cost curves. Furthermore, suppose that a representative firm

More information

BEE2017 Intermediate Microeconomics 2

BEE2017 Intermediate Microeconomics 2 BEE2017 Intermediate Microeconomics 2 Dieter Balkenborg Sotiris Karkalakos Yiannis Vailakis Organisation Lectures Mon 14:00-15:00, STC/C Wed 12:00-13:00, STC/D Tutorials Mon 15:00-16:00, STC/106 (will

More information

CHAPTER 12 MARKETS WITH MARKET POWER Microeconomics in Context (Goodwin, et al.), 2 nd Edition

CHAPTER 12 MARKETS WITH MARKET POWER Microeconomics in Context (Goodwin, et al.), 2 nd Edition CHAPTER 12 MARKETS WITH MARKET POWER Microeconomics in Context (Goodwin, et al.), 2 nd Edition Chapter Summary Now that you understand the model of a perfectly competitive market, this chapter complicates

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Economics 103 Spring 2012: Multiple choice review questions for final exam. Exam will cover chapters on perfect competition, monopoly, monopolistic competition and oligopoly up to the Nash equilibrium

More information

Figure: Computing Monopoly Profit

Figure: Computing Monopoly Profit Name: Date: 1. Most electric, gas, and water companies are examples of: A) unregulated monopolies. B) natural monopolies. C) restricted-input monopolies. D) sunk-cost monopolies. Use the following to answer

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Chapter 11 Monopoly practice Davidson spring2007 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly industry is characterized by 1) A)

More information

ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS

ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS Due the Week of June 23 Chapter 8 WRITE [4] Use the demand schedule that follows to calculate total revenue and marginal revenue at each quantity. Plot

More information

4. Market Structures. Learning Objectives 4-63. Market Structures

4. Market Structures. Learning Objectives 4-63. Market Structures 1. Supply and Demand: Introduction 3 2. Supply and Demand: Consumer Demand 33 3. Supply and Demand: Company Analysis 43 4. Market Structures 63 5. Key Formulas 81 2014 Allen Resources, Inc. All rights

More information

CHAPTER 11 PRICE AND OUTPUT IN MONOPOLY, MONOPOLISTIC COMPETITION, AND PERFECT COMPETITION

CHAPTER 11 PRICE AND OUTPUT IN MONOPOLY, MONOPOLISTIC COMPETITION, AND PERFECT COMPETITION CHAPTER 11 PRICE AND OUTPUT IN MONOPOLY, MONOPOLISTIC COMPETITION, AND PERFECT COMPETITION Chapter in a Nutshell Now that we understand the characteristics of different market structures, we ask the question

More information

EXAM TWO REVIEW: A. Explicit Cost vs. Implicit Cost and Accounting Costs vs. Economic Costs:

EXAM TWO REVIEW: A. Explicit Cost vs. Implicit Cost and Accounting Costs vs. Economic Costs: EXAM TWO REVIEW: A. Explicit Cost vs. Implicit Cost and Accounting Costs vs. Economic Costs: Economic Cost: the monetary value of all inputs used in a particular activity or enterprise over a given period.

More information

Chapter 8 Production Technology and Costs 8.1 Economic Costs and Economic Profit

Chapter 8 Production Technology and Costs 8.1 Economic Costs and Economic Profit Chapter 8 Production Technology and Costs 8.1 Economic Costs and Economic Profit 1) Accountants include costs as part of a firm's costs, while economists include costs. A) explicit; no explicit B) implicit;

More information

ANSWERS TO END-OF-CHAPTER QUESTIONS

ANSWERS TO END-OF-CHAPTER QUESTIONS ANSWERS TO END-OF-CHAPTER QUESTIONS 23-1 Briefly indicate the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. Under which of these market classifications

More information

UNIVERSITY OF CALICUT MICRO ECONOMICS - II

UNIVERSITY OF CALICUT MICRO ECONOMICS - II UNIVERSITY OF CALICUT SCHOOL OF DISTANCE EDUCATION BA ECONOMICS III SEMESTER CORE COURSE (2011 Admission onwards) MICRO ECONOMICS - II QUESTION BANK 1. Which of the following industry is most closely approximates

More information

Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 1 of 9

Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 1 of 9 Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 1 of 9 print name on the line above as your signature INSTRUCTIONS: 1. This Exam #2 must be completed within the allocated time (i.e., between

More information

Productioin OVERVIEW. WSG5 7/7/03 4:35 PM Page 63. Copyright 2003 by Academic Press. All rights of reproduction in any form reserved.

Productioin OVERVIEW. WSG5 7/7/03 4:35 PM Page 63. Copyright 2003 by Academic Press. All rights of reproduction in any form reserved. WSG5 7/7/03 4:35 PM Page 63 5 Productioin OVERVIEW This chapter reviews the general problem of transforming productive resources in goods and services for sale in the market. A production function is the

More information

Microeconomics Topic 7: Contrast market outcomes under monopoly and competition.

Microeconomics Topic 7: Contrast market outcomes under monopoly and competition. Microeconomics Topic 7: Contrast market outcomes under monopoly and competition. Reference: N. Gregory Mankiw s rinciples of Microeconomics, 2 nd edition, Chapter 14 (p. 291-314) and Chapter 15 (p. 315-347).

More information

CEVAPLAR. Solution: a. Given the competitive nature of the industry, Conigan should equate P to MC.

CEVAPLAR. Solution: a. Given the competitive nature of the industry, Conigan should equate P to MC. 1 I S L 8 0 5 U Y G U L A M A L I İ K T İ S A T _ U Y G U L A M A ( 4 ) _ 9 K a s ı m 2 0 1 2 CEVAPLAR 1. Conigan Box Company produces cardboard boxes that are sold in bundles of 1000 boxes. The market

More information

Econ 201 Final Exam. Douglas, Fall 2007 Version A Special Codes 00000. PLEDGE: I have neither given nor received unauthorized help on this exam.

Econ 201 Final Exam. Douglas, Fall 2007 Version A Special Codes 00000. PLEDGE: I have neither given nor received unauthorized help on this exam. , Fall 2007 Version A Special Codes 00000 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 201 Final Exam 1. For a profit-maximizing monopolist, a. MR

More information

Chapter 9: Perfect Competition

Chapter 9: Perfect Competition Chapter 9: Perfect Competition Perfect Competition Law of One Price Short-Run Equilibrium Long-Run Equilibrium Maximize Profit Market Equilibrium Constant- Cost Industry Increasing- Cost Industry Decreasing-

More information

Profit maximization in different market structures

Profit maximization in different market structures Profit maximization in different market structures In the cappuccino problem as well in your team project, demand is clearly downward sloping if the store wants to sell more drink, it has to lower the

More information

Practice Multiple Choice Questions Answers are bolded. Explanations to come soon!!

Practice Multiple Choice Questions Answers are bolded. Explanations to come soon!! Practice Multiple Choice Questions Answers are bolded. Explanations to come soon!! For more, please visit: http://courses.missouristate.edu/reedolsen/courses/eco165/qeq.htm Market Equilibrium and Applications

More information

Midterm Exam #1 - Answers

Midterm Exam #1 - Answers Page 1 of 9 Midterm Exam #1 Answers Instructions: Answer all questions directly on these sheets. Points for each part of each question are indicated, and there are 1 points total. Budget your time. 1.

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Chap 13 Monopolistic Competition and Oligopoly These questions may include topics that were not covered in class and may not be on the exam. MULTIPLE CHOICE. Choose the one alternative that best completes

More information

Price Theory Lecture 6: Market Structure Perfect Competition

Price Theory Lecture 6: Market Structure Perfect Competition Price Theory Lecture 6: Market tructure Perfect Competition I. Concepts of Competition Whether a firm can be regarded as competitive depends on several factors, the most important of which are: The number

More information

Chapter 7 Monopoly, Oligopoly and Strategy

Chapter 7 Monopoly, Oligopoly and Strategy Chapter 7 Monopoly, Oligopoly and Strategy After reading Chapter 7, MONOPOLY, OLIGOPOLY AND STRATEGY, you should be able to: Define the characteristics of Monopoly and Oligopoly, and explain why the are

More information

1 Monopoly Why Monopolies Arise? Monopoly is a rm that is the sole seller of a product without close substitutes. The fundamental cause of monopoly is barriers to entry: A monopoly remains the only seller

More information

Chapter 14 Monopoly. 14.1 Monopoly and How It Arises

Chapter 14 Monopoly. 14.1 Monopoly and How It Arises Chapter 14 Monopoly 14.1 Monopoly and How It Arises 1) One of the requirements for a monopoly is that A) products are high priced. B) there are several close substitutes for the product. C) there is a

More information

CHAPTER 6 MARKET STRUCTURE

CHAPTER 6 MARKET STRUCTURE CHAPTER 6 MARKET STRUCTURE CHAPTER SUMMARY This chapter presents an economic analysis of market structure. It starts with perfect competition as a benchmark. Potential barriers to entry, that might limit

More information

Equilibrium of a firm under perfect competition in the short-run. A firm is under equilibrium at that point where it maximizes its profits.

Equilibrium of a firm under perfect competition in the short-run. A firm is under equilibrium at that point where it maximizes its profits. Equilibrium of a firm under perfect competition in the short-run. A firm is under equilibrium at that point where it maximizes its profits. Profit depends upon two factors Revenue Structure Cost Structure

More information

Monopoly: static and dynamic efficiency M.Motta, Competition Policy: Theory and Practice, Cambridge University Press, 2004; ch. 2

Monopoly: static and dynamic efficiency M.Motta, Competition Policy: Theory and Practice, Cambridge University Press, 2004; ch. 2 Monopoly: static and dynamic efficiency M.Motta, Competition Policy: Theory and Practice, Cambridge University Press, 2004; ch. 2 Economics of Competition and Regulation 2015 Maria Rosa Battaggion Perfect

More information

AP Microeconomics Chapter 12 Outline

AP Microeconomics Chapter 12 Outline I. Learning Objectives In this chapter students will learn: A. The significance of resource pricing. B. How the marginal revenue productivity of a resource relates to a firm s demand for that resource.

More information

Thus MR(Q) = P (Q) Q P (Q 1) (Q 1) < P (Q) Q P (Q) (Q 1) = P (Q), since P (Q 1) > P (Q).

Thus MR(Q) = P (Q) Q P (Q 1) (Q 1) < P (Q) Q P (Q) (Q 1) = P (Q), since P (Q 1) > P (Q). A monopolist s marginal revenue is always less than or equal to the price of the good. Marginal revenue is the amount of revenue the firm receives for each additional unit of output. It is the difference

More information

Managerial Economics

Managerial Economics Managerial Economics Unit 3: Perfect Competition, Monopoly and Monopolistic Competition Rudolf Winter-Ebmer Johannes Kepler University Linz Winter Term 2012 Winter-Ebmer, Managerial Economics: Unit 3 1

More information

COST THEORY. I What costs matter? A Opportunity Costs

COST THEORY. I What costs matter? A Opportunity Costs COST THEORY Cost theory is related to production theory, they are often used together. However, the question is how much to produce, as opposed to which inputs to use. That is, assume that we use production

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The four-firm concentration ratio equals the percentage of the value of accounted for by the four

More information

CHAPTER 9: PURE COMPETITION

CHAPTER 9: PURE COMPETITION CHAPTER 9: PURE COMPETITION Introduction In Chapters 9-11, we reach the heart of microeconomics, the concepts which comprise more than a quarter of the AP microeconomics exam. With a fuller understanding

More information

Practice Questions Week 6 Day 1

Practice Questions Week 6 Day 1 Practice Questions Week 6 Day 1 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Economists assume that the goal of the firm is to a. maximize total revenue

More information

CHAPTERS 6-7 MANAGERIAL ECONOMICS: THEORY, APPLICATIONS, AND CASES. Perfect Competition, Monopoly, And Monopolistic Competition

CHAPTERS 6-7 MANAGERIAL ECONOMICS: THEORY, APPLICATIONS, AND CASES. Perfect Competition, Monopoly, And Monopolistic Competition MANAGERIAL ECONOMICS: THEORY, APPLICATIONS, AND CASES W. Bruce Allen Keith Weigelt Neil Doherty Edwin Mansfield CHAPTERS 6-7 Perfect Competition, Monopoly, And Monopolistic Competition OBJECTIVES Explain

More information

Econ 101, section 3, F06 Schroeter Exam #4, Red. Choose the single best answer for each question.

Econ 101, section 3, F06 Schroeter Exam #4, Red. Choose the single best answer for each question. Econ 101, section 3, F06 Schroeter Exam #4, Red Choose the single best answer for each question. 1. Profit is defined as a. net revenue minus depreciation. *. total revenue minus total cost. c. average

More information

Econ 101: Principles of Microeconomics

Econ 101: Principles of Microeconomics Econ 101: Principles of Microeconomics Chapter 14 - Monopoly Fall 2010 Herriges (ISU) Ch. 14 Monopoly Fall 2010 1 / 35 Outline 1 Monopolies What Monopolies Do 2 Profit Maximization for the Monopolist 3

More information

Pre-Test Chapter 21 ed17

Pre-Test Chapter 21 ed17 Pre-Test Chapter 21 ed17 Multiple Choice Questions 1. Which of the following is not a basic characteristic of pure competition? A. considerable nonprice competition B. no barriers to the entry or exodus

More information

Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry s output.

Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry s output. Topic 8 Chapter 13 Oligopoly and Monopolistic Competition Econ 203 Topic 8 page 1 Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry

More information

Monopoly and Monopsony Labor Market Behavior

Monopoly and Monopsony Labor Market Behavior Monopoly and Monopsony abor Market Behavior 1 Introduction For the purposes of this handout, let s assume that firms operate in just two markets: the market for their product where they are a seller) and

More information

A Detailed Price Discrimination Example

A Detailed Price Discrimination Example A Detailed Price Discrimination Example Suppose that there are two different types of customers for a monopolist s product. Customers of type 1 have demand curves as follows. These demand curves include

More information

CHAPTER 18 MARKETS WITH MARKET POWER Principles of Economics in Context (Goodwin et al.)

CHAPTER 18 MARKETS WITH MARKET POWER Principles of Economics in Context (Goodwin et al.) CHAPTER 18 MARKETS WITH MARKET POWER Principles of Economics in Context (Goodwin et al.) Chapter Summary Now that you understand the model of a perfectly competitive market, this chapter complicates the

More information

Theory of Perfectly Competitive Markets

Theory of Perfectly Competitive Markets Economics 147 John F. Stewart Theory of Perfectly Competitive Markets University of North Carolina Chapel Hill Theory: The Structure of an Economic Model Economic theory is based on deductive logic, if

More information

Profit Maximization. PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University

Profit Maximization. PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University Profit Maximization PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 1 The Nature and Behavior of Firms A firm An association of individuals Firms Who have organized themselves

More information

Table of Contents MICRO ECONOMICS

Table of Contents MICRO ECONOMICS economicsentrance.weebly.com Basic Exercises Micro Economics AKG 09 Table of Contents MICRO ECONOMICS Budget Constraint... 4 Practice problems... 4 Answers... 4 Supply and Demand... 7 Practice Problems...

More information

PART A: For each worker, determine that worker's marginal product of labor.

PART A: For each worker, determine that worker's marginal product of labor. ECON 3310 Homework #4 - Solutions 1: Suppose the following indicates how many units of output y you can produce per hour with different levels of labor input (given your current factory capacity): PART

More information

Chapter 05 Perfect Competition, Monopoly, and Economic

Chapter 05 Perfect Competition, Monopoly, and Economic Chapter 05 Perfect Competition, Monopoly, and Economic Multiple Choice Questions Use Figure 5.1 to answer questions 1-2: Figure 5.1 1. In Figure 5.1 above, what output would a perfect competitor produce?

More information

INTRODUCTORY MICROECONOMICS

INTRODUCTORY MICROECONOMICS INTRODUCTORY MICROECONOMICS UNIT-I PRODUCTION POSSIBILITIES CURVE The production possibilities (PP) curve is a graphical medium of highlighting the central problem of 'what to produce'. To decide what

More information

Lab 12: Perfectly Competitive Market

Lab 12: Perfectly Competitive Market Lab 12: Perfectly Competitive Market 1. Perfectly competitive market 1) three conditions that make a market perfectly competitive: a. many buyers and sellers, all of whom are small relative to market b.

More information

AP Microeconomics Review

AP Microeconomics Review AP Microeconomics Review 1. Firm in Perfect Competition (Long-Run Equilibrium) 2. Monopoly Industry with comparison of price & output of a Perfectly Competitive Industry 3. Natural Monopoly with Fair-Return

More information

N. Gregory Mankiw Principles of Economics. Chapter 15. MONOPOLY

N. Gregory Mankiw Principles of Economics. Chapter 15. MONOPOLY N. Gregory Mankiw Principles of Economics Chapter 15. MONOPOLY Solutions to Problems and Applications 1. The following table shows revenue, costs, and profits, where quantities are in thousands, and total

More information

Market Supply in the Short Run

Market Supply in the Short Run Equilibrium in Perfectly Competitive Markets (Assume for simplicity that all firms have access to the same technology and input markets, so they all have the same cost curves.) Market Supply in the Short

More information

A2 Micro Business Economics Diagrams

A2 Micro Business Economics Diagrams A2 Micro Business Economics Diagrams Advice on drawing diagrams in the exam The right size for a diagram is ½ of a side of A4 don t make them too small if needed, move onto a new side of paper rather than

More information

Unit 2.3 - Theory of the Firm Unit Overview

Unit 2.3 - Theory of the Firm Unit Overview Unit 2.3.1 - Introduction to Market Structures and Cost Theory Intro to Market Structures Pure competition Monopolistic competition Oligopoly Monopoly Cost theory Types of costs: fixed costs, variable

More information

All these models were characterized by constant returns to scale technologies and perfectly competitive markets.

All these models were characterized by constant returns to scale technologies and perfectly competitive markets. Economies of scale and international trade In the models discussed so far, differences in prices across countries (the source of gains from trade) were attributed to differences in resources/technology.

More information

CHAPTER 8 PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY

CHAPTER 8 PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY CHAPTER 8 PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY TEACHING NOTES This chapter begins by explaining what we mean by a competitive market and why it makes sense to assume that firms try to maximize profit.

More information

1 of 14 11/5/2013 4:33 PM

1 of 14 11/5/2013 4:33 PM 1 of 14 11/5/2013 4:33 PM Market power is A characteristic of all market structures. The ability to alter the market price of a product. Most common for competitive firms. Enjoyed by all firms at high

More information

Chapter 14 Monopoly. 14.1 Monopoly and How It Arises

Chapter 14 Monopoly. 14.1 Monopoly and How It Arises Chapter 14 Monopoly 14.1 Monopoly and How It Arises 1) A major characteristic of monopoly is A) a single seller of a product. B) multiple sellers of a product. C) two sellers of a product. D) a few sellers

More information

chapter Perfect Competition and the >> Supply Curve Section 3: The Industry Supply Curve

chapter Perfect Competition and the >> Supply Curve Section 3: The Industry Supply Curve chapter 9 The industry supply curve shows the relationship between the price of a good and the total output of the industry as a whole. Perfect Competition and the >> Supply Curve Section 3: The Industry

More information

Chapter 6 MULTIPLE-CHOICE QUESTIONS

Chapter 6 MULTIPLE-CHOICE QUESTIONS Chapter 6 MULTIPLE-CHOICE QUETION 1. Which one of the following is generally considered a characteristic of a perfectly competitive labor market? a. A few workers of varying skills and capabilities b.

More information

Long Run Supply and the Analysis of Competitive Markets. 1 Long Run Competitive Equilibrium

Long Run Supply and the Analysis of Competitive Markets. 1 Long Run Competitive Equilibrium Long Run Competitive Equilibrium. rinciples of Microeconomics, Fall 7 Chia-Hui Chen October 9, 7 Lecture 6 Long Run Supply and the Analysis of Competitive Markets Outline. Chap 8: Long Run Equilibrium.

More information

SUPPLY AND DEMAND : HOW MARKETS WORK

SUPPLY AND DEMAND : HOW MARKETS WORK SUPPLY AND DEMAND : HOW MARKETS WORK Chapter 4 : The Market Forces of and and demand are the two words that economists use most often. and demand are the forces that make market economies work. Modern

More information

We will study the extreme case of perfect competition, where firms are price takers.

We will study the extreme case of perfect competition, where firms are price takers. Perfectly Competitive Markets A firm s decision about how much to produce or what price to charge depends on how competitive the market structure is. If the Cincinnati Bengals raise their ticket prices

More information

At the end of Chapter 18, you should be able to answer the following:

At the end of Chapter 18, you should be able to answer the following: 1 How to Study for Chapter 18 Pure Monopoly Chapter 18 considers the opposite of perfect competition --- pure monopoly. 1. Begin by looking over the Objectives listed below. This will tell you the main

More information

Employment and Pricing of Inputs

Employment and Pricing of Inputs Employment and Pricing of Inputs Previously we studied the factors that determine the output and price of goods. In chapters 16 and 17, we will focus on the factors that determine the employment level

More information

Final Exam 15 December 2006

Final Exam 15 December 2006 Eco 301 Name Final Exam 15 December 2006 120 points. Please write all answers in ink. You may use pencil and a straight edge to draw graphs. Allocate your time efficiently. Part 1 (10 points each) 1. As

More information

Revenue Structure, Objectives of a Firm and. Break-Even Analysis.

Revenue Structure, Objectives of a Firm and. Break-Even Analysis. Revenue :The income receipt by way of sale proceeds is the revenue of the firm. As with costs, we need to study concepts of total, average and marginal revenues. Each unit of output sold in the market

More information

Examples on Monopoly and Third Degree Price Discrimination

Examples on Monopoly and Third Degree Price Discrimination 1 Examples on Monopoly and Third Degree Price Discrimination This hand out contains two different parts. In the first, there are examples concerning the profit maximizing strategy for a firm with market

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Firms that survive in the long run are usually those that A) remain small. B) strive for the largest

More information