A seller who can only sell his or her goods at the equilibrium price.

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1 Chapter 8, Section 1 A Perfectly Competitive Market What are the four characteristics of a perfectly competitive market? 1. Many buyers and sellers 2. All firms sell identical goods 3. Buyers and sellers have relevant information 4. Easy entry and exit 5. A seller in a perfectly competitive market is a price taker. What is a price taker? A seller who can only sell his or her goods at the equilibrium price. 6. Why does a price taker take the equilibrium price? Why doesn t he or she sell for a price that is higher or lower than equilibrium? Take the equilibrium price to maximize profit. If he/she sold at a higher price, they would not be able to sell all of their product. There s no reason to sell lower when you can make a profit at the higher price. 7. How much output does a seller in a perfectly competitive market produce? MR = MC 8. What prices does a seller in a perfectly competitive market charge for its products? Equilibrium price 9. Fill in the missing numbers in the following tables. The data are for a seller in a perfectly competitive market in which the equilibrium price is. (10 points possible) Units of Output Total Revenue Marginal Revenue Total Cost Marginal Cost Profit or (loss) 1 $ ($6) 2 $29 $8 $1 3 $45 $33 $4 $12 4 $37 $23 5 $75 $49 $12 6 $64 7 $105 $ Based on the table above, how much output should the firm produce? 20. What price should the firm charge for its product?

2 Chapter 8, Section 2 A Monopolistic Market 21. Whereas a firm in a perfectly competitive market is a price taker, the firm in a monopolistic market is a price searcher. 22. Is it easier for a perfectly competitive firm or for a monopolist to determine price? Explain. Perfectly competitive because they just take the equilibrium price. Monopolist needs to search and adjust their price more. 23. Does a monopolist face any limit on the price it charges? Explain. Limited by the demand for its product. 24. Is a monopolist guaranteed profits? Explain. No. Only earns profits if its price is greater than its average total cost. Identify each of the company below as a government monopoly or a market monopoly. 25. Company A owns nearly all of the world s diamonds. Market Monopoly 26. Company B invents an entirely new product, and a patent is granted. Government Monopoly 27. Company C has the exclusive rights to provide cable TV services to a city. Government Monopoly 28. Company D has per-unit costs that are much lower than those of any of its competitors. Market Monopoly

3 Each of the scenarios listed below presents a monopoly issue. In each blank provided, write the name of the law that was passed to deal with the issue. 29. Company A, a nationally known big box store with 150,000 square feet of merchandise, builds a store in your city. Because company A buys from suppliers in huge quantities, it receives special discounts. The small businesses in town say they are unable to survive and must have protection from company A. Law: Robinson-Patman Act 30. People in your town have been flocking to company W since it started its new advertising campaign. The company is making claims that seem too good to be true. The competitors of company W say that company W is using false advertising to deceive its customers. Law: Wheeler-Lea Act 31. Company X promises to sell a scarce resource to company B only if company B buys other goods from company X. Law: Clayton Act 32. Company Y attempts to buy all of the firms that compete with it. Law: Sherman Antitrust Act 33. Your chief competitor, company Z, slashes prices on its products. Its new prices are much lower than the prices charged by any of its competitors in town. You and the other business owners in town accuse company Z of cutthroat pricing. Law: Federal Trade Commission Act

4 Chapter 8, Section 3 A Monopolistic Competitive Market What are the three characteristics of a monopolistic competitive market? 34. Many buyers and sellers 35. Slightly differentiated products 36. Easy entry and exit 37. How much output does a monopolist competitor produce? MR = MC 38. What price does a monopolist competitor charge for its product? Highest price at which it can sell all of its output 39. Do most sellers prefer more competition or less competition? Explain why. Sellers prefer less competition because it allows them to charge higher prices. More competition = lower prices. 40. What two factors determine the amount of competition a seller faces? (2 points) How close to unique a seller s product is. How easy it is for new sellers to enter the market. 48. Some of the differences in a monopolistic competitors products are physical. What other kinds of differences might exist for products in this market? Packaging, location, delivery options 49. Why does a monopolistic competitive firm try to differentiate its product from that of its competitors? Differentiation = Less competition = Ability to charge higher prices 50. Most clothing producers are monopolistic competitors. When you go clothes shopping, what factors determine what jeans or shirt you buy? Do you see why firms try to differentiate their products? Answers will vary

5 Chapter 8, Section 4 An Oligopolistic Market What are the three characteristics of an oligopolistic market? 51. Few sellers 52. Identical or slightly differentiated products 53. Significant barriers to entry 54. Is an oligopolist a price taker or a price searcher? Price searcher 55. How do economists identify oligopolistic industries? Percentage of sales accounted for by the top four firms. Example: the top three auto makers (GM, Ford, and Chrysler) account for a large percentage of sales in the American-made car industry. 56. Why might oligopolistic firms be temped to enter into a cartel agreement? It allows firms to act as a monopoly because cartels limit competition and allow them to raise prices. 57. Why do cartels usually fail? Because each firm has a strong monetary incentive to break the promise it made with other firms. Firms will secretly produce and sell more to take advantage of higher prices. 58. Suppose you (age 17) go to the zoo with your little sister (age 5), your mother (age 42) and your grandfather (age 66). When you arrive at the zoo, you find the following sign at the admission stand. Your mother mumbles something about age discrimination under her breath. You ask what she means, and she explains that although she may enjoy the zoo the least, she is charged the most. She says, Your little sister, who likely Children (age 0-6) $3 Students (age 6-18 with school ID) $4 Seniors Citizens (over 65) $6 General Admission $8 enjoys the zoo the most, is charged the least. What an unfair pricing system! Having mastered your recent economics quiz on price discrimination, how would you explain the purpose of the zoo pricing structure? NEXT PAGE

6 Objective is to charge everyone the highest price he or she is willing and able to pay. Senior citizens are often on a fixed income, students have less disposable income, parents may not take children if they have to pay for them. The price structure is not based on perceived enjoyment but on ability to pay. 59. Stores often offer mail-in rebates for some of the products they sell. How are mail-in rebates a form of price discrimination? Because it often leads to charging consumers different prices for the same product. Some will send in the rebate form, others will not. The rebate allows the store to discriminate and ensure that it is charging everyone the price he or she is willing and able to pay.

7 Monopoly Game Day Reflection & Analysis Answer in COMPLETE SENTENCES. 10 points possible. 1) What is the goal of the game of the monopoly? 2) How does the game of monopoly display the characteristics of a monopolistic market? (please refer to all three characteristics) A) The market consists of one seller. B) The single seller sells a product that has no close substitutes. C) The barriers to entry are high. 3) What strategy do you use to play the game successfully? How does this relate to strategies a business owner may use?

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