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1 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 levels of output. If a firm can change market prices by altering its output, then it has market power. Difficulty: 1 Easy Monopolists are price Takers, as are competitive firms. Takers, but competitive firms are price makers. Makers, but competitive firms are price takers. Makers, as are competitive firms. Competitive firms must charge the market price because of the perfectly elastic demand curve that they face. On the other hand, monopolists are price makers in that the firm chooses the profit-maximizing output and then charges the price that consumers are willing and able to pay. A monopolist has market power because it Faces a downward-sloping demand curve for its own output. Can raise price as much as it wishes and not lose any customers. Is a price taker. Is regulated by the government. A firm that faces a downward-sloping demand curve can change market prices by altering its output and therefore has market power.

2 2 of 14 11/5/2013 4:33 PM The marginal revenue curve is below the demand curve If a firm must lower its price to sell additional output. For a competitive firm. When a market is characterized by economies of scale. For all firms. If a firm must lower its price to sell additional output (demand is downward-sloping), marginal revenue is less than price and therefore the MR curve will fall below the demand curve. Which of the following is true about the output level where marginal revenue equals marginal cost? Economic profits are equal to zero. The firm should increase its output. The firm is maximizing profit. The firm should reduce its output. A firm maximizes total profit at the output rate where MR is equal to MC. If MC is less than MR, the firm can increase profits by producing more. If MC exceeds MR, the firm should reduce output. Which of the following statements is not correct? A monopolist's ability to act as a price setter guarantees economic profits in the short run. The monopolist's marginal revenue is less than the price for any output greater than one. A monopolist's demand curve is the same as the market demand curve for the product. In the long run, a monopolist will experience only positive or zero economic profits. No firm, regardless of whether it is a monopoly or a perfectly competitive firm, is guaranteed profits.

3 3 of 14 11/5/2013 4:33 PM Which of the following is the same for monopoly and competition under the same cost and demand conditions? The amount of output that is produced. Economic profits. The goal of maximizing profits. Efficiency of production at the profit-maximizing output. The basic incentive for any firm to produce goods and services is the expectation of profit. In Table 24.1, according to the profit maximization rule, at the profit-maximizing level of output marginal, cost is $200. $250. $300. $350. Profit is maximized at the output level where the difference between revenue and cost is greatest (where MR is equal to MC). This occurs at three units of output and MC is equal to $300.

4 4 of 14 11/5/2013 4:33 PM The shaded area in Figure 24.1 represents Total revenue. Total cost. Total profit. Total loss. Total profit is equal to the difference between price and average total costs times quantity, which will be the shaded area.

5 5 of 14 11/5/2013 4:33 PM In Figure 24.1 total cost is represented by the area ABFE. CDFE. ABGHE. ABDC. Total cost will be the ATC times quantity, which is area CDFE.

6 6 of 14 11/5/2013 4:33 PM In Figure 24.2, total revenue at the profit-maximizing rate of output is $ $6.40. $4.00. $ Total revenue is equal to price times quantity, which will be $22.

7 7 of 14 11/5/2013 4:33 PM In Figure 24.2, total profit at the profit-maximizing rate of output is $ $5.50. $6.00. $ Total profit is equal to the difference between price and average total cost times quantity, which will be ($ $4) 4 or $6.

8 8 of 14 11/5/2013 4:33 PM Reductions in minimum average costs that come about through increases in the size of plants and equipment are called Barriers to entry. Economies to monopoly power. Economies of scale. Diseconomies of entry. Economies of scale occur when a firm increases efficiency by investing in a larger plant or more equipment. Like a competitive industry, a monopoly must Practice marginal cost pricing. Deal with the law of demand. Confront a demand curve equal to its marginal revenue curve. Earn only zero economic profit in the long run. The monopoly faces the industry demand curve, which is downward-sloping. Because of this, the monopoly firm will have to lower prices in order to sell additional goods. Difficulty: 3 Hard Assume a monopoly confronts the same costs and demand as a competitive industry. In this case, the monopolist produces The same output and charges the same price as the competitive industry. More output and charges a higher price than the competitive industry. Less output and charges a lower price than the competitive industry. Less output and charges a higher price than the competitive industry. When compared to a competitive market, monopolists tend to charge a higher price and produce a lower level of output.

9 9 of 14 11/5/2013 4:33 PM A monopoly realizes larger profits than a comparable competitive market by Setting a higher price at the competitive level of output, thereby increasing total revenue. Producing a greater quantity at the competitive price, thereby increasing profits. Producing at output levels with more favorable cost structures and charging the competitive market price, thereby increasing profits per unit. Reducing production and pushing prices up. A monopoly receives larger profits than a comparable competitive industry by reducing the quantity supplied and pushing prices up. Price-discriminating firms charge higher prices to those who Have greater incomes. Have lower price elasticities of demand. Have many substitutes available to them. Want the product less. Consumers who have inelastic (or less elastic) demand will not respond significantly to increases in price. Therefore, a price-discriminating monopoly will charge consumers with inelastic demand higher prices, while charging consumers with elastic demand lower prices. Price-discriminating firms that sell in two markets will charge higher prices in the market, ceteris paribus, With a higher positive cross-price elasticity of demand with respect to substitutes. With the more price-inelastic demand. With the more income-elastic demand. With lower incomes. Consumers who have inelastic (or less elastic) demand will not respond significantly to increases in price. Therefore, a price-discriminating monopoly will charge consumers with inelastic demand higher prices, while charging consumers with elastic demand lower prices.

10 10 of 14 11/5/2013 4:33 PM A patent gives a firm the exclusive right to produce a product for 6 months. 2 years. 20 years. Forever. A government-awarded patent gives a producer 20 years of exclusive rights to produce a particular product, thus serving as a barrier to entry to potential competitors in the market. Difficulty: 1 Easy Which of the following contributes to a firm maintaining a monopoly? Exclusive franchises. The existence of substitute goods. A large number of firms in the industry. Homogeneous products in the market. Barriers to entry help a monopoly maintain its market power. Examples of barriers include patents, control over key inputs, and acquisition of competitors, franchise rights, and economies of scale. The argument that concentration of market power enhances research and development efforts may be weak because Monopolies cannot afford basic research. A monopoly may have no clear incentive to pursue new research and development. No one has attempted to gather any empirical evidence. No existing monopoly has a research and development program. Although monopolists have a clear financial advantage in pursuing research and development activities, they have no clear incentive to do so. Research and development aren't necessarily required for profitable survival. Learning Objective: The pros and cons of monopoly.

11 11 of 14 11/5/2013 4:33 PM According to the text, a convincing argument against concentration of market power is that Market power increases incentives for innovation and invention. Market power results in lower barriers to entry. The exercise of market power results in a higher price. Large firms can produce more efficiently than small firms because of diminishing returns in production. Economies of scale may help monopolies reduce costs, but because of their market power, they will retain the cost savings rather than pass them along to the consumer in the form of lower prices. Learning Objective: The pros and cons of monopoly. Markets that exhibit economies of scale over the entire range of market output Are natural monopolies. Are perfectly competitive. Have downward-sloping short-run average total cost curves. Have upward-sloping long-run average total cost curves. Industries that exhibit economies of scale over the entire range of market output are called natural monopolies. Difficulty: 1 Easy Learning Objective: The pros and cons of monopoly. In a contestable market, Entry occurs when prices rise above average total costs. Many firms compete, which drives prices down to minimum long-run average total cost. A few firms use predatory prices to achieve market share. A few firms collude to achieve monopoly profits. A contestable market is an imperfectly competitive industry subject to potential entry if prices or profits increase. Learning Objective: The pros and cons of monopoly.

12 12 of 14 11/5/2013 4:33 PM According to the theory of contestable markets, monopoly may not be a problem if The structure of a market is competitive. Antitrust regulations are enforced. Firms can exit from the market. Potential competition exists. A contestable market is an imperfectly competitive industry subject to potential entry if prices or profits increase. Therefore firms will keep prices low, which will result in low profits. Learning Objective: The pros and cons of monopoly. Sky-High Skywriters charges competitive prices for its skywriting services even though it has no competition. This is most likely because There are no economies of scale in this industry. It operates in a contestable market. It is a natural monopoly. It cares more about customers' well-being than its own well-being. A contestable market is an imperfectly competitive industry subject to potential entry if prices or profits increase. Therefore firms will keep prices low, which will result in low profits. Difficulty: 3 Hard Learning Objective: The pros and cons of monopoly. The Microsoft Corporation was sued by the government for all but which one of the following antitrust violations? Discouraging computer manufacturers from installing any operating system other than Microsoft's. Buying out potential competitors. Bundling software. Stealing competitors' secrets. Microsoft was sued for thwarting its competitors in operating systems by erecting entry barriers such as exclusive purchase agreements with computer manufacturers, using its monopoly position in operating systems to gain an unfair advantage in the applications market, and thwarting competition by simply buying out promising rivals.

13 13 of 14 11/5/2013 4:33 PM Which of the following prohibits price discrimination, certain types of mergers, and interlocking boards of directors among competing companies? The Sherman Act. The Clayton Act. The Federal Trade Commission Act. The Full Employment and Balanced Growth Act. The Sherman Act prohibits "conspiracies in restraint of trade," including mergers, contracts, or acquisitions that threaten to monopolize an industry, while the principal aim of the Clayton Act is to prevent the development of monopolies by prohibiting price discrimination, exclusive dealing agreements, certain types of mergers, and interlocking boards of directors among competing firms. Which of the following was the first to prohibit "conspiracies in restraint of trade"? The Sherman Act. The Federal Trade Commission Act. The Clayton Act. The Gramm-Rudman Act. The Sherman Act prohibits "conspiracies in restraint of trade," including mergers, contracts, or acquisitions that threaten to monopolize an industry, while the principal aim of the Clayton Act is to prevent the development of monopolies by prohibiting price discrimination, exclusive dealing agreements, certain types of mergers, and interlocking boards of directors among competing firms. The World View article titled "Foxy Soviets Pelt the West: Sable Monopoly Traps Hard Currency, Coats Capitalists" provides evidence that the Soviets experienced Market power. Economies of scale. Barriers to entry. Price discrimination. The Soviet Union earned $100 million in 1984 fur sales. High profits give some evidence that the Soviets had market power.

14 14 of 14 11/5/2013 4:33 PM Based on the headline "Foxy Soviets Pelt the West: Sable Monopoly Traps Hard Currency, Coats Capitalists" you could predict that Output is more than it would be in a competitive market. Long-run economic profit is positive. The sable market is contestable. Sable producers are franchise monopolists. The headline mentions a monopoly trapping currency, which correctly suggests high long-run economic profits. Difficulty: 3 Hard The In the News article "XM-Sirius Merger Made Simple: One Is Always Less Than Two" discusses the proposed merger of two satellite radio companies. Antitrust officials will examine the merger in order to Prevent the abuse of market power. Prevent economies of scale. Protect the government from frivolous lawsuits. Increase the profitability of monopolies. The Sherman Act prohibits "conspiracies in restraint of trade," including mergers, contracts, or acquisitions that threaten to monopolize an industry. The In the News article "XM-Sirius Merger Made Simple: One Is Always Less Than Two" discusses the proposed merger of two satellite radio companies. In some industries, mergers can be economically justified if economies of scale Lower the average cost of production. Result in more product variety. Act as a barrier to entry. Increase the total cost of production. Monopolies may enjoy economies of scale. In the long run, however, consumers may benefit more from competitive pressures to reduce costs, improve product quality, and lower prices.

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