ECON 101 Lecture Notes - Lecture 2: Price Discrimination, Deadweight Loss, Marginal Cost

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raspberryimpala524

10 Jan 2017

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Economic efficiency- two conditions must occur to maximize gains from trade: total benefits total costs (this condition means that gft 0, marginal benefits = marginal costs. In general, we found that price taker markets are efficient, that is, the standard intersection of supply and demand was efficient. At this quantity, mc, given by the supply curve, and the mv, given by the demand curve, are equal. Price controls- both ceilings and floors end up restricting output below efficient level. One price monopolists- restrict output below efficient level. Whenever all costs and benefits are borne by demanders and suppliers, this efficiency argument holds true. Whenever this is not true, we need to account for this. Often private decisions cause costs and benefits that are borne by someone other than demanders or suppliers. When this happens, the efficient outcome expressed above is the private solution, which would be incomplete.

Related Questions

Just Me Inc. is the only provider of high-speed internet in Tinytown. The firm charges its customers on an annual basis. It's cost and demand information are given below.

Quantity (Millions of subscribers)	Price ($ per subscriber)	Total Cost (million $)
1	300	200
2	260	380
3	233.33	540
4	210	680
5	180	800
6	150	900
7	100	980
8	60	1040

a. What will the market price be if the government decides to regulate this natural monopoly by forcing them to sell the quantity and price where the market demand curve crosses the average cost?

b. How many units will be sold at what price if the monopoly is not regulated?

c. If the internet was regulated to provide the most allocatively efficient quantity of output, what output would it supply and what price would it charge? What subsidy would be necessary to ensure this efficient provision of internet services? (Remember: allocative efficiency requires that price equals marginal cost).

coralfish303

20) When price is less than average variable cost at the profit-maximizing level of output, a firm should: A) continue to produce the level of output at which marginal revenue equals marginal cost if it is operating in the long run. B) shutdown, because it cannot even cover all of its variable costs let alone its fixed costs if it stays in business. C) shutdown, because it will lose nothing in that case. D) continue to produce the level of output at which marginal revenue equals marginal cost if it is operating in the short run. 21) When price is greater than average variable cost but less than average total cost at the profit-maximizing level of output, a firm should: A) continue to produce the level of output at which marginal revenue equals marginal cost. B) shutdown to minimize its losses. C) reduce output to the level at which price equals average variable cost to minimize its losses. D) increase output to minimize its losses. 22) Assume that at the current market price, a perfectly competitive firm's profit-maximizing level of output yields total revenues that are just equal to total costs. Which of the following statements applies to this firm? A) The firm should increase its explicit costs to reduce its tax burden. B) The firm should shut down right now. C) The firm should continue to operate in the short run to minimize losses, but shut down if things don't improve over the long run. D) The firm is earning zero economic profit and should continue to operate. 23) The perfectly competitive firm's supply curve: A) coincides with its perfectly elastic demand curve. B) is the firm's average total cost curve above the shutdown point. C) is perfectly inelastic at the market price. D) is the firm's marginal cost curve above the minimum point on the AVC curve. 24) Assume there is a decrease in the market demand for a good sold by price-taking firms that are initially producing the profit-maximizing level of output. How will the market adjust over time? A) Firms will exit the market, causing price to rise until losses are eliminated. B) Firms will exit the market, causing price to fall until positive profits are eliminated. C) Firms will enter the market, causing price to fall until positive profits are eliminated. D) Firms will enter the market, causing price to rise until losses are eliminated. 25) What is the "most efficient capacity" for the perfectly competitive firm? A) The plant size for which Price = AR. B) The plant size at which LRAC is at its minimum. C) The plant size at which MR = MC. D) The plant size at which any of the SRATC curves are tangent to the LRAC curve.

greenrat247

21)

Compared to the results in a perfectly competitive market, a monopoly does which of the following?

	It charges a higher price.
	It charges a price greater than the marginal cost.
	It produces less output.
	All of the above
	None of the above

22)

"X-inefficiency" refers to the idea that

	government restrictions on competition create a monopoly, which results in inefficiency.
	the cost of rent-seeking activity should be added to the welfare cost of monopoly.
	Generation X is less efficient due to a lack of competitive spirit.
	a lack of competitive pressure results in a monopoly not keeping its costs down to the lowest possible level.
	price discrimination results in inefficiently low cross-elasticities of demand.

23)

Firms in which of the following market structures can engage in price discrimination?

	monopoly
	oligopoly
	monopolistic competition
	All of the above
	None of the above

24)

Monopolistic competition and perfect competition are in all of the following ways except

	Barriers to entry are low in both
	There are many firms in both
	Firms in both produce the output level where MR=MC
	Nonprice competition is important in both

25)

To get rid of excess capacity from the monopolistic competition in the long run, what would have to be given up?

	Free entry and exit.
	economic rent
	resource allocative efficiency
	differentiated product
	productive efficiency

taupeant454

ECON 101 Lecture Notes - Lecture 2: Price Discrimination, Deadweight Loss, Marginal Cost

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