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ECON-1020 Chapter Notes - Chapter 12: Economic Surplus, Market Power, Natural Monopoly

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brownmule668
3 Feb 2020
School
Vanderbilt University
Department
Economics
Course
ECON-1020
Professor
Heather Luea

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Document Summary

But their gain will come at the cost of making consumers worse off and decreasing social surplus] 12. 1 introducing a new market structure: characteristics (table in textbook), one primary seller, good or service sold has no close substitutes, high barriers to entry. Firms are price-makers--a seller than sets the price of a good (when no competitors, no close substitutes: demand curve facing firm is downward-sloping. Shares two similarities with perfectly competitive seller"s problem: must understand how inputs combine to make outputs, must know costs of production. Like competitive market, must consider both cost and revenue when making production decision: producing the optimal quantity, continue to expand production as long as mr > mc. Stop when mr = mc (profit maximizing output: this rule is identical to rule in perfectly competitive market. Steps in the production and pricing decisions facing the monopolist: expand q until mc = mr, produce q at that point, trace up to the demand curve.

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Related Questions

11)

A constant-cost, perfectly competitive industry experiences a permanent increase in demand. In adjusting to this change, what will happen to the price of the product?

 

It will increase in the short-run and then decrease in the long-run, but end up above its original level in the long-run.
 

It will increase in the short-run and then increase further in the long-run.
 

It will increase in the short-run and then decrease back to its original level in the long-run.
 

It will increase in the short-run and then decrease below its original level in the long-run.
 

It will decrease in the short-run but return to its original level in the long-run.

12)

Assume that a perfectly competitive firm owns or rents a higher-quality resource that results in lower average total costs and higher economic profits in the short run. What will happen in the long-run?

 

The price of the higher-quality resource will be bid upward resulting in economic rents and equalizing costs across firms.
 

New firms will enter and compete with any excess profits away.
 

None of the other answers is correct.
 

The government will tax away any excess profits.
 

The firm with the higher-quality resource will earn positive economic profits in the long run.

13)

Which of the following are characteristics of long-run equilibrium?

 

No firm has an incentive to change its level of output.
 

No firm has an incentive to change its plant size.
 

Economic profit is zero
 

All of the above
 

None of the above

14)

Which of the following statements is consistent with the textbook’s analysis of perfect competition?

 

Although individual perfectly competitive firms won’t pay to advertise, the industry as a whole may well advertise.
 

Higher costs for one firm in the industry will result in that firm charging a higher price than the other firms in the industry.
 

If all the firms in an industry charge an identical price for their products, this is clear evidence of collusive behavior.
 

All of the above
 

None of the above

15)

The assumptions that define the market structure known as monopoly include which of the following?

 

High barriers to entry.
 

There is one seller.
 

There are no close substitutes available.
 

All of the above
 

None of the above

1. In a constant cost industry, P = AC = $20. Which sequence of events follows an increase in demand?

a. P = AC, firms make no economic profit, existing firms leave output unchanged, new firms enter the industry, profits remain normal, P = AC = $20.

b. P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts left, price falls until profits return to $0.

c. P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits return to $0.

d. P < AC, firms suffer an economic loss, existing firms reduce output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits exceed $0.

2. Describe the supply curve of a constant cost industry.

a. Upward sloping

b. Flat

c. Downward sloping, then upward sloping

d. Downward sloping

3. At the profit-maximizing output level P = MC, if P > AC then firms can earn an above-normal profit, causing entry into the industry. True or false?

4. In a competitive market, the amount of a good that is produced is such that social surplus is:

a. Minimized

b. Maximized

c. Zero

d. Hidden


1.
If firms in a monopolistically competitive market are earningpositive profits,
A) firms will likely be subject to regulation.
B) barriers to entry will be strengthened.
C) some firms must exit the market.
D) new firms will enter the market.
2.

Panel c in the set of figures shown is consistent with a firm in amonopolistically competitive market that is


A) earning profit and is in both short-run and long-runequilibrium.
B) earning economic profit and is in short-run equilibrium, but notlong-run equilibrium.
C) earning profit and is in long-run equilibrium, but not short-runequilibrium.
D) earning a negative profit and is not in equilibrium.
3.
When a profit-maximizing firm in a monopolistically competitivemarket is producing the long-run equilibrium quantity,
A) its marginal revenue will exceed its marginal cost.
B) its average revenue will equal its marginal cost.
C) it will be earning positive economic profits.
D) its demand curve will be tangent to its average-total-costcurve.
4.
Monopolistic competition differs from perfect competition becausein monopolistically competitive markets
A) each of the sellers offers a somewhat different product.
B) strategic interactions between firms is vitally important.
C) there are barriers to entry.
D) all firms can eventually earn economic profits.
5.
The free entry and exit of firms in a monopolistically competitivemarket guarantees that
A) economic losses can persist into the long run, but not economicprofits.
B) both economic profits and economic losses can persist into thelong run.
C) economic profits can persist into the long run, but not economiclosses.
D) both economic profits and economic losses disappear in the longrun.
6.


Panel (a) shows a profit-maximizing monopolistically competitivefirm that is

A) All answers are correct
B) earning a zero profit.
C) charging a price that is equal to average total cost.
D) in long-run equilibrium.
7.
Since a firm in a monopolistically competitive market faces a
A) perfectly elastic demand curve, it will always operate withexcess capacity.
B) downward-sloping demand curve, it will always operate atefficient scale.
C) perfectly inelastic demand curve, it will always operate atefficient scale.
D) downward-sloping demand curve, it will always operate withexcess capacity.
8.
In a monopolistically competitive market,
A) firms can enter or exit the market without restriction.
B) each firm takes the price of its product as given.
C) each firm produces a product that is essentially identical tothe products of other firms in the market.
D) there are only a few sellers.
9.
The fact that there is a great deal of advertising of men’s shavingproducts indicates that
A) it costs firms very little to produce those products.
B) the market for those products is perfectly competitive.
C) those products are highly differentiated.
D) All answers are correct
10.
A profit-maximizing firm in a monopolistically competitive marketdiffers from a firm in a perfectly competitive market because thefirm in the monopolistically competitive market
A) has no barriers to entry.
B) faces a downward-sloping demand curve for its product.
C) faces a horizontal demand curve at the market clearingprice.
D) is characterized by market share maximization.