# Lecture 2: Market Structure I (Perfect Competition and Monopoly)

Size: px
Start display at page:

Transcription

1 Lecture 2: Market Structure I (Perfect Competition and Monopoly) EC 105. Industrial Organization Matt Shum HSS, California Institute of Technology October 1, 2012 EC 105. Industrial Organization ( Matt Shum HSS, California Lecture 2: Institute MarketofStructure Technology) I (Perfect Competition and Monopoly) October 1, / 22

2 Market structure 1: Perfect Competition Consider market for a single good. The perfectly competitive firm is a price taker: it cannot influence the price that is paid for its product. This arises due to consumers indifference between the products of competing firms = for example, buy from store with lowest price. Consumers indifference arises from: Product homogeneity Consumers have perfect information No transactions cost Many firms PC firm faces horizontal demand curve at market price p EC 105. Industrial Organization ( Matt Shum HSS, California Lecture 2: Institute MarketofStructure Technology) I (Perfect Competition and Monopoly) October 1, / 22

3 PC firm s profit maximization problem max q π(p) = pq C(q) First-order condition: p = C (q) = MC(q) Second-order condition: C (q) > 0, satisfied if MC(q) is an increasing function If p, production rises along MC(q) curve: MC(q) is the supply curve of the firm. EC 105. Industrial Organization ( Matt Shum HSS, California Lecture 2: Institute MarketofStructure Technology) I (Perfect Competition and Monopoly) October 1, / 22

4 PC firm s shutdown decisions A firm produces only when its profits from producing exceed the costs it would avoid by not producing In short-run: avoidable costs do not include sunk costs. Shut down when revenues fall short of avoidable costs pq < Avoidable costs(q). Consider two cases: 1 All fixed costs are sunk. Avoidable costs = VC(q): shut down once p < AVC(q) (< AC(q)). 2 Proportion α of fixed costs not sunk. Avoidable costs = VC(q) + αf : shut down once p < AVC(q) + αf q In long-run: avoidable costs include sunk cost. Shut down when pq < C(q) = p < AC(q) Short-run supply curve? Long-run supply curve? Graph. EC 105. Industrial Organization ( Matt Shum HSS, California Lecture 2: Institute MarketofStructure Technology) I (Perfect Competition and Monopoly) October 1, / 22

5 The perfectly-competitive industry: Short run In the short run: Number of firms fixed Industry supply curve: sum of individual firms short-run supply curves. Zero supply at prices below shutdown point. Graph. Industry demand curve: downward sloping. Graph. Price determined by intersection of industry demand and supply curves. Graph. In short-run equilibrium: positive profits for each firm as long as p > AC(q). EC 105. Industrial Organization ( Matt Shum HSS, California Lecture 2: Institute MarketofStructure Technology) I (Perfect Competition and Monopoly) October 1, / 22

6 The perfectly competitive industry: Long-run Number of firms can vary Free entry and exit: Any short-run profits soaked up by new firms in long-run = Price is driven down to the minimum of the AC curve Long-run industry supply curve: horizontal at minimum of the average cost curve LR supply curve may be upward-sloping if min AC is rising in market demand Q (due, for example, to resource scarcity) EC 105. Industrial Organization ( Matt Shum HSS, California Lecture 2: Institute MarketofStructure Technology) I (Perfect Competition and Monopoly) October 1, / 22

7 Elasticities and the residual demand curve Can downward-sloping industry demand curve and horizontal firm-level demand curve coexist? Price elasticity of demand: ɛ q(p) p log q(p) = p q log p = q(p) p p q(p) Steep demand curves are inelastic Flat demand curves are elastic Residual demand: D r (p) = D(p) S o (p). At competitive equilibrium, firm i s residual demand elasticity is: ɛ i = ɛn η o (n 1) where η 0 is the residual supply elasticity: η 0 = S 0(p) p p S 0 (p) Inelastic industry demand (low ɛ ) consistent with elastic residual demand curve (high ɛ i ) as n increases Example market demand Q = 100 p 50 firms, each with supply curve q = p EC 105. Industrial Organization ( Matt Shum HSS, California Lecture 2: Institute MarketofStructure Technology) I (Perfect Competition and Monopoly) October 1, / 22

8 Desirability of PC outcome p = MC(q) = min q AC(q) Production at p = MC(q): firm produces an additional unit only if it can cover the production costs. Producer surplus is maximized. Value placed on marginal unit of the good p exactly equals the cost of producing that marginal unit (consumption efficiency). Consumer surplus is maximized. Production at minimum average cost: no better alternative use of resources is possible (production efficiency). In other words, each firm operating at minimum efficient scale. EC 105. Industrial Organization ( Matt Shum HSS, California Lecture 2: Institute MarketofStructure Technology) I (Perfect Competition and Monopoly) October 1, / 22

9 General equilibrium Consider the general case with multiple goods, and heterogeneous firms and agents. All agents are price takers. Given prices, consumers choose how much of each good to buy in order to maximize their welfare, given that their expenditures must not exceed their income. This gives rise to demand functions. Given prices, producers choose production plans to maximize profits given their technological possibilities, giving rise to supply functions. A competitive equilibrium is a set of prices, with associated demands and supplies, such that all the markets clear EC 105. Industrial Organization ( Matt Shum HSS, California Lecture 2: Institute MarketofStructure Technology) I (Perfect Competition and Monopoly) October 1, / 22

10 Welfare Theorems Perfect competition Weak assumptions about preferences and technological possibilities yield general results on competitive equilibrium. 1 st Welfare Theorem: A competitive equilibrium is Pareto Optimal. A benevolent social planner can t improve on the competitive allocation. 2 nd Welfare Theorem: Any Pareto-optimal allocation can be descentralized by a choice of the right prices and an appropriate redistribution of income among consumers. Requires convexity assumptions that rule out increasing returns to scale. Key property of competitive equilibrium: each good is sold at marginal cost. Prices induce consumers to internalize the (social) cost of producing an additional unit of the good. C 105. Industrial Organization ( Matt Shum HSS, California Lecture 2: Institute MarketofStructure Technology) I (Perfect Competition and Monopoly) October 1, / 22

11 Barriers to Entry Nice outcome in perfect competitive world depends crucially on free-entry assumption. Fixed costs of entry are present in many markets: are they a barrier to entry?? Fixed costs borne equally by all firms: accommodated by free entry assumption Example: salt factory, advertising? Fixed costs which affect entrant firms disproportionately: barriers to entry First mover advantage : incumbent muddies waters to make subsequent entry difficult. Ex: C 1 (q) = F + VC(q), C 2 (q) = 2F + VC(q) Microsoft: computer operating systems? Apple: ipad? Next focus on extreme case where entry ruled out: monopoly EC 105. Industrial Organization ( Matt Shum HSS, California Lecture 2: Institute MarketofStructure Technology) I (Perfect Competition and Monopoly) October 1, / 22

12 Market structure 2: Monopoly Industry has one firm, who faces downward-sloping industry demand curve Market power: ability of a firm to dictate market prices in an industry. Depends on the slope of the residual demand curve. Market power is opposite of price-taking behavior EC 105. Industrial Organization ( Matt Shum HSS, California Lecture 2: Institute MarketofStructure Technology) I (Perfect Competition and Monopoly) October 1, / 22

13 Monopoly and profit maximization Two equivalent formulations: First, monopolist chooses quantity to maximize profits max q p(q)q C(q) = Revenue(q) C(q) Graph. Quantity can be increased only if price is lower. Tradeoff between increased demand versus revenue lost on consumers who would have bought even under the higher price FOC: R (q)) = p(q) + p (q)q = C (q) MR(q) = MC(q). Graph. EC 105. Industrial Organization ( Matt Shum HSS, California Lecture 2: Institute MarketofStructure Technology) I (Perfect Competition and Monopoly) October 1, / 22

14 Monopoly and profit maximization Alternatively, monopolist chooses price to maximize profits max p pq(p) C(q(p)), where q(p) is demand curve. FOC: q(p) + pq (p) = C (q(p))q (p) At optimal price p, Inverse Elasticity Property holds: (p MC(q(p ))) = q(p ) q (p ) or p mc(q(p )) p = 1 ɛ(p ), where ɛ(p ) is q (p ) p q(p ). Across monopolistic markets, should observe negative relationship between price and demand elasticity If ɛ + : p = MC(q) EC 105. Industrial Organization ( Matt Shum HSS, California Lecture 2: Institute MarketofStructure Technology) I (Perfect Competition and Monopoly) October 1, / 22

15 Inverse Elasticity condition p mc(q(p )) p = 1 ɛ(p ), What if 1 < ɛ(p ) < 0? Implies p < mc, which is nonsensical. Unpack marginal revenue expression: MR(q) = R(q) q = p (q)q + p(q) = q(p) q (p) + p = p p q(p) q (p) + p = p ( ) 1 q(p) q + 1 (p) p = p( 1 ɛ(p) + 1) which is negative for prices where 1 < ɛ(p) < 0. (Use p (q) = 1/q (p)). More intuitive: monopolist never chooses a p (or equivalently q(p)) where its marginal revenue would be negative. From this perspective, the cause of the socially too low quantity produced is the monopolist s recognition that a reduction in the quantity it sells allows it to increase the price on all the intramarginal units. EC 105. Industrial Organization ( Matt Shum HSS, California Lecture 2: Institute MarketofStructure Technology) I (Perfect Competition and Monopoly) October 1, / 22

16 Dead-Weight Loss Perfect competition Markup provides a quantification of price distortion, and is useful for policy purposes (later). This is not, however, an appropriate measure of distortion from a normative viewpoint. Instead, the appropriate measure is the loss of social welfare. To measure the later we compare the total surplus (consumer and producer surplus, or profit) at the monopoly price with that at the competitive (marginal cost) price. C 105. Industrial Organization ( Matt Shum HSS, California Lecture 2: Institute MarketofStructure Technology) I (Perfect Competition and Monopoly) October 1, / 22

17 Dead-Weight Loss Perfect competition EC 105. Industrial Organization ( Matt Shum HSS, California Lecture 2: Institute MarketofStructure Technology) I (Perfect Competition and Monopoly) October 1, / 22

18 Dead-Weight Loss Perfect competition The welfare loss does not necessarily decrease with the elasticity of demand, even though the relative markup does. Strong price distortions correspond to low demand elasticities consumers decrease their quantity demanded only slightly in response to a unit price increase. In precisely these situations, price changes do not affect quantity consumed very much; rather, they elicit a large transfer from consumers to the firm. C 105. Industrial Organization ( Matt Shum HSS, California Lecture 2: Institute MarketofStructure Technology) I (Perfect Competition and Monopoly) October 1, / 22

19 How monopolies arise Crucial aspect of monopoly: price-setting ability (relatively inelastic demand curve) Product differentiation: Apple vs. Samsung vs. RIM Superior production technology Government-granted monopolies (patents) EC 105. Industrial Organization ( Matt Shum HSS, California Lecture 2: Institute MarketofStructure Technology) I (Perfect Competition and Monopoly) October 1, / 22

20 Positive aspects of monopoly? Demsetz critique: monopolist is the firm with lowest-cost technology. Monopolist deserves its market leadership. Schumpeter: monopoly profits provide an incentive for innovation and technological change ( process of creative destruction ) Natural monopoly: industry characterized by increasing returns to scale. Government antitrust policy: balance these aspects Checks on a monopolist s market power: threat of entry keeps price around average cost EC 105. Industrial Organization ( Matt Shum HSS, California Lecture 2: Institute MarketofStructure Technology) I (Perfect Competition and Monopoly) October 1, / 22

21 Measuring Market Power Recall definition of market power: ability to profitably charge a price above perfectly competitive levels. Discretion as to what too much market power is. Market share. Small firms can t have any market power. Not true: makers of niche products (ie. Apple Mac) have a lot of market power! Availability of substitutes to monopolist s product: but perhaps (possibly cost-inefficient) substitutes only available when monopolist charges p > MC. Cellophane fallacy availability of substitutes is sign of market power! Direct measure of market power is given by estimates of demand elasticities, which are inversely related to profit-maximizing price-cost margin. Examples (handout) C 105. Industrial Organization ( Matt Shum HSS, California Lecture 2: Institute MarketofStructure Technology) I (Perfect Competition and Monopoly) October 1, / 22

22 Summary 1 Perfect competition Individual firm takes prices as given in making output decisions Shutdown decisions: long run vs. short run Industry equilibrium: in long-run p = MC(q) = min qac(q) 2 Monopoly Firm has power to set both quantity and price Tradeoff between higher demand but lower per-unit prices MR(q ) = MC(q ); inverse-elasticity pricing property EC 105. Industrial Organization ( Matt Shum HSS, California Lecture 2: Institute MarketofStructure Technology) I (Perfect Competition and Monopoly) October 1, / 22

### Lecture 2: Market Structure Part I (Perfect Competition and Monopoly)

Lecture 2: Market Structure Part I (Perfect Competition and Monopoly) EC 105. Industrial Organization Matt Shum HSS, California Institute of Technology EC 105. Industrial Organization ( Matt ShumLecture

### Market structure 1: Perfect Competition The perfectly competitive firm is a price taker: it cannot influence the price that is paid for its product.

Market structure 1: Perfect Competition The perfectly competitive firm is a price taker: it cannot influence the price that is paid for its product. This arises due to consumers indifference between the

### Monopolistic Markets. Causes of Monopolies

Monopolistic Markets Causes of Monopolies The causes of monopolization Monoplositic resources Only one firm owns a resource which is crucial for production (e.g. diamond monopol of DeBeers). Monopols created

### Search markets: Introduction

Search markets: Introduction Caltech Ec106 (Caltech) Search Feb 2010 1 / 16 Why are prices for the same item so different across stores? (see evidence) A puzzle considering basic economic theory: review

### Demand curve - using Game Results How much customers will buy at a given price Downward sloping - more demand at lower prices

31 October Bige Kahraman Class Notes First half of course (Michaelmas) is Microeconomics, second half (Hilary) is Macroeconomics Focusing on profit maximization & price formation Looking at industry level

### Eco 300 Intermediate Micro

Eco 300 Intermediate Micro Instructor: Amalia Jerison Office Hours: T 12:00-1:00, Th 12:00-1:00, and by appointment BA 127A, aj4575@albany.edu A. Jerison (BA 127A) Eco 300 Spring 2010 1 / 61 Monopoly Market

### Chapter 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

Managerial Economics & Business Strategy Chapter 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All

### Marginal willingness to pay (WTP). The maximum amount a consumer will spend for an extra unit of the good.

McPeak Lecture 10 PAI 723 The competitive model. Marginal willingness to pay (WTP). The maximum amount a consumer will spend for an extra unit of the good. As we derived a demand curve for an individual

### Unit 6 Perfect Competition and Monopoly - Practice Problems

Unit 6 Perfect Competition and Monopoly - Practice Problems Multiple Choice Identify the choice that best completes the statement or answers the question. 1. One characteristic of a perfectly competitive

### FINALTERM EXAMINATION FALL 2006

FINALTERM EXAMINATION FALL 2006 QUESTION NO: 1 (MARKS: 1) - PLEASE CHOOSE ONE Compared to the equilibrium price and quantity sold in a competitive market, a monopolist Will charge a price and sell a quantity.

### FIRM SUPPLY: MARKET STRUCTURE & PERFECT COMPETITION

FIRM SUPPLY: MARKET STRUCTURE & PERFECT COMPETITION Firm Supply How does a firm decide how much to supply at a given price? This depends upon the firm s goals; technology; market environment; and competitors

### Monopolistic Markets. Regulation

Monopolistic Markets Regulation Comparison of monopolistic and competitive equilibrium output The profits of a monopolist are maximized when MC(Q M ) = P(Q M ) + Q P (Q M ) negative In a competitive market:

### Seminar 3 Monopoly. Simona Montagnana. Week 25 March 20, 2017

Seminar 3 Monopoly Simona Montagnana Week 25 March 20, 2017 2/41 Question 2 2. Explain carefully why a natural monopoly might occur. a Discuss the problem of using marginal cost pricing to regulate a natural

### ECN 3103 INDUSTRIAL ORGANISATION

ECN 3103 INDUSTRIAL ORGANISATION 3. Monopoly Mr. Sydney Armstrong Lecturer 1 The University of Guyana 1 Semester 1, 2016 OUR PLAN Monopoly Reference for reviewing these concepts: Carlton, Perloff, Modern

### Perfect Competition Definition

Perfect Competition Definition What is the essence of perfect competition? All agents in the market take the relevant price for this market as given. That is, all agents assume that their behaviour will

### The economics of competitive markets Rolands Irklis

The economics of competitive markets Rolands Irklis www. erranet.org Presentation outline 1. Introduction and motivation 2. Consumer s demand 3. Producer costs and supply decisions 4. Market equilibrium

### ECON 311 MICROECONOMICS THEORY I

ECON 311 MICROECONOMICS THEORY I Profit Maximisation & Perfect Competition (Short-Run) Dr. F. Kwame Agyire-Tettey Department of Economics Contact Information: fagyire-tettey@ug.edu.gh Session Overview

### Lecture on Competition 22 January 2003

Lecture on Competition 22 January 2003 Q: How common is Perfect Competition? A: It s not. It s RARE. I. Characteristics of PERFECT COMPETITION: Price Taker, Homogeneous Good, Perfect Info., No Transactions

### Monopoly. Basic Economics Chapter 15. Why Monopolies Arise. Monopoly

1 Why Monopolies Arise Basic Economics Chapter 15 Monopoly Monopoly - The monopolist is a firm that is the sole seller of a product (or service) without close substitutes - The monopolist is a price maker

### Lecture 11. Firms in competitive markets

Lecture 11 Firms in competitive markets By the end of this lecture, you should understand: what characteristics make a market competitive how competitive firms decide how much output to produce how competitive

### Networks, Telecommunications Economics and Strategic Issues in Digital Convergence. Prof. Nicholas Economides. Spring 2006

Networks, Telecommunications Economics and Strategic Issues in Digital Convergence Prof. Nicholas Economides Spring 2006 Basic Market Structure Slides The Structure-Conduct-Performance Model Basic conditions:

### 14.54 International Trade Lecture 17: Increasing Returns to Scale

14.54 International Trade Lecture 17: Increasing Returns to Scale 14.54 Week 11 Fall 2016 14.54 (Week 11) Increasing Returns Fall 2016 1 / 25 Today s Plan 1 2 Increasing Returns to Scale: General Discussion

### Quiz #5 Week 04/12/2009 to 04/18/2009

Quiz #5 Week 04/12/2009 to 04/18/2009 You have 30 minutes to answer the following 17 multiple choice questions. Record your answers in the bubble sheet. Your grade in this quiz will count for 1% of your

### Market structures. Why Monopolies Arise. Why Monopolies Arise. Market power. Monopoly. Monopoly resources

Market structures Why Monopolies Arise Market power Alters the relationship between a firm s costs and the selling price Charges a price that exceeds marginal cost A high price reduces the quantity purchased

### Chapter 11 Perfect Competition

Chapter 11 Perfect Competition Introduction: To an economist, a competitive firm is a firm that does not determine its market price. This type of firm is free to sell as many units of its good as it wishes

### CONTENTS. Introduction to the Series. 1 Introduction to Economics 5 2 Competitive Markets, Demand and Supply Elasticities 37

CONTENTS Introduction to the Series iv 1 Introduction to Economics 5 2 Competitive Markets, Demand and Supply 17 3 Elasticities 37 4 Government Intervention in Markets 44 5 Market Failure 53 6 Costs of

### ECON 2100 (Summer 2012 Sections 07 and 08) Exam #3C Answer Key

ECON 21 (Summer 212 Sections 7 and 8) Exam #3C Answer Key Multiple Choice Questions: (3 points each) 1. I am taking of the exam. C. Version C 2. is a market structure in which there is one single seller

### Pricing with Market Power

Chapter 7 Pricing with Market Power 7.1 Motives and objectives Broadly The model of perfect competition is extreme (and hence wonderfully powerful and simple) because of its assumption that each firm believes

### MICROECONOMIC FOUNDATIONS OF COST-BENEFIT ANALYSIS. Townley, Chapter 4

MICROECONOMIC FOUNDATIONS OF COST-BENEFIT ANALYSIS Townley, Chapter 4 Review of Basic Microeconomics Slides cover the following topics from textbook: Input markets. Decision making on the margin. Pricing

### Monopoly. Cost. Average total cost. Quantity of Output

While a competitive firm is a price taker, a monopoly firm is a price maker. A firm is considered a monopoly if... it is the sole seller of its product. its product does not have close substitutes. The

### Ch. 9 LECTURE NOTES 9-1

Ch. 9 LECTURE NOTES I. Four market models will be addressed in Chapters 9-11; characteristics of the models are summarized in Table 9.1. A. Pure competition entails a large number of firms, standardized

### Ecn Intermediate Microeconomic Theory University of California - Davis June 11, 2009 Instructor: John Parman. Final Exam

Ecn 100 - Intermediate Microeconomic Theory University of California - Davis June 11, 2009 Instructor: John Parman Final Exam You have until 8pm to complete the exam, be certain to use your time wisely.

### The Four Main Market Structures

Competitive Firms and Markets The Four Main Market Structures Market structure: the number of firms in the market, the ease with which firms can enter and leave the market, and the ability of firms to

### ECON 2100 (Summer 2012 Sections 07 and 08) Exam #3A

ECON 21 (Summer 212 Sections 7 and 8) Exam #3A Multiple Choice Questions: (3 points each) 1. I am taking of the exam. A. Version A 2. Excess Capacity refers to the A. quantity of output at which Average

### Ecn Intermediate Microeconomic Theory University of California - Davis March 19, 2009 Instructor: John Parman. Final Exam

Ecn 100 - Intermediate Microeconomic Theory University of California - Davis March 19, 2009 Instructor: John Parman Final Exam You have until 5:30pm to complete the exam, be certain to use your time wisely.

### Handout 1: Monopolistic Competition and International Trade

Handout 1: Monopolistic Competition and International Trade Introduction to monopolistic competition There are two differences between our previous models (Ricardian, SF and H-O) and models with monopolistic

### ECON 2100 Principles of Microeconomics (Summer 2016) Monopoly

ECON 21 Principles of Microeconomics (Summer 216) Monopoly Relevant readings from the textbook: Mankiw, Ch. 15 Monopoly Suggested problems from the textbook: Chapter 15 Questions for Review (Page 323):

### Monopoly. PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University

15 Monopoly PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 1 Market power Why Monopolies Arise Alters the relationship between a firm s costs and the selling price Monopoly

### Lecture 12. Monopoly

Lecture 12 Monopoly By the end of this lecture, you should understand: why some markets have only one seller how a monopoly determines the quantity to produce and the price to charge how the monopoly s

### MICROECONOMICS - CLUTCH CH PERFECT COMPETITION.

!! www.clutchprep.com CONCEPT: THE FOUR MARKET MODELS Market structure describes the environment in which a firm operates, determined by the Perfect Competition Monopolistic Competition Oligopoly Monopoly

### Wireless Network Pricing Chapter 5: Monopoly and Price Discriminations

Wireless Network Pricing Chapter 5: Monopoly and Price Discriminations Jianwei Huang & Lin Gao Network Communications and Economics Lab (NCEL) Information Engineering Department The Chinese University

### 23 Perfect Competition

23 Perfect Competition Learning Objectives After you have studied this chapter, you should be able to 1. define price taker, total revenues, marginal revenue, short-run shutdown price, short-run breakeven

### CH 14: Perfect Competition

CH 14: Perfect Competition Characteristics of Perfect Competition 1. Both buyers and sellers are price takers A price taker is a firm (or individual) who takes the price determined by market supply and

### Perfect Competition CHAPTER14

Perfect Competition CHAPTER14 MARKET TYPES The four market types are Perfect competition Monopoly Monopolistic competition Oligopoly MARKET TYPES Perfect Competition Perfect competition exists when Many

### Chapter 8. Competitive Firms and Markets

Chapter 8 Competitive Firms and Markets Topics Perfect Competition. Profit Maximization. Competition in the Short Run. Competition in the Long Run. 8-2 Copyright 2012 Pearson Addison-Wesley. All rights

### MICROECONOMICS - CLUTCH CH MONOPOLISTIC COMPETITION.

!! www.clutchprep.com CONCEPT: CHARACTERISTICS OF MONOPOLISTIC COMPETITION A market is in monopolistic competition when: Nature of Good: The goods for sale are, but not identical - Products are said to

### At P = \$120, Q = 1,000, and marginal revenue is ,000 = \$100

Microeconomics, monopoly, final exam practice problems (The attached PDF file has better formatting.) *Question 1.1: Marginal Revenue Assume the demand curve is linear.! At P = \$100, total revenue is \$200,000.!

### Econ8500_Imperfect_Competition

Name: Class: Date: ID: A Econ8500_Imperfect_Competition Multiple Choice Identify the choice that best completes the statement or answers the question. 1. In the quasi-competitive model a. firms believe

### ECON 4550 (Fall 2011) Exam 1

ECON 455 (Fall 211) Exam 1 Name Multiple Choice Questions: (4 points each) 1. Jimmy is risk neutral. He is faced with a random payoff with expected value of \$2,. Further, for this payoff the highest possible

### Prof. Wolfram Elsner Faculty of Business Studies and Economics iino Institute of Institutional and Innovation Economics. Real-World Markets

Prof. Wolfram Elsner Faculty of Business Studies and Economics iino Institute of Institutional and Innovation Economics Real-World Markets Readings for this lecture Required reading this time: Real-World

### Eco402 - Microeconomics Glossary By

Eco402 - Microeconomics Glossary By Break-even point : the point at which price equals the minimum of average total cost. Externalities : the spillover effects of production or consumption for which no

### 2007 Thomson South-Western

Monopolistic Competition Characteristics: Many sellers Product differentiation Free entry and exit In the long run, profits are driven to zero Firms have some control over price What does the costs graph

What Is Perfect Competition? Perfect competition is an industry in which Many firms sell identical products to many buyers. There are no restrictions to entry into the industry. Established firms have

### Market structures Perfect competition

Market structures Perfect competition Market Structures Market structure refers to the number and size of buyers and sellers in the market for a good or service. A market can be defined as a group of firms

### Introduction. Managerial Problem. Solution Approach

Monopoly Introduction Managerial Problem Drug firms have patents that expire after 20 years and one expects drug prices to fall once generic drugs enter the market. However, as evidence shows, often prices

### Economics. Monopolistic Perfect Competition. Monopolistic Competition. Monopolistic Competition 11/29/2013. The Big Picture. Perfect Competition

16 Modified by Joseph Tao-yi Wang Ron Cronovich The Big Picture Chapter 13: The cost of production Now, we will look at firm s revenue But revenue depends on market structure 1. Competitive market (chapter

### INTERMEDIATE MICROECONOMICS LECTURE 13 - MONOPOLISTIC COMPETITION AND OLIGOPOLY. Monopolistic Competition

13-1 INTERMEDIATE MICROECONOMICS LECTURE 13 - MONOPOLISTIC COMPETITION AND OLIGOPOLY Monopolistic Competition Pure monopoly and perfect competition are rare in the real world. Most real-world industries

### Basic Micro: Demand. To see how much demand changes with changes price we are interested in the slope of the demand curve, i.e dq

Basic Micro: Demand A demand curve is a relationship between the quantity of a desired item and the willingness to pay (WTP). One feature of a demand curve that we ll be particularly interested in is the

### Final Exam - Solutions

Ecn 100 - Intermediate Microeconomic Theory University of California - Davis December 10, 009 Instructor: John Parman Final Exam - Solutions You have until 1:30pm to complete this exam. Be certain to put

### Ecn Intermediate Microeconomic Theory University of California - Davis December 10, 2008 Professor John Parman.

Ecn 100 - Intermediate Microeconomic Theory University of California - Davis December 10, 2008 Professor John Parman Final Examination You have until 12:30pm to complete the exam, be certain to use your

### Ecn Intermediate Microeconomic Theory University of California - Davis December 10, 2009 Instructor: John Parman. Final Exam

Ecn 100 - Intermediate Microeconomic Theory University of California - Davis December 10, 2009 Instructor: John Parman Final Exam You have until 12:30pm to complete this exam. Be certain to put your name,

### ANTITRUST ECONOMICS 2013

ANTITRUST ECONOMICS 2013 David S. Evans University of Chicago, Global Economics Group Elisa Mariscal CIDE, ITAM, CPI TOPIC 3: DEMAND, SUPPLY AND STATIC COMPETITION Date Topic 3 Part 2 14 March 2013 2 Overview

### ECON 2100 (Summer 2014 Sections 08 & 09) Exam #3A

ECON 21 (Summer 214 Sections 8 & 9) Exam #3A Multiple Choice Questions: (3 points each) 1. I am taking of the exam. A. Version A 2. Average Fixed Costs of Production A. must remain constant as the level

### ECON 8010 (Spring 2014) Exam 1

ECON 81 (Spring 214) Exam 1 Name A. Key Multiple Choice Questions: (4 points each) 1. The states that a rational decision maker should undertake an action if and only if the Marginal Benefit from taking

### WHAT IS A COMPETITIVE MARKET?

Chapter 14. Firms in Competitive Markets WHAT IS A COMPETITIVE MARKET? A perfectly competitive market has the following characteristics: There are many buyers and sellers in the market. small relative

### Syllabus item: 42 Weight: 3

1.5 Theory of the firm and its market structures - Production and costs Syllabus item: 42 Weight: 3 Definition: Total product (TP): The total output that a firm produces, using its fixed and variable factors

Chapter 14 TRADITIONAL MODELS OF IMPERFECT COMPETITION Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved. 1 Pricing Under Homogeneous Oligopoly We will assume that the

### = AFC + AVC = (FC + VC)

Chapter 13-14: Marginal Product, Costs, Revenue, and Profit Production Function The relationship between the quantity of inputs (workers) and quantity of outputs Total product (TP) is the total amount

### Monopoly and How It Arises

13 MONOPOLY Monopoly and How It Arises A monopoly is a market: That produces a good or service for which no close substitute exists If a good has a close substitute, even if it is produced by only one

### Monopolistic Competition. Chapter 17

Monopolistic Competition Chapter 17 The Four Types of Market Structure Number of Firms? Many firms One firm Few firms Differentiated products Type of Products? Identical products Monopoly Oligopoly Monopolistic

### 11.1 Monopoly Profit Maximization

11.1 Monopoly Profit Maximization CHAPTER 11 MONOPOLY A monopoly is the only supplier of a good for which there is no close substitute. Monopolies are not price takers like competitive firms Monopoly output

### Econ 121b: Intermediate Microeconomics

Econ 11b: Intermediate Microeconomics Dirk Bergemann, Spring 01 Week of 3/18-3/4 1 Lecture 14: Theory of Production We can use tools similar to those we used in the consumer theory section of the class

### Week One What is economics? Chapter 1

Week One What is economics? Chapter 1 Economics: is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives

### Firm Behavior. Business Economics Managerial Decisions in Competitive Markets (Deriving the Supply Curve)) Perfect Competition.

Business Economics Managerial Decisions in Competitive Markets (Deriving the Supply Curve)) Thomas & Maurice, Chapter Herbert Stocker herbert.stocker@uibk.ac.at Institute of International Studies University

### CHAPTER 8. Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

CHAPTER 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets CHAPTER OUTLINE Perfect competition Demand at the market and firm levels Short-run output decisions Long-run decisions

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. FIGURE 1-2

Questions of this SAMPLE exam were randomly chosen and may NOT be representative of the difficulty or focus of the actual examination. The professor did NOT review these questions. MULTIPLE CHOICE. Choose

### 6) The mailing must be postmarked by June 15. 7) If you have any questions please me at

Examination Instructions: 1) Answer the examination only after you have read the honesty pledge below. 2) The multiple choice section will be taken in WebCT and a tutorial for using WebCT is to be found

### Econ 98 (CHIU) Midterm 1 Review: Part A Fall 2004

Disclaimer: The review may help you prepare for the exam. The review is not comprehensive and the selected topics may not be representative of the exam. In fact, we do not know what will be on the exam.

### Principles of. Economics. Week 6. Firm in Competitive & Monopoly market. 7 th April 2014

Principles of Economics Week 6 Firm in Competitive & Monopoly market 7 th April 2014 In this week, look for the answers to these questions:!what is a perfectly competitive market?!what is marginal revenue?

BS2243 Lecture 9 Advertisement Spring 2012 (Dr. Sumon Bhaumik) Why advertise? Building brands Creating markets for new products (scope economies) Price competition / Price protection Barrier to entry Product

### Review Chapters 1 & 2

Review Chapters 1 & 2 ECON 1 Midterm 1 Review Session Scarcity or No Free Lunch Principle. Cost-Benefit Principle. Reservation Price. Economic Surplus = Benefit Cost. Opportunity Cost (DO NOT FORGET!!).

### Perfectly Competitive Markets

Characteristics: Fragmented: Many small firms, none of which have market power Undifferentiated Products: Products that consumers perceive as being identical. Perfect Pricing Information: Consumers have

### Ecn Intermediate Microeconomic Theory University of California - Davis December 10, 2008 Professor John Parman.

Ecn 100 - Intermediate Microeconomic Theory University of California - Davis December 10, 2008 Professor John Parman Final Examination You have until 12:30pm to complete the exam, be certain to use your

### Chapter 11. Monopoly. I think it s wrong that only one company makes the game Monopoly. Steven Wright

Chapter 11 Monopoly I think it s wrong that only one company makes the game Monopoly. Steven Wright Chapter 11 Outline 11.1 Monopoly Profit Maximization 11.2 Market Power 11.3 Welfare Effects of Monopoly

### - pure monopoly: only one seller of a good/service with no close substitutes

Micro 101, Chapter 10 1 Chapter 10: Monopoly Main objectives: 1. Define what constitutes a monopoly - pure monopoly: only one seller of a good/service with no close substitutes 2. Describe types of barriers

### 2007 Thomson South-Western

WHAT IS A COMPETITIVE MARKET? A competitive market has many buyers and sellers trading identical products so that each buyer and seller is a price taker. Buyers and sellers must accept the price determined

### Economics. Monopolistic Competition. Firms in Competitive Markets. Monopolistic Competition 11/22/2012. The Big Picture. Perfect Competition

16 Modified by Joseph Tao-yi Wang Ron Cronovich The Big Picture Chapter 13: The cost of production Now, we will look at firm s revenue But revenue depends on market structure 1. Competitive market (chapter

### Econ Microeconomics Notes

Econ 120 - Microeconomics Notes Daniel Bramucci December 1, 2016 1 Section 1 - Thinking like an economist 1.1 Definitions Cost-Benefit Principle An action should be taken only when its benefit exceeds

### AP Microeconomics Chapter 10 Outline

I. Learning Objectives In this chapter students should learn: A. How the long run differs from the short run in pure competition. B. Why profits encourage entry into a purely competitive industry and losses

### Monopoly. While a competitive firm is a price taker, a monopoly firm is a price maker.

Monopoly Monopoly While a competitive firm is a price taker, a monopoly firm is a price maker. Monopoly A firm is considered a monopoly if... it is the sole seller of its product. its product does not

### Microeconomics: MIE1102

TEXT CHAPTERS TOPICS 1, 2 ECONOMICS, ECONOMIC SYSTEMS, MARKET ECONOMY 3 DEMAND AND SUPPLY. MARKET EQUILIBRIUM 4 ELASTICITY OF DEMAND AND SUPPLY 5 DEMAND & CONSUMER BEHAVIOR 6 PRODUCTION FUNCTION 7 COSTS

### SHORT QUESTIONS AND ANSWERS FOR ECO402

SHORT QUESTIONS AND ANSWERS FOR ECO402 Question: How does opportunity cost relate to problem of scarcity? Answer: The problem of scarcity exists because of limited production. Thus, each society must make

### 1. Fill in all requested information above and on the answer sheet.

Economics 101 Professor H. Quirmbach Final Exam PRINT NAME STUDENT ID NO. GROUP TIME SCORE INSTRUCTIONS: 1. Fill in all requested information above and on the answer sheet. 2. There are 40 multiple choice

### Review Notes for Chapter Optimal decision making by anyone Engage in an activity up to the point where the marginal benefit= marginal cost

Review Notes for Chapter 5 1. Optimal decision making by anyone Engage in an activity up to the point where the marginal benefit= marginal cost Sunk costs are costs which must be borne regardless of future

### CH 15: Monopoly. Lecture

CH 15: Monopoly Lecture Characteristics of Monopolies A monopoly is a market structure in which one firm makes up the entire market Firm=Industry Characteristics of Monopolies The monopolist is a price

### 1.3. Levels and Rates of Change Levels: example, wages and income versus Rates: example, inflation and growth Example: Box 1.3

1 Chapter 1 1.1. Scarcity, Choice, Opportunity Cost Definition of Economics: Resources versus Wants Wants: more and better unlimited Versus Needs: essential limited Versus Demand: ability to pay + want

### Price setting problem: Rigidities

Advanced Monetary Theory and Policy EPOS 2012/13 Price setting problem: Rigidities Giovanni Di Bartolomeo giovanni.dibartolomeo@uniroma1.it New Keynesian Economics Most economists believe that short-run

### ECON 2100 (Summer 2015 Sections 07 & 08) Exam #3A

ECON 2100 (Summer 2015 Sections 07 & 08) Exam #3A Multiple Choice Questions: (3 points each) 1. I am taking of the exam. A. Version A 2. For a firm with market power Marginal Revenue, while for a firm