1. Sample Questions for Exam 3 Chapters 12,13,14,15

2. 2 of 35 Define Different Market Structures MARKET STRUCTURE CHARACTERISTIC PERFECT COMPETITION MONOPOLISTIC COMPETITIONOLIGOPOLYMONOPOLY Number of firms Type of product Ease of entry Examples of industries Many Identical Easy Wheat Apples Many Differentiated Easy Selling DVDs Restaurants Few Identical or differentiated Difficult Manufacturing computers Manufacturing automobiles One Unique Entry blocked First-class mail delivery Tap water The Four Market Structures 11 – 1

3. 3 of 35 Perfectly Competitive Markets Perfectly competitive market (1) many buyers and sellers, (2) firms selling identical products, (3) no barriers to new firms entering the market. Why are these firms price-takers? (1) many buyers and sellers (2) firms sell identical products

4. Perfectly Competitive Market On the graphs, find the output quantity that maximizes profit for a perfectly competitive firm. Find the amount of profit at the optimum quantity on the TR and TC graph. 4 of 35

5. Find the profit maximizing quantity for a perfectly competitive firm on the graph. What defines the profit maximizing quantity? (P = MR = MC) If P > ATC, then profit is which one of the following? = 0, zero > 0, positive < 0, negative can’t tell 5 of 35 Illustrating Profit or Loss on the Cost Curve Graph

6. 6 of 35 Illustrating When a Firm Is Breaking Even or Operating at a Loss  P > ATC, which means the firm makes a profit  P = ATC, which means the firm breaks even (its total cost equals it total revenue)  P < ATC, which means the firm experiences losses Illustrating Profit or Loss on the Cost Curve Graph

7. Deciding Whether to Produce or to Shut Down in the Short Run What quantity should a perfectly competitive firm produce if ATC > P > AVC? Why stay in business if ATC > P > AVC?(cover some fixed cost) What is the minimum price a perfectly competitive firm needs to produce output? (find on graph) Perfectly competitive firm with P < AVC produces: (nothing, shutdown) 7 of 35

8. 8 of 35 Economic Profit Leads to Entry of New Firms How does a perfectly competitive market with π > 0 transition to Long Run Equilibrium? (entry shifts supply) What is profit in Long Run Equilibrium? (π = 0)

9. Define Productive efficiency: a good is produced at the lowest possible cost. Perfect Competition achieves Allocative Efficiency because: marginal benefit (price) is equal to marginal cost on the last unit produced. Perfect Competition and Efficiency

10. 10 of 30 Define Monopoly? Monopoly The only seller of a good or service that does not have a close substitute. The most common barriers to entry are economies of scale, ownership of a key input, and government imposed barriers A monopolist faces which of the following: a) horizontal demand b) downward sloping demand c) perfectly elastic demand d) perfectly inelastic demand

11. 11 of 30 Where Do Monopolies Come From? Maintaining a monopoly requires a) perfectly inelastic demand b) an insurmountable barrier to entry c) few competitors d) MD = D Governments grant patents to encourage a) low prices on existing products b) competition for natural monopolies c) research and development on new products d) firms to form corporations Compared to perfect competition, consumer surplus in monopoly is a) higher b) lower c) eliminated d) unchanged

12. Monopoly Profit Maximization Learning Objective 14.3 Identify the profit maximizing price and quantity for a monopolist on a graph. (MR = MC)

13. 13 of 30 Does Monopoly Reduce Economic Efficiency? Measuring the Efficiency Losses from Monopoly Find the area representing the deadweight loss due to monopoly on a graph.

14. MARKET POWER, PROFITS, AND EFFCIENCY Economic Efficiency occurs when a) consumer surplus is maximized b) producer surplus is minimized c) the price is low d) the sum of producer and consumer surplus is maximized Long run economic profits are most likely in a) monopoly only b) monopoly and monopolistic competition c) monopoly and oligopoly d) none of the above Market power is defined as the ability to set price a) above ATC b) above AVC c) above MC d) above MR

15. Policy Toward Monopoly The first U.S. antitrust law was the a) Clayton Act b) Sherman Act c) FTC Act d) Cellar-Kefauver Act In the U.S., natural monopolies are most often regulated by a) Department of Justice b) Federal Trade Commission c) state or local regulatory commissions d) Federal Communications Commission The U.S. antitrust laws are enforced by the a) Department of Justice b) Federal Trade Commission c) Department of Commerce d) both a and b

16. Antitrust The purpose of the antitrust laws is – To make illegal attempts to monopolize or collude Calculate HHI from market shares: 60%, 20%, 9%, 1% – 60 2 + 20 2 + 9 2 + 1 2 = 3600 + 400 + 81 + 1 = 4082 If the firms with 9% and 1% merge, what is the HHI – 3600 + 400 + 100 = 4100 Will the Government challenge this merger?

17. 17 © 2015 Pearson Education, Inc. Merger Guidelines Based on the calculated HHI values, the DOJ and FTC apply the following standards to determine if they ought to challenge the potential merger of two or more firms: Firms having their merger applications challenged must satisfy the DOJ and FTC that their merger would result in substantial efficiency gains. The burden of proof is on the merging firms. Increase in HHI Post-merger HHI< 100100 – 200> 200 < 1,500Challenge unlikely 1,500 – 2,500Challenge unlikelyChallenge possible > 2,500Challenge unlikelyChallenge possibleChallenge very likely

18. 18 of 19 Define Monopolistic Competition Monopolistic competition barriers to entry are low many firms compete similar, but not identical, (differentiated) products. Many sellers facing downward sloping demand curves. Positive profits in monopolistic competition will attract entry in the long run.

19. Monopolistic Competition Find the profit maximizing price and quantity on a graph (MR=MC). Identify long run equilibrium (zero profit) on a graph.

20. 20 of 19 Comparing Perfect Competition and Monopolistic Competition 12 - 6 Comparing Long-Run Equilibrium under Perfect Competition and Monopolistic Competition Is monopolistic competition a) productively efficient? no – not at min ATC b) allocatively efficient? no – P > MC

21. Consumers benefit from monopolistic competition because a) price is lower than in perfect competition b) price is the same as in perfect competition c) high quality products are available at low prices d) consumers can choose products closer to their tastes

22. 22 of 21 Oligopoly Oligopoly A market structure in which a small number of interdependent firms compete. Which of the following are true in oligopoly a)firms pay no attention to rivals b)advertising has no effect on rivals c)one firm’s pricing decision affects all other firms d)pricing decisions have no effect on other firms

23. 23 of 21 Using Game Theory to Analyze Oligopoly Find Nash Equilibrium given the payoff table below Do these firms have dominant strategies? If the firms collude, can they increase their payoffs? Nash equilibrium A situation where each firm chooses the best strategy, given the strategies chosen by other firms.

24. Definitions Dominant strategy A strategy that is the best for a firm, no matter what strategies other firms use. Collusion An agreement among firms to charge the same price or otherwise not to compete. Cooperative equilibrium An equilibrium in a game in which players cooperate to increase their mutual payoff. Noncooperative equilibrium An equilibrium in a game in which players do not cooperate but pursue their own self-interest. Prisoners’ dilemma A game in which pursuing dominant strategies results in noncooperation that leaves everyone worse off.

25. 25 of 21 Sequential Games Find Nash Equilibrium 15% rate of return required for entry

26. The Five Competitive Forces Model Michael Porter’s model identifies five forces that determine the level of competition in an industry.

27. Which of the following is most likely to have bargaining power as a buyer? a) an online store purchases books from publishers b) a small ice cream producer seeks milk supplies from dairy farms c) a pork barbecue producer buying pigs from farmers d) the world’s largest discount store buys products made exclusively for its stores