Markets structures

Question 1

Profit-max rule for any market structure

Answer 1

MR = MC (choose Q where marginal revenue equals marginal cost)

Question 2

How is the demand curve and price role for a firm in a perfect competition?

Answer 2

Demand is perfectly elastic (horizontal); firm is a price taker so P = MR = D

Question 3

Perfect competition (long run) profit outcome

Answer 3

Zero economic profit (normal return); P = MC = ATC

Question 4

Breakeven price (firm) definition

Answer 4

Price where TR = TC (economic profit = 0); occurs when P = ATC at the chosen Q

Question 5

Shutdown price (firm) definition

Answer 5

Price where TR = TVC; if P < AVC at the chosen Q, shut down in the short run

Question 6

Short-run decision rule: operate vs shutdown

Answer 6

If TR > TVC operate; if TR < TVC shut down (even if TR < TC)

Question 7

Long-run decision rule: operate vs exit

Answer 7

If TR ≥ TC operate; if TR < TC exit the industry (all costs are variable in long run)

Question 8

Monopolistic competition: key characteristics

Answer 8

Many sellers, differentiated products, low entry barriers; compete on price & non-price (marketing/features)

Question 9

Monopolistic competition: demand + MR relationship

Answer 9

Downward-sloping, highly elastic demand (many close substitutes); MR < P

Question 10

Monopolistic competition: long-run profit outcome

Answer 10

New entry drives economic profit to zero; firm produces where P = ATC but not at minimum ATC

Question 11

Monopoly: key characteristics

Answer 11

Single seller, no close substitutes, high barriers to entry (legal or natural)

Question 12

Monopoly: profit and output vs other structures

Answer 12

Economic profits possible in short & long run; higher P and lower Q than more competitive structures

Question 13

Oligopoly: defining feature

Answer 13

Interdependence—each firm’s decisions depend on expected competitor reactions; barriers to entry are significant

Question 14

Kinked demand curve logic in oligopoly

Answer 14

Price ↑ → rivals don’t follow → demand more elastic; Price ↓ → rivals follow → demand less elastic (MR has a discontinuity)

Question 15

Cournot vs Stackelberg (duopoly)

Answer 15

Cournot: simultaneous quantity decisions, split market at equilibrium; Stackelberg: sequential, leader commits first and earns more than follower

Question 16

Concentration measures: CRN vs HHI

Answer 16

CRN = sum of top N market shares; HHI = sum of squared market shares (more sensitive to large shares)

Question 17

Economies of scale (definition)

Answer 17

Long-run average total cost (LRATC) decreases as output increases due to efficiencies from larger scale

Question 18

Common sources of economies of scale

Answer 18

Labor specialization, mass production, more efficient equipment/tech, less waste, quality control, better decision making

Question 19

Diseconomies of scale (definition)

Answer 19

LRATC increases as output grows due to rising bureaucracy/inefficiency in very large firms

Question 20

Minimum efficient scale (MES)

Answer 20

Level of output where ATC is minimized (the bottom of the ATC curve)

Question 21

Short run vs long run (plant size)

Answer 21

Short run: plant size fixed; Long run: firm can choose the most profitable plant size

Question 22

Perfect competition: “knowledgeable buyers and sellers” means what?

Answer 22

Participants are well-informed about prices, limiting any single firm’s ability to price above market

Question 23

Monopolistic competition: why demand is highly elastic

Answer 23

Because many close substitutes exist, so consumers can switch easily if price rises

Question 24

Monopolistic competition: why long-run efficiency is “unclear”

Answer 24

Costs of not producing at minimum ATC vs benefits from variety/innovation/brand info/advertising

Question 25

Monopoly: two broad sources of entry barriers

Answer 25

Legal barriers (licensing, patents) and natural barriers (economies of scale)

Question 26

Monopoly: why demand is more inelastic than in monopolistic competition

Answer 26

Fewer/no close substitutes available

Question 27

Monopoly regulation (goal described in the notes)

Answer 27

Prevent abuse of market power by setting price to ensure a normal return on investment (normal ROI)

Question 28

Oligopoly: why firms have an incentive to cooperate

Answer 28

Cooperation (collusion) can increase joint profits relative to aggressive competition

Question 29

Kinked demand model: key implication about MR

Answer 29

MR is discontinuous (has a “gap”), which can explain price rigidity around the kink price

Question 30

Kinked demand model: what it doesn’t explain

Answer 30

It does not specify what determines the market price level (Pk)

Question 31

Cournot model: what happens as number of firms increases

Answer 31

Outcome moves toward the perfect competition solution (lower price, higher total quantity)

Question 32

Nash equilibrium (definition)

Answer 32

No firm can increase profits by unilaterally changing its strategy (given the other firm’s strategy)

Question 33

Nash equilibrium assumption in the notes

Answer 33

Assumes no cooperation (no collusion)

Question 34

Collusion (cartel) basic idea

Answer 34

Set monopoly quantity to maximize total profit, then divide output/profits among participants

Question 35

Cartel cheating incentive

Answer 35

If cheating can’t be detected, a firm can raise its own profit by violating the agreement and increasing output

Question 36

Conditions that make collusion more successful

Answer 36

Fewer firms, homogeneous products, similar cost structures, certain/severe retaliation, little outside competition

Question 37

Dominant firm model: what makes a firm “dominant”

Answer 37

Advantage such as lower costs, greater capacity, first-to-market, or stronger customer loyalty

Question 38

Dominant firm model: how the dominant firm sets price

Answer 38

Price maker: chooses price where MR_DF = MC_DF; other firms accept that price

Question 39

Dominant firm model: how total output is split

Answer 39

Dominant firm produces Q_DF; remaining firms collectively supply the rest (Q_market − Q_DF)

Question 40

Limitations of N-firm concentration ratio

Answer 40

Insensitive to mergers and doesn’t capture important competitive factors well

Question 41

Limits of concentration measures (general)

Answer 41

Do not account for barriers to entry (potential competition) and do not directly estimate demand elasticity

Question 42

Why measuring demand elasticity is useful for market power

Answer 42

Low elasticity can indicate potential market power

Question 43

Two approaches mentioned for estimating elasticity

Answer 43

Time-series regression (needs many observations; structure can change over time) and cross-sectional regression (data-heavy/complex; results sensitive to model variables)