Module 6

Question 1

allocative efficiency

Answer 1

occurs when the industry is producing the optimal quantity of some output.

the quantity where the marginal benefit to society of one more unit just equals the marginal cost.

Question 2

barriers to entry

Answer 2

the legal, technological, or market forces that may discourage or prevent potential competitors from entering a makret.

Question 3

copyright

Answer 3

a form of legal protection to prevent copying.

Question 4

deregulation

Answer 4

the process of removing government controls over setting prices and quantities in certain industries.

Question 5

intellectual property

Answer 5

the body of law that protect the right of inventors to protect and sell their inventions.

Question 6

legal monopoly

Answer 6

legal prohibitions against competition

Question 7

marginal profit

Answer 7

the profit of one more unit of output.

Question 8

monopoly

Answer 8

when one firm produces all of the output in a market.

Question 9

Natural monopoly

Answer 9

refers to economic conditions in the industry

Question 10

patent

Answer 10

a government rule that gives the inventor the exclusive legal rights to make, use, or sell the inventions for a limited time.

Question 11

predatory pricing

Answer 11

occurs when an existing firm uses sharp but temporary pricing cuts to discourage new competition. It is usually illegal but often difficult to prove.

Question 12

trade secrets

Answer 12

methods of production kept secret by the producing firm.

Question 13

trademark

Answer 13

an identifying symbol or name for a particular good and can only be used by the firm that registered that trademark.

Question 14

cartel

Answer 14

a group of firms that collude to produce the monopoly output and sell at the monopoly price.

Question 15

collusion

Answer 15

occurs when firms act together to reduce output and keep price high. It is generally illegal to do so.

Question 16

differentiated product

Answer 16

are products that consumers perceive as distinctive in some way.

Question 17

duopoly

Answer 17

an oligopoly with only two firms in the industry.

Question 18

game theory

Answer 18

used to analyze situations in which players must make decisions and then receive payoffs based on what decisions the other players make.

Question 19

imperfectly competitive

Answer 19

refers to firms and organizations that fall between the extremes of monopoly and perfect competition.

Question 20

kinked demand curve

Answer 20

occurs when a perceived demand curve that arises when competing oligopoly firms commit to match price cuts, but not price increases.

Question 21

monopolistic competition

Answer 21

occurs when many firms compete to sell similar but differentiated products. It is like perfect competition in that there are many firms but goods are not perfect substitutes.

Question 22

oligopoly

Answer 22

occurs when a few large firms have al or most of the sales in an industry.

Question 23

Prisoner’s dilemma

Answer 23

a game in which the gains from cooperation are larger than the rewards from pursuing self-interest.

Question 24

production differentiation

Answer 24

any action that firms do to make consumers think their products are different from their competitors.

Question 25

the monopolistically competitive firm decides its profit-maximizing quantity and the price ( )

Answer 25

in much the same way as a monopolist.

Question 26

what does the demand curve for a monopolistic competitor look like?

Answer 26

a downward sloping demand curve

Question 27

What Q will a firm choose to maximize profits?

Answer 27

MR = MC

Question 28

when will other firms be tempted to enter the market?

Answer 28

if one monopolistic competitor earns positive economic profits.

Question 29

how does the entry of other firms affect the demand curve?

Answer 29

the entry of other firms into the same general market shifts the demand curve that a monopolistically competitive firm faces.

Question 30

what are the long-term results of entry and exit in a perfectly competitive market?

Answer 30

1. firms sell at the price level determined by the lowest point on the AC curve. 2. displays productive efficiency

Question 31

what are the end results of entry and exit in monopolistic competition?

Answer 31

1. firms end up with a price that lies on the downward-sloping portion of the AC curve. 2. monopolistic competition will NOT be productively efficient.

Question 32

what happens if oligopolists compete hard?

Answer 32

they act similarly to perfect competitors, driving down costs and leading to zero profits for all.

Question 33

what happens in oligopolists collude?

Answer 33

they may act like a monopoly, and succeed in pushing up prices and earning consistently high levels of profit.

Question 34

how do firms collude?

Answer 34

1. holding down industry output 2. charging a higher price 3. dividing the profit amongst themselves.

Question 35

what is the way out of the prisoner's dilemma?

Answer 35

to find a way to penalize those who do not cooperate.

Question 36

how might an oligopolist enforce cooperation?

Answer 36

oligopolists may choose to act in a way that generates pressure on each firm to stick to its agreed quantity of output.

Question 37

oligopolies are characterized by ( )

Answer 37

mutual interdependence

Question 38

a business raising prices finds ( )

Answer 38

rivals keep theirs constant, so demand is relatively flat (elastic)

Question 39

a business reducing prices finds ( )

Answer 39

rivals reduce theirs as well, so demand is relatively steep (inelastic)

Question 40

how can members of a cartel force cooperation?

Answer 40

can make members stick to the pre-agreed levels of quantity and price though a strategy of matching all price cuts but not matching any price increases.

Question 41

oligopoly firms acting individually may seek to gain profits ( )

Answer 41

by expanding levels of output and cutting prices.

Question 42

the long term result of entry and exit in a monopolistic competitive market is that all firms end up selling at a price equal to ( )

Answer 42

average costs

Question 43

what represents a difference in the process by which a monopolistic competitor and a monopolist make their respective decisions about price?

Answer 43

a monopolist need not fear entry

Question 44

monopolistic competitors in the food industry will often include a recyclable symbol on their packaging used for their product as a means to ( )

Answer 44

differentiate their product

Question 45

when exit occurs in a monopolistically competitive industry ( )

Answer 45

the perceived demand and marginal revenue curves for each firm will shift to the right

Question 46

through the process of exit, a monopolistically competitive firm remaining in the market ( )

Answer 46

are no longer earning losses

Question 47

the use of sharp, temporary price cuts as a form of ( ) would enable traditional automakers to discourage new competition from smaller car manufacturers

Answer 47

predatory pricing

Question 48

drug companies are allowed to be monopolists in the drugs they discover in order to ( )

Answer 48

encourage research

Question 49

government ( ) regulations specify that inventors will maintain exclusive legal rights to their respective inventions for ( )

Answer 49

patent; a limited time

Question 50

what does the profit-maximization condition for a monopolist differ from that of a competitive firm?

Answer 50

a competitive firm maximizes profit where average revenue equals marginal cost; a monopolist maximizes profit where average revenue exceeds marginal cost.

Question 51

( ) and ( ) refer to the quantity and price at a point in time

Answer 51

productive; allocative efficiency

Question 52

what outcome would monopoly pricing be in comparison to the price competitive firms charge?

Answer 52

a higher price

Question 53

a natural monopoly occurs when the quantity demanded is ( ) the minimum quantity it takes to be at the bottom of the LRAC curve

Answer 53

less than

Question 54

in equilibrium, what condition is common to both unregulated monopoly and perfect competition?

Answer 54

MR = MC

Question 55

a firm that hold a monopoly position in the market place is ( )

Answer 55

a price maker

Question 56

May is a wholesale noodle distributor. She sells her noodles to all the Chinese restaurants in Chinatown. She uses a very special recipe to make the noodles and nobody can make it the same way. Consequently, May is the only firm that sells noodles to all the Chinese restaurants. Assuming that May is maximizing her profit, how will noodle prices compare with marginal cost?

Answer 56

prices will exceed marginal cost

Question 57

if the paper market has barriers to entry then:

Answer 57

entry will be blocked even if firms are earning high profits.

Question 58

why does inefficiency arise from a monopoly?

Answer 58

some buyers will be denied from buying goods do to the high price