Tips for Chapter 11, Micro Two Two remaining market market structures of Monopolistic Competition and Oligopoly are discussed in this chapter. chapter.
Monopolistic Competition is based on three assumptions: many buyers and sellers, rms produce a slightly dierentiated product, and easy entryeasy e!it. "ierentiation of product could be real or imagined as location, ser#ices pro#ided with, brand names, ad#ertisement, color, packaging, etc. would be dierent. "emand cur#e is $atter %more elastic& than Monopoly, but not hori'ontal as in (erfect Competition. (rinciples of Ma!imi'ation of prot or Minimi'ation of loss where MC)M* is still the golden rule in determining the output le#el and computation of prot or loss as before. +n the short run, rms could make prot or incur losses but in the long run, economic prot is e-ual to 'ero %ee /!hibits 0 and 1.& Monopolistically Competiti#e rm produces an output smaller than the output at its it s minimum of 2TC. 2TC. This is known as /!cess Capacity Theorem %ee /!hibit 3.& Oligopoly %the theory of 4ust a few big businesses& is also based on three assumptions: there are are a few sellersmany buyers, rms produce either a homogeneous or dierentiated products, and there is a signicant barrier to entry. entry. The Concentration Concentra tion *atio is the criterion of the si'e and a nd degree of an oligopolistic rm %(lease read page 156 on C*.& 7nlike other market structures, there is no one accepted theory of oligopoly. oligopoly. The Cartel Theory and 8ame Theory are the only two models of oligopoly discussed at this introductory le#el of microeconomics. The Cartel Theory is a theory of oligopoly in which rms act as if there were only one rm in the industry %+ndustry is used as synonym for a market.& Cartel is an organi'ation of rms that reduces production of output and increases price in an eort to raise 4oint prots of the members. The issue in#ol#ed in a cartel
organi'ation is the incenti#e for a member rm to 9cheat. %ee /!hibits ; and 5.& +nterdependence among 4ust a few rms, trying to reach an optimal position by each rm, the interacti#e nature of the rms, and the need for strategies in oligopolistic rms is the sub4ect of Game Theory. 2 wellcient outcome. The lesson learned in prisoner=s dilemma has been described this way: 9?ou do what is best for you, + will do what is best for me, and somehow we end up in a situation that is not best for either of us. %Carefully read pp. 15@<160, and see e!hibit 6 for e!planation of prisoner=s dilemma.& Contestable markets, *e#iew of market structures, and 2pplications of game theory are discussed in the rest of chapter 00.
Sample Questions for Chapter 11, MICRO Multiple Choices Identify the choice that best completes the statement or answers the question.
____ 1. The demand curve facing a monopolistic competitive firm will be __________ than the demand curve facing a perfectly competitive firm, because the price elasticity of demand for the monopolistic competitive firm's product is __________ than that for the perfectly competitive firm. a. steeper; greater b. flatter; greater c. steeper; less d. flatter; less
____ 2. If a perfectly competitive firm and a monopolistic competitive firm face the same demand and cost curves, then a. the perfectly competitive firm will attain resourceallocative efficiency, but the monopolistic competitive firm will not. b. the perfectly competitive firm will attain resourceallocative efficiency,
but the monopolistic competitive firm may or may not, depending upon the demand for its product. c. the perfectly competitive firm will not attain resourceallocative efficiency, but the monopolistic competitive firm will. d. both the perfectly competitive firm and the monopolistic competitive firm will attain resourceallocative efficiency. e. neither the perfectly competitive firm nor the monopolistic competitive firm will attain resourceallocative efficiency.
____ !. " firm in a monopolistic competitive industry will produce an output level at which a. # $ %&. b. # %&. c. # ( %&. d. # %).
____ *. There are few sellers and many buyers in the a. perfectly competitive mar+et structure. b. monopolistic competitive mar+et structure. c. oligopoly mar+et structure. d. monopoly mar+et structure.
____ . Total industry sales are -// million. The four largest firms have sales of -22/ million, -120 million, - million, and -*2 million. The industry's fourfirm concentration ratio is a. /.01. b. /.*. c. /.!. d. /..
____ 0. If you were to ran+ the four mar+et structures in terms of lowest concentration ratio to highest concentration ratio, which of the following ran+ings would be correct a. oligopoly, monopoly, perfect competition, monopolistic competition b. monopoly, oligopoly, monopolistic competition, perfect competition c. perfect competition, monopolistic competition, oligopoly, monopoly d. monopolistic competition, perfect competition, oligopoly, monopoly e. monopolistic competition, oligopoly, perfect competition, monopoly
____ 3. The ma4or economic ob4ective of cartels is to a. impose their political will on others. b. restrict output, push up price, and increase profits. c. reduce costs. d. develop new ways of doing things. e. b and d
____ . The assumption that precludes economic profits in monopolistic competition in the long run is that a. there are many buyers and sellers. b. the firms produce a homogeneous product. c. there is easy entry and e5it in this mar+et structure. d. buyers and sellers have all relevant information.
____ . 6hich of the following is not correct about contestable mar+ets a. There is easy entry into and costless e5it from the mar+et. b. 7ew firms entering the mar+et can produce the product at the same cost as current firms. c. 8irms e5iting the mar+et can easily dispose of their fi5ed assets by selling them elsewhere. d. 8irms already in the mar+et have technological advantages. e. b and c
____1/. The monopolistic competitor's demand curve is a. perfectly elastic because of the many buyers and sellers in the mar+et. b. downward sloping because of product differentiation. c. perfectly elastic because of identical products. d. downward sloping because of the few buyers and sellers in the mar+et. e. none of the above
Exhibit 25-
____11. &efer to 95hibit 2!. Total revenue of this profit ma5imi:ing monopolistic competitor is represented by the area a. /#1"2. b. /#!)2. c. #!#1"). d. #*#1"<.
____12. 6hich of the following assumptions do the mar+et structures of monopolistic competition and perfect competition share a. many buyers and sellers b. homogeneous products c. difficult entry into the mar+et d. difficult e5it from the mar+et
____1!. 95cess capacity results from a a. downwardsloping demand curve and a =shaped "T) curve. b. downwardsloping demand curve and no fi5ed costs. c. hori:ontal demand curve and an upwardsloping marginal cost curve. d. perfectly inelastic demand curve and a downwardsloping "T) curve. e. none of the above
____1*. If the top four firms account for -2 million in sales and total industry sales are -3 million, it follows that the fourfirm concentration ratio is a. /.2.
b. /.0. c. 1.3*. d. /./!.
____1. The +ey behavioral assumption of the cartel theory is that oligopolists in the industry act as if a. all firms in the industry are the same si:e. b. all firms in the industry are price ta+ers. c. there is a dominant firm in the industry and many fringe firms. d. there is only one firm in the industry. e. none of the above
____10. 6hich of the following is not a condition of a contestable mar+et a. There is easy entry into the mar+et. b. There is costless e5it from the mar+et. c. 7ew firms entering the mar+et can produce the product at lower cost than current firms. d. 8irms e5iting the mar+et can easily dispose of their fi5ed assets by selling them elsewhere >less depreciation?. e. 7one of the above; that is, all of the above are conditions of a contestable mar+et.
95hibit 20
____13. &efer to 95hibit 20. The monopolistic competitor in the e5hibit is a. earning positive economic profits. b. ta+ing losses. c. earning a normal profit. d. e5hibiting productive efficiency. e. a and d
____1. In long run e@uilibrium, a monopolistic competitive firmAs price will most li+ely be a. e@ual to average total cost, but higher than marginal cost. b. greater than both average total cost and marginal cost. c. less than both average total cost and marginal cost. d. e@ual to marginal cost, but higher than average total cost.
____1. 6hich if the following is an e5ample of an oligopoly mar+et in which the firms produce a homogeneous product a. aluminum b. soap c. brea+fast cereals d. tires e. all of the above
Exhibit 25-!
$rice -1/ 3 0 *
Quantit" Sol# %units& 1// 2// !// *// // 0// 3//
'otal Cost -0// 1,1// 1,*// 1,// 2,*// !,2// *,2//
____2/. &efer to 95hibit 23. "ssuming that the firm is ma5imi:ing profits, the marginal cost of the last unit produced e@uals a. -*. b. -*/. c. -. d. -/. e. -0.
Exhibit 25-(
Quantit" 2 ! * 0
'otal Re)enue -1*/ -1/ -2// -2// -1/
'otal Cost -1// -11/ -1!/ -10/ -2//
____21. &efer to 95hibit 2. " profitma5imi:ing monopolistic competitive firm will set the price at a. -3/ per unit. b. -0/ per unit. c. -/ per unit. d. -*/ per unit. e. -!/ per unit.
____22. &efer to 95hibit 2. " profitma5imi:ing monopolistic competitive firm will produce ______________ units of output and charge a price of a. !; -0/. b. *; -/. c. ; -*/.
d. 0; -!/.
Exhibit 25-* Mar+et Structure
#erfect competition %onopolistic )ompetition Dligopoly %onopoly
umber of Sellers >"? >C?
'"pe of $ro#uct >9?
arriers to Entr" >B? >I?
>)? one
>8? >F?
>E? >G?
____2!. &efer to 95hibit 2. 8ill in blan+s >B?, >I?, >E?, and >G?, respectively. a. yes; yes; no; no b. no; no; yes; yes c. no; yes; yes; yes d. no; yes; no; yes
Essa"
2*. Hist and describe the three assumptions upon which oligopoly behavior are based. 2. )ompare and contrast the following mar+et structures perfect competition and monopolistic competition.
Sample Questions for Chapter 11, MICRO .ns/er Section M0'I$E COICES
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