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1. Define competitive market
A market with many buyers and sellers trading identical products so that each buyer and seller is
a price taker.
- There are many buyers and sellers in the market.
- The goods offered by the various sellers are largely the same
Therefore the actions of any single buyer or seller in the market have a negligible impact on the
market price.

2. Explain the relationship between MR, AR and Price

Marginal Revenue: change in total revenue from the sale of each additional unit of output
Average Revenue: total revenue divided by the amount of output. Tells us how much revenue a
firm receives for the typical unit sold.

 


   

—p therefore, AR equals the price in all firms, and MR equals the price in all competitive
firms

3. What is the relationship between Marginal Cost and the firms Supply? Why and explain.

—p With the MC, the quantity of output that maximizes profit can be found
—p MC crosses average total cost curve at minimum
—p this allows MC to intersect marginal revenue
—p therefore the point of highest profit maximizing output is where MC = MR
—p this way, the marginal costs are sufficiently covered

4. What is the shut-down decision in the short-run?

When therevenue does not exceed the average variable costs, the firm should shut down.
However, if the revenue pays part of the variable costs, the firm should continue operating at a
loss.
5. Describe how you measure profits on the graph.

—p profit= TR - TC
—p since MR = price, the ATC curve must be below MR to produce profits
—p the area between the MC MR intersection point and the ATC point at that specific
quantity indicate the profit

6. Describe how you measure losses on the graph

 —p if ATC is over MR, firm experiences losses
—p losses are also calculated by area where MC intersects MR and ATC point where quantity
is produced

7. What is the different between short-run and long-run?

8. Why are you at the break-even in the long-run?

- The prices increase and decrease, so they eventually even out, thus operate at break-even

9. When do firms exit the industry and what effect does that have on the firm and the market?
- Firms exit when there is a SR loss
- Supply decreases, market price increases & loses will eventually disappear

10. When do firms enter the industry and what effect does that have on the firm and the market?
-Firms enter if P>ATC
-Its the exact opposite as conditions for firms to exit
-supply increases, price falls and profits of other firms gradually disappear
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1. Why do monopolies exist?
Barriers to entry:
- A key resource is owned by a single firm
- The government gives a single firm the exclusive right to produce some good or service
- The costs of production make a single producer more efficient than a large number of producers

2. What are the different types of monopolies?

‰ 
 : government has given one person or firm the exclusive right
to sell some good or service
ex. patent (exclusive right to manufacture and sell) and copyright (noone can print and sell the
work without permission) laws
Benefits: increased incentive for creative activity



 : A single firm can supply a good or service to an entire market at a smaller
cost than could two or more firms. Arises when tehre are economies of scale over the relevant
range of output.
ex. public goods and common resources (bridge, etc)

3. How and why is DeBeers a monopoly?

DeBeers is a monopoly because they have control of 80% of the worlds production of diamonds
giving them substantial influence over the market price. Also the product they producer,
diamonds, is often viewed as unique and have no substitutes and so they gain even more market
power.
The diamonds are viewed as unique because DeBeers advertises diamonds with slogans like
diamonds are forever, this causes consumers to think diamonds must be diffrent than other
precious gems.

4. How is MR different in monopoly than in PC? Why?

In a monopoly, the MR does not equal the D like in PC.
The MR has a different slope than the D curve and is under the D.
The MR also intersects the x-axis and determines the elasticity.

5. How is the demand curve in monopoly different than in PC? Why?

In PC, the D curve is a horizontal line. In a monopoly, the D curve is downward sloping

6. How and where to monopolies maximize profits?

Monopolies should increase output up to the level where the marginal cost curve intersects the
marginal revenue curve, in order to maximize its profits

7. Why do we say that monopolies are inefficient?

They work in their profit maximization point or MR = MC, and this point is on the downward
slopping section of their ATC curve in monopolies making them less efficient.

8. Why don't monopolies have supply curves?

Monopolies will always try to produce at an output level that maximizes profits. therefore, their
supply is determined by where MR intersects MC
This means that the MC curve acts as the firm's supply curve

9. Discuss deadweight loss and monopoly.

10. What are the social cost of monopolies?

Because a monopoly's price is higher than the market sets it as, consumer welfare is hurt, while
the producers welfare increases. However, there is no loss in total welfare, just a shift towards
producer welfare

In a government created monopoly, the firm must often pay additional costs, such as lobbying
fees, to maintain their monopoly. These costs are another type of deadweight loss, neither the
consumer or the producer benefits

11. How are monopolies controlled by the government?

Governments regulate monopolies by taxing and subsidizing them to influence their prices.
Sometimes the govt. will act in the consumers best interests, and other times it will act in the
industry's best interests. An effective regulation finds an equilibrium point between the two.

12. What is price discrimination?

When prices are different for different people in society, usually due to their social background
and their income. This means that for example water might be cheaper for the poor and more
expensive for the rich. It's prices do not have to anything with the costs.
13. How does price discrimination relate to producer and consumer surplus?
Price discrimination may occur more when consumer surplus is lower, since less consumers will
have the ability to pay a certain price. Also, price discrimination may not occur as often if
producer surplus is lower, since they cannot cover their costs by altering prices
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Do online quiz at: http://www.swlearning.com/economics/mankiw/mankiw3e/mankiw3e.html
and send me the results!

1.p Describe an oligopoly market.

A market structure in which only a few sellers offer similar or identical products
An oligopoly is a type of imperfect competition, meaning firms in these industries have
competitors but at the same time do not face so much competition that they are price takers.
ex. market for tennis balls, world market for crude oil
A key feature of oligopoly is the tension between cooperation and self-interest. The group of
oligopolists is best off cooperating and acting like a monopolist, producing a small quantity of
output and charging a price above marginal cost. HOWEVER because each oligopolist cares
about its own profit as well its hard for a group of firms to maintain the monopoly outcome.

2.p What is a cartel and collusion

—p cartel - a group of firms acting in unison. Once a cartel is formed the market is in effect
served by a monopoly. That outcome maximizes the total profit that the producers can get
from the market.
—p collusion - an agreement among firms in a market about quantities to produce or prices to
change
—p ex. Jack and Jill get together and agree on the quantity of water to produce and the price
to charge for it.

3.p How is equilibrium achieved in an oligopoly?

—p because of competition among the few firms in an oligopoly, they have to watch each
other in deciding how to price their goods in order to compete with the others
—p if one firm charges higher than the others, it will lose profits and vice versa
—p so all firms eventually end up with similar prices in order to collaborate, reaching a price
equilibrium
 4.p What is the Nash Equilibrium?
p A situation in which economic actors interacting with one another each choose
their best strategy given the strategies that all the other actors have chosen.

5.p Describe how the size of an oligopoly can affect market outcomes.

6.p Summarize the OPEC and World Oil Market example on pg. 357

—p world's oil is produced by a few countries, mainly in the Middle East, that form an
oligopoly
—p formed a cartel, OPEC (Organization of Petroleum Exporting Countries) that controls 3/4
of the world's oil
—p OPEC tries to set production levels - increase price through coordination to decrease
quantity produced (high price is ideal)
—p some members choose to "cheat" by agreeing to decrease production but instead increase
to get a larger portion of the total profit
—p this causes the oligopoly to become ineffective b/c of lack of cooperation/arguments
—p success depends on how well its members cooperate

7.p Define Game Theory

Game theory is the study of how people behave in strategic situations, in which
they must consider others' responses to their own actions

8.p How is game theory relevant to oligopoly?

Because the number of firms in an oligopoly is very small, each firm must
take into account the reactions other firms will have to their own actions.

9.p Summarize the other examples of the prisoners dilemma pg. 361-362.

—p Arms Races: Each country prefers to have more arms than the other because a larger
Arsenal gives it more influence in the world affairs. But, each country prefers to live in a
world safe from the other country's weapons.
—p Advertising: Deciding wether to advertise between two companies: If neither advertises,
the two split market. If both advertise, they again split markets, but profits are lower since
they must now pay for advertising. However, if only one advertises, it attracts customers
from the other brand.
 —p Common Resources: This views the dillema into companies having to decide how many
natural resource to obtain and negate the other company. Basically shows the self interest
of both leads them to inferior outcome.

—p

10.pWhy do people sometimes cooperate?

Cooperation can make everyone better off. The "prisoner's dilelamma" states that while
cooperation between the two prisoners is difficult to maintain, it is mutually beneficial.

I.e. In the game we played in class, you could work together and make a constant profit instead
of risking a huge loss for the sake of a larger profit

11.pHow does the government regulate oligopolies and why? Anti-trust laws

—p i.e. Sherman Antitrust Act of 1890 condemned criminal conspriacy amongst oligopolists
—p Clayton Act of 1914 encouraged parties to sue oligopolists, and they could win up to 3
times the cost of their sustained damages
—p ËS Justice Department and private parties can file legal suits to enforce anti-trust laws
—p laws meant to prevent oligopolists from working together in ways that could harm the
public, and also meant to keep the markets competitive

12.pDo question 5 on pg. 373.\

—p a. Dominant Strategy:
p Mexico Low Tariff --- ËS High Tariff gain is greater
p Mexico High Tariff --- ËS High tariff gain is greater
p this means that the Ë 


 
  

p ËS Low Tariff --- Mexico High Tariff gain is greater
p ËS High Tariff --- Mexico High tariff gain is greater
p this means that the !


 
  

—p b. Î

A situation in which "economic actors" interacting with one another
each choose their best strategy given the strategies that all the other actors have chosen
p because both Mexico and the ËS' dominant strategies are high, there is a Nash
Equilibrium for high

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Please complete and send me the online quiz as well.

1.p Describe the monopolistic competition market.

A market structure in which many firms sell products that are similar but not identical

2.p What is the LR equilibrium for MC? Why?

—p LR equilibrium is when price equals ATC and the firm earns 0 profits
—p this is because when firms are making profits, new firms enter the market, shifting the
demand curve to the left, and when the firms are making losses, their demand curves
eventually move to the right
—p the free entry and exit drive the profit to zero

3. Compare and contrast PC and MC. Ënder monopolistic competition firms produce on the
downward sloping portion of their ATC curves. Free entry in competitive markets drives firms to
produce at the minimum of ATC. In the long run perfectly competitive firms produce at the
efficient scale (quantity that minimizes ATC), while monopolistically competitive firms produce
below this level. Monopolistically competitive firms could increase the quantity it produces and
lower the ATC of production. For a competitive firm price equals marginal cost. For a
monopolistically competitive firm price exceeds marginal cost because the firm always has some
market power. For a perfectly competitive firm price exactly equals marginal cost so the profit
from an extra unit sold is zero. However a monopolistically competitive firm is always eager to
get another customer because an extra unit sold at the posted price means more profit.

4.p How does MC affect society¶s welfare?

—p just as monopoly, monopolistic competition creates a dead weight loss

—p too much or too little firm entry
—p externalities of market entry

- product variety externality = consumers have consumer surplus when new product enters
market, so new firm entry is a positive externality for consumers -business stealing externality=
other firms lose profits when new competitors enter markets, so entry is a negative externality for
firms

—p does not always ensure that total surplus is maximized

5.p Describe the different scenarios MC can exist in the SR.

—p Monopolistic competitors, like monopolist, maximize their profit by producing the

quantity at which marginal revenue equals marginal cost. the profit is made when the
price and quantity made exceeds the average total cost.

6.p Describe the elasticity of demand in MC.

The elasticity is the same as for Monopolies. Where the MR curve crosses the x-axis determines
the unit elasticity (draw a vertical line from the MR & x-axis intersection, this equals the unit
elastic point) - to the left of this point is elastic - to the right of this point is inelastic
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