Questions Weeks 4-5 - Market Structures

1. 2.

Why do PC firms have an elastic demand curve?-Because they are P taker Can PC firms make abnormal profit? (explain your answer)-Only in the SR, in the LR they can only make normal profit. This is due to the assumption on barrier to entry and perfect information What is abnormal profit? when AR>AC Show abnormal profit on a graph. The abnormal profit is the area in the rectangle P-ATC-A-B

3. 4.

5.

How do monopolies protect their privileged market position? By increasing barrier to entry. This can be done for example by integrating vertically, using advertising to increase brand loyalty or driving down cost. Give an example of price discrimination. Different P charged for different market segment, e.g. students vs. adult, customer with high PED vs. low PED. Different prices according to the quantity bought (e.g. buy 2 get one free offers, subscription services). What is another name for AR? P How do you calculate TR? PxQ TR TC = profit

6.

7. 8. 9.

10. TC/Q = AC

11. AR > AC= abnormal profit 12. AR < AC= loss 13. AR = AC = normal profit 14. The intersection of which two curves indicates the profit maximizing output level?
MC=MR

15. What are the assumptions of a monopolistically competitive market? Many buyers
and sellers; there are perfect information; free entry and exit; heterogeneous goods

16. What does differentiated good mean? a product or service that differs from its
rivals in packaging or advertising or quality

17. What type of profit do monopolistically competitive firms tend to make in the long
run? (explain your answer) Only normal profit because there are no barrier to entry.

18. Define oligopoly. A market structure where: Few firms dominate the market, there
are barrier to entry and firms action are interdependent

19. Give 5 examples of an oligopoly market. Supermarket, Banks, Petrol, Newspaper,

Mobile Phones services

20. Explain why some oligopolies do not engage in price competition. (Use the kinked
demand curve model in your answer.) According to the kinked-demand theory, each firm will face two market demand curves for its product. At high prices, the firm faces the relatively elastic market demand curve. At low price demand is more inelastic. The oligopolist faces a kinked-demand curve because of competition from other oligopolists in the market. If the oligopolist increases its price above the equilibrium price P, it is assumed that the other oligopolists in the market will not follow with price increases of their own. The oligopolist's market demand curve becomes more elastic at prices above P because at these higher prices consumers are more likely to switch to the lower-priced products provided by the other oligopolists in the market. If the oligopolist reduces its price below P, it is assumed that its competitors will follow suit and reduce their prices as well. The oligopolist will then face the relatively less elastic (or more inelastic) market demand curve MD 2. The oligopolist's market demand curve becomes less elastic. Because of this there are no reasons for the firm to change P, and this lead to P stability. 21. The following features relate to various aspects of market structure. State whether each is a feature of a perfectly competitive market, a monopolistically competitive market, an oligopoly or a monopoly. Note: some features will exist in more than one type of market structure. (a) the products being sold by different firms are more or less the same i.e. they are homogeneous - PC

(b)there are barriers to the entry of new firms PC and MC (c) a few firms supply the whole market- O (d)there is extensive non-price competition- O and MC (e)firms are price takers- PC (f) firms are price makers M, MC, O (g) there are lots of suppliers with similar products which are only differentiated by branding- MC

(h)it is easy for new firms to enter the market (and to leave it) PC and MC (i) existing firms enjoy cost advantages over new firms by virtue of their size- O and M (j) there are lots of traders and none can affect the price.-PC (Please note: the terms imperfectly competitive market and monopolistically competitive market are synonyms. ) 22. Economists tend to analyse markets in terms of models that correspond to certain ideal types - perfect competition, monopoly, oligopoly and imperfect competition. Which of these models would you choose to analyse the following markets in the UK. You may need to qualify your answers. minicabs in London -MC instant coffee- O painters and decorators-PC potatoes-PC confectionary (e.g. chocolate bars)-O water and sewerage services in London-M food retailing-O the foreign exchange market for sterling-PC garment manufacture-MC tobacco and tobacco products-O postal deliveries-O mobile phone services (i.e. not the handsets themselves)-O the domestic supply of mains gas-O hairdressers-MC milk production-PC motor cycles-O home delivery pizza restaurants-MC household detergents-O 23. Thinking in terms of the four main models of market structure (perfect competition, imperfect competition, oligopoly and monopoly) explain:-

(a)

(b)

(c)

why perfectly competitive firms are unlikely to advertise in Yellow Pagesproducts/services provided by PC firms are all the same therefore in this type of market structure there is no customer loyalty and no needs for advertising. what sorts of firms are likely to advertise in the national press or on television-Oligopolies that engage in non price competitions and have large amount of resources to invest in marketing and advertising what sorts or firms are likely to advertise in the local press or in newsagents' windows. MC firms that try to differentiate their products/services but have limited amount of resources to spend on advertising

24. State which of the following firms are price takers (PT)and which are price makers (PM). (a) (b) (c) (d) 25. a perfectly competitive firm -PT a monopolist-PM an oligopolist-PM an imperfectly competitive firm-PM

Refer to the estimates of concentration shown below Explain what these estimates mean. Why is the estimate for the clothing industry so low in comparison to that for motor vehicles? Concentration Ratios (C5) Machine tools Electricity Motor Vehicles Textiles,leather,clothing Chemicals Tobacco % 12.5 40.4 51.0 3.7 41.5 43.7

The concentration ratio of an industry is used as an indicator of the relative size of firms in relation to the industry as a whole. It is calculated as the sum of the percent market share of the top n firms. This ratio can be used to determine the type of market structure. The higher is the index the less competitive is the industry. Industries with higher concentration are usually industry with higher barrier to entry (high fixed cost, technology, patent). Textiles have lower barrier to netry compared to car manufacturing. 26. Explain why the following are all examples of "price discrimination"?

A pricing strategy that charges customers different prices for the same product or service. In pure price discrimination, the seller will charge each customer the maximum price that he or she is willing to pay. In more common forms of price discrimination, the seller places customers in groups based on certain attributes and charges each group a different price.

 price of a holiday in Corsica price may varies across seasons. Targets

customer with different price elasticity of demand price of a train journey price varies according to when the ticket is purchased. Targets customer with different price elasticity of demand

trip to France by ferry, by Eurostar, by Eurotunnel as before telephone call price varies according to the time of the call or according to
the amount of calls bought. the week

fly to Paris (cheaper at week days) price varies according to the day of buy a car in the UK (cheaper in continental Europe) - Targets customer
with different price elasticity of demand different price elasticity of demand 27.

student rail cards, senior citizens concessions - Targets customer with

Rail operators normally offer cheap return tickets which can only be used for offpeak travel - normally after 10.00 in the morning and at weekends. Explain why.

Price Elasticity of demand (PED) in peak time is lower and therefore firms are able to charge a higher price. 28. Compared to a perfectly competitive market, a monopoly market will usually generate (Select one answer) (a) higher prices and lower output (b) higher prices and higher output (c) lower prices and lower output (d) lower prices and higher output 29. A price-making firm sells in two distinct markets. In market A consumers are much more price-sensitive than they are in market B. If the costs of supplying each market are the same what prices should the profit maximising firm charge? (Comment on each of the following stating whether they are true or false) (a) They should charge the same price in each market, because that will be perceived by consumers as the fairest pricing policy. F, as firms are driven by profit maximisation They should set price equal to marginal cost in each market. F, as firms They should ensure that the extra revenue received from the last unit sold

(b) set P=MC (c)

in each market is the same. F, as this is not something which is associated with profit maximisation (d) They should charge a higher price when demand is more elastic.-F, as firms they should charge higher price when demand is inelastic 30. A monopoly is able to continue to generate economic profits in the long run because (Select one answer) (a) there is some barrier to entry to that market (b) potential competitors sometimes don't notice the profits (c) the monopolist is financially powerful (d) antitrust laws eliminate competitors for a specified number of years (e) of all of the things described in these answers

31. A monopolist maximizes profit by producing the quantity at which (Select one answer) (a) marginal revenue equals marginal cost (b) marginal revenue equals price (c) marginal cost equals price (d) marginal cost equals demand (d) none of these answers

32. Which of the following is not a characteristic of a competitive market? (Select one answer) (a) All of these answers are characteristics of a competitive market (b) There are many buyers and sellers in the market (c) The goods offered for sale are largely the same (d) Firms generate small but positive economic profits in the long run (e) Firms can freely enter or exit the market

33.

Dragnet plc is a company which enjoys a monopoly position in its product market. Its Board of Directors is concerned that it is not operating at the profit maximising level of output. The production manager advises that, if the firm

increases its output, its average costs will fall. The marketing manager advises that if the firm produces more units, in order to sell more, the firm will have to reduce its price per unit. As the firms economist, what would be your advice? you may be concerned that excessive expansion may attract the attention of antitrust authority. The strategy of reducing P is sensible if the firms face an elastic demand. 35. Draw on the point in the diagram below which represents the price a monopoly would charge.

The Price charged by the monopolist is B. 36. When firms cooperate with one another, it is generally good for society as a whole. (Select one answer) (a) (b) 37. True False

There is a constant tension in an oligopoly between cooperation and self-interest because after an agreement to reduce production is reached, it is profitable for each individual firm to cheat and produce more. (Select one answer) (a) True

(b)

False

38.

When oligopolists collude and form a cartel, the outcome in the market is similar to that generated by a perfectly competitive market. (Select one answer) (a) (b) True False

39.

Which of the following is true regarding the similarities and differences in monopolistic competition and monopoly? (Select one answer) (a) (b) (c) (d) The monopolist faces a downward-sloping demand curve while the monopolistic competitor faces an elastic demand curve The monopolist charges a price above marginal cost while the monopolistic competitor charges a price equal to marginal cost The monopolist makes economic profits in the long run while the monopolistic competitor makes zero economic profits in the long run Both the monopolist and the monopolistic competitor operate at the efficient scale

40.

The use of the word "competition" in the name of the market structure called "monopolistic competition" refers to the fact that (Select one answer) (a) (b) there are many sellers in a monopolistically competitive market and there is free entry and exit in the market just like a competitive market monopolistically competitive firms face a downward-sloping demand curve just like competitive firms (no as PC firms have an horizontal demand) (c) monopolistically competitive firms charge prices equal to the minimum of their average total cost just like competitive firms (no all firms always charge P that correspond to MC=MR) (d) the products are differentiated in a monopolistically competitive market just like in a competitive market (no in PC product are not differentiated)

41.

Which of the following is not a characteristic of a competitive market? (Select one answer)

(a) (b) (c)

All of these answers are characteristics of a competitive market There are many buyers and sellers in the market The goods offered for sale are largely the same Firms generate small but positive economic profits in the long run (firms generate only normal profit in the long run as the model assumes full information and no barrier to entry/exit)

(d)

(e)

Firms can freely enter or exit the market b,c and e are all characteristics of competitive markets, please have a look at the book to revise the assumptions of perfect competition 42. The competitive firm maximizes profit when it produces output up to the point where (Select one answer) (a) (b) (c) (d) 43. price equals average variable cost marginal revenue equals average revenue marginal cost equals total revenue marginal cost equals marginal revenue

The market for hand tools (such as hammers and screwdrivers) is dominated by Draper, Stanley, and Craftsman. This market is best described as (Select one answer) (a) (b) (c) (d) monopolistically competitive a monopoly an oligopoly competitive

44.

Which of the following is true regarding the similarities and differences in monopolistic competition and monopoly? (Select one answer)

(a)

The monopolist faces a downward-sloping demand curve while the monopolistic competitor faces an elastic demand curve (no both firms face similar demand curve)

(b)

The monopolist charges a price above marginal cost while the monopolistic competitor charges a price equal to marginal cost (no both firms change P that correspond to MC=MR)

(c) (d)

The monopolist makes economic profits in the long run while the monopolistic competitor makes zero economic profits in the long run Both the monopolist and the monopolistic competitor operate at the efficient scale (The minimum efficient scale (MES) is the output for a business in the long run where the internal economies of scale have been fully exploited. It corresponds to the lowest point on the long run average total cost curve and is also known as the output of long run productive efficiency. Firms produce the quantity which maximize the profit, and not the quantity that allow exploiting to achieve economies of scale. Please note that we did not cover MES this year)