Perfect, Imperfect markets and Monopoly

Question 1

what are 2 cons of dissatisfying shareholders

Answer 1

• Negative press
• downward pressure on stock price (hostile takeover risks, more difficult to raise finance)

Question 2

Reasons a firm may profit max or revenue max

Answer 2

shareholder satisfaction
reinvestment
attract investment

Question 3

negatives of profit max/revenue max

Answer 3

negative press
long term factor strain
stock volatility
Exploitative

Question 4

reasons to sales max/limit price

Answer 4

limit competition
increase market share
consumer loyalty

Question 5

reasons to not sales max/limit price

Answer 5

• decreases profit (decreased ECOS/ shareholder satisfaction)
• risk if there are sss

Question 6

why may a firm profit satisfice

Answer 6

• principle agent problem
• other objectives
• risk aversion (media + factor strain)
• knowledge of mr / mc curves

Question 7

what is the principle agent problem
what are the causes?

Answer 7

When a principle delegates power to an agent and they have different objectives
- asymmetry of information
- conflicts of interest

Question 8

how to reslove the principle agent problem

Answer 8

• Performance based rewards

Question 9

what is the shut down condition
what does it assume

Answer 9

AVC>AR shut down
AR>AVC stay in short run as fixed costs are being covered

all fixed costs are sunk

Question 10

3 factors a firm will consider when shutting down

Answer 10

• Shut down condition
• Market conditions (future prospects)
• Ease of liquidating assets

Question 11

2 pros and 2 cons of perfect competition

Answer 11

Pros
- all efficiency apart from dynamic
- zero consumer exploitation

Cons
- zero economies of scale
- No incentive to be entrepreneurial

Question 12

3 Cons of monopolistic competition

Answer 12

• No efficiency’s
• lack of economies of scale
• cost cutting

Question 13

3 pros of monopolistic competition

Answer 13

• Creative destruction
• Differentiated goods
• monopoly power is small

Question 14

why is the demand curve in an oligopoly kinked

Answer 14

• Raising prices will lead to firms undercutting to gain market share
• Lowering prices will lead to price wars as firms cling to market share

Question 15

how does the nash equilibrium improve oligopoly markets

Answer 15

• it means that the only long term price is reasonably fixed therefore firms will compete on non price factors

Question 16

how does the temptation to collude and cheat apply to oligopoly’s

Answer 16

• Temptation to collude applies because firms will gain more profit equally if they do not undercut
• This will always create a temptation to cheat however because in the short run a firm could make more money by cheating the agreement and stealing market share

Question 17

2 positives of oligopoly markets

Answer 17

• Price stability - as there is no aggressive price wars ( non price competition)
• Economies of scale - due to profits and non price competition dynamic efficiency exits

Question 18

2 negatives of oligopoly’s

Answer 18

• Risk of collusion ( inefficiency)
• Reduced innovation ( even in competitive oligopoly’s firms will be fearful of advancement as price wars will be started)

Question 19

2 Factors promoting competitive oligopolies

Answer 19

• Much more difficult to collude
• Market is contestable

Question 20

2 factors promoting collusive oligopoly’s

Answer 20

• price stability
• wage/job stability
• potential for innovation

Question 21

2 Factors that may reduce the effects of oligopolistic firms cutting prices

Answer 21

• Consumer inertia
• Consumer loyalty

Question 22

what is the legal definition of monopoly power in uk

Answer 22

• when a firm has at least 25% market share

Question 23

2 Positives of Monopoly’s

Answer 23

• Large chance of economies of scale
• job security for those in the market

Question 24

negatives of monopoly’s

Answer 24

• Misallocation of resources (profits given to shareholders)
• exploitative behavior

Question 25

What are the characteristics of a natural monopoly

Answer 25

- huge fixed costs - high barriers - competition is wasteful

Question 26

why would a government need to subsidies a natural monopoly

Answer 26

- due to the vastness of demand they face they will not be able to supply at allocatively efficient levels.

Question 27

- characteristics of contestable markets

Answer 27

- low barriers - good information - large pool of entrants

Question 28

what has increased the contestablilty of markets

Answer 28

- Technology - Globalisation (cheap labour/pool of entrants - imformation

Question 29

2 Pros and 2 Cons of contestable markets

Answer 29

Pros - Efficiency's - competition Cons - creative destruction - anticompetitive strategies (cost cutting)

Question 30

3 evaluation points about contestable markets

Answer 30

- Length of contestability - Technology can also increase barriers by creating larger fixed costs - Regulation (patents)

Question 31

what is price discrimination

Answer 31

When a firm charges different prices do different consumers for an identical good/service based of differing demand elasticity

Question 32

what are the 3 conditions necessary for price discrimination to occur

Answer 32

- Price making ability - Imformation to seperate markets - large barriers

Question 33

What is first degree price discrimination

Answer 33

All consumer surplus is transferred to producer surplus as consumer is charged the max price that they are willing and able to pay

Question 34

what is 2nd degree price discrimination

Answer 34

Discrimination is discrimination based of quantity of goods purchased

Question 35

what is third degree price discrimination

Answer 35

When a firm segregates a market into categories based on differing price elasticity's of demand.

Question 36

how do the poorest consumers benefit from 1st and 3rd degree discrimination

Answer 36

the are charged a price the are more willing to pay wheras otherwise they may have not been able to afford the product at all

Question 37

3 cons of Price discrimination

Answer 37

- Allocative inefficiency - firms can charge prices way above the marginal cost curve - Inequality - price discrimination will widen income gap as consumers on lower incomes will spend more of their total income on products - Anti competitive pricing - Firms can drive out competition by having greater knowledge reducing competition - reduced comnsumer surpluss

Question 38

4 pros of price discrimination

Answer 38

- Economies of scale - Some consumers benefit - Cross subsidization - Social tariffs

Question 39

How does business efficiency relate to the economics problem

Answer 39

- It addresses how resources are utilized and allocated to meet the needs of society vs the needs of the firm