Unit 4 Imperfect Competition

Question 1

Imperfect Competition

Answer 1

Firms have some control over price and face fewer competitors.

Question 2

Barriers to Entry

Answer 2

Obstacles that make it hard for new firms to enter a market.

Question 3

Common Barriers

Answer 3

Legal barriers, control of resources, high start-up costs, and geography.

Question 4

Price Makers

Answer 4

Firms that can raise prices without losing all customers.

Question 5

Perfect Competition

Answer 5

Many firms, identical products, no price control, no barriers.

Question 6

Monopolistic Competition

Answer 6

Many firms, slightly different products, little price control, few barriers.

Question 7

Monopoly

Answer 7

One firm, unique product, high price control, high barriers.

Question 8

Oligopoly

Answer 8

Few firms, same or different products, some price control, high barriers.

Question 9

Monopoly Definition

Answer 9

A market with only one seller and no close substitutes.

Question 10

Monopoly Price Rule

Answer 10

Firms produce where MR = MC and set price based on the demand curve.

Question 11

Monopoly Demand Curve

Answer 11

Downward sloping because price must drop to sell more.

Question 12

Marginal Revenue in Monopoly

Answer 12

MR is below the demand curve due to price effects.

Question 13

Allocative Inefficiency in Monopoly

Answer 13

Price is higher than MC, which means underproduction.

Question 14

Productive Inefficiency in Monopoly

Answer 14

Firm does not produce at the lowest ATC.

Question 15

No Supply Curve

Answer 15

A monopoly sets both price and quantity, so there is no true supply curve.

Question 16

Natural Monopoly

Answer 16

Firm with high fixed costs and long-lasting economies of scale.

Question 17

ATC in Natural Monopoly

Answer 17

ATC is always decreasing as output increases.

Question 18

Natural Monopoly Regulation

Answer 18

Gov’t may set price where ATC = demand to avoid losses.

Question 19

Price Discrimination

Answer 19

Selling the same product at different prices to different buyers.

Question 19

Requirements for Price Discrimination

Answer 19

Market power, no resale, and buyer separation.

Question 19

Effects of Price Discrimination

Answer 19

No consumer surplus or deadweight loss; all surplus goes to producers.

Question 20

Perfect Price Discrimination

Answer 20

Each buyer pays the maximum they’re willing to.

Question 21

Imperfect Price Discrimination

Answer 21

Buyers are grouped into types, and each group gets a different price.

Question 22

Examples of Price Discrimination

Answer 22

Coupons, bulk buying, student discounts, airline tickets.

Question 23

Firm Output with Price Discrimination

Answer 23

More units are produced compared to single-price monopoly.

Question 24

Monopolistic Competition

Answer 24

Many firms selling slightly different products.

Question 25

Product Differentiation

Answer 25

Firms make their product seem different using features or branding.

Question 26

Advertising in Monopolistic Competition

Answer 26

Used to increase demand and make it more inelastic.

Question 27

Price Setting in Monopolistic Competition

Answer 27

Firms set prices above marginal cost but are limited by competition.

Question 28

Short-Run Profits

Answer 28

Firms can earn profits when demand is strong.

Question 29

Long-Run Outcome

Answer 29

Firms enter the market, causing demand to fall until profits are zero.

Question 30

Long-Run Efficiency

Answer 30

Firms are not allocatively or productively efficient in the long run.

Question 31

Tangency in Long Run

Answer 31

In long run, demand curve is tangent to ATC, so only normal profit.

Question 32

Excess Capacity

Answer 32

Firms don’t produce at the lowest ATC; they could produce more.

Question 33

Oligopoly

Answer 33

A market with a few large firms that dominate

Question 34

Interdependence in Oligopoly

Answer 34

Firms must consider how rivals will respond when making decisions.

Question 35

Cartel

Answer 35

A formal group of firms that collude to act like a monopoly. Group of firm formally agree and set a price

Question 36

Collusion

Answer 36

Firms agreeing to fix prices or output; often illegal. Firms coop to set a price. Choice A + Choice N = Highest

Question 37

Game Theory

Answer 37

The study of how firms behave when their actions depend on others.

Question 38

Payoff Matrix

Answer 38

A chart showing the outcomes based on what each firm chooses.

Question 39

Dominant Strategy

Answer 39

Best choice for a firm no matter what the other firm does.

Question 40

Nash Equilibrium

Answer 40

When both firms choose the best response to each other, and neither wants to change.

Question 41

Prisoner’s Dilemma

Answer 41

Situation where both players end up worse off by acting in self-interest.

Question 42

Socially Optimal Quantity (Allocative Efficiency)

Answer 42

Occurs where P = MC. This is the quantity society wants most because the value to consumers equals the cost to produce.

Question 43

Monopoly vs. Socially Optimal

Answer 43

Monopolies underproduce compared to the socially optimal level. They produce where MR = MC, not P = MC.

Question 44

Fair-Return Price

Answer 44

A regulated price set where P = ATC. This gives the firm normal profit but no economic profit.

Question 45

Deadweight Loss in Monopoly

Answer 45

Exists because monopolies produce less than the efficient quantity and charge a higher price.

Question 46

Productive Efficiency

Answer 46

Occurs where ATC is minimized. Monopolies and monopolistic competitors do not produce here.

Question 47

Excess Capacity in Monopolistic Competition

Answer 47

Firms could produce more at a lower cost, but they don’t. This causes productive inefficiency. Monopoly not allocatively efficient

Question 48

Legal Examples of Price Discrimination

Answer 48

Airline tickets, student pricing, quantity discounts. These are legal when they follow the rules.