ECON 206- Exam 3 Graded A+ 237
Complete Solutions.
ECON 206- Exam 3 Graded A+ 237
Complete Solutions.
Monopolistically Competitive - ANSWER- An industry with many competitors, all
producing slightly different products
Oligoplistic Competition - ANSWER- Only a few firms producing similar (or
differentiated) products
Cartel - ANSWER- A group of producers agreeing to act in concert with one another
Payoff Matrix - ANSWER- A payoff matrix is usually a two-by-two table with two actors
or players. Each player will have a set of actions that will result in different payoffs. Each
player's payoff is dependent on both players' course of action.
Market Failures - ANSWER- When private markets do not produce an economically
efferent allocation of resources. In other words, when the positive market does not
maximize total surplus
External Costs - ANSWER- The costs of producing a good or services that are borne by
individuals other than the producer or consumer
External Benefits - ANSWER- The benefit received by individuals other than the
producer or consumer
Marginal Social Cost - ANSWER- The marginal cost of production from society's point of
view
Marginal Social Benefits - ANSWER- The marginal benefit of consumption from
society's point of view
Private Goods - ANSWER- A good and service that can be consumed by only one
person at a time. It is also possible to exclude non-buyers form consuming the goods
Public Goods - ANSWER- A public good has two characteristics. First, it is difficult or
impossible to exclude non-buyers from consuming the goods. Second, consumers can
consume a public good without interfering with others' consumption of the same goods
Common Resources - ANSWER- A resource that can be consumed by only one
producer or consumer at a time and is found in environments in which it is difficult to
exclude nonpaying users
,ECON 206- Exam 3 Graded A+ 237
Complete Solutions.
What is similar and what is different between the automobile industry and restaurant
industries? - ANSWER- There are far more competitors in the restaurant industry than
in the automobile industry. This is likely due to the barriers to entering the automobile
industry compared to opening a new restaurant. There are much larger economies of
scale in the automobile production compared to the production of a meal. Both
industries produce goods that are unique when compared to a competitor's product
Will the monopolistically competitive firms tend to have a more elastic or less elastic
demand that a monopoly? Explain why? - ANSWER- A perfectly competitive firm will not
influence the price of goods. Market supply and demand will determine the equilibrium
price and equilibrium quantity for he whole market. For any single perfectly competitive
firm, raising prices will mean that all consumers will buy their products from someone
next door. From a graphing perspective, we will have a horizontal demand curve.
What do you think would happen in a commercial neighborhood near home if a
restaurant in that neighborhood were making a great deal of profit? - ANSWER-
Domino's Pizza will move to this neighborhood from another area of the town
What will happen in the monopolistically competitive industry if demand increases? -
ANSWER- If demand increases, in the short run marginal revenue will rise. Firms will
increase output since marginal revenue exceeds marginal cost. Economic profits will
rise in the long run, new firms will enter, and this will lower demand for each firm's
output; thus, profits will go down again.
What will happen in the monopolistic competitive industry if variable costs increase? -
ANSWER- If variable costs increase, firms will reduce production. Since average cost
increased, firms will be making economic losses. In the long run, some firms will leave
the industry. Demand for each reminding firm's output will increase. The likely result will
be an increase in price. It is more difficult to tell about quantity.
Summarize in your one words what monopolistically competitive market is and what is
important about that type of market structure. - ANSWER- A market that is
monopolistically competitive will have many firms; a variety of types of products, each
one slightly different; relatively easy entry and exit, there will not be economic profits in
try long run. However, firms will produce e where marginal costs are less that prices,
and thus less than an allocatively efficient amount of output will be procured.
What is the rationale to use in setting price, if the firms in the entire industry are acting
together? - ANSWER- We would use the same rationale as in the case of monopoly.
We would maximize the profit for one firm within an industry structure. For firms
operating in oligopoly industry structure, setting marginal revenue equal to marginal cost
will achieve that goal of maximizing profits for the industry
, ECON 206- Exam 3 Graded A+ 237
Complete Solutions.
Why are the cartel's profit-maximizing price and quantity similar to the monopoly price
and quantity? - ANSWER- A monopoly maximizes its profits if it produces when
marginal cost equal marginal revenue. Because a monopoly is the only firm in an
industry, it is producing where industry profits are maximized. Thus, a small group of
firms would want to produce the same level of output and prices as a monopolistic if
total industry products are to be maximized.
What might happen if one firm lowers its price? - ANSWER- If one firm lower its price it
will likely attract new customers and attract some existing companies' customers away.
Is the demand curve facing one of the in a cartel more elastic or less elastic than market
demand? Why? - ANSWER- Demand facing a single firm is more elastic. This is
because a small decrease in piece will not only attract more buyers (movement along
the market demand curve) but it will also attract buyers from the other members of the
cartel who are charging a higher price.
Is marginal revenue facing a single firm in the cartel different than the marginal revenue
curve facing the whole market? Which is higher why? - ANSWER- The marginal
revenue for the individual firm include the marginal revenue for the elastic industry plus
some additional revenue that is take away from the other existing firms.
What incentive does Ford have to lower prices? What happens to all of the firms? What
are the incentives and what might happen as a result? - ANSWER- Profits will increase
for Ford if it can lower prices and get away with it, that is, not have General Motors also
lower prices. the same is true for General Motors.
However, when Ford lowers prices, General Motors will find its profits falling rather
dramatically as customers switch to Ford. To protect itself, General Motor may well
lower prices in response to the initial cut by Ford.
The end result is that both companies end up earning less than they could have earned
ifs they all kept their higher prices.
Summarize, in your own words, the economic model of oligopolistic behavior -
ANSWER- The moral of this story is that oligopolistic industries will benefit for
agreements to price and produce like monopolies. If they are able to fo that, they will be
able to maximize profits for all firms together, that is, for the entire industry. However,
there is always the incentive to "cheat" an agreement. A firm that lowers it spruces will
fo so to increase its own production and profits. However, other firms will match the
decreases. That cheating on the original attempts to maximize industry profits will result
in lower profits, lower prices, and greater quantities for all firms together than the
monopoly level of profits, prices, and quantities
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