Question 1

The higher the level of market power among the sellers in a market, the _____ when the Rational Rule for Sellers is applied.

Accepted Answer

Market power allows sellers to restrict output to increase prices, leading to lower market output under the Rational Rule for Sellers, which equates marginal revenue with marginal cost.

Question 2

The negative outcomes of market power do NOT include

Accepted Answer

Market power typically leads to higher prices, larger economic profits, and higher costs, but does not necessarily lead to smaller demand. In fact, firms with market power may sometimes have more control over demand and may be able to manipulate it to some extent through advertising and other marketing strategies.

Question 3

The negative outcomes of market power include all of the following EXCEPT

Accepted Answer

The negative outcomes of market power typically include smaller quantity, higher costs, and larger profits due to the ability to raise prices beyond competitive levels. However, lower prices cannot be considered a negative outcome of market power.

Question 4

Which of the following is NOT an outcome of a market where sellers have market power?

Accepted Answer

When sellers have market power, they are able to charge higher prices and capture larger economic profits. This often leads to an inefficiently small output, as they have no incentive to produce more at a lower price. However, market power does not generally lead to lower costs for sellers. In fact, it is often the ability to charge higher prices that allows them to invest in cost-reducing technology and production methods.

Question 5

Which of the following is a negative outcome of markets where sellers have market power?

Accepted Answer

When sellers have market power, they can charge higher prices because they face less competition. This leads to higher prices for consumers, which is a negative outcome of such markets. An inefficiently large output, smaller economic profits, and lower costs are not necessarily negative outcomes in markets where sellers have market power.

Question 6

The output in a market with market power is

Accepted Answer

In a market with market power, firms can set prices above marginal costs, leading to a situation where the marginal benefit to society of producing an additional unit (which is reflected in the price consumers are willing to pay) exceeds the marginal cost of producing that unit. This results in an inefficient allocation of resources, as not enough of the good is produced to maximize societal welfare.

Question 7

Which of the following is correct about the discount effect facing companies in perfectly and imperfectly competitive markets? Companies in perfect competition _____ it. Companies in imperfect competition _____ it.

Accepted Answer

In perfect competition, prices are determined by the market and companies are price takers, meaning they cannot set prices above the equilibrium without losing all their customers. Therefore, they do not face a discount effect. In imperfect competition, companies have some power to set prices and can face a discount effect because they can influence their prices and sales through discounts and promotions.

Question 8

What effect do patents have on competition?

Accepted Answer

Patents create a barrier to new companies entering a market by giving exclusive rights to the patent holder to produce and sell the patented product. This reduces the competition by limiting the number of companies that can enter the market and offer similar products.

Question 9

What effect does increasing competition have on price for firms with market power?

Accepted Answer

Increasing competition reduces the market power of firms and they have to lower their prices in order to attract customers. Therefore, the price will be driven down to the level of costs.

Question 10

One of the market failures caused by market power is

Accepted Answer

Market power can lead to underproduction because firms with significant market power may produce less than the socially optimal quantity to maximize profits, leading to inefficiencies in the market.

Question 11

Market power results in companies that _____ and that have _____ compared to perfect competition.

Accepted Answer

Market power allows companies to produce less and charge higher prices since they have the ability to control the market. This is in contrast to perfect competition where there are many firms competing, resulting in lower prices and higher output.

Question 12

Patents have a positive impact of _____ and the negative impact of _____.

Accepted Answer

Patents encourage research and development by providing legal protection for an inventor's idea, giving them a financial incentive to innovate. However, they also create a monopoly by preventing others from using or selling the same invention, which can limit competition and potentially increase prices for consumers.

Question 13

What would happen in the renewable energy markets if patents were banned?

Accepted Answer

Without patents, companies may be less incentivized to invest in research due to lack of protection for their innovations, leading to reduced research. However, new companies could enter the market more easily by emulating existing technologies.

Question 14

Patents on drugs to treat AIDS were removed in South Africa. How would the market for these drugs have been different if there had never been patents on drugs?

Accepted Answer

If patents had never existed, it is possible that drug companies would not have invested the large amounts of money necessary to develop drugs to treat AIDS. Without the financial incentive of being able to hold a patent and control the exclusive distribution of the drug, companies may not have wanted to take on the high risk and cost of developing the drugs. Therefore, the drugs may not have been developed at all.

Question 15

To maximize social benefits from markets, governments regulate markets using what two basic approaches?

Accepted Answer

The two basic approaches for maximizing social benefits from markets are to encourage competition and minimize harm from market power. This means that governments should create conditions that promote competition, such as preventing monopolies and providing information to consumers, while also ensuring that powerful firms do not harm smaller competitors or consumers. This approach aims to balance the benefits of markets with the need to protect consumers and maintain a level playing field for businesses. The other choices are incorrect, as they either focus solely on one aspect of market regulation or encourage harmful practices such as reducing competition and encouraging market power.

Question 16

Which of the following is NOT an example of a type of law that tries to foster competition?

Accepted Answer

Patents are a form of intellectual property protection that grants exclusive rights to an inventor or creator of a new invention or idea. While they may incentivize innovation, they do not necessarily foster competition, as they give the patent holder a monopoly on their invention for a certain period of time. The other options listed all aim to promote competition by preventing anti-competitive behavior or encouraging a competitive marketplace.

Question 17

What is collusion?

Accepted Answer

Collusion refers to agreements between sellers to limit competition and increase their market power. This can include price-fixing, dividing markets, and other anti-competitive practices that harm consumers. Collusion is illegal under antitrust laws in most countries.

Question 18

Which of the following is NOT an example of illegal collusion in a market?

Accepted Answer

Including complete and accurate lists of ingredients on products is not an example of illegal collusion in a market. The other three choices involve sellers conspiring to restrict competition or raise prices, which are illegal activities.

Question 19

An agreement among sellers in a market that limits competition is called:

Accepted Answer

Collusion is an agreement among sellers in a market that limits competition by fixing prices, dividing market share, or agreeing to not compete with each other. Patents are legal protections for products or processes that give the owner exclusive rights to use them for a certain period of time. Covert manipulation and power promotion are not related to limiting competition in a market.

Question 20

When collusion occurs, sellers in a market

Accepted Answer

When collusion occurs, sellers come together to act like a monopolist to increase profits. They agree to limit production or raise prices to increase profits as if they were a monopoly. Collusion is illegal and is seen as anti-competitive behavior.

Quiz 14: Market Structure and Market Power