Question 1

What are some of the arguments for and against advertising?

Accepted Answer

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Question 2

Both the kinked demand curve and the price leadership variants of oligopoly theory assume that firms collude with each other.

Accepted Answer

The kinked demand curve theory assumes that firms in an oligopoly do not collude but instead compete based on perceived market reactions to price changes. Price leadership theory, on the other hand, does involve a form of tacit collusion among firms where one firm sets a price that is then followed by other firms in the industry.

Question 3

Demonstrate graphically and explain verbally the case of a monopolistically competitive firm earning a positive economic profit.Is this firm in a short run or a long-run equilibrium? How does this case differ from the monopoly market outcome?

Accepted Answer

The The monopolistically competitive firm determines its profit maximizing output level by producing where MR = MC (Q_M in the diagram).The firm determines its price by reading it off of the demand curve above Q_M (price is P_M in the diagram).The firm is earning a positive economic profit as shown by the filled in rectangle in the diagram. This represents a short-run equilibrium;in the long run there can be no positive economic profit for the firm since with easy entry in the long run other firms will enter in and compete away any short run positive economic profit. The key difference between this case and a monopoly case is that demand D is not the entire market demand (as it would be in the monopoly case).D is the portion of the market demand that customers buy from this firm.

Question 4

The assumption that firms attempt to maximize sales revenue underlies much of the analysis in microeconomics.

Accepted Answer

Microeconomics typically assumes that firms attempt to maximize profits, not just sales revenue. This involves considering both revenues and costs to achieve the highest possible profit.

Question 5

Galbraith argues that oligopoly firms can be efficient because of the research they engage in and the technological change they foster.

Accepted Answer

Galbraith's argument is that oligopoly firms have the resources to invest in research and development, which can lead to technological advancements and greater efficiency in production. Therefore, he believes that oligopolies can be efficient despite their ability to limit competition.

Question 6

The franchise system attempts to limit the entry of new firms into an existing industry.

Accepted Answer

The franchise system involves an agreement between a franchisor and a franchisee, where the franchisor grants the franchisee the right to use its brand, products, and business model. This system allows the franchisor to expand its reach and market share without having to invest in new locations and infrastructure. However, it also limits the entry of new firms into the industry, as potential competitors would need to obtain a franchise agreement from the franchisor in order to operate under the same brand and business model.

Question 7

Explain four methods of product differentiation.

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Question 8

One characteristic of monopolistic competition is the existence of many firms operating in the same industry.

Accepted Answer

Monopolistic competition is characterized by a large number of firms operating in the same industry, each producing differentiated products. This allows each firm to have some degree of market power, but they are still subject to competition from other firms.

Question 9

Productive efficiency occurs when firms charge a price that is equal to AC.

Accepted Answer

Productive efficiency occurs when a firm produces output at the lowest possible cost, which is achieved when the firm produces at the minimum point of its average cost curve. When a firm is producing at the minimum point of its average cost curve, its price is equal to its average cost, which means that it is charging a price that is equal to AC. Therefore, option A is correct.

Question 10

Imperfect competition is characterized by firms competing on price.

Accepted Answer

Imperfect competition is characterized by firms competing on non-price factors such as product differentiation, branding, and marketing strategies. In imperfect competition, firms have some degree of market power to manipulate prices and output levels without immediately losing all their customers to rivals. Examples of imperfectly competitive markets include monopolistic competition, oligopoly, and monopoly.

Question 11

"The loss of profits resulting from higher production costs is often less than the loss of profits that would occur from raising prices to try to recoup those costs" Why might this be so?

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Question 12

Use the kinked demand curve diagram to illustrate and describe why prices are often sticky in an oligopoly market.

Accepted Answer

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Question 13

All of the following statements,except one,are valid statements regarding barriers to entry and the existence of large profits in an oligopoly industry.Which statement is not valid?

Accepted Answer

Barrier to entry may lead to the existence of large profits in an oligopoly industry. The other statements are all valid in terms of how barriers to entry can affect industry characteristics. For example, barriers to entry can enable firms to spend more on research and development, which can help them develop new technologies and products. Additionally, barriers to entry can help maintain large firms within the industry, which can enhance the firms' ability to capture economies of scale. However, the existence of large profits is not a consequence of barriers to entry. In fact, barriers to entry can reduce competition and make it easier for firms to maintain their market power and generate profits.

Question 14

All of the following statements,except one,are correct about a firm operating under conditions of either monopolistic competition or oligopoly.Which is the exception?

Accepted Answer

In monopolistic competition or oligopoly, a firm charges a price above marginal cost in both the short run and the long run to maximize its profits. It faces a downward-sloping demand curve due to product differentiation, which means that it has some market power to raise the price. However, it does not charge a price equal to average cost in either the short run or the long run. This is because in the short run, it may operate at a loss, and in the long run, it may have excess capacity that increases its average cost. Therefore, it fails to achieve productive efficiency, which is the lowest possible average cost.

Question 15

Compare how P,ATC,MC,and MR are related to each other in the long-run equilibrium setting for a perfectly competitive firm and a monopolistically competitive firm.

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Question 16

Allocative efficiency is absent if price exceeds marginal cost.

Accepted Answer

Allocative efficiency is achieved when price equals marginal cost. If price exceeds marginal cost, it indicates that resources are not being allocated efficiently and there may be consumer surplus or deadweight loss.

Question 17

Mutual interdependence is a significant characteristic of a monopolistically competitive industry.

Accepted Answer

Mutual interdependence is a characteristic of oligopolistic industries, not monopolistically competitive ones. In monopolistic competition, firms act independently and do not consider the reactions of other firms when making decisions.

Question 18

Monopolistically-competitive firms typically make economic profits in the long run.

Accepted Answer

Monopolistically-competitive markets involve firms selling differentiated products, leading to some degree of market power but also significant competition. In the long run, new firms can enter the market and offer similar products, eroding the market power and profits of existing firms. Therefore, economic profits are typically competed away and firms may only make normal profits in the long run.

Question 19

Explain why the demand curve for an oligopoly firm might be kinked.

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Question 20

In long-run equilibrium,a monopolistically competitive firm's AC equals price.Given this,why hasn't it achieved productive efficiency? How is excess capacity related to your answer?

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Quiz 11: Imperfect Competition