Transcript Unit IV: Imperfect Competition

Unit IV: Imperfect
Competition
Problem Set #4
Points Distribution
1a. Barriers to Entry
-Skip (Gax will grade)
1b. MR=MC Rule
• 1 Point- Profit-maximizing point, true for all
market structures
• 1 Point- Explanation of why MR=MC is the rule
(any point beyond the firm is losing money)
• 1 Point- Clear example of MR=MC Rule using
numbers
1c. Price Discrimination
• 1 Point- Definition (charging customers different
prices for the same product)
• 1 Point- Qualifications (monopoly power, no
resell, segregate the market)
• 1 Point- Clear example
1d. Socially Optimal Price
• 1 Point- P=MC
• 1 Point-Allocatively Efficient
• 1 Point- Clear example using numbers/graph.
1e. Fair Return Price
• 1 Point- P=ATC
• 1 point- Zero economic profit/normal
profit/TR=TC
• 1 Point- Clear example of FRP using numbers or
a graph.
Problem Set Question #3:
Worksheets
A Quick Review of PC
and Monopoly
½ Point for EACH
1. A
5. C
9. C
2. C
6. D
10. C
3. D
7. A
11. C
4. B
8. C
Regulating a Monopoly
1 point-each question (All must be correct)
1. Unregulated
A.
B.
C.
D.
E.
1500
$4
$6000
$4500
$1500 Profit
2. Socially Optimal (Approx. Ok)
A.
B.
C.
D.
E.
F.
G.
3,000
$1.50
$4,500
$7500
$3000 Loss
Yes
$3000 (amount of the loss)
Regulating a Monopoly
1 point-each question (All must be correct)
3. Fair Return
A.
B.
C.
D.
E.
2500
$2.50
$6250
$6250
Zero Economic Profit
4. If not answered, (-1)
5. If not answered, (-1)
Question 4
Price
Quantity Demanded
Total Revenue
Marginal Revenue
$11.00
0
0
-
10
1
10
10
9
2
18
8
8
3
24
6
7
4
28
4
6
5
30
2
5
6
30
0
4
7
28
-2
3
8
24
-4
2
9
18
-6
4. Demand, MR, and TR for Monopolies
a. Why the MR curve less than the demand
curve for all imperfectly competitive
firms.
• 3 Points- To sell more the firm must lower
price It lowers price for ALL units. (It can’t
charge people different prices)
• 2 Point- SPECIFIC numerical example
that proves that the MR is less than the
price.
b. Plotting MR and TR Curves
• 1 Point- correctly plotted demand and marginal
revenue curves with D above MR
• 1 Point- correctly plotted TR with TR rising then
falling
• 1 Point- Identifies that elastic range is to the left
where MR is positive and inelastic is on the
right.
• 1 Point- Total Revenue test says that when price
falls and TR increases, demand is elastic
• 1 Point- Total Revenue test says that when price
falls and TR decreases, demand is inelastic
Labeled elastic and inelastic ranges.
Inelastic
Dollars
Elastic
MR
D
Dollars
Q
TR
Q
5. Compare AND contrast monopolistic
competition and perfect competition
• 2 Point (similarities)- perfect comp and mono comp
have the following in common:
– Many Firms
– Easy Entry/Exit
– Zero economic profit in LR
• 3 Points (differences)-perfect comp and mono comp
have the following differences:
– MC: controls price; PC: price takers
– MC: D>MR; PC: D=MR
– MC: advertising used; PC: no advertising
– MC: Not All./Prod. Eff. In LR; PC: Both
Explain Oligopolies
• 2 Point- Identify the characteristics of an
Oligopoly (few firms, large control over price,
identical/differentiated products, high barriers to
entry)
• 2 point- Explanation of game theory, ability to
collude and incentive to cheat
• 1 Point- They explain that the kinked demand
curve shows that non-colluding oligopolies
match price cuts and ignore price increases.