Essay Examination 3
Microeconoimcs

Lecture 9 - Competitive Markets

1. What are four characteristics of price takers?

2. Please draw a firm’s Average Variable Costs (AVC), Average Total Costs (ATC), and Marginal Cost (MC) functions.  On this graph, please draw a Marginal Revenue (MR) function where this firm earns economic profits.

(a) Please show the region on the graph where this firm earns economic profits.

(b) Could this firm earn economic profits indefinitely?  Please explain.

3. Please draw a firm’s Average Variable Costs (AVC), Average Total Costs (ATC), and Marginal Cost (MC) functions.  On this graph, please draw a Marginal Revenue (MR) function where this firm earns economic losses (but still operates).

(a) Please show the region on the graph where this firm earns economic losses.

(b) Could this firm earn economic losses indefinitely?  Please explain.

(c) When would this firm shut down?

4. Please draw a firm’s Average Variable Costs (AVC), Average Total Costs (ATC), and Marginal Cost (MC) functions.  Along side these functions, please derive the firm’s supply function.

(a) Why does a firm shut down?

(b) Why does a firm go out of business?

(c) Is a firm’s Marginal Cost (MC) function the same as a firm’s supply function?

5. (20 points) Please draw the market for cookies with an equilibrium price of $3.  The cookie market is a competitive market.  Also draw one representative competitive firm next to the market with its demand (d) and Marginal Revenue (MR) functions.

(a) What happens if consumers’ income fall and cookies are a normal good?  Please show the impact on the market.

(b) What happens to a firm’s profits?  Please show on the graph.

(c) What happens in the long run?  Please show the result on the graph.

6. (20 points) Please draw the market for coffee with an equilibrium price of $1.  The coffee market is a competitive market.  Also draw one representative competitive firm next to the market with its demand (d) and Marginal Revenue (MR) functions.

(a) What happens if researchers say coffee is good for health?  Please show the impact on the market.

(b) What happens to a firm’s profits?  Please show on the graph.

(c) What happens in the long run?  Please show the result on the graph.

7. Please graph the supply and demand functions for an increasing cost industry.  What happens if this industry expands?  Explain in words and show graphically.

8. Please graph the supply and demand functions for a decreasing cost industry.  What happens if this industry expands?  Explain in words and show graphically.  Which industries tend to be decreasing cost industries?

9.  Please define the following terms.

(a) Allocative Efficiency

(b) Production Efficiency

(c) How do we know if social welfare is maximized for a particular market?

Lecture 10 - Monopolies

10. What are the characteristics of a pure monopoly?

11. What are market barriers?

(a) How is economies of scale a market barrier?

(b) How do patents and licenses create a market barrier?

(c) How does control of an essential resource create a market barrier?

(d) How does unfair competition create a market barrier?

12. What are three reasons why monopolies are bad?

13. Please draw an average total cost (ATC), marginal revenue (MR), marginal cost (MC), and demand (D) functions for a monopolist earning profits.

14. In terms of a monopoly, please define the terms.

(a) Early bird –

(b) Price gouging –

(c) X-inefficiency –

(d) Rent-seeking behavior –

15. What is price discrimination?

16.  What are three conditions required for price discrimination?

17. Please using a university as an example, please show and explain how the university can increase its revenue using price discrimination.

18. What are four policies that government can use to discipline a monopoly?

(a) Which policy is the best?

(b) Which policy is the worse?

Lectures 11 - Oligopolies and Monopolistic Competition

19. Please define the four market structures.

(a) Pure monopoly –

(b) Oligopoly –

(c) Monopolistic competition –

(d) Pure competition –

20. What are the characteristics of monopolistic competitive firms?

21. Please define the terms.

(a) Differentiated product –

(b) Homogeneous product –

(c) Nonprice Competition –

22. What are three benefits of advertising?

23. What are three problems of advertising?

24. Please draw the marginal revenue (MR) and demand (d) functions for a monopolistic competitive firm.

(a) What happens if these firms are earning profits?  What happens to the MR and d functions?

(b) What happens if these firms are earning losses?  What happens to the MR and d functions?

25. Please draw the marginal revenue (MR), demand (d), average total costs (ATC), and marginal cost (MC) functions for a monopolistic competitive firm earning profits.

26. What are the similarities between a monopolistic competitive firm and a purely competitive firm?

27. What are the difference between a monopolistic competitive firm and a purely competitive firm?  Refer to productive and allocative efficiency.

28. What are the characteristics of an oligopoly?

29.  Please define these terms.

(a) Mutual Interdependence –

(b) Mergers –

(c) Strategic behavior (or game theory) –

30. What are the two extreme outcomes for an oligopoly?

31. What is a cartel?

(a) Which organization is the most famous cartel?

(b) What three reasons why cartels are not successful in the long run?

32. Please define the following terms.

(a) Tacit understandings –

(b) Price leadership –

(c) Contestable Market –

33. We have a prisoner’s dilemma. Two countries, the United States and Canada, enter into an agreement to reduce pollution that drifts across the border.

• If both countries choose tough environmental laws, their GDPs grows slowly at 1%
• If one country has soft environmental laws and the other has tough, then industries with the weak laws have a cost advantage.  They can produce more output, increasing GDP to 6%.
• If both countries have soft environmental laws, then their GDPs growth at 5%.

(a) Please explain what happens with this game.  What is the outcome?

(b) What should be the socially desired outcome?

34. We have a prisoner’s dilemma. The police captured two criminals and they are trying to get one prisoner to confess.  The payoffs in the matrix are the number of years in prison.  Thus, the lower the payoff, the better it is for the criminals.

• If both prisoners confess, then they each get 5 years in prison.
• If one prisoner confesses, he gets one year in prison, while the other prisoner gets 10 years in prison.
• If both criminals do not confess, then they each get one year in prison.
• The payoff matrix is (Row criminal, Column criminal)
• Be careful!  Remember, lower numbers are better than higher numbers.  Higher numbers is more punishment.

(a) Please explain what happens with this game.  What is the outcome?

(b) What should the criminals do in theory?