Question 1

Natural gas sellers and natural gas buyers constitute a market a
  group of producers and consumers who exchange a good or service for
  payment. In this chapter, we'll focus on a particular type of market
  known as a competitive market. A competitive market is a market in
  which there are many buyers and sellers of the same good or service.
  More precisely, the key feature of a competitive market is that no
  individual's actions have a noticeable effect on the price at which
  the good or service is sold. It's important to understand, however,
  that this is not an accurate description of every market.

Market Type Perfect Competition Monopolistic Competition Oligopoly Monopoly
Number of Firms Numerous Many Few One
Nature of Product

Same, or very similar products

Example: Produce

Different products (Might seem the same but are still different)

Example: Fast food restaurants

Can be similar or different

Example: Washing machines

Unique in nature
Example: Electricity
Implications for demand curve


This firm is a price taker and the demand curve is perfectly elastic

Downward Sloping:

Relatively Elastic

Downward Sloping:

Price curve is price-elastic.

Demand curve is directly affected by competition

Downward sloping:
Firms in this market have the most control over price
Average size Small Small - Medium Large Very Large
Possible consumer demand Demand is potentially unlimited. Demand will rely on what is available through supply Demand will depend on what differentiation the competition provides Consumers are in control of what and how to buy Firms only produce when demand is elastic. If the product is not desirable demand will be low
Profit making possibility

In the short run, it's possible to make an economic profit.

In the long run it's impossible for this market type to earn an economic profit

In the short run it is possible to make a profit however in the long run there will be zero economic profit There is potential for moderate economic profit, however how much will depend on the competition and competitive advantage over these firms. Because firms in this industry are usually a one-of, the profit making possibility is large
Government intervention Very little limitations Very little, regulations depend on industry (eg. Food permits) Government will monitor to ensure that Cartels and Collusions aren't manipulating the market The government can/will impose taxes specific to the industry or profits being made. If a monopoly refuses to pay these fee's they can be shut down by the government
Specific trait to market Buyers can easily switch between sellers with little to no difference in product and price Brand loyalty aids the firm when prices are raised to increase revenue Firms often form a collusion to stabilize markets and reduce risks. This can be highly illegal and is monitored by the government Firms who operate as a Monopoly are one-of in their area. They have control of their market

Question 10

  • The MC curve intersects the ATC curve at the minimum point of the ATC curve

    Cost of case $250 MC 200 150 ATC AVC 100 50 AFC 10 Quantity of salsa
(cases) Minimum-cost output

Question 11

  • When a new computerized system for a firm increases the marginal productivity of its workers, the marginal revenue product curve will shift to the right, causing the wage rate to increase.

    Machine generated alternative text: D = MRP Number of Workers

Question 14

  • A consumer surplus is established as the difference between the total utility (satisfaction) received and the price paid by the consumer.

Question 19

  • Profits of an unregulated monopolist: difference between ATC (NOT MC) and D times the Quantity

    Machine generated alternative text: price, cost, marginal reve n u e
Monopo , profit 丆 CM MC D Quantity In this case , the marginal cost
curve has a "swoosh" shape and the average total cost curve is
U-shaped. The monopolist maximizes profit by producing the level Of ou
ut at which MR= MC , given point generating quantity Q". It finds its
monopo price , PM, from the point on fre demand curve directly above
point point B here The æerage total cost Of QM is shown 卸 point C.
Profit is given by the area of the shaded rectangle

Question 23

  • If price < ATC, this would result in a loss

    Profitability condition (minimum ATC = break-even price) P \>
minimum ATC P = minimum ATC P < minimum ATC Result Firm profitable.
Entry into industry in the long run. Firm breaks even. No entry into
or exit from industry in the long run. Firm unprofitable. Exit from
industry in the long run.

Question 24

  • The government announcement would result in an increase in demand for red grape juice. But the change will not be a change along a demand curve or a change in quantity demanded.

Question 29

  • Source of wage differentials

    • Marginal Productivity and Wage Inequality

      • Compensating differentials

      • Differences in talent

      • Quantity of human capital

    • Market Power

    • Efficiency wage

    • Discrimination

Question 38

  • Monopolistic competition is characterized by lower output, higher price than competitive industries. Price is greater than MR and greater than MC

Question 43


Question 49


  • If we pay these costs including the value of what could be earned elsewhere with the same resources, we would be paying a transfer earning (the value of alternative use of the resources of suppliers).

  • The transfer earning is the minimum price we must pay, as consumers, in order to assure a continuing supply of goods and services.

  • Rents are those payments that suppliers receive that are in excess of transfer earning or are in excess of what those suppliers could earn elsewhere.

  • These rents cause a reallocation resources away from more productive use of resources.

Question 54

  • This refers to the interdependence characteristic of oligopoly.

  • Price decreases are matched in the hope of maintaining or increasing market share.

  • Price increases are not matched for fear of losing market share or having the possibility of gaining market share over the price-increasing rival

Question 55

  • collusive

    • adj. acting together in secret toward a fraudulent or illegal end
  • kinked demand curve

    • This curve illustrates the interdependence of rivals under non-collusive oligopoly in which rivals match price decreases but do not match price increase of an oligopolist

    Fig, 1203(c) Oligopoly—Formation of Kinked Demand Curve (dD)

  • The major feature of the kinked demand curve is that it consists of two segments (one that indicates "following" and the other that "does not follow" the price changes of rivals)

Question 56

  • Elasticity tends to be greater in the long run since the firm will be able to adjust to changes in demand.

  • The firm will have more options in availability of resources in order to substitute less expensive resources (inputs) for more expensive resources in the long run

Question 58


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