Term
Question 11.
How does a profit maximizing strategy of the monopolistic differ from that of a competitive firm? (2) |
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Definition
| - Although both competitive monopolistic firms and monopolistic firms maximize profit by producing at MR = MR and where P > MC. The Competitive monopolistic firm needs to constantly adjust / differentiate their products because the incentives for new firms to enter the market is big if the firm within the competitive monopolistic market is making profits. In short run, Monopolistic and competitive monopolistic firms share the same profit maximizing strategy, but what differs is in the long run. In comparison to a perfect competitive firm, the strategy is totally different, because of the perfectly elastic demand curve. Perfect competitive firms are considered price takers, where as monopolistic firms are considered price makers. |
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Term
| Why do monopolies occur and persist? (1) |
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Definition
| - Monopolies occur because of no similar substitutes, and persist because of high barriers of entry, which can be divided into four different segments. For instance a Government may block entry of other firms into a specific market to obtain a monopoly. Network Externalities may also create a monopoly, such as the more the product is being consumed, everyone else is better off. Economies of scale, which means high costs may prevent other firms to operate in the same market. Lastly if a firm are able to have control over Key resources to produce a specific good, it will cause a monopoly. Barriers of entry, differentiate your product, and create incentives through innovation. |
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Term
| Why do we believe that monopoly is disadvantageous to consumers and society? (2) |
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Definition
| We (Economists) believe that monopoly may be bad for the consumer / society because it will reduce consumer surplus while increasing producer surplus. Monopoly also causes deadweight loss which is not economic efficient. Total social welfare would be less whenever there is a monopoly. |
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Term
| How can we measure the distortions of a specific monopoly? (3) |
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Definition
| - We measure the distortions of a monopoly by finding the deadweight loss. Adding the area of triangle A and B or calculating the area of the big triangle can find the deadweight loss in a monopoly. To find the area we use the formula ½(base X height). |
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Term
| What conditions are necessary for price discrimination? (1) |
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Definition
| - Price discrimination is the ability to charge different price for the same product. The ideal condition for price discriminations to work is a monopoly, but also imperfect competition would be suitable. Because if there is a monopoly or imperfect competition, the firms gain market power to be able to set a higher price than the marginal cost. Some consumers also need to have greater willingness to buy than others and you are not allowed to re-sell the product. |
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Term
| When is price discrimination not illegal? (1) |
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Definition
| - If it increases competition and results in increase in social welfare. Price discrimination is not illegal in many cases, for instance buying tickets from airline companies, or college education etc |
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Term
Question 12)
Compare and contrast three policies used to correct the inefficiencies of monopolies (3) |
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Definition
| - The antitrust policy involves regulating inefficiencies in monopolies by prohibit mergers and to promote breaking up monopolies. Antitrust policy also tries to find and fine firms who work together to raise prices to create additional consumer surplus. Subsidizing entry of new farms into the mark is also a way to promote efficiency. |
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Term
| Which laws and agencies authorize and enforce these policies? (2) |
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Definition
| - The agencies in The U.S. that control these policies are FTC (Federal Trade Commission) and Antitrust Division of the Justice Department. The laws that they enforce are Sherman Act 1890, Clayton Act, FTC Act, Robinson-Patman Act and Cellar-Kefauver Act. Wheeler / Lee Act |
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Term
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Definition
| - A cartel is a group of firms working together to create a similarity of a monopoly. |
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Term
| What problems must be solved by a cartel to be formed and to operate successfully? (2) |
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Definition
| Prediction of Demand, Find out MC. Then decide where you are going to produce, the quota and then decide nobody deviates. |
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Term
| Why is it difficult to sustain a cartel? (2) |
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Definition
- The biggest problem about a cartel is to maintain it.
The main reason is that the incentive to cheat is high, to produce more than they’re given limit which is set by the cartel. When interest rates are high, the incentives to cheat is high. |
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Term
Question 13)
Explain what determines the Demand for Labor (3). |
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Definition
| - A firms demand for labor is determined by the firm’s output. If the demand for the firm’s output increases, the firm will demand more labor. And vice versa if the firms output decreases. Once we know the firm’s output we can find MRP (Marginal Revenue Product) = Market Wage Rate to maximize profit. |
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Term
| What factors determine the Supply for Labor in the market? (3). |
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Definition
| Monetary and Non-monetary aspects determine the supply of labor. These includes Wages, Substitute occupations, Barriers of Entry |
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Term
| Explain how an increase in the wages offered by employers influences the supply of labor (2) |
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Definition
- The Graph Wages(Y),WorkHours(X) which is derived into three perpendicular lines:
- If f(x) < y1 Substitution Effect less leisure, more work
- If y1 < x < y2 perfect wage
- If f(x) > y2 Then it’s the income effect which leads to more leisure
The price of leisure is ones opportunity cost. |
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Term
| Use an example of labor choice from you own experience to demonstrate the income and substitution effect of higher wages (2). |
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Definition
| One example would be when I was working in the retail business as a salesperson, I could clearly distinguish when leisure became more important than the wage. My manager offered me to work overtime a lot, and I did up to a specific point, where I valued my leisure more than my salary. However in contrast to this, not considering overtime I was working on commission which it self was an incentive to work more but as income-taxes in Sweden raises more or less exponentially depending on your salary, my incentives for leisure became higher when I reached a specific point. |
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Term
| Contrast physical capital and financial capital (1) |
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Definition
- Physical Captial is physical objects within a firm’s inventory, which is used for production. Tangible assets, which can be used for future production.
- Financial Capital is resources(money,stocks,bonds) that is needed to purchase those physical objects |
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Term
| What are the four critical attributes of financial securities? (1) |
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Definition
| - 1 Yield , 2Risk, 3Tax-treatment, If tax-treatment is yieldable your tax-treatment is higher. 4Liquidity, liquidity is important for future usage of able to |
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Term
| Explain the relationship between the rental rate of physical capital and the demand price of physical capital. (2) |
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Definition
| As interest rates go up asset prices go down. ValueXYield=Income. If interest rates go up, your yield will go down. Rental(Income)/Yield=Value. You will prefer the resources today rather than in the future. |
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Term
| What determines the production of new capital? |
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Definition
| Existing Capital, Price will determine the expected cash flow. The rental rate will determine how much cashflow you will get in the future |
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Term
| What determines the development of Natural Resources (3) |
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Definition
| - How scare the resources are determines the development of natural resources. Marginal Revenue Product = Demand Curve for the natural resource. |
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