Microeconomics: Market Structures Flashcards
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A monopolist practicing perfect (first-degree) price discrimination will produce a quantity where:
Answer: Price equals marginal cost for every unit sold
With perfect price discrimination, the firm charges each consumer their maximum willingness to pay, eliminating consumer surplus and producing where P = MC.
Which market structure generates the largest deadweight loss relative to the competitive outcome?
Answer: Oligopoly with collusion acting as a monopoly
A colluding oligopoly that acts as a joint monopoly restricts output to the monopoly level, producing the greatest deadweight loss.
In a Cournot duopoly, each firm chooses its output assuming:
Answer: The rival's output remains fixed
The Cournot model assumes each firm treats the rival's quantity as fixed when choosing its own profit-maximizing output.
Excess capacity in monopolistic competition refers to the fact that in long-run equilibrium:
Answer: Firms produce below the output level that minimizes average total cost
Monopolistically competitive firms operate on the downward-sloping portion of their ATC curves, producing less than the minimum-cost output.
Which best describes the Bertrand model of oligopoly?
Answer: Firms compete by setting prices, leading to P = MC in equilibrium
In the Bertrand model, price competition between firms with identical products drives price down to marginal cost, replicating the competitive outcome.
A monopoly's marginal revenue curve lies below its demand curve because:
Answer: To sell additional units, the firm must lower price on all units sold
Since the monopolist must reduce price to sell more and cannot price discriminate, MR from additional units is less than the new price.
Which outcome is most likely when oligopolists face a prisoner's dilemma situation?
Answer: Both firms defect, resulting in lower profits than if they had cooperated
In a prisoner's dilemma, the dominant strategy for each firm is to defect (cut price or increase output), resulting in a Nash equilibrium with lower profits for both.