Microeconomics: Market Structures Flashcards

Price leadership in an oligopoly most closely resembles which other market outcome?

Answer: Monopoly, where output is restricted and price is elevated

When followers match the leader's price, the industry behaves like a monopoly, restricting output and raising price above the competitive level.

Which scenario best illustrates a barrier to entry that sustains monopoly power?

Answer: A pharmaceutical company holds a 20-year patent on a life-saving drug

A patent grants legal exclusion of competitors for its duration, giving the firm monopoly power over the patented product.

In a perfectly contestable market, even a single firm will price at:

Answer: Average total cost, earning zero economic profit

The threat of costless hit-and-run entry disciplines a firm in a contestable market to price at ATC and earn zero economic profit.

Which best explains why collusive agreements among oligopolists tend to be unstable?

Answer: Each firm has an individual incentive to cheat by cutting price or expanding output

Each cartel member can increase its own profits by secretly undercutting the agreed price, creating a persistent temptation to defect.

The markup (P − MC) as a share of price (the Lerner Index) is larger when:

Answer: Demand is less price elastic

The Lerner Index equals −1/Ed; when demand is less elastic, consumers are less responsive to price increases, allowing a larger markup.

Which statement about monopolistic competition in the SHORT run is correct?

Answer: Firms may earn positive, negative, or zero economic profit

In the short run, a monopolistically competitive firm can earn positive, negative, or zero economic profit depending on demand and cost conditions.

Allocative efficiency requires that resources be allocated so that:

Answer: Price equals marginal cost for every good produced

Allocative efficiency occurs when P = MC, meaning the value consumers place on the last unit equals the cost of producing it.