Chapter 11: Oligopolies
Which market is closest to an oligopoly?
A) Farmers selling rice
B) Baton Rouge gas stations owned by a few chains
C) Yard sale sellers
D) Baton rouge water company
B)
Which is most common in monopolistic competition?
A) Identical products
B) Product differentiation
C) One seller
D) Government price floor
A tax charged for each ton of pollution emitted is called:
A) Emission charge
B) Price ceiling
C) Green tax
D) Command and control policy
A
A drought that hurts Louisiana rice production is an example of:
A) Response lag
B) Supply shock
C) Marketing order
D) External cost
B
Supply curve shifts to the left
A negative externality exists when:
A) Buyers gain benefits
B) Third parties bear costs
C) Government gives subsidies
D) Demand rises
B
When one Baton Rouge gas station lowers price and others quickly match it, this shows:
A monopolistically competitive firm maximizes short-run profit where:
MR=MC
Two firms face different costs of reducing pollution. Firm A can clean cheaply; Firm B’s cleanup costs are really high. Under a cap-and-trade system, what will most likely happen?
a. Both firms reduce the same amount of pollution
b. Firm B reduces more because it’s bigger
c. Firm A will reduce more pollution and sell permits to Firm B
d. No one reduces pollution unless the government forces them
C
Why can a bumper crop lower farmer revenue?
A) Demand is perfectly elastic
B) Supply decreases
C) Food demand is inelastic
D) Government bans sales
C
A bumper crop means a very large harvest so supply increases. this decreases price because demand for food is inelastic (people do not buy much more food when price falls)
If many new coffee shops open near LSU, existing coffee shops likely experience:
A) Higher demand
B) Higher supply
C) Lower supply
D) Lower demand
D
Why do gas stations usually keep prices close together instead of one station cutting prices a lot?
If one gas station cuts price, rivals usually match it, so everyone earns lower profit. Typically tho oligopolies will match price cuts but not price increases, so in the end they still end up losing money
Why do firms in monopolistic competition spend money on advertising? Give an example.
to differentiate products ( product differentiation) build loyalty (brand loyalty) and increase demand.
ex) two coffee shops may sell similar lattes. If one runs Instagram ads promoting its seasonal drinks and study atmosphere, students may choose that shop over competitors.
Explain what it means to internalize external costs. Give 2 examples of this.
making the producer or consumer who creates a negative externality pay the full cost of their actions, including costs imposed on others. This moves private costs closer to social costs.
2 examples) Green tax, Emission charge
Why can technological progress create problems for farmers in the long run?
Higher productivity increases supply, lowers prices, and can reduce farm income. Small farmers also cant keep up with the technological advancements so they get pushed out of the market since their ATC is higher
Explain tacit collusion and give an example.
When firms coordinate pricing or output without making a formal agreement. Gas stations in Baton Rouge watch each other’s prices. If one station raises price by 10 cents and nearby stations quickly match it without discussing it then this is an example of tacit collusion.
Why is collusion hard to maintain even if firms want higher profits?
Collusion is hard to maintain because each firm has an incentive to cheat. If firms agree to keep prices high one company can secretly lower price slightly which attracts more customers and increase its own profit while others keep prices high. then once other firms notice, they often cut prices too, and the agreement breaks down.
Explain and draw on a graph where a monopolistically competitive firm produces in long-run equilibrium.
Produces where the demand curve is tangent to the atc curve
Explain why output is too high when firms pollute without paying for damages and draw the graph for a negative externality
private marginal cost < social marginal cost
Market equilibrium output is higher than the optimal output
If fertilizer subsidies increase, explain what happens to MC, output, and price.
MC falls, output rises, and market price tends to fall.
Why does monopolistic competition have excess capacity?
because firms produce less than the output level that minimizes average total cost (ATC) in the long run.
Two Baton Rouge phone companies can charge High or Low prices.
What is the likely outcome and why?
The likely outcome is both companies choose Low prices, so each earns $6 million.
Compare monopolistic competition to perfect competition. To get the question correct create a venn diagram on the board
Both have many firms and easy entry, but monopolistic competition has differentiated products and some price power, while perfect competition has identical products and no price power. (this is what should be on the venn diagram
The government wants a total reduction of 4 tons from two Louisiana plants. Their marginal abatement costs are:
Under a tradable permit system, what allocation minimizes total cost?
B 1st ton = $10
A 1st ton = $20
B 2nd ton = $25
A 2nd ton = $35
Plant A reduces 2 tons
Plant B reduces 2 tons
Total Cost = $90
Explain how a price support creates a surplus. Draw the graph
normal supply, demand graph with a price floor above equilibrium
Compare productive inefficiency in monopolistic competition with overproduction from pollution as discussed in chapter 14
Firms produce below the output that minimizes ATC and this creates excess capacity (unused resources)
Firms produce more than the socially efficient quantity. They ignore external pollution costs.