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100
Illustrate a firm and a perfectly competitive market (2 graphs) where the firm is earning negative economic profit and still willing to produce in the short run. Illustrate and explain the adjustment to the LR equilibrium
Since firms are negative positive economic profits and are still willing to produce, the initial price is able AVC and less than ATC. Overtime, the firms want to exit and there are no barriers. As they exit, the supply curve decreases, increasing market price and firm profits until economic profit equals zero (LR equilibrium)
100
Provide an illustration where you compare the consumer, producer, and total surplus in perfect competition, a single price monopolist, and a first degree PD monopolist. Explain how we used this info to explain why price discrimination in general is legal
In this example, we see that the 1st degree PD monopoly's result delivers a greater TS than the single price monopoly result. This provided us with a general statement that price discrimination can increase total surplus when compared to a single product.
100
Explain how a firm selects the profit maximizing level of advertising. Explain whether advertising is good ro bad for society
Chooses profit maximizing level of advertising up to the point where the marginal benefit of advertising equals the marginal cost of advertising MB=MC

Good- encourages competition (lower price, higher quantity, higher TS), provides more info for consumers (less mistakes in purchases)

Bad- creates barriers to entry (increase price, decrease quantity, lower TS), could mislead consumers (creates mistakes in purchases)

100
Illustrate a monopolistically competitive firm in the LR equilibrium. Explain the two issues that we discussed regarding this LR equilibrium
Issues:

1. firm is not producing at the minimum average total cost (excess capacity)

2. the outcome doesn't maximize net benefit for society because the price exceeds the marginal cost of production (price markup) 

100
Ways to differentiate a product
physical characteristic

service

location

image

200
Explain the difference between a monopoly market and monopoly (or market) power.
a monopoly is a single firm with extremely high barriers to entry and a unique product. 

Monopoly power is the ability of a firm to charge increase its price without losing all of its customers. This allows firms the ability to charge a price above costs

200
Provide real world examples of all the degrees of price discrimination
1st-car, tuition (charged exact willingness to pay)

2nd-beer (single, six pack, case, keg) (pay different prices based on quantity)

3rd- coupons, student discount, senior citizen discount, movie tickets, airline tickets etc (different prices for different groups)

200
Provide the main barriers to entry that can lead to a monopoly market (explain how each creates a monopoly)
1. complete control of a necessary resource- other firms cannot enter because they cannot access a resource that is necessary for production

2. government created- against the law to enter (such as patent or contract)

3. natural monopoly- costs and demands are such that only one firm can operate with economic profits greater than or equal to zero. Other firms do not enter because of expected negative profits. 

200
Why is PD legal
it has the potential to increase total surplus and it appeals to out cultural ideas of fairness 
200
Goal for firm with advertising
1. attract more customers

2. charger a greater price due to greater willingness to may 

(choose amount of advertising where MC=MB)

300
Illustrate a typical monopolist earning negative economic profit. Explain the transition to a long run equilibrium.
Assuming nothing changes, overtime this firm will want to exit the market and does so the market is eliminated. Just because there is a single firm in a market does not guarantee positive economic profit.
300
Provide illustration of monopolistically competitive firm earning positive economic profit. Explain the transition to a LR equilibrium (don't illustrate transition)
If the firm is earning positive economic profits, other firms want to enter (and can because there are no barriers to entry). As they enter, FSD decreases, which decreases the price this firm can charge and its profits. Entry continues until profits get driven to zero
300
Explain the shape of the marginal revenue for a typical monopolist and why it is different than a perfectly competitive firm
the typical monopolist's demand is the market demand if it wants to sell more of its good, it must lower its price. In this scenario, the marginal revenue is twice as steep (falls twice as fast) as the demand. This is different than PC because a firm in PC was a price taker or had a horizontal FSD which implied a horizontal marginal revenue
300
Explain 2 inefficiencies in monopolistically competitive market. 
Excess capacity- average total cost of production is greater than the minimum

Price markup- the marginal benefit exceeds the marginal cost which means net benefit is not maximized

400
Given that monopolists are bad for society, list and explain methods that the government can apply to improve the monopoly outcome, assuming it is addressing a typical monopolist. Explain how this changes when addressing a natural monopolist.
For each case, governments objective is to increase well being of society

Typical- gov can price regulate (force firms to charge P=MC=D, firm is willing bc profits are >=0); decrease trade barriers (entry occurs, decreasing price an increasing quantity); enforce antitrust laws (objective to make more competitive, increasing TS); or operate the firm itself (optimization problem is maximizing the TS rather than profit)

Natural-gov regulate price (P=ATC=D bc marginal cost pricing results in neg economic profits); could operate firm itself (different objective) CANNOT reduce trade barriers or enforce antitrust laws because each of those depends on having more than one firm in the marker and in natural monopolies, cost and demand are such that only one firm can earn profits greater or equal to zero

400
*Explain 2 problems with LR outcome in monopolistic competition. Provide 2 solutions to these problems (and how they address the problems) and whether the gov should implement these solutions
2 Problems: 1. the outcome has firms producing at an average total cost that is greater than average total cost (excess capacity-if the firms increased production, average total cost would decrease). 2. the marginal benefit of consumption is greater than the marginal cost of production or the outcome fails to maximize net benefit for society.

Solutions:

1. standardize the product- creates perfectly competitive market, firm-specific demand curves are now horizontal and the LR equilibrium is found where P=MC=ATC. 

2. Limit entry and price regulate- limit entry so that firms demand passes through the point where MC=ATC, then price regulate at P=MC=ATC=D. 

These solutions create more costs than benefits; 1st eliminates choices to consumers and 2nd eliminates some choices that would be costly to implement

400
Does a monopolist always earn positive economic profit
No necessarily because even though you are the only firm in the market doesn't mean that your price is greater than or equal to your average total cost of production. A monopolist just like a PC firm can earn neg economic profit 
400
Illustrate a natural monopolist earning positive economic profit. Explain the transition to a long run equilibrium
Since the firm is earning positive economic profit, other firms would normally want to enter. However, as long as they think their profits will be negative, no entry will occur and this will be the LR equilibrium.
500
Explain the necessary characteristics of price discrimination. Explain why we do not see real world examples of first degree PD
market power-in the absence of MP, firms are price takers and cannot change different prices to different consumers

Different consumers and a way to separate them- in order to charge different prices to different consumers, there must be consumers with different willingness to pay and a way to separate them

Prevent resale- if you cannot prevent resale, then a low demand group will buy the product and sell it to a higher demand group, taking some of the profits you hoped you gained

Profit from price discrimination>profits from charging a single price- we assume that firms are profit maximizers, they would choose the profit maximizing strategy (whether same or different prices)


In 1st degree each consumer is charges his/her willingness to pay. Since WTP is unknown and each consumer has an incentive to misrepresent WTP, we fail to see any examples that fit the category perfectly

500
Explain why a FSD in PC is horizontal and in monopolistic competition downward sloping
In PC, there were lots of firms and the product was the same. In this case, if a firm attempts to charge a price higher than the market price, it loses all of its customers (bc price takers). This creates horizontal FSD

In monopolistic competition, the product is differentiated and a firm can raise its price and not lose all of its customers. Thus there will be a decrease in quantity demanded (law of demand), but the quantity demanded will not go directly to zero. Since price increases and the FSD decreases, the slope is negative 

500
Illustrate a monopolistically competitive firm that is in a SR equilibrium that is not a LR equilibrium (label Profit). Explain (not illustrate) the transition to a LR equilibrium
I am assuming positive economic profit in the SR. Since profits are greater than zero, other firms want to enter. Since there are no barriers to entry, firms can enter and do so. As they enter, this firm's FSD decreases, causing the price and profit to decrease until profits equal zero.
500
What is the problem of a typical monopolist
monopoly outcomes result in a lower TS than competitive market outcome, creating a DWL