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Unit IV: Imperfect Competition

Unit IV: Imperfect Competition. Problem Set #4 Points Distribution. 1a. Barriers to Entry -Skip (Gax will grade). 1b. MR=MC Rule 1 Point- Profit-maximizing point, true for all market structures 1 Point- Explanation of why MR=MC is the rule (any point beyond the firm is losing money)

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Unit IV: Imperfect Competition

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  1. Unit IV: Imperfect Competition Problem Set #4 Points Distribution

  2. 1a. Barriers to Entry -Skip (Gax will grade)

  3. 1b. MR=MC Rule • 1 Point- Profit-maximizing point, true for all market structures • 1 Point- Explanation of why MR=MC is the rule (any point beyond the firm is losing money) • 1 Point- Clear example of MR=MC Rule using numbers

  4. 1c. Price Discrimination • 1 Point- Definition (charging customers different prices for the same product) • 1 Point- Qualifications (monopoly power, no resell, segregate the market) • 1 Point- Clear example

  5. 1d. Socially Optimal Price • 1 Point- P=MC • 1 Point-Allocatively Efficient • 1 Point- Clear example using numbers/graph.

  6. 1e. Fair Return Price • 1 Point- P=ATC • 1 point- Zero economic profit/normal profit/TR=TC • 1 Point- Clear example of FRP using numbers or a graph.

  7. Problem Set Question #3: Worksheets

  8. ½ Point for EACH A Quick Review of PC and Monopoly

  9. 1 point-each question (All must be correct) • 1. Unregulated • 1500 • $4 • $6000 • $4500 • $1500 Profit • 2. Socially Optimal (Approx. Ok) • 3,000 • $1.50 • $4,500 • $7500 • $3000 Loss • Yes • $3000 (amount of the loss) Regulating a Monopoly

  10. 1 point-each question (All must be correct) • 3. Fair Return • 2500 • $2.50 • $6250 • $6250 • Zero Economic Profit • 4. If not answered, (-1) • 5. If not answered, (-1) Regulating a Monopoly

  11. Price Quantity Demanded Total Revenue Marginal Revenue $11.00 0  0  - 10 1  10  10 9 2  18  8 8 3  24  6 7 4  28  4 6 5  30 2  5 6  30 0 4 7  28  -2 3 8  24  -4 2 9  18  -6 Question 4

  12. 4. Demand, MR, and TR for Monopolies a. Why the MR curve less than the demand curve for all imperfectly competitive firms. • 3 Points- To sell more the firm must lower price It lowers price for ALL units. (It can’t charge people different prices) • 2 Point- SPECIFIC numerical example that proves that the MR is less than the price.

  13. b. Plotting MR and TR Curves • 1 Point- correctly plotted demand and marginal revenue curves with D above MR • 1 Point- correctly plotted TR with TR rising then falling • 1 Point- Identifies that elastic range is to the left where MR is positive and inelastic is on the right. • 1 Point- Total Revenue test says that when price falls and TR increases, demand is elastic • 1 Point- Total Revenue test says that when price falls and TR decreases, demand is inelastic

  14. Elastic Inelastic Labeled elastic and inelastic ranges. Dollars MR D Q Dollars TR Q

  15. 5. Compare AND contrast monopolistic competition and perfect competition • 2 Point (similarities)- perfect comp and mono comp have the following in common: • Many Firms • Easy Entry/Exit • Zero economic profit in LR • 3 Points (differences)-perfect comp and mono comp have the following differences: • MC: controls price; PC: price takers • MC: D>MR; PC: D=MR • MC: advertising used; PC: no advertising • MC: Not All./Prod. Eff. In LR; PC: Both

  16. Explain Oligopolies • 2 Point- Identify the characteristics of an Oligopoly (few firms, large control over price, identical/differentiated products, high barriers to entry) • 2 point- Explanation of game theory, ability to collude and incentive to cheat • 1 Point- They explain that the kinked demand curve shows that non-colluding oligopolies match price cuts and ignore price increases.

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