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Chapter 9 Imperfect Competition and Government Intervention

Chapter 9 Imperfect Competition and Government Intervention. Welcome to the Economics of Organisations & Strategy Tutorial.

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Chapter 9 Imperfect Competition and Government Intervention

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  1. The Economics of Organisations and Strategy

  2. Chapter 9 Imperfect Competition and Government Intervention The Economics of Organisations and Strategy

  3. Welcome to the Economics ofOrganisations & StrategyTutorial The purpose of this tool is to allow you to test your understanding of basic microeconomic concepts and also to help you build confidence. These notes are by no means exhaustive, and it is recommended that you refer to the chapter for a fuller understanding of the issues. To use the tutorial, read the question(s), and decide upon the most appropriate answer, by clicking on the A, B, C or D button. Questions can be skipped by clicking on the appropriate button at the bottom or tabs at the top of the screen. You can always end the session by clicking on the ‘End’ button. The Economics of Organisations and Strategy End

  4. Chapter 9 - Question 1 A pure monopoly is defined as: A A single seller of a consumer product; A single seller of a product for which there are few substitutes; B C A single seller of a product for which there are no close substitutes; C D A single seller of a product with inelastic demand. The Economics of Organisations and Strategy End

  5. Price X Q Demand MR Chapter 9 - Question 2 This is the market demand curve facing a monopolist. At point X the price elasticity of demand is: A A B = 0 = -1 C D > -1 < -1 The Economics of Organisations and Strategy End

  6. MC A B SRAC C D Q0 Q Chapter 9 - Question 3 The point of profit maximisation for a firm operating under pure monopoly is: A A B C or D The Economics of Organisations and Strategy End

  7. Chapter 9 - Question 4 The Lerner index is equal to: A The price elasticity of demand; B The price elasticity of supply; D The sum of the elasticities of demand and supply; C The reciprocal of the price elasticity of demand. D The Economics of Organisations and Strategy End

  8. E A P B C D D Q0 Q MR Chapter 9 - Question 5 The deadweight welfare loss associated with the exercise of monopoly power is given by the area: PABD; A C PACD; B ABC; C D PECD. The Economics of Organisations and Strategy End

  9. Chapter 9 - Question 6 What is the defining characteristic of an oligopolistic industry: A There are five or less firms; C Firms always earn profits equivalent to those of a monopolist; B There are so few firms that each is influenced by the price or quantity decisions of its rivals; C D Each firm faces a kinked demand curve. The Economics of Organisations and Strategy End

  10. Price Demand Quantity Chapter 9 - Question 7 The kinked demand curve represents the belief that if any oligopolist changes its price: Rivals will do the opposite; A B Rivals will follow if prices are reduced and abstain if they are raised; B Rivals will always maintain market share C Rivals will follow if prices are raised and abstain if they are reduced. D The Economics of Organisations and Strategy End

  11. Chapter 9 - Question 8 In oligopolistic markets a Cournot equilibrium is also a Nash equilibrium. That is: Individuals firms are doing the best they can regardless of their rivals; A Individual firms are doing the best they can given that their rivals are also doing the best they can; B B Individual firms choose a level of output that is invariant to their rivals; C Individual firms do not attempt to maximise profits. D The Economics of Organisations and Strategy End

  12. QB A’s reaction function Y Z QA X Chapter 9 - Question 9 Given the reaction function for firms A and B which of the following is true: Point X represents the quantity A will supply if B supplies Z; A Point Z represents the quantity B wishes to supply when A produces Y; D B Point X represents the quantity A wishes to supply when B supplies Y; C Point Y represents the quantity B wishes to supply when A supplies X. D The Economics of Organisations and Strategy End

  13. Chapter 9 - Question 10 If an oligpolistic market has five equal sized firms and each faces a price elasticity of demand of 2, what is their optimal profit maximising mark-up on marginal cost – hint this is the Lerner Index adjusted for oligopolists. A 0 per cent; C 15 per cent; B 10 per cent; C D 5 per cent. The Economics of Organisations and Strategy End

  14. Chapter 9 - Answer 1 Correct answer: By definition a monopolist is the sole seller of a good or service. However, the good or service in question must have no close substitute. Hence, there may be only one seller of Heinz baked beans, but Heinz is not a monopolist as there are other brands of baked beans to choose from. We are concerned with the exercise of monopoly power and this requires that when the monopolist raises the price of its product, people are forced to buy at the higher price. The Economics of Organisations and Strategy Return End

  15. Chapter 9 - Answer 2 Correct answer: For a straight line demand curve we know that the marginal revenue curve divides the area under the demand curve exactly half way down a straight line demand curve the price elasticity of demand equals unity. Strictly as the relationship between price and quantity is negative the elasticity coefficient is negative. The Economics of Organisations and Strategy Return End

  16. Chapter 9 - Answer 3 Correct answer: Profits are maximised – whether the firm is perfectly competitive or a monopolist – at the level of output that equates marginal revenue and marginal cost. In the figure the level of output where this occurs generates the price represented by point A. Point B is the price associated with the lowest unit production costs; point C is where the price paid equals the marginal cost; and point D is the breakeven level of output. The Economics of Organisations and Strategy Return End

  17. Chapter 9 - Answer 4 Correct answer: The Lerner Index measures the proportion by which a firm’s price exceeds its marginal cost. Under perfect competition the individual firm’s price elasticity of demand approaches zero ie, in a perfectly competitive market price equals marginal cost. A monopolist will face a price elasticity of demand that is greater than unity, but probably less than ten. Say it is equal to 2, its reciprocal is 0.5 suggesting the optimal mark-up for this monopolist would be 50 per cent. The Economics of Organisations and Strategy Return End

  18. Chapter 9 - Answer 5 Correct answer: The deadweight welfare loss measures the loss of utility to consumers who would have consumed the product at a lower price. Under perfect competition the price would equal marginal cost. The exercise of monopoly power ie, setting marginal revenue equal to marginal cost, pushes the price up to P. Hence, the area ABC measures the loss to those consumers who have left the market. The Economics of Organisations and Strategy Return End

  19. Chapter 9 - Answer 6 Correct answer: The most important characteristic of an oligopolistic market is interdependence. That is, each firm has a significant market share and the actions of its rivals will either diminish or increase its market share and/or diminish its market price. It might be tempting to say this is what the kinked demand curve attempts to represent but this is merely one, of several competing theories of oligopolistic behaviour. The Economics of Organisations and Strategy Return End

  20. Chapter 9 - Answer 7 Correct answer: The idea is that oligopolists will seek to prevent a loss of market share. If a rival reduces its price then unless the oligopolist follows it will lose market share to its price reducing rival. The effect therefore of a price cut for an oligopolistic is a relatively small gain in sales. However, if it raises its price its rivals will not follow and consequently the rivals will take market share resulting in a flatter demand curve for a price rise. The Economics of Organisations and Strategy Return End

  21. Chapter 9 - Answer 8 Correct answer: The assumption is that individual firms attempt to maximise profits. These would be highest if the firm was a monopolist. Faced with rivals the collective output on the market is higher than it would be under a monopolist hence, prices are lower and each firm takes a lower profit. The Economics of Organisations and Strategy Return End

  22. Chapter 9 - Answer 9 Correct answer: We start at point X which is the quantity A would supply if it was a monopolist. B observing output X chooses to supply output Y – which is read on the vertical axis. However, A now observing that B is supply quantity Y – and consequently suffering a price fall – chooses to reduce supply to Z. The Economics of Organisations and Strategy Return End

  23. Chapter 9 - Answer 10 Correct answer: The Lerner Index for such a market is: P - c = 1 p Ni where c is marginal cost and N the number of firms. If i = 2 and N = 5 then 1/10 = 10 per cent. The Economics of Organisations and Strategy Return End

  24. INCORRECT ANSWER Here you have several choices, you can either return to the question that you were asked, or, you may move on to the next question. If you wish to return to the question you were working on, then simply click on the RETURN button on the bottom right of the screen. You can END the session too. The Economics of Organisations and Strategy Return End

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