Microeconomics: Principles & Policy
14th Edition
ISBN: 9781337794992
Author: William J. Baumol, Alan S. Blinder, John L. Solow
Publisher: Cengage Learning
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According to the textbook, which of the following statements is (are) correct?
(x) As new firms enter a monopolistically competitive market, product diversity in the market increases, however, profits of existing firms decrease since demand for the products of those firms decreases as they lose customers to the new entering firms.
(y) The product-variety externality associated with monopolistic competition arises because in markets that are monopolistically competitive markets, firms try to differentiate their products.
(z) When the loss from a business-stealing externality exceeds the gain from a product-variety externality, there are likely to be too many firms in a monopolistically competitive market.
Consider a buyer who, in the upcoming month, will make a decision about whether to purchase a good from a monopoly seller. The seller “advertises” that it offers a high-quality product (and the price that it has set is based on that claim). However, by substituting low-quality components for higher-quality ones, the seller can reduce the quality of the product it sells to the buyer, and in so doing, the seller can lower the variable and fixed costs of making the product. The product quality is not observable to the buyer at the time of purchase, and so the buyer cannot tell, at that point, whether he is getting a high-quality or a low-quality good. Only after he begins to use the product does the buyer learn the quality of the good he has purchased. The payoffs that accrue to the buyer and seller from this encounter are as follows: The buyer’s payoff (consumer surplus) is listed first; the seller’s payoff (profit) is listed second. Answer each of the…
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- If a firm successfully adopts a product-differentiation strategy, the elasticity of demand for its products should a. increase. b. decrease. c. become marginal. d. be unaffected.arrow_forwardSuppose a monopolistically competitive firm is in long-run equilibrium. The firm's demand curve is tangent to its average cost curve at Q = 25. Average cost is minimized at Q = 35, where average cost is $50. Which of the following is true? Group of answer choices This firm maximizes profit at an output level of 35 units. This firm maximizes profit at an output level lower than 25 units. This firm maximizes profit at an output level of 25 units. This firm incurs an economic loss in the long run. This firm maximizes profit at an output level greater than 35 units.arrow_forwardIf a monopolistically competitive firm is earning positive profits in the short-run, then we would expect more competition to enter the industry assuming there are no barrier to entry in the market: True or Falsearrow_forward
- Due to a successful advertising campaign, a monopolistic competitor experiences an increase in demand for its product. In the long run, the positive economic profits that the monopolistic competitor earns will attract a response either from existing firms in the industry or firms outside. As those firms capture the original firm’s profit, what will happen to the original firm’s profit-maximizing price and output levels?arrow_forwardSuppose, Pfizer Company is the only company allowed by the Sultanate government to sell COVID vaccine in Oman. According to you, what type of market Pfizer Company is having in Oman? a. Monopoly market b. Monopolistic market c. Competitive market d. Oligopoly marketarrow_forwardEverything else held constant, when a producer advertises the goal is to Decrease the public’s desire and decrease the demand for their product Decrease the public’s desire and increase the demand for their product Increase the public’s desire and increase the demand for their product Increase the public’s desire and reduce the demand for their productarrow_forward
- Suppose that there are two firms competing in the market for taxi services. Big Ben Taxis has the marginal cost MCB = $9 per trip, and the fixed cost FCB = $3,000,000. While Whitehall Taxis has the marginal cost MCW = $15 per trip, and the fixed cost FCW =$1,000,000. Inverse demand for taxi trips in the market is given by the function, P=75− Q . 10,000 In this equation, P is the price of a taxi trip, and Q is the total quantity of taxi trips supplied by the two taxi companies. Question 1: Find the equilibrium price and quantities for the case in which the two taxi companies engage in Cournot (quantity) competition. What profits will Big Ben Taxis and Whitehall Taxis earn. Question 2: Using your answers to question 1, determine which firm has the greater market power. Question 3: Now suppose that a firm can only supply taxi services if it purchases a licence from the government. What is the highest fee that the government can charge for a license, if the government wants both Big Ben…arrow_forwardSuppose a company creates its own differentiated type of sneaker and is thus considered a monopolistically competitive firm. This firm has a constant marginal cost curve. For each unit of output that the monopolistically competitive firm produces, it costs an additional $50. The firm's marginal revenue curve is MR=200−30Q, where Q is the quantity produced. The firm's perceived demand curve is P=200−15Q. What is the monopolistically competitive firm's profit-maximizing output and price?arrow_forwardA decrease in the number of competitors in a monopolistically competitive market causes an increase in the price elasticity of demand for the output of each of the remaining firms in the market.arrow_forward
- In the long run, a monopolistically competitive firm will charge prices that are ______________ a perfectly competitive firm and will normally produce an amount that is ______________ a perfectly competitive firm. a greater than; equal to b equal to; less than c less than; equal to d greater than; less thanarrow_forwardWhich of the following statements is correct? Group of answer choices The more similar Firm A’s product is to Firm B’s product, the more likely Firm A is to advertise. Monopolistically competitive firms advertise in order to increase the elasticity of the demand curve they face. According to the signaling theory, the more product information an advertisement contains, the more effective it is. Brand names may help consumers if they provide information about the quality of a product when acquiring such information is difficult.arrow_forwardYou are hired as a consultant to a monopolistically competitive firm. The firm reports the following information about its price, marginal cost, and average total cost. Can the firm possibly be maximizing profit? If not, what should it do to increase profit? If the firm is maximizing profit, is the market in a long-run equilibrium? If not, what will happen to restore long-run equilibrium? P < MC, P > ATC P > MC, P < ATC P = MC, P > ATC P > MC, P = ATCarrow_forward
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