Download Models of Competition Review

Models of Competition Review
I
J
Lines are noted with arrows.
Please use letters to define areas:
K
H
S
1. Long-run competitive supply A
2. Monopolist marginal revenue K
3. Total welfare (producer + consumer) in
a competitive market in the short run.
I,F,L
4. Producer surplus in the long-run
competitive market. None!
M
G
L
Q
A
R
F
B
K
E
D
Z
C
S
5. Consumer surplus in a single price monopoly.
I,H,K
6. Producer surplus in a single price monopoly.
H,K,R,F
7. Dead-weight loss due to monopoly power
K,R,L
8. What is the monopolist profit maximizing mark-up (Learner Index)
K-R
9. Which would consumers prefer – a tax equal to (H-G) or a single-price monopoly?
Consumers are indifferent in the long-run; better with tax in the short run.
The market consists of the following firms:
5 firms with TC = 500 + 2.5Q2 + 20Q;
MC = 5Q + 20
1 firm with TC = 1,000 + 5Q2 + 100Q; MC = 10Q + 100
1 firm with TC = 5,000 + 0.5Q2 + 600Q; MC = Q + 600
What is the market supply?
P = 300 + (10/21)Q
If the demand is P = 2400 – 11/21Q
What is the perfectly competitive equilibrium price and quantity?
Q = 2100, P = $1,300
5 firms with Q = 256
1 firm with Q = 120
How much will each firm make?
1 firm with Q = 700
Which firm(s) can cut their price to what $ to put the others out of
business?
2.5(256) + 20 = $660
5(120) + 100 = $700
0.5(700) + 600 = $950
The five firms with AVC $660 can cut to $699
Demand: P = 200 -4Q
MC = 4Q1
MC = 6Q2
If there are two (2) firms in the market with
different cost structures (Cournot Oligopoly):
How would you express the marginal
revenue for firm #1?
P  200  4(Q1  Q2 )
MR  200  8Q1  4Q2
What is Firm #1’s response function? (How much would they make
depending on how much Firm #2 makes?)
200  8Q1  4Q2  4Q1
200  4Q1  8Q2  6Q2
200  4Q2  12Q1
200  4Q1  14Q1
Q1 
200  4 Q2
12
Q2 
200  4 Q1
14
How much will each firm make?
 200  4Q1 
200  4 

14

  10.87
Q1 
12
Q2 
200  4 10.87 
 11.18
14
P  200  4(22)
What will be the equilibrium price P  112
For a perfectly competitive market:
Industry supply & demand
What is the producer surplus? ½ x 25 x 500 = 5,250
What is the consumer surplus?
½ x 50 x 500 = 12,750
Draw a graph and explain in words what
would happen in this market in the long-run
Producer surplus attracts supply, increasing Q decreasing
P, forcing some firms to shut down until all firms
produce identically at long run min AVC
For a single-price monopoly:
What would be the monopolist’s marginal revenue function?
P = 100 – Q/10; MR = 100 - Q/5
What would be the monopolist’s optimal price and quantity at a marginal cost of $50?
Q = 250 P = 75
What would be the monopolist’s producer surplus at the optimal P & Q?
25 x 250 = 6,250
What would be the consumers’ surplus at the optimal P & Q?
½ x 25 x 250 = 3,125
Demand: P = 200 -4Q
TC = 10 +2Q2
MC = 4Q
What is the optimal price and quantity in a perfectly
competitive market?
Q = 25, P = $100
What is the producer surplus in a perfectly competitive market?
$1,250
What will happen to price and quantity in the long run (just direction, not actual numbers.)
New competitors will enter increasing Q and decreasing P.
What is the optimal price and quantity in a monopoly market? (round to nearest whole Q)
Q = 17, P = $132
What is the producer surplus for the monopolist?
$1,666
What is the consumer surplus with the monopolist’s market power?
½ (200 – 132)(17) = $578
What is the dead-weight loss associated with the monopolist’s market power?
½ (64 x 8) = $256
What will happen to the monopoly market in the long run?
Nothing if there are barriers to entry and the monopolist is producing at min AVC
Please answer the following with math notation
What is the short-run profit maximizing condition?
MR = MC
What is the long-run profit maximizing condition?
MR = MC = AVC
What is the equilibrium price in the long run? P = MR = MC = LAC=ATC
Can a firm have an economic loss but stay in business in the short run?
Yes
Can a firm have an economic loss but stay in business in the long run?
No
Is producer surplus the same as economic profit?
No
What is the shut-down condition?
P < minAVC
A
B
Which panel shows perfect competition and which monopoly competition?
What is one difference and one similarity between perfect and monopoly
competition?
Are these short or long term graphs? How do you know?
Answers in notes section below
Good Luck!!