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Economics 202 ch 23

Principles of Economics Ch 23

QuestionAnswer
Monopolistic Competition Many sellers of similar products.
Product Different The process of distinguishing a firm's product from similar products.
Product differentiation benefits a monopolistic competitor in two ways: Product differentiation increases the firm's market power and product differentiation increases the demand for the firm's product.
Since a monopolistic competitor sells a product that is differentiated from its competitors, it will face: A downward sloping curve; the degree of slope will depend largely on product differentiation.
Since a monopolistic competitor faces a downward sloping demand curve: Its marginal revenue curve will not be the same as its demand curve.
All business firms are assumed to pursue the same chief goal: Profit-maximization
A monopolistic competitor will maximize profits by: Producing the quantity of output where marginal revenue equals marginal cost.
Monopolistic competition is economically inefficient because: It results in a quantity of output where price exceeds marginal cost, and thus where marginal social benefit exceeds marginal social cost.
Monopolistic competition is not as inefficient as monopoly because: Monopolistic competition results in a smaller deadweight loss than monopoly.
Deadweight Loss The area between the demand curve and the marginal cost curve for the amount of underproduction.
If the market price is high enough that firms earn economic profit: New firms will be attracted to the market.
As new firms enter the market: Market supply increases and market price decreases. Eventually, the price will reach the point of zero economic profit for most firms.
Oligopoly An industry dominated by a few mutually interdependent firms.
In an oligopolistic industry: Each firm's production decision affects market price, and the other firms in the industry.
What are the three different theories of oligopoly behavior? Kinked demand curve theory, Unkinked demand curve theory, and Cartel theory.
Kinked Demand Curve Theory Assumes that if one of the oligopoly firms lowers its price, the other firms will match the price reduction, but if one of the oligopoly firms raises its price, the others firms will not match the price increase.
The different response of competitors to an increase in price versus a decrease in price for the Kinked Demand Curve Theory will cause: An oligopoly to face a demand curve that is kinked at its current prices and quantity.
Unkinked Demand Curve Theory The assumption that there is no kink in the demand curve, no gap in the marginal revenue cure, and no sticky prices for oligopolists. This is based on the disagreement that oligopolists match price decreases but do not match price increases.
Cartel An organization through which members jointly make decisions about prices and production.
Cartel Theory Competing firms can benefit from forming an organization that sets output for the industry. This will cause a reduction in output, increase in price, and increase in profits.
In America most cartel agreements would be: Illegal as a violation of antitrust law.
A cartel would prove to be difficult to maintain because: Noncartel competition and the tendency of cartel members to cheat on the agreement.
Game Theory A method for analyzing strategic behavior.
Dominant Strategy A strategy that always yields that best result regardless of the strategies of the other players.
Nash Equilibrium The outcome when each game player has chosen their best strategy, assuming that all other players have also chosen their best strategies.
Created by: dengler
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