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Behavior and Choice: EC 102

Andrew Monaco

Exercises 4.3 Practice Problems

Subsection 4.3.1 Market structures

  1. How could one consider the difference between identical products and differentiated products? Use real-world examples to explain the distinction.
  2. How can we distinguish between markets with few sellers and markets with many sellers? What do “few” versus “many” mean?
  3. Give three examples of real-world markets with barriers to entry. What type of barrier to entry exists in each example?
  4. Give an example of a real-world market best modeled by a monopoly. Why does this make sense?
  5. Give an example of a real-world market best modeled by an oligopoly. Why does this make sense?
  6. Give an example of a real-world market best modeled by monopolistic competition. Why does this make sense?
  7. Give an example of a real-world market best modeled by perfect competition. Why does this make sense?
  8. Give an example of a real-world market that cannot be modeled well by any of the four market structures mentioned above (monopoly, oligopoly, monopolistic competition, perfect competition). Why does this make sense?
  9. In this section, we introduce the concept of residual demand.
    1. Define the concept of residual demand in words.
    2. How does a residual demand equation inform the price a firm charges?
    3. What is the relationship between residual demand and total revenue?

Subsection 4.3.2 Market power

  1. How does MP1 define market power for a seller? How does it define market power for a buyer?
  2. Give an example of a situation where a seller has market power. From where does the seller derive this market power?
  3. Give an example of a situation where a buyer has market power. From where does the buyer derive this market power?
  4. How does the term residual demand re-frame the concept of demand from sellers’ perspective?
  5. How does MP2 define market power?
  6. Draw a residual demand curve for a firm with no market power. Underneath the demand curve, shade in two total revenue areas, and describe how the lack of market power influences a firm’s incentive to increase its output.
  7. Draw a residual demand curve for a firm with market power. Underneath the demand curve, shade in two total revenue areas, and describe how the presence of market power influences a firm’s incentive to increase its output.
  8. The presence of market power has a direct impact on firm’s total revenue.
    1. Give the equation which defines total revenue.
    2. How does the equation of total revenue look when a firm does not have market power? Does this equation incentivize the firm to produce higher quantities of output?
    3. Graph total revenue for a firm with no market power.
    4. How does the equation of total revenue look when a firm does have market power? Does this equation incentivize the firm to produce higher quantities of output?
    5. Graph total revenue for a firm with market power.
  9. How does an increase in price change the total revenue function for a firm with no market power? Explain in words and illustrate on a graph.
  10. Importantly, the presence of market power also has an important impact on firm’s marginal revenue.
    1. Define a firm’s marginal revenue with an equation and in words.
    2. When a firm does not have market power, is marginal revenue constant?
    3. Graph marginal revenue for a firm with no market power.
    4. When a firm does have market power, is marginal revenue constant?
    5. Graph marginal revenue for a firm with market power.
  11. Consider the table below, which shows the total revenue for a firm producing output \(q\text{.}\) The price for each unit of output is \(P = 20\text{.}\)
    output (\(q\)) \(TR\) \(MR\)
    0 -
    10
    20
    30
    40
    50
    1. Calculate the total revenue (\(TR\)) column.
    2. Graph the total revenue curve. What is the slope of the curve?
    3. Calculate the marginal revenue (\(MR\)) column.
    4. Graph the marginal revenue curve on a separate graph.
    5. Based on this data, does this firm have market power? Explain.
  12. Consider the table below, which shows the total revenue for a firm producing output \(q\text{.}\) The price for each unit of output is determined by the residual demand curve \(P = 100 - 2Q\text{.}\)
    output (\(q\)) \(TR\) \(MR\)
    0 -
    10
    20
    30
    40
    50
    1. Calculate the total revenue (\(TR\)) column.
    2. Graph the total revenue curve. What can you say about the slope of the curve?
    3. Calculate the marginal revenue (\(MR\)) column.
    4. Graph the marginal revenue curve on a separate graph.
    5. Based on this data, does this firm have market power? Explain.
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