ps9 - ECON 1001 Tutorial 9 Q1 Market power measures the...

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ECON 1001 Tutorial 9
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Q1) Market power measures the firm’s ability to A) Under cut its competitors. B) Resist union wage demands. C) Raise its price without losing all of its sales. D) Influence the price its competitors charge. E) Force consumers to pay prices higher than their reservation prices. Ans:C
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This is the way that economists define what market power is. A firm has more market power if it is able to raise the price of its product more and not losing as many customers. Firms in a perfectly competitive market do not have any market power at all. If a firm raises its price in a perfectly competitive market, all its customers will switch to another firm which is selling the same product at the market price.
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A firm which is a monopolist has the most market power. Because it is the only firm selling a certain kind of product, if it raises the price, there will still be some customers staying behind. Of course, that does not mean when a firm has market power, it will not lose any sales at all. When price rises, quantity demanded inevitably drops (law of demand). It just mean the firm will not lose all its customers, unlike in the case of perfect competition.
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Q2) Suppose a firm increases its labour usage and office space (the only inputs used) by 10% and observes a 13% increase in output. The firm has A) Increasing returns to scale. B) Constant returns to scale. C) Violated the law of diminishing marginal returns. D) Increased its average costs. E) Reduced its total costs. Ans:A
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A firm is said to have constant returns to scale when an x % increase in inputs results in an x % rise in output. A firm is said to have decreasing returns to scale when an x % increase in inputs leads to a less than x % rise in output. A firm is said to have increasing returns to scale when an x % increase in inputs causes a more than x % rise in output.
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Q3)Imagine that you are an entrepreneur, making designer T-shirts in your garage. Your
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ps9 - ECON 1001 Tutorial 9 Q1 Market power measures the...

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