CLEP Microeconomic Notes 1

# I2a when price is greater than mc the firm is

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(a.i.2.a) when price is greater than MC the firm is inefficient 145) Marginal Revenue a) Joe has a monopoly of tea, he sells 25 glasses of tea for \$1 each, If he wants to sell 26 glasses, Joe can only charge \$.97 per glass. What is the Marginal Revenue on the 26 th glass of tea sold? a.i) First determine total revenue for 25 glasses and 26 glasses, and then determine the difference between the two. (a.i.1) P1: 25 x \$1.00 = \$25.00 (a.i.2) P2: 26 x \$.97 = 25.22 (a.i.3) P2- P1 = MR (a.i.4) 25.22 – 25.00 = \$.22 (a.i.5) MR on the 26 th glass is \$.22 146) Oligopoly Characteristics (a.i.1) Product Branding (a.i.2) Entry Barriers – anything that makes it difficult to enter the market (a.i.2.a) Ex: other brands, patents, copyrights, trademarks, and cost (a.i.3) Interdependent decision Making (most important characteristic of oligopoly) (a.i.3.a) If one Cell phone company lowers prices the other must, price wars do not lead to increased demand, they lead to decreased revenue for each firm. (a.i.3.b) For interdependent decision making to be effective the number of firms in the oligopoly must be small (a.i.3.c) This firms are the price makers and must strategically consider the reactions of the other firms in the market (a.i.4) Non-price competition – by providing higher quality products or characteristics (a.i.4.a) Ex: warranties, return-policy, store hours, things that match the consumers preferences (a.i.4.a.i) In the USA a current oligopoly is the Cell Phone industry a.i.4.a.i.1. Dominated by a few interdependent producers a.i.4.a.i.2. Very difficult to enter the market a.ii) When 5 or less make up 60% of a market, it is considered an oligopoly 147) Kinked Oligopoly Demand Curve – when competing firms follow price decreases but not price increases a) Assumptions made regarding the kinked demand curve: (a.i.1) If one firm raises its price, competition likely will not raise their prices in fear of losing market share (a.i.2) If a firm lowers its price, competitors will follow, so they do not lose market share b) Things to remember

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(b.i.1) The firms Marginal Revenue (MR) has a gap at the kink 2 (b.i.2) Prices above the current price are relatively elastic (b.i.3) Prices below the current price are relatively inelastic 148) Federal Trade Commission (FTC) works with the Justice Department to protect free trade a) FTC handles civil actions b) U.S. Justice Department can handle civil and criminal actions b.i)They have the power to: (b.i.1) Break up firms (b.i.2) Discourage through taxation (b.i.3) Price floor (b.i.4) Price ceilings (b.i.5) Prevent mergers b.ii) Granted these powers through the Sherman Act c) Can exercise power through: c.i) Advising – counsel regarding legality c.ii) Consent decrees – FTC agrees not to fine a business if they cease c.iii) Cease and Desist Orders – tells a business to stop breaking laws or face fines c.iv) Extreme Measures – order a business to sell off assets or dissolve itself 149) Federal Trade Commission Act of 1914 a) Outlawed a.i) unfair or deceptive business practices a.ii) Unfair methods of competition b) Created a commission to investigate and enforce 150)
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