Question

17. Market power a. is the capability to increase price without losing all sales. b. exists whenever the firm faces a downward-sloping demand curve. c. is greater the less elastic is demand. d. is smaller the more positive is the cross-price elasticity of demand. e. all of the above. 18. A monopoly is maximizing short-run profit at a point on demand where demand elasticity is -3. What is the Lerner index? a. 3 b. 1/3 c. 33.3 d. -3/4 19. Monopolistic competition is similar to monopoly since both market structures have a. a small number of firms. b. downward-sloping demands for the firm c. economic profit in long-run equilibrium. d. easy entry and exit. e. all of the above. 20. The primary difference between perfect and monopolistic competition is that for monopolistic competition a. there is product differentiation. b. entry is difficult. c. a large number of sellers exists. d. consumers have perfect information with respect to prices. 21. In long-run equilibrium under monopolistic competition, a. price equals minimum long-run average cost. b. price is higher than minimum long-run average cost. c. the firms earn less than a normal profit. d. firms have the incentive to enter the market. e. both a and d.

Answer 1

17) select E. All these options are correct because market power is the power to charge a price that does not result in using all the consumers similar to the case in perfect competition. Because of this the demand is downward sloping and that market power increases with demand becoming inelastic

18) select B. Lerner index is the reciprocal of the absolute value of elasticity of demand. Since elasticity of demand is 3 in this case lerner index will be 1/3.

19) select B. Otherwise there are wide differences between monopolistic competition and monopoly. However because they both are imperfectly competitive, they have a demand function

20) select A

21) select B