ARM Final Exam
Monopoly - correct answer ✔A firm is a monopoly if it is the only supplier of a
product in a market.
Downward sloping demand because firm demand = industry demand.
Base Case - correct answer ✔Base Case - MC = 0. Profits depend on the
elasticity of demand 𝛜d = P/Q * dQ/dP where moving towards a point where 𝛜d
= |-1| increases total revenue.
Natural Monopoly - correct answer ✔Declining average cost over all
meaningful quantities. The most efficient outcome is for a single firm to
produce all output. Increasing returns to scale is sufficient but not necessary
for a natural monopoly.
First Degree - correct answer ✔(i.e., perfect price discrimination) - occurs
when a firm charges a different price for every unit consumed.
Second Degree - correct answer ✔(i.e., non-linear pricing such as quantity
discounts) - means charging a different price for different quantities, such as
quantity discounts for bulk purchases.
Third Degree - correct answer ✔(i.e., market segmentation) - This involves
charging a different price to different groups of consumers.
Durable Goods - correct answer ✔goods that are bought only once in a long
time and can be used for a long time. Examples: cars, houses, land. US
census definition = 3years
, Informative Advertising - correct answer ✔Unless a firm advertises bad
news, this should result in an outward shift of demand for a monopolist
advertiser
Highlights the fact that advertising is endogenous - a firm chooses it optimally
In competitive markets, informative advertising may facilitate entry and
strengthen competition
It may even make demand more elastic in those markets(but not for a
monopolist; the monopolist won't do it)
Informative advertising has no effect on the price elasticity of demand in a
monopoly
Search Goods in Informative Ads - correct answer ✔Good whose quality can
be determined prior to purchase
Experience goods in Informative Ads - correct answer ✔Goods whose
quality can not be determined prior to purchase(consumption)
Experience goods offer three avenues of indirect information provision
signaling-efficiency(I couldn't advertise if I wasn't efficient)
Match products to buyers
Remind consumers when the product is high-quality
Persuasive Advertising - correct answer ✔Advertising should result in an
upward shift of demand
If firms have economies of scale in production, this might move them to a
lower part of the cost curve(YO WTF WHY)
This scale effect may lower prices(cause cost is lower)
But advertising is expensive, so that may raise prices(damn it, make up your
mind)
Advertising may make demand less elastic by encouraging brand loyalty
Monopoly - correct answer ✔A firm is a monopoly if it is the only supplier of a
product in a market.
Downward sloping demand because firm demand = industry demand.
Base Case - correct answer ✔Base Case - MC = 0. Profits depend on the
elasticity of demand 𝛜d = P/Q * dQ/dP where moving towards a point where 𝛜d
= |-1| increases total revenue.
Natural Monopoly - correct answer ✔Declining average cost over all
meaningful quantities. The most efficient outcome is for a single firm to
produce all output. Increasing returns to scale is sufficient but not necessary
for a natural monopoly.
First Degree - correct answer ✔(i.e., perfect price discrimination) - occurs
when a firm charges a different price for every unit consumed.
Second Degree - correct answer ✔(i.e., non-linear pricing such as quantity
discounts) - means charging a different price for different quantities, such as
quantity discounts for bulk purchases.
Third Degree - correct answer ✔(i.e., market segmentation) - This involves
charging a different price to different groups of consumers.
Durable Goods - correct answer ✔goods that are bought only once in a long
time and can be used for a long time. Examples: cars, houses, land. US
census definition = 3years
, Informative Advertising - correct answer ✔Unless a firm advertises bad
news, this should result in an outward shift of demand for a monopolist
advertiser
Highlights the fact that advertising is endogenous - a firm chooses it optimally
In competitive markets, informative advertising may facilitate entry and
strengthen competition
It may even make demand more elastic in those markets(but not for a
monopolist; the monopolist won't do it)
Informative advertising has no effect on the price elasticity of demand in a
monopoly
Search Goods in Informative Ads - correct answer ✔Good whose quality can
be determined prior to purchase
Experience goods in Informative Ads - correct answer ✔Goods whose
quality can not be determined prior to purchase(consumption)
Experience goods offer three avenues of indirect information provision
signaling-efficiency(I couldn't advertise if I wasn't efficient)
Match products to buyers
Remind consumers when the product is high-quality
Persuasive Advertising - correct answer ✔Advertising should result in an
upward shift of demand
If firms have economies of scale in production, this might move them to a
lower part of the cost curve(YO WTF WHY)
This scale effect may lower prices(cause cost is lower)
But advertising is expensive, so that may raise prices(damn it, make up your
mind)
Advertising may make demand less elastic by encouraging brand loyalty
