Economics Chapter 8 - 11

Price discrimination refers to the practice of selling a product to different buyers at varying prices, even when there is no significant difference in the cost of production or distribution. This strategy allows businesses to maximize their profits by charging higher prices to customers who are willing to pay more, while offering lower prices to customers who are more price-sensitive. This form of discrimination can be seen in various industries, such as airlines offering different fares for the same flight or movie theaters charging different ticket prices based on age or time of day.

Monopolistic competition refers to a market structure where there are many small firms that sell similar but slightly differentiated products. The first characteristic, small market shares, implies that no single firm has a dominant position in the market, and each firm has a relatively small market share. The second characteristic, no collusion, means that firms in monopolistic competition do not engage in collusion or secret agreements to manipulate prices or restrict competition. Lastly, independent action refers to the fact that firms in monopolistic competition make decisions independently, considering factors such as pricing, marketing, and product differentiation, without coordination with other firms.

Collusion refers to a scenario where multiple firms collaborate and conspire with each other to manipulate market conditions in their favor. This can involve activities such as price-fixing, where the firms agree to set prices at artificially high levels, or market division, where they allocate specific territories or customers among themselves. Collusion is also characterized by efforts to restrict competition, often through agreements to not compete with each other or by creating barriers to entry for new competitors.

The correct answer defines a cartel as an agreement among firms in an industry. This agreement is aimed at setting the price of a product, determining the outputs of each firm, or dividing the market among them. In other words, a cartel involves collusion among competitors to manipulate market conditions in their favor, often resulting in higher prices and reduced competition.

The definition of barriers to entry is anything that artificially prevents firms from entering an industry. This means that there are certain obstacles or restrictions that make it difficult for new companies to enter a specific market. These barriers can include high startup costs, government regulations, patents, brand loyalty of existing customers, or economies of scale enjoyed by established firms. By having these barriers in place, existing companies can maintain their market power and limit competition.

X-inefficiency refers to a situation where a firm is producing output at a higher average cost than is necessary. This means that the firm is not utilizing its resources efficiently and is experiencing higher costs in producing its output. This can be due to factors such as poor management, lack of motivation among employees, or outdated production techniques. X-inefficiency leads to a decrease in a firm's competitiveness and profitability as it is incurring unnecessary costs in its production process.

The term "excess capacity" refers to a situation where a firm's plant or equipment is not being fully utilized because the firm is producing less than the minimum average total cost (ATC) output. This means that the firm has the ability to produce more goods or services, but chooses not to do so because it is not economically efficient. This can occur due to various reasons such as lower demand for the firm's products or inefficient production processes. In such cases, the firm may have idle resources that could be better utilized to increase productivity and profitability.

The given answer correctly lists the six characteristics of an oligopoly: a few large producers, differentiated products, control over price, entry barriers, mergers, and measures of industry concentration. These characteristics are commonly associated with oligopolistic markets, where a small number of firms dominate the industry and have significant control over pricing and market behavior. Differentiated products and entry barriers further contribute to the market power of oligopolies, while mergers and measures of industry concentration reflect the tendency for consolidation and concentration of power within these markets.

The three positives in advertising are: informing the consumer about the product, promoting the name of the brand, and creating awareness about the product among potential customers. By informing consumers about the product, advertising helps them make informed decisions. Promoting the brand name helps in establishing brand recognition and loyalty. Creating awareness about the product ensures that it reaches a wider audience and increases the chances of sales.

The correct answer is:
A) Single Seller - one sole producer or seller
B) Price Taker - no competition
C) No Close Substitution - unique product
D) Blocked Entry - control total quantity over price


A single seller refers to a monopoly where there is only one producer or seller in the market. Price taker means that there is no competition, and the seller has the power to control the total quantity over the price. No close substitution indicates that the product being sold is unique and cannot be easily replaced by alternatives. Blocked entry refers to the barriers that prevent other sellers from entering the market and competing with the monopoly.

Price discrimination occurs when a firm charges different prices for the same product or service to different groups of customers. In order for a firm to practice price discrimination, it must have the ability to control both the output and the price of the product. This means that the firm must have some level of monopoly power in the market. Additionally, the firm must be able to segregate buyers, meaning that it can identify and target different groups of customers who are willing to pay different prices. Finally, the original purchaser of the product must not be able to resell it, as this would undermine the firm's ability to charge different prices to different customers.

The three obstacles to collusion are demand and cost differences, the number of firms, and cheating. Demand and cost differences refer to the variation in the market demand and production costs among the colluding firms, making it difficult for them to agree on pricing and output levels. The number of firms also poses a challenge as collusion becomes more difficult to maintain with a larger number of participants. Lastly, cheating refers to the temptation for individual firms to deviate from the agreed-upon collusive behavior in order to gain a competitive advantage. These obstacles make it challenging for firms to successfully collude and maintain a coordinated market behavior.