Perfectly Competitive Output Markets - AP Microeconomics

Although the monopolist will not end up producing at the socially optimal level, the effect of the change described is very similar to a shift in the supply curve in a perfectly competitive market.

Starting with the graph below as a baseline, you can see that if the marginal cost curve shifts down, the monopolist will produce at a point further along the marginal revenue curve, which would correspond to a greater output at a lower market price.

A natural monopoly is defined by an industry where production is most efficient (i.e. lowest long-run average cost) when it is concentrated in a single firm. This implies increasing returns to scale, which is not characteristic of perfect competition. In other words, the natural monopolist will have a significant cost advantage over smaller competitors that try to enter the market.

A natural monopoly is very similar to and experiences the same inefficiencies as a traditional monopoly. The difference is that these inefficiencies cannot be corrected by increasing competition, as a single seller can produce more efficiently than many sellers in a market that is a natural monopoly.

The electric company, railway, and telecoms operator are all examples of industries with very high fixed costs where the lowest average cost could only be achieved at a high level output, which discourages competition and is characteristic of natural monopoly.

The drug-maker operates as a monopoly due to the legal barrier (patent) that prevents entry into the market (for that specific drug). Therefore, it is NOT a natural monopoly.

As pencils and erasers are used together they can be considered complementary goods. You can use a supply and demand graph for each market to track the following steps:

• The shortage in rubber shifts the supply curve in the eraser market inward
• As a result, the price of erasers increases
• Since pencils and erasers go together, a higher price for erasers means people demand fewer pencils at any given price.
• This results in an inward shift of the demand curve in the pencil market.
• As a result, both the price and quantity of pencils being sold goes down.

Complementary goods are defined by a negative cross elasticity of demand, which means simply that demand for one good increases when the price of another decreases (and vice versa). A price increase for Good A resulting in a decrease in demand for Good B fits this definition.

The goods are thus not substitutes. They could potentially be one of the other types of goods but you don't have enough information in the question to make that determination.

A decrease in the price of a complementary good would result in an outward shift in the demand curve, which is the only shift which would result in increased price and quantity of a given good.

A decrease in the price of substitute good would result in an inward shift of the demand curve. A subsidy for production would affect the supply curve. A price floor above the current equilibrium would necessarily affect the price, but not the quantity traded.

An increase in production costs for tea results in an inward shift in the supply curve in the tea market. As a result, the market price of tea increases.

As tea becomes more expensive, consumers will prefer to consume more coffee at any given price. This is an outward shift in the demand curve that will result in a higher market price for coffee.

The correct answer is an example of a "network externality." The software might be a video chat service or spreadsheet software and the more people who use it the more value it has for others who use the same format. If it reaches a so-called "tipping point" it may lead to one firm dominating the market.

A public good is non-exclusive and non-rivalrous and thus provides external benefits that others can enjoy without paying. However, this does not mean that it cannot be sold at a price above zero. It is just that whoever produces such a good does so knowing some consumers will benefit without paying.

It is impossible to prevent people from enjoying clean air (assuming the air is clean, of course). Fish stocks are a common resource accessible to all (although there may be some attempts to limit access by government).

You can be excluded from satellite TV if you don't pay for the service.

This is an interesting case of a good that is non-rivalrous up to a point. In the middle of the night one additional car on the highway makes no difference to others already on the road. At the morning rush hour, even one car adds delay to a surprising number of drivers upstream.

You can enjoy a poetry reading or the benefits of law enforcement without diminishing the quality for others. The movie theater is the opposite case of the highway. It can definitely be rivalrous at peak times but on Wednesday mornings the theater is likely mostly empty and one additional person makes no difference.

A performance on a public street is both non-excludable and non-rivalrous. A concert in an arena and the discount warehouse store are excludable - you would have to pay to enjoy the benefits. A fillet of salmon is a private good - you would have to pay and by consuming it you would leave less (or none) for the next person.

If demand for widgets increases when incomes decrease, then the income elasticity for widgets is negative. This is because income elasticity is E = percent change in quantity/percent change in income. If E < 0 then the good is inferior.

A rise in consumer income would shift the demand curve for apples out while a large harvest would shift the supply curve out. This would unambiguously increase the quantity traded. The price would depend on the relative amount of the shifts and the slopes of the supply and demand curves.

A new technology for harvesting/processing apples would shift the supply curve outward, which would necessarily result in a lower market price for apples.

Incorrect answers:

• Talk show host increases demand => higher price
• Price of substitute increases => higher demand => higher price
• Wages increase => lower supply. Lower incomes => lower demand. Net result is lower quantity, ambiguous change in price.

Inferior goods are those which a consumers uses less of when his income increases. They tend to be goods which have a higher-quality substitute that becomes affordable as income increases. For John, the train ride may be a faster or more comfortable alternative to the bus ride.

Carol's income has increased and she subsequently buys more apples and oranges. Therefore, apples and oranges are normal goods for her.

The first sentence is also true for superior goods. However, a superior good is one in which the proportion of a consumer's budget for a certain good increases with an increase in income. Carol received a 25% raise and subsequently bought 25% more apples and 20% more oranges. Thus, they are normal goods but not superior goods.

You can infer simply from the decreasing market price that the firm is a price-setter and thus not a price-taker nor in a perfectly competitive market. Of the choices given, that would imply a monopoly, which we would expect to make both an accounting profit and an economic profit.

You can even calculate the marginal revenue so that the MR curve would be declining as characteristic of a monopolist.