A cartel in an industry: O leads to price wars. leads to the coordination of the increase in prices in the market. O leads to the uncoordinated expansion in output supplied to the market. exacerbates the competition between firms.

There are two firms. Firm 1 (or, a small firm) produces a single product, product A, at zero cost. Firm 2 (or, a big firm) is a multi-product firm that sells both products A and B. Firm 2 is less efficient in producing A. It incurs a constant marginal cost c > 0 for producing A. However, firm 2 is a monopolist of the market of product B and its cost of producing productB is zero. A unit mass (i.e. a total measure of 1) of consumers all have the same preference which is known to producers, and view the two products as independent. To consumers, the value of product A is vA > c while the value of product B is vB > 0. If a consumer buys both products, the gross payoff is vA + vB . (Note that, unlike in the lecture slides where consumers are heterogenous and their values are distributed in [0, 1], here the setting is simpler and all consumers are homogenous and have the same vA and vB) Firms compete in prices and set their prices simultaneously and independently. We assume…

A monopoly shuts down when         never, because it can raise its prices as high as necessary to keep operating and maximize profits.       the short run price is below its average variable costs.       the average cost is less than price.       the long run price is below its average variable costs.

Identify whether each statement is true or false.                                       Market power is the ability of a firm to charge a price greater than marginal cost                                       Most markets are perfectively competitive                                       Charging a price greater than marginal cost leads to maximum economic efficiency                                       In reality, few markets are perfectively competitive