chapter 7

natural monopoly

A production process in which the long-run average cost curve is sufficiently downward-sloping to make it impossible to sustain competition among firms in this market.

The market demand curve of a particular good is downward-sloping. Based on this information, which of the following statements is correct regarding a price-taking firm producing that good?

Answer is not provided

The diagram shows the demand and the supply curves for a textbook. The curves intersect at (Q, P) = (24, 8). Which of the following is correct? (ECO-U8-Q2-01)

At $8, the market clears.

market-clearing price

At this price there is no excess supply or excess demand.

willingness to pay (WTP)

An indicator of how much a person values a good, measured by the maximum amount he or she would pay to acquire a unit of the good.

decreasing returns to scale

These occur when doubling all of the inputs to a production process less than doubles the output.

diseconomies of scale

These occur when doubling all of the inputs to a production process less than doubles the output.

The effect of a tax on the welfare of buyers, sellers, or both. [8.7]

tax incidence

In a perfectly competitive market in which the demand is and the supply is Q = 2P+3 :

-The equilibrium price is P = 11. -The consumer surplus at equilibrium is 180.5.

A shop sells 20 hats per week at $10 each. When it increases the price to $12, the number of hats sold falls to 15 per week. Which of the following statements are correct?

-A 20% increase in the price causes a 25% fall in demand. -The elasticity of demand is approximately 1.25.

Which of the following statements are correct?

-A fall in the mortgage interest rate would shift up the demand curve for new houses. -A fall in the oil price would shift up the demand curve for oil. -A fall in the oil price would shift down the supply curve for plastics.

Which of the following statements are correct?

-A market is in equilibrium if the actions of buyers and sellers have no tendency to change the price or the quantities bought and sold. -In a competitive equilibrium, both buyers and sellers are price-takers.

A profit function, drawn on a graph with quantity on the horizontal axis and profit on the vertical axis, depicts a firms profit for different outputs. Which of the following statements are correct?

-At the peak of the profit function, the profit level equals that of the isoprofit curve that is tangent to the demand curve. -Assuming no fixed costs of production, the profit function goes through the origin.

The figure shows the demand and supply curves in the salt market, both under competitive equilibrium (quantity Q*) and under a 30% sales tax on the price of salt (quantity Q^T), paid by the suppliers. The government now considers different tax rates. Which of the following statements will always be true for a higher tax rate? (OUP-U8-Q18-01)

-Deadweight loss is higher. -Quantity traded is lower.

Consider a firm whose unit cost (the cost of producing one unit of output) is the same at all output levels. Which of the following statements are correct?

-Every price-quantity combination lies on an isoprofit curve. -Isoprofit curves slope downward when the price is above the unit cost.

Which of the following statements is correct?

-If a firms technology exhibits constant returns to scale, doubling the inputs leads to doubling of the output level. -If a firms technology exhibits economies of scale, costs per unit will fall as the firm expands its production. -If a firms technology exhibits diseconomies of scale, doubling the inputs leads to less than doubling of the output level.

Which of the following statements are true for a competitive market in which all firms have upward-sloping marginal cost curves?

-If more firms enter the market, the market price will fall, and so will profits. -The average cost is always equal to the price.

A firm produces 24 units of output with 10 workers and 4 machines. Which of the following statements are correct?

-If the firm produces 10 units of output with 5 workers and 2 machines, then the firms technology exhibits increasing returns to scale. -If the firm produces 30 units of output with 15 workers and 6 machines, then the firms technology exhibits decreasing returns to scale.

The figure is a demand curve for Cheerios. Based on this figure, which of the following statements are correct? (OUP-U7-Q5-01)

-It is feasible to produce 16,000 pounds when the price is $3. -All points on the demand curve cannot be dominated by any other feasible choices.

Which of the following statements about a competitive equilibrium allocation are correct?

-No buyers or sellers surplus can be increased without reducing someone elses surplus. -The total surplus from trade is maximized.

The left-hand diagram shows the market for Choccos, which is a trademarked brand that only one firm can produce. There are many close substitutes in the wider market for chocolate bars, which are shown in the right-hand diagram. Based on this information, which of the following statements are correct? (OUP-U8-Q24-01)

-Point A is determined by the highest attainable isoprofit curve, given the demand curve faced by the firm. -Point A will always be to the left of the marginal cost curve.

In Figure 8.9a, the market equilibrium output and price of the bread market is shown to be at (Q*, P*) = (5,000,2). Suppose that the mayor decrees that bakeries must sell as much bread as consumers want, at a price of 1.50. Which of the following statements are correct? (ECO-U8-Q5-01)

-The consumer surplus increases but the producer surplus decreases. -The total surplus is lower than at the market equilibrium.

The figure depicts the demand curve of a firm producing cars, together with its marginal cost, average cost, and isoprofit curves. Based on this figure, which of the following statements are correct? (OUP-U7-Q17-01)

-The firm makes the same profit at B and D. -The slope of the isoprofit is zero at D.

The following diagram shows the market demand curve of Apple Cinnamon Cheerios, the isoprofit curves of the producer firm, and the firm's profit function curve. Based on the graph, which of the following statements are correct? (TEA-U7-Q1-01)

-The highest profit that the firm can make is $60,000. -The profit-maximising choice for the firm is where the highest attainable isoprofi tcurve is tangent to the demand curve. -The profit-maximising choice for the firm is where its marginal rate of substitution between the price charged and the quantity produced is equal to its marginal rate of transformation. -The profit-maximising choice for the firm is at the peak of its profit function curve.

Which of the following markets can generally be considered to be competitive?

-The market for milk. -The market for plane tickets from London to Tokyo.

Suppose that in a small town a multinational retailer is planning to build a new superstore. Which of the following arguments could be correct?

-The new retailer argues that the close substitutability of some of the goods implies a high elasticity of demand, leading to healthy competition and lower prices for consumers. -The local protestors argue that once the local retailers are driven out, there will be no competition, giving the multinational retailer more market power and driving up prices.

In which of the following situations could the competitive market not be Pareto efficient?

-The product sold is a differentiated good. -In the labour market, where workers effort levels are non-verifiable. -When production of a good traded creates air pollution.

The diagram shows the market demand and supply curves for the bread market. You know that there are 250 identical bakeries operating in the market, but you do not know their cost structure (i.e. their average cost and marginal cost curves). Based on this information, which of the following statements is correct? (OUP-U8-Q9-01)

A bakerys marginal cost of producing the 21st loaf is 2.

monopoly rents

A form of economic profits, which arise due to restricted competition in selling a firm's product.

The following diagram shows the consumer and producer surplus in the market for bread. Consider changes in the elasticities of the demand and supply curves. Assuming that the market equilibrium output and price are unchanged, which of the following statements is correct? (TEA-U8-Q2-01)

A less elastic supply curve will lead to a larger producer surplus.

competitive equilibrium

A market outcome in which all buyers and sellers are price-takers, and at the prevailing market price, the quantity supplied is equal to the quantity demanded.

differentiated product

A product produced by a single firm that has some unique characteristics compared to similar products of other firms.

As a student representative, one of your roles is to organize a second-hand textbook market between the current and former first-year students. After a survey, you estimate the demand and supply curves to be the ones shown in Figures 8.1 and 8.2. For example, you estimate that pricing the book at $7 would lead to a supply of 20 books and a demand of 26 books. Which of the following statements is correct? (ECO-U8-Q1-01)

A rumour that the textbook may be required again in Year 2 would change the supply curve, shifting it upwards.

excess demand

A situation in which the quantity of a good demanded is greater than the quantity supplied at the current price.

excess supply

A situation in which the quantity of a good supplied is greater than the quantity demanded at the current price.

equilibrium (of a market)

A state of a market in which there is no tendency for the quantities bought and sold, or the market price to change, unless there is some change in the underlying costs, preferences, or other determinants of the behaviour of market actors.

market power

An attribute of a firm that can sell its product at a range of feasible prices, so that it can benefit by acting as a price-setter (rather than a price-taker).

shock

An exogenous change in some of the fundamental data used in a model.

The figure shows the demand and supply curves in the salt market. The government now decides to impose a sales tax of 30% on the price of salt, to be paid by the suppliers. Which of the following statements is correct? (OUP-U8-Q18-01)

Both consumer surplus and producer surplus decrease.

price-taker

Characteristic of producers and consumers who cannot benefit by offering or asking any price other than the market price in the equilibrium of a competitive market. They have no power to influence the market price.

exogenous

Coming from outside the model rather than being produced by the workings of the model itself.

Which of the following statements is correct??

Consumer surplus is the difference between the consumers willingness to pay and what they actually pay.

normal profits

Corresponds to zero economic profit and means that the rate of profit is equal to the opportunity cost of capital.

The figure shows the demand and supply curves in the salt market. The government imposes a sales tax of 30% on the price of salt, to be paid by the suppliers. As a result, the equilibrium quantity falls from Q* to Q^T. Which of the following statements is correct after the tax has been implemented? (OUP-U8-Q20-01)

Gains from trade are A + B + D + F.

antitrust policy

Government policy and laws to limit monopoly power and prevent cartels.

law of one price

Holds when a good is traded at the same price across all buyers and sellers. If a good were sold at different prices in different places, a trader could buy it cheaply in one place and sell it at a higher price in another.

The following statements is/are true about a monopoly:

If marginal revenue is larger than marginal cost, its profits would increase if quantity increased.

The figure depicts isoprofits of firms selling Cheerios. Which of the following statements is correct? (OUP-U7-Q4-01)

Isoprofit curve C goes through the point (Q, P) = (2,000, 9).

monopolized market

Market in which a single firm produces all the goods that are sold.

A firms cost of production is £12 per unit of output. If P is the price of the output good and Q is the number of units produced, which of the following statements is correct?

Points (Q, P) = (2,000, 20) and (4,000, 16) are on the same isoprofit curve.

constrained optimization problem

Problems in which a decision-maker chooses the values of one or more variables to achieve an objective (such as maximizing profit) subject to a constraint that determines the feasible set (such as the demand curve).

costs of entry

Startup costs that would be incurred when a seller enters a market or an industry. These would usually include the cost of acquiring and equipping new premises, research and development, the necessary patents, and the cost of finding and hiring staff.

perfectly competitive equilibrium

Such an equilibrium occurs in a model in which all buyers and sellers are price-takers. In this equilibrium, all transactions take place at a single price. This is known as the law of one price. At that price, the amount supplied equals the amount demanded: the market clears. No buyer or seller can benefit by altering the price they are demanding or offering. They are both price-takers. All potential gains from trade are realized.

The diagram shows the demand and the supply curves for textbooks. Based on this figure, which of the following statements is correct? (OUP-U8-Q4-01)

The Nash equilibrium price is $8.

marginal utility

The additional utility resulting from a one-unit increase of a given variable.

The figure shows the market demand curve for bread, together with original and new supply curves, where the curve has shifted due to an introduction of a new technology. Assume that the number of bakeries remains constant. Which of the following statements is correct? (OUP-U8-Q15-01)

The bakeries marginal cost of production has fallen.

gains from exchange

The benefits that each party gains from a transaction compared to how they would have fared without the exchange.

demand curve

The curve that gives the quantity consumers will buy at each possible price.

supply curve

The curve that shows the number of units of output that would be produced at any given price. For a market, it shows the total quantity that all firms together would produce at any given price.

The diagram depicts the demand curve of a product. Assume that there are 100 potential buyers who can choose to purchase one unit each. Based on this graph, which of the following statements is correct? (OUP-U7-Q15-01)

The diagram demonstrates the Law of Demand.

profit margin

The difference between the price and the marginal cost.

tax incidence

The effect of a tax on the welfare of buyers, sellers, or both.

marginal cost

The effect on total cost of producing one additional unit of output. It corresponds to the slope of the total cost function at each point.

Figure 8.8 shows the equilibrium of the bread market to be 5,000 loaves per day at price 2. A year later, we find that the market equilibrium price has fallen to 1.50. What can we conclude? (ECO-U8-Q7-01)

The fall in price could have been caused by a shift in either curve.

You are given that the market demand curve of the good in concern is downward-sloping. Based on this information, which of the following statements is correct regarding a price-taking firm?

The firm chooses its output where the marginal cost equals the price.

Figure 7.11 depicts the demand curve for Beautiful Cars, together with the marginal cost and isoprofit curves. The quantity-price combination at point E is (Q*, P*) = (32, 5,440). The average cost of producing 50 cars is the same as the average cost of producing 32. Suppose that the firm keeps the price at P = $5,440 but now produces 50 cars instead of 32. Which of the following is correct? (ECO-U7-Q9-01)

The firms profit is now reduced.

marginal revenue

The increase in revenue obtained by increasing the quantity from Q to Q + 1.

reservation price

The lowest price at which someone is willing to sell a good (keeping the good is the potential seller's reservation option).

willingness to accept (WTA)

The lowest price at which someone is willing to sell a good (keeping the good is the potential seller's reservation option).

Suppose that a perfectly competitive market is in equilibrium, and marginal costs are strictly increasing for all firms. If the willingness to pay at a given quantity doubles, then at the new equilibrium:

The marginal cost at equilibrium will be larger than the original one.

The following is a table of the total cost (TC) of producing output Q for a particular firm. Based on this information, which of the following statements is correct? (TEA-U7-Q3-01)

The marginal cost curve intersects the average cost curve at Q = 60.

Figure 8.5 shows a price-taking bakery's marginal and average cost curves, and its isoprofit curves. The market price for bread is P*=2.35. Which of the following statements is correct? (ECO-U8-Q3-01)

The marginal cost curve is the firms supply curve.

Look again at Figure 8.18, which shows the market for Choccos and for all chocolate bars. Based on the two diagrams, which of the following statements is correct? (ECO-U8-Q11-01)

The market marginal cost (MC) curve is approximately the sum of the MC curves of all the producers of the chocolate bars.

There are two different types of producers of a good in an industry where firms are price-takers. The marginal cost curves of the two types are given below: Type A is more efficient than Type B: for example, as shown, at the output of 20 units, the Type A firms have a marginal cost of $2, as opposed to a marginal cost of $3 for the Type B firms. There are 10 Type A firms and 8 Type B firms in the market. Which of the following statements is correct? (ECO-U8-Q4-01)

The market will supply 510 units at price $3.

The figure shows the market supply curve for second-hand textbooks, together with original and new demand curves, where the curve has shifted due to the arrival of new students. Based on the figure, which of the following statements is correct? (OUP-U8-Q14-01)

The more elastic the supply curve, the smaller the price rise.

price elasticity of demand

The percentage change in demand that would occur in response to a 1% increase in price. We express this as a positive number. Demand is elastic if this is greater than 1, and inelastic if less than 1.

monopoly power

The power that a firm has to control its own price. The fewer close substitutes for the product are available, the greater the firm's price-setting power.

The table represents market demand Q for a good at different prices P. The firm's unit cost of production is £60. Based on this information, which of the following is correct? (ECO-U7-Q3-01)

The profit-maximizing output is Q = 400.

average cost

The total cost of the firms's output divided by the total number of units of output.

total surplus

The total gains from trade received by all parties involved in the exchange. It is measured as the sum of the consumer and producer surpluses.

The figure shows a demand curve for Cheerios. Based on this figure, which of the following statements is correct? (OUP-U7-Q1-01)

There is no demand if the price is set above $7.20.

network economies of scale

These exist when an increase in the number of users of an output of a firm implies an increase in the value of the output to each of them, because they are connected to each other.

constant returns to scale

These occur when doubling all of the inputs to a production process doubles the output. The shape of a firm's long-run average cost curve depends both on returns to scale in production and the effect of scale on the prices it pays for its inputs.

There are five students who are looking to buy one second-hand textbook each. Their willingness-to-pay are £5, £6, £8, £12, and £15, respectively. Based on this information, which of the following statements is correct?

To sell three books, the maximum price that can be charged is £8.

Consider the demand curve shown in the figure. Suppose that the unit cost (the cost of producing each pound) is $C at all levels of output. Which of the following statements is correct? (OUP-U7-Q1-01)

Total cost doubles when quantity doubles.

substitutes

Two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other.

market failure

When markets allocate resources in a Pareto-inefficient way.

Consider the demand curve shown in the figure. Suppose that the unit cost (the cost of producing each pound of Cheerios) is C = $2. Based on the demand curve, which of the following statements is correct? (OUP-U7-Q1-01)

he total cost when P = 4 is $64,000.

The additional utility resulting from a one-unit increase of a given variable. [8.2]

marginal utility

Characteristic of producers and consumers who cannot benefit by offering or asking any price other than the market price in the equilibrium of a competitive market. They have no power to influence the market price. [8.2]

price-taker