ECO 202 Chapter 12

Difference between allocative and productive efficiency

Productive efficiency pertains to production within an industry while allocative efficiency pertains to production across all industries

MR = MC; Slope of TR = Slope is TC

True when differences between TR and TV is at its maximum positive value?

Is produced up to the point where the marginal benefit for consumers equals the marginal cost of producing it

What is meant by allocative efficiency? Allocative efficiency is when every good or service

No. Because short run profits encourage entry, firms earn zero economic profit in the long run

"In a perfectly competitive market, in the long run consumers benefit from reductions in costs but firms don't" don't firms also benefit from cost reduction because they are able to earn greater profits

A price taker

A buyer or seller that is unable to affect the market price is called

False. Profit is maximized at the output level where marginal revenue equals marginal cost

A student argues: "to maximize profit, a firm should produce the quantity where the differences between marginal revenue and marginal cost is the greatest. If a firm produces more than this quantity, then the profit made on each additional unit will be falling." True or false?

Total cost per square foot is equal to $40 or more

AXA's actions could make economic sense in the long run if AXA's

Variable cost per square foot was equal to or less than 40

According to an article in the Wall Street journal, in 2007 the insurance company AXA Equitable signed a long-term lease on 2 million square feet of office space in a skyscraper on sixth avenue in manhattan in New York City. In 2013, AXA decided that it only needed 1.7 million square feet of office space, so it subleased 300,000 square feet of space to several other firms. Although AXA is paying a rent if $88 per square foot on all 2 million square feet it is leasing, it is only receiving $40 per square foot for the firms subleasing the 300,000 square feet. AXA's actions might make economic sense in the short run if AXA's

Easy, so firms can expect to earn zero economic profit in the long run

An article in the Wall Street journal discusses the visual effects industry, which is made up of firms that provide visual effects for films and television programs. The article notes that "blockbusters... often have thousands of visual effects shots. Even dramas and comedies today can include hundreds of them". But the article notes that the firms producing the effects have not been very profitable. Some firms have declared bankruptcy, and the former general manager of one firm was quoted as saying "a good year for us was a 5% return". What dynamics nest describe the factors at play in this market? Market entry for visual effect companies is relatively

Costs decrease more than revenue decreases

An article in the Wall Street journal discussing the financial resources for General Electric company (GE) for the first quarter of 2017 reported that, compared with the same quarter in the previous year, the firms revenue had fallen from $27.94 billion, while its profit had increased from $228 million to $653 million. Is it possible for profits to increase even if revenue decreases if

allocative efficiency

Best describes a state of the economy in which production reflects consumer preferences

productive efficiency

Best describes the result of the forces of competition driving the market price to the minimum average cost of the typical firm

At the point where revenue is maximized, the difference between total revenue and total cost may not be maximized.

Best explains why firms don't maximize revenue rather than profit

No, the demand curve is not horizontal because Chicken nuggets are not identical to other chicken products

By 2017, McDonald's had stopped selling Chicken McNuggets and other products made from chickens fed antibiotics. The change increased McDonald's costs, but an article in the Wall Street journal noted that "...McDonald's ability to raise its prices is limited because of stiff competition." Does this stiff competition mean that the demand curve for McDonald's chicken nuggets is horizontal? Briefly explain.

incorrect. The commentator is confusing the market demand for wheat with the demand line facing the representative firm.

Correct or incorrect? "According to the model of perfectly competitive markets, the demand for wheat should be a horizontal line. But this can't be true: when the price of wheat rises, the quantity of quantity wheat demanded falls, and when the price of wheat falls, the quantity of wheat demanded rises. Therefore, the demand for wheat is not a horizontal line"

When are firms likely to enter an industry? When are they likely to exit?

Economic profits attract firms to enter an industry, and economic losses cause firms to exit an industry

The marginal revenue curve for a perfectly competitive firm is the same as its demand curve

Explain why it is true for a firm in a perfectly competitive market, the profit maximizing condition MR = MC is equivalent to the condition P = MC. When maximizing profits, MR = MC is equivalent to P = MC because

Increase revenues and cut costs

How can GE nest maximize its profit?

By horizontally adding the individual firms' supply curves

How is the market supply curve derived from the supply curve of individual firms? The market supply surge is derived

Larger

If a firm decided to maximize revenue, would it be likely to produce a smaller or larger market than quantity than if it were maximizing profit?

Continue to develop mobile games because they can cover all costs of production if they break even

In 2017, apple reported that since it's iTunes App Store has opened in 2008, third party app developers had earned more than $60 billion and currently employed 1.4 million people. Yet, as we've seen, because of intense competition, many game developers can only break even on the games they develop. If the game companies can only break even on the mobile games they develop, in the long run, we would expect them to

Not matter to consumers since the product would be homogeneous

In 2017, two beer drinkers in California filed a lawsuit against Kona brewing company, which sells Kona beer. The beer drinkers claimed that Kona was marketed as if it were brewed in Hawaii, but the beer was actually brewed in Oregon, Washington, Tennessee, and New Hampshire. If the market for beer were perfectly competitive, the location of breweries would

Horizontal

In a perfectly competitive industry with constant costs, the long-run supply curve will be

Upward sloping

In a perfectly competitive industry with increasing average costs, the long run supply curve will be

Firms can sell as much output as they want at the market price

In a perfectly competitive market, P = MR = AR because

Zero

In an perfect competition, long-run equilibrium occurs when the economic profit is

Allocative and productive efficiency

Long run equilibrium in perfect competition results in

perfectly competitive market

Meets the conditions of: 1.) many buyers and sellers 2.) all firms selling identical products 3.) no barriers to new firms entering the market

Because prices reflect consumer preferences; because firms are motivated by profit

Perfect competition leads to allocative and productive efficiency

B. After demand increases and supply increases, the quantity will be mire than 4 million boxes but the price will return to its initial level

Suppose that the market for gluten-free spaghetti is in the long-run equilibrium at a price of $3.50 per box and a quantity of 4 million boxes sold per year. Assume that the production of gluten free spaghetti is a constant cost industry. If the demand for gluten-free spaghetti increases permanent, which of the following combinations of equilibrium price and quantity would you expect to see in the long run? A. A price of $3.50 per box and a quantity of 4 million boxes B. A price of $3.50 per box and a quantity of more than 4 million boxes C. A price of more than $3.50 per box and a quantity of more than 4 million boxes D. A price of less than $3.50 per box and a quantity of less than 4 million boxes

Yes, because you are covering your variable costs

Suppose you decide to open a copy store. You rent store space (signing a one-year lease), and you take out a loan at a local bank and use the money to purchase 10 copiers. Six months later, a large chain opens a copy store two blocks away from yours. As a result, the revenue you receive from your copy store, while sufficient to cover the wages of your employees and the cost of paper and utilities, doesn't cover all of your rent and the interest and repayment costs on the loan you took out to purchase the copiers. Should you continue operating your business?

While it's true that firms don't care about consumer welfare, they do maximize profits by producing the efficient level of output

The chapter states, "firms will supply all those goods that provide consumers with a marginal benefit at least as great as the marginal cost of producing them" a student objects to this statement by making the following argument "I doubt that firms will really do this. After all, firms are in business to make a profit, they don't care about what is best for consumers" after reminding the class that we are all assuming a competitive market, your professor would most likely give the following reply

The market price

The financial writer Andrew Tobias has described an incident when he was a student at Harvard business school. Each student in the class was given large amounts of information about a particular firm and asked to determine a pricing strategy for the firm. Most of the students spent hours preparing their answers and case to class carrying many sheets of paper with their calculations. When his professor called on him for an answer in class, Tobias stayed, "the case said the XYZ company was in a very competitive industry ... and the case said that the company had all the business it could handle" given this information, what price do you think Tobias argues that the company should charge?

Marginal revenue

The increase in total revenue that results from selling one more unit of output is

It is a benchmark- a market with the maximum possible competition- that economists use to evaluate actual markets that are not perfectly competitive

The late Nobel-prize winning economist George Stigler once wrote, "the most common and most important criticism of perfect competition... (is) that it is unrealistic". Despite the fact that few firms sell identical products in markets where there are no barriers to entry, economists believe that the model of perfect competition is important because

Many buyers and sellers, with all firms selling identical products, and no barriers to new firms entering the market

What are the three conditions for a market to be perfectly competitive? For a market to be perfectly competitive, there must be

Average variable cost curve, while in the long run, a firms exit point is the minimum point on the average total cost curve

What is the difference between a firm's shutdown point in the short run and it's exit point in the long run? In the short run, a firms shutdown point is the minimum point in the

A firms marginal cost curve and is equal to its supply curve for prices above average variable cost

What is the relationship between a perfectly competitive firm's marginal cost curve and it's supply curve?

Price is equal to both average and marginal revenue

What is the relationship between price, average price, and marginal revenue for a firm firm in a perfectly competitive market?

That firms marginal cost curve for prices at or above average variable cost

What is the supply curve for a perfectly competitive firm in the short run? The supply curve for a firm in a perfectly competitive market in the short run is

Because it is the consumers' demand that influences the market price and dictates what producers will supply in the market

Why are consumers so powerful in a market system

there are fixed costs in the short run but not in the long run

Why are firms willing to accept losses in the short run but not in the long run?

With many firms selling an identical product, single firms have no effect on market price

Why do single firms in perfectly competitive markets face horizontal demand curves?

Will continue to produce because such profit corresponds with negative accounting profit

Would a firm earning zero economic profit continue to produce, even in the long run? In a long run competitive equilibrium, a firm earning zero profit

A price taker is

a firm that is unable to affect the market price

A firm is likely to be a price taker when

it sells a product that is exactly the same as every other firm

productive efficiency

when a good or service is produced at the lowest possible cost