Econ 102 - Midterm 3

Which of the following types of firms most closely fits the description of a competitive firm? - New car manufactures ex. toyota, ford, chysler - corn farmers -local grocery store markets - local electricity company

corn farmers -How many sellers exist in each type of firm? How similar are the products sold by each of the types of firms?

Suppose most people regard emeralds, rubies, and sapphires as close substitutes for diamonds. Then DeBeers, a large diamond company, has less market power than it would otherwise have. higher profits than it would otherwise have. less incentive to advertise than it would otherwise have. more control over the price of diamonds than it would otherwise have.

less market power than it would otherwise have.

A competitive firm maximizes profit at an output level of 500 units, market price is $24, and ATC is $24.50. At what range of AVC values for an output level of 500 would the firm choose not to shut down? AVC > $24 AVC = $24 AVC < $24 cannot be determined from the given information

AVC < 24

In a perfectly competitive market, the price of the product is - independently set by each competeing firm - set by the market leader and copied by other firms -jointly set after a meeting of all firms in the market - set by market supply and demand

set by market supply and demand - What is meant by a "price taker"?

The price of a competitive firm's product is $50 per unit. The firm currently has marginal cost equal to $40. To maximize profits this firm: -should increase its output -should reduce its output -should keep its output the same -needs more information to determine if it should adjust its output

should increase its output - Profit maximization occurs when a firm expands output until marginal revenue is equal to marginal cost, MR = MC. Since price is equal to the marginal revenue, this firm is currently operating at MR > MC ($50 > $40) and could increase profits by increasing its output.

Converse, an apparel company, has been fairly successful selling denim-colored college sportswear. Lydia sees an opportunity for profit and enters the market. After producing her profit maximizing level of output, she finds that her average total cost per unit is $40, her average variable cost per unit is $30, and the market price is $35. In the short run, Lydia should -shut down her denim-colored college sportswear business and go back to college - stay in business even though she is suffering a loss -expand production since she is making a positive economic profit - More information is needed to answer this question

stay in business even though she is suffering a loss

Granting a pharmaceutical company a patent for a new medicine will lead to (i) a product that is priced higher than it would be without the exclusive rights.(ii)incentives for pharmaceutical companies to invest in research and development.(iii)higher quantities of output than without the patent. (i), (ii), and (iii) (i) and (ii) only (i) and (iii) only (ii) and (iii) only

(i) and (ii) only

To maximize profits, firms expand output until - MR = MC - MR > MC -MR < MC Either where MR > MC or MR < MC

MR = MC Look at the figure below. What is the relationship between MR and MC at the profit maximizing point?

Firms producing an identical product in a perfectly competitive market are producing at a quantity that maximizes profit. The current market price is $4.50 per unit, and the firms are producing at a long-run average cost of $3.50 per unit. Firms in this market experience: a profit a loss zero profit cannot be determined

a profit

A fundamental source of monopoly market power arises from - availability of "free" natural resources, such as water or air. - barriers to entry. -perfectly inelastic demand. -perfectly elastic demand.

barries to entry

Profits when a competitive firm shuts down are -$7,250 and -$250 when the firm continues to produce. This firm will minimize losses by shutting down continuing to produce either shutting down or continuing to produce None of these are true.

continuing to produce -

If competitive firms experience a loss, over the long run there will be a(n): increase in market supply to reduce the market price increase in market supply to increase the market price decrease in market supply to reduce the market price decrease in market supply to increase the market price

decrease in market supply to increase the market supply

Firms producing an identical product in a competitive market are producing at a level of output that maximizes profit. The current market price is $4.50 per unit and the firms are producing at a long-run average cost of $3.50 per unit. Over the long-run one should expect -entry of new firms into this market -exit of firms from this market -no change in the number of firms in this market - information is needed to answer this question.

entry of new firms into this market

For a perfectly competitive firm, marginal revenue is greater than price less than price equal to price at first greater than price but eventually will be less than price

equal to price -

The long-run market supply curve is: upward sloping horizontal at the market price vertical at the profit maximizing output level downward sloping

horizontal at the market price -Free entry into the market and easy exit force the long-run price to the minimum point on the average total cost curve. At all prices above the long-run price, firms will earn a profit (causing new firms to enter and driving the price lower) and at all prices below the long-run price firms will experience a loss (causing firms to leave and driving the price higher). This means the long-run supply curve must be horizontal at the long-run price. If the price was any higher or lower firms would enter or exit the market, and the market would not be in long-run equilibrium.