Exam 3 Review Microeconomics, Ch 9 Microeconomics, Ch 8 Microeconomics, Chapter 7 Microeconomics

in the short run

- one factor of production is fixed, usually the plant size - firms cannot enter or leave the industry

Characteristics of Monopoly:

- one firm - no close substitutes for product - nearly insuperable barriers to entry - potential for long run economic profits - substantial market power and control over price

__(Figure: Monopoly Pricing and Output Decisions) Using the graph, what is the equilibrium output for this monopolist?

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profit

= (Price - ATC) x Quantity

Loss

= Negative profit = (P - ATC) x Quantity

market power

A firm's ability to set prices for goods and services in a market.

increasing marginal returns

A new worker hired adds more to total output than the previous worker hired, so that both average and marginal products are rising.

variable costs

Costs that vary with output fluctuations, including expenses such as labor and material costs.

_____ in an industry can be so large that demand will support only one firm.

Economies of scale

HHI

Herfindahl-Hirschman index (HHI) A way of measuring industry concentration, equal to the sum of the squares of market shares for all firms in the industry.

HHI > 1,800

Industry is highly concentrated

x- inefficiency

because monopolies do not face competition, they do not act efficiently - corp. travel, jets, and other perks contribute to x- inefficiencey

Jim Delaney sold his pizza firm to an investor who then sold stock to the public. Jim now earns a salary of $5,000 a month, and all the profits are distributed to the stockholders. This firm is an example of a:

corporation.

Corn is a perfectly competitive commodity. In the market place, the demand curve for corn is:

downward sloping.

monopolies do not guarentee

economic profit

Which of the following costs are usually tend to be fixed?

lease on a building

Monopolists are

price makers

The demand curve for a monopolist is:

the industry demand curve.

Consider the corn industry (a perfectly competitive industry). The price per bushel is $2 and there are constant returns to scale. If the long-run, minimum ATC is $1.50 per bushel, it should follow that (ceteris paribus):

the long-run price will be $1.50 per bushel.

In the short run:

the number of firms is fixed.

Normal profit

the rate of return necessary to keep a firm in business over an extended period of time

if supply increases

there are no firm entering or leaving the industry

which is an explicit cost?

wage

Normal profits are equal to:

zero economic profits.

A perfectly competitive firm has total revenues equal to $360 when it produces 40 units. What is the marginal revenue for the 41st unit?

$9

Monopoly power

- a firm with monopoly power has some control over price

Oligopoly

- ex: the automobile industry

control over a significant factor

- if a firm owns or has control over an important input into the production process, that firm can keep potential rivals out off the market

we say a firm is generating ECONOMIC PROFITS

- if it is generating profits in excess of zero once implicit costs are factored in

Above- normal profits

- increases industry supply and market price falls

price taker

- individual firms in competitive markets get their prices from the market since they are so small that they cannot influence market price

The future of antitrust policy

- is it time for policy to adapt to the global markets and focus on information and services?

The firm's short run supply curve

- is its marginal cost curve above the minimum point on the average variable cost curve

patents

- legal monopoly status for new inventions, usually lasts 20 years

revenue

- price per unit times quantity sold (we assume that the GOAL of the firm is to MAXIMIZE profit)

government franchises, patents, and copyrights

- some barriers to entry are legal government mandates

the short run

-a period of time over which at least one factor of production is fixed or cannot be changed - economists typically assume that plant capacity is fixed in the short run

5 steps to determine a monopolit's optimal output, price and profit

1) Find the point where MC = MR 2) Find the corresponding output level 3) Find the profit maximizing price by coming up to the demand curve 4) At the profit maximizing output find the average total cost 5) Find the profit = (P - ATC) x Q

Table) In the table, the marginal product for the fourth worker is: (Look in phone for chart)

10

If an industry is made up of five firms with market shares of 25%, 20%, 20%, 20%, and 15%, respectively, its Herfindahl-Hirschman Index is:

2,050.

economic profit

= total rev - explicit cost - implicit cost

barriers to entry

Any obstacle that makes it more difficult for a firm to enter an industry, and includes control of a key resource, prohibitive fixed costs, and government protection.

total revenue

Equal to price per unit times quantity sold.

profit

Equal to the difference between total revenue and total cost.

Which of the following examples represents the short run?

Ford asks its workers to work overtime.

price caps

Maximum price at which a regulated firm can sell its product. They are often flexible enough to allow for changing cost conditions.

Each firm's total revenue will be equal to

Price x Quantity sold = ( P x Q)

marginal cost pricing rule

Regulators would prefer to have natural monopolists price where P = MC, but this would result in losses (long term) because ATC > MC. Thus, regulators often must use an average cost pricing rule.

average cost pricing rule

Requires a regulated monopolist to produce and sell output where price equals average total cost. This permits the regulated monopolist to earn a normal return on investment over the long term and therefore remain in business.

rent seeking

Resources expended to protect a monopoly position. These are used for such activities as lobbying, extending patents, and restricting the number of licenses permitted.

short run supply curve

The marginal cost curve above the minimum point on the average variable cost curve.

production

The process of turning inputs into outputs.

sunk costs

Those costs that have been incurred and cannot be recovered, including, for example, funds spent on existing technology that has become obsolete and past advertising that has run in the media.

explicit costs

Those expenses paid directly to another economic entity, including wages, lease payments, taxes, and utilities.

A perfectly competitive market helps ensure that the things produced are the things that consumers want. This demonstrates the concept of:

allocative efficiency.

accounting profit is calculated

by including only explicit cost

If a firm increases its inputs by 80% and its output increases by 60%, then this would be an example of:

diseconomies of scale.

normal profit occurs when

economic profit equals zero

A bicycle factory finds that it can lower costs if it also produces tricycles and unicycles. This is an example of:

economies of scope.

__(Figure: Determining Marginal Returns) Referring to both the table and the figure, adding a third worker leads to:

increasing marginal returns.

When perfectly competitive firm X sells three units of product Z, its marginal revenue is $4.67. When it sells 100 units, marginal revenue is $4.67. We can conclude that the price:

is $4.67.

A deadweight loss:

is the same as welfare loss.

Which of the following is an implicit cost?

opportunity cost

Assume that at a given level of output a monopoly firm has marginal revenue of $9, its ATC is $9, and marginal cost is $7. If this firm were to incrementally increase its output, then:

profit will increase.

All of the following are barriers to entry in an industry, EXCEPT:

relatively low marginal tax rates.

When a business offers its customers bulk discounts, they are practicing:

second-degree price discrimination.

how to calculate marginal product

subtract total production from period zero from period one

marginal cost

the additional cost or rev when you add another unit of product

Marginal cost

the change in total cost arising from the production of additional units of output Marginal cost = change in total cost / change in quantity = 1?

losses will lead to

the exit of some firms

constant returns to scale

you double your input and get exactly double your output

diseconomies of scale

you double your input and get less than double your output

__(Figure: Determining Long-Run Adjustments) The figure depicts the cost curves for a firm in a perfectly competitive industry. In the long run, the market price of this product will be:

$40

The profit maximizing monopolist will earn profit equal to which of the following?

( P - ATC) x Q

If an industry contains 8 firms with market shares of 25, 18, 15, 12, 20, 10, 10, 6, 4, its 4 firm concentration ratio is what?

( just add up the first 4 numbers/ firms) 70

If FC = total fixed costs VC = total variable cost TC = total cost

- Average fixed cost (AFC) = FC/Q - Average variable cost (AVC) = VC/Q - Average total cost (ATC) = TC/Q

Short run cost curves

- Both the Average variable cost and Average total cost curves are U- shaped - at relatively low levels of output, the curves slope downward, reflecting an increase in returns as average costs drop - as production levels rise, diminishing returns set in, and average costs start to rise again

economic profits

- The sum of explicit (out-of-pocket) and implicit (opportunity) costs. - Profit in excess of normal profits. These are profits in excess of both explicit and implicit costs.

The profit maximizing rule

- a firm maximizes profit by producing at the point ( quantity) where marginal revenue equals marginal cost (MR = MC) - if a firm is earning zero economic profits at this point, it means that it is earning a normal rate of accounting profit

when perfect price discrimination can be employed:

- a firm will charge each customer a different price : the maximum price each is willing to pay.

IN the long run

- a firm will choose the plant size appropriate for its market - each different plant size is associated with a unique long run cost structure

in the long run

- all factors are variable - firms will enter the industry in response to profits - firms will leave the industry in response to losses

implicit costs

- all opportunity costs of using resources that belong to the firm - these include depreciation, depletion of business assets, and the opportunity cost of a firm's capital

firm

- an economic institution that transforms inputs, or factors of production, into outputs, or products for consumers - must determine MARKET NEED - must decide HOW to produce the good or service

increasing cost industry

- an industry that faces higher prices and costs as industry output expands

Economies of scale

- as a firm's output increases, its long run average total costs will tend to decrease - decreasing Long run average total cost - by producing more, the cost per unit decreases - this is because as a firm grows in size, economies of scale result from such items: - specialization of labor and management - better use of capital - increases possibilities for making several products that utilize complimentary production techniques

semiconductor industry

- as the demand for semiconductors has risen over the past few decades, their price has fallen dramatically

because of increasing and decreasing returns associated with typical production processes:

- average costs will vary with the level of output

economic profitis calculated using

- both explicit and implicit costs

Monopolies maximize profit the same way competitive firms do:

- by following the rule: profit is maximized at the quantity where MR = MC

Economies of scope

- by producing products that are interdependent, firms are able to produce and market these goods at lower costs - Once a company has established a department, its easier in the future to expand - "learning by doing" - Worth publisher can more easily produce and print new textbooks than you can

second degree price descrimination

- charging consumers for different blocks of consumption - ex: producers of electric, gas, and water utilities often incorporate block pricing

The firm can minimize the loss by following this rule:

- continue to produce ( in the short run) as long as price covers average variable cost - shut down in the short run if price falls below average variable cost

sources of monopoly power:

- control over a significant factor of production - economies of scale: As the firm expands in size, average total costs decline - government franchises, patents, copyrights

sunk costs

- costs that have been spend, can't be recovered and don't effect your recovery - rational decisions ignore sunk costs

third degree price descrimination

- different price to each type of consumer - the various fares charged for airline flights are a good example - student an senior discounts at the movies

perfectly competitive market

- each firm is a PRICE TAKER

a natural monopoly exists when:

- economies of scale are so significant that the minimum efficient scale of operation id roughly equal to market demand - in this case, efficiency production can only be accomplished if the industry lies in the hands of one firm - a monopolist

long run industry supply

- economies or diseconomies of scale determine the shape of the long run average average total cost (LRATC) curve for individual firms - How much does the expansion of an industry influence resources prices? ( increase in costs)

Monopoly

- ex: the diamond industry - one company has a monopoly over all the worlds diamond mines

constant cost industiries

- expand in the long run without significant changes in average cost - some fast food restaurants re-create their operations from market to market without a noticeable rise in costs

Characteristics of oligopoly:

- fewer firms - mutually interdependent decisions - substantial barriers to entry - potential for long run economic profits - shared market power and considerable control over price

total cost is the sum of

- fixed costs and variable costs - TC= FC + VC

The concentration ratio

- is the share of industry sales accounted for by the industry's largest firm - the 4 firm and 8 firm concentration ratios are most commonly reported

The goal of antitrust policy and laws to eliminate monopolies:

- is to perserve competition and prevent monopolies with their maximum market power from arising in the first place

Economists define a normal rate of return on capital as the return

- just sufficient to keep investors satisfied

characteristics of monopolistic competition:

- many buyers and seller - differentiated products - no barriers to market entry or exit - no long run economic profits - some control over price

Characteristics of Perfect Competition:

- many buyers and sellers - homogeneous (standardized) products - no barriers to market entry or exit - no long run economic profits - no control over price

Network externalities

- markets in which the network becomes more valuable as more people are connected to the network

Contestable markets

- markets that look monopolistic but where entry costs are so low that the sheer threat of entry keeps prices low - potential competition constrains form behavior - In a contestable market, firms will behave like competitive firms ( even if there are only a few)

price caps

- maximum limits on the prices firms can charge for products - these caps can be adjusted in response to changing cost conditions

MR = Change in TR / Change in Q where TR = P x Q

- monopoly firm has price control.... but to sell more quantity it must obey the law of demand and lower the price - so any increase in sales requires a lower price..... - to sell 11 instead of 10 requires the firm reduce price form $18 to $17 - The total revenue at P = $18 was ($18x10=$180) p- The total revenue at P= $17 is ($17x11=$187) - The marginal revenue is change in total revenue/ change in quantitiy or $7/1=$7

Partnership

- more than one owner - can divide tasks amongst partners -division of labor -UNLIMITED LIABILITY of all owners for EACH partner's actions ( you are liable for your partners actions as well)

monopolies do create some benefits

- new products, technologies and medical cures that benefit many companies - the incentives to earn monopoly profit created by parents and copyrights

4 factors of the market firm

- number of firms - nature of product - barriers to entry - extent of control over price

natural monopolies

- often forced to charge a pice equal to its ATC

Sole Proprietorships

- one owner - easy to start - limited access to financial capital - owner's personal assets are subject to unlimited liability ( basically, if there is a lawsuit, your personal assets could be taken)

corporations

- owners are called "stockholder" - corporation has legal rights( like an individual) - can raise money by issuing stock - LIMITED LIABILITY for all owners: losses are unlimited to value of stock - ( profit earned from a corporation is taxed twice. once on a personal level and then again on the corporate level)

Primary market structures

- perfect competition - monopolistic competition - oligopoly - monopoly ( goes from most competition to least?)

market structure analysis

- perfect competition Many buyers and sellers Homogeneous (standardized) products No barriers to market entry or exit No long-run economic profit No control over price - monopolistic competition Many buyers and sellers Differentiated products No barriers to market entry or exit No long-run economic profit Some control over price - oligopoly Fewer firms (such as the auto industry) Mutually interdependent decisions Substantial barriers to market entry Potential for long-run economic profit Shared market power and considerable control over price - monopoly One firm No close substitutes for product Nearly insuperable barriers to entry Potential for long-run economic profit Substantial market power and control over price ( need to know and describe all of these) -By observing a few industry characteristics such as number of firms in the industry or the level of barriers to entry, economists can use this information to predict pricing and output behavior of the firm in the industry. (4 factors defining the intensity of competition) - number of firms in the industry - nature of the industry's product - barriers to entry - extent to which individual firms can control prices

Technology

- plays a role in altering the shape of the LRATC curve - Enhance production techniques - Instantaneous global communications - The use of computers in accounting and cost control are just a few recent examples of ways in which technology has permitted firms to increase their scale of operations

Rate of return regulation:

- product pricing that allows the firm to earn a normal return on investment - This leads to added regulation regarding allowable costs

The long run outcome in competitive markets will have :

- production efficiencey: goods are supplied at the lowest possible opportunity cost - allocative efficiencey: the mix of goods and services produced are just what society desires. The price that consumers pay is equal to marginal cost and is also equal to the least average total cost

copyrights

- protect intellectual property for an extended period of time

the normal rate of return

- represents the opportunity cost of capital - if a firm's rate of return on capital falls below this rate, investors will put their funds to use elsewhere

Monopolistic compettion

- restaurant industry - pizza shops everywhere, not just industry but mom and pop places , but not all the products are the same, there are different variations of pizza

The conditions required for price discrimination:

- sellers must have control over price - sellers must be able to separate the market into different consumer groups based on their elasticities of demand - sellers must be able to prevent arbitrage ( buying it in one location and selling it in another location for a different price)

Marginal revenue

- the change in the total revenue that results from the sale of one added unit of product - total revenue = Price x Quantity - Marginal revenue = change in total revenue/ change in quantity

The shape of the Long Run Average Total Cost

- the concept of the LRATC assumes that, in the long run, firms will build plants of the size best fitting the levels of output they wish to produce

profit

- the difference between total revenue and total cost

marginal product ( of labor)

- the extra output by adding to one more unit of labor/ by hiring one more laborer - (change in quanitiy/ change in labor) - the extra output resulting from the addition of one unit increase in the amount of labor output

under price discrimination

- the firm captures all consumer surplus as profit ex haggling at the flea market: perfect price discrimination

If price falls below the average total cost

- the firm will incur a loss

The herfindahl- hirshman index (HHI):

- the main measure of concentration used by the justice department to evaluate mergers and judge monopoly power - HHI: the sum of the squares of the market shares held by the largest firms - if you have 10% of the market power, you take the square. so 10 x 10 = 100 and add that to the squares of the other market shares - HHI range ( how high and low it can go): 0 to 10,000 - index numbers range from 0 to 10,000: larger numbers mean more market concentration

The definition of monomopoly

- the market has only one seller - no close substitutes exist for the product - there are significant barriers to entry - ex: utilities, microprocessors, diamonds, patented pharmacuticals

Under conditions of monopoly

- the price will be higher and output will be lower than under conditions of competition - the amount of allocative inefficiencey arising from a monopoly outcome is referred to as a dead weight loss ( AKA "welfare loss") - ( welfare means Producer surplus + Consumer surplus)

average product

- the total output divided by the amount of labor (total quantity/total labor)

Perfect competition

- the wheat industry - there is a small variation between a bushel of wheat - hot dog venders in new york city

as firms continue to grow

- they usually encounter diseconomies of scale - diseconomies of scale: a range of output where average total costs tend to increase - (some firms become so big that management loses the flexibility to adapt quickly)

explicit costs

- those paid directly to some other economic entity - these include wages, lease payments, expenditures for raw materials, taxes, utilities ect.

perfect competition

- what profit maximizing rule is - how to find the shut down point - how to find the short run supply curve - know the difference between production and allocative efficiency Many buyers and sellers Homogeneous (standardized) products No barriers to market entry or exit No long-run economic profit No control over price -A market structure with many relatively small buyers and sellers who take the price as given, a standardized product, full information to both buyers and sellers, and no barriers to entry or exit.

profit declines toward

- zero economic profits

5 steps to maximizing profit

1) Find the point value where MC = MR 2) FInd the corresponding output level 3) Find the profit maximizing price by coming up to the demand curve 4) At the profit maximizing output find the average total cost 5) Find the profit = (P x ATC) x Q

Staci's Sign Shoppe makes signs for businesses. Staci is currently producing 210 signs per week with three employees. Staci hires an additional worker and total output per week rises to 328. The marginal product of the last worker is ___________ signs.

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in practice, we use other methods of simplicity ( regulation in practice) :

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A monopolist has four distinct groups of customers. Group A has an elasticity of demand of 0.2, B has an elasticity of demand of 0.8, C has an elasticity of demand of 1.0, and D has an elasticity of demand of 2.0. The group paying the highest price for the product will be:

A

monopoly

A one-firm industry with no close product substitutes and with substantial barriers to entry.

short run

A period of time over which at least one factor of production (resource) is fixed, or cannot be changed.

long run

A period of time sufficient for firms to adjust all factors of production, including plant capacity.

diseconomies of scale

A range of output where average total costs tend to increase. Firms often become so big that management becomes bureaucratic and unable to control its operations efficiently.

Regarding the short-run cost model, the vertical distance between the ATC curve and the AVC curve is:

AFC

Which of the following is equivalent to AVC?

ATC - AFC

MC or marginal cost passes through the minimum points of the

ATC and AVC curves

diminishing marginal returns

An additional worker adds to total output, but at a diminishing rate.

firm

An economic institution that transforms resources (factors of production) into outputs

natural monopoly

An industry exhibiting large economies of scale such that the minimum efficient scale of operations is roughly equal to market demand

increasing cost industry

An industry that, in the long run, faces higher prices and costs as industry output expands. Industry expansion puts upward pressure on resources (inputs), causing higher costs in the long run.

decreasing cost industry

An industry that, in the long run, faces lower prices and costs as industry output expands. Some industries enjoy economies of scale as they expand in the long run, typically the result of technological advances.

constant cost industry

An industry that, in the long run, faces roughly the same prices and costs as industry output expands. Some industries can virtually clone their operations in other areas without putting undue pressure on resource prices, resulting in constant operating costs as they expand in the long run.

economies of scale

As a firm's output increases, its LRATC tends to decline. This results from specialization of labor and management, and potentially a better use of capital and complementary production techniques. - As the firm expands in size, average total costs decline.

economies of scope

By producing a number of products that are interdependent, firms are able to produce and market these goods at lower costs.

price discriminatition

Charging different consumer groups different prices for the same product.

second-degree price discrimination

Charging different customers different prices based on the quantities of the product they purchase.

third-degree price discrimination

Charging different groups of people different prices based on varying elasticities of demand.

perfect (first-degree) price discrimination

Charging each customer the maximum price each is willing to pay, thereby expropriating all consumer surplus.

fixed costs

Costs that do not change as a firm's output expands or contracts, often called overhead. These include items such as lease payments, administrative expenses, property taxes, and insurance premiums.

average total cost

Equal to total cost divided by output (TC/Q). Average total cost is also equal to AFC + AVC.

average fixed cost

Equal to total fixed cost divided by output (FC/Q).

average variable cost

Equal to total variable cost divided by output (VC/Q).

normal profits

Equal to zero economic profits; where P = ATC.

profit maximizing rule

Firms maximize profit by producing output where MR = MC. No other level of output produces higher profits.

long run average total cost (LRATC)

In the long run, firms can adjust their plant sizes so that LRATC is the lowest unit cost at which any particular output can be produced in the long run.

price taker

Individual firms in perfectly competitive markets get their prices from the market because they are so small they cannot influence market price. For this reason, perfectly competitive firms are price takers and can produce and sell all the output they produce at market-determined prices.

1,000< HHI < 1,800

Industry is moderately concentrated

antitrust

Laws designed to maintain competition and prevent monopolies from developing.

Among perfectly competitive firms, profit maximizing will always operate where:

MC = MR.

An unregulated natural monopolist would produce to the point at which:

MR = MC

p =

MR = MC = SRATC (min) = LRATC (min)

Price =

Marginal Revenue = Marginal Cost = LRATC (min)n

average product

Output per worker, found by dividing total output by the number of workers employed to produce that output (Q/L).

rate of return regulation

Permits product pricing that allows the firm to earn a normal return on capital invested in the firm.

x-inefficiency

Protected from competitive pressures, monopolies do not have to act efficiently. Spending on corporate jets, travel, and other perks of business represents x-inefficiency.

______ are more numerous, but ______ sell more goods and services.

Sole proprietorships; corporations

marginal costs

The change in total costs arising from the production of additional units of output (ΔTC/ΔQ). Because fixed costs do not change with output, marginal costs are the change in variable costs associated with additional production (ΔVC/ΔQ).

marginal revenue

The change in total revenue from selling an additional unit of output. Because competitive firms are price takers, P = MR for competitive firms.

accounting profits

The difference between total revenue and explicit costs. These are the profits that are taxed by the government.

implicit costs

The opportunity costs of using resources that belong to the firm, including depreciation, depletion of business assets, and the opportunity cost of the firm's capital employed in the business.

Which of the following is NOT a condition necessary for price discrimination?

The product must be a durable good.

normal profits

The return on capital necessary to keep investors satisfied and keep capital in the business over the long run.

total cost

The sum of all costs to run a business. To an economist, this includes out-of-pocket expenses and opportunity costs.

economic costs

The sum of explicit (out-of-pocket) and implicit (opportunity) costs.

Which of the following statements is TRUE about the relationship between a firm's demand curve under perfect competition and monopoly?

Under perfect competition, the demand curve is perfectly elastic; under monopoly, the demand curve has elastic, unit-elastic, and inelastic portions.

shutdown point

When price in the short run falls below the minimum point on the AVC curve, the firm will minimize losses by closing its doors and stopping production. Because P < AVC, the firm's variable costs are not covered, therefore by shutting the plant, losses are reduced to fixed costs only.

Assume that Coca-Cola has a market share of 40% and Pepsi has a market share of 30%. If Pepsi and Coca-Cola attempt to merge, will the Federal Trade Commission challenge the attempt in court?

Yes. The industry is concentrated.w2q

Which of the following firms is MOST likely to operate in a perfectly competitive market?

a maple syrup company

The long run

a period of time sufficient for a firm to adjust all factors of production, including plant capacity - firms can enter or exit the industry in the long run

The average fixed cost curve

always decreases as production increases

An example of x-inefficiency is:

an executive, at corporate expense, hiring a limousine to travel one block. whenever it is raining.

Decreasing cost industry

an industry that experiences lower costs as it expands

the marginal product initially rises

as more workers are hired, then DECLINES - ex: past a certain point, another field worker will be so crowded his marginal product will be lower than the last worker's

When the Keep On Calling Cell Phone Company is at full capacity, it incurs costs of $230,000. During the December shutdown period, when no cell phones are produced, it incurs costs of $76,000. One can conclude that:

at full capacity, variable costs are $154,000.

If the public utility commission allows the water company to earn a normal profit, then it is enforcing a(n):

average cost pricing rule.

average cost per unit is the sum of

average fixed cost and average variable cost - ATC = AFC + AVC example in notes

Rent seeking

behavior directed toward avoiding competition - ex: include lobbying for protective legislation, gaining parents and restricting licenses

market structure analysis

by observing a few industry characteristsics, we can predict pricing and output behavior of the firm

price discrimination

charging different consumer groups different prices for the same product ex: wednesday all you can drink ladies early bird special

__(Figure: Determining Industry Cost Characteristics) Short-run and long-run supply curves with short-run market equilibrium at points A and B are shown in the graph. We can conclude that the industry in the graph is a(n):

constant cost industry.

fixed costs (overhead)

do not vary with the quantity produced

economic costs include both _____ and _______ costs

explicit and implicit

__(Table) In the table, diminishing marginal returns begin with the:

fifth worker.

LRATC concept assumes that in the long run

firms build plants of the size best fitting the levels of output they wish to produce

short run costs can either be

fixed or variable

A price taker is a firm that:

has no control over the market price.

At movie theaters, lower prices are charged for matinees than for evening showings of the same film. The customers attending the matinees have:

higher elasticities of demand than customers attending the evening showings.

economies of scale

if you double your input, you get more than double your output

The cost incurred by a firm through the depreciation of an apartment complex is a(n):

implicit cost.

HHI < 1,000

industry is unconcentrated

Farmer Ted sells winter wheat in a perfectly competitive market. The market price for a bushel of winter wheat is $9. Ted has 270 bushels of wheat to sell. If his total variable cost is $2,000 and his total fixed cost is $500, then Ted:

is minimizing his losses.

Final equilibrium in the long run

is the point at which industry price is just tangent to the minimum point on the ATC curve

production

is the process of turning inputs into outputs - the cost structure of a firm depends on the nature of the production process

__(Figure: Determining Long-Run Adjustments) If the current price is $36 and this is a perfectly competitive industry:

losses in the short run would induce some firms to leave the industry.

If the price of a mango is $2 and a farmer sells 2,000 mangos, but it costs him $400 for labor, $1,600 for rent, and $2,000 for advertising, then the farmer:

makes $4,000 in total revenue.

As an industry becomes more concentrated among just a few firms:

monopoly power increases

When hiring additional workers reduces total output, the firm faces:

negative marginal returns.

If firms in the industry are earning short run economic profits

new firms can be expected to enter the industry in the long run, or existing firms may increase the scale of their operations

does profit maximization necessarily mean cost minimization?

no

variable costs fluctuate as the level of

output changes

In which of the following lists are market structures ordered from the highest number of sellers to the lowest?

perfect competition, monopolistic competition, oligopoly, monopoly

All market structures experience some type of control over price, EXCEPT:

perfect competition.

Suppose a water utility compnay charges a residential customer $1.50 per 1,000 gallons for the first 30,000 gallons of water used, and $1.00 per 1,000 gallons for any amounts used in excess of 30,000 gallons of water. The water utility is practicing:

second-degree price discrimination.

_(Table) If the toy-making firm in the table faces a market price of $20 in the short run it should:

shut down.

Which sequence describes the long-run adjustment process in a competitive market when firms are earning short-run economic losses?

some firms exit, industry supply decreases, market price rises

__(Table) In the table, as long as marginal product is greater than average product:

the average product rises.

Losses begin to exceed fixed costs

the firm will do better to close down and limit losses to fixed costs

when an industry expands

this new demand for raw materials and labor may push up the price of some inputs

The marginal cost curve will intersect the AVC curve and ATC curve

through both curves minimum points of the ATC and AVC Curves

the marginal product is the slope of

total product curve

The Federal Trade Commission Act, as amended, prohibits:

unfair competitive practices and deceptive acts.

Shutdown rule

when the price falls below minimum AVC, firm should shut down immediately