Flash cards

In this graph, price is less than average total cost, so P - ATC is negative. This profits is actually negative, so we call it a loss.

firms with losses Recall profit = (P-ATC) x Q

A monopoly without price discrimiation

has a deadweight loss

A monopoly with perfect price discrimination

has a total surplus equal to that of a competitive market

Thus, for these two reasons, a higher price may be necessary to induce a larger quantity supplied, in which case the long-run supply curve is upward-sloping rather than horizontal. Nonetheless, the basic lesson about entry and exit remains true. Because firms can enter and exit more easily in the long run than in the short run, the long-run supply curve is typically more elastic than the short-run supply curve.

Assumptions we need so that long run supply curve is perfectly elastic (Flat horizontal line) So far, we have seen that entry and exit can cause the long-run market supply curve to be perfectly elastic. The essence of our analysis is that there are a large number of potential entrants, each of which faces the same costs. As a result, the long-run market supply curve is horizontal at the minimum of average total cost. When the demand for the good increases, the long-run result is an increase in the number of firms and in the total quantity supplied, without any change in the price. There are, however, two reasons that the long-run market supply curve might slope upward. The first is that some resources used in production may be available only in limited quantities. For example, consider the market for farm products. Anyone can choose to buy land and start a farm, but the quantity of land is limited. As more people become farmers, the price of farmland is bid up, which raises the costs of all farmers in the market. Thus, an increase in demand for farm products cannot induce an increase in quantity supplied without also inducing a rise in farmers' costs, which in turn means a rise in price. The result is a long-run market supply curve that is upward-sloping, even with free entry into farming. A second reason for an upward-sloping supply curve is that firms may have different costs. For example, consider the market for painters. Anyone can enter the market for painting services, but not everyone has the same costs. Costs vary in part because some people work faster than others and in part because some people have better alternative uses of their time than others. For any given price, those with lower costs are more likely to enter than those with higher costs. To increase the quantity of painting services supplied, additional entrants must be encouraged to enter the market. Because these new entrants have higher costs, the price must rise to make entry profitable for them. Thus, the long-run market supply curve for painting services slopes upward even with free entry into the market.

Collusion A cartel is a group of firms that collude to earn normal profit. True/False

False

True/False Bertha owns iSnack, a firm producing veggie chips, and Danko owns a snack stand. Yesterday, Bertha called Danko and proposed that she will supply her chips to the stand at $1 per bag if Danko agrees to sell them at $1.20 per bag. Economists deem such a practice as anticompetitive and detrimental to society and will recommend that the Justice department punish iSnack. True False

False The practice of selling a product to retailers and requiring the retailers to charge a specific price for the product is called resale price maintenance. Some courts may indeed see such as practice as anticompetitive and detrimental to society. Yet economists defend resale price maintenance on the grounds that it cannot reduce competition below what it already would be, as iSnack has no incentive to discourage competition among its retailers.

The height of the rectangle is P − ATC, the difference between price and average total cost. The width of the rectangle is Q, the quantity produced. Therefore, the area of the rectangle is (P − ATC) × Q, which is the firm's profit.

Firms with profits Recall profit = (P-ATC) x Q

Why is MR < P for monopolies?

For a monopoly, marginal revenue is lower than price because a monopoly faces a downward-sloping demand curve. To increase the amount sold, a monopoly firm must lower the price it charges to all customers. If MR is positive, I can make more revenue by selling one more unit If MR is negative, I can make more revenue by selling one less unit

TR< VC:

If the firm shuts down, it loses all revenue from the sale of its product. At the same time, it saves the variable costs of making its product (but must still pay the fixed costs). Thus, the firm shuts down if the revenue that it would earn from producing is less than its variable costs of production.

Inefficiency of Monopoly

Note: when the monopolist charges a price above marginal cost, some potential consumers value the good at more than its marginal cost, but less than the monopolist's price. They don't buy the good. Because their value > cost, this is inefficient. Monopoly Q is less than Efficient Q, creating DWL

Recall for a competitive firm MR = P In contrast, for a competitive firm, if they sell one more unit, the marginal revenue they get from that unit is simply the Price of that unit, so MR = P

Observe MR = ∆TR/∆Q = (TR1 - TR2)/(Q1 - Q2) = (P x Q1 - P x Q2)/(Q1 - Q2) = P x (Q1 - Q2)/(Q1 - Q2) = P

A useful way to write profits

Profit = Total Revenue - Total Cost = P x Q - ATC x Q = (P - ATC) x Q

What is the optimum choice for a consumer?

The point of tangency between the indifference curve and the budget constraint The optimum consumer choice is the point at which the budget constraint and the indifference curve have the same slope, which is the point of tangency between the indifference curve and the budget constraint.

tying

The practice of requiring someone to buy two or more items together, rather than separately, is called tying.

resale price maintenance.

The practice of selling a product to retailers and requiring the retailers to charge a specific price for the product is called

P<AVC:

This rule is intuitive: When choosing to produce, the firm compares the price it receives for the typical unit to the average variable cost that it must incur to produce the typical unit. If the price doesn't cover the average variable cost, the firm is better off stopping production altogether. The firm still loses money (because it has to pay fixed costs), but it would lose even more money by staying open. The firm can reopen in the future if conditions change so that price exceeds average variable cost.

True/False Suppose Samantha is planning for two periods in her life: (1) young and working, and (2) old and retired. When the interest rate rises from 5 percent to 10 percent, Samantha plans to consume more in period (1) due to the higher interest rate. For Samantha, the income effect is greater than the substitution effect.

True When the interest rate rises, consumption in period (2) becomes less costly relative to consumption in period (1). The substitution effect induces Samantha to consume more in period (2) and less in period (1). But the higher interest rate moves Samantha to a higher indifference curve, so she wants to consume more in both period (1) and period (2). If the income effect is greater than the substitution effect, Samantha consumes more in period (1), meaning she saves less.

True/False An increase in market demand for a product in a competitive market will raise profits for firms currently in the market.

True An increase in market demand in a competitive market in the short run will have the effect of raising price. The increase in demand will also raise profits for firms that currently exist in the market.

True/False To move the allocation of resources closer to the social optimum, policymakers should encourage firms in an oligopoly to compete rather than cooperate with each other.

True. Protecting and encouraging competition through antitrust laws, the government can improve allocation of resources and move the market outcome closer to the social optimum.

Monopolist's Profit = (P - ATC) x Q

You always shade in the area between price and ATC If price is above ATC its positive profits If ATC is above price, its negative profits This is why its so important to clearly label your axis, because then you can tune out the rest of the graph and focus on where you labeled We use the curves to find Q P and ATC But once we have Q P and ATC we do not need the lines to find profit, and in fact they can make things confusing

Deadweight loss Consider the market for a fictional product called juppers. If total surplus under a competitive environment is $100, but under a monopoly consumer surplus is $20 and producer surplus is $60, what is the value of the deadweight loss caused by this monopoly? a. $20 b. $180 c. $80 d. $70

a. $20 Deadweight loss caused by a monopoly market structure is equal to the loss of total surplus resulting from the good being sold by a monopolist rather than in a competitive market. Therefore, it is equal to $100 - $20 - $60 = $20.

Profit maximization for perfectly competitive firms How does marginal revenue compare to marginal cost? a. Both depend on changes in quantity produced. b. Neither depend on changes in market price. c. Both depend on changes in total revenue. d. Both depend on changes in variable cost.

a. Both depend on changes in quantity produced. Correct. Marginal revenue is the change in revenue divided by the change in quantity, while marginal cost is the change in total cost divided the change in quantity.

Common resources The Coase Theorem applies to the allocation of: a. Common resources b. Private goods c. Club goods d. Public goods

a. Common resources According to the Coase Theorem, the best way to prevent overuse of common resources is to create a tradable permit system.

Regulation on monopolies From an economist's point of view, what regulation system achieves allocative efficiency? a. Require that the monopoly set prices based on average cost. b. Require that the monopoly set prices based on marginal cost. c. Require that another firm forms to compete with the monopoly. d.Allow the monopoly to set prices

a. Require that the monopoly set prices based on average cost. Average cost pricing allows the monopoly zero economic profit, which mimics perfect competition. Marginal cost pricing leads to negative profit, which will discourage companies from entering industries that lend themselves to natural monopolies. Allowing the monopoly to set prices leads to deadweight loss, while creating false competition is inefficient.

Public goods To make a private good into a club good, you would need to find some way to convert the good from: a. Rival to non-rival in consumption b. Non-rival to rival in consumption c. Excludable to non-excludable in consumption d. Non-excludable to excludable in consumption

a. Rival to non-rival in consumption A private good is rival and excludable in consumption, whereas a club good is excludable and non-rival in consumption. Therefore, you would need to find a way to convert the good from rival to non-rival to transform it into a club good.

Which of the following statements is not correct? a. The government should never intervene to improve monopoly inefficiency. b. By regulating a natural monopoly where price equals average total cost, the monopoly earns zero profits. c. Private ownership is typically preferred to public ownership. d. The government may use antitrust laws to prevent a merger if the government believes the merger will reduce competition and increase prices.

a. The government should never intervene to improve monopoly inefficiency. Because monopolies fail to allocate resources efficiently, they produce less than the socially desirable quantity of output and charge prices above marginal cost. Sometimes it is desirable for the government to intervene to improve monopoly inefficiency either by using antitrust laws, regulation, or public ownership

Tax systems What is the expected result of a change in the tax base for a proportional tax? a. The tax rate remains constant. b. The tax rate increases proportionally. c. The tax rate decreases proportionally. d.The tax rate also changes.

a. The tax rate remains constant. A proportional tax will have a constant tax rate despite changes in the tax base.

Firms will have an incentive to enter a competitive market when a. economic profits are positive. b. price is equal to marginal cost. c. price is less than marginal cost. d. economic profits are negative.

a. economic profits are positive. There will be an incentive for firms to enter a competitive market when economic profits are positive. In a competitive market with free entry and exit, existing firms making positive economic profit will induce new firms to enter.

Refer to the Figure. Interest rates increase by 3 percent. Stefanie's optimal choice point moves from _______ and Stefanie saves _____ than she did before interest rates increased. a. point A to point B; less b. point B to point A; more c. point B to point A; less d. point A to point B; more

a. point A to point B; less A higher interest rate rotates the budget constraint outward and moves Stefanie's optimum from point A to point B. Stefanie consumes more while she is younger and saves less than she did before interest rates increased. Because Stephanie's saving is her income when young minus her consumption when young, consuming more while young decreases Stephanie's saving.

Shutdown decisions The shutdown point of a perfectly competitive firm occurs at: a. the minimum of the average variable cost curve. b. the minimum of the average total cost curve. c. the intersection of the marginal cost curve and the average total cost curve. d. the quantity where marginal revenue equals marginal cost.

a. the minimum of the average variable cost curve. A perfectly competitive firm maximizes profit where marginal revenue equals marginal cost. As long as total revenue covers total variable cost, the firm should not shut down. Therefore, the price where the firm is indifferent between producing and shutting down occurs where the marginal cost curve intersects the average variable cost curve, which occurs at the minimum of the average variable cost curve.

New Age Beverage, Harmony Soda, and Old Time Bottles have agreed to each reduce production in order to reduce total supply so that price will increase. New Age Beverage, Harmony Soda, and Old Time Bottles are an example of which of the following? a. A duopoly b. A cartel c. A monopoly d. A payoff matrix Feedback: Correct. A cartel is a group of firms that collude to produce the monopoly output and sell at the monopoly price.

b. A cartel Feedback: Correct. A cartel is a group of firms that collude to produce the monopoly output and sell at the monopoly price.

Externalities To limit water consumption, the government requires that all new construction and renovation include low-flow toilets that use less water. This is an example of which of the following? a. Better defined property rights b. A command-and-control regulation c. A corrective tax d. Marketable permits

b. A command-and-control regulation Command-and-control regulations require specific actions by market participants, thus dictating what they must or must not do.

Game theory New Age Beverage and Harmony Soda make cola-flavored soft drinks in an oligopoly market. Consider the following summary of their choices and consequences concerning the decision to heavily discount their product during the upcoming holiday season. The numbers listed are in millions of dollars of profit. What is most likely to occur? a. Both companies will not discount their product. b. Both companies will discount their product. c. Harmony Soda will not discount, but New Age Beverage will discount. d. New Age Beverage will not discount, but Harmony Soda will discount.

b. Both companies will discount their product. Both companies will discount their product because that is the dominant strategy for each company.

Which of the following is not a possible strategy for the government to follow to remedy the inefficient allocation of resources associated with monopolies? a. Prevent mergers through antitrust laws b. Mandate that the firm release more stock options c. Regulate the prices that monopolies can charge d. Do nothing

b. Mandate that the firm release more stock options Policymakers in the government can respond to the problem of monopoly in one of four ways: increasing competition with antitrust laws, regulation, public ownership, or doing nothing.

A large, lightly-used pool at a private resort is an example of a a. public good b. nonrival but excludable good c. private good d. rival but nonexcludable good

b. nonrival but excludable good A pool at a private resort is excludable, and because it is large and lightly used, one person's use doesn't diminish another person's use, so the pool is also nonrival.

Refer to the Figure. This firm experiences diseconomies of scale at what output levels? a. output levels between Q2 and Q4 b. output levels greater than Q4 c. output levels between Q1 and Q5 d. output levels less than Q

b. output levels greater than Q4 Diseconomies of scale exist when the long-run average total cost rises as the quantity of output increases. The long-run average total cost (ATCD) rises for output levels greater than Q4.

Which of the following is correct with respect to firms in a competitive market in the long-run? a. price is equal average fixed costs b. price is equal to average total costs c. economic profits are positive d. price is below average total costs

b. price is equal to average total costs In the long-run, from entry and exit, price equates average total costs. This condition explains why economic profits are zero in the long-run.

Which of the following is an example of economies of scale? a. 20 workers producing 100 units, increasing to 40 workers producing 200 units b. 20 workers producing 100 units, increasing to 40 workers producing 150 units. c. 20 workers producing 100 units, increasing to 40 workers producing 300 units d. 20 workers producing 100 units, increasing to 40 workers producing 100 units

c. 20 workers producing 100 units, increasing to 40 workers producing 300 units Economies of scale are experienced when specialization of labor allows average costs of production to fall as production increases.

Natural monopoly Which of the following is a distinguishing feature of a natural monopoly? a. A rising average total cost curve b. A declining marginal cost curve c. A declining average total cost curve d. A vertical average total cost curve

c. A declining average total cost curve A natural monopoly arises when average total costs decline over the range of production that satisfies market demand. As a result, one firm is able to produce the total quantity demanded in the market at a lower cost than can two or more firms.

Profit maximization for monopolies a. BDEG b. ABGH c. ADEH d. BCFG

c. ADEH A monopolist maximizes profit at the quantity where marginal revenue equals marginal cost. This occurs at point F. At this quantity, the monopolist charges consumers' willingness to pay at that quantity, shown by point E. Total revenue is equal to price times quantity, which is graphically represented by area ADEH.

Refer to the Figure. Which curve represents the long-run average total cost? a. ATCB b. ATCC c. ATCD d. ATCA

c. ATCD . The long-run average-total-cost curve is a much flatter U-shape than the short-run average-total-cost curve. In addition, all the short-run curves lie on or above the long-run curve

Characteristics of perfectly competitive markets Acme Industries produces widgets in a perfectly competitive market. The market price is $10, and Acme has been selling 100 widgets per week at that price. Acme decides to increase the price to $11. What will happen in this situation? a. Acme will continue to sell 100 widgets per week. b. Acme will continue to sell widgets, but sales will decrease to less than 100 per week. c. Acme will be unable to sell any widgets. d. There is not enough information given to determine what will happen.

c. Acme will be unable to sell any widgets. In a perfectly competitive market, firms have zero market power, so if a firm increases its price above the market price, it will have zero sales.

The Tragedy of the Commons a. Occurs most often with club goods b. Is an example of a positive externality c. Can be eliminated by taxing use of a common resource. d. Is only applicable to land owned in common, which is rare.

c. Can be eliminated by taxing use of a common resource. The Tragedy of the Commons occurs when a common resource is overused. One way to decrease use of a good is to make it more costly by applying a tax. In fact, if the tax is the right amount, the use can be brought down to the efficient level, which eliminates the Tragedy of the Commons

When regulators use a marginal-cost pricing strategy to regulate a natural monopoly, which of the following is not true? a. The regulated monopoly will experience a price below average total cost. b. The regulated monopoly may rely on a government subsidy to remain in business. c. Deadweight loss still remains in this market. d. The regulated monopoly will experience a loss.

c. Deadweight loss still remains in this market. If the regulated price for a natural monopolist equals marginal cost, the monopoly suffers from an economic loss because price is below average total cost. Often times the regulated monopoly will rely on a government subsidy to remain in business because of this profit loss. Because the monopolist's price reflects the marginal cost of producing the good, deadweight loss no longer exists in this market.

Entry and exit decisions What is the expected result of a sustained pattern of losses in a given market or industry in the long run? a. Bankruptcy b. Diversification c. Exit d. Reduction

c. Exit Exit is the long-run process whereby firms leave a market in response to a sustained pattern of losses.

Which of the following is not a possible strategy for the government to follow to remedy the inefficient allocation of resources associated with monopolies? a. Prevent mergers through antitrust laws b. Regulate the prices that monopolies can charge c. Mandate that the firm release more stock options d. Do nothing

c. Mandate that the firm release more stock options Policymakers in the government can respond to the problem of monopoly in one of four ways: increasing competition with antitrust laws, regulation, public ownership, or doing nothing.

Monarch Gear and Line Drive Apparel are the only licensed producers of authentic World Series shirts. Consider the following summary of their choices and consequences concerning the decision to advertise. The numbers listed are in millions of dollars of profit. What is most likely to occur? a. Both companies will advertise. b. Both companies will not advertise. c. Monarch Gear will advertise, but Line Drive Apparel will not advertise. d. Monarch Gear will not advertise, but Line Drive Apparel will advertise.

c. Monarch Gear will advertise, but Line Drive Apparel will not advertise. Feedback: Each company will pursue their dominant strategy, which will lead Monarch Gear to advertise and Line Drive Apparel to not advertise.

What happens when oligopolists cooperate? a. Barriers to entry are relaxed. b. Net social welfare increases. c. Production is at the same level as in a monopoly market. d. Consumer surplus is at the same level as in a competitive market.

c. Production is at the same level as in a monopoly market. When oligopolists cooperate like a single firm, then price and production are also at levels characteristic of a single monopolistic firm.

Which of these is the socially desirable outcome of interactions among firms in an oligopoly? a.The firms set the price and output in a way that maximizes total profit in the market. b. The firms are able to create a successful cartel. c. The firms fail to make a sustainable agreement to collude. d. The firms get the government to nationalize the industry.

c. The firms fail to make a sustainable agreement to collude. When firms in an oligopoly are able to collude, they can pursue monopoly pricing and production levels, which produces more deadweight loss than if the firms are forced to compete.

Which of the following is not a common resource? a. the cleanliness of a house where cleaning is a shared duty b. open grazing land c. an uncongested toll highway d. the atmosphere

c. an uncongested toll highway An uncongested toll highway is excludable but not rival in consumption, making it a club good. The other choices are all not excludable but rival in consumption, making them common resources.

Which of the following is correct with respect to firms in a competitive market in the long-run? a. price is equal average fixed costs b. economic profits are positive c. price is equal to average total costs d. price is below average total costs

c. price is equal to average total costs In the long-run, from entry and exit, price equates average total costs. This condition explains why economic profits are zero in the long-run.

Refer to the Table . What is the self-interested strategy for Hoogle? a. Offer the perk only if Bapple does not offer the perk b. Do not offer the perk regardless of the decision made by Bapple. c. Offer the perk only if Bapple offers the perk d. Offer the perk regardless of the decision made by Bapple.

d. Offer the perk regardless of the decision made by Bapple. . Hoogle has a dominant strategy, which is to offer the perk regardless of the choice made by Bapple. To see this dominant strategy, note that, if Bapple offers the new perk, Hoogle's best response is also to offer the new perk, as Hoogle's profits increase by $20 million if Hoogle offers the perk but only $5 million if it doesn't. Meanwhile, if Bapple does not offer the new perk, Hoogle's best response is still to offer the new perk, as Hoogle's profits increase by $60 million if it offers the new perk but only $40 million if it does not.

Price discrimination What is the term for a firm that can determine the price within the confines of the demand curve? a. Demand taker b. Demand setter c. Price taker d. Price setter

d. Price setter Correct. Price setters set their own price within the confines of consumers' willingness to pay.

Asymmetric information and moral hazard Which of the following practices are attempts to reduce the problem of moral hazard? a. Certain interstate highways charge tolls for high traffic areas. b. As part of the application for a home equity line of credit, the bank checks your credit history. c. Vince works extra long hours at his new job to impress his boss. d. Restaurant workers receive most of their wages in the form of tips.

d. Restaurant workers receive most of their wages in the form of tips. . Moral hazard occurs when someone engages in risky behavior either because they are insured or because of the presence of a principal-agent problem. When restaurant hostesses and waitresses are paid more on tips versus an hourly wage, they are disincentivized to shirk, thus reducing the problem of moral hazard.

Characteristics of monopolies What is the expected result in a market served by a monopoly? a. Customers will see lower prices. b. New firms will arise to produce equivalent or substitute products. c. Mergers and acquisitions will increase. d. The seller is the price setter. Feedback: Correct. The seller is the price setter in a monopoly market.

d. The seller is the price setter. Feedback: Correct. The seller is the price setter in a monopoly market.

Refer to the Figure. The firm experiences economies of scale at which output levels? a. output levels between Q2 and Q4 b. output levels greater than Q4 c. output levels between Q1 and Q5 d. output levels less than Q2

d. output levels less than Q2 Economies of scale exist when the long-run average total cost falls as the quantity of output increases. The long-run average total cost (ATCD) falls for output levels less than Q2.

Refer to the Figure. Suppose Max experiences an increase in his hourly wage such that his budget constraint shifts from BC-1 to BC-2. His optimal choice point moves from ____, and his labor supply curve is ____________. a. point A to point B; upward sloping b. point B to point A; backward bending c. point B to point A; upward sloping d. point A to point B; backward bending

d. point A to point B; backward bending When Max's wage rises, his optimal choice point moves from point A to point B. Both consumption and leisure rise, resulting in a labor supply curve that slopes backward.

Refer to the Figure. Interest rates increase by 5 percent. Eric's optimal choice point moves from _______ and Eric saves _____ than he did before interest rates increased. a. point A to point B; less b. point B to point A; more c. point B to point A; less d. point A to point B; more

d. point A to point B; more A higher interest rate rotates the budget constraint outward and moves Eric's optimum from point A to point B. Eric consumes less while he is younger and saves more than he did before interest rates increased. Because Eric's saving is his income when young minus his consumption when young, consuming less while young increases Eric's saving.

The nash equilibrium is

what happens to players when they each act in their own interest and assume that the other players do the same

What is a Competitive Market?

•A firm in a competitive market is given the price, and it picks Quantity and sells to maximize its profit •Profit = Total revenue (TR) - total cost (TC)

Monopoly

•A monopoly is a price maker. It chooses the price and quantity to sell at to maximize its profits •If a monopoly wants to increase demand of its good, it needs to decrease the price of the good •Marginal revenue lies below the demand line, i.e. MR < P.

Monopoly does not have a supply curve

•A supply curve tells us the Q a firm supplies given a P, which makes sense for price takers. •However, Monopolys are price makers. •So, a supply curve does not really make sense in this context

The optimum consumer choice is the point at which the budget constraint and the indifference curve have the same slope, which is the point of tangency between the indifference curve and the budget constraint.

•ATC = AVC + AFC •AFC - always declines as output rises •the fixed cost is getting spread over a large number of units •AVC - typically rises as output increases •Because of diminishing marginal product •At first the effect of AFC decreasing is larger than the effect of AVC going up, causing ATC to go down. •But as Q increases, eventually the effect of AVC increasing becomes larger than the effect of AFC decreasing, causing the ATC to go up •This causes the ATC to decrease at first, but then increase. Giving it a U shape.

In the short run number of firms is fixed

•Each firm supplies quantity where P = MC •If the price increases, then in the short run firms adjust their Q so that P = MC

Firm maximizes profit by setting MR = MC

•Firm compares marginal revenue with marginal cost to find profit maximizing Q •If MR > MC: increase production •If MR < MC: decrease production •Maximize profit where MR = MC •So if we have a graph with MR and MC, we can easily find profit maximizing quantity 🎉 • •Marginal revenue is the increase in revenue you get from producing one more unit •Marginal cost is the increase in cost you get from producing one more unit

Shutdown

•Fixed costs: not relevant; are sunk costs in short run •Many of a restaurant's costs—the rent, kitchen equipment, tables, plates, silverware, and so on—are fixed. •Variable costs, VC: relevant •When the owner is deciding whether to serve lunch, only the variable costs—the price of the additional food and the wages of the extra staff—are relevant. •Shut down if revenue from lunch < VC (less-than sign) •Stay open if revenue from lunch > VC (greater-than sign)

In the long run firms can enter and exit the market

•If P > ATC, firms are making positive economic profit 1.new firms enter the market 2.increase the quantity of the good supplied 3.Decreases prices and economic profits •If P < ATC, firms are making negative economic profit 1.firms exit the market 2.Decreases the quantity of the good supplied 3.Increases prices and economic profits •Thus in long run P = ATC and no firms exit or enter •Firms still in market make zero economic profit (P = ATC) •Recall Profit = (P-ATC)*Q. This only = 0 when P = ATC

In the long run, there are no sunk costs

•If the firm permanently exits, it will lose all revenue from the sale of its product, but now it will save not only its variable costs of production but also its fixed costs. •In the long run, I can sell the factory I bought. But in the short run I can't. •Firms exit the market if profits are negative, P < ATC •Firms enter the market if profits are positive, P > ATC Competitive firm's long-run supply curve is the portion of its marginal-cost curve that lies above average total cost

Monopoly production and pricing decisions

•Monopoly Maximizes profit where Marginal Revenue = Marginal Cost •If MR > MC: increase production •If MC > MR: produce less •Same logic as for competitive firms. • •Finding Monopoly Profits in 3 steps (with a graph) 1.Find the profit maximizing Q, This is where MR = MC 2.Find the P at this Quantity , and the ATC at this Quantity 3.Profits = Q x (P - ATC)

The Welfare Cost of Monopolies

•Socially efficient Q is the Q where MC = Demand •Remember Monopoly choose Q where MC = MR •Remember MR lies below the demand line, so

Firm shuts down in short run if Total Revenue < Variable cost

•TR < VC same as P < AVC: TR<VC TR/Q<VC/Q (P∗Q)/Q<AVC P<AVC •Recall that Price = MC, •Competitive firm's short-run supply curve is the portion of its marginal-cost curve that lies above average variable cost. •So if we have a graph with MC and AVC, we can easily find the firms short run supply curve 🎉

Things that make cartels more likely to last

•The firms frequently and repeatedly interact with each other •They trust each other •The firms can react quickly if another firm breaks the deal •The smaller the cartel, the more likely it is to last