Combo with "Microeconomics Potter Chapter 11 Grade-It-Now" and 2 others

How does an individual perfectly competitive firm's demand curve change when the market price changes?

If a perfectly competitive firm can sell all it would like at the market equilibrium price, it faces a perfectly elastic demand curve at the market equilibrium price. Therefore, anything that changes the market equilibrium price (any of the market demand curve shifters or the market supply curve shifters) will change the price at which each perfectly competitive firm's demand curve is perfectly elastic (horizontal).

What is the difference between fixed costs and variable costs?

Fixed costs are the expenses associated with fixed inputs (that therefore only exist in the short run), which are constant regardless of output. Variable costs are the expenses associated with variable inputs, which change as the level of output changes

What is the difference between fixed and variable inputs?

Fixed inputs are those, such as plants and equipment, that cannot be changed in the short run, while variable inputs are those, such as hourly labor, that can be changed in the short run.

Why do firms in perfectly competitive markets involve homogeneous goods?

For there to be a large number of sellers of a particular good, so that no seller can appreciably affect the market price (i.e., sellers are price takers), the goods in question must be the same, or homogeneous.

Diminishing marginal product of Labor

From the graph, you can see that the production function becomes flatter as the number of workers increases, representing the property of

In an increasing-cost industry, an unexpected increase in demand would lead to what result in the long run?

Higher costs and a higher price

Why can we represent the demand curve of a perfectly competitive firm as perfectly elastic (horizontal) at the market price?

If a perfectly competitive firm can sell all it would like at the market equilibrium price, the demand curve it faces for its output is perfectly elastic (horizontal) at that market equilibrium price.

**How do we measure profits?

Profit is measured as total revenue minus total cots.

Why do firms enter profitable industries?

Profitable industries generate a higher rate of return to productive assets than other industries. Therefore, firms will enter such industries in their search for more profitable uses for their assets.

Which of the following is true in the short run?

a. MC equals ATC at the lowest point of ATC. b. MC equals AVC at the lowest point of AVC. c. When AVC is at its minimum point, ATC is falling. d. When ATC is at its minimum point, AVC is rising. *e. All of the above are true.

Which of the following is true?

a. The short-run ATC exceeds the short-run AVC at any given level of output. b. If the short-run ATC curve is rising, the short-run AVC curve is also rising. c. The short-run AFC is always falling with increased output, whether the short-run MC curve is greater or less than short-run AFC. d. If short-run MC is less than short-run AVC, short-run AVC is falling. *e. All of the above are true.

Total fixed costs?

a. do not vary with the level of output. b. be avoided in the short run without going out of business. c. do not exist in the long run. *d. are characterized by all of the above.

The long run

a. is a period in which a firm can adjust all its inputs. b. can vary in length from industry to industry. c. is a period in which all costs are variable costs. *d. is characterized by all of the above.

The short run

a. is a period too brief for any inputs to be varied. b. is a period that involves no fixed costs. c. is normally a period of one year. *d. is none of the above.

An explicit cost

a. is an opportunity cost. b. is an out-of-pocket expense. c. does not require an outlay of money. *d. is characterized by both (a) and (b). e. is characterized by both (a) and (c).

An individual, perfectly competitive firm

has no perceptible influence on the market price.

What are sunk costs

have already been incurred and cannot be recovered

Diminishing marginal productivity in a frozen-pizza company means that

hiring additional workers adds fewer and fewer pizzas to total output.

In perfectly competitive markets, products are ______ and sellers are_______ .

homogeneous; price takers

The crucial difference between how economists and accountants analyze the profitability of a business has to do with whether or NOT ___________ are included when calculating total production costs.

implicit costs

Variable input

is a resource whose quantity can be changed in the short run. Because Kyoko can vary the number of workers she hires based on her production needs, her workers are a variable input.

Fixed input

is a resource whose quantity cannot be changed in the short run

The marginal revenue of a perfectly competitive firm

is constant as output increases and is equal to price

Which of the following is false? a. A perfectly competitive firm cannot sell at any price higher than the current market price and would not knowingly charge a lower price because it could sell all it wants at the market price. b. In a perfectly competitive market, individual sellers can change their output without altering the market price. c. In a perfectly competitive industry, the firm's demand curve is downward sloping. d. The perfectly competitive model does not assume any knowledge on the part of individual buyers and sellers about market demand and supply—they only have to know the price of the good they sell.

c.

Total revenue (TR)

is the revenue that the firm receives from the sale of its products. *a product price times the quantity sold For example, if a farmer sells 10 bushels of wheat a day for $5 a bushel, his total revenue is $50 ($5 × 10 bushels). (Note: We will use the lowercase letter q to denote the single firm's output and reserve the uppercase letter Q for the output of the entire market. For example, q would be used to represent the output of one lettuce grower, while Q would be used to represent the output of all lettuce growers in the lettuce market.)

If a firm's ATC is falling in the long run, then

it is subject to economies of scale over that range of output.

If a perfectly competitive firm's marginal revenue exceeded its marginal cost,

it would expand its output but not cut its price in order to increase its profits.

If a perfectly competitive firm's marginal revenue exceeded its marginal cost,

it would expand its output but not its price in order to increase its profits

A profit-maximizing perfectly competitive firm would never knowingly operate at an output level at which

it would lose more than its total fixed cost

The short-run supply curve of a perfectly competitive firm is

its MS curve above the minimum point of AVC

In perfect competition, at a firm's short-run profit-maximizing (or loss minimizing) output

its price be greater or less than average cost

A perfectly competitive firm seeking to maximize its profits would want to maximize the difference between

its total revenue and its total cost

Perfectly competitive markets tend to have a _______ number of sellers and a(n) _______ entry.

large; entry

When a firm experiences economies of scale in production,

long-run average total cost declines as output expands

Perfectly competitive markets have _______ sellers, each of which produces a _______ share of industry output

many; small

The change in total cost that results from the production of one additional unit of output is called

marginal cost

**When marginal product is increasing,

marginal cost is decreasing

If a taxi service is operating in the region of diminishing marginal product and more taxi service is added in the short run, what will happen to the marginal cost of providing the additional service?

marginal cost will increase

Constant returns to scale

occur in an output range where LRATC does not change as output varies

Economies of scale

occur in an output range where LRATC falls as output increases

Diseconomies of scale

occur in an output range where LRATC rises as output expands

The minimum price at which a firm would produce in the short run is the point at which

price equals the minimum price on its average variable cost curve

Why does the average total cost rise at some point as output expands further?

Average total cost begins to rise at some point as output expands further because of the law of diminishing marginal product, also called the law of increasing costs. Over this range of output, adding more variable inputs does not increase output by the same proportion, so the average cost of production increases over this range of output.

Marginal Product of labor

-is the change in the quantity of output produced when one additional unit of labor (i.e., one worker) is hired, with all other inputs held constant. For example, when the first worker is added, output rises from 0 to 10 pizzas per day, so the marginal product of labor of the first worker is 10 pizzas per day. When Kyoko hires the second worker, output increases from 10 to 50 pizzas per day, so the marginal product of the second worker is 40 pizzas per day. The remaining values can be calculated in a similar manner. -The slope of the production function measures the change in output for each additional unit of labor input

Why would a perfectly competitive firm not try to raise or lower its price?

A perfectly competitive firm is able to sell all it wants at the market equilibrium price. Therefore, it has no incentive to lower prices (sacrificing revenues and therefore profits) in an attempt to increase sales. Because other firms are willing to sell perfect substitutes for each other's product (because goods are homogeneous) at the market equilibrium price, trying to raise the price would lead to the firm losing all its sales. Therefore, it has no incentive to try to raise its price, either.

Why is a situation of zero economic profits a stable long-run equilibrium situation for a perfectly competitive industry?

A situation of zero economic profits is a stable long-run equilibrium situation for a perfectly competitive industry because that situation offers no profit incentives for firms to either enter or leave the industry.

ATC=

AFC + AVC

In long-run equilibrium under perfect competition, price does not equal which of the following?

Average fixed cost

Which short-run curve typically declines continuously as output expands?

Average fixed cost

Which of the following is true? a. Productive efficiency occurs in perfect competition because the firm produces at the minimum of the ATC curve. b. Allocative efficiency occurs when P=MC; production is allocated to reflect consumers' want. c. Both (a) and (b) are true. d. None of the above is true.

Both (a) and (b) are true.

When market demand shifts ______, a perfectly competitive firm's demand curve shifts ________.

Both (a) and (d) are correct

What is diminishing marginal product? What causes it?

Diminishing marginal product means that as the amount of a variable input is increased—the amount of other inputs being held constant—a point will ultimately be reached beyond which marginal product will decline. It is caused by reductions in the amount of fixed inputs that can be combined with each unit of a variable input, as the amount of that variable input used increases.

What are economies of scale, diseconomies of scale, and constant returns to scale?

Each of these terms refers to average or per-unit costs as output expands. Economies of scale means that long-run average cost falls as output expands; diseconomies of scale means that long-run average cost rises as output expands; and constant returns to scale means that long-run average cost is constant as output expands.

What may cause economies or diseconomies of scale?

Economies of scale can result when expanding output allows the use of mass production techniques such as assembly lines or allows gains from further labor specialization that may not be possible at lower levels of output. Diseconomies of scale can result when a firm finds it increasingly difficult to handle the complexity as well as the information and coordination problems of large-scale management.

Why does entry eliminate positive economic profits in a perfectly competitive industry?

Entry eliminates positive economic profits (above-normal rates of return) in a perfectly competitive industry because entry will continue as long as economic profits remain positive (rates of return are higher than in other industries), that is, until no more positive economic profits can be earned.

Why does exit eliminate economic losses in a perfectly competitive industry?

Exit eliminates negative economic profits (below-normal rates of return) in a perfectly competitive industry because exit will continue as long as economic profits remain negative (rates of return are lower than in other industries); that is, until no firms are experiencing economic losses.

What is the difference between explicit costs and implicit costs?

Explicit costs are those costs readily measured by the money spent on the resources used, such as wages. Implicit costs are those that do not represent an explicit outlay of money, but do represent opportunity costs, such as the opportunity cost of your time when you work for yourself.

Why is marginal revenue equal to price for a perfectly competitive firm?

If a perfectly competitive seller can sell all it would like at the market equilibrium price, it can sell one more unit at that price without having to lower its price on the other units it sells (which would require sacrificing revenues from those sales). Therefore, its marginal revenue from selling one more unit equals the market equilibrium price, and its horizontal demand curve therefore is the same as its horizontal marginal revenue curve.

Why would a profit-maximizing, perfectly competitive firm continue to operate for a period of time if price was greater than average variable cost but less than average total cost?

If price was greater than average variable cost but less than average total cost, a firm would be earning losses and would eventually go out of business if that situation continued. However, in the short run, as long as revenues more than covered variable costs, losses from operating would be less than the losses from shutting down (these losses equal total fixed cost), as at least part of fixed costs would be covered by revenues; so a firm would continue to operate in the short run in this situation.

What must be true about input costs as industry output expands for an increasing-cost industry?

Input costs increase as industry output expands for an increasing-cost industry (which is why it is an increasing-cost industry).

What must be true about input costs as industry output expands for a constant-cost industry?

Input costs remain constant as industry output expands for a constant-cost industry (which is why it is a constant-cost industry).

Why is marginal cost the relevant cost to consider when a producer is deciding whether to produce more or less of a product?

Marginal cost is the additional cost of increasing output by one unit. That is, it is the cost relevant to the choice of whether to produce and sell one more unit of a good. For producing and selling one more unit of a product to increase profits, the addition to revenue from selling that output (marginal revenue) must exceed the addition to cost from producing it (marginal cost).

How might cooking for a family dinner be subject to falling average total cost in the long run as the size of the family grows?

Once the appropriate larger-scale cooking technology has been adopted (i.e., in the long run, when all inputs can be varied), such as larger cooking pots, pans, and baking sheets, larger ovens, dishwashers, and so on, and more family members can be involved, each specializing in fewer tasks, this larger scale can reduce the average cost per meal served.

Which of the following is most likely a variable cost for a business?

Payments for electricity

Which of the following most accurately describes the long-run period?

The long run is of sufficient length to allow a firm to alter its plant capacity and all other factors of production.

What would be the long-run equilibrium result of an increase in demand in a constant-cost industry?

The long-run equilibrium result of an increase in demand in a constant-cost industry is an increase in industry output with no change in price because output will expand as long as price exceeds the constant level of long-run average cost.

What would be the long-run equilibrium result of an increase in demand in an increasing-cost industry?

The long-run equilibrium result of an increase in demand in an increasing-cost industry is an increase in industry output (but a smaller increase than in the constant-cost case) and a higher price. Output will expand as long as price exceeds long-run average cost; but that expansion of output increases costs by raising input prices, so in the long run prices just cover the resulting higher costs of production.

What is the primary reason that the average total cost falls as output expands over low output ranges?

The primary reason average total cost falls as output expands over low output ranges is that average fixed cost declines sharply with output at low levels of output.

True or False: The shape of the production function reflects the law of diminishing marginal product of labor.

True The slope of the production function measures the change in output for each additional unit of labor input (the marginal product of labor). From the graph, you can see that the production function becomes flatter as the number of workers increases. This represents the property of diminishing marginal product of labor.

Why do firms exit unprofitable industries?

Unprofitable industries generate lower rates of return to productive assets than other industries. Therefore, firms will exit such industries in their search for more profitable uses for their assets elsewhere

Which of the following is *always* true?

When marginal cost is greater than average total cost, average total cost is increasing.

If marginal costs are less than the average total cost, why does ATC fall? If MC is greater than ATC, why does ATC rise?

When the marginal cost of a unit of output is less than its average total cost, including the lowercost unit will lower the average (just as getting lower marginal grades this term will decrease your GPA). When the marginal cost of a unit of output exceeds its average total cost, including the higher-cost unit will raise the average (just as getting higher marginal grades this term will increase your GPA).

If the marginal cost facing every producer of a product shifted upward, would the position of a perfectly competitive firm's demand curve be likely to change as a result? Why or why not?

Yes. If the marginal cost curves facing each producer shifted upward, a decrease (leftward shift) would occur in the industry supply curve. This shift would result in a higher market price that each producer takes as given, which would shift each producer's horizontal demand curve upward to that new market price.

If the domino-making industry is a constant-cost industry, one would expect the long-run result of an increase in demand for dominos to include

a greater number of firms and the same price

Average total cost (ATC)

a per-unit cost of operation; total cost divided by output

Average fixed cost (AFC)

a per-unit measure of fixed costs; fixed costs divided by output

Average variable cost (AVC)

a per-unit measure of variable costs; variable costs divided by output

Long run

a period over which all production inputs are variable

Short run

a period too brief for some production inputs to be varied

Production in the short run

a. is subject to the law of diminishing marginal product. b. involves some fixed factors. c. can be increased by employing another unit of a variable input, as long as the marginal product of that input is positive. *d. is characterized by all of the above. e. is characterized by none of the above.

(p.307) In the long run,

all costs are variable

In an increasing-cost industry, an increase in industry demand would lead to ______ in the number of firms and _____ in firms' average cost curves in the long run.

an increase; an upward shirt

Constant-cost industry

an industry where input prices (and cost curves) do not change as industry output changes

Decreasing-cost industry

an industry where input prices fall (and cost curves fall) as industry output rises

Increasing-cost industry

an industry where input prices rise (and cost curves rise) as industry output rises

Diminishing marginal product

as a variable input increases, with other inputs fixed, a point will be reached where the additions to output will eventually decline Specifically, as the amount of a variable input is increased, with the amount of other (fixed) inputs held constant, a point will ultimately be reached beyond which marginal product will decline. Beyond this point, output increases but at a decreasing rate. It is the crowding of the fixed input with more and more workers that causes the decline in the marginal product.

Fixed costs

costs that do not vary with the level of output

Sunk costs

costs that have been incurred and cannot be recovered

Variable costs

costs that vary with the level of output

A perfectly competitive firm maximizes its profit at an output in which a. total revenue exceeds total cost by the greatest dollar amount. b. marginal cost equals the price. c. marginal cost equals marginal revenue. d. all of the above are true.

d

The entry of new firms into an industry will likely a. shift the industry supply curve to the right. b. cause the market price to fall. c. reduce the profits of existing firms in the industry. d. do all of the above.

d.

The exit of firms from an unprofitable industry a. will shift the market supply curve left. b. will cause the market price to rise. d. will increase the economic profits of the firms that remain. d. will do all of the above.

d.

Which of the following is true? a. In constant-cost industries, the cost curves of the firm are not affected by changes in the output of the entire industry. b. In an increasing-cost industry, the cost curves of the individual firms rise as total output increases. c. A decreasing-cost industry has a downward-sloping long-run supply curve; firms experience lower cost as industry expands. d. All of the above are true.

d.

In a market with perfectly competitive firms, the market demand curve is _______ and the demand curve facing each individual firm is ________.

downward sloping; horizontal

Which of the following is true? a. Economic profits encourage the entry of new firms, which shift the market supply curve to the right. b. Any positive economic profits signal resources into the industry, driving down prices and revenues to the firm. c. Any economic losses signal resources to leave the industry, leading to supply reduction, higher prices, and increased revenues. d. Only at zero economic profits is there no tendency for firms to either enter or exit the industry. e. All of the above are true.

e.

In long-run equilibrium, firms make zero_________ profits, earning a _________ rate of return.

economic; normal

Marginal cost (MC)

the change in total costs resulting from a one-unit change in output shows the change in total cost (TC) associated with a change in output (Q) by one unit . Put a bit differently, marginal cost is the cost of producing one more unit of output. As such, looking at marginal cost is a useful way to view variable cost—cost that varies as output varies. Marginal cost represents the added labor, raw materials, and miscellaneous expenses incurred in making an additional unit of output. Marginal cost is the additional, or incremental, cost associated with the "last" unit of output produced.

Marginal product (MP)

the change in total output of a good that results from a one-unit change in input

Profits

the difference between total revenues and total costs

If a perfectly competitive firm finds that price is greater than AVC but less than ATC at the quantity where its marginal cost equals the market price,

the firm will product in the short run but may eventually go out of business

Short-run market supply curve

the horizontal summation of the individual firms' supply curves in the market

Marginal revenue (MR)

the increase in total revenue resulting from a one-unit increase in sales. In other words, marginal revenue represents the increase in total revenue that results from the sale of one more unit

The lowest level of output at which a firm's goods are produced at minimum long-run average total cost is called

the minimum efficient scale

Implicit costs

the opportunity costs of production that do not require a monetary payment

Explicit costs

the opportunity costs of production that require a monetary payment

Minimum efficient scale

the output level where economies of scale are exhausted and constant returns to scale begin

Short-run supply curve

the portion of the MC curve above the AVC curve

Production function

the relationship between the quantity of inputs and the quantity of outputs

Total fixed costs (TFC)

the sum of the firm's fixed costs

Total cost (TC)

the sum of the firm's total fixed costs and total variable costs

Total variable costs (TVC)

the sum of the firm's variable costs

Total product (TP)

the total output of a good produced by the firm

Average revenue (AR)

total revenue divided by the number of units sold (TR ÷ q, or [P × q] ÷ q).

Economic profits

total revenues minus explicit and implicit costs

Accounting profits

total revenues minus total explicit costs

A production function shows the relationship between

variable inputs and outputs

When will a perfectly competitive firm's demand curve shift?

when either (b) or (c) occurs

Allocative efficiency

where P=MC and production will be allocated to reflect consumer preferences

Productive efficiency

where a good or service is produced at the lowest possible cost P= minimum ATC