ECON EXAM 2

what is 2nd degree price discrimination?

charging a different price based on quantity sold

what is 1st degree price discrimination?

charging a different price based on the customer (involves charging what consumers are willing to pay)

what is 3rd degree price discrimination?

charging a different price for different groups of people

monopolies can change prices while ______ cannot.

competitive markets

implicit cost?

costs that you don't directly pay but that are part of the opportunity cost of a decision

does a monopolist take market price as given? why or why not?

no, because it faces a downward-sloping demand curve -as production increasing, consumers' willingness to pay falls, which means it will receive less per unit for the additional units produced along with all the previous units produced

equation for (economic) profit?

profit = total revenue - explicit cost - implicit cost

true or false? monopolists differ from perfect competitors because monopolists make a profit. Why?

-Not necessarily true -Monopolists may or may not make economic profit -the distinguishing factor is that the monopolist can restrict output to hold up the market price; a perfect competitor cannot affect the market price

what distinguishes the short run from the long run?

-Short run and long run do not necessarily refer to specific periods of time but rather to the degree of flexibility a firm has in changing the level of output. -In the long run a firm can vary its inputs as much as it wants, but in the short run these variations can be so costly that we consider them as fixed. *****Simply stated, in the short run some inputs are fixed and in the long run all inputs are variable.

what is the key difference between a monopolist and a perfect competitor?

-a competitive firm is too small to affect market price, so it takes market prices as given -for a perfect competitor, MR=P. -a monopoly takes into account the fact that its output decision can affect price; its marginal revenue does NOT equal price -the price a monopoly can get for each unit sold will fall, including the price for all previous units sold. MR < P

what costs and revenues do economists include when calculating profit that accountants don't include? Give an example of each.

-accountants don't include implicit costs or implicit revenue, but economists do. -ex. of implicit cost: the opportunity cost of a business owner's time -ex. of implicit revenue is changes in the value of any assets owned by the firm, such as the building and equipment it owns

fixed costs?

-cost that is already spent and cannot be recovered -costs that are spent and cannot be changed in the period of time under consideration -exists only in the short run

variable costs?

-costs that vary with production -costs that change as output changes

Suppose Mimi's Magic Marker Company operates in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of production its average total cost of producing magic markers is $0.20, average variable cost is $0.15, and marginal cost is $0.25. What's..? 1) the MR of producing magic markers? 2) the price of a magic marker? 3) Mimi's profit from selling magic markers (+ or -)?

1) 0.25 2) 0.25 3) positive

characteristics of a perfectly competitive market?

1) Buyers and sellers are price takers 2) There are no barriers to entry 3) Firms' products are identical

for all firms: 1) Profit = ? 2) profit-maximizing rule? 3) Remain in business if..? 4) Shut down if..?

1) Profit = (P-ATC)xQ 2) produce quantity Q* where MR=MC 3) P>=AVC 4) P < AVC

Relationship between P, and ATC or AVC for open, closed, positive, and negative?

1) open if P>= AVC 2) closed if P < AVC 3) pos profit if P > ATC 4) negative profit if P < ATC

Which of the following is a characteristic of a perfectly competitive market? 1. Firms are price makers in the market. 2. Firms face no barriers to entering the market. 3. There are few firms selling the good in the market. 4. The goods sold in the market are differentiated.

2. firms face no barriers to entering the market

Suppose Michelle's Mitten Mill operates in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of production its average variable cost of producing mittens is $17, average total cost is $19, and marginal revenue is $18. In the short run, Michelle should: 1. maintain her current level of production since she is earning a positive economic profit. 2. maintain her current level of production since her economic profit is zero. 3. maintain her current level of production since she is minimizing her losses. 4. shut down immediately. 5. increase production since it will increase her economic profit. 6. decrease production since it will increase her economic profit.

3. maintain her current level of production since she is minimizing her losses

why must buyers and sellers be price takers for a market to be perfectly competitive?

Because if sellers could set prices, they would be able to raise them to make a profit and their demand curve wouldn't be horizontal.

Suppose Danielle is considering opening her own beauty salon. She anticipates the following costs per year: Furniture: $20,000 Equipment: $30,000 Rent: $36,000 Coloring products: $40,000 Styling products: $43,000 Danielle is withdrawing $50,000 from her savings account that pays 2 percent interest per year to purchase furniture and equipment and is quitting her current job that pays $40,000. She expects that the total revenues from the new business in the first year will be $200,000. What's Danielle's: EC? IC? AP? EP?

EC = 169k IC = 41k AP = 31k EP = -10k

Suppose Al owns a donut shop. He pays his employees $80,000 per year and his inventory costs him $20,000 per year. Prior to running the donut shop, Al worked on a television show and earned $50,000 per year. (Assume these are the only costs he faces.) The total revenue of the store per year is $180,000. What is Al's: explicit cost? implicit cost? accounting profit? economic profit?

EC= 100k IC= 50k AP=80K EP= 30k

Profit-maximizing condition?

MC=MR=P => if MR > MC, gains by increasing production => if MR < MC, gains by decreasing production

in perfect competition, P = ?

P = MR at all levels of output; thus, P=MR=MC at the profit-maximizing level of output, Q*

relationship between P and MR in a monopoly?

P > MR

equation for total revenue?

TR= price x quantity

what's a price taker?

a firm or individual who takes the price determined by market supply and demand as given

Suppose, at a given point in time, Snappy Snack Shack operates in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of production, Snappy's average total cost of producing snacks is $1.70, average variable cost is $1.25, and marginal cost is $1.60. What is: At her current level of production, what is... a) Snappy's average fixed cost of producing a snack? b) Snappy's marginal revenue from selling a snack? c) the price of a snack? d) Snappy's profit from selling snacks? will Snappy Snack Shack remain open or shut down (in the short run)?

a) 0.45 b) 1.60 c) 1.60 d) negative they'll stay open because AVC<P<ATC

Suppose Marcy's Medical Machines is a monopolist and is producing its profit-maximizing level of output. Suppose further that at this level of production its average total cost is $2500, average fixed cost is $900, and marginal revenue is $2800. What's: a) Marcy's average variable cost of producing a medical machine? b) Marcy's marginal cost of producing a medical machine? c) the price of a medical machine? d) Marcy's profit from selling medical machines? e) Will Marcy continue to produce medical machines in the long run?

a) 1600 b) 2800 c) > 2800 d) positive bc price is greater than ATC e) yes

Suppose, at a given point in time, Stephanie's Soda Fountain sells ice cream in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of production its average variable cost of producing ice cream is $2.50, average total cost is $3.30, and marginal revenue is $3.00. What's..? a) the marginal cost of producing ice cream? b) the price of ice cream? c) Stephanie's profit from selling ice cream?

a) 3.00 b) 3.00 c) negative

Suppose, at a given point in time, Stephanie's Soda Fountain sells ice cream in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of production its average variable cost of producing ice cream is $2.50, average total cost is $3.30, and marginal revenue is $3.00. Over time, what will happen to: a) the number of firms selling ice cream? b) the price of ice cream? c) the quantity of ice cream transacted in the market? d) profits of firms operating in the ice cream market?

a) decrease b) increase c) decrease d) increase to 0

Suppose Mimi's Magic Marker Company operates in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of production its average total cost of producing magic markers is $0.20, average variable cost is $0.15, and marginal cost is $0.25. Over time, what will happen to: a) the number of firms selling magic markers? b) the price of magic markers c) the quantity of magic markers transacted in the market? d) profits of firms operating in the magic marker market?

a) increase b) decrease c) increase d) decrease to 0

Which of the following conditions must hold if a firm is to engage in price discrimination? a) The transaction costs of one consumer selling the product to another consumer must be high. b) A firm must be a price taker in its market. c) Different consumers must have similar preferences for the product. d) A firm must be a monopolist in its market.

a) the transaction costs of one consumer selling the product to another consumer must be high.

equation for accounting profit?

accounting profit = total revenue - explicit cost

relationship between accounting profit (AP) and economic profit (EP)?

accounting profit > economic profit

what is implicit cost?

accounting profit from the next best alternative

natural monopoly

an industry in which a single firm can produce at a lower cost than can two or more firms

Suppose, at a given point in time, Wanda's Wig Warehouse, a non-price discriminating monopolist, is producing at a level of output where marginal revenue is less than marginal cost. Everything else held constant, Wanda could increase her firm's profits by _____ the quantity of wigs she produces and _____ the price she charges for them.

decreasing; increasing

Answer true or false to the following statement. If a non-price discriminating monopolist is maximizing its profits, we know that it has equated its marginal cost with the market price.

false (price is always larger than MR if you have a monopoly)

having store reward card benefits is an example of which type of price discrimination?

first

a lump-sum tax is a type of..?

fixed cost (it must be paid no matter what the firm's level of output is)

Mario is a profit-maximizing wholesale meatball distributor who sells his meatballs to all of the finest restaurants in town. Because nobody can make meatballs like Mario, he is the only distributor in town that sells meatballs to restaurants. As a result, the marginal revenue from selling one of Mario's meatballs will be _____ the price he charges for it.

less than

If the price a firm charges for a good is greater than its average total cost of producing it, then the firm is earning an economic profit _____ zero. 1. greater than 2. less than 3. equal to

greater than

It can be concluded with certainty that a monopolist's economic profits will be _____ zero in the long run. a) greater than b) greater than or equal to c) equal to d) less than or equal to e) less than

greater than or equal to

Suppose Petra's Plantain Plantation sells plantains in a perfectly competitive market. Suppose further that at her current level of production, Petra's marginal cost is $2.00 per kilo. If the market price of plantains is $2.25 per kilo, it can be concluded with certainty that Petra's profits are 1. positive 2. negative 3. increasing 4. decreasing

increasing

When marginal cost is greater than the average total cost at a particular level of output, average total cost must be 1. increasing 2. decreasing 3. remaining constant

increasing

equation for marginal cost?

marginal cost = change in total cost

which of the costs discussed is most important when a firm is deciding how much to produce?

marginal costs

equation for marginal revenue?

marginal revenue = change in total revenue

what is explicit cost?

out of pocket cost

Suppose a profit-maximizing firm is earning positive economic profits at its current level of output. Everything else held constant, the firm's accounting profits are..? 1. positive 2. negative 3. normal 4. ambiguous

positive

Suppose a grocery store advertises the following special: "This Week ONLY: 10% Off & a Free Bag when you purchase 6 Bottles or more of any 750 ml Wine." With this offer, the store is engaging in _____-degree price discrimination.

second

Suppose a parking garage has the following pricing schedule: 0-2 Hours, $5; 2-4 Hours, $10; 4-8 Hours, $15. With this pricing scheme, the garage is engaging in _____-degree price discrimination.

second

Admission tickets to the New Orleans Museum of Art are $12 for adults and $10 for seniors (65 and over). This pricing scheme is an example of _____-degree price discrimination.

third

equation for total cost?

total cost = fixed cost + variable cost

a change in hourly pay is a type of..?

variable cost (because it affects wages)

a tax on emission of air pollutants is a type of..?

variable cost (because the tax varies with the degree of air pollution)

in the long run, perfectly competitive firms make...?

zero profit