Econ Exam 3
What does ATC equal to?
AFC+AVC
When will a monopolist receive economic profits?
As long is P>ATC
In a PC market, MR=...
P
In a monopoly, which is higher: MC or P?
P
What does MR equal in a PC market?
P
What is AR equal to in a monopoly?
P
In the short run, if there is an increase in demand for a PC market, what happens to P, Q, and profits?
P and Q raise. Firm now earns profits because P now exceeds ATC
What kind of market has free entry and exit?
PC
When a monopoly increases the amount it sells, what happens to P and Q?
Q is higher, P is lower
How do you calculate ATC?
TC/Q
How can profit be calculated for a PC firm?
TR-TC (TR/Q-TC/Q) X Q (P-ATC) X Q
How do you calculate a monopoly's profit?
TR-TC (TR/Q-TC/Q) X Q (P-ATC) X Q
What is the output effect in a monopoly?
The more output sold (Q is higher)
When does profit maximization occur for all markets?
When MR=MC
When MC is less than ATC, ATC is...
fallin
A monopolist's MR is always ___ than the price of its good.
less
How can a government respond to a monopoly?
1) Making more monopolized industries more competitive 2) Regulating the behavior of monopolies 3) Turning some private monopolies into public enterprises 4) Nothing
What are the three sources of these barriers that cause monopolies?
1) Ownership of a key resource 2) The government gives a single firm the exclusive right to produce some good 3) Costs of production make a single producer more efficient than a large number of producers
What are antitrust laws?
A collection of statutes aimed at curbing monopoly power
Where does MC cross ATC?
At its minimum
Why is the ATC curve U shaped?
At low levels of output, ATC is high because AFC are high ATC declines as output increases ATC starts rising because as Q increases, AVC rises
What is the fundamental cause of a monopoly?
Barriers to entry
How does a monopoly maximize profit?
By producing the Q at which MR=MC, then it uses the demand curve to find out P
How do you calculate Marginal Cost?
Change in TC/ Changes in Q
Which firm is considered to be a price taker?
Competitive firm
What are fixed costs
Costs that do not vary with the quantity of output produced
Sunk costs
Costs that have already been committed and cannot be recovered
What are variable costs
Costs that vary with the quantity of output produced
When a monopoly drops the price to sell one more unit, the revenue received from previously sold units goes up or down?
Down, because of the downward sloping demand curve.
Which profit is always equal or smaller?
Economic profit
What is a reason that monopolies RARELY arise from?
Exclusive ownership of key resources
If P< ATC in a PC firm, what should it do?
Exit the market
If TR/Q < TC/Q in a PC firm, what should it do?
Exit the market
How do you calculate Average Fixed Costs?
FC/Q
What do total costs equal to?
Fixed Costs+Variable Costs
What can costs of production be divided into?
Fixed costs and variable costs
Does a firm's cost curve differ ever?
From Short run to long run
What is the short run market supply for the PC market?
Horizontal sum of each firm's SR supply
What question does Marginal Cost answer?
How much does it cost to produce one more unit of output?
Why is a monopoly desirable to consumers?
ITS NOT DESIRABLE TO CONSUMERS B/C OF THE MARK-UP
When does a PC exit the market in the long run?
If TR<TC
How does a PC firm decide that it should shut down temporarily?
If the revenue it gets from producing is less than the variable cost of production
What does a firms cost of production include?
Implicit and explicit costs
In which markets are antitrust laws needed?
In monopolies
When does a PC firm consider sunk costs?
In the LR
Marginal Product/Marginal cost
Increase in output that arises from an additional unit of that input
What are implicit costs
Input costs that do not require an outlay of money by the firm
What are explicit costs
Input costs that require a direct outlay of money by the firm
What does the long run market supply look like for PC firms?
It is horizontal at P
In comparison to the PC market, the monopoly's Q is higher or lower?
Lower
If a monopoly wants to sell more, what must it do?
Lower price
With the quantity of output, what eventually rises?
MC
If a firm is the sole seller of its product, what is it classified as?
Monopoly
If a firm sells a product with no close substitutes, what is it classified as?
Monopoly
If a market has a downward-sloping demand curve, what is it?
Monopoly
If a market is the sole producer of a good or service, what is it?
Monopoly
If a market reduces the price of a good to increase sale, what is it?
Monopoly
Which firm is considered to be a price maker?
Monopoly
Which market creates a DWL?
Monopoly and MC
In the long run, how much of costs are fixed?
NONE. ALL FIXED COSTS BECOME VARIABLE COSTS IN THE LONG RUN
What kind of market has identical goods being sold?
PC
What kind of market has many buyers and sellers?
PC
What kind of market has no market power?
PC
What are examples of government created monopolies?
Patents and copyrights
Who is a monopoly desirable to?
Producers
When MR is less than MC in a PC market, what should happen to Q?
Q should decrease
When MR is greater than MC in a PC market, what should happen to Q?
Q should increase
What did the Sherman Antitrust act do?
Reduced the market power of the large and powerful "trusts" of that time period
Economies of scale
Refer to the property whereby long run ATC falls as Q increases
Diseconomies of scale
Refer to the property whereby long run ATC rises as Q increases
Constant returns to sale
Refers to the property whereby longrun ATC stays the same as Q increases
What were the two most important antitrust laws
Sherman Antitrust Act and Clayton Antitrust act
Production function
Shows the relationship between inputs and outputs
If a PC firm's P<AVC, what should it do?
Shut down temporarily
If a PC firm's TR/Q<VC/Q, what should it do?
Shut down temporarily
If a PC firm's TR<VC, what should it do?
Shut down temporarily
In the short run, how much of costs are fixed?
Some
How do you figure out profit/loss on a graph?
The Area Between Price and the ATC
What is the efficient scale of the firm
The bottom of the U shaped ATC curve
What is Average Total Cost
The cost of each typical unit of production
Total Revenue
The dollar figure a firm receives for the sale of its output. TR=P * Q
What is Marginal Cost?
The increase in total cost that arises from an extra unit of production
What is the slope of the production function
The marginal product of an imput
Total Cost
The market value of the inputs a firm uses in production
What is a PC's long run supply curve?
The portion of the MC curve that lies above ATC
What is a PC's short run supply curve?
The portion of the MC curve that lies above AVC
In the long run, if new firms enter a PC market what happens to P? Profits?
They both are driven down
What do antitrust laws do?
They give the government various ways to promote competition by: preventing mergers breaking up companies preventing companies from performing activities that make markets less competitive
Profit
Total Revenue-Total Cost
Economic profit
Total revenue-(Explicit and implicit costs)
Accounting profit
Total revenue-(explicit costs)
What shape is the ATC curve?
U shaped
How do you calculate AVC?
VC/Q
What makes a natural monopoly?
When a single firm can supply a good or service to an entire market for cheaper than 2+ firms could
What is the price effect in a monopoly?
When price falls (P is lower)
What is the diminishing marginal product
When the marginal product of an input declines as the quantity of the input increases. (Like Microsoft)
When does a natural monopoly arise?
When there are economies of scale over the relevant range of output
In the short run, what do PC firms decide?
Whether to continue to produce or shut down temporarily
In the long run, what do PC firms decide?
Whether to stay or exit the market permanently
When MC is more than ATC, ATC is...
rising
