Econ Final
Explicit costs
require an outlay of money by the firm
Average Revenue
revenue firm receives for typical unit sold.. AR= TR/Q
whenever MC is greater than ATC (or AVC), ATC (or AVC) must be
rising
Price discrimination is the business practice of
selling the same good at difference prices to different customers
Phil sells duck calls in a perfectly competitive market. If duck calls sell for $10 each and average total cost per unit is $11 at the profit-maximizing output level, then in the long run
some firms will exit from the market.
Marginal Cost
the increase in total cost that arises from producing an additional unit of output. Marginal Cost = Change in Total Cost divided by Change in Quantity (MC = ΔTC/ΔQ) (MC curve intersects the ATC (& AVC) curves at their minimum)
Total Cost
the market value of the inputs a firm uses in production (the amount that the firm pays to buy inputs) Fixed + Variable
A monopolist maximizes profits by
producing an output level where marginal revenue equals marginal cost
Tom's Tent Company has total fixed costs of $300,000 per year. The firm's average variable cost is $80 for 10,000 tents. At that level of output, the firm's average total costs equal
$110
Last year, Julia's revenue from tax and bookkeeping were $150,000 and her expenses for the business were $15,000. She used to earn $10,000 per year from pet sitting... Julia's economic profits are
$150,000-$15,000-$10,000= $125,000
Last year, Julia's revenue from tax and bookkeeping were $150,000 and her expenses for the business were $15,000. She used to earn $10,000 per year from pet sitting... Julia's accounting profits are
$150,000-$15,000= $135,000
Total profit for a firm is calculated as
(P x Q) - (ATC x Q)
When a profit-maximizing firm is earning profits, those profits can be identified by
(P-ATC) x Q
Economists normally assume that the goal of a firm is to (i) sell as much product as possible (ii) set the price of the product as high as possible (iii) maximize profit
(iii) only (Maximize profit)
What are the three main sources of barriers to entry
1. a key resource is owned by a single firm 2. the costs of production make a single producer more efficient than a large number of producers. 3. the government has given the existing monopolist the exclusive right to produce the good.
Tom quit his $65,000 a year corporate lawyer job to open up his own law practice. In Tom's first year in business his total revenue equaled $150,000. Tom's explicit cost during the year totaled $85,000. What is Tom's economic profit for his first year in business?
150,000-65,000-85,000 = 0
Economies of scale rises:
AFC getting smaller specialization (better at what you are doing) bulk purchase of inputs as you produce more, long run ATC falls
The cost of producing the typical unit of output is the firm's
ATC
There are no what in the long run
Fixed Costs
Profit Maximization for perfect competition
MR = MC
Diseconomics of scale rises:
Management complexity (coordination of problems that occur in large organizations) supervision employees (easier to monitor less employees) rules and regulations (bigger companies have more rules)
Characteristics of Perfect Competition:
Many buyers and sellers Must accept the price market gives → price takers The goods offered by the various sellers are largely the same (identical) -free entry and exit
Monopolistic competition is characterized by what attributes?
Many sellers, product differentiation, and free entry.
The shape of the average total cost curve reveals information about the nature of the barrier to entry that might exist in a monopoly market. Which of the following monopoly types best coincides with the figure? (ATC is decreasing)
Natural monopoly
For a profit-maximizing monopolist,
P > MR = MC
Bob's Butcher shop is the only place within 100 miles that sell bison burgers. assuming that bob is maximizing his profit, which of the following statements are true?
Price of Bob's bison burgers exceed MC
Perfect competition maximizes profit at
TR - TC
Total Cost Curve
The relationship between quantity produced and total costs.
Profit =
Total Revenue - total cost
If a firm produces nothing, which of the following costs will be zero?
Variable cost (cost that vary with QUANITY of output produced)
The higher the concentration ratio, the a. more control an individual firm has to set prices b. more competitive the industry c. less competitive the industry d. both a and c are correct
both a and c are correct
What is the shape of the monopolist's marginal revenue curve?
a downward-sloping line that lies below the demand curve.
Which of the following would be most likely to have monopoly power? a. national florist b. local restaurant c. local electrical cooperative d. online bookstore
a local electrical cooperative
A firm that is the sole seller of a product without close substitutes is
a monopolist
Which of the following is not a difference between monopolies and perfectly competitive markets? a. Monopolies choose to produce the quantity at which marginal revenue equals marginal cost while perfectly competitive firms do not b. Monopolies charge price higher than MC while perfectly competitive firms charge a price equal to MC c. Monopolies face downward sloping demand curves while perfectly competitive firms face horizontal demand curves. d. Monopolies can earn profits in the long run while perfectly competitive firms break even
a. Monopolies choose to produce the quantity at which marginal revenue equals marginal cost while perfectly competitive firms do not
Which of the following firms is closest to being a perfectly competitive firm? a. hot dog vendor in NY b. campus bookstore c. Microsoft Corporation d. Ford Motor Company
a. hot dog vendor in NY
Average Fixed Cost
fixed cost divided by the quantity of output produced (AFC = FC/Q)
Advertising a. provides information about products, including prices and seller locations b. has been proven to increase competition and reduce prices compared to markets without advertising c. signals quality to consumers, because advertising is expensive. d. all of the above are correct
all of the above are correct
Critics of advertising argue that advertising a. creates desires that otherwise might not exist b. hinders competition c. often fails to convey substantive information d. all of the above are correct
all of the above are correct
Foregone investment opportunities are an example of
an implicit cost (opportunity cost of capital is another example)
If marginal cost is equal to average total cost, then
average total cost is minimized
Which of the following is not an example of price discrimination? a. local pizza chain offers buy one get one free b. ice cream parlor chargers higher price for ice cream than for sherbet c. a university rebates part of cost of tuition in form of financial aid for needy students d. a movie theater charges lower price for a child than adult
b. ice cream parlor chargers higher price for ice cream than for sherbet
The fundamental source of monopoly power is
barriers to entry
Mrs. Smith operates a business in a competitive market. The current market price is $8.10. At her profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should
continue to operate in the short run but shut down in the long run
Average total cost tells us
cost of a typical unit of output, if total cost is divided evenly over all the units produced
Fixed Cost
costs that do not vary with the quantity of output produced (salary,rent)
Variable Cost
costs that do vary with the quantity of output produced (wages)
Frank owns a dog-grooming business. Which of the following costs would be implicit costs? (i) dog shampoo (ii) rent on the storefront (iii) interest that Frank's money was earning before he spent his savings to set up the dog-grooming business. a. (i), (ii), and (iii) b. (ii) and (iii) only c. (i) and (ii) only d. (iii) only
d. (iii) only
Which of the following statements is correct? a. If MC is rising, then ATC is rising. b. If MC is rising, then AVC is rising. c. If AVC is rising, then marginal cost is minimized. d. If ATC is rising, then marginal cost is greater than ATC
d. If ATC is rising, then marginal cost is greater than ATC
If you operated a small bakery, which of the following would be a variable cost in the short run? a. interest on business loans b. baking ovens c. annual lease payment for use of the building d. baking supplies
d. baking supplies
Which of the following is not a characteristic of a perfectly competitive market? a. many sellers b. goods offered for sale are largely the same c. firms are price takers d. firms have difficulty entering the market.
d. firms have difficulty entering the market.
Joan grows pumpkins. If Joan plants no seeds on her farm, she gets no harvest. If she plants 1 bag of seeds, she gets 500 pumpkins. If she plants 2 bags, she gets 800 pumpkins. If she plants 3 bags, she gets 900 pumpkins. A bag of seeds costs $100, and seeds are her only cost. Joan's production function exhibits a. increasing marginal product. b. decreasing marginal product. c. constant marginal product. d. Any of the above could be correct.
decreasing marginal product
The fundamental reason that marginal cost eventually rises as output increases is because of
diminishing marginal product
When adding another unit of labor leads to an increase in output that is smaller than the increases in output that resulted from adding previous units of labor, the firm is experiencing
diminishing marginal product
Which of the following is not a reason for the existence of monopoly? a. sole ownership of a key resource b. government licenses c. patents d. diseconomies of scale
diseconomies of scale
Implicit costs
do not require outlay of money
Product differentiation causes the seller of a good to face what type of demand curve?
downward sloping
The market demand curve for a monopolist is typically
downward sloping
In a perfectly competitive market, the process of entry and exit will end when
economic profits are zero
Suppose that a firm's long run average total costs of producing televisions decreases as it produces 10,000 and 20,000 televisions. For this range of output, this firm is experiencing
economies of scale
For a firm in a perfectly competitive market, the price of the good is always
equal to marginal revenue
whenever MC is less than ATC (or AVC), ATC (or AVC) must be
falling
If you start a business, you must
incorporate
The marginal product of any input is the
increase in total output obtained from one additional unit of that input
If MR> MC, the firm should
increase production
The length of the short run
is different for different types of firms
If a competitive firm is selling 900 units of its product at a price of $10 per unit and earning a positive profit, then
its average total cost is less than $10
For a monopolist, marginal revenue is
less than price, whereas marginal revenue is equal to price for a perfectly competitive firm
Economies of scale occur when
long-run average total cost falls as output increases
In order to sell more of its product, a monopolist must
lower its price
Laura is a gourmet chef who runs a small catering business in a competitive industry. Laura specializes in making wedding cakes. Laura sells 20 wedding cakes per month. Her monthly total revenue is $5,000. The marginal cost of making a wedding cake is $200. In order to maximize profits, Laura should
make more than 20 wedding cakes per month
The amount by which total cost rises when the firm produces one additional unit of output is called
marginal cost
A monopolistically competitive firm chooses the quantity to produce where
marginal revenue equals marginal cost
At the profit-maximizing level of output,
marginal revenue equals marginal cost
A profit-maximizing monopolist will produce the level of output at which
marginal revenue is equal to marginal cost
firms that operate in a perfectly competitive market try to
maximize profit
The efficient scale of the firm is the quantity of output that
minimizes ATC (intersection between MC and ATC)
The efficient scale of the firm is the quantity of output that
minimizes average total cost
Considering the relationship between average total cost and marginal cost, the marginal cost curve for this firm
must lie entirely below the average total cost curve
Marginal Product
of any input is increase in quantity of output obtained by adding one additional unit of that input
What are the characteristics of monopoly?
one seller, barriers to entry, product without close substitutes
In the long run, all of a firm's costs are variable. In this case the exit criterion for a profit-maximizing firm is to shut down if
price is less than average total cost
A profit-maximizing firm will shut down in the short run when
price is less than average variable cost
Suppose that a monopoly is currently charging a price of $10 and faces an average total cost of $5. What will happen in the long run?
the monopolist will continue to earn an economic profit in long run
When a monopoly increases its output and sales,
the output effect works to increase total revenue and the price effect works to decrease total revenue.
The short-run supply curve for a firm in a perfectly competitive market is
the portion of its marginal cost curve that lies above its average variable cost
Marginal revenue equals
the price of the good
Total Revenue =
the price the good is sold at * the quantity sold = P * Q (amount firm receives for sale of its output )
Economies of scale
the property where the long-run ATC falls as output ↑ (as u make more stuff, stuff gets cheaper)
Constant Returns to Scale
the property whereby long-run ATC stays the same as quantity of output changes
Diseconomies of scale
the property whereby long-run ATC ↑ as output ↑ (price raises as you buy more stuff)
Diminishing Marginal Product
the property whereby the marginal product of an input declines as the quantity of the input increases
The Production Function
the relationship between quantities of inputs used to make a good/service & the quantity of output of that good/service. Exhibit diminishing marginal return. NOT LINEAR. Not efficient. (increase output- hire workers, decrease output- fire workers).
Average Total Cost
the total cost divided by the quantity of output produced (ATC = TC/Q)
A natural monopoly occurs when
there are economies of scale over the relevant range of output
What is accounting profit?
total revenue - explicit costs
What is economic profit?
total revenue - explicit costs - implicit costs
Average Variable Cost
variable cost divided by the quantity of output produced (AVC = VC/Q)
In long run, each firm in a competitive industry earns
zero economic profits
in the long run, each firm in a competitive industry earns
zero economic profits
