FE ECON
Efficient Scale
-The quantity that minimizes ATC
Markup over Marginal Cost
-Under monopolistic competition, P > MC. Under perfect competition, P = MC
Short Run
-Under monopolistic competition, SR firm behavior is very similar to monopoly
For a monopoly
-average revenue exceeds marginal revenue
Which of the following pairs illustrates the two extreme examples of market structures?
-competition and monopoly
The market demand curve for a monopolist is typically
-downward sloping
Average TC
-equals total cost divided by the quantity of output =TC Q
The product-variety "externality"
-surplus consumers get from the introduction of new products
If a firm uses labor to produce output, the firm's production function depicts the relationship between
-the number of workers and the quantity of output
Suppose a firm in a competitive market produces and sells 150 units of output and earns $1,800 in total revenue from the sales. If the firm increases its output to 200 units, the average revenue of the 200th unit will be
-$12
If a monopolist sells 100 units at $8 per unit and realizes an average total cost of $6 per unit, what is the monopolist's profit?
-$200
Suppose a firm in a competitive market produces and sells 150 units of output and earns $1,800 in total revenue from the sales. If the firm increases its output to 200 units, total revenue will be
-$2400
Suppose that eight workers can manufacture 70 radios per day and that nine workers can manufacture 90 radios per day. If radios can be sold for $20 each, the value of marginal product of the ninth worker is
-$400
Suppose a monopolist charges a price of $27 for its product and sells 10 units at that price. At 10 units of production the firm has average fixed cost equal to $10 and average variable cost equal to $12. How much total profit is the firm earning at this price?
-$50
When a certain competitive firm produces and sells 100 units of output, marginal revenue is $80. When the same firm produces and sells 200 units of output, what is average revenue?
-$80
If income were equally distributed among households
-50 percent of the households would receive exactly 50 percent of the income
Exit
-A long-run decision to leave the market permanently
Monopoly
-A monopolist is the only seller, so it faces the market demand curve. -To sell a larger Q, the firm must reduce P. Thus, MR ≠ P
Shutdown
-A short-run decision not to produce anything because of current market conditions
Which of the following is a characteristic of a competitive market?
-Buyers and sellers are price takers
Which of the following statements is correct?
-Differences in human capital may explain differences in wages between blacks and whites
Excess Capacity
-Every monopolistic competitor operates on the downward-sloping part of its ATC curve, produces less than the cost-minimizing output. -Under perfect competition, firms produce the quantity that minimizes ATC
Which of the following statements regarding a competitive firm is correct?
-For all firms, average revenue equals the price of the good
Which of the following statements best reflects a price-taking firm?
-If the firm were to charge more than the going price, it would sell none of its goods
Perfect Competition
-In a competitive market, the market demand curve slopes downward. -But the demand curve for any individual firm is horizontal at the market price. -The firm can increase Q without lowering P, so MR = P for the competitive firm -many firms, identical products
Long Run
-In monopolistic competition, entry and exit drive LR economic profits to zero
Skill-biased Technological Change
-New technologies have increased demand for skilled workers, reduced demand for unskilled workers
If a certain market were a monopoly, then the monopolist would maximize its profit by producing 4,000 units of output. If, instead, that market were a duopoly, then which of the following outcomes would be most likely if the duopolists successfully collude?
-One duopolist produces 2,400 units of output and the other produces 1,600 units of output
Increasing Q
-Output effect: higher output raises revenue -Price effect: lower price reduces revenue
International Trade
-Rising exports of goods made with skilled labor, rising imports of goods made with unskilled labor
Human Capital
-The accumulation of investments in people, such as education and on-the-job training -an important determinant of wages, and it affects the production of goods and services
Lorenz Curve
-The cumulative percentage of the population from lowest to highest incomes (on the horizontal axis) is graphed against the cumulative percentage of income (on the vertical axis).
Which of these assumptions is often realistic for a firm in the short run?
-The firm can vary the number of workers it employs but not the size of its factory
Diminishing Marginal Product
-The marginal product of an input declines as the quantity of the input increases (other things equal).
Minimum Wage Laws
-The minimum wage may exceed the eq'm wage of the least-skilled and experienced workers
Discrimination
-The offering of different opportunities to similar individuals who differ only by race, ethnicity, gender, or other personal characteristics
Long-Run Equilibrium
-The process of entry or exit is complete— remaining firms earn zero economic profit -P=minimum ATC
Which of the following will not occur when government policies are enacted to make the distribution of income more equitable?
-Total utility will likely remain constant
Labor Unions
-Union: a worker association that bargains with employers over wages and working conditions -Unions use their market power to obtain higher wages; most union workers earn 10-20% more than similar nonunion workers
Which of the following statements about oligopolies is not correct?
-Unlike monopolies and monopolistically competitive markets, oligopolies prices do not exceed their marginal revenues
Tit-for-tat
-Whatever your rival does in one round (whether renege or cooperate), you do in the following round
Prisoner's Dilemma
-a "game" between two captured criminals that illustrates why cooperation is difficult even when it is mutually beneficial
Utility
-a "measure" of happiness or satisfaction (not income, but related to income)
A difference in wages that arises to offset the nonmonetary characteristics of different jobs is known as
-a compensating differential
Workers who work the night shift are often paid more than those who do identical work on the day shift. This is referred to as a
-a compensating differential
Sunk Cost
-a cost that has already been committed and cannot be recovered
Cartel
-a more formal version of collusion; firms basically become one in terms of decision making
If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then
-a one-unit decrease in output will increase the firm's profit
If a competitive firm is currently producing a level of output at which marginal revenue exceeds marginal cost, then
-a one-unit increase in output will increase the firm's profit
Which of the following is a characteristic of a monopoly?
-a product without close substitutes
Natural Monopoly
-a single firm can produce the entire market Q at lower cost than could several firms
Nash Equilibrium
-a situation in which economic participants interacting with one another, each choose their best strategy given the strategies that all the others have chosen
Dominant Strategy
-a strategy that is best for a player in a game regardless of the strategies chosen by the other players
Negative Income Tax
-a tax system that collects revenue from high-income households and gives transfers to low-income households
Most economists believe that the higher average salaries earned by men in comparison to women arise from
-a variety of factors, including differences in human capital, compensating differentials, and discrimination
In a monopolistically competitive industry, firms set price
-above marginal cost since each firm is a price setter
Efficiency Wages
-above-equilibrium wages paid by firms to increase worker productivity -Firms may pay higher wages to reduce turnover, increase worker effort, or attract higher-quality job applicants
Poverty Line
-an absolute level of income set by the govt for each family size, below which a family is deemed to be in poverty
Collusion
-an agreement among firms in a market about quantities to produce or prices to charge
A law that encourages market competition by prohibiting firms from gaining or exercising excessive market power is
-an antitrust law
Compensating Differentials
-are differences in wages that arise to offset some unpleasant job characteristics of different jobs
In-Kind Transfers
-are goods or services provided to the needy
Liberalism
-argues that govt should choose policies deemed to be just by an impartial observer behind a "veil of ignorance." -Calls for more redistribution than utilitarianism (though still not complete equalization of incomes). -Sees income redistribution to be a form of social insurance, a govt policy aimed at protecting people against the risk of adverse events
Utilitarianism
-argues that govt should choose policies to maximize society's total utility -Yet, utilitarians do not advocate equalizing incomes - would reduce total income of everyone due to incentive effects and efficiency losses
Libertarianism
-argues that govt should punish crimes and enforce voluntary agreements but not redistribute income -Instead of focusing on outcomes, libertarians focus on the process -Govt should enforce individual rights, should try to equalize opportunities. If the income distribution is achieved fairly, govt should not interfere, even if unequal
For a monopolistically competitive firm
-average revenue and price are the same
A monopolistically competitive market has characteristics that are similar to
-both a monopoly and a competitive firm
A monopolistically competitive market is like a competitive market in that
-both market structures feature easy entry by new firms in the long run
Land of Many Lakes (LML) sells butter to a broker in Albert Lea, Minnesota. Because the market for butter is generally considered to be competitive, LML
-can choose quantity of butter that it produces but not the price at which it sells its butter
A firm that has little ability to influence market prices operates in a
-competitive market
When a firm operates under conditions of monopoly, its price is
-constrained by demand
The economic inefficiency of a monopolist can be measured by the
-deadweight loss
Typically, as a firm hires additional workers, the marginal product of labor
-decreases, and the value of the marginal product of labor decreases
Because a firm's demand for a factor of production is derived from its decision to supply a good in the market, it is called a
-derived demand
The prisoners' dilemma provides insights into the
-difficulty of maintaining cooperation
When the government redistributes income to achieve greater equality, it
-distorts incentives
Implicit Costs
-do not require a cash outlay, e.g., the opportunity cost of the owner's time
Fixed Costs
-do not vary with the quantity of output produced
Product differentiation causes the seller of a good to face what type of demand curve?
-downward sloping
Monopoly firms have
-downward-sloping demand curves, so they can sell only the specific price-quantity combinations that lie on the demand curve
The simplest type of oligopoly is
-duopoly
An agreement between two duopolists to function as a monopolist usually breaks down because
-each duopolist wants a larger share of the market to capture more profit
Which of the following is not a characteristic of a competitive market?
-entry is limited
A firm's opportunity costs of production are equal to its
-explicit+implicit costs
A monopolistically competitive market is like a monopoly in that
-firms in both market structures set price above marginal cost
The long-run average total cost curve is always
-flatter than the short-run average total cost curve, but not necessarily horizontal
Which of the following is a characteristic of monopolistic competition?
-free entry
Welfare
-govt programs that supplement the incomes of the needy
To say that a firm is competitive in the labor market is to say that the firm
-has little or no control over the wage it pays its workers
In both perfect competition and monopolistic competition, each firm
-has many competitors
Because monopolistically competitive firms produce differentiated products, each firm
-has some control over product price
Which of the following can be used to help explain wage differences among different groups of workers?
-human capital and compensating differentials
Bubba is a shrimp fisherman who could earn $5,000 as a fishing tour guide. Instead, he is a full-time shrimp fisherman. In calculating the economic profit of his shrimp business, the $5,000 that Bubba gave up is counted as part of the shrimp business's
-implicit costs
A difference between explicit and implicit costs is that
-implicit costs do not require a direct monetary outlay by the firm, whereas explicit costs do
Assume a certain firm regards the number of workers it employs as variable but regards the size of its factory as fixed. This assumption is often realistic
-in the short run but not in the long run
Consider the market for university economics professors. Suppose the opportunity cost of going to graduate school to get a Ph.D. in economics increases for many individuals. Suppose it generally takes about five years to get a Ph.D. in economics. Holding all else constant, in five years the equilibrium wage for university economics professors will
-increase
The marginal product of labor is equal to the
-increase in output obtained from a one unit increase in labor
Monopoly Firm
-is a "price-maker," not a "price-taker" -Q does not depend on P; -Q and P are jointly determined by MC, MR, and the demand curve
Gini Coefficient
-is a commonly used measure of income inequality, with values between 0 and 1 -0 corresponds to perfect equality whereby everyone has exactly the same income -1 corresponds to perfect inequality where one person has all the income, while everyone else has zero income
Monopoly
-is a firm that is the sole seller of a product that product has no close substitute
Marginal Cost
-is the increase in Total Cost from producing one more unit =change in TC change in Q
When a factory is operating in the short run
-it cannot adjust the quantity of fixed inputs
A monopoly is an inefficient way to produce a product because
-it produces a smaller level of output than would be produced in a competitive market
The total cost to the firm of producing zero units of output is
-its fixed cost in the short run and zero in the long run
If a competitive firm is selling 500 units of its product at a price of $8 per unit and earning a positive profit in the short-run, then
-its total cost is less than $4,000
Difference in wages can be explained by differences in
-job characteristics and worker characteristics
A monopolist produces
-less than the socially efficient quantity of output but at a higher price than in a competitive market
The business-stealing "externality"
-losses incurred by existing firms when new firms enter market
When the supply of workers is plentiful, one would predict that market wages would be
-low, other things equal
In order to sell more of its product, a monopolist must
-lower its price
A monopoly firm is a price
-maker and has no supply curve
Monopolistic Competition
-many firms sell similar but not identical products, like Starbucks coffee
To maximize its profit, a monopolistically competitive firm chooses its level of output by looking for the level of output at which
-marginal revenue equals marginal cost
Mr. Rogers sells colored pencils. The colored-pencil industry is competitive. Mr. Rogers hires a business consultant to analyze his company's financial records. The consultant recommends that Mr. Rogers increase his production
-marginal revenue exceeds his marginal cost
Because a monopolist must lower its price in order to sell another unit of output
-marginal revenue is less than price
Monopolistic competition is a type of
-market structure
Total cost is the
-market value of the inputs a firm uses in production
Economists assume that the typical person who starts her own business does so with the intention of
-maximizing profits
The two types of imperfectly competitive markets are
-monopolistic competition and oligopoly
Market Power
-monopoly has the ability to influence the market price of the product it sells -main cause: barriers to entry
Other things the same, we'd expect that a job with less pleasant working conditions pays
-more; this is known as a compensating differential
For a monopolist, when does marginal revenue exceed average revenue?
-never
Free entry
-no legal barriers prevent a firm from entering an industry
The best government policy to reduce poverty is
-not obvious. Government programs to reduce poverty have many advantages but also many disadvantages
Marginal Product
-of any input is the increase in output arising from an additional unit of that input, holding all other inputs constant
Some discriminatory hiring practices can be expected, even if markets are competitive, as a result
-of customer preferences
Game theory is important for the understanding of
-oligopolies
The story of the prisoners' dilemma shows why
-oligopolies can fail to cooperate, even when cooperation is in their best interest
Which of the following is not a characteristic of a monopoly?
-one buyer -free entry and exit
Oligopoly
-only a few sellers (offer similar or identical goods).
The marginal product of labor can be defined as the change in
-output divided by the change in labor
When a production function exhibits a diminishing, but positive, marginal product of labor
-output increases, but at a decreasing rate, as more workers are employed
The marginal product of labor is defined as the change in
-output per additional unit of labor
f there are many firms participating in a market, the market is either
-perfectly competitive or monopolistically competitive
Land of Many Lakes (LML) sells butter to a broker in Albert Lea, Minnesota. Because the market for butter is generally considered to be competitive, LML does not choose the
-price at which it sells butter
A key characteristic of a competitive market is that
-producers sell nearly identical products
The deadweight loss associated with a monopoly occurs because the monopolist
-produces an output level less than the socially optimal level
Which of the following formulas would correctly calculate a monopolist's profit?
-profit = (price - average total cost) × quantity
The intersection of a firm's marginal revenue and marginal cost curves determines the level of output at which
-profit is maximized
For a firm, the production function represents the relationship between
-quantity of inputs and quantity of output
A production function is a relationship between inputs and
-quantity of output
Along the vertical axis of the production function we typically measure
-quantity of output
The marginal product of an input in the production process is the increase in
-quantity of output obtained from an additional unit of that input
Because of diminishing marginal utility
-redistributing income from rich to poor increases utility of the poor more than it reduces utility of the rich
Suppose a firm in a competitive market reduces its output by 20 percent. As a result, the price of its output is likely to
-remain unchanged
Explicit Costs
-require an outlay of money, e.g., paying wages to workers.
Value of marginal product is defined as the additional
-revenue earned from hiring one more factor of production
Westland and Oceania have just started to trade with each other. Westland exports goods produced with skilled labor and imports goods made with unskilled labor from Oceania. Over time (the next few years), we would expect that in Oceania the wages of unskilled workers will
-rise, and the wages of skilled labor will fall
A similarity between monopoly and monopolistic competition is that in both market structures
-sellers are price makers rather than price takers
Price Discrimination
-selling the same good at different prices to different buyers
Price discrimination requires the firm to
-separate customers according to their willingnesses to pay
Production Function
-shows the relationship between the quantity of inputs used to produce a good and the quantity of output of that good.
A utilitarian government has to balance the gains from greater income equality against the losses from distorted work incentives. To maximize total utility, therefore, the government would never tax labor income
-stops short of a fully egalitarian society
In the language of game theory, a situation in which each person must consider how others might respond to his or her own actions is called a
-strategic situation
Competitive Firm
-takes P as given, it has a supply curve that shows how its Q depends on P
Total Revenue
-the amount a firm receives from the sale of its output, hence: Q*P
In a game, a dominant strategy is
-the best strategy for a player to follow, regardless of the strategies followed by other players
Capital
-the equipment and structures used to produce goods and services
Each firm in a monopolistically competitive industry faces a downward-sloping demand curve because
-the firm's product is different from those offered by other firms in the market
Factors of Production
-the inputs used to produce goods and services
Total Cost
-the market value of the inputs a firm uses in production =FC+VC
Perfect Price Discrimination
-the monopolist produces the competitive quantity, but charges each buyer his or her WTP
The poverty rate is
-the percentage of the population whose family income falls below a specified level
Poverty Rate
-the percentage of the population whose family income falls below the poverty line
Purchase Price
-the price a person pays to own that factor indefinitely
Rental Price
-the price a person pays to use that factor for a limited period of time
In a representative labor market
-the wage adjusts to balance the supply and demand for labor -the wage equals the value of the marginal product of labor
The nature of a firm's cost (fixed or variable) depends on the
-time horizon under consideration
Suppose that the market for labor is initially in equilibrium. An increase in immigration will cause the equilibrium wage
-to fall and the equilibrium quantity of labor to rise
The amount of money that a firm receives from the sale of its output is called
-total revenue
Profit is defined as
-total revenue minus total cost
From society's standpoint, cooperation among oligopolists is
-undesirable, because it leads to output levels that are too low and prices that are too high
Variable Costs
-vary with the quantity produced
Average Revenue
=P
Billy's Bean Bag Emporium produced 300 bean bag chairs but sold only 275 of the units it produced. The average cost of production for each unit of output produced was $100. The price for each of the 275 units sold was $95. Total profit for Billy's Bean Bag Emporium would be
=-3,875
Which of the following conditions is characteristic of a monopolistically competitive firm in short-run equilibrium?
=P>MC
Profit
=Total revenue - Total cost
MPL
=change in Q change in L
Marginal Revenue
=change in TR change in Q
Economic Profit
=total revenue minus total costs (including explicit and implicit costs) Note: Economists study the pricing and production decisions of firms, which are affected by implicit as well as explicit costs.
Accounting Profit
=total revenue minus total explicit costs Note: Accountants keep track of how much money flows into and out of the firm, so they ignore implicit costs.