Micro Midterm 2

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Single price monopoly, Total Cost (TC) = ?

ATC x Q

If a monopolistically competitive retailer maximizes profit by producing 400 shirts per​ hour, it must be true that at 400 shirts per​ hour:

Marginal Cost = Marginal Revenue (MC=MR)

the tragedy of the commons results when

common pool resources are overused (overfishing in public waters)

By forcing monopolists to set price equal to marginal​ cost,

economic loss can occur.

the short-run adjusts

labor

what is a firms markup?

price exceeds marginal cost

Elasticity of demand:

% change in quantity / % change in price - <1 = inelastic demand - >1 = elastic demand - =1 = unit elastic (% change in quantity = % change in price) - =0 = perfectly inelastic (perfect vertical line) - =infinity = perfectly elastic (perfect horizontal line)

Suppose the production of a particular good causes a negative externality. Based on market forces​ only, how will this impact the production levels for a factory if negative externalities are​ present?

It will produce the good above the socially efficient level.

What happens in a monopolistically competitive market when new firms enter the​ market?

The existing​ firm's demand curve shifts in and becomes flatter.

in short-run, total cost on K = ? and is ---

Total Fixed Cost, constant

in short-run, total cost on L = ?

Total Variable Cost

on L, Average Variable Cost =

Total Variable Cost/Total Product

What is a sunk cost?

a cost that has already been committed and cannot be recovered

Externalities are called market failures because they

cause markets to produce suboptimal social outcomes

Unlike products sold in a competitive​ market, the products sold in a monopolistically competitive market are ----

differentiated (make smth diff.)

the long-run adjusts

labor and capital

entry and exit exists in and not?

long-run not short-run

Consider four market​ structures: perfect​ competition, monopolistic​ competition, oligopoly, and monopoly. Firms in all four market structures maximize profits by producing the quantity where​ ___________.

marginal revenue equals marginal cost.

an individual or a firm can internalize an externality by

paying the cost of the externality

in perf. compet. MR = ?, and is ----

price, constant

diseconomies of scale

quantity increases, long run avg. cost increases

what is efficient scale?

quantity where ATC is minimized

game theory

self interest (prison game with teach teach)

what is irrelevant in short-run?

sunk cost = Total Fixed Cost

For economic profit to exist within a duopoly with homogeneous​ goods:

the firms would have to agree to a set price.

which of the following statements are true regarding externalities?

- A negative externality occurs when an economic activity has a spillover cost to a bystander. - Deadweight loss can be either a foregone benefit or the total cost of the externality to society.

In which of the following ways is a monopoly beneficial to an​ economy?

- Monopoly profits give firms more reason to invest in the creation of new products through research and development. - Firms that are allowed monopoly profits search out innovative technologies that they can bring to market. - With natural​ monopolies, costs may be lower than those that would exist in competitive markets with many producers.

Which of the following statements regarding price regulation is not ​true?

- The regulated monopoly results in no costs to consumers as they benefit from a lower price. - Setting an efficient price always results in economic profits. As a​ result, the monopolist will never leave the industry.

firms maximize profits with what constraints

- Y (output) - K (capital) - L (labor)

A monopolistic competition is

- differentiated products - firms compete on product, price and quality - entry and exist - many sellers - 0 economic profits in long-run (cuz free entry of many firms) - no substitutes ? - demand curve is negative - sellers = price makers (ex. fast food industry, pharmaceuticals, laundry mat)

- Based on your understanding of environmental​ economics, you argue against your​ friend's suggestion saying that taxes on pollution are effective. Which of the following reasons will strengthen your​ argument? - Which of the following statements is true regarding the goal of any policy on pollution​ abatement?

- eliminating all pollution will eliminate all the benefits associated with the activities that create pollution - the policy should ensure that if any pollution is created it is overall worth it

If a price ceiling is set above the equilibrium price: If a price ceiling is set below the equilibrium price:

- equilibrium, efficient - shortage, inefficient

what happens when MP (exceeds, below, and equal) AP?

- exceeds: AP increase - equal: AP is at max. - below: AP decrease

- the largest source of revenue for the federal government is - the sources for revenue for state and local governments are --- those of the fed gov - which of the following is the largest source of revenue for state governments?

- individual income tax - different from - miscellaneous taxes and fees (tolls on roads and public transportation tickets)

a duopoly is ---

- industry wit 2 firms - if one firm p is lower they will get all consumers if = p they will share

which of the following statements regarding social enforcement mechanisms is not true?

- it reduces the net benefit to society - it is enforced by official gov. regulations and results in a stiff financial penalty if not followed

which of the following is the correct definition of marginal social cost?

- marginal private cost + marginal external cost - marginal private cost + marginal cost of externality

A monopoly is

- only one seller - price maker - no substitutes - high barriers to entry

A oligopoly is

- small # of firms compete - identical or differentiated products - barriers for entry - market price depends on other firm's market price ex. t shirt companies

tax incidence refers to ? is the entire burden of the tax always borne by those on whom it is imposed?

- who bears the burden of a tax - not necessarily since the burden of the tax depends on price elasticity

Compared to a perfectly competitive​ market, the price in a monopoly market is higher and quantity is lower If a monopolist loses its monopoly​ power, what happens to price and​ surplus?

If the monopolist loses its monopoly​ power, price decreases​, consumer surplus increases, producer surplus decreases​, and social surplus increases (increases cuz dwl is eliminated)

Which of the following is a key difference between perfect competition and​ monopoly?

In perfect​ competition, no one firm can influence​ price, but with​ monopoly, a single seller sets the price.

short run vs long run

In the short run, -wages and other prices are fixed -# of firms is fixed In the long run -wages and prices are flexible. -firms can stay/enter/exist

Why is a natural gas pipeline better off as a natural​ monopoly?

Industries like a natural gas pipeline experience economies of scale since they have high fixed costs.​ Thus, it is cheaper to have a single firm provide a larger quantity.

To restrict a​ firm's monopoly​ power, why​ can't antitrust authorities just set a floor or a ceiling in the​ market?

It is difficult to set a fair​ price, and even if regulators​ did, the firm would then have no incentive to innovate.

All of the following statements about market structures are true except​: A. Perfect competitors can have​ short-run economic profits. B. Oligopolists often practices game theory. C. Monopolistic competitors practice marginal cost pricing. D. ​Monopolists' sales revenues are constrained by market demand.

Monopolistic competitors practice marginal cost pricing.

Monopolistically competitive firms earn zero economic profit in the long run as do perfectly competitive firms. Does this mean that total surplus is maximized in a monopolistically competitive​ market?

No, because firms produce where price is greater than marginal cost.

P>ATC= Profit ? P=ATC= Profit ? P<ATC = Profit ?

P>ATC= Profit>0 P=ATC= Profit=0 P<ATC = Profit<0

Single price monopoly, Total Revenue (TR) = ?

Price x Quantity

ATC = ?

TC/Q or AFC + AVC

Total Cost=

Total Fixed Cost+Total Variable Cost

on K, Average Fixed Cost =

Total Fixed Cost/Quantity

All of the following statements describe a duopoly with differentiated products except​:

When consumers view the products as more​ substitutable, prices are higher.

When MC = ATC, ATC is

at minimum

when MC=AVC, AVC is

at minimum

Suppose there are four firms in a market and each of them sells differentiated products. If the four firms engage in a price​ war, then​ ____________.

each firm's profit will be less than with collusion but not zero

my forcing natural monopolist to seet price equal to marginal cost ---

economic loss and

In an oligopoly with differentiated​ products:

economic profit will exist

natural monopoly

economies of scale enable one firm to supply entire market at lowest price possible (ex. electricity generation)

in monopoly demand is always ---

elastic (demand changes as price changes)

In the model of an oligopoly with identical​ (homogeneous) products, the price is likely to be​ ___________.

equal to marginal cost

Why does a Monopolistically Comp. Firm's Economic Profit go to 0 in the Long Run?

free entry of many firms

A monopoly is selling workbooks to students in a college town and is currently maximizing profits by charging ​$70.00 per book. The marginal cost of textbooks

is less than ​$70

David runs a bakery in a monopolistically competitive market. He sells his specialty cupcakes at ​$2.25 ​each, and his​ per-cupcake cost is ​$1.75. ​David's market​ is

likely to see new competitors and demand curve will shift left

Single price monopoly, if price > quantity effect, revenue will --- if price < quantity effect, revenue will ---

lower increase

Suppose you are an​ "all-knowing" government planner. Your goal is to regulate a​ monopolist's price and quantity in order to maximize social welfare but still allow the monopolist to produce. To accomplish your​ goal, you would have the monopoly produce where​ ____________.

marginal cost equals​ demand, and you would price the good at marginal cost.

when MR = MC, economic profit is ---

maximized

Both monopolies and monopolistically competitive firms set marginal revenue equal to marginal cost to maximize profit. Given the same cost​ curves, would you expect prices to be higher in a monopoly or a monopolistically competitive​ market?

monopoly because more inelastic

Consider a market structure in which there are only a few firms. These firms face a downward sloping residual demand curve with some entry barriers in the long-run in the market, if there are zero economic profits, then it reflects a situation of

non-collusive firms producing differentiated products in the long-run

You need to fly from Kansas City to Miami but only two airlines provide the service. This market is best characterized as​ ___________.

oligopoly

short run profit = ? long run profit = ?

p - ATC x Q 0

Nash Equilibrium

player A chooses best option for themselves and player B

economic profit for a monopoly

profits=(P-ATC)xQ

which of the following would not be considered a common pool resource good?

streetlight

Based on your conversations today and your economics​experience, you conclude that when externalities are​ present,

the free market outcome is not efficient

long run equilibrium for a perf. compet. has

- 0 profit - no entry/exit - economic profit and loss is eliminated

MP>AP ===> MP=AP ===> MP<AP ===>

AP increases max[AP ] AP decreases

In short run, TFC = ?

K x Total Product

In short run, TVC = ?

L x Total Product

P=MR<min[ATC], firm should --- P=MR>min[ATC], firm should ---

P=MR<min[ATC] shut down P=MR>min[ATC] open

economies of scales

Quantity increases, Long run avg. cost decreases

AP = ?

Total Product /L

single-price monopoly

one price for all costumers

in long run, total cost = ?

total cost on K and L


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