Microeconomics Exam 2

# of sellers for each structure

Pure competition: very large Monopolistic competition: large Oligopoly: a few Monopoly: one

Explicit costs

costs that require actual monetary payment

P=minimum ATC

firm is achieving productive efficiency (producing at lowest possible per unit costs)

MR=MC

firm is producing optimal output

Constant-cost industry

industry expansion or contraction will not affect resource prices and therefore production costs

Perfect oligopoly

standard product

Average variable cost (AVC)

TVC per unit; TVC/Q; due to increasing then diminishing returns, AVC declines initially, reaches a minimum, and then increases, creating a U-shaped graph

P=MC

firm is achieving economic/allocative efficiency (optimal output)

Average product (AP)

TP/L; approaches zero but can never be negative; where MP exceeds AP, AP rises, and where MP is less than AP, AP declines

Two methods for finding optimal output

TR TC approach: the output where TR exceeds TC the most MR MC approach: the output where MR=MC; if MR>MC, produce; if MC>MR, don't produce

Stages of returns

stage 1: increasing returns stage 2: diminishing returns stage 3: negative returns production in the real world happens in stage 2 (where the law of diminishing returns begins to operate)

Optimal output

that which either maximizes profits or minimizes losses (MR=MC)

Variable costs (TVC)

those costs which increase as output increases (ex. labor, energy, raw materials); first increases at a decreasing rate, then increases at an increasing rate (law of diminishing returns eventually causes more and more variable resources to be used to produce successive units of output)

Remember:

-monopolies do not produce enough (allocative efficiency not achieved) -monopolies produce less for higher price than purely competitive markets -monopolies plant-size is too big/wasteful

Also remember

-supply curves only exist in PC because they're the only price-takers -MR curve for a monopolist always declines and is less than P

Assume that in the short run a firm is producing 100 units of output, has average total costs of $200, and has average variable costs of $150. The firm's total fixed costs are: A. $5,000. B. $500. C. $0.50. D. $50.

A. $5,000.

If a firm wanted to know how much it would save by producing one less unit of output, it would look to: A. MC. B. ATC. C. AVC. D. AFC.

A. MC.

Which of the following is characteristic of a purely competitive seller's demand curve? A. Price and marginal revenue are equal at all levels of output. B. Average revenue is less than price. C. Its elasticity coefficient is 1 at all levels of output. D. It is the same as the market demand curve.

A. Price and marginal revenue are equal at all levels of output.

Suppose that a pure monopolist can sell 4 units of output at $2 per unit and 5 units at $1.75 per unit. The monopolist will produce and sell the fifth unit if its marginal cost is: A. $1 or less. B. $.75 or less. C. $1.75 or less. D. $2 or less.

B. $.75 or less.

We would expect an industry to expand if firms in that industry are: A. earning normal profits. B. earning economic profits. C. breaking even. D. earning accounting profits.

B. earning economic profits.

In the short run, which of the following statements is correct? A. The marginal cost curve intersects the average variable and average fixed cost curves at their minimum points. B. Average variable cost declines continuously as total output is expanded. C. Total cost will exceed variable cost. D. If the inputs of all resources are increased by equal amounts, total output will expand by diminishing amounts.

C. Total cost will exceed variable cost.

A competitive firm in the short run can determine the profit-maximizing (or loss-minimizing) output by equating: A. price and average total cost. B. price and average fixed cost. C. marginal revenue and marginal cost. D. price and marginal revenue.

C. marginal revenue and marginal cost.

Assume for a competitive firm that MC = AVC at $12, MC = ATC at $20, and MC = MR at $16. This firm will: A. realize a profit of $4 per unit of output. B. maximize its profit by producing in the short run. C. minimize its losses by producing in the short run. D. shut down in the short run.

C. minimize its losses by producing in the short run.

Pure monopolists may obtain economic profits in the long run because: A. of advertising. B. marginal revenue is constant as sales increase. C. of barriers to entry. D. of rising average fixed costs.

C. of barriers to entry.

Assume that in the short run a firm is producing 100 units of output, has average total costs of $200, and has average variable costs of $150. The firm's total fixed costs are: A. $0.50. B. $50. C. $500. D. $5,000.

D. $5,000.

In comparing the changes in TVC and TC associated with an additional unit of output, we find that: A. the change in TC is greater than the change in TVC. B. no generalization about the changes in TC and TVC can be made. C. the change in TVC is greater than the change in TC. D. the changes in TC and TVC are equal.

D. the changes in TC and TVC are equal.

Monopoly equalites

P = MR: no, P>MR MR = MC: yes P = ATC: no, P >ATC P = MC: no, P>MC P = min. ATC: no

Monopolistic competition equalities

P = MR: no, P>MR MR = MC: yes P = ATC: yes P = MC: no, P>MC P = min. ATC: no

Total revenue (TR)

P x Q; increases by a constant amount since P and MR are fixed

SR relationships in PC

P=MR=MC

LR relationships in PC

P=MR=MC=ATC

Price of firms in pure competition

PC firms are price takers, so they take the equilibrium price of the entire market; price is perfectly elastic; P=MR

Long-run

all inputs are variable

Normal profit

an implicit cost; cost of running your own business/being an entrepreneur (giving up potential income earned working for someone else)

Break-even point

an output at which a firm makes a normal profit but not an economic profit

Marginal product (MP)

change in TP/change in L; equals the slope of TP stage 1: positive and increasing stage 2: positive and decreasing stage 3: negative

Marginal revenue (MR)

change in total revenue that results in selling one more unit of output; equal to P and AR (constant)

Decreasing-cost industry

firms experience lower resource costs as their industry expands

Increasing-cost industry

firms' ATC curves shift upward as the industry expands and downward as the industry contracts

SR supply curve

is the same as the portion of the MC curve that lies above AVC

P=MR

means that firm is a price-taker

MC<P

not producing enough

Efficiency loss

optimal output to optimal price to P=MC

Short-run

plant is fixed, labor is variable; period too brief for a firm to alter its plant capacity, but long enough to permit a change in the degree to which the plant's current capacity is used

A pure monopolist is selling six units at a price of $12. If the marginal revenue of the seventh unit is $5, then the: A. price of the seventh unit is $10. B. price of the seventh unit is $11. C. price of the seventh unit is greater than $12. D. firm's demand curve is perfectly elastic.

B. price of the seventh unit is $11.

A firm is producing an output such that the benefit from one more unit is more than the cost of producing that additional unit. This means the firm is: A. producing more output than allocative efficiency requires. B. producing less output than allocative efficiency requires. C. achieving productive efficiency. D. producing an inefficient output, but we cannot say whether output should be increased or decreased.

B. producing less output than allocative efficiency requires.

If the total variable cost of 9 units of output is $90 and the total variable cost of 10 units of output is $120, then: A. the average variable cost of 10 units is $10. B. the average variable cost of 9 units is $10. C. the marginal cost of the tenth unit is $90. D. the firm is operating in the range of increasing marginal returns.

B. the average variable cost of 9 units is $10.

Accounting profit

the profit number that accountants calculate by subtracting total explicit costs from total sales revenue

A competitive firm in the short run can determine the profit-maximizing (or loss-minimizing) output by equating: A. price and marginal revenue. B. marginal revenue and marginal cost. C. price and average total cost. D. price and average fixed cost.

B. marginal revenue and marginal cost.

Which of the following is true concerning purely competitive industries? A. There will be economic losses in the long run because of cut-throat competition. B. Economic profits will persist in the long run if consumer demand is strong and stable. C. In the short run, firms may incur economic losses or earn economic profits, but in the long run they earn normal profits. D. There are economic profits in the long run but not in the short run.

C. In the short run, firms may incur economic losses or earn economic profits, but in the long run they earn normal profits.

Marginal cost is the: A. rate of change in total fixed cost that results from producing one more unit of output. B. change in average total cost that results from producing one more unit of output. C. change in total cost that results from producing one more unit of output. D. change in average variable cost that results from producing one more unit of output.

C. change in total cost that results from producing one more unit of output.

The pure monopolist's demand curve is relatively elastic: A. in the price range where total revenue is declining. B. at all points where the demand curve lies above the horizontal axis. C. in the price range where marginal revenue is negative. D. in the price range where marginal revenue is positive.

D. in the price range where marginal revenue is positive.

Total costs (TC)

total fixed costs + total variable costs; behaves the same as TVC; difference between TC and TVC curves equals TFC

Economic/pure profits

total revenue - total costs

Where will monopolists never operate?

where demand is inelastic (to the right of the profit-maximizing point on total revenue curve)

Which of the following is a short-run adjustment? A. A local bakery hires two additional bakers. B. Six new firms enter the plastics industry. C. The number of farms in the United States declines by 5 percent. D. BMW constructs a new assembly plant in South Carolina.

A. A local bakery hires two additional bakers.

Which of the following statements concerning the relationships between total product (TP), average product (AP), and marginal product (MP) is not correct? A. AP continues to rise so long as TP is rising. B. AP reaches a maximum before TP reaches a maximum. C. TP reaches a maximum when the MP of the variable input becomes zero. D. MP cuts AP at the maximum AP.

A. AP continues to rise so long as TP is rising.

Which of the following is most likely to be an implicit cost for Company X? A. Forgone rent from the building owned and used by Company X. B. Rental payments on IBM equipment. C. Payments for raw materials purchased from Company Y. D. Transportation costs paid to a nearby trucking firm.

A. Forgone rent from the building owned and used by Company X.

In the short run, a purely competitive firm will always make an economic profit if: A. P > ATC. B. P = MC. C. P = ATC. D. P > AVC.

A. P > ATC.

Which of the following will not hold true for a competitive firm in long-run equilibrium? A. P equals AFC. B. P equals minimum ATC. C. MC equals minimum ATC. D. P equals MC.

A. P equals AFC.

Which of the following is not a characteristic of pure competition? A. Price strategies by firms. B. A standardized product. C. No barriers to entry. D. A larger number of sellers.

A. Price strategies by firms.

In the short run: A. TVC will increase for a time at a diminishing rate, but then beyond some point will increase at an increasing rate. B. TVC will increase for a time at an increasing rate, but then beyond some point will increase at a diminishing rate. C. TVC will increase by the same absolute amount for each additional unit of output produced. D. one cannot generalize concerning the behavior of TVC as output increases.

A. TVC will increase for a time at a diminishing rate, but then beyond some point will increase at an increasing rate.

Assume a purely competitive increasing-cost industry is initially in long-run equilibrium and that an increase in consumer demand occurs. After all economic adjustments have been completed, product price will be: A. higher and total output will be larger than originally. B. higher, but total output will be smaller than originally. C. lower, but total output will be larger than originally. D. lower and total output will be smaller than originally.

A. higher and total output will be larger than originally.

The nondiscriminating pure monopolist's demand curve: A. is the industry demand curve. B. shows a direct or positive relationship between price and quantity demanded. C. tends to be inelastic at high prices and elastic at low prices. D. is identical to its marginal revenue curve.

A. is the industry demand curve.

If a pure monopolist is producing at that output where P = ATC, then: A. its economic profits will be zero. B. it will be realizing losses. C. it will be producing less than the profit-maximizing level of output. D. it will be realizing an economic profit.

A. its economic profits will be zero.

A natural monopoly occurs when: A. long-run average costs decline continuously through the range of demand. B. a firm owns or controls some resource essential to production. C. long-run average costs rise continuously as output is increased. D. economies of scale are obtained at relatively low levels of output.

A. long-run average costs decline continuously through the range of demand.

When total product is increasing at an increasing rate, marginal product is: A. positive and increasing. B. positive and decreasing. C. constant. D. negative.

A. positive and increasing.

If a monopolist's marginal revenue is $3.00 and its marginal cost is $4.50, it will increase its profits by: A. reducing output and raising price. B. reducing both output and price. C. increasing both price and output. D. raising price while keeping output unchanged.

A. reducing output and raising price.

Accounting profits equal total revenue minus: A. total explicit costs. B. total implicit costs. C. total economic costs. D. economic profits.

A. total explicit costs.

A pure monopolist: A. will realize an economic profit if price exceeds ATC at the profit-maximizing/loss-minimizing level of output. B. will realize an economic profit if ATC exceeds MR at the profit-maximizing/loss-minimizing level of output. C. will realize an economic loss if MC intersects the downsloping portion of MR. D. always realizes an economic profit.

A. will realize an economic profit if price exceeds ATC at the profit-maximizing/loss-minimizing level of output.

Allocative efficiency is achieved when the production of a good occurs where: A. P = minimum ATC. B. P = MC. C. P = minimum AVC. D. total revenue is equal to TFC.

B. P = MC.

In which of the following industry structures is the entry of new firms the most difficult? A. Pure competition. B. Pure monopoly. C. Oligopoly. D. Monopolistic competition.

B. Pure monopoly.

What do economies of scale, the ownership of essential raw materials, and patents have in common? A. They must all be present before price discrimination can be practiced. B. They are all barriers to entry. C. They all help explain why a monopolist's demand and marginal revenue curves coincide. D. They all help explain why the long-run average cost curve is U-shaped.

B. They are all barriers to entry.

Which of the following is correct? A. When MP is rising MC is rising, and when MP is falling MC is falling. B. When MP is rising MC is falling, and when MP is falling MC is rising. C. When AP is rising MC is falling, and when AP is falling MC is rising. D. There is no relationship between MP and MC.

B. When MP is rising MC is falling, and when MP is falling MC is rising.

Which of the following is not correct? A. Where marginal product is greater than average product, average product is rising. B. Where total product is at a maximum, average product is also at a maximum. C. Where marginal product is zero, total product is at a maximum. D. Marginal product becomes negative before average product becomes negative.

B. Where total product is at a maximum, average product is also at a maximum.

In the short run the Sure-Screen T-Shirt Company is producing 500 units of output. Its average variable costs are $2.00 and its average fixed costs are $.50. The firm's total costs: A. are $2.50. B. are $1,250. C. are $750. D. are $1,100.

B. are $1,250.

For most producing firms: A. average total costs rise as output is carried to a certain level, and then begin to decline. B. average total costs decline as output is carried to a certain level, and then begin to rise. C. marginal cost rises as output is carried to a certain level, and then begins to decline. D. total costs rise as output is carried to a certain level, and then begin to decline.

B. average total costs decline as output is carried to a certain level, and then begin to rise.

Marginal cost is the: A. rate of change in total fixed cost that results from producing one more unit of output. B. change in total cost that results from producing one more unit of output. C. change in average variable cost that results from producing one more unit of output. D. change in average total cost that results from producing one more unit of output.

B. change in total cost that results from producing one more unit of output.

Suppose you find that the price of your product is less than minimum AVC. You should: A. maximize your profits by producing where P = MC. B. close down because, by producing, your losses will exceed your total fixed costs. C. minimize your losses by producing where P = MC. D. close down because total revenue exceeds total variable cost.

B. close down because, by producing, your losses will exceed your total fixed costs.

The demand curve in a purely competitive industry is ______, while the demand curve to a single firm in that industry is ______. A. perfectly inelastic; perfectly elastic B. downsloping; perfectly elastic C. downsloping; perfectly inelastic D. perfectly elastic; downsloping

B. downsloping; perfectly elastic

A constant-cost industry is one in which: A. a higher price per unit will not result in an increased output. B. if 100 units can be produced for $100, then 150 can be produced for $150, 200 for $200, and so forth. C. the demand curve and therefore the unit price and quantity sold seldom change. D. the total cost of producing 200 or 300 units is no greater than the cost of producing 100 units.

B. if 100 units can be produced for $100, then 150 can be produced for $150, 200 for $200, and so forth.

A pure monopolist should never produce in the: A. elastic segment of its demand curve because it can increase total revenue and reduce total cost by lowering price. B. inelastic segment of its demand curve because it can increase total revenue and reduce total cost by increasing price. C. inelastic segment of its demand curve because it can always increase total revenue by more than it increases total cost by reducing price. D. segment of its demand curve where the price elasticity coefficient is greater than one.

B. inelastic segment of its demand curve because it can increase total revenue and reduce total cost by increasing price.

A decreasing-cost industry is one in which: A. contraction of the industry will decrease unit costs. B. input prices fall or technology improves as the industry expands. C. the long-run supply curve is perfectly elastic. D. the long-run supply curve is upsloping.

B. input prices fall or technology improves as the industry expands.

If a purely competitive firm is maximizing economic profit: A. it is necessarily maximizing per-unit profit. B. it may or may not be maximizing per-unit profit. C. then per-unit profit will be minimized. D. it is necessarily overallocating resources to its product.

B. it may or may not be maximizing per-unit profit.

In the short run, the individual competitive firm's supply curve is that segment of the: A. average variable cost curve lying below the marginal cost curve. B. marginal cost curve lying above the average variable cost curve. C. marginal revenue curve lying below the demand curve. D. marginal cost curve lying between the average total cost and average variable cost curves.

B. marginal cost curve lying above the average variable cost curve.

If a purely competitive firm is producing at the MR = MC output level and earning an economic profit, then: A. the selling price for this firm is above the market equilibrium price. B. new firms will enter this market. C. some existing firms in this market will leave. D. there must be price fixing by the industry's firms.

B. new firms will enter this market.

An industry comprised of four firms, each with about 25 percent of the total market for a product, is an example of: A. monopolistic competition. B. oligopoly. C. pure monopoly. D. pure competition.

B. oligopoly.

The demand schedule or curve confronted by the individual, purely competitive firm is: A. perfectly inelastic. B. perfectly elastic. C. relatively inelastic, that is, the elasticity coefficient is less than unity. D. relatively elastic, that is, the elasticity coefficient is greater than unity.

B. perfectly elastic.

When a purely competitive firm is in long-run equilibrium: A. marginal revenue exceeds marginal cost. B. price equals marginal cost. C. total revenue exceeds total cost. D. minimum average total cost is less than the product price.

B. price equals marginal cost.

A firm finds that at its MR = MC output, its TC = $1,000, TVC = $800, TFC = $200, and total revenue is $900. This firm should: A. shut down in the short run. B. produce because the resulting loss is less than its TFC. C. produce because it will realize an economic profit. D. liquidate its assets and go out of business.

B. produce because the resulting loss is less than its TFC.

Accounting profits equal total revenue minus: A. total economic costs. B. total explicit costs. C. total implicit costs. D. economic profits.

B. total explicit costs.

If a firm in a purely competitive industry is confronted with an equilibrium price of $5, its marginal revenue: A. may be either greater or less than $5. B. will also be $5. C. will be less than $5. D. will be greater than $5.

B. will also be $5.

Which of the following best expresses the law of diminishing returns? A. Because large-scale production allows the realization of economies of scale, the real costs of production vary directly with the level of output. B. Population growth automatically adjusts to that level at which the average product per worker will be at a maximum. C. As successive amounts of one resource (labor) are added to fixed amounts of other resources (capital), beyond some point the resulting extra or marginal output will decline. D. Proportionate increases in the inputs of all resources will result in a less-than-proportionate increase in total output.

C. As successive amounts of one resource (labor) are added to fixed amounts of other resources (capital), beyond some point the resulting extra or marginal output will decline.

Which of the following is correct as it relates to cost curves? A. Average fixed cost intersects marginal cost at the latter's minimum point. B. Marginal cost intersects average fixed cost at the latter's minimum point. C. Marginal cost intersects average total cost at the latter's minimum point. D. Average variable cost intersects marginal cost at the latter's minimum point.

C. Marginal cost intersects average total cost at the latter's minimum point.

Which of the following conditions is true for a purely competitive firm in long-run equilibrium? A. P > MC = minimum ATC. B. P > MC > minimum ATC. C. P = MC = minimum ATC. D. P

C. P = MC = minimum ATC.

Which of the following statements is correct? A. The long-run supply curve for a purely competitive industry will be less elastic than the industry's short-run supply curve. B. The long-run supply curve for a purely competitive decreasing-cost industry will be upsloping. C. The long-run supply curve for a purely competitive increasing-cost industry will be upsloping. D. The long-run supply curve for a purely competitive increasing-cost industry will be perfectly elastic.

C. The long-run supply curve for a purely competitive increasing-cost industry will be upsloping.

Which of the following holds true? A. There is no relationship between AP and AVC. B. When MP is rising AVC is falling, and when MP is falling AVC is rising. C. When AP is rising AVC is falling, and when AP is falling AVC is rising. D. When AP is rising AVC is rising, and when AP is falling AVC is falling.

C. When AP is rising AVC is falling, and when AP is falling AVC is rising.

A pure monopolist is producing an output such that ATC = $4, P = $5, MC = $2, and MR = $3. This firm is realizing: A. a loss that could be reduced by producing more output. B. a loss that could be reduced by producing less output. C. an economic profit that could be increased by producing more output. D. an economic profit that could be increased by producing less output.

C. an economic profit that could be increased by producing more output.

Fixed cost is: A. usually zero in the short run. B. the cost of producing one more unit of capital, for example, machinery. C. any cost that does not change when the firm changes its output. D. average cost multiplied by the firm's output.

C. any cost that does not change when the firms changes its output.

The law of diminishing returns indicates that: A. because of economies and diseconomies of scale, a competitive firm's long-run average total cost curve will be U-shaped. B. the demand for goods produced by purely competitive industries is downsloping. C. as extra units of a variable resource are added to a fixed resource, marginal product will decline beyond some point. D. beyond some point, the extra utility derived from additional units of a product will yield the consumer smaller and smaller extra amounts of satisfaction.

C. as extra units of a variable resource are added to a fixed resource, marginal product will decline beyond some point.

The marginal revenue curve for a monopolist: A. is a straight, upsloping curve. B. rises at first, reaches a maximum, and then declines. C. becomes negative when output increases beyond some particular level. D. is a straight line, parallel to the horizontal axis.

C. becomes negative when output increases beyond some particular level.

The MR = MC rule applies: A. in the short run but not in the long run. B. in the long run but not in the short run. C. in both the short run and the long run. D. only to a purely competitive firm.

C. in both the short run and the long run.

If a purely competitive firm shuts down in the short run: A. its loss will be zero. B. it will realize a loss equal to its total variable costs. C. it will realize a loss equal to its total fixed costs. D. it will realize a loss equal to its explicit costs.

C. it will realize a loss equal to its total fixed costs.

In the short run, the individual competitive firm's supply curve is that segment of the: A. average variable cost curve lying below the marginal cost curve. B. marginal revenue curve lying below the demand curve. C. marginal cost curve lying above the average variable cost curve. D. marginal cost curve lying between the average total cost and average variable cost curves.

C. marginal cost curve lying above the average variable cost curve.

If in the short run a firm's total product is increasing, then its: A. marginal product must also be increasing. B. marginal product must be decreasing. C. marginal product could be either increasing or decreasing. D. average product must also be increasing.

C. marginal product could be either increasing or decreasing.

A purely competitive firm is precluded from making economic profits in the long run because: A. it is a "price taker." B. its demand curve is perfectly elastic. C. of unimpeded entry to the industry. D. it produces a differentiated product.

C. of unimpeded entry to the industry.

If marginal cost is: A. falling, then average total cost must also be falling. B. rising, then average total cost must also be rising. C. rising, then average total cost could be either falling or rising. D. falling, then average total cost could be either falling or rising.

C. rising, then average total cost could be either falling or rising.

The term productive efficiency refers to: A. any short-run equilibrium position of a competitive firm. B. the production of the product mix most desired by consumers. C. the production of a good at the lowest average total cost. D. fulfilling the condition P = MC.

C. the production of a good at the lowest average total cost.

In a purely competitive industry: A. there will be no economic profits in either the short run or the long run. B. economic profits may persist in the long run if consumer demand is strong and stable. C. there may be economic profits in the short run but not in the long run. D. there may be economic profits in the long run but not in the short run.

C. there may be economic profits in the short run but not in the long run.

Suppose that, when producing 10 units of output, a firm's AVC is $22, its AFC is $5, and its MC is $30. This firm's: A. ATC is $35. B. ATC is $57. C. total cost is $270. D. total cost is $30.

C. total cost is $270.

An important economic problem associated with pure monopoly is that, at the profit-maximizing outputs, resources are: A. overallocated because price exceeds marginal cost. B. overallocated because marginal cost exceeds price. C. underallocated because price exceeds marginal cost. D. underallocated because marginal cost exceeds price.

C. underallocated because price exceeds marginal cost.

If a firm in a purely competitive industry is confronted with an equilibrium price of $5, its marginal revenue: A. will be greater than $5. B. will be less than $5. C. will also be $5. D. may be either greater or less than $5.

C. will also be $5.

Which of the following is most likely to be an implicit cost for Company X? A. Rental payments on IBM equipment. B. Payments for raw materials purchased from Company Y. C. Transportation costs paid to a nearby trucking firm. D. Forgone rent from the building owned and used by Company X.

D. Forgone rent from the building owned and used by Company X.

The MR = MC rule: A. applies only to pure competition. B. applies only to pure monopoly. C. does not apply to pure monopoly because price exceeds marginal revenue. D. applies both to pure monopoly and pure competition.

D. applies both to pure monopoly and pure competition.

Total fixed cost (TFC): A. falls as the firm expands output from zero, but eventually rises. B. falls continuously as total output expands. C. varies directly with total output. D. does not change as total output increases or decreases.

D. does not change as total output increases or decreases.

The supply curve of a pure monopolist: A. is that portion of its marginal cost curve that lies above average variable cost. B. is the same as that of a purely competitive industry. C. is its average variable cost curve. D. does not exist because prices are not "given" to a monopolist.

D. does not exist because prices are not "given" to a monopolist.

Assume the XYZ Corporation is producing 20 units of output. It is selling this output in a purely competitive market at $10 per unit. Its total fixed costs are $100 and its average variable cost is $3 at 20 units of output. This corporation: A. is realizing a loss of $60. B. is maximizing its profits. C. should close down in the short run. D. is realizing an economic profit of $40.

D. is realizing an economic profit of $40.

Assume the XYZ Corporation is producing 20 units of output. It is selling this output in a purely competitive market at $10 per unit. Its total fixed costs are $100 and its average variable cost is $3 at 20 units of output. This corporation: A. should close down in the short run. B. is maximizing its profits. C. is realizing a loss of $60. D. is realizing an economic profit of $40.

D. is realizing an economic profit of $40.

If a purely competitive firm is producing at the P = MC output and realizing an economic profit, at that output: A. ATC is being minimized. B. marginal revenue is less than price. C. total revenue equals total cost. D. marginal revenue exceeds ATC.

D. marginal revenue exceeds ATC.

If a purely competitive firm is producing at some level less than the profit-maximizing output, then: A. price is necessarily greater than average total cost. B. fixed costs are large relative to variable costs. C. price exceeds marginal revenue. D. marginal revenue exceeds marginal cost.

D. marginal revenue exceeds marginal cost.

An industry comprised of four firms, each with about 25 percent of the total market for a product, is an example of: A. monopolistic competition. B. pure monopoly. C. pure competition. D. oligopoly.

D. oligopoly.

When total product is increasing at an increasing rate, marginal product is: A. positive and decreasing. B. constant. C. negative. D. positive and increasing.

D. positive and increasing.

A firm finds that at its MR = MC output, its TC = $1,000, TVC = $800, TFC = $200, and total revenue is $900. This firm should: A. liquidate its assets and go out of business. B. shut down in the short run. C. produce because it will realize an economic profit. D. produce because the resulting loss is less than its TFC.

D. produce because the resulting loss is less than its TFC.

Suppose that a business incurred implicit costs of $500,000 and explicit costs of $5 million in a specific year. If the firm sold 100,000 units of its output at $50 per unit, its accounting: A. profits were $100,000 and its economic profits were zero. B. losses were $500,000 and its economic losses were zero. C. profits were $500,000 and its economic profits were $1 million. D. profits were zero and its economic losses were $500,000.

D. profits were zero and its economic losses were $500,000.

Long-run competitive equilibrium: A. is realized only in constant-cost industries. B. will never change once it is realized. C. is not economically efficient. D. results in zero economic profits.

D. results in zero economic profits.

Suppose a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC. Given this, the firm: A. minimizes losses by producing at the minimum point of its AVC curve. B. maximizes profits by producing where MR = ATC. C. should close down immediately. D. should continue producing in the short run but leave the industry in the long run if the situation persists.

D. should continue producing in the short run but leave the industry in the long run if the situation persists.

In a purely competitive industry: A. there will be no economic profits in either the short run or the long run. B. there may be economic profits in the long run but not in the short run. C. economic profits may persist in the long run if consumer demand is strong and stable. D. there may be economic profits in the short run but not in the long run.

D. there may be economic profits in the short run but not in the long run.

A firm reaches a break-even point (normal profit position) where: A. marginal revenue cuts the horizontal axis. B. marginal cost intersects the average variable cost curve. C. total revenue equals total variable cost. D. total revenue and total cost are equal.

D. total revenue and total cost are equal.

A firm reaches a break-even point (normal profit position) where: A. marginal revenue cuts the horizontal axis. B. total revenue equals total variable cost. C. marginal cost intersects the average variable cost curve. D. total revenue and total cost are equal.

D. total revenue and total cost are equal.

Conditions of entry for each structure

Pure competition: free Monopolistic competition: relatively easy Oligopoly: very difficult Monopoly: blocked

Product type for each structure

Pure competition: standard/homogeneous Monopolistic competition: differentiated/similar but not identical Oligopoly: standard or differentiated Monopoly: unique

Average total cost (ATC)

TC/Q or AFC+AVC

Average fixed cost (AFC)

TFC per unit; TFC/Q; since fixed costs, by definition, do not change with output, as Q gets larger, AFC becomes smaller because you're dividing a fixed number by a bigger and bigger number

Natural monopoly case

economies of scale over a wide range of outputs; a declining long-run ATC curve

Average revenue (AR)

equal to P and MR

Economic costs

explicit costs + implicit costs

Economies of scale

input doubles, output more than doubles (increasing returns of scale); downsloping part of the ATC curve in the LR as plant size increases, a number of factors will for a time lead to lower average costs of production (ex. labor specialization, managerial specialization, efficient capital, etc.)

MC>P

producing too many

Marginal cost (MC)

cost of producing an additional unit; equals the slope of TC and TVC; change in TC/change in Q or change in TVC/change in Q; first decreases sharply and reaches a minimum (because TC and TVC first increase at a decreasing rate) then increases (because TC and TVC increase at an increasing rate)

Implicit costs

costs of using the resources that it already owns to make the firm's own product rather than selling those resources to outsiders for cash

Constant returns to scale

input doubles, output doubles; flat part of the ATC curve in the LR where unit costs do not change with output

Diseconomies of scale

input doubles, output less than doubles (decreasing returns to scale); upward sloping part of the ATC curve in the LR at a certain point, plant size becomes too large to manage easily and efficiently

P=ATC

means firm is breaking even

Long-run equilibrium for a firm in PC

PC firms in the LR must break even if firms in a market are making profits, more firms will enter the market, causing an upward shift in supply if firms are making losses, firms will eventually leave the market, causing supply to shift downward

How to determine if a firm is making profits or losses (graphically)

1. P>ATC: making profits 2. P<ATC: making losses 3. P=ATC: breaking even

How to determine if a firm that is making a loss should shut down or stay open (graphically)

1. P>AVC: stay in market 2. P<AVC: shut down 3. P=AVC: firm is at shutdown point (doesn't matter)

Concentration ratio

% of output produced by 4 largest firms

Which of the following distinguishes the short run from the long run in pure competition? A. Firms can enter and exit the market in the long run but not in the short run. B. Firms attempt to maximize profits in the long run but not in the short run. C. Firms use the MR = MC rule to maximize profits in the short run but not in the long run. D. The quantity of labor hired can vary in the long run but not in the short run.

A. Firms can enter and exit the market in the long run but not in the short run.

In the short run, a purely competitive firm will always make an economic profit if: A. P = ATC. B. P > AVC. C. P = MC. D. P > ATC.

D. P > ATC.

Total product (TP)

amount of output produced stage 1: increasing at an increasing rate stage 2: increasing at a decreasing rate stage 3: decreasing

Imperfect oligopoly

differentiated product

Fixed costs (TFC)

those costs that do not vary with changes in output (ex. rent, salaries, insurance, etc.); equal to TC at q=0 because there are no variable costs at q=0