Microeconomics Exam 2

Perfect competition

1) many buyers and sellers (all too small to influence price on their own) 2) identical product 3)buyers and sellers have good info about price and quality 4) no barriers to entry or exit

Necessary conditions for price discrimination in monopolies

1. Have some market power 2. Segment marked based on elasticity 3. Prevent arbitrage (stop resale) 4. Increase profits by lowering amount paid for some people which is greater than others

MU1 MU2 ——— = ——— P1 P2

Utility maximization rule

Average variable costs

VC ——- Q

utility

a hypothetical measure of consumer satisfaction -have to be able to rank things

Modeling firm decisions

Firms are always maximize profit

The demand curve facing a monopoly firm is:

equivalent to the market demand curve.

The ________________ arises when a price changes because consumers have an incentive to consume less of the good with a relatively higher price and more of the good with a relatively lower price.

substitution effect

Marginal costs

🔺TC ———— 🔺Q

Firm

And organization that transforms inputs to outputs (businesses)

Marginal cost (MC) will equal average total cost (ATC) at the point where:

ATC is lowest

How do companies become a monopoly

Barriers to keep sellers out

Shut down in perfect competition

Below AVC

Average total cost

TC ——- Q

Pros of price discrimination

Get rid of deadweight

legal monopoly

Government gives a monopoly to you (USPS)

Marginal utility

Happiness made on the margin (Change in TU —————————- Change in Q. )

Explicit costs

Monetary costs -changing hands

Market structure analysis allows economists to:

Predict the behavior of firms

Behavioral economics

Psychological factors influence behavior sometimes predictably

When perfectly competitive firms are earning short-run economic profits, all of the following happens, EXCEPT: A. supply increases. B. market prices fall. C. the number of firms in the industry will fall. D. firms are attracted to the industry by the profits.

The number of firms in the industry will fall

Implicit costs

Whatever worse you can do with your resources

Law of diminishing returns

When something is fixed every additional unit will decrease the Marginal product -only in the short run -bumping elbows rule

Which of the following is a characteristic of a monopoly firm? A. easy entry and exit B. many buyers and sellers C. barriers to entry D. vertical individual demand curve

barriers to entry

Occasionally____________may lead to pure monopoly; in other market conditions, they may limit competition ___________________________.

barriers to entry; to a few oligopoly firms

Behavioral economics integrates the fields of economics and...?

psychology

For a perfectly competitive industry in the long run all of the following are true, EXCEPT: A. the industry has achieved allocative efficiency. B. consumer surplus is maximized. C. firms are earning a positive economic profit. D. the industry has achieved productive efficiency.

firms are earning a postivie economic profit

Long run adjustments

-economics profits will go away because more people coming in -as firms leave supply falls and there isn't any more losses

benefits of perfect competition

-productive efficiency -allocative efficiency

Impacts of monopolies

-rent seeming -price discrimination

Limit the power of monopolists

1) demand for their good 2) likelihood of new competition

A perfectly competitive firm is producing 100 units (profit maximizing). If the price is $12, marginal cost is $12, and average total cost is $11, this firm's profits are:

$100

Predatory pricing

Do things to hurt competitors

Fixed costs (production costs)

Don't vary with quantity produced

Production in the long run

Everything is variable

Average fixed costs

FC ——- Q

Which event would cause the entire budget line to shift outwards? A. The price of one of the goods decreased. B. Income decreased. C. Income increased. D. The price of one of the goods increased.

Income increased

Contestable market

Look like monopolies but entry costs are so low they can't act like it

Cons of price discrimination

Loss of consumer surplus

The perfectly competitive firm's short-run supply curve is the:

MC curve above the AVC curve

A perfectly competitive firm should continue to produce until:

MC=P

Price discrimination in monopolies

Selling same good for different price to different people

Which of the following is most unlikely to present a barrier to entry into a market? A. market forces B. patent laws C. technological advantage D. deregulation

Degregulation

Are monopolies bad

Depends on where they came from (natural vs. predatory) and what they do (serving consumers or profits)

Which of the following would occur in the long run? A restaurant hires another server. B. A new movie theater is built. C. A grocery store expands its hours of operation. D. An aircraft company adds another shift.

a new movie theater is built

marginal revenue is....

equal to the change in total revenue derived from the sale of one additional unit.

economists calculate profits as total revenue minus ___________

explicit and implicit costs

Economic costs

explicit costs + implicit costs

Market power means the ability to:

have some control over price

Compared with competitive markets, monopolies charge ______ prices and produce a ______ output.

higher; lower

If Casey receives 50 utils from his first burrito, 13 from the second burrito, and 8 from the third burrito, then: A. his marginal utility from a fourth burrito will be greater than 8 utils. B. his total utility is 29 utils. C. his total utility is declining. D. his total utility is 71 utils.

his total utility is 71 units

A firm is an economic institution that transforms _____ of production into _____ for consumers.

inputs; outputs

The use of sharp, temporary price cuts as a form of would enable traditional US automakers to discourage new competition from smaller electric car manufacturers.

predatory pricing

Suppose the MU/P for bottled water is greater than the MU/P for bags of chips. To maximize total utility, the consumer should buy:

more bottled water and fewer bags of chips.

A constantly declining long-run average cost curve is a characteristic of what type of industrial structure?

natural monopoly

The slope of the budget line is:

negative, since to purchase more of one good means giving up some of the other good.

Demand curves for products can be derived from marginal utility analysis by changing the _____ and finding the resulting _____.

price of one good; changes in utility-maximizing consumption

Why would labor be treated as a variable cost?

producing larger quantities of a good or service generally requires more workers

Accounting profit

total revenue - explicit costs

Economic profit

total revenue - explicit costs - implicit costs

Economists assume that consumers attempt to maximize: A. total income. B. total profits. C. total utility. D. marginal utility.

total utility

The price of a Chinese buffet dinner is $10 and an evening of bowling costs $20. Bill has $100/month to spend on these two goods. Assuming Bill is a utility-maximizing consumer, if Bill wants to eat at the Chinese buffet six times this month, he can only go bowling _____ time(s) this month.

two

Barriers to entry

the legal, technological, or market forces that may discourage or prevent potential competitors from entering a market

When firms in an industry are earning zero economic profit:

the number of firms in the industry is stable

Long run production

Nothing is fixed. Firms choose the production technology appropriate for their market

total utility

Total happiness -want to utilize totally

According to the Law of diminishing marginal utility:

as more units are consumed, additional satisfaction falls

If the marginal revenue for the next unit being produced is $50, but the marginal cost is $45, the firm should:

increase production

At 500 units of output, total cost is $50,000 and variable cost is $5,000. What does fixed cost equal at 500 units?

$45,000

Suppose that Bob leaves a job that pays $50,000 per year in order to open a new sponge business. His insurance cost is $5,000, his material cost is $25,000, his lease payments are $10,000, and his sales revenue is $90,000. Bob's economic profit is:

$0

A perfectly competitive firm has total revenues equal to $360 when it produces 40 units. What is the marginal revenue for the 41st unit?

$9

Referring to the table, suppose the coffee plant experiences fixed costs of $35, then, at 2 units of production ($55) , the firm would have total costs of:

$90

profit in perfect competition

Anything above ATC

Production in the short run

At least one factor of production is fixed

____________ tells a firm whether it can earn profits given the price in the market.

Average cost

Network effects

Benefit of good increases as more people is it (Venmo)

Economic loss in perfectly competition

Between ATC and AVC

Economies of scale

LRAC falls as output rises -specializing -reusing resources

A monopolist will maximize its profit when it produces the quantity of output where:

MR=MC

profit maximization of monopolies

MR=MC

Deriving the demand curve

Need to know utility maximizing choice at multiple price -substitution effect: P increases look for substitutes -income effect: P increases purchasing power decreases

Market structure analysis

Predict pricing and output behavior by observing industry characteristics: 1) number of sellers 2) nature of product 3) barriers to entry

Firms are.... in perfect competition

Price takers

profit maximization rule

Produce Q where marginal revenue=MC

productive efficiency

Produce at minimum ATC

allocative efficiency

Producing why society wants -Price=MC -value to consumers is same as opportunity cost to society

Variable costs (production costs)

Rise as output increases

Monopoly

Single seller with no close substitutes

Marginal utility analysis

Studies consumer decision making in the face of budget constraint -assumes: rational consumers will allocate incomes to maximize your own well-being

The perfectly competitive market structure assumes all of the following except: A. ease of entry and exit. B. identical products. C. a small number of buyers and sellers. D. zero economic profit in the long run.

a small number of buyers and sellers

The reason a monopoly imposes a deadweight loss on society is that:

consumers are denied output for which they are willing to pay more than the cost of producing it.

If the price of a Chinese buffet increases, the budget line will rotate:

in and become steeper

The economies-of-scale curve is a long-run average cost curve, because

it allows all factors of production to change

When a natural monopoly exists in a given industry, the per-unit costs of production will be

lowest when a single firm generates the entire output of the industry.

The assumed goal of any firm is to....

maximize profit

In a perfectly competitive market, individual firms set:

quantities but not prices

Tena has $50 per week to spend on lunches. Egg rolls cost $2 each and a plate of chow mein costs $7. Tena wants to buy five plates of chow mein and ten egg rolls per week. This combination of chow mein and egg rolls each week is:

unobtainable

The marginal cost curve is generally ______________, because diminishing marginal returns implies that additional units are ________________________.

upward-sloping; more costly to produce