Principles of Economics II Microeconomics Final Exam Review

Oligopolistic Industries

- Four-firm concentration ratio - 40% or more to be an oligopoly - Shortcomings - Localized markets - Interindustry competition - Import competition - Dominant firms

Oligopoly Behavior

- Game Theory - Collusion - Incentive to cheat - Prisoner's dilemma

Pure Competition and Efficiency

- In the long run, efficiency is achieved - Productive efficiency -Producing where P = minimum ATC - Allocative efficiency -Producing where P = MC - Triple equality - P = MC = minimum ATC - Consumer surplus and producer surplus are maximized

Economic Effects of Monopoly

- Income transfer - Cost complications - Economies of scale - Simultaneous consumption - Network effects - X-inefficiency - Rent-seeking behavior - Technological advance

Three Oligopoly Models

- Kinked demand curve - Collusive pricing - Price leadership - Reasons for 3 models - Diversity of oligopolies - Complications of interdependence

Efficiency of the Long Run

- Long run for a perfectly competitive market - P = min AVC - Goods produced in the least costly way - P = MC - Goods most highly valued by consumer - Reaching both Allocative and Productive efficiency

Loss Minimizing Case

- Loss minimization - Still produce because MR > minimum AVC - Losses at a minimum where MR = MC - Producing adds more to revenue than to costs

Monopolistic Competition and Efficiency

- Monopolistic competition inefficient - P> min ATC is condition for productive inefficiency - P > MC is condition for allocative inefficicney - Excess capacity

Misconceptions Concerning Monopoly Pricing

- Not highest price - Total profit - Possibility of losses

Purely Competitive Demand

- Perfectly elastic demand - Firm produces as much or little as they wish at the market price - Demand graphs as horizontal line

Price Discrimination

- Price discrimination - Charging different buyers different prices - Different prices are not based on cost differences - Conditions for success - Monopoly power - Market segregation - No resale

The Short Run: Loss

- Priced at demand curve price under ATC - Produce when MR=MC see notes for graph

Examples of Monopoly

- Public utility companies -Natural gas -Electric -Cable television - Near monopolies -Intel -Wham-O -Professional sports teams

Dynamic Adjustments

- Purely competitive markets will automatically adjust to: -Changes in consumer tastes -Resource Supplies -Technology - Recall the "invisible hand"

Characteristics of Monopolistic Competition

- Relatively large number of sellers - Product differentiation - Easy entry and exit - Non price competition like advertising

Average Revenue Formula

- Revenue per Unit - AR=TR/Q=P

Short Run Supply

- Short run supply curve -- As long as P exceeds min. AVC -- Firm continues to produce using the MR (=P) = MC rule - Supply graphs as up-sloping line

Fixed Costs: Digging Out of a Hole (not really needed)

- Shutting down in the short run does not mean shutting down forever - Low prices can be temporary - Some firms switch production on and off depending on the market price - Examples: oil producers, resorts, and firms that shut down during a recession

Characteristics of a Pure Monopoly

- Single seller - a sole producer - No close substitutes - unique product - Price maker - control over price - Blocked entry - strong barriers to entry - Non-price competition - mostly PR but can engage in advertising to increase demand

Resources are efficiently allocated when production occurs where A) price is equal to marginal cost. B) price is equal to average revenue. C) marginal cost equals average variable cost. D) price is equal to average variable cost.

A) price is equal to marginal cost.

Collusive Pricing

occurs when companies in an industry conspire in their pricing and production decisions to achieve a price above the competitive price and so restrain trade

Monopolistic Competition

a market structure in which many companies sell products that are similar but not identical - Many firms in the market - Differentiated products - Some control over the price but within narrow limits - Relatively easy entry - Considerable emphasis on advertising, brand names, trademarks for nonprice competition - Example: Retail Trade, Dresses, Shoes

Kinked Demand Curve

a perceived demand curve that arises when competing oligopoly firms commit to match price cuts, but not price increases - Non-collusive oligopoly - Uncertainty about rivals' reactions - Rivals match any price change - Rivals ignore any price change - Assume combined strategy - Match price reductions - Ignore price increases

Nash Equilibrium

a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen One-Time Game: Equilibrium - Outcome from which neither firm wants to deviate - Current strategy viewed as optimal - Stable persistent outcome

Firm versus Industry: Equilibrium

see notes

Output Determination

*Output Determination in Pure Competition in the Short Run* Should this firm produce? Yes, if price is equal to, or greater than, minimum average variable cost. This means that the firm is profitable or that its losses are less than its fixed cost. What quantity should this firm produce? Produce where MR (=P) = MC; there profit is maximized (TR exceeds TC by a maximum amount) or loss is minimized. Will production result in economic profit? Yes, if price exceeds average total cost (TR will exceed TC). No, if average total cost exceeds price (TC will exceed TR)

Characteristics of an Oligopoly

- A few large producers - Homogeneous oligopoly - Differentiated oligopoly - Limited control over price - Strategic behavior - Mutual interdependence - Entry barriers and mergers

A One-Time Game: Strategy

- A one-time game - A simultaneous game - A positive-sum game - Zero-sum game - Negative sum game - A firm's dominant strategy

Long Run Adjustment Process

- Adjustment process in pure competition - Firms seek profits and shun losses - Firms are free to enter or to exit - Production will occur at firm's minimum average total cost - Price will equal minimum average total cost

Barriers to Entry

- Barriers to entry are factors that prevent firms from entering the industry - Economies of scale - Legal barriers to entry like patents and licenses - Ownership or control of essential resources - Pricing and other strategic barriers

Examples of Price Discrimination

- Business travel - Electric utilities - Movie theaters - Golf courses - Railroad companies - Coupons - International trade

Creative Destruction

- Competition and innovation may lead to "creative destruction" - Creation of new products and methods may destroy the old products and methods

Long Run Supply Curves

- Constant-Cost Industry - # of firms entering or leaving the industry do not affect costs - Entry or exit does not affect LR ATC - Constant resource prices - Special case - Increasing-Cost Industry - Entry or exit of firms does affect costs - Most industries - LR ATC increases with expansion - Specialized resources - Decreasing-Cost Industry -changes are inverse

Price and Output in Monopolistic Competition

- Demand is highly elastic - Short run profit or loss - Produce where MR = MC - Long run only a normal profit - Entry and exit

Profit Maximization in the Long Run

- Easy entry and exit - The only long-run adjustment we consider. - Identical costs - All firms in the industry have identical costs. - Constant-cost industry - Entry and exit do not affect resource prices

Technological Advance and Competition

- Entrepreneurs would like to increase profits beyond just a normal profit - Decrease costs by innovating - New product development

Entry and Exit Cases in the Long Run

- Entry If P>ATC - new firms will enter, if new firms enter then the market supply curve will shift right (increase) and decrease the market price - New firms will enter if existing firms are making a profit and existing firms will exit if they are experiencing losses - Exit If P<ATC - the existing firms will exit, if the existing firms exit, the market supply curve will shift left (decrease) and increase the market price

Long Run Equilibrium

- Entry eliminates profits - Firms enter - Supply increases - Price falls - Exit eliminates losses - Firms leave - Supply decreases - Price rises

Game Theory

- Evaluates alternate strategies when outcome depends not only on each individual's strategy but also that of others. - The study of how people behave in strategic situations

Marginal Revenue Formula

- Extra revenue from 1 more unit - MR=Change in TR/ Change in Q

Long run in pure competition

- Firms can expand or contract capacity - Firms can enter or exit the industry - Decisions are based on the incentives of profits or losses - Long run supply curve

Output and Price Determination Steps

- Steps for Graphically Determining the Profit-Max Output, Profit-Max Price, and Economic Profit (if Any) in Pure Monopoly - Step 1 - Determine the profit-maximizing output by finding where MR = MC. - Step 2 - Determine the profit-maximizing price by extending a vertical line upward from the output determined in step 1 to the pure monopolist's demand curve. - Step 3 - Determine the pure monopolist's economic profit by using one of two methods: - Method 1 - Find profit per unit by subtracting the average total cost of the profit-maximizing output from the profit-maximizing price. Then multiply the difference by the profit-maximizing output to determine economic profit (if any). - Method 2 - Find total cost by multiplying the average total cost of the profit-maximizing output by that output. Find total revenue by multiplying the profit-maximizing output by the profit-maximizing price. Then subtract total cost from total revenue to determine the economic profit (if any).

Total Revenue Formula

- TR=P*Q

Profit Maximization: TR-TC Approach

- The competitive producer will wish to produce at the output level where total revenue exceeds total cost by the greatest amount - Break-even point - Economic profit = TR-TC - Breakeven point - Economic profits are 0 - Normal Profit

Product Variety

- The firm constantly manages price, product, and advertising - Better product differentiation - Better advertising - The consumer benefits by greater array of choices and better products - Types and styles - Brands and quality

Monopoly Demand

- The pure monopolist is the industry - Monopolist demand curve is the market demand curve - Demand curve is downsloping - Marginal revenue is less than price - Marginal revenue will be less than price - Monopolist is a price maker - Monopolist sets price in elastic region of the demand curve

Profit Maximization: MR=MC Approach

- Using the MR=MC Rule - For a price taker, price = marginal revenue - The firm considers three questions: -- Should the firm produce? -- If so, what amount? -- What economic profit (Loss) will be realized?

X-Inefficiency

- the production of output, whatever its level, at a higher average (and total) cost than is necessary for producing that level of output

Four Market Models

1. Pure Competition 2. Monopolistic Competition 3. Oligopoly 4. Pure Monopoly

A demand curve in a perfectly competitive market is A) perfectly elastic. B) perfectly inelastic. C) more elastic. D) more inelastic.

A) perfectly elastic.

Oligopoly

A market structure in which a few large firms dominate a market - Few firms in market - Standardized or differentiated products - Limited control over price by mutual inter-dependence; considerable with collusion - Significant obstacles for entry - Typically a great deal for nonprice competition, particularly with product differentiation - Examples: Steel, Auto, Farm Implements

Pure Monopoly

A market structure in which one firm sells a unique product, into which entry is blocked, in which the single firm has considerable control over product price, and in which nonprice competition may or may not be found. - One firm in market - Unique products; no close substitutes - Considerable control over price - Blocked entry - Mostly public relations advertising for nonprice competition - Examples: Local Utilities

Output Marginal Revenue Marginal Cost 0 -- -- 1 $16 $10 2 16 9 3 16 13 4 16 17 5 16 21 Refer to the data in the accompanying table. At the profit-maximizing output, the firm's total revenue is A) $48. B) $32. C) $80. D) $64.

A) $48.

Total Output Price MR ATC MC 1 $100 $100 $100.00 $30 2 90 80 63.00 26 3 80 60 52.67 32 4 70 40 49.50 40 5 60 20 49.60 50 6 50 0 50.00 52 7 40 -20 52.29 66 8 30 -40 55.75 80 9 20 -60 60.67 100 10 10 -80 67.60 130 Refer to the data for a non-discriminating monopolist. At its profit-maximizing output, this firm's total profit will be A) $82. B) zero C) $54. D) $27

A) $82

Refer to the diagram. At the point P, firms in this industry will realize, (see notes CH 11 problem 8) A) 0 Economic Profit. B) Positive Economic Profit. C) Negative Economic Profit. D) Allocative efficiency, but not productive.

A) 0 Economic Profit. - notes problem 8 on paper

TP AFC AVC ATC MC 1 $150.00 $25.00 $175.00 $25 2 75.00 23.00 98.00 21 3 50.00 20.00 70.00 14 4 37.50 21.00 58.50 24 5 30.00 23.00 53.00 31 6 25.00 25.00 50.00 35 7 21.43 28.00 49.43 46.01 8 18.75 33.00 51.76 68.07 9 16.67 39.00 55.67 86.95 10 15.00 48.00 63.00 128.97 The accompanying table gives cost data for a firm that is selling in a purely competitive market. If the market price for this firm's product is $15, it will produce A) 0 units at a loss of $150. B) 3 units at a loss of $168. C) 3 units at an economic profit of zero. D) 4 units at a loss of $138.

A) 0 units at a loss of $150.

Which of the following do we not consider to be an assumption in a perfectly competitive market in the long run? A) All costs are different with every firm in an industry. B) All costs are identical with every firm in an industry. C) There are constant costs in the industry. D) Easy entry and exit

A) All costs are different with every firm in an industry.

Which of the following would not be expected to occur in a purely competitive market in long-run equilibrium? A) Consumer and producer surplus will be minimized. B) P = MC = lowest ATC. C) The maximum willingness to pay for the last unit equals the minimum acceptable price for that unit. D) We would expect all of these to occur in the long run in a purely competitive market.

A) Consumer and producer surplus will be minimized.

According to the accompanying diagram, to maximize profit or minimize losses, this firm will produce A) E units at price A. B) D units at price J. C) K units at price C. D) E units at price B.

A) E units at price A.

Refer to the diagram. At the profit-maximizing level of output, the firm will realize (notes on paper CH 12 problem 14 & 15) A) an economic profit of ABHJ. B) an economic profit of ACGJ. C) a loss of GH per unit. D) a loss of JH per unit.

A) an economic profit of ABHJ.

If a regulatory commission wants to establish a socially optimal price for a natural monopoly, it should select a price A) at which the marginal cost curve intersects the demand curve. B) at which marginal revenue is zero. C) at which the average total cost curve intersects the demand curve. D) that corresponds with the equality of marginal cost and marginal revenue.

A) at which the marginal cost curve intersects the demand curve.

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.

Refer to the diagram for a nondiscriminating monopolist. The profit-seeking monopolist will (notes on paper CH 12 problem 7 & 8) A) never produce an output larger than q2. B) always produce more than q2. C) always produce at output q2. D) never produce an output larger than q1.

A) never produce an output larger than q2.

Monopoly Demand Curve

According to law of demand prices fall, quantity demanded increases, luxottica can increase rev by lowering prices as they sell more sunglasses - This is not the case, as a firm decreases price it loses some revenue on a good they were previously selling. - Luxottica loses $40 on each of the 20 million glasses sold at $160. 20 million people were willing to pay $160, now people pay $120. This is a $800 million loss for luxottica (red area) - Luxottica gains $120 on each 20 million sold, there was $20 million not willing to pay $160 but willing to pay $120 that is going to be a gain of $2.4 billion (black area) that is a net gain of $1.6 billion

Which of the following is not a characteristic of the long run? A) Firms can enter and exit industries B) Firms can expand and contract C) All costs are fixed D) All costs are variable

C) All costs are fixed

Total Output Price MR ATC MC 1 $100 $100 $100.00 $30 2 90 80 63.00 26 3 80 60 52.67 32 4 70 40 49.50 40 5 60 20 49.60 50 6 50 0 50.00 52 7 40 -20 52.29 66 8 30 -40 55.75 80 9 20 -60 60.67 100 10 10 -80 67.60 130 Refer to the data for a non-discriminating monopolist. This firm will maximize its profit by producing A) 3 units B) 4 units. C) 5 units. D) 6 units.

B) 4 units.

Refer to the diagram. To maximize profits or minimize losses, this firm should produce (notes on paper CH 12 problem 14 & 15) A) E units and charge price C. B) E units and charge price A. C) M units and charge price N. D) L units and charge price LK.

B) E units and charge price A.

Refer to the diagram, If prices should rise above the P point, then, (notes on paper, CH 11 problem 9) A) Firms will achieve 0 Economic Profit. B) Firms will achieve positive economic profit. C) Firms will achieve an economic loss. D) Firms will achieve both an economic loss and profit.

B) Firms will achieve positive economic profit.

Refer to the diagram, if prices should fall because demand falls, what would most likely occur? A) Firms would enter the industry causing prices to rise again. B) Firms would exit the industry causing prices to rise. C) Firms would enter the industry causing prices to fall. D) Firms would exit the industry causing prices to fall.

B) Firms would exit the industry causing prices to rise. - notes on paper problem 10 & 11

Productive and allocative efficiency, in the long run, are met when, A) P = MR = AVC B) P = MC = Min ATC C) P = FC = AVC D) P = MC = Max ATC

B) P = MC = Min ATC

Refer to the diagram for a purely competitive producer. The lowest price at which the firm should produce (as opposed to shutting down) is A) P1. B) P2. C) P3. D) P4.

B) P2.

Firms seek what? A) Losses. B) Profits. C) Higher wages. D) Morally correct products.

B) Profits.

Firms will enter an industry in the long run when, A) There are economic losses. B) There are economic profits. C) There are production points yet to be explored. D) There are unique technologies that will raise costs of production.

B) There are economic profits.

If a monopolist engages in price discrimination, it will A) realize a smaller profit. B) charge a higher price where individual demand is inelastic and a lower price where individual demand is elastic. C) produce a smaller output than when it did not discriminate. D) charge a competitive price to all its customers.

B) charge a higher price where individual demand is inelastic and a lower price where individual demand is elastic.

If a pure monopolist is producing more output than the MR = MC output, A) the firm may, or may not, be maximizing profits. B) it will be in the interest of the firm, but not necessarily of society, to reduce output. C) it will be in the interest of the firm and society to increase output. D) it will be in the interest of the firm and society to reduce output.

B) it will be in the interest of the firm, but not necessarily of society, to reduce output.

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.

In the long run, a pure monopolist will maximize profits by producing that output at which marginal cost is equal to A) average total cost. B) marginal revenue. C) average variable cost. D) average cost.

B) marginal revenue.

Firms seek to maximize A) total revenue. B) total profit. C) total avc. D) total market share.

B) total profit.

Economic profits are, (see notes, CH 11 problem 10 & 11 for graph) A) Disincentives for producers to enter the industry. B) Disincentive for buyers to enter the industry. C) Incentive for producers to enter the industry. D) Incentive for buyers to enter the industry.

C) Incentive for producers to enter the industry. - notes on paper problem 10 & 11

Answer the question on the basis of the accompanying demand schedule. Price Quantity Demanded $7 1 6 2 5 3 4 4 3 5 The marginal revenue obtained from selling the third unit of output is A) $6. B) $1. C) $3. D) $5.

C) $3.

If a firms ATC in the long run is $10 and the output level they are at is 40, the total costs in the long run at that output would be, A) 0 B) 40 C) 400 D) 40,000

C) 400

TP AFC AVC ATC MC 1 $100.00 $17.00 $117.00 $17 2 50.00 16.00 66.00 15 3 33.33 15.00 48.33 13 4 25.00 14.25 39.25 12 5 20.00 14.00 34.00 13 6 16.67 14.00 30.67 14 7 14.29 15.71 30.00 26 8 12.50 17.50 30.00 30 9 11.11 19.44 30.55 35 10 10.00 21.60 31.60 41 11 9.09 24.00 33.09 48 12 8.33 26.67 35.00 56 The accompanying table gives cost data for a firm that is selling in a purely competitive market. If the market price for the firm's product is $32, the competitive firm will produce A) 6 units at an economic profit of $7.98. B) 7 units at an economic profit of $41.50. C) 8 units at an economic profit of $16. D) 8 units at an economic profit of $4.

C) 8 units at an economic profit of $16.

Which would best describe perfect competition? A) One seller, selling a unique product with considerable control over prices. B) Many sellers, selling differentiated products, with minimal control over prices. C) A large number of sellers, selling standardized products that are easily substitutable, with zero control over prices. D) A few sellers, selling a standardized or differentiated product, with limited control over prices.

C) A large number of sellers, selling standardized products that are easily substitutable, with zero control over prices.

Which of the following would best describe why firms in a perfectly competitive market are price takers? A) They must take the given price, set by the consumer and previous firms. B) The firm takes the price and sets it at a level they wish it to be at. C) Individual firms have no market power, and their products are easily substitutable. D) The market demand curve is perfectly elastic as well, therefore, the entire market cannot change their price.

C) Individual firms have no market power, and their products are easily substitutable.

Pure monopoly refers to A) any market in which the demand curve for the firm is downsloping. B) a standardized product being produced by many firms. C) a single firm producing a product for which there are no close substitutes. D) a large number of firms producing a differentiated product.

C) a single firm producing a product for which there are no close substitutes.

Refer to the diagram for a purely competitive producer. If product price is P3, A) the firm will maximize profit at point d. B) the firm will earn an economic profit. C) economic profits will be zero. D) new firms will enter this industry.

C) economic profits will be zero.

Refer to the diagram for a non-discriminating monopolist. Demand is elastic (notes for diagram CH 12 problem 7 & 8) A) in the q1q3 output range. B) only for outputs greater than q4. C) for all levels of output less than q2. D) for all levels of output greater than q2.

C) for all levels of output less than q2.

In a perfectly competitive market, A) prices = MC B) prices = ATC C) prices = MR D) prices = economic profit.

C) prices = MR

Price discrimination refers to A) selling a given product for different prices at two different points in time. B) any price above that which is equal to a minimum average total cost. C) the selling of a given product to different customers at different prices that do not reflect cost differences. D) the difference between the prices a purely competitive seller and a purely monopolistic seller would charge

C) the selling of a given product to different customers at different prices that do not reflect cost differences.

If a non-discriminating imperfectly competitive firm is selling its 100th unit of output for $35, its marginal revenue A) may be either greater or less than $35. B) will also be $35. C) will be less than $35. D) will be greater than $35.

C) will be less than $35.

CHAPTER 10

CHAPTER 10

CHAPTER 11

CHAPTER 11

CHAPTER 12

CHAPTER 12

CHAPTER 13

CHAPTER 13

CHAPTER 14

CHAPTER 14

Consumer and Producer Surplus

Check slides and notes

The MR = MC rule can be restated for a purely competitive seller as P = MC because A) the firm's marginal revenue and total revenue curves will coincide. B) the market demand curve is downsloping. C) the firm's average revenue curve is downsloping. D) each additional unit of output adds exactly its price to total revenue.

D) each additional unit of output adds exactly its price to total revenue.

Total Output Price MR ATC MC 1 $100 $100 $100.00 $30 2 90 80 63.00 26 3 80 60 52.67 32 4 70 40 49.50 40 5 60 20 49.60 50 6 50 0 50.00 52 7 40 -20 52.29 66 8 30 -40 55.75 80 9 20 -60 60.67 100 10 10 -80 67.60 130 Refer to the data for a non-discriminating monopolist. At its profit-maximizing output, this firm's total costs will be A) $300. B) $248. C) $126. D) $198.

D) $198.

Answer the question on the basis of the provided demand and cost data for a pure monopolist. Demand Data Cost Data Price QD Output Total Cost $5.50 3 3 $5.00 5.00 4 4 6.00 4.50 5 5 6.50 3.85 6 6 7.50 3.35 7 7 9.00 2.90 8 8 11.00 2.50 9 9 14.00 The profit-maximizing price for the monopolist will be A) $5.00. B) $2.90. C) $3.35. D) $4.50.

D) $4.50.

Profits and Losses A) Are morally good and bad, respectively. B) Are morally bad and good, respectively. C) Are signals to show that if a firm is making a loss, resources should be further allocated in that industry. D) Are signals that show if a firm is making a profit, firms will understand that resources should be further allocated in that industry.

D) Are signals that show if a firm is making a profit, firms will understand that resources should be further allocated in that industry.

Refer to the diagram for a purely competitive producer. The firm will produce at a loss at all prices between, A) Below P2. B) Below P3. C) Below P1. D) Between P2 and P3.

D) Between P2 and P3.

Prices, in the long run, are equal to A) ATC B) AVC C) AFC D) MR

D) MR

Which of the following is not a characteristic of a pure monopoly? A) High barriers of entry. B) A single seller. C) A price taker. D) Market demand is perfectly elastic.

D) Market demand is perfectly elastic.

According to the accompanying diagram, at the profit-maximizing output, the firm will realize A) a loss equal to BCFG. B) a loss equal to ACFH. C) an economic profit of ACFH. D) an economic profit of ABGH.

D) an economic profit of ABGH.

If production is occurring where marginal cost exceeds price, the purely competitive firm will A) maximize profit, but resources will be underallocated to the product. B) maximize profit, but resources will be overallocated to the product. C) fail to maximize profit and resources will be underallocated to the product. D) fail to maximize profit and resources will be overallocated to the product

D) fail to maximize profit and resources will be overallocated to the product

In the accompanying diagram, if price is reduced from P1 to P2, total revenue will (notes on paper CH 12 problem 4) luxottica A) decrease by A − C. B) increase by A − C. C) decrease by C − A. D) increase by C − A.

D) increase by C − A.

Answer the question on the basis of the accompanying demand schedule. Price Quantity Demanded $7 1 6 2 5 3 4 4 3 5 At the point where 3 units are being sold, the coefficient of price elasticity of demand A) cannot be estimated. B) suggests that the market is purely competitive. C) is less than unity (one). D) is greater than unity (one).

D) is greater than unity (one).

Demand curve is perfectly elastic

D=AR=MR=P

When will economic profit be realized?

If the price were set higher than the minimum of ATC, the firm would earn a economic profit

When will economic loss be realized?

If the price were set lower than the minimum of ATC, the firm would earn a economic loss

Regulated Monopoly

Monopoly that the government allows to exist legally - Natural monopolies - Socially optimal price - Set price equal to marginal cost - Fair return price - Set price equal to average total cost - See notes for graph

The Short Run: Profit

See notes for graph

Dominant Strategies

Strategies that always yield the highest benefit. Regardless of what other players do, a dominant strategy will yield the most benefit for the player using it.

How to find economic profit

TR=P*Q ATC=TC/Q Profit=TR-TC Profit = (Price-ATC)*Q

Shutdown Case

The circumstance in which a firm would experience a loss greater than its total fixed cost if it were to produce any output greater than zero; alternatively, a situation in which a firm would cease to operate when the price at which it can sell its product is less than its average variable cost. - If price falls below minimum AVC, the competitive firm will minimize its losses in the short run by shutting down because there is no level of output at which the firm can produce and incur a loss SMALLER than its total fixed cost - If the price is lower than the minimum of AVC, then the firm will not produce -> shutdown - A firm may choose produce, even if it is making a loss (P<ATC). - In the short run, a firm must pay its fixed costs. If it does not produce, its loss is equal to the amount of its fixed costs. - If it produces, as long as P>AVC, it can recoup some of its fixed costs. ***Shutdowns can be temporary -> turn off production on and off depending on price Ex: Seasonal resorts, Ice cream stands

How can you find the supply curve using MC?

The firm's supply curve in the short run is its marginal cost curve for prices above the average variable cost. At prices below average variable cost, the firm's output drops to zero.

Inefficiency of Pure Monopoly

There will be a dead weight loss on BAC for graph so not as efficient since there is a dead weight loss

Output and Price Determination for a Monopolist

Will have a downward sloping demand (AR) curve and marginal revenue curve. in monopoly, since average revenue falls as more units of output are sold, the marginal revenue is less than the average revenue. In other words, under monopoly the MR curve lies below the AR (Demand) curve. - will set price where there is the biggest difference between TR and TC

Single vs Multiple Games

multiple games people will use info from the first game to determine what to do for second game

Pure Competition

the market structure that exists when there are many small businesses selling one standardized product - A very large number of firms - Standardized product - No control over price - Very easy entry - No non-price competition - Example: Agriculture Other Characteristics - Price Takers - A large number of sellers - Easy entry and exit - Standardized product

Normal Profit

the payment made by a firm to obtain and retain entrepreneurial ability; the minimum income entrepreneurial ability must receive to induce it to perform entrepreneurial functions for a firm is an economic condition that occurs when the difference between a firm's total revenue and total cost is equal to zero. Simply put, normal profit is the minimum level of profit needed for a company to remain competitive in the market. Total Revenue - (Explicit Expense + Implicit Expenses) = 0