econ exam 2

Explicit costs:

Are the sum of actual monetary payments made for resources used to produce a good. bc Explicit costs are the monetary payments that a firm must make to outsiders.

Too many workers interfere and can cause a

NEGATIVE Marginal product

In a long-run competitive market equilibrium:

Price equals the minimum of average total cost.

marginal cost

change in cost over the change in output

Marginal Product

change in output/ change in input

A natural monopoly achieves _____ over the entire range of market supply.

economies of scale

P<ATC

negative Profit

Producing the max amount of output thus efficiently will be a point

on the production function

The MC curve is a competitive firm's short-run _____ curve.

supply

A production function describes:

the maximum amount of output attainable from a given combination of factor inputs. bc A production function expresses the maximum quantity of a good attainable from different combinations of factor inputs.

The competitive price is usually higher than the monopoly price.

true

A monopolist sets price at a point on the _______ curve, corresponding to the rate of output determined by the intersection of _______.

Demand; marginal revenue and marginal cost. b/c Maximum profit is at the point where marginal revenue equals marginal cost and the profit per unit would be the difference between the price and the average total cost.

In the perfectly competitive catfish market, the market demand curve is:

Downward sloping. b/c Even though the individual firm in the catfish market faces a horizontal demand curve the market demand curve is still downward sloping.

If price equals ATC and equals MC then:

Economic profits would be zero. b/c In a perfect competition market, in the long run, the market price will equal ATC and MC and economic profits would be zero.

Which of the following is not a barrier to entry into a monopoly market? A government franchise. A patent. Exclusive licensing. Economic profits.

Economic profits. bc Economic profits are what a firm can expect as a consequence of barriers of entry.

In defining costs, economists recognize:

Explicit and implicit costs while accountants recognize only explicit costs. bc Economic cost includes those costs which must be made with a monetary payment and those that the firm pays by using its own resources.

Which of the following is equivalent to total cost?

Fixed costs plus variable costs. bc Total cost is equal to costs that can vary in the short run (variable) and costs which can only vary in the long run (fixed).

Costs of production that do not change with the rate of output are:

Fixed costs. bc Fixed costs in the short run are constant and do not vary with output.

Which of the following is a factor of production for Cathy's Cookies?

Flour bc Flour would be included in capital. Cookies are the final good.

For a monopoly in long-run equilibrium, economic profits are likely to be:

Greater than zero. bc Since a monopoly will operate at a point where marginal revenue equals marginal cost and at this point the average revenue will be greater than the average cost, the firm will experience economic profit and without competition is likely to not change.

If a seafood restaurant can raise the price of its fried shrimp without losing all of its customers, then the restaurant definitely:

Has market power. b/c The fewer customers that a seafood restaurant loses when it raises its price the more market power it has.

Last year, Dr. Lopez quit his $100,000 job at the MegaMall Dental Clinic and opened his own dental practice. His revenue for the first year was $400,000. He paid $80,000 in rent for the dental office, $60,000 for his office manager's salary, $25,000 for the dental hygienist, $150,000 for insurance, and $10,000 for other miscellaneous expenses. Based on this information, which of these statements is correct?

His implicit costs are $100,000. His accounting profit is $75,000. His economic profit is -$25,000. bc Dr. Lopez's explicit costs equal $325,000; therefore his accounting profit is $75,000 ($400,000 - $325,000.) Because economic profit subtracts both implicit costs ($100,000 in foregone salary) and explicit costs ($325,000), Dr. Lopez's experienced an economic loss of $25,000 ($400,000 - $425,000) or economic profit of -$25,000.

If the market price is $50, MC equals $45, ATC equals $40, the firm should:

Increase output MC=change in costs over change in output b/c When the P > MC, then the firm needs to produce more output.

The demand curve for an individual monopolist:

Is the same as the market demand curve. bc Since the number of firms in a monopolistic industry is one the individual demand curve is the market demand curve.

_______ ________ and _________ limit potential output

Land, labor, and capital

The demand curve for a monopolist:

Lies above the marginal revenue curve at every point but the first. Since the law of diminishing marginal utility means that marginal revenue must be falling with each additional unit, average revenue (market demand) must also be falling and will be greater than marginal revenue at any point on the curve.

A producer tries to maximize profits by operating at an output where:

MC equals price. b/c What counts is total profits, profits per unit is the difference between price and the ATC curve, so maximum profit will occur at a point where MC equals price.

the best possible rate of output for a competitive market is when _______ =____________

MC is equal to P (the demand curve, horizontal line)

In a competitive firm: the price that will prevail in the long-term equilibrium is where _________=_______

MC=ATC

The short-run supply decision focuses on:

Marginal cost versus price. bc In the short-run a producer will want to operate at a level where the price is equal to the marginal cost.

Ceteris paribus, the law of diminishing returns states that beyond some point the:

Marginal physical product of a variable input declines as more of it is used. bc By varying one factor while holding all other factors of production constant less and less additional output will be produced.

In long-run competitive market equilibrium, price equals _______ and economic profit is _______.

Minimum average total cost; zero

The market structure of the U.S. fast food industry is most likely:

Monopolistically competitive. bc The fast food industry is a good example of using non-price competition through the use of advertising, brand names and trademarks.

Refer to Figure 6.1 for a perfectly competitive firm. If the market price is $30:

No entry or exit will occur. b/c If the market price is $30 the price it tangent to the low point on the average total cost curve and the economic profit would equal zero.

monopoly: bundled products

PC and internet explorer bc it comes on computer

Monopoly may not be a problem in contestable markets if:

Potential competition exists. bc If entry barriers are modest, a firm may enter the industry if the profits are very high.

A profit-maximizing producer wants to produce where:

Price equals marginal cost. b/c Any increase in output beyond the point where price equals marginal cost will mean the additional costs exceed the additional revenues and profits will decline.

In the short run, a manufacturer should produce the next unit of output as long as:

Price is greater than marginal cost. bc For a manufacturer if the price is greater than the marginal cost then the total profit will increase or a loss will decrease.

Which of the following do a monopolist and a competitive firm have in common?

Profit-maximization rule. bc As with all firms in all market structures profit is maximized where marginal revenue equals marginal costs.

Which of the following is most likely a fixed cost? Labor cost Raw materials Shipping costs Property taxes

Property taxes bc Property taxes would likely be fixed costs because they are not related to production volume and would not change in amount.

In order to sell one additional unit of output, a profit-maximizing monopolist must:

Reduce the price of all units sold. bc Since the monopolist faces a downward sloping demand curve only by reducing the price will the quantity demanded increase.

monopoly: economies of scale

Reductions in minimum average costs that come through increases in the size (scale) of plant and equipment

Redeeming Qualities of a monopoly

Research & Development Entrepreneurial Incentives Economies of Scale Natural Monopolies

constrains the input (labor) and causes diminishing returns

Scarcity of capital and land

The planning period over which at least one resource input is fixed in quantity is the:

Short run. bc In the short run we assume that only the variable factors of production can be changed.

Suppose a perfectly competitive firm increases its output. In order to sell this additional output, the firm:

Should price it at the market price. b/c Since the firm is a price taker, it must sell the additional output at the market price.

The market supply curve is calculated by:

Summing the marginal cost curves of all firms.

If the first, second, third and fourth worker employed by the firm add 15, 21, 12 and 8 units of total product respectively, we can conclude that:

That after the second worker marginal product declines. bc At first marginal physical product increases but eventually the law of diminishing returns will cause marginal physical product to decline.

Which of the following is true for a monopoly?

The demand curve indicates the highest price consumers are willing to pay for the rate of output. bc Maximum profit is at the point where marginal revenue equals marginal cost and the price on the demand curve would be the highest price at that level of output.

Rising marginal costs are the result of:

The law of diminishing returns. bc Since any factor of production will be affected by the law of diminishing returns, more of each factor will be required to produce the same additional output and so additional costs will rise.

Competitive firms cannot individually affect market price because:

Their individual production is insignificant relative to the production of the industry. b/c In a competitive market a firms relative output is so small that it will have no effect on the market price.

Refer to Figure 6.1 for a perfectly competitive firm. If the market price is $46:

There will be economic profits. b/c If the market price is $46 the price would be above the low point on the average total cost curve and the economic profit would be positive.

Which of the following is an argument in support of monopolies?

They are protected from competition so they have greater ability to pursue research and development. bc One marginal argument in favor of monopolies is their ability to do research and development.

It takes ______ to get more fixed variables (land and capitol)

Time

Which of the following is consistent with a competitive market?

Zero economic profit in the long run Since a major characteristic of a competitive market is low barriers to entry if any economic profit exits, the ease of entry quickly allows new firms to enter the market increasing the market supply curve and bringing the market price and profits back to zero.

monopoly: exclusive licensing

addias to sell NBA jerseys

explicit costs

electricity bill advertising in news papers employee wages

In a competitive firm: If ATC is above P(demand curve, horizontal line) _________ would raise _________

exists from the industry would raise market price

monopoly: government franchises

government patent

The demand curve facing a monopoly:

is equal to the industry demand curve.

When a monopoly operates in a contestable market:

it is unable to charge a price above cost without inducing entry by a rival firm.

If firms in an industry are experiencing economic losses, firms will ______ the industry and the price of the good will ______.

leave; increase bc The presence of losses will encourage firms to exit the industry; as a result, the price of the good will increase.

More labor hired, each person has

less capital and land to work with

A worker's productivity is measured by their

marginal product

The goal of most business firms is to:

maximize total profit

monopoly: contestable market

monopolies know if they charge a price too high, other firms will come in to under cut them ex: airlines having reasonable price for a 1 non stop flight

Examples of short run

one-year lease of a factory and machine

P>ATC

positive profit new entry market supply shifts to the right

natural monopolies

power companies -delmarua -water supply -cable

fixed costs

property taxes insurance

If a firm converts a previously competitive industry into a monopoly without any changes in the cost curves, it will

reduce output and raise price to generate more profit.

If a firm converts a previously competitive industry into a monopoly without any changes in the cost curves, it will:

reduce output and raise price to generate more profit. bc Assuming equal costs, a monopolist produces a smaller output and charges a higher price than a competitive industry.

monopoly: control of resources

supply all/most diamond supply

Drug companies are willing to spend millions of dollars on developing new drugs because

they can patent the new drug and have a monopoly on its production and sale. bc Patents grant temporary monopolies, so drug manufacters are willing to invest is research and development of a new drug fro whihch they will be the sole supplier. A patent is a government grant of exclusive ownership of an innovation.

ATC

total cost _______________ total output

change in total cost come from

variable costs

variable costs

wages for workers materials ingredients

Production function answers the question of

what the MAXIMUM OUTPUT for producers from inputs

Short run:

where at least one input is fixed

If an additional unit of labor costs $40 and has an MPP of 50 units of output, the marginal cost is:

$0.80. bc Marginal cost is found by dividing the change in cost by the change in output.

Suppose a monopoly firm produces software and can sell 10 items per month at a price of $50 each. In order to increase sales by one item per month, the monopolist must lower the price of its software by $1 to $49. The marginal revenue of the 11th item is:

$39 bc Marginal revenue is defined as the change in total revenue ($539 - $500) divided by the one additional unit.

Refer to Figure 6.2 for a perfectly competitive firm. If price is $4, the profit-maximizing rate of output is:

32 units. b/c At a market price of $4 the marginal cost would equal the price at an output of 32 units and the economic profit would be Negative.

In a competitive market where firms are earning economic profits, which of the following is likely as the industry moves toward long-run equilibrium?

A lower price and more firms.

Which of the following statements is true, assuming the same cost and demand conditions?

A monopoly produces less output than a competitive firm. bc Since a monopolist demand curve is downward sloping whereas a firm in a competitive market is flat, the marginal revenue curve for a monopolist will intersect with the marginal cost curve sooner and therefore the monopolist will charge a higher price and produce a lower quantity.

A text NEWSWIRE article about Microsoft reported: "Microsoft mounted a deliberate assault upon entrepreneurial efforts that...could well have prevented the introduction of competition..." This passage suggests that Microsoft was able to erect barriers to entry and behave like:

A monopoly. bc A monopoly will attempt to erect barriers to entry to keep firms out of the market.

the long run refers to:

A period of time long enough for all inputs to be varied. bc Unlike the short-run where only variable factors can be changed, the long run assumes that all factors of production can be changed.

Which of the following is likely to be a monopolist?

A small firm with a patent granting it the exclusive right to produce a drug. bc An exclusive right to use a process or produce or sell a particular product for a designated period of time is a patent and a firm that has this right is a monopoly in the market for that particular drug.

Marginal revenue is the:

A) additional revenue from selling one more of a good.

If firms are earning positive economic profits:

A) entry would tend to erode those profits in competitive industries but not in monopolistic industries. B) barriers to entry would permit those profits to persist. C) firms must be producing where marginal revenue equals marginal cost, regardless of industry structure.

A major criticism of monopolies is that they

A) inhibit technological innovation. B) limit consumption choices.

A monopolist sets its price:

At the rate of output where marginal revenue equals marginal cost. bc Maximum profit is at the point where marginal revenue equals marginal cost and the profit per unit would be the difference between the price and the average total cost.

An industry structure with many firms, each of which has some distinct brand image, is called:

C) monopolistic competition.

A perfectly competitive firm:

Can sell all of its output at the prevailing price. b/c Since a perfectly competitive firm faces a horizontal demand curve it can sell all of its output at the market price.

Suppose a firm has the following expenditures per day: $240 for wages, $150 for materials, and $80 for equipment rental. The owner of the firm owns the building in which it operates. If the firm were not operating in the building, he could rent the building for $70 per day. Total daily revenue is $600. What are the daily explicit costs for the firm described above?

$470 bc Explicit costs are those costs that the firm pays with monetary resources.

Suppose a firm has the following expenditures per day: $240 for wages, $150 for materials, and $80 for equipment rental. The owner of the firm owns the building in which it operates. If the firm were not operating in the building, he could rent the building for $70 per day. Total daily revenue is $600. What are the daily implicit costs for the firm described above?

$70 bc Implicit costs are the monetary income that a firm sacrifices when it uses a resource that it owns.

implicit costs

-labor of owner with no salary -alternative use of capital invested in business -use of owner's car, and personal stuff for business

long run investment decision

-no fixed costs -no contracts -can either enter or exit market bc no commitments -build, buy, or lease a plant or equitment

Why do monopolies experience diminishing marginal returns as they increase output?

B) Monopolies must lower the price in order to increase quantity demanded.

If producers produce less and inefficiently they will produce at a point

BELOW the production function

Which of the following is not characteristic of a perfectly competitive market? Firms are price takers Brand loyalty Low barriers to entry Many firms

Brand loyalty bc it is a characteristic of a monopolistically competitive market.

examples of why producers would produce below the production function

Broken machines and distracted workers

When firms exit a market, all of the following occurs except: -The market supply shifts to the left. -Profits increase for firms that remain in the market. -The equilibrium price level rises. -The market demand curve shifts to the right.

The market demand curve shifts to the right. bc As firms exit a market the market supply curve shifts to the left (up the market demand curve) and this causes the market price to rise and the quantity demanded to fall.

As more labor is hired in the short run, diminishing returns are observed because:

The new workers have less capital and land to work with. bc The fixed factors of production must be used with more and more units of the variable factor and beyond some point additional amounts of input will yield less and less output.