econ exam 3 questions

by adjusting the quantity it supplies to the market.

Because a monopolist is the sole producer in its market, it can necessarily alter the price of its good by

• Exit

a long-run decision to leave the market

ATC increasing as output increases • Most types of firms eventually have diseconomies of scale • Coffee shops are an extreme example

3. Those with Diseconomies of scale:

cartel

A group of firms that act in unison to maximize collective profits is called a

charging a price that is greater than marginal revenue.

A monopolist maximizes profits by

creates no deadweight loss.

A monopolist that practices perfect price discrimination

has the usual deadweight loss of monopoly pricing. is said to have excess capacity. experiences a zero profit in a long-run equilibrium.

A monopolistically competitive firm

15 units of output.

A monopolistically competitive firm faces the following demand schedule for its product The firm has total fixed costs of $9 and a constant marginal cost of $3 per unit. The firm will maximize profit with

Shutdown

A short-run decision not to produce anything because of market conditions.

Price decreases, and total surplus increases.

After the patent runs out on a brand name drug, generic drugs enter the market. What happens next in the market?

average fixed cost is high.

Average total cost is very high when a small amount of output is produced because

$3,000.

Barney builds custom wooden birdhouses. He can make 150 birdhouses per month and sell them for $50 each. His average total cost is $30 per birdhouse. Refer to Scenario 13-16. Barney's monthly total profit is

$40

Bubba is a shrimp fisherman who used $2,000 from his personal savings account to buy a boat and equipment for his shrimp business. The savings account paid 2% interest. What is Bubba's annual opportunity cost of the financial capital that he invested in his business?

continue flying until the lease expires and then drop the run.

Cold Duck Airlines flies between Tacoma and Portland. The company leases planes on a year-long contract at a cost that averages $600 per flight. Other costs (fuel, flight attendants, etc.) amount to $550 per flight. Currently, Cold Duck's revenues are $1,000 per flight. All prices and costs are expected to continue at their present levels. If it wants to maximize profit, Cold Duck Airlines should

Monopoly

Complete control of a product or business by one person or group a firm that is the only firm in the market • There are "barriers to entry" for other firms

long-run average total costs rise as output increases.

Diseconomies of scale occur when

long-run average total costs are decreasing as output increases.

Economies of scale occur when a firm's

1250

Eileen's Elegant Earrings produces pairs of earrings for its mail order catalogue business. Each pair is shipped in a separate box. She rents a small room for $150 a week in the downtown business district that serves as her factory. She can hire workers for $275 a week. There are no implicit costs. What is the total cost associated with making 890 boxes of earrings per week?

2 houses

Eldin is a house painter. He can paint three houses per week. He is considering hiring his friend Murphy. Together, Eldin and Murphy can paint five houses per week. What is Murphy's marginal product?

-Last minute airline tickets • If you buy a ticket at the last minute, likely to be a business traveler -Coupons: • People who have the time to cut coupons usually willing to pay less -Intentionally downgraded products • Sell some low-quality goods so you can sell better ones at a markup

Examples of Price Discrimination

The accounting costs of running a business • Salary • Rent • Cost of inputs

Explicit cost:

the costs that don't depend on how much you produce • Example: rent of the factory building.

Fixed cost:

equal to marginal revenue

For a firm in a perfectly competitive market, the price of the good is always

declining, often because fixed costs are very large.

For a typical natural monopoly, average total cost is

no legal barriers prevent a firm from entering an industry

Free entry means that

average total costs are rising at Q = 500.

If Franco's Pizza Parlor knows that the marginal cost of the 500th pizza is $3.50 and that the average total cost of making 499 pizzas is $3.30, then

. rise by less than $1.

If a monopolist's marginal costs increase by $1 for all levels of output, then the monopoly price will

earn zero profits.

If the government regulates the price that a natural monopolist can charge to be equal to the firm's average total cost, the firm will

The opportunity cost of the resources invested in the business • Money • Time

Implicit cost:

only a perfectly competitive firm operates at its efficient scale.

In a long-run equilibrium,

lower its price

In order to sell more of its product, a monopolist must

15 bouquets

Kate is a florist. Kate can arrange 20 bouquets per day. She is considering hiring her husband William to work for her. Together Kate and William can arrange 35 bouquets per day. What is William's marginal product?

1.10

Larry's Lunchcart is a small street vendor business. If Larry makes 15 pretzels in his first hour of business and incurs a total cost of $16.50, his average total cost per pretzel is

produce less than the socially efficient level of output.

Many economists criticize monopolists because the

$140

Only two firms, ABC and XYZ, sell a particular product. The table below shows the demand curve for their product. Each firm has the same constant marginal cost of $8 and zero fixed cost. Refer to Table 17-11. ABC and XYZ agree to maximize joint profits. However, while ABC produces the agreed upon amount, XYZ breaks the agreement and produces 5 more than agreed. How much profit does XYZ make?

If the MC of production is less than the MR (earn money on each unit produced) -> make more. If the MC is less than the MR (lose money on each unit produced) -> make less. Optimal quantity: MR = MC

Profit Maximization • What quantity of output should a firm produce?

J+H

Refer to Figure 15-11. Which area represents the deadweight loss from monopoly?

$1,562.50.

Refer to Figure 15-19. If the monopoly firm is not allowed to price discriminate, then consumer surplus amounts to

$6,250.

Refer to Figure 15-19. If there are no fixed costs of production, monopoly profit with perfect price discrimination equals

$120

Refer to Figure 15-7. A profit-maximizing monopolist would earn profits of

p=marginal cost; firm makes loss, so firm is subsidized The taxes to finance that might cause a different DWL - "Efficient (socially optimal) price" p = average cost, lowest price consistent with no loss - "Fair-returns price"

Regulating a Natural Monopoly "Best" option: "Second best":

3 cases

Riva crafts and sells hard cider as a part-time job. She can bottle and sell four cases in a week. She is considering hiring her friend Atul to help her. Together, Riva and Atul can bottle and sell seven cases per week. What is Atul's marginal product?

The price is determined by the demand for the product at the quantity the monopolist chooses • How to find this price Start from optimal quantity on x-axis Draw line up to demand curve Draw horizontal line over to price

Setting the Optimal Price Monopolist produces quantity at which MR = MC How to determine price?

monopolistic competition

Shares all of the characteristics of perfect competition - sell products that are slightly different.

If shut down in SR, must still pay FC. • If exit in LR, zero costs.

Shutdown vs. Exit A key difference:

lease on the studio space. insurance that the landlord requires Sonia to carry for the studio.

Sonia opened a yoga studio where she teaches classes and sells yoga clothing. Fixed costs for Sonia's yoga studio include the cost of the

lemons and sugar. paper cups. the wages paid to her hourly workers.

Suppose Jan started up a small lemonade stand business last month. Variable costs for Jan's lemonade stand now include the cost of

$800

Suppose executives at an art museum know that 100 adults are willing to pay $12 for admission to the museum on a weekday. Suppose the executives also know that 200 students are willing to pay $8 for admission on a weekday. The cost of operating the museum on a weekday is $2,000. Refer to Scenario 15-9. How much profit will the museum earn if it engages in price discrimination?

constant returns to scale.

The Big Blue Sky jet company has long-run total costs of $20 million if it produces 5 jets and long-run total costs of $24 million if it produces 6 jets. The Big Blue Sky jet company is experiencing

is always decreasing

The average-fixed-cost curve

diminishing marginal product.

The fundamental reason that marginal cost eventually rises as output increases is because of

hellon's profit is $450 and Standstop's profit is $600.

The table shows the town of Mauston's demand schedule for gasoline. For simplicity, assume the town's gasoline seller(s) incur no costs in selling gasoline. Refer to Table 17-4. Suppose there are exactly two sellers of gasoline in Mauston: Shellon and Standstop. If Shellon sells 150 gallons and Standstop sells 200 gallons, then

$0

Tom quit his $65,000 a year corporate lawyer job to open up his own law practice. In Tom's first year in business his total revenue equaled $150,000. Tom's explicit cost during the year totaled $85,000. What is Tom's economic profit for his first year in business?

The cost, divided by the quantity of output.

Types of costs: Average Costs

the costs that depend on how much you produce • Example: Salary for workers.

Variable costs:

satellite radio

Which of the following industries is least likely to exhibit the characteristic of free entry?

exit if P < ATC

Which of the following represents the firm's long-run condition for exiting a market?

shut down if TR < VC

Which of the following represents the firm's short-run condition for shutting down?

If the firm were to charge more than the going price, it would sell none of its goods.

Which of the following statements best reflects a price-taking firm?

The firm can vary the number of workers it employs but not the size of its factory.

Which of these assumptions is often realistic for a firm in the short run?

perfect competition

a market structure in which a large number of firms all produce the same product

natural monopoly

a market that runs most efficiently when one large firm supplies all of the output

Oligopoly

a state of limited competition, in which a market is shared by a small number of producers or sellers. - have a small number of firms and high barriers to entry

barriers to entry

business practices or conditions that make it difficult for new firms to enter the market Legal: patents, copyrights, etc. • Natural: Network externalities (Facebook, Skype) • Economies of scale: industry has increasing returns to scale (electricity distribution, water distribution)

Price Discrimination

charging different customers different prices for the exact same thing - can recover some of the surplus lost by monopoly pricing.

total cost - variable cost

fixed cost=

change in total cost / change in quantity

marginal cost=

change in total revenue / change in quantity

marginal revenue=

Clothing firms • Restaurants Over-the-counter medications

monopolistic competition examples

-very large number of identical firms -all produce the exact same products -Any single company can sell as much as it wants at the market price -marginal revenue (MR) = price (P) • Profit maximizing firms will set MC = P • Therefore we can think of the MC curve as the (short- run) supply curve.

perfectly competitive markets In these markets,

marginal revenue

the additional income from selling one more unit of a good; sometimes equal to price -left sloping curve

marginal cost

the cost of producing one more unit of a good or service -represented by straight line curve

total cost - fixed cost

variable cost=

lower than 0.50

​Chloe's Café sells gourmet cinnamon rolls. In the long run, the café incurs a total cost of $500 to produce 1,000 cinnamon rolls. If Chloe's Café exhibits economies of scale between 1,000 and 2,000 cinnamon rolls, the long-run average total cost for 1,500 cinnamon rolls is