Econ exams 2
If MR > MC, then
increase Q to raise profit
A short-run decision not to produce anything because of market conditions.
Shutdown
a cost that has already been committed and cannot be recovered
Sunk cost
Let L represent the number of workers hired by a firm and let Q represent that firm's quantity of output. Assume two points on the firm's production function are (L = 5, Q = 125) and (L = 6, Q = 162). Then the marginal product of the 6th worker is a. 25 units of output. b. 27 units of output. c. 37 units of output. d. 162 units of output.
c
A firm in a monopolistically competitive market is similar to a monopoly in the sense that (i) they both face downward-sloping demand curves. (ii) they both charge a price that exceeds marginal cost. (iii) free entry and exit determines the long-run equilibrium. a. (i) only b. (ii) only c. (i) and (ii) only d. (i), (ii), and (iii) only
c
total revenue minus total costs (including explicit and implicit costs)
economic profit
The quantity that minimizes ATC
efficient scale
require an outlay of money, e.g., paying wages to workers
explicit costs
total cost =
fixed cost + variable cost
do not vary with the quantity of output produced.
fixed costs
do not require a cash outlay, e.g., the opportunity cost of the owner's time
implicit costs
selling the same good at different prices to different buyers
price discrimination
lower price reduces revenue
price effect
§Total revenue (TR)=
price x quantity
A monolopy firm is a
price-maker
shows the relationship between the quantity of inputs used to produce a good and the quantity of output of that good.
production function
If MR < MC, then
reduce Q to raise profit
Cost of exiting the market
revenue loss = TR
Cost of shutting down
revenue loss = TR
other firms cannot enter the market.
barriers to entry
profit =
(P-ATC) x Q
steps to calculating profit
1. Find Q* Remember That is where MR = MC 2. Find Price at Q* 3. Find ATC at Q* 4. Calculate Profit.
Why is Monopolistic Competition Is Less Efficient than Perfect Competition
1. excess capacity 2. markup over marginal cost
A monopolist maximizes profits by A. producing an output level where marginal revenue equals marginal cost B. charging a price equal to marginal revenue and marginal cost C. charging a price where marginal cost equals average total cost D. Both a and b are correct
A
The fundamental source of monopoly power is a. barriers to entry. b. profit. c. decreasing average total cost. d. a product without close substitutes.
A
What do economists call the business practice of selling the same good at difference prices to different customers? A. price discrimination B. collusion C. compensating differential D. Both a and b are correct
A
Which of the following are necessary characteristics of a monopoly? (i) The firm is the sole seller of its product. (ii) The firm's product does not have close substitutes. (iii) The firm generates a large economic profit. (iv) The firm is located in a small geographic market. a. (i) and (ii) only b. (i) and (iii) only c. (i), (ii), and (iii) only d. (i), (ii), (iii), and (iv)
A
A monopolist produces A. more than the socially efficient quantity of output but at a higher price than in a competitive market B. less than the socially efficient quantity of output but at a higher price than in a competitive market C. the socially efficient quantity of output but at a higher price than in a competitive market D. possibly more or possibly less than the socially efficient quantity of output, but definitely at a higher price than in a competitive market
B
A monopolistically competitive firm A. charges a price that is equal to marginal cost B. experiences a zero profit in the long run C. produces at the efficient scale in the long run D. All of the above are correct
B
Consider monopoly, monopolistic competition, and perfect competition. In which of these three market structures does a profit-maximizing firm charge a price that exceeds marginal cost? A. monopoly only B. monopoly and monopolistic competition only C. monopoly, monopolistic competition, and perfect competition D. The answer cannot be determined without knowing whether the market is in the long run or short run
B
The defining characteristic of a natural monopoly is A. constant marginal cost over the relevant range of output B. economies of scale over the relevant range of output C. constant returns to scale over the relevant range of output D. diseconomies of scale over the relevant range of output
B
Which of the following statements is true of a monopoly firm? A. A monopoly firm is a price taker and has no supply curve. B. A monopoly firm is a price maker and has no supply curve C. A monopoly firm is a price maker and has a downward-sloping supply curve D. A monopoly firm is a price maker and has an upward-sloping supply curve
B
A monopoly A. can set the price it charges for its output and earn unlimited profits. B. takes the market price as given and earns small but positive profits. C. can set the price it charges for its output but faces a downward-sloping demand curve so it cannot earn unlimited profits. D. can set the price it charges for its output but faces a horizontal demand curve so it can earn unlimited profits.
C
A monopoly market A. always maximizes total economic well-being. B. always minimizes consumer surplus. C. generally fails to maximize total economic well-being. D. generally fails to maximize producer surplus.
C
At the profit-maximizing level of output, a. marginal revenue equals average total cost. b. marginal revenue equals average variable cost. c. marginal revenue equals marginal cost. d. average revenue equals average total cost.
C
If a pharmaceutical company discovers a new drug and successfully patents it, patent law gives the firm A. partial ownership of the right to sell the drug for a limited number of years. B. partial ownership of the right to sell the drug for an unlimited number of years C. sole ownership of the right to sell the drug for a limited number of years. D. sole ownership of the right to sell the drug for an unlimited number of years.
C
If a pharmaceutical company discovers a new drug and successfully patents it, patent law gives the firm a. partial ownership of the right to sell the drug for a limited number of years. b. partial ownership of the right to sell the drug for an unlimited number of years. c. sole ownership of the right to sell the drug for a limited number of years. d. sole ownership of the right to sell the drug for an unlimited number of years.
C
The two types of imperfectly competitive markets are a. monopoly and monopolistic competition. b. monopoly and oligopoly. c. monopolistic competition and oligopoly. d. monopolistic competition and cartels.
C
Which of the following is not a characteristic of a competitive market? a. Buyers and sellers are price takers. b. Each firm sells a virtually identical product. c. Free entry is limited. d. Each firm chooses an output level that maximizes profits.
C
A firm that is a natural monopoly A. is not likely to be concerned about new entrants eroding its monopoly power. B. is taking advantage of economies of scale C. would experience a higher average total cost if more firms entered the market D. All of the above are correct
D
Advertising A. provides information about products, including prices and seller locations B. has been proven to increase competition and reduce prices compared to markets without advertising C. signals quality to consumers, because advertising is expensive D. All of the above are correct
D
If firms in a monopolistically competitive market are earning positive profits, then A. firms will likely be subject to regulation B. barriers to entry will be strengthened C. some firms will exit the market D. new firms will enter the market
D
Perfect price discrimination A. increases profits to the firm B. increases total surplus C. decreases consumer surplus D. All of the above are correct
D
Some firms have an incentive to advertise because they sell a A. similar product and charge a price equal to marginal cost. B. similar product and charge a price above marginal cost C. differentiated product and charge a price equal to marginal cost. D. differentiated product and charge a price above marginal cost.
D
Which of the following is a characteristic of a natural monopoly? a. Average cost exceeds marginal cost over large regions of output. b. Increasing the number of firms increases each firm's average total cost. c. One firm can supply output at a lower cost than two firms. d. All of the above are correct.
D
Which of the following is not a reason for the existence of a monopoly? A. sole ownership of a key resource B. patents C. copyrights D. diseconomies of scale
D
the marginal product of an input declines as the quantity of the input increases (other things equal
Diminishing marginal product:
A long-run decision to leave the market
Exit
cost rises by
MC
revenue rises by
MR
Like a competitive firm, a monopolist maximizes profit by producing the quantity where
MR = MC
Profit-maximization
MR=MC
Characteristics: Many sellers Product differentiation Free entry and exit Examples: apartments books bottled water clothing fast food night clubs
Monopolistic Competition
one seller no free entry or exit positive long run Econ profits has market power downward sloping D curve no close substitutes
Monopoly
in a monopoly Q does not depend on
P
competitive eq'm
P = MC
Perfect competition
P = MR
shut down if
P<AVC
enter if
P>ATC
exit if
P>ATC
many sellers free entry and exit zero long run Econ. profits identical products price taker Horizontal D curve
Perfect competition
Explicit costs increase $500/month. Accounting profit & economic profit each fall $500/month
You rent your office space.
Kevin quit his $65,000 a year corporate lawyer job to open uphis own law practice. In Kevin's first year in business his total revenue equaled $150,000. Kevin's explicit cost during the year totaled $85,000. Using the information from Kevin's first year in business, what is his economic profit? a. $0 b. $20,000 c. $65,000 d. $85,000
a
total revenue minus total explicit costs
accounting profit
For a large firm that produces and sells automobiles, which of the following costs would be a variable cost? a. the $20 million payment that the firm pays each year for accounting services b. the cost of the steel that is used in producing automobiles c. the rent that the firm pays for office space in a suburb of St. Louis d. All of the above are correct.
b
main cause of monopolies
barriers to entry
When marginal cost is less than average total cost, a. marginal cost must be falling. b. average variable cost must be falling. c. average total cost is falling. d. average total cost is rising.
c
§Dianne has decided to start her own photography studio. To purchase the necessary equipment, Dianne withdrew $10,000 from her savings account, which was earning 3% interest, and borrowed an additional $5,000 from the bank at an interest rate of 8%. What is Dianne's annual opportunity cost of the financial capital that has been invested in the business? a. $300 b. $400 c. $700 d. $1,650
c
§Which of the following expressions is correct for a competitive firm? a. Profit = (Quantity of output) x (Price - Average total cost) b. Marginal revenue = (Change in total revenue)/(Quantity of output) c. Average total cost = Total variable cost/Quantity of output d. Average revenue = (Marginal revenue) x (Quantity of output)
c
marginal product of labor
change in quantity/change in labor
marginal cost =
change in total cost / change in quantity
Marginal revenue
change in total revenue / change in quantity
Many buyers and many sellers. 2. The goods offered for sale are largely the same. 3.Firms can freely enter or exit the market
characteristics of perfect competition
MR = P is only true for firms in
competitive markets
Benefit of exiting the market
cost savings = TC
Benefit of shutting down
cost savings = VC (firm must still pay FC)
we assume the the firms goal...
is to maximize profit
All inputs are variable (e.g., firms can build more factories, or sell existing ones).
long run
The process of entry or exit is complete - remaining firms earn zero economic profit.
long-run equilibrium
is the increase in Total Cost from producing one more unit
marginal cost
any input is the increase in output arising from an additional unit of that input, holding all other inputs constant
marginal product
A monopoly firm has
market power
the ability to influence the market price of the product it sells. A competitive firm has no market power.
market power
many firms sell similar but not identical products
monopolistic competition
many sellers free entry and exit zero long run Econ profits different products firm has market power D curve is downward sloping
monopolistic competition
many sellers has free entry and exit zero long run Econ profits has market power downward sloping D curve many close substitutes
monopolistic competition
is a firm that is the sole seller of a product without close substitutes.
monopoly
one firm
monopoly
: a single firm can produce the entire market Qat lower cost than could several firms.
natural monopoly
only a few sellers offer similar or identical products
oligopoly
higher output raises revenue
output effect
Increasing Q has two effects on revenue
output effect and price effect
many firms, identical products
perfect competition
Some inputs are fixed (e.g., factories, land). The costs of these inputs are FC.
short run
total revenue
the amount a firm receives from the sale of its output
total cost
the market value of the inputs a firm uses in production
profit =
total revenue - total cost
Average revenue =
total revenue/quantity= p
vary with the quantity produced. For Farmer J
variable costs
Explicit costs do not change, so accounting profit does not change. Implicit costs increase $500/month (opp. cost of using your space instead of renting it), so economic profit falls by $500/month.
you own your office space