Econ Review #3

Since hair salons all offer the exact same service, this market is an example of perfect competition.

False

Some oligopoly markets are characterized by identical products, but others are characterized by differentiated products.

True

The difference between perfect competition and monopolistic competition is that perfectly competitive firms sell identical products while monopolistically competitive firms sell differentiated product.

True

The typical long-run average cost (LRAC) curve is:

U-shaped due to economies and diseconomies of scale.

Jane was a partner at a law firm earning $200,000 per year. She left the firm to open her own law practice. In the first year of business, Jane generated revenues of $350,000 and incurred explicit costs of $100,000. Jane's economic profit from her first year in her own practice is therefore equal to:

$50,000.

Suppose Frank left his $50,000 per year job to start his own consulting business. In his first year, Frank was hired by 6 clients that paid $10,000 each for his services. Frank spent $2,500 on a new laptop and printer and had $1,000 in other business-related expenses in his first year. In his first year, Frank had an accounting profit of ____ and an economic profit of ____.

$56,500; $6,500

Economic theory about oligopoly firms has to account for different possibilities since it is uncertain which markets are characterized by competition and which are characterized by collusion.

True

Markets dominated by a few large firms are referred to as oligopolies.

True

Suppose point guard Luka Doncic scored an average of 25 points per game during the last 20 games. If he scored 30 points during his 21st game, his marginal score is (greater or less) 1.____________ than his average score, which will cause his season average to (rise or fall) 2.________

1. greater 2. rise

The free-market outcome is efficient as long as:

1. marginal benefit is equal to marginal cost for the market equilibrium quantity. 2. deadweight loss is equal to zero. 3. total surplus (consumer and producer surplus combined) is maximized. ALL OF THE ABOVE

Oligopoly

A few large firms dominate an industry that is difficult for potential rivals to enter.

Which of the following is most likely to be a fixed input?

A movie theater

Monopoly

A single firm protected by barriers to entry sells a unique product.

Which equation is not accurate?

ATC + AVC = AFC

The difference between perfect competition and monopolistic competition is that there are no barriers to entry in the former, but there are significant barriers to entry in the latter.

False

U.S. law prohibits monopoly firms from operating in all cases, so there is really no purpose in learning about this type of market model.

False

Which of the follow is the best example of a good or service sold by a monopolist?

Ibrance, a patented drug used to slow the spread of breast cancer

Which of the following is not a characteristic of a perfectly competitive market?

It is nearly impossible for new firms to effectively compete against well-established firms.

Firms in perfectly competitive markets:

are price-takers and sell output at the price determined by the market forces of demand and supply.

According to the law of diminishing marginal product, the marginal product of a variable input must eventually begin to fall because:

at least one input is being held fixed.

Economic theory divides decisions into those made in the:

short run, when at least one input is fixed, and the long run, when all inputs are variable.

Output is efficient when:

deadweight loss is equal to zero.

In most cases, the long-run average cost (LRAC) curve initially:

decreases due to economies of scale until the minimum efficient scale is reached.

The downward-sloping portion of a LRAC curve implies:

economies of scale exist over that range of the curve.

Long-run equilibrium under perfectly competitive conditions is:

efficient because MR = MC and P = minimum ATC.

All of the following are assumptions of the perfectly competitive model except:

entry into the market in the long run is barred.

If perfectly competitive firms are incurring economic losses in the short run, the adjustment to long-run equilibrium includes firms _ the market which causes market supply to _ and market price to ___.

exiting; decrease; increase

Assume blueberries are produced in a perfectly competitive market. If existing sellers in this market are earning positive economic profit, the number of sellers would be expected to _ in the long run, resulting in a _ equilibrium price, ceteris paribus.

increase; lower

An individual firm operating in a perfectly competitive market:

is a price-taker and has a demand curve that is perfectly elastic at the price determined by the market forces of demand and supply.

Firms experience economies of scale when:

long-run average cost decreases as output increases.

If a corporation goes bankrupt:

stockholders lose their investment but personal assets are not at risk.

The typical firm in a perfectly competitive market earns zero economic profit in the long run because:

there are no barriers preventing new firms from entering the market in the long run.

Smaller firms generally enjoy economies of scale as they expand because:

they are able to spread capital overhead costs when more output is produced.

Suppose Shelly left her $40,000 per year job to start her own painting business. In her first year, Shelly painted 30 houses and was paid $3,000 each for each house. In her first year, Shelly paid her brother $20,000 to help her paint the houses and she paid $6,000 for paint and supplies. In her first year, Shelly had an accounting profit of ____ and an economic profit of ____.

$64,000; $24,000

Samantha resigned from her position as a fashion magazine editor to start her own fashion line, giving up a $120,000 per year salary. Over the last year, her business earned revenue of $600,000 and her explicit costs for employees, a warehouse, equipment, fabric, and other supplies were $420,000. Based on these numbers, Samantha's accounting costs for the year were equal to $

Accounting Costs: 420,000 Economic Costs: 540,000 Accounting Profit: 180,000 Economic Profit: 60,000

Which of the follow is the best example of a good or service sold by firms operating in an oligopoly?

Airplane manufacturers

Which of the follow is the best example of a good or service sold in a perfectly competitive market?

Avocados

In the real world, entrepreneurs always have perfect information about potential profits in markets as the consider starting a new business.

False

Most real-world markets are perfectly competitive.

False

Profit is defined as total revenue minus total cost, but economists do not include implicit costs when adding up total costs so the calculated value for profit is often inaccurate.

False

The difference between perfect competition and monopolistic competition is that there are always more firms in a perfectly competitive market than in a monopolistically competitive market.

False

The short-run supply curve for the perfectly competitive firm is the portion of the _ curve that lies above the _ curve.

MC; AVC

Ray's Pizzeria is considering the addition of a 5th worker if this increases profit. Pizza sales increased from 300 per day to 360 per day when the 4th worker was added, indicating that the marginal product of the 4th worker was equal to

MP of 4th worker = 60 MP of 5th worker = 40

The profit-maximizing rule is for firms to produce the amount of output at which:

MR = MC.

Perfect Competition

Many small firms offering identical products compete in an industry with easy entry.

Monopolistic Competition

Many small firms offering slightly different products compete in an industry with easy entry.

A firm is in long-run equilibrium in a perfectly competitive market when:

P = MR = MC = ATC.

Partnership

There are two or more owners and some may have limited liability for the firm's debts.

Sole Proprietorship

There is a single owner who has unlimited liability for the debts of the firm.

Corporation

There may be multiple owners and each has limited liability for the firm's debts.

Suppose a firm in a perfectly competitive industry is producing at the output level where MC = MR = Price = $8. If ATC = $7 and AVC = $5, then the firm:

is earning positive economic profit.

Suppose a firm in a perfectly competitive industry is producing at the output level where MC = MR = Price = $7. If ATC = $7 and AVC = $5, then the firm:

is earning zero economic profit.

Suppose a doggie day care business firm uses only two inputs: hourly workers (labor) and a building (capital). In the short run, the firm most likely considers:

labor to be variable and capital to be fixed.

A firm that is deciding how many workers to hire in order to produce the profit-maximizing level of output in its current factory space is:

making a short-run decision.

A perfectly competitive firm producing where MR = MC and P = ATC in the short run is:

making an economic profit equal to zero.

If a firm's Total Revenue function is linear with slope equal to 5, this means that:

marginal revenue and price are both equal to $5.

The assumed goal of firms in the marketplace is to:

maximize profit.

Suppose a firm in a perfectly competitive industry is producing at the output level where MC = MR = Price = $6. If ATC = $7 and AVC = $5, then the firm:

minimizes losses by remaining in business for the short run.

Suppose a firm in a perfectly competitive industry is producing at the output level where MC = MR = Price = $4. If ATC = $7 and AVC = $5, then the firm:

minimizes losses by shutting down immediately.

If pencil manufacturers are earning positive economic profit in the short run, and there are no barriers to entry into the pencil market, economic theory predicts that:

new firms will enter the market and drive down the price of pencils in the long run, ceteris paribus.

Assume the current price per bushel of tomatoes is $11 and each firms' average total cost is $9; these numbers indicate that:

new growers are likely to enter the market in the long run, causing the price per bushel to fall.

A firm that chooses not to produce in the short run suffers a loss equal to:

total fixed cost.

If a sole proprietorship goes bankrupt:

owners lose their investment and personal assets are also at risk.

The demand curve for a firm in a perfectly competitive market is:

perfectly elastic at the market price.

A perfectly competitive firm is a price-taker, meaning the firm faces a:

perfectly elastic demand function.

When a firm uses additional inputs to increase output, these inputs are:

variable