Economics Test 4
*Gasoline industry* (↑demand for gas → ↑ price of oil → ↑ price of gas) *Electricity* (↑ demand → ↑ demand for coal) *Coal*
Any industry that buys a large fraction of the output of and increasing cost industry will also be an increasing cost industry. give three examples:
A
1. If a single supplier produces a good with many good substitutes, then A. it will have little control over the market price. B. the demand curve for its output will be downward sloping. C. the price it chooses to set must be less than the market price in order to sell additional output. D. the market demand will be perfectly elastic.
C
1. In the language of game theory, a situation in which each person must consider how others might respond to his or her own actions is called a a. quantifiable situation. b. cooperative situation. c. strategic situation. d. tactical situation
B
10.In a game, a dominant strategy is a. the best strategy for a player to follow only if other players are cooperative. b. the best strategy for a player to follow, regardless of the strategies followed by other players. c. a strategy that must appear in every game. d. a strategy that leads to one player's interests dominating the interests of the other players.
excess capacity (The monopolistic competitor operates on the downward-sloping part of its AC curve, produces less than the cost-minimizing output) markup over marginal cost (P>MC)
2 reasons why monopolistic competition is less efficient than perfect competition
C
2. A market is considered perfectly competitive if I. there is a lot of product differentiation amongst sellers. II. there are many sellers, each small relative to the total market. III. the product sold is similar across sellers. IV. there are only a few buyers. A. I and II only B. I, II, and III only C. II and III only D. II, III, and IV only
D
2.Which of the following statements is not correct? a. Monopolistic competition is different from monopoly because monopolistic competition is characterized by free entry, whereas monopoly is characterized by barriers to entry. b. Both monopolistic competition and oligopoly fall in between the more extreme market structures of competition and monopoly. c. Monopolistic competition is different from oligopoly because each seller in monopolistic competition is small relative to the market, whereas each seller can affect the actions of other sellers in an oligopoly. d. Both monopolistic competition and perfect competition are characterized by product differentiation.
Resale Price Maintenance ("Fair Trade"), predatory pricing, Tying
3 controversies Over Antitrust Policy
what price to set, what quantity to produce, when to enter and exit the industry
3 questions to ask if you want to maximize profit
A
3. In a highly competitive industry, demand for a firm's product is A. perfectly elastic. B. slightly elastic. C. unit elastic. D. perfectly inelastic.
C
4. Economists call the time after all exit or entry has occurred A. the short run. B. the medium run. C. the long run. D. the marginal run.
C
4. Graphically, a firm's marginal revenue curve is A. perfectly elastic and equal to their marginal cost curve. B. downward sloping and equal to the market demand curve. C. downward sloping, but with twice the slope of the market demand curve. D. perfectly elastic but lies underneath the market demand curve.
B
4.A monopolistically competitive industry is characterized by a. many firms, differentiated products, and barriers to entry. b. many firms, differentiated products, and free entry. c. a few firms, identical products, and free entry. d. a few firms, differentiated products, and barriers to entry.
Increasing cost industry
Industry costs ↑ with greater output, show with an upward sloped supply curve
in a free market, P = MC1 = MC2 = ... = MCn
Invisible Hand Property 1
no
Is there a way for policymakers to improve the market outcome in monopolistic competition?
T
It is good when entrepreneurs move capital and labor resources from low-profit industries to high-profit industries. Choose: True or False
D
Marcie quit her job as a preschool teacher, which paid an annual salary of $28,000, and became a street food vendor. She used $8,000 out of her savings account that paid a 4 percent annual interest rate to buy a street cart to sell food. In her first year of operations, she spent $10,000 on food and supplies (napkins, cups, plates, etc.) and earned total revenue of $45,000. Marcie's accounting profit is ______ and economic profit is ______. A. $28,000; $20,000 B. $35,000; -$1,000 C. $27,000; $17,000 D. $35,000; $6,680
c
Above-normal profits are eliminated by ______, and below-normal profits are eliminated by ______. A. entry; entry B. exit; exit C. entry; exit D. exit; entry
False
According to the elimination principle, above-normal profits will never occur. Choose: True or False
the invisible hand
Adam Smith's term for the natural self-regulation of a market economy driven by self-interest and efficiency
individuals acting to maximize their own profits would minimize industry costs
Adam smith's description of the invisible hand says that ....
they control a good that is used to produce other goods
Monopolies are especially harmful if ....
total surplus
Monopolies reduce...
A
More potential sellers ______ the elasticity of ______ firm-level demand. A. increase; short-run B. decrease; short-run C. increase; long-run D. decrease; long-run
predatory Pricing
Occurs when a firm cuts prices to prevent entry or drive a competitor out of the market, so that it can charge monopoly prices later
tying
Occurs when a manufacturer bundles two products together and sells them for one price
Resale Price Maintenance
Occurs when a manufacturer imposes lower limits on the prices retailers can charge.
TR >TC
P > AC is equivalent (inequality that starts with TR)
True
Patent buyouts could reduce deadweight loss from monopolies, while still protecting the incentive to innovate. Choose: True or False
D
Price times quantity minus total cost equals A. total revenue. B. fixed costs. C. marginal revenue. D. profit.
-Transmission and distribution remained natural monopolies. -Electricity is difficult to store. -Booming economy required importing electricity from other states. -Inelastic demand curves
Problems with California deregulating wholesale electricity prices in 1998.
total revenue - total cost
Profit = ________
TR - TC, or (P -AC)Quantity
Profit equation (there is 2)
Price effect
Raising output increases market quantity, which reduces price and reduces profit on all units sold
The value of Q where MR= 0 is one half of that where P = 0.
Shortcut for finding MR in a monopoly
A firm's decisions about P or Q can affect other firms and cause them to react. The firm will consider these reactions when making decisions.
Strategic behavior in oligopoly
C
The Private Express Statutes, passed in 1792 and (in amended form) still in effect today,contain federal civil and criminal laws relating to the delivery of mail. The Statutes grant monopoly powers to the U.S. Postal Service. The average effect of this monopoly on the price and quality of mail service in the populated parts of the U.S. is that the ______ because of the monopoly privilege of the USPS. A. price and quality of service are higher B. price and quality of service are lower C. price is higher and the quality of service is lower D. price is lower and the quality of service is higher
Invisible Hand Property 2
The balance of industries
D
The demand curve for oil from OPEC is A. flat. B. vertical. C. upward-sloping. D. downward-sloping.
True
The government can create monopolies by legally requiring its citizens to buy from a particular seller. Choose: True or False
B
The greatest use of our limited resources occurs when A. the price of all goods is the same. B. profits in every industry are the same. C. the price of goods varies. D. profits vary by industry.
less
The higher the concentration ratio, the ____ competition.
C
The marginal cost curve intersects the average cost curve A. on the downward-sloping portion. B. on the upward-sloping portion. C. at its minimum point. D. on the vertical portion.
Invisible Hand Property 1
The minimization of total industry costs of production
*The "you can't take it with you" effect* (People with serious illnesses are relatively insensitive to the price of life saving medicine.) *The "other people's money" effect* (If third parties are paying for the medicine, people are less sensitive to price.)
The two effects can make the elasticity of demand for pharmaceuticals more inelastic:
True
There is a tendency for economic profit in all competitive industries to go to zero. Choose: True or False
True
To assuage the deadweight loss from a natural monopoly, governments could employ a price control. Choose: True or False
D
Tom opens a sandwich shop; which of the following is NOT an economic cost (total cost) of running his business? A. his forgone earnings as a book editor, his next best opportunity for employment B. the interest income he could have earned on the money he invested in his business from savings C. the wages that he pays his workers D. the expenses for his own lunch every day
A
Total cost incorporates A. implicit and explicit cost. B. implicit cost only. C. explicit cost only. D. neither explicit nor implicit cost.
Constant cost industry
Industry costs do not change with greater output
B
5. Suppose that Jay-Z and Beyonce are duopolists in the music industry. In January, they agree to work together as a monopolist, charging the monopoly price for their music and producing the monopoly quantity of songs. By February, each singer is considering breaking the agreement. What would you expect to happen next? a. Jay-Z and Beyonce will determine that it is in each singer's best self interest to maintain the agreement. b. Jay-Z and Beyonce will each break the agreement. The new equilibrium quantity of songs will increase, and the new equilibrium price will decrease. c. Jay-Z and Beyonce will each break the agreement. The new equilibrium quantity of songs will decrease, and the new equilibrium price will increase. d. Jay-Z and Beyonce will each break the agreement. The new equilibrium quantity of songs will increase, and the new equilibrium price also will increase.
C
7. Which of the following statements is correct? a. Cigarettes are likely to be produced in a monopolistically competitive industry. b. Novels are likely to be produced in a monopoly industry. c. Movies are likely to be produced in a monopolistically competitive industry. d. Milk is likely to be produced in an oligopoly industry.
D
8. A market becomes more competitive as there are ______ buyers and ______ sellers. A. fewer; fewer B. fewer; more C. more; fewer D. more; more
A
8. Total costs cannot be minimized if firms A. face different prices. B. have different marginal cost curves. C. face the same prices. D. have the same marginal cost curves.
A
8. Which market structure would likely have the highest concentration ratio? a. Monopoly b. Oligopoly c. Monopolistic competition d. Perfect competition
Variable Costs
A Firm Should Stay Open in the Short Run if it Can Cover its ____ ____
C
A firm earning zero economic profits A. will shut down immediately. B. may continue to operate in the short run, but will always shut down in the long run if zero economic profits continue. C. is earning just "normal profits." D. will not be earning enough to cover all payments to capital and labor.
marginal cost
A firm's short-run supply curve is its ____ _____ curve.
D
A strawberry farmer has 5,000 pounds of strawberries ready to harvest. The cost of picking and transporting the strawberries to the market is $3,500. If the market pays $0.60 per pound of strawberries, what should the strawberry farmer do? A. pick and sell the strawberries to recover the fixed costs of planting B. not make a decision until he knows something about average costs C. pick and sell the strawberries, since doing so increases profits by $500 D. not pick and sell the strawberries, since doing so would reduce profits by $500
B
At zero economic profits, a competitive firm A. has an incentive to leave the industry to make higher profit elsewhere. B. is making a normal profit; its revenues are just sufficient to cover all costs of production, including opportunity costs. C. is unable to pay its opportunity costs of production but will remain in business to minimize losses. D. will benefit, in the form of higher profits, by raising its prices above average cost.
B
Because the rate of profit tends to be ______ in all industries, the marginal value of resources is ______ in all industries. A. different; different B. the same; the same C. the same; different D. different; the same
Many firms, differentiated products, relatively easy to enter/exit
Characteristics of a Monopolistic Competition market (# of firms in market, product, easiness of entry/exit)
A lot of firms, identical products, very easy to exit/enter
Characteristics of a Perfect Competition market (# of firms in market, product, easiness of entry/exit)
one firm, identical product (only one), very hard to enter
Characteristics of a monopoly (# of firms in market, product, easiness of entry/exit)
few firms, either identical or differentiated products, relatively hard to enter/exit
Characteristics of an oligopoly (# of firms in market, product, easiness of entry/exit)
A
Competitive firms want to produce the quantity such that A. P = MC. B. P > MC. C. P > AC. D. P < AC.
B
In the short run, if price is less than average cost, a firm A. will certainly shut down. B. might shut down, but might stay open. C. is earning positive profits. D. is earning normal profits.
A
Counterfeit brands carry labels from companies that did not actually make the product in question (for example, a purse not made by Gucci but carrying a Gucci label). With what kind of monopoly are the makers of these items trying to compete? A. one with hard to duplicate inputs B. one with laws preventing entry C. one with economies of scale D. one with patents
above
Does the monopolist price its product above or below the price of the competitive firm?
above-normal profits are eliminated by entry, and below-normal profits are eliminated by exit.
Elimination Principle
downward
Firm with market power faces a _____ sloping demand curve.
-It is costly to enter or exit -There is uncertainty about future prices
Firms must base their exit or entry decisions on lifetime expected profit when... (2)
sum of share of leading firms/total market size
How to calculate a concentration ratio
B
If Tom sells 500 sandwiches for $7 and has average cost of $5, what is his profit? A. $500 B. $1,000 C. $2,500 D. $3,500
increases
If output effect > price effect, the firm ____ production
reduces
If price effect > output effect, the firm _____ production
C
If the marginal cost of production at Firm 1 is less than the marginal cost of production at Firm 2, but the overall costs of production are lower on average at Firm 2, then A. Firm 2 should produce all of the output. B. Firm 1 should produce all of the output. C. Firm 1 should produce output up to the point that its marginal costs of production are equal to the marginal costs of Firm 2. D. Firm 2 should produce additional output up to the point that its average costs are less than its marginal costs.
B
If the price of the AIDS drug Combivir was driven down to marginal cost by competition A. fewer people would use Combivir. B. there would be less incentive to invest in creating the next AIDS drug. C. deadweight loss would increase. D. GlaxoSmithKline's profits would increase.
A
In Chicago's Southside (and other places) auto mechanics (who work outside the formal sector, without a business license, advertising, or even a garage) will do work for gang members without charging them. In exchange, gang members chase away other mechanics who wish to operate in the area. These auto mechanics have monopoly power; what type of source does it come from? A. barriers to entry B. hard to duplicate inputs C. innovation D. economies of scale
c
In a perfectly competitive market, each firm produces A. the same quantity. B. a potentially different quantity. C. as much quantity as possible. D. as little quantity as possible.
B
In competitive markets, the demand curve faced by the individual firm is A. equal to the market demand curve. B. perfectly elastic. C. perfectly inelastic. D. downward sloping.
B
In late November of 2010, a share of Microsoft sold for about $25 and a share of McDonald's sold for about $80. In late June of 2011, Microsoft shares were about $26 and McDonald's shares were about $85. If these two companies were the only choices available, what is your economic profit if you invest $400 in Microsoft? A. -$25 B. -$9 C. $9 D. $16
Decreasing cost industry
Industry cost ↓ with greater output, shown with a flat supply curve
*P = AC* (a compromise Profits are normal There is a deadweight loss P = MC → Optimal level of output At P = MC P < AC due to economies of scale The firm's profit is less than the normal level.)
What price should the government choose for natural monopoly? -P = MC or -P = AC
Tit-for-tat
Whatever your rival does in one round (whether renege or cooperate), you do in the following round.
zero
When P = AC, profits are _____
prisoners dilemma
When oligopolies form a cartel in hopes of reaching the monopoly outcome, they become players in a ____ _____
C
When resources move from a low-profit industry into a high profit industry A. the value of production falls. B. the profits of the low-profit industry fall and the profits of the high-profit industry rise. C. the profits of the low-profit industry rise and the profits of the high-profit industry fall. D. the Invisible Hand Property 2 is violated.
it is increasing because of diminishing marginal product
Why is the marginal cost of all firms are equal to each other
Zero profits - means at the market price the firm is covering all of its costs including enough to pay labor and capital their ordinary opportunity cost.
Why would firms remain in an industry if profits are zero?
Prisoners' dilemma
a "game" between two captured criminals that illustrates why cooperation is difficult even when it is mutually beneficial
explicit cost
a cost that requires a money outlay
monopoly
a firm with market power
Cartel
a group of firms that gets together to make output and price decisions in an oligopoly
Oligopoly
a market in which control over the supply of a commodity is in the hands of a small number of producers and each one can influence prices and affect competitors
Nash equilibrium
a situation in which economic participants interacting with one another each choose their best strategy given the strategies that all the others have chosen
Dominant strategy
a strategy that is best for a player in a game regardless of the strategies chosen by the other players
Elimination Principle
above-normal profits are eliminated by entry, and below-normal profits are eliminated by exit.
Collusion
an agreement among firms in a market about quantities to produce or prices to charge
total cost/quantity
average cost of production (AC) =
sunk costs
cost that once incurred can never be recovered
=
costs are minimized when MC1 (<,>,=) MC2
fixed costs
costs that do not vary with output
variable costs
costt that do vary with output
taking an action under uncertainty
definition of the Austrian perspective
not necessarily
does MR = MC mean the firm makes a profit?
tap water, cable tv
examples of monopoly
wheat, milk
examples of perfect competition
Barriers to entry
factors that increase the cost to new firms of entering an industry.
price
for a firm in a competitive industry, marginal revenue is equal to what?
Economies of scale
how is it possible for monopoly prices to be < competitor prices
Each industry should produce the "right" quantity.
how to minimize cost across industries
Output effect
if P > MC, increasing output raises profits
NO or False
if the question asks if something is good or bad, the answer is....
>
in a monopoly, P is _____ than MC
market price
in order to maximize profits, what price do you set?
negative
in the long run, stop producing if profits are ____
fixed costs, variable costs
in the short run produce if total profits can cover ___ and some of ____
variable costs
in the short run stop producing if total profits dont cover ____
if P > MC, increasing output raises profits
output effect
implicit cost
is a cost that does not require an outlay of money (opportunity cost)
Natural monopoly
is said to exist when a single firm can supply the entire market at a lower cost than two or more firms.
average cost
is the cost per unit of output, i.e. the total cost divided by Q
no, because profits are zero
is there incentive to either leave or enter the industry when P = AC? why or why not?
Sherman Antitrust Act (1890)
law that Forbids collusion between competitors
Clayton Antitrust Act (1914)
law that Strengthened rights of individuals damaged by anticompetitive arrangements between firms
The business-stealing externality
losses incurred by existing firms when new firms enter market
MR = ΔTR/ΔQ
marginal revenue formula
Monopolistic Competition
most common market
Domain name registration industry
name a constant cost industry, shown with a downward sloped supply curve
subway
name a natural monopoly
oil industry
name an increasing cost industry,
Perfect Competition, Monopolistic Competition, Oligopoly, Monopoly
name the four market structures
The government could buy the patent for a little more than monopoly profits ... then rip it up
patent buyout
1) Product being sold is similar across sellers. 2) There are many buyers and sellers, each small relative to the total market. 3) There are many potential sellers
perfectly elastic demand curve is a reasonable assumption under what three conditions?
What's the downside? Higher taxes - they also create DWL Difficulty in determining the right price Possible corruption
possible downsides of patent buyouts
Raising output increases market quantity, which reduces price and reduces profit on all units sold
price effect
>
profit = P (<,>,=) AC
short run: firm behavior similar to monopoly long run: entry and exit drive profit to zero
short and long run of monopolistic competition
Government ownership
solution to natural monopoly
Patents, Government regulations (other than patents), Economies of scale, Exclusive access to an important input, Technological innovation
sources of market power (5)
The product-variety externality
surplus consumers get from the introduction of new products
Economies of scale
the advantages of large-scale production that reduce AC as quantity increases.
because although both firms would be better off if both stick to the cartel agreement, each firm has incentive to renege on the agreement
why is it difficult for oligopoly firms to form cartels and honor their agreements
marginal cost
the change in total cost from producing an additional unit
marginal revenue
the change in total revenue from selling an additional unit
concentration ratio
the percentage of the market's total output supplied by its four largest firms.
short run
the period before exit or entry can occur
market power
the power to raise price above marginal cost without fear that other firms will enter the market.
Game theory
the study of how people behave in strategic situations.
long run
the time after all exit or entry has occured
fixed cost +variable cost
total cost =
Price x Quantity
total revenue = ________
accounting profit
total revenue minus explicit cost
economic profit
total revenue minus total cost including implicit cost
the mainstream perspective and the Austrian perspective
two different perspectives on entrepreneurship
patent buyout, prizes
two solutions to monopolies/patents
positive
what are the long run profits of a monopoly (pos, neg or zero)
average cost
what does profit have to be greater than to have a profit?
Prices increased and number and quality of choices increased
what happened when congress lifted caps on pay TV rates in 1979 and all cable TV in 1984
HIV medicine
what medication was discussed as a monopoly?
P = MC
what quantity should you produce to maximize profits?
when p < AC only if expected to remain like that for a while
when do you exit the market?
when firms dont have influence over the price of their product
when is an industry most competitive?
long run, enter P> AC and ext P<AC
when should you enter or exit a market?
TR > VC they are better off staying open
why would it make sense to continue running a business even if P < AC (ski resort example)
