exam 3
Before the coronavirus pandemic, Sergio's Sweaters was making an economic profit of $1,000 per week. The local government has not required the firm to close. However, due to the pandemic the firm's weekly revenue has temporarily decreased by $900 and variable costs have increased by $200 per week. If the goal of Sergio's Sweaters is to maximize profit, you predict that the firm will
theres not enough info to say
_____________ is calculated by taking the quantity of everything that is sold and multiplying it by the sale price.
total revenue
A museum can distinguish between residents of the city where the museum is located and visitors from outside of the city. Through market research the museum finds that the price elasticity of demand for people from the city is .7 and the elasticity of demand for people visiting the city is .5. If the museum maximizes profit, which group will pay the highest price for admission?
visitors from outside the city
When would a firm wish to enter a market?
when it believes it will make a positive economic profit
The world market for crude oil is characterized by a few firms that produce an identical product. Some large producers can impact the world price of oil. Which type of model discussed in this class would be most useful in understanding interactions between firms in this market.
Oligopoly
What type of model would be most useful for studying the result of a merger between two cellphone providers where before the merger there where 4 main providers?
Oligopoly
In a long-run equilibrium with free entry,
P = ATC
What two lines on a cost curve diagram intersect at the shutdown point?
average variable cost and marginal revenue
Why can a monopolist make profits in the long run?
barriers to entry
patents are examples of
barriers to entry
which best describes how a consumer makes an optimal decision?
choose the optimal combo of goods subject to a budget constraint
Which of the following is not needed for group pricing to be a profitable price discrimination strategy?
economies of scale
The marginal revenue for a firm in perfect competition is increasing in the level of output.
false
Profit maximizing firms have an average total cost of $50. The price is currently $55. What do you predict will happen in the long-run if there if free entry and exit?
firms will enter, and the price will decrease
what prevents a perfectly competitive firm from seeking higher profits by increasing the price that it charges?
if a perfectly competitive firm tries to increase prices, all of its customers will simply switch to another seller
How does the average cost curve help to show whether a firm is making profits or losses?
if the average cost curve is below the marginal revenue curve, or the price, at the selected level of output, the firm will make profits
A firms in a competitive market finds that its marginal cost is increasing, but marginal cost is still below the market price. What should the firm do to maximize profit?
increase output
Oligopoly firms would like to coordinate to keep prices high. However, if one firm believes that other firms will keep the agreement, that firm would be tempted to
increase output to take advantage of high prices
An decrease in demand results in a short term decrease in the price, and in the long-run, the price is lower than before the decrease in demand. What type of industry is this?
increasing cost
What can we infer about a market in which whenever demand permanently increases price is higher in the long-run?
it is an increasing cost industry
The rush hour traffic game is played among people traveling home to a suburb from a big city during rush hour. There are two routes which are the actions that each player receives. Players only care about the time spent traveling. So each player's payoff is higher if they spend less time traveling. What would be true if the players of this game are playing a Nash Equilibrium?
no single player could get home any faster by choosing another route
what is a "price taker" firm?
one that cannot influence price in a market
A monopolist finds that at the current level of output, the marginal revenue is $20 and the marginal cost is $30. What can the monopolist do to increase profit?
reduce output and increase price
Saudi Arabia and Russia are two countries where the state controls much of the oil production. If these countries attempt to collude they will agree to
reduce output in order to keep prices high
Suppose a government has the ability to create barriers that can preserve the market power of individual firms. Firms would then have the incentive to lobby or bribe government official to create such barriers. The spending that goes into influencing the government in this way is referred to as
rent seeking
Which industry characteristic would make it easier for firms to collude/cooperate?
repeated interaction between firms
A single firm in a perfectly competitive market is relatively small compared to the rest of the market. What does this mean? How "small" is "small"?
small means the firm has no ability to influence price and must take the market price as given
What two lines on a cost curve diagram intersect at the zero-profit point?
the average cost curve and the marginal revenue curve
A firm who wishes to maximize profit should shut down if
there is no quantity at which the price exceeds the average variable cost.
Since a perfectly competitive firm can sell as much as it wishes at the market price, why can the firm not simply increase its profits by selling an extremely high quantity?
Because rising marginal and average costs and diseconomies of scale eventually make expanding production unprofitable
A college football team would like to price discriminate by charging a different price to students. What would make this price discrimination more successful? Select all that apply.
-ability to prevent students from selling tickets to others -market power -info about the demand of students and others -ability to distinguish who is a student and who is not
Which of the following is a barrier to entry?
-large economies of scale -patent protection -government restriction on entry
An industry consists of 6 firms. Two larger firms have 30% market share each. The remaining firms have 10% market share. What is the HHI of this industry?
2,200
Sasha is a rational consumer that is behaving optimally when he buys candy and movie tickets. When he buys 9 movie tickets at $10 each, his marginal utility is 100 utils per dollar spent if the price of candy is $5, what is the marginal utility he is getting from the last bag of candy he purchased?
500 utils
which does not describe decision making based on marginal analysis?
An individual comparing the average utility they receive from all units of consumption against the average cost of all units of consumption.
In the Whole Foods and Wild Oats merger, those in favor of the merger argued that the relevant market for identifying competition included grocery stores that sell organic food. Those opposed to the merger argued that the relevant market was stores that sell primarily premium organic food. This disagreement illustrates one of the weaknesses of one of the following approaches to analyzing mergers. Which approach does the weakness apply most to?
Approaches that rely on measures of market concentration
How does the average variable cost curve help a firm know whether it should shut down immediately?
If the entire average variable costs curve is higher than the price, then there is no output capable of producing profits and the firm should shut down
A monopolist that charges the same price to all consumers will produce at a level where there are some consumer who would not pay the price the Monopolist is charging. Some of those consumers would be willing to pay more than what it costs the firm to produce more. Why doesn't the monopolist sell to those consumer?
In order to sell more, the monopolist would be reducing the price paid by everyone.
A small for-profit university has 8,000 students. The average cost to the university of accommodating a student is $17,000. The university may admit 10 more students who will pay $25,000 in tuition. If they do admit the students, the average cost per student will increase to $17,010. Will admitting the students increase the school's profit?
No revenue will grow by $250,000 and cost will increase by $17,010*10+$10*8,000=$250,100.
Your company operates in a perfectly competitive market. You have been told that advertising can help you increase your sales in the short run. Would you create an aggressive advertising campaign for your product?
No, because your product is identical to every other product in the market, and customers know this, since they have perfect information. Advertising will not help.
Should a firm shut down immediately if it is making losses?
No. The firm should shut down only if its revenues are not able to cover its variable costs. If it is able to cover its variable costs, and perhaps some of its fixed costs, it should stay open in the short run.
There is an increasing cost industry. What will be the short-run and long-run effect of an increase in demand on the market price in that industry?
Price will be higher in the short-run and long-run, but the long-run increase will be smaller than the short-run increase.
The Federal Trade Commission (FTC) is reviewing a merger between two health food stores. The FTC is most concerned about the effect that the merger will have on consumers of health food. Which of the following evidence would likely be most helpful for the FTC to decide whether the merger will negatively impact consumers?
Pricing data that shows how the prices change when the two firms compete in a local market.
Briefly explain the reason for the shape of a marginal revenue curve for a perfectly competitive firm
The marginal revenue curve is flat for a perfectly competitive firm, because it cannot influence prices by changing the level of output
The AAA Aquarium Co. sells aquariums for $20 each. Fixed costs of production are $20. The total variable costs are $20 for one aquarium, $25 for two units, $35 for the three units, $50 for four units, and $80 for five units. In the form of a table, calculate total revenue, marginal revenue, total cost, and marginal cost for each output level (one to five units). What is the profit-maximizing quantity of output? On one diagram, sketch the total revenue and total cost curves. On another diagram, sketch the marginal revenue and marginal cost curves.
The profit maximizing level of output is 4 aquariums, with a profit of $10. Producing more or less than this amount results in lower profits.
Perfectly competitive firm Doggies Paradise Inc. sells winter coats for dogs. Dog coats sell for $72 each. The fixed costs of production are $100. The total variable costs are $64 for one unit, $84 for two units, $114 for three units, $184 for four units, and $270 for five units. In the form of a table, calculate total revenue, marginal revenue, total cost and marginal cost for each output level (one to five units). On one diagram, sketch the total revenue and total cost curves. On another diagram, sketch the marginal revenue and marginal cost curves. What is the profit maximizing quantity?
The profit maximizing level of output is 4 coats, with a profit of $4. Producing more or less than this amount results in lower profits.
The firm receives an order from a customer who would pay $45,000. The finance department says that this order would increase the firm's costs by $35,000. What would be in the best interest of a firm that is primarily concerned with financial gain?
accept the order
