Micro Exam 2
economies of scale
factors that cause a producer's average cost per unit to fall as output rises
average fixed cost
fixed cost divided by the quantity of output
total cost
fixed costs plus variable costs
Returns to scale
rate at which output increases as inputs are increased proportionately
market power
the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
marginal revenue
the additional income from selling one more unit of a good; sometimes equal to price
marginal product of labor
the change in output from hiring one additional unit of labor
marginal cost
the cost of producing one more unit of a good
transaction costs
the costs that parties incur in the process of agreeing to and following through on a bargain
production function
the relationship between quantity of inputs used to make a good and the quantity of output of that good
Monopoly Model Assumptions
1 firm, high price setting power, high barriers to entry, one of a kind (homogeneous), no non price competition
Sources of Market Power
1. The elasticity of market demand 2. The number of firms in the market 3. Interactions among firms
Monopolistic Competition Characteristics
1. many, small buyers and sellers 2. no barriers to entry 3. differentiated products
Cobb-Douglas production function
A Cobb-Douglas production function models the relationship between production output and production inputs (factors). It is used to calculate ratios of inputs to one another for efficient production and to estimate technological change in production methods.
profit-maximizing output
A firm's total profit is maximized by producing the level of output at which marginal revenue for the last unit produced equals its marginal cost, or MR = MC. In a perfectly competitive market, MR is equal to the market price P for all levels of output.
Isocosts
A line that represents the combinations of inputs that will cost the producer the same amount of money.
A firm produces two goods, Q1 and Q2. For economies of scope to occur, it must be TRUE that: A. TC(Q1,0) + TC(0,Q2) > TC(Q1,Q2). B. TC(Q1,0) + TC(0,Q2) < TC(Q1,Q2). C. [[TC(Q11,0)+TC(Q1,Q2)]−TC(Q1,Q2)]/[TC(Q1,Q2)]<0 D. (TC(Q11,0) + TC(0,Q12))/(TC(Q11, Q12)) < 1.
A. TC(Q1,0) + TC(0,Q2) > TC(Q1,Q2).
(Figure: Capital and Labor IX) The movement of the isocost line is caused by a(n): A. decrease in the wage rate. B. increase in the wage rate or rental rate of capital. C. increase in the wage rate. D. decrease in the rental rate of capital.
A. decrease in the wage rate.
(Figure: Monopoly and Perfect Price Discrimination I) Producer surplus under monopoly and under perfect price discrimination are _____ and _____, respectively. A. $16; $32 B. $24; $48 C. $8; $12 D. $32; $12
A. $16; $32
A movie theater faces the following hourly inverse demand curves: Seniors: Ps = 12 - 0.5Q Adults: Pa = 19 - Q The marginal cost is constant at $1. If the movie theater uses segmenting, the ticket price charged to adults is $____. A. 10 B. 9 C. 8.50 D. 6.50
A. 10
A fixed cost: A. does not change with the level of the firm's output. B. is associated with the firm's variable inputs. C. decreases as the firm increases output. D. captures the wear and tear of using capital in production.
A. does not change with the level of the firm's output.
Isoquant vs isocost
An isoquant shows all combination of factors that produce a certain output. An isocost show all combinations of factors that cost the same amount. Isocosts and isoquants can show the optimal combination of factors of production to produce the maximum output at minimum cost.
What returns to scale does the production function Q=KL exhibit? A. Constant returns to scale B. Increasing returns to scale C. Decreasing returns to scale D. No returns to scale
B. Increasing returns to scale
If TC = 1,500 + 7.5Q + Q2, the cost function for AVC is AVC = ____. A. 1,500/Q B. 7.5 + Q C. 1,500/Q + 7.5 + Q D. Q
B. 7.5 + Q
To produce a banh mi sandwich, a firm needs labour and ingredients. The ingredients for each sandwich cost $3, while labor costs $20 per hour. What is the marginal cost of a sandwich that takes 3 minutes to produce? A. $3 B. $4 C. $5 D. $6
B. $4
Selma rents a food truck for $200 per day. When increasing production from 99 to 100 tacos, her costs increase from $496 to $500. This means the marginal cost of the 100th taco is _______ and her average total costs are _______ . A. $4; increasing B. $4; decreasing C. $5; increasing D. $5; decreasing
B. $4; decreasing
Mingyi was offered a job paying $90,000 for the year. Instead, he started a consulting business. He paid himself $80,000, paid $15,000 for advertisements and received $100,000 in revenue. Mingyi's business had an accounting profit of _______ and an economic profit of _______ . A. -$5,000; +$5,000 B. +$5,000; -$5,000 C. +$5,000; +$5,000 D. +$85,000; +$85,000
B. +$5,000; -$5,000
According to Hayek, economists use the perfectly competitive market model to judge the effectiveness of ________. A. Monetary policy B. Competition in real life C. Fiscal policy D. Economic theory
B. Competition in real life
A basic assumption of the long run is that a firm: A. cannot change the amount of labor or capital that it employs. B. can change the amount of labor and capital that it employs. C. can change the amount of capital that it employs but not the amount of labor. D. cannot change the amount of capital that it employs but can change the amount of labor.
B. can change the amount of labor and capital that it employs.
Demesetz (1968) defines a natural monopoly as __________. A. having extreme economies of scale, restricting output and setting prices above their marginal cost, with that markup being unconstrained. B. having extreme economies of scale, restricting output and setting prices above their marginal cost, with that markup being constrained by the demand curve. C. having extreme diseconomies of scale, restricting output and setting prices above their marginal cost, with that markup being constrained by the demand curve. D. having extreme diseconomies of scale, restricting output and setting prices ab
B. having extreme economies of scale, restricting output and setting prices above their marginal cost, with that markup being constrained by the demand curve.
In which of the following situations are costs sunk? A drug company spends $20 million to test the effectiveness of a new replacement drug for insulin, only to find out it is ineffective. AB-Inbev spends $15 million to develop and advertise a new mango-wheat beer that few people enjoy. A Kansas farmer wants to open a winery; she spends $600,000 to buy farmland only to discover that the weather is too extreme to grow finicky grapes. She can resell the land to a wheat farmer for $600,000. Lockton, a risk-management company, pays a $10,000 signing bonus to a new employee who turns out to be unreliable. You purchase a $150 resaleable ticket to a nighttime concert, only to have an instructor surprise you with a demanding assignment due the same evening. A. 1 and 2 B. 3 and 5 C. 1, 2 and 4 D. All of the above
C. 1, 2 and 4
(Figure: Capital and Labor VI) Suppose a firm spends $4,000 per day producing a good. The wage rate per worker is $200 per day, and the rental rate per unit of capital is $500 per day. The firm's isocost line at the current expenditure level is represented by: A. C1. B. C2. C. C3. D. C4.
C. C3.
A drug company produces a new drug to treat baldness. The inverse demand curve for the drug is P = 205 - 20Q, where Q measures the number of pills in millions. The various costs of production are given by TC = 100 + 5Q, ATC = 5 + 100/Q, and MC = 5. If the government grants this firm a patent, it will earn profits of _____. If the government revokes the patent, and the firm must sell its drug at marginal cost because of competition, it will earn profits or losses of _____. A. $600 million; $500,000 B. $2 billion; $0 C. $400 million; -$100 million D. $70 million; -$25 million
C. $400 million; -$100 million
Given a total cost equation of C=10K+5L, what is the rental price of capital? A. 0 B. 5 C. 10 D. 15
C. 10
According to Coase (1937), what is the distinguishing mark of the firm? A. Exploitation B. The utilization of the price mechanism C. The suppression of the price mechanism D. Production
C. The suppression of the price mechanism
If the taqueria's monthly rent increases from $4,000 to $5,000 per month, its marginal cost curve _______ while the average total cost curve _______ . A. shifts up; shifts up B. shifts up; does not shift C. does not shift; shifts up D. does not shift; does not shift
C. does not shift; shifts up
When producing 1000 units, the firm's variable costs are $10,000. If producing an additional unit increases costs by $15, then producing this addition unit _______ average variable cost and _______ average total cost. A. increases; increases B. increases; decreases C. increases; may increase or decrease D. decreases; increases E. decreases; decreases
C. increases; may increase or decrease
As firms enter a monopolistically competitive industry, the existing firms' demand curves will: A. remain unchanged. B. shift outward and become more inelastic. C. shift inward and become more elastic. D. shift outward and become more elastic.
C. shift inward and become more elastic.
Demsetz (1968) argues that __________. A. the economic theory of monopoly provides the justification and foundation for regulating monopolies. B. if a firm has extreme economies of scale, they will dominate a market, such as utilities, and charge monopoly prices for utility services. C. the market dominance of a single firm due to extreme economies of scale does not imply that they will engage in monopoly pricing. D. if there is a single firm serving a market, then they will engage in monopoly pricing.
C. the market dominance of a single firm due to extreme economies of scale does not imply that they will engage in monopoly pricing.
Ch 10: Pricing Strategies for Firms with Market Power
Chapter 10 of Microeconomics, Third Edition by Austan Goolsbee is titled "Pricing Strategies for Firms with Market Power." The chapter begins by discussing the importance of pricing strategies for firms with market power, including monopolies and firms in monopolistically competitive markets. The chapter covers the concept of price discrimination, where a firm charges different prices to different customers based on their willingness to pay. It discusses the different types of price discrimination, including first-degree, second-degree, and third-degree price discrimination. It also covers the conditions necessary for price discrimination to be successful. The chapter then explores the concept of bundling, where a firm sells multiple products together as a package. It covers the potential benefits and drawbacks of bundling and discusses the different types of bundling, including pure bundling, mixed bundling, and tying. The chapter also covers the concept of two-part pricing, where a firm charges a fixed fee in addition to a per-unit price. It discusses the conditions necessary for two-part pricing to be successful and the potential benefits for firms and consumers. The chapter ends with a discussion of dynamic pricing, where a firm adjusts prices based on changes in market conditions. It covers the different types of dynamic pricing, including peak-load pricing and yield management, and the potential benefits for firms and consumers. Overall, Chapter 10 provides a comprehensive overview of pricing strategies for firms with market power. It covers the concept of price discrimination, bundling, two-part pricing, and dynamic pricing. It also discusses the potential benefits and drawbacks of each strategy and the conditions necessary for their success.
11.7 Monopolistic Competition
Chapter 11.7 of Microeconomics, Third Edition by Austan Goolsbee is titled "Monopolistic Competition." The chapter focuses on the concept of monopolistic competition, which occurs when many firms produce differentiated products and have some market power. The chapter begins by discussing the characteristics of monopolistic competition, including product differentiation, relatively low barriers to entry, and the presence of excess capacity. It also covers the concept of the demand curve facing a monopolistically competitive firm, which is downward-sloping but not perfectly elastic. The chapter then explores the behavior of monopolistically competitive firms, including how they set prices and output levels to maximize profits. It covers the concept of marginal revenue and how it differs from the price in a monopolistically competitive market. It also discusses the potential for advertising to increase demand for a firm's product. The chapter then discusses the potential benefits and drawbacks of monopolistic competition. It covers the potential benefits for consumers, including product variety and innovation, as well as the potential drawbacks, including higher prices and reduced efficiency. The chapter ends with a discussion of the long-run equilibrium in a monopolistically competitive market. It covers the concept of zero economic profit, where firms are earning only normal profit. It also discusses the potential for firms to exit the market in the long run if they are unable to earn a profit. Overall, Chapter 11.7 provides a comprehensive overview of monopolistic competition. It covers the characteristics of a monopolistically competitive market, the behavior of firms in such a market, and the potential benefits and drawbacks for consumers. It also discusses the long-run equilibrium in a monopolistically competitive market.
Chapter 6: Producer Behaviour
Chapter 6 of Microeconomics, Third Edition by Austan Goolsbee is titled "Production and Cost Analysis." The chapter begins by introducing the concept of production, the production function, and how the law of diminishing returns affects the marginal product of labor. The chapter then moves on to discuss how firms make decisions about production and pricing, based on the costs and revenues associated with production. The chapter covers the concept of marginal cost and how it changes with the quantity of output produced. It also introduces the idea of fixed and variable costs and how they affect a firm's total costs. The concept of average total cost is also discussed. The chapter then moves on to explore the short-run versus the long-run production decision-making process. The short-run decision-making process involves varying only one input while holding all others constant. In contrast, the long-run decision-making process allows firms to vary all inputs. The chapter also discusses the factors that influence a firm's costs, such as the price of inputs, technological advancements, and economies of scale. It covers the economies of scale in detail, explaining how they arise and the different types of economies of scale. The chapter ends with a discussion of the supply curve and how changes in production costs can affect the supply curve. It explains the relationship between the firm's cost curves and the market supply curve. Overall, Chapter 6 provides a comprehensive overview of the production and cost analysis, and the factors that affect a firm's production decisions.
Assume a monopolist can prevent resale of its product and that it has complete information about each of its customers. Although each customer has a different demand curve, the seller can identify each customer's demand curve before a purchase takes place. It faces the inverse market demand of P = 10 - Q, with constant marginal costs of MC = 2 . The consumer surplus at the profit-maximizing result is $____. A. 32 B. 16 C. 8 D. 0
D. 0
Assume a monopolist can prevent resale of its product and that it has complete information about each of its customers. Although each customer has a different demand curve, the seller can identify each customer's demand curve before a purchase takes place. It faces the inverse market demand of P = 160 - 10Q, with marginal cost of MC = 10 + 5Q. The deadweight loss at the profit-maximizing result is $____. A. 500 B. 400 C. 200 D. 0
D. 0
A firm's demand curve is Q = 2 - 0.01P, where Q is measured in millions. The firm's output, when marginal revenue is equal to zero, is ____million. A. 2 B. 1.5 C. 1.25 D. 1
D. 1
Ch 7: Costs
Chapter 7 of Microeconomics, Third Edition by Austan Goolsbee is titled "The Costs of Production." The chapter begins by introducing the concept of economic profit, which takes into account both explicit costs (such as wages, rent, and supplies) and implicit costs (such as the opportunity cost of the owner's time). The chapter then moves on to discuss the various costs associated with production, including fixed costs, variable costs, total costs, and marginal costs. The chapter covers the concept of the short-run and long-run average total cost curves and their shapes. It also introduces the idea of diseconomies of scale, where the cost per unit of production increases as the scale of production increases. The chapter then explores the relationship between costs and supply in the market. It discusses the effects of changes in production costs on the supply curve and how the entry and exit of firms in a market can affect market supply. The chapter ends with a discussion of cost estimation and the importance of understanding a firm's cost structure in making business decisions. It covers different cost estimation methods, including engineering estimates, accountants' estimates, and econometric estimates. Overall, Chapter 7 provides a comprehensive overview of the costs of production and their role in determining a firm's profitability and supply decisions. It highlights the importance of understanding a firm's cost structure in making business decisions, and the relationship between production costs and the supply curve in the market.
Ch 8: Supply in a Competitive Market
Chapter 8 of Microeconomics, Third Edition by Austan Goolsbee is titled "Supply in a Competitive Market." The chapter begins by defining a competitive market and discussing the characteristics of such a market. It then introduces the concept of market supply and how it is determined by the individual decisions of firms in the market. The chapter covers the concept of producer surplus, which is the difference between the price a producer receives for a product and the minimum price at which the producer is willing to sell that product. It also introduces the idea of the supply curve and how it is derived from the individual firm's marginal cost curves. The chapter then explores the factors that can shift the supply curve, such as changes in input prices, technological advancements, and changes in government policies. It also discusses the effects of taxes and subsidies on the supply curve. The chapter ends with a discussion of market equilibrium, where the market demand and supply curves intersect. It explains how changes in demand and supply can affect the equilibrium price and quantity in the market. Overall, Chapter 8 provides a comprehensive overview of the determination of market supply in a competitive market. It covers the concept of producer surplus, the supply curve, and the factors that can shift it. It also discusses the effects of taxes and subsidies on the supply curve, and the concept of market equilibrium.
Ch 9: Market Power and Monopoly
Chapter 9 of Microeconomics, Third Edition by Austan Goolsbee is titled "Market Power and Monopoly." The chapter begins by defining the concept of market power and how it differs from a competitive market. It then introduces the concept of monopoly, which occurs when a single firm dominates the market. The chapter covers the sources of market power, including economies of scale, control over a crucial input, and barriers to entry. It also discusses the potential negative effects of market power, such as higher prices, reduced output, and reduced innovation. The chapter then explores the behavior of monopolies, including how they set prices and output levels to maximize profits. It covers the concept of marginal revenue and how it differs from the price in a monopoly market. It also discusses the potential for price discrimination, where a firm charges different prices to different consumers based on their willingness to pay. The chapter then discusses the government's role in regulating monopolies, including antitrust laws and price regulation. It also covers the concept of natural monopolies, where a single firm can produce at a lower cost than multiple firms in the same market. The chapter ends with a discussion of monopolistic competition, which occurs when many firms compete in a market but have some market power due to product differentiation. It covers the concept of excess capacity and how it differs from a monopoly market. Overall, Chapter 9 provides a comprehensive overview of market power and monopoly. It covers the sources and potential negative effects of market power, the behavior of monopolies, government regulation of monopolies, and the concept of monopolistic competition.
fixed costs
Costs that do not vary with the quantity of output produced
(Figure: Market for Wine Gift Baskets I) Zinfandelic, which sells wine gift baskets, faces the demand curve and marginal cost curve depicted in the graph. The profit-maximizing quantity for Zinfandelic is ____, and the price they charge is ____. A. 50, $20 B. 40, $40 C. 30, $60 D. 25, $70
D. 25, $70
Which of the following are sources of market power? government-issued patents and copyrights a Minnesota law requiring all new funeral homes to have an embalming room, which costs upward of $30,000, whether or not it is functional or will be used a Portland, Oregon law that makes it a crime for limousine companies to charge less than $50 per ride Aluminum Company of America owns almost all sources of ore (bauxite) needed to produce aluminum A. 4 B. 1, 2, and 3 C. 2 and 3 D. 1, 2, 3 and 4
D. 1, 2, 3 and 4
n a monopolistically competitive industry, which of the following statements is TRUE? Firms produce identical products. There are significant barriers to entry. Firms consider the production decisions of their rivals when setting output levels. Firms act like monopolies by producing where marginal revenue equals marginal cost. A. 1, 2, and 3 B. 1 and 3 C. 2 D. 4
D. 4
variable costs
costs that vary with the quantity of output produced
Hayek (1996) concludes by defining competition as ________. A. A state in which market data is constant. B. The absence of market adjustment C. The condition wherein firms receive zero profit. D. A process of the formation of opinion.
D. A process of the formation of opinion.
Which of the following is NOT one of the implications that emerge from the choice-bound conception of cost that Buchanan (1969) develops? A. Costs can only be borne by the chooser. B. Costs are subjective. C. Costs exist at the moment of choice. D. Costs can be measured by someone other than the chooser.
D. Costs can be measured by someone other than the chooser.
Price discrimination is motivated by a firm's desire to: A. Penalize customers they do not like. B. Reduce the deadweight loss attributable to monopoly pricing. C. Affect social justice through long-run sustainable pricing strategies that benefit all community stakeholder. D. Increase producer surplus.
D. Increase producer surplus.
Anvi runs a coffee shop that has annual revenues of $300,000, supply costs of $60,000, and employee salaries of $60,000. She has the option of renting out the coffee shop for $80,000 per year, and she has three outside offers from competitors to work as a senior barista at Starbucks (for an annual salary of $30,000), at Simon's coffee house (for an annual salary of $40,000), and at Peet's coffee shop (for an annual salary of $60,000). She can only hold one job at a time. What should Anvi do to minimize her opportunity costs? A. She should rent out her coffee shop and take the job at Starbucks. B. She should rent out her coffee shop and take the job at Simon's. C. She should rent out her coffee shop and take the job at Peet's. D. She should continue to run her coffee shop.
D. She should continue to run her coffee shop.
According to Buchahan (1969), in the theory of choice, cost only exists before someone makes a choice. True False
False
According to Buchanan, uncertainty ensures that the evaluation of available alternatives by the chooser is the same as that of any external observer. True False
False
According to Hayek, the perfectly competitive model assumes away the essential characteristics of competition, which is inherently a static process. True False
False
Demesetz (1968) argues that the theory of natural monopoly provides a firm logic for why firms enjoying extreme economies of scale will charge monopoly prices. True False
False
In order to minimize their costs, producers will choose the bundle of inputs where (W/R) = (MPK/MPL). True False
False
Buchanan (1969) Cost and Choice
In "Cost and Choice," James Buchanan argues that the theory of economics should be focused on the study of decision-making processes rather than on the allocation of resources. He proposes that individuals have a subjective understanding of their preferences and make choices based on their subjective evaluation of the costs and benefits of each option. Buchanan emphasizes that costs are not just monetary expenses, but also include the opportunity costs of choosing one option over another. He also highlights the importance of understanding the institutional framework in which decision-making takes place, including the role of social norms, customs, and legal systems. Ultimately, Buchanan's analysis provides a framework for understanding how individuals make decisions and how institutions shape those decisions, which has significant implications for policy-making and economic theory.
Hayek (1996) The Meaning of Competition
In "The Meaning of Competition," Friedrich Hayek argues that competition is a process that enables individuals to discover and utilize dispersed knowledge in society, which is necessary for the efficient allocation of resources. He contends that competition is not just a rivalry among firms, but also a discovery process that enables individuals to learn from one another and adapt to changing circumstances. Hayek emphasizes that competition is not just limited to the market, but also exists in other spheres of life, such as science and politics. He also highlights the importance of institutions, such as property rights and the rule of law, in creating an environment that encourages competition and innovation. Ultimately, Hayek's analysis provides a framework for understanding the role of competition in economic and social life, and the importance of institutions in enabling individuals to engage in productive competition.
Coase (1937) - The Nature of the Firm
In "The Nature of the Firm," Ronald Coase argues that firms exist because it is more efficient to organize production under a single entity than through market transactions between individuals. He asserts that transaction costs, such as the costs of searching for suppliers and negotiating contracts, make the coordination of economic activity within a firm more efficient than through the price mechanism of the market. Coase also proposes that the size and boundaries of firms are determined by the costs of organizing production internally versus contracting out to external suppliers. Ultimately, his analysis provides a framework for understanding the role and structure of firms in the economy.
Demsetz (1968) Why regulate utilities?
In "Why Regulate Utilities?", Harold Demsetz challenges the conventional wisdom that government regulation is necessary to ensure that utility companies provide services at reasonable prices. He argues that the potential for competition among utilities and the ability of consumers to choose between different providers can serve as a check on the prices charged by utilities. Demsetz contends that government regulation often leads to inefficiencies, such as reduced incentives for innovation and a lack of responsiveness to changing consumer preferences. He proposes that instead of relying on regulation, policymakers should focus on creating an environment that encourages competition and enables consumers to make informed choices. Demsetz's analysis provides a framework for understanding the trade-offs between regulation and competition in the provision of utility services, and highlights the potential benefits of market-based solutions.
Costs in The Long Run vs. The Short Run
In long run cost, all the factors of production are variable, whereas, in the short run cost, at least one factor of production is fixed.
Perfectly competitive model
Perfectly competitive markets must have the following characteristics: No barriers to entry and exit, no market influencers, homogeneous products, and complete product transparency
Meaning of lambda in producer optimization problems
The Lagrange multiplier, λ, measures the increase in the objective function (f(x, y) that is obtained through a marginal relaxation in the constraint (an increase in k).
shut down point
The point where the price of a good or service is equal to the minimum point on the average variable cost curve.
According to Buchanan (1969), in predictive theory, cost is the market value of the alternative product the producer could make, and that market value is reflected in the market prices. True False
True
According to Buchanan (1969), opportunity cost refers to a person's evaluation of the opportunities they sacrifice as a result of their choice. True False
True
According to Coase (1937), economists treat the entrepreneur as a coordinating instrument like the price mechanism. True False
True
According to Coase (1937), firms arise when the costs of allowing an entrepreneur to direct the use of productive resources are less than the costs of allowing the price mechanism to direct the use of those resources. True False
True
According to Coase (1937), firms will grow until the cost of organizing an additional transaction within the firm equals the cost of organizing that transaction in the market. True False
True
According to Coase (1937), the most obvious cost of organizing production through the price mechanism is discovering what the relevant prices are. True False
True
According to Hayek, 'perfect competition' means the absence of all competitive activities. True False
True
According to Hayek, the real economic problem is to identify what institutional arrangements are necessary to ensure that as much of the available knowledge as possible is used. True False
True
Coase (1937) defines a firm as a system of relationships in which the direction of resources is dependent on an entrepreneur rather than the price mechanism. True False
True
Demsetz (1968) argues that economic theory provides no foundation for the conclusion that markets with a single firm will be characterized by monopoly pricing. True False
True
Demsetz (1968) suggests that potential competition is enough to constrain a natural monopoly from engaging in monopoly pricing. True False
True
Hayek (1996) argues that imperfect competition arises from heterogeneity in goods, and is thus unavoidable in most markets. True False
True
sunk cost
a cost that has already been committed and cannot be recovered
cost minimization
a firm's goal of producing a specific quantity of output at minimum cost
natural monopoly
a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms
barriers to entry
business practices or conditions that make it difficult for new firms to enter the market
Isoquants
curve showing all possible combinations of inputs that yield the same output
perfect price discrimination
takes place when a monopolist charges each consumer his or her willingness to pay—the maximum that the consumer is willing to pay
Marginal product of capital
the increase in output caused by the addition of one more unit of capital. The marginal product of capital diminishes as more and more capital is added
opportunity cost
the most desirable alternative given up as the result of a decision
relative price
the price of one good in comparison with the price of other goods
average total cost
total cost divided by the quantity of output
economic profit
total revenue minus total cost, including both explicit and implicit costs
accounting profit
total revenue minus total explicit cost
average variable cost
variable cost divided by the quantity of output
economies of scope
when its cheaper to produce a range of products rather than specialise in a very limited number.