Micro Final

increasing cost industry

LRSC is upward sloping the prices of some of all inputs increase as the industry expands and the demand for input grows diseconomies of scale for one or more inputs

low elasticity of supply

MC increases rapidly due to increase in output

high elasticity of supply

MC increases slowly in response to increase in output

perfectly elastic supply

MC is constant

if VC=bq

MC is constant and equal to b

Cost Output Elasticity, Ec

MC/AC Ec<1= economies of scale Ec>1= diseconomies of scale

ATC is minimized where

MC=ATC

MRTS of 3 means

MPL is 3 times MPK

MRTS=

MPL/MPK derivative w respect to L over derivative w respect to k

expressions for cost minimizing combinations of inputs

MPL/w=MPK/r MRTS=w/r MPL/MPK=w/r

licensing tax will have no effect on a firms

MR or MC

along the perfectly competitive demand curve:

MR=AR=P

to find profit maximizing output for monopoly

MR=MC

rule of thumb for pricing monopoly

MR=P + P(1/Ed) or P= MC/1+(1/Ed)

in the short run if a perfectly competitive firm has not shut down...

it is operating on the upward-sloping portion of its AVC curve

the demand curve facing a perfectly competitive firm is the same as

its AR and MR curves

if a competitive firm's MC curve is U-shaped...

its short-run supply curve is the upward sloping portion of the MC curve that lies above the short run AVC curve

producer surplus with high cost firms

less PS

a firms MC curve does not depend on

level of fixed costs

VC=23+Q+7Q^2 implies an MC curve that is

linear

if cost of producing each unit falls, market price will also fall in the

long-run

a tax imposed on monopoly increases

marginal cost by the amount of the tax (and total cost)

if MC is rising and AVC is falling as output increases...

marginal cost is below AVC

a firm maximizes profit by operating at the level of output where

marginal revenue equals marginal cost

for a competitive firm, market price is determined by

marker demand and supply curves -the amount of output for an individual firm has no effect

average revenue= the monopolist

market demand curve

for monopolist if MC=0...

maximizing profit is equivalent to maximizing revenue, when Ed=-1

for economies and diseconomies of scale on graph:

minimum points of SRAC curves do not lie on LRAC curves

producer surplus with lower cost firms

more PS

whenever a firm's ATC costs are rising as output rises, AVC...

must be rising too

effect of excise tax on monopolist

new optimal production where MR=MC+t change in price can be larger than tax

why does monopolist market have no supply curve

no one-to-one relationship between price and quantity

a firm never operates

on the downward sloping portion of its AVC curve

In the short run, a perfectly competitive firm earning positive economic profit is

on the upward-sloping portion of its ATC

the demand curve facing a perfectly competitive firm is

perfectly horizontal

for a monopolist, if MR=MC=AR, economic profit must be

positive

for a monopolist, at every output level, AR is equal to

price

for monopolist, shifts in demand can change

price and/or output

effect of output tax on the industry

raises market price and decreases total output

to find output that maximizes consumer surplus and producer surplus for monopoly

set inverse demand function=MC

how to find equilibrium output rate and price

set market demand to market supply

increase in demand for a good raises the market price in the...

short-run

isocost line

shows all of the input combinations that yield the same cost

only way a firm can eliminate its fixed costs

shutting down

negative economic profit

signals you are earning less than the normal rate of return (below average), and you are not covering your opportunity cost. -firm should consider going out of business

decreasing returns to scale

situation in which output less than doubles when all inputs are doubled

increasing returns to scale

situation in which output more than doubles when all inputs are doubled

market supply curve

sum of each firms individual supply curves

if the market price for a competitive firm's output doubles, then

the MR doubles

if the perfectly competitive firm is earning negative economic profit it is operating on...

the downward sloping portion of the ATC curve

VC=52+2Q+3Q^2 implies an MC curve that is

upward sloping

if capital and labor are perfect substitutes but labor is cheaper,

use only labor in production process

consumer surplus=

variable cost?

MC=

w/MPL

constant returns to scale

when long-run average total cost is constant as output increases

If the firm's current output is two unites less than the profit-maximizing output, then the next unit produced

will increase revenue more than it increases cost

for monopoly you should always raise price if

you face inelastic demand

in competitive markets in the long run economic profit is

zero no incentive to enter or exit

when input costs are increased...

-MC increases -lower output -lower profit

Long-run average cost curve

-U-shaped because of increasing and decreasing returns to scale

a price taker is

-a perfectly competitive firm -a firm that cannot influence the market price

to find expansion path:

-find MRTS -set equal to w/r -isolate and solve for K

for competitive firms when there is an increase in market price

-firms increase quantities produced -increases firms total profit and makes additional production profitable

to use expansion path and budget to find K and L:

-set budget equal to cost function -plug in expansion path for K -solve for L -substitute to solve for K -plug in L and K into production function to find Q

to find MR for monopoly

-take inverse demand function -same intercept double the slope

decreasing cost industry

LRSC is downward sloping industry takes advantage of its size to obtain inputs for cheaper

every linear supply curve from origin has a price elasticity=

1

3 conditions for long-run competitive equillibrium

1. all firms in the industry are maximizing profit 2. zero economic profit, no incentive for entry or exit 3. price of product is such that Q supplied= Q demanded

three assumptions of perfectly competitive markets

1. price takers 2. product homogeneity 3. free entry and exit

why do short-run supply curves for perfectly competitive firms tend to be upward sloping

1. there is diminishing marginal product for one or more variables 2. marginal costs increase as output increases

zero economic profit

A firm is earning a normal return on its investment—i.e., it is doing as well as it could by investing its money elsewhere.

when APL>MPL

APL is decreasing

when APL<MPL

APL is increasing

when MC is below ATC,

ATC is falling

ATC is always greater than

AVC

when MC is constant...

AVC is also constant and =MC

when MC is above AVC,

AVC is rising

market supply curve begins at

AVC of lowest cost firm

Is LRAC is constant,

LRAC=LRMC

isocost equation

C = wL + rK

opportunity cost

Cost of the next best alternative use of money, time, or resources when one choice is made rather than another

constant cost industry

LRSC is a horizontal line at a price that is equal to the long run minimum average cost of production

positive economic profit

Earning more than the normal rate of return and beating your opportunity cost encourages entry and supply curve shifts right

when demand is extremely elastic for monopoly

Ed is a large negative number, price will be very close to MC -little benefit to being a monopolist

AFC=

FC/Q

short-run expansion path is

Horizontal line showing the cost-minimizing input combinations for various output levels when capital is fixed in the short run. -only L can be changes

markup for monopoly=

P-MC

competitive firm should shut down when

P<AVC

to maximize profit in long run produce where

P=LRMC

profit maximization condition for perfectly competitive firm:

P=MC MR=MC

2 ways to find producer surplus

PS=R-VC PS=profit+FC

profit=

R-TC P(Q)-TC

producer surplus=

R-VC

ATC=

TC/Q

short-run average cost curve

U-shaped because diminishing returns to a factor of production

sunk cost

a cost that has already been committed and cannot be recovered -should not influence current decisions -if it has no alternative use, opportunity cost is zero

expansion path

a curve that shows a firm's cost-minimizing combination of inputs for every level of output

economies of scale

a doubling of output requires less than a doubling of cost

diseconomies of scale

a doubling of output requires more than a doubling of cost

accounting cost

actual expenses plus depreciation charges for capital equipment explicit costs of production

economic rent

amount that firms are willing to pay for an input less the minimum amount necessary to obtain it -opportunity cost to owning any factor of production whose supply is limited

in a constant cost industry, and increase in demand in the long run will be followed by

an increase in supply that will bring price down to the level it was before the demand shift

LRMC intersects LRAC...

at its minimum

firms often use patent rights as a

barrier to entry

as price of labor increases, isocost curve

becomes steeper

The MC curve goes through the minimum of

both the AVC and ATC curve

as output increases the difference between a firm's ATC and AVC

cannot rise

if price is between AVC and ATC...

continue operating, but plan to go out of business

Distance between ATC and AVC curves

decrease as output increases

how does license cost effect monopoly

decreases profit

as LMC and LAC get further apart

decreasing returns to scale

MC=

derivative of TC function

producer surplus graphically

difference between MC and price

convex isoquant

diminishing MRTS

an improvement in technology would result in

downward shifts of MC and increases in output.

in long-run competitive equilibrium, a firm that owns factors of production will have

economic profit=0 accounting profit>0

LAC>LMC

economies of scale

an output tax that does not effect market price...

encourages firm to reduce output MC increases by the amount of the tax

The LRAC curve is the ____ of the SRAC curves

envelope

perfectly inelastic supply

equipment is fully utilized, can only have greater output if more plants are built

to maximize profit for monopoly:

find point where MC=MR and go up to that point on the demand/AR curve

for monopolist if at current level of output price elasticity=-0.15

firm should cut output

if monopolist is producing where MR>MC,

firm's output is smaller than the profit maximizing quantity

if ATC is a straight line and MC is positive constant...

fixed costs must be zero

producer surplus= economic profit when

fixed costs=0

as LMC and LAC get closer

increasing returns to scale

for monopolists at output level P=MC

the monopolist is not maximizing profit and should decrease output

Competitive firm's supply curve

the portion of the MC curve for which MC>AVC

constant returns to scale

the situation in which a firm's long-run average costs remain unchanged as it increases output

marginal revenue graphically is

the slope of the total revenue curve at a given point

economic cost

the value of all resources used to produce a good or service; opportunity cost

at every output level, a firm's SRAC equals or exceeds its LRAC because

there are at least as many possibilities for substitution between factors of production in the long run as the short run

when a monopolist is on inelastic portion of demand curve...

they could make a greater profit by producing less and selling at a higher price

what would happen in the short run, keeping capital fixed, to the input mix if output increased

this would have to be accomplished with more labor the level of production in the short run would be more expensive than in the long run in the long run, both labor and capital could be adjusted to find a more efficient input combo

sunk costs should not impact

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