Micro Midterm 2
Single price monopoly, Total Cost (TC) = ?
ATC x Q
If a monopolistically competitive retailer maximizes profit by producing 400 shirts per hour, it must be true that at 400 shirts per hour:
Marginal Cost = Marginal Revenue (MC=MR)
the tragedy of the commons results when
common pool resources are overused (overfishing in public waters)
By forcing monopolists to set price equal to marginal cost,
economic loss can occur.
the short-run adjusts
labor
what is a firms markup?
price exceeds marginal cost
Elasticity of demand:
% change in quantity / % change in price - <1 = inelastic demand - >1 = elastic demand - =1 = unit elastic (% change in quantity = % change in price) - =0 = perfectly inelastic (perfect vertical line) - =infinity = perfectly elastic (perfect horizontal line)
Suppose the production of a particular good causes a negative externality. Based on market forces only, how will this impact the production levels for a factory if negative externalities are present?
It will produce the good above the socially efficient level.
What happens in a monopolistically competitive market when new firms enter the market?
The existing firm's demand curve shifts in and becomes flatter.
in short-run, total cost on K = ? and is ---
Total Fixed Cost, constant
in short-run, total cost on L = ?
Total Variable Cost
on L, Average Variable Cost =
Total Variable Cost/Total Product
What is a sunk cost?
a cost that has already been committed and cannot be recovered
Externalities are called market failures because they
cause markets to produce suboptimal social outcomes
Unlike products sold in a competitive market, the products sold in a monopolistically competitive market are ----
differentiated (make smth diff.)
the long-run adjusts
labor and capital
entry and exit exists in and not?
long-run not short-run
Consider four market structures: perfect competition, monopolistic competition, oligopoly, and monopoly. Firms in all four market structures maximize profits by producing the quantity where ___________.
marginal revenue equals marginal cost.
an individual or a firm can internalize an externality by
paying the cost of the externality
in perf. compet. MR = ?, and is ----
price, constant
diseconomies of scale
quantity increases, long run avg. cost increases
what is efficient scale?
quantity where ATC is minimized
game theory
self interest (prison game with teach teach)
what is irrelevant in short-run?
sunk cost = Total Fixed Cost
For economic profit to exist within a duopoly with homogeneous goods:
the firms would have to agree to a set price.
which of the following statements are true regarding externalities?
- A negative externality occurs when an economic activity has a spillover cost to a bystander. - Deadweight loss can be either a foregone benefit or the total cost of the externality to society.
In which of the following ways is a monopoly beneficial to an economy?
- Monopoly profits give firms more reason to invest in the creation of new products through research and development. - Firms that are allowed monopoly profits search out innovative technologies that they can bring to market. - With natural monopolies, costs may be lower than those that would exist in competitive markets with many producers.
Which of the following statements regarding price regulation is not true?
- The regulated monopoly results in no costs to consumers as they benefit from a lower price. - Setting an efficient price always results in economic profits. As a result, the monopolist will never leave the industry.
firms maximize profits with what constraints
- Y (output) - K (capital) - L (labor)
A monopolistic competition is
- differentiated products - firms compete on product, price and quality - entry and exist - many sellers - 0 economic profits in long-run (cuz free entry of many firms) - no substitutes ? - demand curve is negative - sellers = price makers (ex. fast food industry, pharmaceuticals, laundry mat)
- Based on your understanding of environmental economics, you argue against your friend's suggestion saying that taxes on pollution are effective. Which of the following reasons will strengthen your argument? - Which of the following statements is true regarding the goal of any policy on pollution abatement?
- eliminating all pollution will eliminate all the benefits associated with the activities that create pollution - the policy should ensure that if any pollution is created it is overall worth it
If a price ceiling is set above the equilibrium price: If a price ceiling is set below the equilibrium price:
- equilibrium, efficient - shortage, inefficient
what happens when MP (exceeds, below, and equal) AP?
- exceeds: AP increase - equal: AP is at max. - below: AP decrease
- the largest source of revenue for the federal government is - the sources for revenue for state and local governments are --- those of the fed gov - which of the following is the largest source of revenue for state governments?
- individual income tax - different from - miscellaneous taxes and fees (tolls on roads and public transportation tickets)
a duopoly is ---
- industry wit 2 firms - if one firm p is lower they will get all consumers if = p they will share
which of the following statements regarding social enforcement mechanisms is not true?
- it reduces the net benefit to society - it is enforced by official gov. regulations and results in a stiff financial penalty if not followed
which of the following is the correct definition of marginal social cost?
- marginal private cost + marginal external cost - marginal private cost + marginal cost of externality
A monopoly is
- only one seller - price maker - no substitutes - high barriers to entry
A oligopoly is
- small # of firms compete - identical or differentiated products - barriers for entry - market price depends on other firm's market price ex. t shirt companies
tax incidence refers to ? is the entire burden of the tax always borne by those on whom it is imposed?
- who bears the burden of a tax - not necessarily since the burden of the tax depends on price elasticity
Compared to a perfectly competitive market, the price in a monopoly market is higher and quantity is lower If a monopolist loses its monopoly power, what happens to price and surplus?
If the monopolist loses its monopoly power, price decreases, consumer surplus increases, producer surplus decreases, and social surplus increases (increases cuz dwl is eliminated)
Which of the following is a key difference between perfect competition and monopoly?
In perfect competition, no one firm can influence price, but with monopoly, a single seller sets the price.
short run vs long run
In the short run, -wages and other prices are fixed -# of firms is fixed In the long run -wages and prices are flexible. -firms can stay/enter/exist
Why is a natural gas pipeline better off as a natural monopoly?
Industries like a natural gas pipeline experience economies of scale since they have high fixed costs. Thus, it is cheaper to have a single firm provide a larger quantity.
To restrict a firm's monopoly power, why can't antitrust authorities just set a floor or a ceiling in the market?
It is difficult to set a fair price, and even if regulators did, the firm would then have no incentive to innovate.
All of the following statements about market structures are true except: A. Perfect competitors can have short-run economic profits. B. Oligopolists often practices game theory. C. Monopolistic competitors practice marginal cost pricing. D. Monopolists' sales revenues are constrained by market demand.
Monopolistic competitors practice marginal cost pricing.
Monopolistically competitive firms earn zero economic profit in the long run as do perfectly competitive firms. Does this mean that total surplus is maximized in a monopolistically competitive market?
No, because firms produce where price is greater than marginal cost.
P>ATC= Profit ? P=ATC= Profit ? P<ATC = Profit ?
P>ATC= Profit>0 P=ATC= Profit=0 P<ATC = Profit<0
Single price monopoly, Total Revenue (TR) = ?
Price x Quantity
ATC = ?
TC/Q or AFC + AVC
Total Cost=
Total Fixed Cost+Total Variable Cost
on K, Average Fixed Cost =
Total Fixed Cost/Quantity
All of the following statements describe a duopoly with differentiated products except:
When consumers view the products as more substitutable, prices are higher.
When MC = ATC, ATC is
at minimum
when MC=AVC, AVC is
at minimum
Suppose there are four firms in a market and each of them sells differentiated products. If the four firms engage in a price war, then ____________.
each firm's profit will be less than with collusion but not zero
my forcing natural monopolist to seet price equal to marginal cost ---
economic loss and
In an oligopoly with differentiated products:
economic profit will exist
natural monopoly
economies of scale enable one firm to supply entire market at lowest price possible (ex. electricity generation)
in monopoly demand is always ---
elastic (demand changes as price changes)
In the model of an oligopoly with identical (homogeneous) products, the price is likely to be ___________.
equal to marginal cost
Why does a Monopolistically Comp. Firm's Economic Profit go to 0 in the Long Run?
free entry of many firms
A monopoly is selling workbooks to students in a college town and is currently maximizing profits by charging $70.00 per book. The marginal cost of textbooks
is less than $70
David runs a bakery in a monopolistically competitive market. He sells his specialty cupcakes at $2.25 each, and his per-cupcake cost is $1.75. David's market is
likely to see new competitors and demand curve will shift left
Single price monopoly, if price > quantity effect, revenue will --- if price < quantity effect, revenue will ---
lower increase
Suppose you are an "all-knowing" government planner. Your goal is to regulate a monopolist's price and quantity in order to maximize social welfare but still allow the monopolist to produce. To accomplish your goal, you would have the monopoly produce where ____________.
marginal cost equals demand, and you would price the good at marginal cost.
when MR = MC, economic profit is ---
maximized
Both monopolies and monopolistically competitive firms set marginal revenue equal to marginal cost to maximize profit. Given the same cost curves, would you expect prices to be higher in a monopoly or a monopolistically competitive market?
monopoly because more inelastic
Consider a market structure in which there are only a few firms. These firms face a downward sloping residual demand curve with some entry barriers in the long-run in the market, if there are zero economic profits, then it reflects a situation of
non-collusive firms producing differentiated products in the long-run
You need to fly from Kansas City to Miami but only two airlines provide the service. This market is best characterized as ___________.
oligopoly
short run profit = ? long run profit = ?
p - ATC x Q 0
Nash Equilibrium
player A chooses best option for themselves and player B
economic profit for a monopoly
profits=(P-ATC)xQ
which of the following would not be considered a common pool resource good?
streetlight
Based on your conversations today and your economicsexperience, you conclude that when externalities are present,
the free market outcome is not efficient
long run equilibrium for a perf. compet. has
- 0 profit - no entry/exit - economic profit and loss is eliminated
MP>AP ===> MP=AP ===> MP<AP ===>
AP increases max[AP ] AP decreases
In short run, TFC = ?
K x Total Product
In short run, TVC = ?
L x Total Product
P=MR<min[ATC], firm should --- P=MR>min[ATC], firm should ---
P=MR<min[ATC] shut down P=MR>min[ATC] open
economies of scales
Quantity increases, Long run avg. cost decreases
AP = ?
Total Product /L
single-price monopoly
one price for all costumers
in long run, total cost = ?
total cost on K and L
