Micro midterm #2

What does the perceived demand curve for a perfectly competitive firm look like?

flat. The flat shape means that the firm can sell either a low quantity or a high quantity at exactly the same price. In a monopoly, the demand curve is downward sloping (reflects market)

If a regulatory agency sets the price equal to marginal cost for a natural monopoly, the

government might have to provide a subsidy to the firm to keep it in business

Name some things that apply to an industry's market structure

how many sellers are in the market, the types of product being sold on the market, how easy or difficult it is to enter the market

mental accounting

idea of putting dollars into different mental categories (winning money vs money via paycheck)

Diminishing marginal returns implies

increasing marginal costs

In a perfectly competitive market in long-run equilibrium, an increase in demand creates economic profit in the short run and _________________ in the long run.

induces entry

Mental accounting is an example of what kind of behavior?

irrational

The point where an indifference curve just touches the budget line at one point

is the best affordable price

factors of production

land and raw materials, labor, capital

With an average cost pricing rule, the quantity produced by the natural monopoly is ________ the quantity produced with a marginal cost pricing rule.

less than

When compared to a perfectly competitive market, a single-price monopoly with the same costs produces ________ output and charges ________ price.

less; higher

What are other terms for "break-even point?"

long run equilibrium + zero economic profit

When all firms earn zero economic profits producing the output level where P=MR=MC and P=AC and there is no incentive to leave or join the market, the market is in __________.

long run equilibrium. A market is in long-run equilibrium when all firms earn zero economic profits producing at the output level where P=MR=MC and P=AC. There is no incentive to leave or enter the market.

When a $1 loss of money pains an individual 2.25 times more than a $1 gain in money, we refer to this as _______________________.

loss aversion

For a decreasing cost industry, as the market expands, the old and new firms experience ________________, which makes the new zero-profit level intersect at a ___________ price than before.

lower costs of production; lower

In situations in which there are substantial economies of scale, the ___________ of adding an additional customer is very _________ once the fixed costs of the overall system are in place.

marginal cost; low. Natural monopolies tend to arise in conditions such as these

The rate at which a person is willing to trade one good for another so that utility will remain the same is referred to as ________________________.

marginal rate of substitution

Marginal Profit equation

marginal revenue - marginal cost

Equation for marginal revenue

marginal revenue = change in total revenue / change in quantity

What is the equation for marginal utility per dollar?

marginal utility/price

Consider that a market is in long-run equilibrium and demand decreases. What are two things that will occur as a result of a decrease in demand.

market prices begin to fall and market prices will fall below the average cost curve.

When price is below marginal cost in a perfectly competitive market structure...

more units must be produced to achieve allocative efficiency + producing another unit will likely add more to consumer satisfaction than to costs

Cost and production conditions can affect ___________.

production decisions, the amount of employees, price of products

The mathematical equation that explains the engineering relationship between inputs and outputs is called the ___________.

production function

Profit Equation

quantity x (Price - average cost)

) Which of the following is the set of conditions necessary for long-run equilibrium for a perfectly competitive firm?

P = SRMC = SRAC = LRAC

If a firm's demand curve is perfectly elastic, then at the profit-maximizing level of output,

P=MR=Mc

When will a firm exit the market?

A business might find itself in need of exiting a market due to domestic competition, unproductive workers, or even poor management. (long run)

What is a monopoly?

A monopoly is defined as a situation in which one firm produces all of the output in a market. While a monopoly, by definition, refers to a single firm, in practice people often use the term to describe a market in which one firm merely has a very high market share.

When will a natural monopoly occur?

A natural monopoly occurs in an industry where the cost structure is such that economies of scale are large relative to quantity demanded. This creates a barrier to entry as entering firms must produce a high quantity to face low cost. Other types of barriers to entry that lead to monopolies are government induced barriers and exclusive control of a natural resource.

What is a patent?

A patent gives the inventor the exclusive legal right to make, use, or sell the invention for a limited time.

What is a trademark?

A trademark is an identifying symbol or name for a particular good, like Chiquita bananas, Chevrolet cars, or the Nike "swoosh" that appears on shoes and athletic gear.

Accounting Profit equals what?

Accounting Profit= Total Revenue- explicit costs

A pencil producing plant sells pencils for $0.25. The marginal cost to produce each pencil is $0.25. The firm is operating at ______.

Allocative Efficiency (when price is = to marginal

Define allocative efficiency

Allocative efficiency means that the cost of a product will be equal to the benefit it gives the consumer. This occurs when the market price is equal to the cost of production (prices are as low as possible), and the social costs of production are in line with the social benefits received.

What do economists say is problematic with the allocative efficiency of a monopoly?

Allocative inefficiency is an economic concept regarding inefficiency at the social or societal level. In the case of monopoly, price is always greater than marginal cost at the profit-maximizing level of output. Thus, consumers will suffer from a monopoly because it will sell a lower quantity in the market at a higher price compared to a firm in a perfectly competitive market.

What is an entrepreneur?

An entrepreneur is the person who creates the business, whose idea it is to combine the inputs to produce the outputs.

Define implicit cost

An implicit cost is a subtle cost, such as opportunity cost, owner contributed resources, and depreciation of goods.

Which of the following are characteristics of an increasing cost industry?

An increasing cost industry is an industry in which the old and new firms experience increases in their costs of production as the market expands, making the new zero-profit level intersect at a higher price than before. The LR supply curve is upward sloping.

Barriers to entry occur in a monopoly market because ________.

Barriers to entry in a monopoly market occur because of the legal, technological, or market forces that discourage or prevent potential competitors from entering the market. Barriers to entry can range from the simple and easily surmountable, such as the cost of renting retail space, to the extremely restrictive.

Assume the market for beef is perfectly competitive. Beef producers are currently earning a zero economic profit. If consumers switch from chicken to beef, which of the following is most likely to occur?

Beef producers will incur economic profits in the short run. Some producers will enter the industry until all firms in the industry are earning a zero economic profit.

Cost Equation

Cost = workers (L) x Wage Rate per hour

On a graph, if the shaded rectangle (marginal revenue which is = to price) is above total average costs, does this represent economic profit?

Yes

Definition of economies of scale

Decreases in the total average costs of production due to increased factors of production. By definition, a firm is said to experience economies of scale when long-run average cost declines as the firm expands its output.

Economic profit equals what?

Economic Profit = Total Revenue - Explicit costs - implicit costs

What are factor payments?

Factor payments are what the firm pays for the use of the factors of production. Factor payments include raw material prices, rent, wages and salaries, interest and dividends, and profit.

True or False: Variable inputs cannot be easily increased or decreased in a short period of time.

False

True or False: Diseconomies of scale can be represented by the portion of the long-run average cost curve with a downward slope.

False. Diseconomies of scale can be represented by the portion of the LRAC with an upward slope

True or false: Because of market pressures, monopolies frequently demonstrate allocative efficiency.

False. Monopolies do not need to respond to market pressures, and have no incentive to demonstrate allocative efficiency.

True or false? A firm is facing constant returns to scale if its total cost of production does not change with increases in output produced.

False: Constant returns to scales is when the firm's average cost of production does not change with increases in output produced.

True or false: In a constant cost industry, the supply curve is said to be "inelastic."

In a constant-cost industry, an increase in demand for production inputs due to market expansion does not ultimately lead to an increased cost. Because the supply curve is very elastic, it can easily accommodate an increase in need.

__________ explains why adding more workers will eventually decrease or have no effect on output.

Law of Diminishing Marginal Product

Marginal Cost Equation

Marginal Cost = Change in total cost/change in output

What is an example of a natural monopoly? And what does the graph look like?

Once the electric company installs lines in a new subdivision, the marginal cost of providing additional electrical service to one more home is minimal. It would be costly and duplicative for a second electricity company to enter the market and invest in a whole new set of electrical wires. This industry offers an example where, because of economies of scale, one producer can serve the entire market more efficiently than a number of smaller producers that would need to make duplicate physical capital investments. In this market, the demand curve intersects the long-run average cost (LRAC) curve at its downward-sloping part. A natural monopoly occurs when the quantity demanded is less than the minimum quantity it takes to be at the bottom of the long-run average cost curve as seen in the graph above. Another type of natural monopoly occurs when a company has control of a scarce physical resource.

What does production entail?

Production involves manufacturing and any process or service that creates value, including transportation, distribution, wholesale and retail sales. Therefore, production is not limited only to manufacturing a good.

Profit Equation

Profit = Total Revenue - Total Costs Profit = Price x Quantity - (Fixed Cost + Variable Cost) Profit= Price x Quantity - ATC x Quantity

Average Total Cost Equation

TC/Q

Choosing the best process or method to produce a good falls under which category of the factors of production?

Technology

The income effect describes...

The income effect describes how changes in prices change real income which changes consumption.

The profit-maximizing output choice for a perfectly competitive firm occurs at what level of output?

The level of output where marginal revenue is equal to marginal cost.

Where should the consumption point be if you were to illustrate total effect of price?

The point should be after both the income and substitution effects (it is just the final position for consumption after the change in price).

Why is the monopolists outcome of producing and selling not allocatively efficient?

Their product is sold at a price above marginal cost. A monopoly sells where P>MC. In a competitive market if P=MC profits would be used to improve a firms product to make it more appealing to consumers. However the monopolist does not need to do this as there is no competition to force the monopoly into producing a better more innovative product.

Assume the wool industry is perfectly competitive. Why is it difficult for a wool producer to make excess profits in the long run?

There is free entry into the wool industry

True or false: In a perfectly competitive market, the marginal revenue curve is equivalent to the demand curve.

True

True or False: Indifference Curves are specific to each individual?

True- a measurement of satisfaction cannot be compared to other individuals

True or false: A perfectly competitive firm is a price taker

True. A perfectly competitive firm perceives the demand curve that it faces to be flat. In perfect competition, a firm is a price taker and the flat shape means that the firm can sell either a low quantity or a high quantity at exactly the same price.

True or false: In a perfectly competitive market, the industry supply curve is equal to the marginal cost curves of the individual firms that make up that industry.

True. If input costs change a firm's variable costs, its average total cost curve will reflect these changes. Any change in marginal cost produces a similar change in industry supply, which can be found by adding up the marginal cost curves for individual firms.

True or False: If a firm is unable to cover its fixed costs in the long-run, then the firm must exit the market.

True; Inability to cover fixed costs will eventually lead to bankruptcy. While a firm can operate in a short-run loss this must improve at some point to remain in the market.

When does productive efficiency occur?

When an economy is operating on its production possibilities curve, we say that it is engaging in productive efficiency. Productive efficiency occurs when price equals minimum average total cost. Additionally, productive efficiency holds when a perfectly competitive market is in long-run equilibrium.

Where is the shutdown point located?

When marginal cost is equal to marginal variable cost

Can utility be negative?

Yes

What is an example of predatory pricing?

a firm is selling a service for less than its average variable cost. (most firms operating at this point (shut down point) would be shutting down)

A legal monopoly is _____________________.

a situation in which there are legal prohibitions against competition. For some products, the government erects barriers to entry by prohibiting or limiting competition. Most legal monopolies are considered utilities—products necessary for everyday life—that are socially beneficial to have. As a consequence, the government allows producers to become regulated monopolies, to ensure that an appropriate amount of these products is provided to consumers.

If marginal cost is below average total cost, average total cost will

be decreasing

A long-run average cost curve with a ___________ allows fewer firms to compete because any firm producing at a different quantity will have higher costs.

clear minimum point

In a(n) ______ industry, an increase in market demand and price will result in a rightward shift in supply, new firms will enter, and supply will stop at the point where the new long-run equilibrium intersects at the previous market price.

constant cost

What is a form of legal protection to prevent copying, for commercial purposes, original works of authorship, including books and music?

copyright. No one can reproduce, display, or perform a copyrighted work without the author's permission.

An individual wheat farmer produces wheat in a perfectly competitive market. A decrease in the market demand for wheat will cause the farmer's marginal revenue to ________ and his profit-maximizing level of output to ________.

decrease; decrease

Which of the following describes old and new firms experiencing lower costs of production as the market expands?

decreasing cost industry (economies of scale)

Normally shaped indifference curves are bowed towards the origin of the graph. The reason for this shape is

diminishing marginal rate of substitution.

If a company triples its output and its average cost decreases, then the firm is definitely experiencing

economies of scale

Which techniques improve economies of scale?

employing sales specialists, introducing an assembly line to maximize product.

True or false: A firm selling smartphones for $300 when the marginal cost is $250 is operating at allocative efficiency.

false, in order for a firm to operating at allocative efficiency, price must be equal to cost.

average fixed cost

fixed cost divided by the quantity of output

The long run average cost curve

shows the lowest average cost facing a firm as it increases output changing both its plant and labor force.

A rise in the price of Pepsi that causes a household to shift its purchasing pattern toward Coke and away from Pepsi is the ________ effect of a price change.

substitution

What effect is at play when faced with a change in price of a good, a consumer has an incentive to consume less of the good with a higher price and more of the good with a lower price?

substitution effect

When looking at a firms profit maximizing data and the chart has total revenue and total cost... how do you find the profit maximizing quantity?

subtract total revenue and total cost to find which has the highest profit

Since a profit-maximizing firm in perfect competition chooses a quantity to produce when price (marginal revenue) equals marginal cost, the marginal cost curve is effectively

supply curve

With perfect price discrimination ________, and production is expanded until marginal revenue equals ________.

the firm's demand curve becomes its marginal revenue curve; marginal cost

Total Profit equals what?

the sum of marginal profits

true or false: when the long-run average cost (LRAC) increases as output increases, a firm is experiencing diseconomies of scale.

true

Factor payments are _________________________.

what the firm pays for the use of the factors of production