Microeconomics Exam II Review
Which of the statements is true regarding advertising?
Advertising is only potentially effective if a firm has some market power.
What is the marginal cost of the sixth unit based on the table?
$30 MC = ΔTC / ΔQ = (190 - 160) / (6 - 5) = 30
Which statement describes a monopoly?
A single firm produces a product with no close substitutes and control over the market price.
The long run is best defined as a time period
during which all inputs can be varied.
Which of the markets is the best example of monopolistic competition?
the fast food industry
The graph shows the marginal cost (MC), average total cost (ATC), and marginal revenue (MR) curves for a perfectly (or purely) competitive firm. Note that the demand (D) curve is the same as the MR curve for such a firm. Assume that the cost curves are representative of other firms in the industry.
Given the current price, this firm will earn a negative economic profit. In the long run, this market will experience exit by some firms. What is going to happen to the price of this product? It will increase.
The table shows sales information for the firms in three different markets. Use the Herfindahl‑Hirschman Index (HHI) to sort the markets from most concentrated to least concentrated.
Most concentrated Market B Market C Market A Least concentrated
In comparison to oligopolies, firms in monopolistic competition
face competition from many other firms.
The graph shows the case of an unregulated natural monopolist. Please label the appropriate areas. Suppose that the government decides to regulate this natural monopolist by requiring the firm to charge a price of P2. Which is true if the government takes this approach?
Consumer surplus will increase.
Which of the statements is not true?
Costs that are small and unimportant with little impact on profits are called marginal costs.
Which scenario is an example of an industry in monopolistic competition?
Within walking distance from your home, there are a plethora of fast-food restaurants including Koala Express, Cabo Bob's Burritos, Oodles of Noodles, and Hanz's Hearty Hamburgers.
What is a natural monopoly?
a monopoly that results when one firm is able to produce at a lower cost than multiple firms, giving large firms with higher levels of output an advantage over smaller competitors
The graph illustrates a monopoly with constant marginal cost and zero fixed cost. Use the graph to show the profits and deadweight loss (DWL) for this firm. Assume that potential competitors to the monopoly face prohibitive barriers to entry.
These profits are economic. In the long run, economic profits for this monopoly will be positive
Categorize each statement as true or false.
True: Price leadership occurs when one firm announces a price change and other firms match the announced price. Price leadership is a form of implicit (tacit) collusion. False Price leadership is illegal. Price leadership prevents cooperation among competing firms.
The graph illustrates an average total cost (ATC) curve (also sometimes called average cost), marginal cost (MC) curve, average variable cost (AVC) curve, and marginal revenue (MR) curve (which is also the market price) for a perfectly competitive firm that produces terrible towels. Please answer the three questions, assuming that the firm is profit maximizing and does not shutdown in the short run.
What is the firm's total revenue? $104000 𝑇𝑅 = 𝑃 × 𝑄 = $400.00 × 260.00 = $104000.00 What is the firm's total cost? $169000 𝑇𝐶 = 𝐴𝑇𝐶 × 𝑄 = $650.00 × 260.00 = $169000.00 What is the firm's profit? (Enter a negative number for a loss.) -$65000 Profits are the difference between total revenue and total cost. profit = $104000.00 − $169000.00 = −$65000.00
Dumphy and Funke are rival tattoo artists in the small town of Feline. There are no other tattoo artists in town. It costs $30 to produce a Tweety Bird tattoo. Assume for simplicity that fixed costs are zero and that Dumphy and Funke perform identical work. For a while, there was too much demand for Funke and Dumphy to handle and they both charged $200 for a tattoo. But recently, demand has dropped significantly and there is not enough work for both to fill their days at any price. However, there is some demand at all prices.
What type of competition would Funke and Dumphy likely engage in after the decrease in demand? price What will be the equilibrium price that Dumphy and Funke will charge? $30 What are the profits for Dumphy and Funke at the equilibrium price? $0
Indicate whether each item is associated with network externalities or not.
a Facebook account associated with a network externality steel production, which results in air pollution not associated with a network externality operating systems, such as Windows or Mac associated with a network externality a power strip not associated with a network externality plastic grocery bags not associated with a network externality
The table shows total cost and total revenue information for a perfectly (or purely) competitive firm.
Firms earning a loss will sometimes shut down in the short run. What quantity will the firm produce if it shuts down in the short run? 0 units What will the profits be if this firm shuts down? -$500 profits = total revenue − total costs At a quantity of zero, profits = $0 −$500 = −$500 Firms sometimes prefer to minimize losses by continuing to operate in the short run. What quantity will the firm produce to minimizes losses in the short run? 4 units The smallest loss occurs at a quantity of 4, where the profit is −$420. If this firm chooses to operate, what will its profits equal? Enter a negative number for a loss. -$420 If the cost and revenue numbers in the table will continue forever (permanently), is it better for this firm to continue to operate in the short run, and exit the market in the long run.
Classify each statement or equation according to whether it describes average variable cost, marginal cost, or average (total) cost. (TC is total cost; VC is variable cost; Q is quantity.)
ΔTC / ΔQ: Marginal cost The amount by which total cost increases when an additional unit is produced: Marginal cost TC / Q: Average (total) cost The total cost divided by the quantity of output: Average (total) cost The change in total cost divided by the change in output: Marginal cost VC / Q: Average variable cost The sum of all costs that change as output changes divided by the number of units produced: Average variable cost
Classify the assumptions according to whether or not each item is an assumption made under perfect competition (also known as pure competition or competitive industry).
Assumed in perfect competition: price-taking behavior Not assumed in perfect competition: a small number of producers significant barriers to entry firms selling a similar but differentiated good
If a firm is producing a quantity where marginal cost exceeds marginal revenue, the firm should ____ existing levels of production in order to ____.
decrease ; increase profitability
Monopolies and monopolistically competitive firms differ in that monopolies
participate in markets where barriers to entry are present.
The graph shows the relevant curves for an individual firm in a perfectly (or purely) competitive industry. Adjust the horizontal price line to show a price at which the firm will shut down immediately. Which of the choices best explains why this price will cause the firm to shut down instead of continuing to operate at a loss?
total revenue < total variable costs
Suppose you are a manager of a firm that operates in a duopoly. Recently, the state attorney general fined you and your competitor for price fixing. In your market, firms only set prices, not total quantities to sell. From previous experience, you know your competitor has a marginal cost of $6.76. Further, your marginal costs are $6.74. The previous cartel price was $10.00, when you and your competitor were price fixing. What price level do you now choose to maximize profits?
$6.75
Papa Mel's is an alfalfa farm in a perfectly competitive industry. The market demand and supply for alfalfa is shown in the market graph. Based on this information, move the line segment in Papa Mel's graph to show the correct placement of the demand curve for Papa Mel's alfalfa, then answer the question. What is Papa Mel's profit‑maximizing level of output?
6 bales Mel will maximize his profit by producing the quantity where the marginal revenue is equal to his marginal cost. These curves intersect at a quantity of 6 bales.
A monopolistic competitor wishing to maximize profit will select a quantity where
marginal revenue equals marginal cost.
Read each statement and determine if it is true or false.
A monopolistic competitor, much like a firm in perfect competition, sells its product at a point where the price is equal to the marginal cost. false Advertising can play a role as an indirect signal of product quality to customers. true Monopolistically competitive industries are more likely to make use of advertising to create products that catch on in mainstream popularity than industries in perfect competition. true In the long run, monopolistic competitors make a similar amount of profit to monopolists, since, in both cases, the firm's demand curves are downward sloping, and at the profit maximizing point, the marginal cost is equal to the marginal revenue. false In the short term, a monopolistic competitor will make a profit if the demand curve is above the average total cost curve at some point. true
Tyler and Margaret are arrested and charged with armed robbery. The police interview both suspects separately about their involvement in the crime. The table shows the sentences that Tyler and Margaret will receive given their choices. Use the table to answer the three questions.
If Tyler trusts Margaret to remain silent, what should he do to minimize his sentence? Tyler should confess. If Tyler thinks Margaret will confess, what should he do to minimize his sentence? Tyler should confess. What will be the dominant strategy outcome for Tyler and Margaret? The dominant strategy outcome is they both get 12 years. Note that Margaret also faces the same incentives, so the outcome of the prisoner's dilemma is that they both confess and get 12 years each. If they had cooperated, they would have only gotten 10 years, but the nature of the prisoner's dilemma is that the prisoners acting in their own individual best interests do not get the optimal outcome.
The table shows the cost and revenue information for a perfectly (or purely) competitive firm that produces external hard drives. Use whole numbers to answer the six questions.
What is the marginal revenue received from the 11th unit? $100 MR = ($1,100 − $1,000) / (11 − 10) = $100 / 1 = $100 What is the marginal cost of producing the 11th unit? $38 MC = ($174 − $136) / (11 − 10) = $38 / 1 = $38 What price does this firm charge for each hard drive? $100 per unit As can be seen from the table, price nearly equals marginal costs at 14 units. At that output, price is $100 per unit and marginal cost is $98 per unit. How many units should this firm produce to maximize profits? 14 units Profits are maximized at 14 units, at which output profits equal $1,000. When profit maximizing, what is this firm's profit? $1000 Total revenue is $1,400 and total costs are $400; to calculate profits, subtract $1,400 from $400 to obtain profits of $1,000.
Which of the statements is true of the prisoner's dilemma?
In the prisoner's dilemma, firms could do better if they both did exactly the opposite of what they ultimately choose to do.
What are antitrust laws?
Laws meant to eliminate collusion and promote competition among firms.
Classify each statement about types of market structure as either true or false.
Monopolies produce differentiated products. false Monopolistic competition is a market structure that consists of a small number of producers. false Perfect (pure) competition is characterized by product differentiation. false Oligopolies exist in a market that has a small number of producers that may or may not exhibit product differentiation. true
Identify the first antitrust law and its purpose.
The Sherman Act of 1890 prohibits price fixing, collusion, and monopolization.
Everything Looks Like a Nail, Inc. is a manufacturing company that produces hammers. The company faces various fixed and variable costs in the short run. Determine which of Everything Looks Like a Nail's costs are fixed costs and which are variable costs. Assume the company cannot easily adjust the amount of capital that it uses and that salaries are negotiated only once per year.
Variable cost: Postage and packaging costs Cost of wood used in manufacturing Cost of metal used in manufacturing Fixed cost: Lease on building Industrial equipment costs Interest on current debt Liability insurance costs Annual salaries of top management
Candice is a jewelry shop owner, specializing in beaded necklaces. For each of the following inputs, indicate which items are variable inputs as opposed to fixed inputs in the long run. Variable inputs include:
beads two-year lease on office and retail space upper management salaries chairs computers hourly labor shipping
Which of the following makes monopolistic competition different than perfect competition? Monopolistically competitive firms
differentiate their products
Suppose that in the small town, Prairie, there are only two cable providers. What type of market structure does the local cable market have?
duopoly
If a firm is producing a quantity where marginal revenue exceeds marginal costs, the firm should ____ existing levels of production in order to ____.
expand ; increase profitability
In game theory, a dominant strategy is
the best strategy to pick, no matter which moves are chosen by the other player.
Consider the table. *Average Variable Cost The table shows the cost structure of a firm producing computer mainframes. Calculate the missing values A through H and enter these into the boxes provided.
A: 20,000 VC = TC - FC = 30,000 - 10,000 = 20,000 B: 20000 TC = FC + VC = 10,000 + 10,000 = 20,000 C: 277.8 MC = ΔTC / ΔQ = (15,000 − 10,000) / (18 − 0) = 277.78 D: 384.6 MC = ΔTC / ΔQ = (30,000 − 25,000) / (78 − 65) = 384.6 E: 833.3 MC = ΔTC / ΔQ = (40,000 − 35,000) / (94 − 88) = 833.3 F: 833.3 ATC = TC / Q = 15,000 / 18 = 833.3 G: 384.6 ATC = TC / Q = 30,000 / 78 H: 319.1 AVC = VC / Q = 30,000 / 94 = 319.5
Robert has a passion for making ice cream. Assume that ice cream parlors have a market structure of monopolistic competition. Between the local Amy's, Cold Stone Creamery, Marble Slab, Ben & Jerry's, and Baskin Robbins, he has an uphill battle to break into the local ice cream market. Robert is considering various strategies to differentiate his ice cream shop, JubJub's, so that he can garner some market power. Indicate the value of each suggestion.
Making ice cream using fresh organic milk and fruit, something none of the other competitors are doing, will help Robert differentiate his ice cream. Opening JubJub's next to "The Triangle," an area with an elementary school, a middle school, and a high school less than 5 minutes away will help Robert differentiate his ice cream. Carrying only the exact same flavors, with the same names, as his competitors will not help Robert differentiate his ice cream. Pricing JubJub's ice cream at $100 a scoop to appeal to the luxury crowd will help Robert differentiate his ice cream.
Which firm is most likely to be a natural monopoly?
Municipal Power Light, the local supplier of electricity
There are many differences between a market served by a monopoly and a market that is perfectly competitive. Indicate whether each item is associated with a single-price monopoly, perfect competition, or is true of both market structures.
The price is higher than in other market structures. monopoly An efficient quantity is produced. perfect competition Firms can earn positive economic profit in the long run. monopoly There are significant barriers to entry. monopoly Firms have no market power. perfect competition Firms maximize profits by operating where marginal revenue equals marginal cost. both monopoly and perfect competition
Coca‑Cola and Pepsi are both releasing a new soda at the same time. Each company is fairly well known, and they are both deciding between pursuing two advertising strategies. Each firm knows that its profits will be affected by its own decision and the decision of the competing firm. The payoff matrix contains the estimated profits for both companies for all possible strategies. Pepsi's profits are in the lower (green) triangle of each cell and Coca‑Cola's profits are in the upper (blue) triangle of each cell. Profits (payoffs) are in millions of dollars.
What is Coca‑Cola's dominant strategy? Strategy 1 What is the Nash equilibrium in this game? A
The hypothetical production data is for a profit maximizing firm. Suppose the market price falls from $200 to $182 and the firm does not shut down. Use this information and the table to match the labels.
If the market price is $160, then the firm will shutdown. false Since the firm is still operating, the firm must be earning a positive profit. false If the price increases to $200, then the firm will earn a positive economic profit. true A price of $200 is greater than the minimum value of ATC, $186.67. It follows that the firm will produce and earn a positive economic profit.
Determine if the statements and expressions regarding costs are true or false.
All costs are either fixed or variable. true Average fixed cost is always higher than average variable cost. false The average fixed cost curve is downward-sloping. true In the short run, ATC is always greater than or equal to AVC. true The ATC curve crosses the MC curve at the lowest point on the MC curve. false ATC = (FC + VC) / Q true The ATC is increasing whenever the MC is increasing. false Marginal cost refers to the change in total cost associated with the production of another unit. true The VC curve is modeled as a horizontal line. false TC = FC + VC + MC false
The graph shows the demand curve for cable television. Assume that monopoly conditions apply.
What is the firm's total revenue when selling cable television to 6 houses? $72 What is the firm's marginal revenue from selling cable television to the 13th house? -$7
The accopmanying graph depicts the long-run costs and revenue for a monopolistically competitive firm. The numbers in parentheses show the output level and the cost, respectively, associated with various points. Place point A at the profit maximizing price and quantity.
What is the profit-maximizing output of this monopolistically competitive firm? 5 units of output Firm profits are maximized at the level of output where MR = MC. What is the level of excess capacity for this monopolistically competitive firm? 3 units of output Excess Capacity = Minimum ATC Output − Profit Maximizing Output = 8 units − 5 units = 3 units
Iz, Lauren, Odd, and Ralph started a T‑shirt company. They can produce any number of T‑shirts at a cost of $2 per T‑shirt, both marginal and average. They are the only producers of T‑shirts. As monopolists, they charge $20 per T‑shirt and obtain total profits of $10,000. Now assume there are creative differences and they split the company in two. Lauren and Ralph join together and compete against Iz and Odd. If they compete on quantity, each company would produce 50 T‑shirts and charge $12 a T‑shirt. For technical reasons, assume that the quantity demanded is greater than zero for all prices greater than $0.
If, however, Ralph and Lauren compete directly against Iz and Odd in prices, the market price for T‑shirts will be $2 And their profits will be $0 In response to the price war, Iz and Odd decide to put an iguana on the chest of their T‑shirt. They convince the world that the iguana is necessary for coolness. This type of behavior is called product differentiation. What economic reason is likely to have caused Iz and Odd put an iguana on their T‑shirts? increase profits
The table shows the demand schedule of a monopolist. Calculate marginal revenue and fill in the revenue column in the table. Assume that output can only be sold in integer amounts (i.e., 11 unit, 22 units, etc.). Once you have filled in marginal revenue, identify the quantity produced by the monopolist in this market.
MR = ΔTR when quantity sold increases by one MR1: 13 MR2: 11 MR3: 9 MR4: 7 MR5: 5 MR6: 3 How many units does the monopolist produce? 4 The monopolist produces at the point where MR=MC, or gets as close as possible without MRMR falling below MC. Here, that output level is 4.
Rambutan is a fruit prized in Eastern Asia for its unique hairy look. Once peeled, it reveals a sweet, slightly sour, grape‑like, gummy‑tasting fruit. Shown is a graph for a perfectly or purely competitive rambutan farmer.
This firm is incurring a profit. In the long run, firms will enter this market. What is this firm's profit/loss? Round to the nearest penny. $14.00 profit = 7 bushels of rambutan × ($12.11 − $10.11) per bushel of rambutan = $14 If the market price fell to $9.51, then this firm would be breaking even (zero profit).
Product differentiation is a key component of monopolistic competition. Given the scenarios, label them accordingly by how products are differentiated.
GrrrArg! Productions attempts to carve out a niche in the crowded zombie film industry by specializing in movies featuring only finger-puppet zombies. differentiated by style/type Jay is a Korean pop star, and as such, he has long, flowing hair. One day, he decides to retire from the singing industry and walks to the local Procuts right outside his apartment, despite it being more expensive than the Supercuts 10 minutes away. differentiated by location Wayne is a beginning photographer. He is in the market to buy a new camera lens and notes that certain lenses take clearer pictures but they become exponentially more expensive to purchase as the sharpness of the image increases. He chooses to start with the lowest grade lens (i.e., the cheapest). differentiated by quality The video game industry caters to a wide array of people, with games like Final Fantasy to appeal to the role playing type, Tekken for those who like fighting games, Halo for the first person shooters, and Super Mario for the adventurous. differentiated by style/type
The graph shows the relevant curves for a profit maximizing monopolist. Assume that it is possible for the firm to produce a quantity that is not a whole number.
What quantity will the firm produce? 30.36 units What price will the firm charge? $20.59 What is the firm's profit? $171.23 profit = total revenue − total cost = (price × quantity) − (average cost × quantity) = ($20.59 × 30.36) − ($14.95 × 30.36) = $171.23
A firm's ___________________ are costs that increase as quantity produced increases. These costs often show ___________________ illustrated by the increasingly steeper slope of the total cost curve.
variable costs; diminishing marginal returns
The table shows the demand curve for monster trucks. There are two monster truck producers. For simplicity, assume that the cost of producing a monster truck is zero. (AC=0, FC=0) Assume the two producers initially collude to maximize profits, splitting production and profits evenly.
What price will they charge? $9 What is the total quantity produced? 6 monster trucks When two firms collude, they produce the same quantity as a monopolist and then split the profits. In this case, profit is maximized where Q=6. At that quantity, the market price is $9. The firms agreed to split the profits evenly. What are the profits for each firm? $27 total profits = 𝑃 × 𝑄 − 𝑇𝐶 = 9 × 6 = 54 profits for each firm = total profits / 2 = 54 / 2 = 27 If one of the producers produces an extra unit to get higher profits, what is the new market price? $7 If one firm produces an extra unit of the good, then the total quantity in the market is now 7. The market price would be $7. What are the profits for this firm when it breaks the agreement? $28 profits for cheater = 𝑃 × 𝑄 − 𝑇𝐶 = 7 × 4 = 28 What are the other firm's profits after the agreement is broken? $21 profits for the non-cheater = 𝑃 × 𝑄 − 𝑇𝐶 = 7 × 3 = 21
One thing that distinguishes the short run and the long run is
the existence of at least one fixed input.
In the short run, perfectly (or purely) competitive firms will maximize their profit by producing which of the choices? Select all that apply.
the quantity where marginal revenue = marginal cost the quantity where price equals marginal cost
Nola and Charles both own party planning firms in the small town of Trident, IA. Because they are the only party planners in town, they want to collude to make the price of party planning high. Classify the scenarios according to whether they are more likely to aid or impede Nola and Charles in colluding.
A party planning school opens and the new graduates are ready to plan. This will impede Nola's and Charles' efforts to collude. Charles and Nola both charge a fixed price per person for a party. This will aid Nola's and Charles' efforts to collude. Charles develops a signature appetizer that becomes the must-have appetizer in Trident. This will impede Nola's and Charles' efforts to collude. Nola lowers her price on national television. This will impede Nola's and Charles' efforts to collude. Nola and Charles are regulars at the same coffee house. They talk regularly. This will aid Nola's and Charles' efforts to collude. Nola's marginal cost is lower than Charles's. This will impede Nola's and Charles' efforts to collude. Most of the parties are given by Trident's largest employer, a water bottling plant. This will impede Nola's and Charles' efforts to collude.
Choose the answer that makes the statement correct.
For firms in perfectly (purely) competitive markets, long‑run economic profits are zero because firms will exit this market if profits are less than that and enter if profits are greater than that.
Please label the scenarios with the term that best matches them.
Bauer and CMM are duopolists in the hockey skate market. Suppose every year Bauer produces one million pairs of skates. CMM produced one million skates the first year but has since chosen to produce 1.5 million pairs of skates each year. none of these terms Unilever and Proctor & Gamble are fined 315 million euros for price-fixing the washing detergent market in Europe. antitrust policy Zyrtec, Allegra, and Claritin, antihistamines used frequently for allergies, place ads on TV promoting the superiority of their drug. non-price competition At the beginning of a new year, Canon displays the prices for its newest line of camera lenses. Nikon, Sigma, and Tamaron, other camera makers, follow with their prices soon after, set near Canon's prices. price leadership Sprint, AT&T, and T-Mobile keep undercutting each other's prices in order to gain a larger customer base. price war
The graph contains information on the long‑run equilibrium situation faced by Patty's Frozen Pizzas. Use the information to answer the questions. Notice that quantities in the graph are in thousands.
Determine Patty's profit‑maximizing price and profit‑maximizing quantity. profit‑maximizing price: $5 profit‑maximizing quantity: 40,000 pizzas At what level of output is Patty's average total cost minimized? 60,000 pizzas Average total cost is at a minimum where it intersects the marginal cost curve. The point of intersection is illustrated on the accompanying graph. Notice that the quantity associated with this point of intersection is 60,000 pizzas. This is the cost minimizing output for this firm. Calculate Patty's excess capacity. 20,000 pizzas The value of the firm's excess capacity can be calculated as the difference between the cost‑minimizing output and the output being produced. In this case, Patty's excess capacity is equal to 60,000 pizzas − 40,000 pizzas = 20,000 pizzas
Consider the table, which contains hypothetical data on the long‑run average cost values for the refrigerator industry.
Economies of scale begin at A and end at C Constant returns to scale begin at C and end at D. Diseconomies of scale begin at D and end at F.
The accompanying graph represents Hayden's Fro-Yo Emporium, which is the only seller of frozen yogurt in a small college town, showing the marginal cost (MC), average cost (AC), marginal revenue (MR), and demand (D) curves.
How many cups of frozen yogurt should Hayden sell? q1 How much should Hayden charge per cup? p4
Kiviaq is a little known regional delicacy served during the winter time and at celebrations near the arctic circle. Although some people have found the taste (and smell) to be overpowering, a few exuberant companies have chosen to produce kiviaq for the masses so that the world may know its unique taste. The given table shows the market shares for kiviaq producers in Inuit territory.
Use the data in the table to calculate the Herfindahl-Hirschman Index (HHI) for the market for kiviaq. HHI: 2752 43^2 + 19^2 + 18^2 + 13^2 + 7^2 = 2752 Based on the HHI that you calculated, what kind of market does kiviaq have? oligopolistic HHI < 1000 indicates a strongly competitive market. 1,000 < HHI < 1,800 indicates a mildly competitive market. HHI > 1,800 shows an oligopolistic market structure. Assume Siorapaluk and Ikuo propose a corporate merger because they think together they can make the best kiviaq the world will ever know. Calculate the new HHI if the merger were to occur. HHI: 4386 (43 + 19)^2 + 18^2 + 13^2 + 7^2 = 4386 Assume Canadian parliament wants to review the merger. Upon scrutiny, this merger will likely not be allowed as the merger significantly reduces competition.
Determine if each example represents a barrier to entry or not.
Pfizer is the only firm that is legally allowed to produce and sell Lipitor, a best‑selling cholesterol drug. barrier to entry DeBeers owns nearly all of the world's diamond mines. barrier to entry Boeing already serves a large fraction of the jumbo jet market and is able to produce at a lower average cost than any potential competitors. barrier to entry Tinseltown Theaters shows almost all the most popular newly‑released movies. not a barrier to entry
Suppose Ralph has a chicken processing plant with the total cost function shown in the accopmanying table.
What is Ralph's fixed cost? $800 Ralph pays his workers $100 each, and labor is the only variable cost. At a quantity of 1000 chickens, how many workers does he hire? 2 Why does total cost increase faster as output increases? There are diminishing returns to labor.
The accompanying graph depicts average total cost (ATC), marginal cost (MC), marginal revenue (M), and demand (D) facing a monopolistically competitive firm. Place point A at the firm's profit maximizing price and quantity.
What is the firm's total cost? $1250 The total cost is the dollar amount of producing a single unit multiplied by the total number of units produced. At a quantity of 50, the total cost per unit is $25. The total cost is, therefore, 50 × 25 = $1,250 What is the firm's total revenue? $1500 The company's total revenue is the price multiplied by the profit-maximizing level of output produced. The total revenue is, therefore, 30 × 50 = $1,500 What is the firm's total profit? $250 Instead, the price charged by a monopolistic firm is located on the graph where this quantity intersects the demand curve. The total profit is, therefore, $1,500 − $1,250 = $250
A firm's ___________________ are costs that are incurred even if there is no output. In the short run, these costs ___________________ as production increases.
fixed costs; do not change
Classify the statements as either true or false.
Price discrimination is illegal under all circumstances. False' Airlines are often able to price discriminate. True Firms do not have an incentive to price discriminate because it results in some groups paying a lower price than others. False Perfect price discrimination occurs when perfectly competitive firms charge some people higher prices than others. False All else being equal, single price monopolists earn lower profits than firms that can price discriminate. True Price discrimination only occurs with natural monopolies. False
Antel and IMD both produce similar computer chips, and the two companies dominate this market. The table shows the choices available to Antel and IMD in terms of total output and the profits they would make in each of these situations. Use this table to answer the four questions.
Using what you know about the prisoner's dilemma, what would be the profit for Antel and IMD in millions? Antel profit: $100 million IMD profit: $100 million What would be the best collective option for both firms? The firms should cooperate. Select all of the reasons Antel and IMD would make more profit at the original constant production level? The original production level is more profitable because: they can both charge more for the product at the given level of production. it restricts the supply of computer chips.
Suppose that Kyle and Lisa are both in the public eye. They get offers to sell secrets of the other to tabloids. If both keep the secrets, they are both better off than if they get exposed. If only one is exposed, the other person is better off than if no one was exposed. Their payoffs from each option are given in the payoff matrix. Suppose that Lisa and Kyle play the game over four television seasons, where each season is a new game. Consider the scenarios. Remember, a tit‑for‑tat strategy is one where the person starts by cooperating and then plays whatever strategy the other firm played last.
Over four seasons, how much will Lisa make if she and Kyle both play tit‑for‑tat? $32 Over four seasons, how much does Lisa make if she always exposes and Kyle plays tit‑for‑tat? $25 Over four seasons, how much will Lisa make if she plays a tit‑for‑tat strategy and Kyle always exposes? $17 Over four seasons, how much will Lisa make if she and Kyle both always expose? $20 Does Lisa have a dominant strategy when she and Kyle play for four seasons? No, there is no dominant strategy between tit‑for‑tat and always expose in this situation.
The table shows a hypothetical demand schedule for monosodium glutamate (MSG). Ajinomoto holds 50% of the market, Jiali holds 30% of the market, and Quingdao holds 20% of the market. Suppose the three firms agree to form a cartel to fix production of monosodium glutamate. Assume marginal cost equals zero, and the output is split equally across the firms.
What quantity maximizes the cartel's profit? 90 million pounds It follows that the profit-maximizing quantity occurs where total revenue, calculated as price multiplied by quantity, is at its height at $270 million (90 million pounds and a price of $3). Thus, the cartel produces a total of 9090 million pounds and charges a price of $3 per pound. Each member of the cartel produces 30 million pounds and earns a profit of $90 million Suppose Ajinomoto's marginal cost remains equal to zero, but for Jiali and Quingdao, marginal costs rise above zero. How would this affect the incentive of Ajinimoto to act noncooperatively and change its output? Ajinomoto will have an incentive to increase its output of MSG.
