Microeconomics Quiz 9

What do we see economic profit become in the long run of a competitive market?

0→TR=TC

How is marginal revenue different for a monopolist? (2)

1) Marginal Revenue decreases as output increases (rather than staying constant). 2) Marginal Revenue is less than price

What are the 3 causes of monopoly?

1) Monopoly Resources 2) Government created Monopolies 3) Natural Monopoly

What are the types of monopoly?

1) Single price monopoly (or one price monopoly) 2) Price discriminatory monopoly

What are two questions we ask about revenue?

1) What is the revenue received for the typical unit of output?: Average Revenue 2) How does revenue change with an additional unit of output?: Marginal Revenue

What are the three questions firms ask?

1) What price to charge? 2) What quantity to produce? 3) When to enter/exit the market?

What is a single price monopoly?

A monopoly that charges each buyer the same price

What is a monopoly?

A sole seller of a good with no close substitutes

What is true about Average Revenue and Marginal Revenue in a Competitive market?

AR=MR=P (price)

How does AR change over the range of output?

AR=TR/q

What is the equation for Average Revenue?

AR=TR/q

What types of inputs are in long run?

All inputs are variable

When do firms continue producing in the short run?

As long as P≥AVC

What types of inputs are in short run?

At least one input is fixed

What do we see a price become in the long run of a competitive market?

Average Total Cost

Why do firms continue producing in the short term when AVC<P<ATC?

Because they would rather pay for a few of their losses than none of them.

What is question 2 a function of?

Costs and revenue

What should firms do when MR<MC?

Decrease output to increase profit.

What motivates firms to enter/exit a competitive market?

Economic profit, which includes opportunity cost: the value of the next best option

What are three properties used to interpret an ATC graph?

Economies of scale, constant returns to scale, and diseconomies of scale

How do you differentiate between short run and long run when thinking about firms?

Fixed inputs

What is the output effect?

In a monopoly: it is when output increases as price decreases.

What is the price effect?

In a monopoly: it is when price decreases as output increases.

What should firms do when MR>MC?

Increase output to increase profit

What is a price discriminatory monopoly?

It can charge different prices to different buyers

What is a natural monopoly?

It occurs when the high fixed costs make it cheaper for a single firm to produce the good than it would be for two or more firms. They have economies of scale (example: utilities)

We also know firms choose q where...

MR=MC, P=MC, ATC=MC

When do firms exit a market?

P<ATC → π<0

What happens as a result of economic forces when exiting a competitive market becomes profitable for firms?

P<ATC→π<0→firms exit→supply decreases→price increases→P=>ATC→π=>0

When do firms enter a market?

P>ATC → π>0

What happens as a result of economic forces when entering a competitive market becomes profitable for firms?

P>ATC→π>0→firms enter→supply increases→price decreases→P=>ATC→π=>0

What is the profit maximizing behavior of a single price monopoly?

Questions 1 and 2 are now linked because they are the only producer of the good.

What are the two types of production stops?

Shutdown and exit

When will a firm exit in the long run?

TR<TC, or P<ATC (π<0)

How does Average Total Cost differ in the Short run vs Long run?

The LRATC curve is flatter than the SRATC curve since the property of diminishing marginal product does not apply until higher levels of output are reached. This is because in the long run, all inputs are variable.

What is the firms short run supply curve on the graph?

The MC curve above the AVC curve

What is a monopoly resource?

The firm owns and controls a key input to production (generally rare)

What is a government created monopoly?

The government gives exclusive rights to produce (patents/copyrights)

What is an exit?

The long run decision to leave the market, no fixed costs

What is economies of scale?

The property whereby LRATC is declining as output increases

What is constant returns to scale?

The property whereby long run ATC is constant as output increases

What is diseconomies of scale?

The property whereby long run ATC is increasing as output increases

What quantity of output maximizes profit?

The quantity that satisfies MR=MC

What is a shutdown?

The short run decision to stop producing, still has fixed costs

What relationship do firms have with price in a monopoly?

They are price setters (market power) so they can choose a price greater than marginal cost

Why would the government create monopolies?

They incentivize innovation and creativity

What was the second question that firms ask?

What quantity to produce?

When do firms shut down in the short run?

When TR<VC, or when P<AVC

What was the third question that firms ask?

When to enter/exit a market?

What are sunk costs?

costs that have already been incurred and cannot be recovered

What do firms treat fixed costs as in the short run?

sunk costs

What are two equations for profit?

π=TR-TC, π=(p-ATC)*q

What is the equation for Marginal Revenue?

∆TR/∆q