Chapter 10 econ combined
What kind of efficiency exists in monopoly?
Neither productive for allocative because profit maximization is at MR=MC
tuition costs and the cost of books, whereas the implicit costs include foregone income.
The explicit costs of going to college include:
Contestable Market
An imperfectly competitive industry subject to potential entry if price or profits increase
true if the loss is less than the fixed cost.
"Even if a firm is losing money, it may be better to stay in business in the short run." This statement is
QUICK REVIEW 10.3
- A competitive firm's short-run supply curve is the portion of its marginal cost (MC) curve that lies above its average variable cost (AVC) curve. - If price P is greater than minimum average variable cost, the firm will produce the amount of output where MR (= P) = MC in order to either maximize its profit (if price exceeds minimum ATC) or minimize its loss (if price lies between minimum AVC and minimum ATC). - Market supply in a competitive industry is the horizontal sum of the individual supply curves of all of the firms in the industry. The market equilibrium price is determined by where the industry's market supply curve intersects the industry's market demand curve.
QUICK REVIEW 10.2
- A firm will choose to produce if it can at least break even and generate a normal profit. - Profit is maximized, or loss minimized, at the output at which marginal revenue (or price in pure competition) equals marginal cost, provided that price exceeds variable cost. - If the market price is below the minimum average variable cost, the firm will minimize its losses by shutting down.
QUICK REVIEW 10.1
- In a purely competitive industry a large number of firms produce a standardized product and there are no significant barriers to entry. - The demand seen by a purely competitive firm is perfectly elastic—horizontal on a graph—at the market price. - Marginal revenue and average revenue for a purely competitive firm coincide with the firm's demand curve; total revenue rises by the product price for each additional unit sold.
Very large numbers
A basic feature of a purely competitive market is the presence of a large number of independently acting sellers, often offering their products in large national or international markets. Examples: markets for farm commodities, the stock market, and the foreign exchange market.
What kind of demand curve does a monopoly face?
A downward-sloping market demand curve for its own output
is really in the long run.
A firm with no fixed cost
Cartel
A group of firms with an explicit, formal agreement to fix prices and output shares in a particular market (they allocate market shares and or fix prices)
The Investment Decision
A long run decision to build, buy, or lease plants and equipment or to enter or exit an industry
Perfect Competition
A market in which no buyer or seller has market power. There are lots of buyers and sellers and each is insignificant. They are only able to decide how to produce. Zero economic profit. Horizontal demand curve. P = MR
this is the amount required to ensure continued supply of the product.
A normal profit is considered a cost because:
TR exceeds TC by as much as possible.
A purely competitive firm whose goal is to maximize profit will choose to produce the amount of output at which:
List the conditions required for purely competitive markets.
A purely competitive industry consists of a large number of independent firms producing a standardized product. Pure competition assumes that firms and resources are mobile among different industries.
Short-run Supply Curve
A supply curve that shows the quantity of a product a firm in a purely competitive industry will offer to sell at various prices in the short run; the portion of the firm's short-run marginal cost curve that lies above its average-variable-cost curve.
If payroll taxes are raised
AVC and ATC rise and so does MC. The MC curve will shift upward to the left, and production output decrease
Accounting Profit
Accounting Profit = Total Revenue - Explicit Costs
Adam Weed is the owner/operator of a flower shop. Last year he earned $250,000 in total revenue. His explicit costs were $175,000 paid to his employees and suppliers (assume that this amount represents the total opportunity cost of these resources). During the year he received three offers to work for other flower shops with the highest offer being $75,000 per year. Which of the following is true about Adam's accounting and economic profit?
Accounting profit = $75,000; economic profit = $0
Profit Motive
All firms are in business to make a profit. The expectations of profit is the basic incentive to produce. The profit motive encourages firms to produce the goods and services that consumers desire, at prices they are willing to pay
Imperfect Competition
All market structures except pure competition; includes monopoly, monopolistic competition, and oligopoly.
Cartels are most effective when
All producers are included in the cartel and each producer obeys the quota that is assigned
Herfindahl-Hirschman Index (HHI)
An index of market concentration found by summing the square of percentage shares of firms in the market. It concentrates on how compact the industry is
Break-even point
An output at which a firm makes a normal profit (total revenue = total cost) but not an economic profit.
Explain why a competitive firm's marginal cost curve is the same as its supply curve.
Applying the MR (= P) = MC rule at various possible market prices leads to the conclusion that the segment of the firm's short-run marginal-cost curve that lies above the firm's average-variable-cost curve is its short-run supply curve. A competitive firm shuts down production at least temporarily if price is less than minimum average variable cost because, in those situations, producing any amount of output will always result in variable costs exceeding revenues. Shutting down therefore results in a smaller loss because the firm will lose only its fixed cost, whereas, if it operated, it would lose its fixed cost plus whatever money is lost due to variable costs exceeding revenues. Competitive firms choose to operate rather than shut down whenever price is greater than average variable cost but less than average total cost because, in those situations, revenues will always exceed variable costs. The amount by which revenues exceed variable costs can be used to help pay down some of the firm's fixed costs. Thus, the firm loses less money by operating (and paying down some of its fixed costs) than it would if it shut down (in which case it would suffer a loss equal to the full amount of its fixed costs).
This is the amount required to ensure continued supply of the product. *Find this by dividing the Total Product / Labor units.
Average Product
Raises when its less than the marginal product.
Average product in a graph:
Why does price discrimination work?
Because some customers have a more inelastic demand for a good
What kind of products does an oligopoly produce?
Both differentiated and homogeneous products
Moderately Concentrated Market
Challenge if index is raised by more than 100 points by a merger
Concentrated Market
Challenge if index is raised by more than 50 points by a merger
Monopolistic Competition
Characterized by a relatively large number of sellers producing differentiated products (clothing, furniture, books). Present in this model is widespread nonprice competition, a selling strategy in which a firm does not try to distinguish its product on the basis of price but instead on attributes like design and workmanship (an approach called product differentiation). Either entry to or exit from monopolistically competitive industries is quite easy. Number of firms: Many Type of product: Differentiated Control over price: Some, but within rather narrow limits Conditions of entry: Relatively easy Non-price competition: Considerable emphasis on advertising, brand names, trademarks Examples: Retail trade, dresses, shoes A market in which there are many firms with a little market power. Each firm differs enough to stay competitive but no one seller has a significant effect on the market. These firms have more control than perfect competition because they are able to distinguish themselves
Zero Economic Profit
Competition drives costs to minimum ATC and economic profits to zero. Point of profit maximization for perfect competition
The Competitive Process
Competitive forces drive the product's price down, making it more affordable to more consumers. Thus the market expands. Also, competitive forces spur firms to improve quality, add features, and look for lower costs
No, the firm will want to shut down.
Consider a firm that has no fixed costs and which is currently losing money. Are there any situations in which it would want to stay open for business in the short run?
What can create barriers?
Control of an input, sheer size, or some legal means of excluding competition
Monopoly: If MR < MC
Decrease output and profit will rise
Firm Demand (equation)
Demand = Price - Market Revenue = Average Revenue
What kind of products does monopolistic competition produce?
Differentiated products
What is the ideal game theory strategy?
Dominant strategy tends to be self-serving while inderdependent strategy involves small losses for all firms involved
What will an exiting firm do with leftover inventory?
Dump it on the market at a reduced price. This causes the industry price to drop further, possibly causing losses for other industry firms
Allocation of Market Shares
Each firm is assigned a quota of production, with the sum of all output being the industry's profit-maximizing rate of output. This is fixing output, which is illegal
Game Theory (Oligopoly)
Each oligopolist has to consider the potential responses of rivals when formulating price or output strategies. The strategy is a function of what the other firms choose to do and requires the creation of possible outcomes. This is called the payoff matrix
Entry/Exit: If P<ATC
Economic losses exist, firms will reduce capacity (cut back) or exit if P < AVC
Economic Profit
Economic profit = Total Revenue - Explicit Costs - Implicit Costs or Accounting Profit - Implicit Costs
Entry/Exit: If P = ATC
Economic profits are zero, firms are breaking even and will maintain existing capacity (no entry or exit) and there is no incentive to change
Entry/Exit: If P>ATC
Economic profits exist, firms will enter the industry or expand capacity
Give the names and summarize the main characteristics of the four basic market models.
Economists group industries into four models based on their market structures: (a) pure competition, (b) pure monopoly, (c) monopolistic competition, and (d) oligopoly.
inputs such as wages and salaries to its employees, whereas implicit costs are non-expenditure costs that occur through the use of self-owned resources such as foregone income.
Explicit costs are payments the firm makes for:
Marginal revenue
Extra revenue from 1 more unit, MR = ΔTR/ΔQ
Kinked Curve: Shallow (nearly horizontal) demand curve
Faced by oligopolists if rivals don't match price changes
Kinked Curve: Steep demand curve
Faced by oligopolists if rivals match price changes
Kinked Curve: Angular demand curve
Faced by oligopolists if rivals match price cuts but not price hikes
How many firms exist in oligopoly?
Few
Price Fixing
Firms explicitly agree to charge the same price. Not allowed because it creates a monopolistic hold on goods that drive price up for consumers
Any cost that in total does not change when the firm changes its output.
Fixed cost
What kind of products does perfect competition produce?
Homogeneous
Unit Labor Cost
How much it costs us to produce in terms of labor and units of output. Unit Labor Cost = wage rate / marginal physical product
Product differentiation
How we create real or perceived difference in our products
When do perfectly competitive firms exit the market?
If P<AVC
may be temporary until the price of the product increases.
If a firm's current revenues are less than its current variable costs and it decides to shut down, this decision
immediately
If a firm's current revenues are less than its current variable costs, it should shut down?
Explain how demand is seen by a purely competitive seller.
In a competitive industry, no single firm can influence market price. This means that the firm's demand curve is perfectly elastic and price equals marginal revenue.
"Price takers"
In a purely competitive market, individual firms do not exert control over product price. Each firm produces such a small fraction of total output that increasing or decreasing its output will not perceptibly influence total supply or, therefore, product price. In short, the competitive firm is a price taker: It cannot change market price; it can only adjust to it. That means that the individual competitive producer is at the mercy of the market. Asking a price higher than the market price would be futile. Consumers will not buy from firm A at $2.05 when its 9,999 competitors are selling an identical product, and therefore a perfect substitute, at $2 per unit. Conversely, because firm A can sell as much as it chooses at $2 per unit, it has no reason to charge a lower price, say, $1.95. Doing that would shrink its profit.
Monopoly: If MR > MC
Increase output and profits will rise
Economies of Scale and Market Power
Increasing scale does lower costs and economies of scale kick in. However, there is no incentive for the monopolist to expand to achieve this advantage
What are oligopolies like in their decision making?
Interdependent. Firms in an oligopoly make decisions based on what they think their competitors will do
Pure Competition
Involves a very large number of firms producing a standardized product (that is, a product like cotton, for which each producer's output is virtually identical to that of every other producer.) New firms can enter or exit the industry very easily. Number of firms: A very large number Type of product: Standardized Control over price: None Conditions of entry: Very easy, no obstacles Non-price competition: None Examples: Agriculture involves a very large number of firms producing a standardized product (that is, a product like cotton, for which each producer's output is virtually identical to that of every other producer.) New firms can enter or exit the industry very easily. Large number of firms, standardized product, no control over price, very easy entry, no nonprice competition, example: agriculture
If profit taxes are raised
Neither fixed nor variable costs are changed. Owners receive less return and may reduce investment in new business
Oligopoly
Involves only a few sellers of a standardized or differentiated product, so each firm is affected by the decisions of its rivals and must take those decisions into account in determining its own price and output. Number of firms: Few Type of product: Standardized or differentiated Control over price: Limited by mutual interdependence; considerable with collusion Conditions of entry: Significant obstacles Non-price competition: Typically a great deal, particularly with product differentiation Examples: Steel, automobiles, farm implements, many household appliances A market in which there are few firms, each with considerable market power. All competitors know each other and are aware of their actions
How far does the price go in perfect competition?
It gets pushed down until the price touches the very bottom of the ATC curve
Is entry easy in an oligopoly?
It is limited
Potential Competition
It is more likely the monopolist will take action to suppress potential competition
$300; negative $100
Linda sells 100 bottles of homemade ketchup for $10 each. The cost of the ingredients, the bottles, and the labels was $700. In addition, it took her 20 hours to make the ketchup and to do so she took time off from a job that paid her $20 per hour. Linda's accounting profit is _____________ while her economic profit is ______________.
Incentive to move product
Lower costs improve profits and stimulate output. Cost reductions promote more output
A profit-maximizing monopolist produces the rate of output where
MR = MC and determines price based on the demand curve
Monopoly Price Maximization
MR = MC is maximization for a monopoly. A monopoly's price is when Quantity of Profit Maximizing intersects with the Demand curve. Find where the MR curve intersects the MC curve (point d) for profit maximization for any kind of market (perfectly competitive or monopoly)
Profit maximization: MR-MC Approach
MR> MC: stay open and produce more, MR=MC: stop making the product, profit maximization occurs at MR=MC
How many firms exist in monopolistic competition?
Many
How many firms exist in perfect competition?
Many
Monopolistic competition
Many firms, differentiated product, some control over price, relatively easy entry, considerable emphasis on advertising (nonprice competition), examples: retail trade, dresses
The extra output or added product associated with adding a unit of a variable resource, in this case labor, to the production process *Find this by dividiing the change in total product/ change in labor input
Marginal Product
the slope of the total-product curve in graph (a) is zero.
Marginal Product in a graph is zero when:
Marginal Revenue and Price (Monopoly)
Marginal revenue is less than price
What sets price in monopoly?
Market Demand
What does a business owner want to do?
Maximize profit. He wants the overall combination of maximized product movement at the minimized production cost
What does the sales manager want to do?
Maximize sales revenue (goal is to move as much product as possible, regardless of price)
Marginal Physical Product (MPP)
Measure of added output as labor increases (in relation to price and quantity). MPP = change in Total Output / change in input labor. Shows how much more output we get for each additional unit of a certain factor
What does a production manager want to do?
Minimize production costs (do not want to maximize production at an increased expense)
Invention and Innovation
Most new products come from entrepreneurs who were not allowed to pursue their dreams while working for a large firm. They break away and start their own firms
Payoff Matrix
Multiple possible outcomes produced in game theory in an oligopoly to determine actions
Free entry and exit
New firms can freely enter and existing firms can freely leave purely competitive industries. No significant legal, technological, financial, or other obstacles prohibit new firms from selling their output in any competitive market.
Is entry easy in monopoly?
No
Is price a decision variable in perfect competition?
No
Unconcentrated Market
No challenge
An industry with a concentration ratio above 60% is considered an...
Oligopoly
How many firms exist in a monopoly?
One
Price Leadership
One firm sets the price and the others match it. Similar to price-fixing but is legal. Prices match because firms follow the actions of dominant firms (firms agree with/like the leader's path)
What kind of products does a monopoly produce?
One or many versions of the product
Nonprice Competition
Only affective tool in increasing competition in an oligopolist market. Includes advertising and product differentiation
Short-run shut down point
P< minimum AVC
Barriers to Entry in an Oligopoly
Patents, distribution control, shelf space, acquisition of a rival or startups (merger), government regulation that limits competition, brand loyalty, network economies, size
What do oligopolists do with market share?
Preserve it. If firm A's market share drops, that means one of the other firms (B, C, or D) has gained the difference in their own market share
Shutdown Decision
Produce as long as your profit is higher than AVC. Any point below intersection of MC and AVC is not worth keeping the business open
Profit Maximization for Perfect Competition
Produce at that rate of output where marginal revenue equal marginal cost (P=MC=MR)
Monopoly: If MR = MC
Produce this profit-maximizing output (break even, worth producing because nothing is lost - ensures that you acquire every shred of profit)
What quantity should this firm produce?
Produce where MR=MC; there profit is maximized or loss is minimized Produce where MR (= P) = MC; there, profit is maximized (TR exceeds TC by a maximum amount) or loss is minimized.
Monopolistic Competition Behavior
Product differentiation with a goal of creating a small monopoly with brand loyalty
What kind of efficiency exists in a perfectly competitive market?
Productive (lowest cost) and allocative (best output mix)
Monopolistic results in what in regards to efficiency?
Productive inefficiency (cost above minimum ATC) and allocative inefficiency (wrong mix of output)
Break even point
Profits= 0
last unit produced adds more to revenue than to costs, and its production must necessarily increase profits or reduce losses.
The equality of marginal revenue and marginal cost is essential for profit maximization in all market structures because when this is true the:
Explain how purely competitive firms can use the marginal-revenue-marginal-cost approach to maximize profits or minimize losses in the short run.
Provided price exceeds minimum average variable cost, a competitive firm maximizes profit or minimizes loss in the short run by producing the output at which price or marginal revenue equals marginal cost. If price is less than minimum average variable cost, a competitive firm minimizes its loss by shutting down. If price is greater than average variable cost but is less than average total cost, a competitive firm minimizes its loss by producing the P = MC amount of output. If price also exceeds average total cost, the firm maximizes its economic profit at the P = MC amount of output.
Four market models
Pure competition, pure monopoly, monopolistic competition, and oligopoly
Standardized product
Purely competitive firms produce a standardized (identical or homogeneous) product. As long as the price is the same, consumers will be indifferent about which seller to buy the product from. Buyers view the products of firms B, C, D, and E as perfect substitutes for the product of firm A. Because purely competitive firms sell standardized products, they make no attempt to differentiate their products and do not engage in other forms of nonprice competition.
What sets price in monopolistic competition?
Quality competition
Average revenue
Revenue per unit, AR = TR/Q = P
Research and Development
Since there is no competition, monopolies have little incentive to improve the product
Loss-Minimizing Case
Still produce because P > minAVC, losses at a minimum where MR=MC
What sets price in oligopoly?
Strategic behavior
A horizontal line at 2 cents per paper clip.
Suppose that the paper clip industry is perfectly competitive. Also assume that the market price for paper clips is 2 cents per paper clip. The demand curve faced by each firm in the industry is:
Total revenue
TR = P X Q
Production Function
Technological relationship expressing the maximum quantity of a good attainable from different combinations of factor inputs. Or, how much we can produce with the available factors of production (land, labor, capital)
Market Power
The ability to alter the market price of a good or service
What limits profit opportunities?
The amount of competition a firm faces. More competition means more constraint on price
Marginal Revenue
The change in total revenue that results from the sale of 1 additional unit of a firm's product; equal to the change in total revenue divided by the change in the quantity of the product sold.
Allocative Efficiency
The industry is producing the right mixture of output
Productive Efficiency
The industry produces at the lowest possible cost
Law of Diminishing Returns
The marginal physical product of a variable input (like labor) declines as more of it is employed with a given (fixed) quantity of other inputs. Added output begins to decrease quickly
Diminishing Marginal Returns
The marginal physical product of a variable input declines as more of it is employed with a given quantity of other (fixed) inputs
What sets price in perfect competition?
The market
Which of the following is likely to occur if a monopoly suddenly loses its ability to deny potential competitors entry into the market?
The market price of the product will fall
Market Structure
The number and relative size of firms in an industry
Normal Profit
The opportunity cost of capital. Equals implicit cost
Minimum Average Cost
The output at which ATC switches from being dominated by AFC to being dominated by rising AVC is the point where average costs are minimal (at their lowest). It is at this output where the firm can produce at the lowest cost per unit (minimal cost)
Market Share
The percentage of the total market produced by a single firm
MR = MC Rule
The principle that a firm will maximize its profit (or minimize its losses) by producing the output at which marginal revenue and marginal cost are equal, provided product price is equal to or greater than average variable cost.
Concentration Ratio
The proportion of total industry output produced by the largest firms (the share of industry output in sales or employment accounted for by the top 4 or 8 firms)
Total Revenue
The total number of dollars received by a firm (or firms) from the sale of a product; equal to the total expenditures for the product produced by the firm (or firms); equal to the quantity sold (demanded) multiplied by the price at which it is sold.
Characteristics of Monopoly
There has to be a total barrier to entry. There can be no close substitutes for the monopolist's product (must be relatively unique). There is no competitive pressure. Will choose to operate where they maximize profit (MR = MC)
If property taxes (a fixed cost) are raised
There is no change in the production division
Monopolistic Competition Profit Maximization
They face a downward-sloping demand curve, so MR slopes downward also. They will produce an output where MR = MC. At long-run equilibrium, economic profits tend to zero as new entrants shift supply to the right and drive down prices
Should this firm produce?
Yes, if price is equal to, or greater than, minimum AVC Yes, if price is equal to, or greater than, minimum average variable cost. This means that the firm is profitable or that its losses are less than its fixed cost.
Profit maximization: TR-TC Approach
Three questions: Should the firm produce? If so, what amount? What economic profit (loss) will be realized?
Total Cost (equation)
Total Cost = ATC * Q
How much market power does a monopoly have?
Total market power
Average Revenue
Total revenue from the sale of a product divided by the quantity of the product sold (demanded); equal to the price at which the product is sold when all units of the product are sold at the same price.
false
True or false. The U shape of the long-run ATC curve is the result of diminishing returns.
Convey how purely competitive firms can use the total-revenue-total-cost approach to maximize profits or minimize losses in the short run.
We can analyze short-run profit maximization by a competitive firm by comparing total revenue and total cost or by applying marginal analysis. A firm maximizes its short-run profit by producing the output at which total revenue exceeds total cost by the greatest amount.
Brand Loyalty
We convince the consumer that our version of a product is unique and more desirable than that of the competition and as long as the consumer remains brand-loyal, you are a monopolist. This means you can increase the price without losing the consumer's business
produces ideal results in terms of low-cost production and allocative efficiency, and can be used as a basis of comparison.
We study pure competition because it:
this is the amount required to ensure continued supply of the product.
What is the total product?
the demand curve is perfectly elastic and the price is constant regardless of the quantity demanded, so the MR is constant and equal to the price.
When an industry is purely competitive, price can be substituted for marginal revenue in the MR = MC rule because
Fixed costs include insurance and variable costs include gasoline.
Which of the following statements is true regarding the costs associated with owning and operating an automobile?
A) Accounting profit equals sales revenue minus explicit costs.
Which of the following statements is true? A) Accounting profit equals sales revenue minus explicit costs. B) Normal profit equals sales revenue minus implicit costs. C) Economic profit equals the opportunity cost. D) Accounting profit gives a true measure of the opportunity cost of the current business venture.
Is entry easy in a monopolistic competition?
Yes
Is entry easy in a perfectly competitive market?
Yes
Is price a decision variable in monopoly?
Yes
Is price a decision variable in oligopoly?
Yes
Is price a decision variable in monopolistic competition?
Yes but it is limited
Will production result in economic profit?
Yes, if price exceeds ATC (TR exceeds TC). No, if ATC exceeds price (TC exceeds TR). Yes, if price exceeds average total cost (so that TR exceeds TC). No, if average total cost exceeds price (so that TC exceeds TR).
the variable cost of the trip, the opportunity cost of time, and the need for transportation in Florida.
You are considering whether to drive your car or fly 1,000 miles to Florida for spring break. In making your decision you should consider:
A firm sells a product in a purely competitive market. The marginal cost of the product at the current output of 1000 units is $2.50. The minimum possible average variable cost is $2.00. The market price of the product is $2.50. To maximize profit or minimize losses, the firm should: A. Continue producing 1000 units B. Produce less than 1000 units C. Produce more than 1000 units D. Shut down
a
Suppose that a firm produces 200,000 units a year and sells them all for $10 each. The explicit costs of production are $1,500,000 and the implicit costs of production are $300,000. The firm has an accounting profit of: A. $500,000 and economic profit of $200,000 B. $400,000 and economic profit of $200,000 C. $300,000 and economic profit of $400,000 D. $200,000 and economic profit of $500,000
a
A monopolist will charge a higher price and produce a small quantity and will not experience a profit squeeze because
a monopolist does not need to increase quantity even if consumer demand increases.
When the average total cost curve is rising, the marginal cost curve will be
above the average total cost curve
oThe entrepreneur will go into business only if the prospect of earning more there is greater than the
alternative use of resources
If economic profits are earned in a competitive market, then over time
an additional firm will enter the market
As output increases, average fixed costs: A. Increase B. Decrease C. Remain constant D. First increase and then decrease
b
_______________________ |Amt of Labor | Total Product| |_____1____ | _____6_____| |_____2____ | _____16____| |_____3____ | _____24____| |_____4____ | _____30____| |_____5____ | _____34____| |_____6____ | _____36____| Refer to the table. The marginal product of the fourth unit of labor is: A. 4 units of output B. 6 units of output C. 8 units of output D. 30 units of output
b
_______________________ |Amt of Labor | Total Product| |_____1____ | _____6_____| |_____2____ | _____16____| |_____3____ | _____24____| |_____4____ | _____30____| |_____5____ | _____34____| |_____6____ | _____36____| Refer to the table. There are increasing marginal returns through the: A. First unit of labor B. Second unit of labor C. Third unit of labor D. Fourth unit of labor
b
_______________________ |Amt of Labor | Total Product| |_____1____ | _____6_____| |_____2____ | _____16____| |_____3____ | _____24____| |_____4____ | _____30____| |_____5____ | _____34____| |_____6____ | _____36____| Refer to the table. When the firm hires four units of labor the average product of labor is: A. 5 units of labor B. 7.5 units of labor C. 8.5 units of labor D. 30 units of labor
b
A firm should always continue to operate at a loss in the short run if: A. The firm will show a profit B. The owner enjoys helping her customers C. It can cover its variable costs and some of its fixed costs D. The firm cannot produce any other products more profitably
c
In a purely competitive industry, each firm: A. Is a price maker B. Produces a differentiated product C. Can easily enter or exit the industry D. Engages in forms of non-price competition
c
In the long run a firm will choose a plant size that has the: A. Minimum of average fixed costs B. Capacity to produce the largest quantity of a product C. Minimum average total cost of producing the target level of output D. Maximum level of resource use per unit of the total product of output
c
_______________________ |Amt of Labor | Total Product| |_____1____ | _____6_____| |_____2____ | _____16____| |_____3____ | _____24____| |_____4____ | _____30____| |_____5____ | _____34____| |_____6____ | _____36____| Refer to the table. Diminishing marginal returns set in with the addition of the: A. First unit of labor B. Second unit of labor C. Third unit of labor D. Fourth unit of labor
c
In perfect competition, when firms are entering the market, producers must improve their product and innovate technologically to remain
competitive
A firm should produce as long as: A. Short run: P>=ATC and Long Run: P>=ATC B. Short run: P>AVC and Long Run: P>AVC C. Short run: P>= ATC and Long Run: P>=MC D. Short run: P>= min AVC and Long Run: P=min ATC
d
As output increases, AFC rapidly
decreases. Any increase in output will lower AFC
When technology improves, the firm's marginal cost curve shifts
downward and supply increases
As marginal physical product curve increases, cost of production tends to
drop
As the MPP curve peaks, the cost
drops
MC will always be below ATC when ATC is
falling
In the short run, when a firm produces zero output, total cost equals
fixed costs
A monopoly charges
higher prices than competitive firms, ceteris paribus
As the MPP curve then continues to drop, the cost begins to
increase
With fixed land and capital, adding more labor will
increase production
When capital is fixed, as labor increases, output
increases
oligopoly
involves only a few sellers of a standardized or differentiated product, so each firm is affected by the decisions of its rivals and must take those decisions into account in determining its own price and output. Few firms, standardized or differentiated product, limited control on price, significant obstacles for entry, great deal with product differentiated for nonprice competition, examples: steel, auto, farm implements
Pure monopoly
is a market structure in which one firm is the sole seller of a product or service (for example, a local electric utility). One firm, unique type of product, considerable control over price, blocked entry, public relation advertising for nonprice competition, example: local utilities Is a market structure in which one firm is the sole seller of a product or service (for example, a local electric utility). Since the entry of additional firms is blocked, one firm constitutes the entire industry. The pure monopolist produces a single unique product, so product differentiation is not an issue. Number of firms: One Type of product: Unique; no close substitutes Control over price: Considerable Conditions of entry: Blocked Non-price competition: Mostly public relations advertising Examples: Local Utilities
ATC decrease when MC
is greater than ATC
ATC decreases when MC
is less than ATC
A firm's market supply curve is the same as
its marginal cost curve (S = MC)
•Investment will occur if the anticipated profits are
large enough to compensate for the effort and risk
When ATC is above the price, there is a
loss because TC > TR
The price of the good represents the
marginal benefit of the good sold
Short-run profits are maximized at the rate of output where
marginal revenue is equal to marginal cost (MR=MC)
High price and profits signal consumer's demand for
more output
Once MC rises above the firm price, the product costs
more than it was sold for
A productive activity reaps an economic profit only if it earns
more than its opportunity cost
If economic profits are high, consumers are willing to
pay more than the opportunity cost of resources to acquire a product, signaling they want more of that industry's goods
According to the theory of contestable markets, monopoly may not be a problem if
potential competition exists
A perfectly competitive market results in efficiency because
price is driven down to minimum ATC
As long as MC is below ATC, ATC will be
pulled down
The period in which at least one input is fixed in quantity is the
short run
If competition drives price below AVC for a firm, it will
shut down and exit the industry
A prefectly competitive firm is a price
taker
Perfectly competitive firms cannot individually affect market price because
there are many firms, none of which has a significant share of total output
If economic profits are negative (losses), consumers are
unwilling to pay the opportunity cost of resources to acquire a product, signaling that they want fewer of that industry's goods
