ECO #3

maximize profits π =

(P - ATC)Q

impact of wage rates

1. As the wage rises, individuals respond by increasing their consumption of leisure because with rising wages individuals obtain additional income. Assuming that leisure is a normal good, individuals will buy more of all normal goods, including leisure, as income rises. Hence, the quantity supplied of labor will decrease as the wage rate rises. 2. As the wage rises, individuals respond by decreasing their consumption of leisure because leisure has become more costly. In other words, the increased wage also has the impact of increasing the opportunity cost of leisure. As with any consumption good, as its price rises, individuals respond by decreasing the quantity consumed of that good. Hence, the quantity supplied of labor will increase as the wage rate rises.

Perfect Competition

1. Lots of buyers and sellers 2. All firms are small relative to the market. 3. Homogenous product. 4. Free entry and exit from market.

Monopoly

1. Lots of buyers only one seller 2. Single firm is the market. 3. Homogenous product. 4. Barriers to entry.

problems the firms face with collusion

1. Setting total output. 2. Setting each firm's share of total output. 3. Reducing production by non-cartel members. 4. Cheating by cartel members.

What are the requirements for a firm to successfully price discriminate?

1. The firm must have at least some market power. It is not required that the firm be a monopolist. However, perfectly competitive firms, who have no market power at all, cannot price discriminate because if they charge a price higher than the market price, plenty of competitors exist to take away their business. 2. The firm must be able to separate the market into at least two different groups of customers - high demanders, those willing to pay a higher price, and low demanders, those only willing to buy at a much lower price. If the firm can't do this, they will be unable to identify which group should pay the higher price and which the lower price. 3. The firm must be able to prevent resell of the product from low demanders to high demanders. If not, the low demanders will buy the product at a low price and become competitors of the firm, by reselling to high demanders.

natural barriers to entry

A byproduct of economies of scale A factor of fixed costs needed to produce efficiently (technologically). As size↑ LRAC ↓ For a natural monopoly economies of scale must be large enough to drive out all other competition.

Measuring market or monopoly power

A concentration ratio measures only the first source of market power, lack of competition. A concentration ratio takes the ratio of total sales of the ___ largest firms in the industry divided by the total industry sales.

perfectly competitive firm long-run industry supply decreasing cost industry

A decreasing cost industry can only occur if entry causes costs to fall. This can only happen for relatively short periods of time and occurs for two primary reasons: (1) economies of scale in a new industry and (2) new technology that decreases costs. Therefore, the price must fall with increasing output (entry) in the long-run to keep profit equal to zero and, hence, the long-run supply curve will have a negative slope.

All profit maximizing firms will hire labor until: A. MRP=MFC. B. MRP=w. C. VMP=MFC. D. VMP=w.

A. MRP=MFC.

In the long-run for a competitive industry: A. all factors of production are variable so that firms are free to enter or leave the market. B. technology may change in response to profit opportunities. C. all inputs are fixed for the industry as a whole. D. firms can earn more than normal accounting profits if demand is high. E. profits serve as a signal for entry which does not happen for other market structures (such as monopolies, oligopolies, or monopolistically competitive firms).

A. all factors of production are variable so that firms are free to enter or leave the market.

Consider the following three statements: I. A profit maximizing monopoly will employ labor and capital so that each resource price equals their marginal revenue product (MRPL = w and MRPK = i). II. Wage discrimination reduces the inefficiency of a monopsonist. III. A firm who hires labor such that VMP = MRP = MFC > w is a monopsonist. A. all three statements are true. B. all three statements are false. C. I is false while II and III are true. D. I is true while II and III are false. E. II is true while I and III are false.

A. all three statements are true.

A member of a cartel would be most likely to increase its profits by: A. cheating on cartel output restrictions by under cutting the prices of other cartel members (assuming that it did not get caught cheating). B. setting its price above that of other cartel members. C. pursuing an aggressive non-price promotions policy. D. restricting its output below the cartel-set production quota in order to drive price up. E. insisting that the cartel continually raise the price it charges.

A. cheating on cartel output restrictions by under cutting the prices of other cartel members (assuming that it did not get caught cheating).

The public-interest theory of regulation suggests that: A. consumers and workers need protection from such things as monopoly power, externalities, business misrepresentations, and other abuses as well as protection from their own ignorance. B. nearly all business activities need to be closely regulated due to monopoly power. C. business firms may manipulate government regulation for their own ends. D. only the federal government should correct failures of the market system.

A. consumers and workers need protection from such things as monopoly power, externalities, business misrepresentations, and other abuses as well as protection from their own ignorance.

If the last worker hired adds more to the firm's revenue than to the firm's cost: A. hiring the last worker causes profits to rise. B. hiring the last worker causes profits to fall. C. the firm should stop hiring additional workers. D. marginal resource cost is decreasing. E. marginal resource cost is increasing.

A. hiring the last worker causes profits to rise.

At present output levels, a perfectly competitive firm is in the following position: output = 4000 units, market price = $1, fixed costs = $2000, total variable costs = $1000, marginal cost = $1.10. This firm is: A. making a positive economic profit. B. making a zero economic profit. C. losing money, although it could make a profit by decreasing its output. D. producing the output where AVC = MC. E. not maximizing its profit but could do so by increasing its output.

A. making a positive economic profit.

When in long-run equilibrium, perfectly competitive firms: A. must employ the most efficient (least costly) production technology or be driven out of the business by competition. B. are paid a price that equals the maximum value of the long-run average cost curve. C. collectively produce more output than society desires. D. reap economic profits if the firm is exceptionally efficient. E. cover all variable costs and make a profit just sufficient to cover previous losses.

A. must employ the most efficient (least costly) production technology or be driven out of the business by competition.

Monopolistically competitive firms: A. produce where marginal revenue equals marginal cost. B. always make a positive economic profit. C. have perfectly elastic demand curves. D. are protected by high entry barriers.

A. produce where marginal revenue equals marginal cost.

Unlike a firm in pure competition, a monopoly is able to: A. reap economic profits in the long-run as long as sufficient barriers to entry exist, legal or illegal. B. generate only normal profits in the long-run. C. sustain consistent economic losses and still survive in the long-run due to substantial economies of scale. D. remain viable only in the short-run if it operates in an economically inefficient manner. E. make economic profits even if short-run total costs exceed total revenue.

A. reap economic profits in the long-run as long as sufficient barriers to entry exist, legal or illegal.

According to limit pricing models of oligopolist pricing behavior, existing firms in an oligopolistic industry can deter the entry of new firms by: A. setting lower prices and producing more than that which maximizes short-run profits, if economies of scale and capital costs are significant. B. setting lower prices and producing more than competitive firms if economies of scale are insignificant and capital costs are small. C. setting higher prices and producing less than a pure monopoly. D. encouraging government regulation and licensing. E. only by resorting to such illegal practices as price discrimination or setting price below marginal cost.

A. setting lower prices and producing more than that which maximizes short-run profits, if economies of scale and capital costs are significant.

Monopolists are allocatively inefficient because: A. the monopolist's price is greater than marginal cost. B. the monopolist's demand curve is downward sloping. C. monopolized industries do not produce at the minimum point of the average total cost curve. D. monopolists may earn a positive economic profit in the long run.

A. the monopolist's price is greater than marginal cost.

The antitrust doctrine that holds that all monopolies are illegal is known as: A. the per se doctrine B. the rule of reason doctrine C. the celler-kefauver doctrine D. the robinson-patman doctrine

A. the per se doctrine

The doctrine of "conscious parallelism": A. was developed to deal with the socially undesirable economic effects caused by oligopolies making similar pricing decisions. B. was developed by the FTC to deal with collusive oligopoly behavior. C. is used to deal with cartels in the U.S. D. is based on written documents passed between oligopoly firms. E. has its roots in existentialist philosophy.

A. was developed to deal with the socially undesirable economic effects caused by oligopolies making similar pricing decisions.

Which of the following is not a characteristic of an oligopolistic market structure? A. zero economic profits in the long-run. B. substantial barriers to entry. C. domination of the industry by a relatively small number of firms. D. awareness by individual firms that other firms will react to changes in their price.

A. zero economic profits in the long-run.

what is total cost?

ATC = TC/q AVC = TVC/q. AFC = TFC/q. TFC = AFC x q

Relationship between firm demand and market demand.

As the number of firms in the market increase then firm demand will get smaller. The increased competition also leads to more substitutes for firms and, hence, firm demand is more elastic than is market demand. As the number of firms in the market increase then firm demand will become more elastic.

Total Cost (TC) =

Average Total Cost x Quantity = P x ATC

Which of the following will not occur in the short-run when market D increases in a perfectly competitive market? A. Market price will rise. B. Each firm in the market will produce less output than previously. C. Firm profit will rise. D. Market output will rise. E. All of the above will occur.

B. Each firm in the market will produce less output than previously.

Economists would be willing to say that price discrimination is more efficient than single-price monopoly pricing if it results in: A. higher total revenue for the firm. B. an increase in net benefit for society. C. the producer capturing some of the consumer's surplus. D. some consumers paying a lower price than they would under a single-price monopoly. E. all of the above.

B. an increase in net benefit for society.

Although a monopolistically competitive firm in long-run equilibrium is producing output at an average total cost higher than the minimum, economists are not greatly concerned about this inefficiency because: A. additional firms may enter the industry and force price down. B. consumers gain satisfaction from having a wide variety of products available. C. consumers would unquestionably benefit from having fewer products produced more cheaply. D. advertising may allow a firm to expand output. E. firms are making zero economic profit.

B. consumers gain satisfaction from having a wide variety of products available.

As compared to other firms that may have monopoly power, a natural monopoly: A. faces a demand curve that is inelastic throughout its entire output range. B. has marginal and average costs that decline continuously over the entire range of industry or market demand. C. is often the result of mergers. D. is likely to have a stranglehold on raw material sources. E. faces a demand curve that is elastic throughout its entire output range.

B. has marginal and average costs that decline continuously over the entire range of industry or market demand.

A monopoly firm will produce at minimum ATC: A. when in long-run equilibrium. B. if MR happens to equal MC where ATC is at a minimum. C. if price happens to equal ATC at the output where ATC is at its minimum. D. under no circumstances. E. whenever price is everywhere below the monopolist's ATC.

B. if MR happens to equal MC where ATC is at a minimum.

The demand for labor slopes downward because: A. additional workers are usually less skilled and thus deserve lower wages. B. if another resource is fixed, hiring more workers eventually reduces output per hour worked. C. higher wages generally generate more work effort. D. as the relative price of capital falls, firms replace capital with labor.

B. if another resource is fixed, hiring more workers eventually reduces output per hour worked.

As a budding young economist you are called in to consult with a friend of yours who has just started his own business producing and selling pie cherries in Utah Valley. He tells you that in the past year, he has attempted to maximize his profits by decreasing his price below the market price. He currently sells his pie cherries for $1 a pound which is just equal to his ATC and his MC (the market price is $1.50 a pound). You do a study of the cherry industry and find that there are a very large number of pie cherry producers who are all quite small relative to the market. Further, you find that the cost of starting a cherry orchard is relatively small. What would you suggest that your friend do to maximize profits? A. increase price to the market price but decrease his output. B. increase price to the market price and increase his output. C. increase price to the market price but leave his output unchanged. D. decrease price further in an attempt to gain more market share. E. shut down since he is just barely covering his cost at the present output level.

B. increase price to the market price and increase his output.

The revenue added by the last worker hired is called the: A. marginal physical product of labor. B. marginal revenue product of labor. C. wage rate. D. marginal factor cost of labor. E. marginal utility of labor.

B. marginal revenue product of labor.

A firm that is a price taker in the labor market will hire labor to the point where the wage rate equals labor's: A. average output. B. marginal revenue product. C. average revenue product. D. marginal factor cost. E. marginal value product.

B. marginal revenue product.

A monopsony is a: A. market with only one seller. B. market with only one buyer. C. market with only one product. D. market that only employs one resource in its production process. E. market that is protected by government regulation.

B. market with only one buyer.

The economic rationale for antitrust laws is that monopoly markets are inefficient and must be made to: A. set output so that marginal social benefit exceeds marginal social cost. B. set price and output as if the market were competitive. C. reinvest profits into research and development of new technologies. D. pay taxes that shrink concentrated wealth and power.

B. set price and output as if the market were competitive.

Which of the following is not usually a characteristic of a perfectly competitive industry? A. no individual firm has any significant amount of market power. B. the market demand curve is perfectly elastic. C. any individual firm can increase its production and sales without affecting the price of the good. D. existing firms cannot bar the entry of new firms. E. all of the above are characteristics of perfectly competitive industries.

B. the market demand curve is perfectly elastic.

The short-run shutdown point for the perfectly competitive firm occurs: A. where total revenue is just sufficient to cover total cost. B. when the demand curve facing the firm is tangent to its average variable cost curve. C. where total revenue is just sufficient to cover all explicit cost but not any implicit or imputed costs. D. when the firm is able to cover all of its fixed costs and part of its variable costs. E. at the same quantity level as the long-run shutdown point.

B. when the demand curve facing the firm is tangent to its average variable cost curve.

When a perfectly competitive market's long-run supply curve is downward sloping the industry is considered a: A. Constant cost industry. B. Increasing cost industry. C. Decreasing cost industry.

C. Decreasing cost industry.

PIC65 Monopoly exploitation is measured by: A. D - L. B. H - E. C. H - F. D. H - G. E. D - C.

C. H - F.

Consider the following three statements: I. A purely competitive firm's demand for a resource depends on the value of the marginal product generated by the resource. II. Labor productivity depends on individual effort rather than on the technology used or the amounts of other resources employed. III. The value of the marginal product of a resource is found by multiplying the resource's marginal physical product times its cost. A. all three statements are true. B. all three statements are false. C. I is true while II and III are false. D. II is false while I and II are true. E. III is true while I and II are false.

C. I is true while II and III are false.

"In comparison to a monopoly industry, a perfectly competitive industry is generally:" A. both more efficient and has more market power. B. Less efficient but has more market power. C. More efficient but has less market power. D. Both less efficient and has less market power.

C. More efficient but has less market power.

In which of the following market structures are firms mutually interdependent? A. Perfect competition. B. Monopolistic competition. C. Oligopoly. D. Monopoly.

C. Oligopoly.

At the profit-maximizing output for a monopolist, price: A. always exceeds average total cost. B. is less than marginal cost. C. exceeds marginal cost. D. equals marginal cost. E. may be greater than or equal to average total cost but will never be less than average total cost.

C. exceeds marginal cost.

In the long-run, competition in competitive markets: A. yields economic inefficiency in the absence of external costs. B. results in output being produced at maximum opportunity cost. C. forces all surviving firms to adopt the most efficient technology. D. guarantees each firm long-run economic profits. E. may result in economic losses.

C. forces all surviving firms to adopt the most efficient technology.

In the long-run, competition in competitive markets: A. yields economic inefficiency with the absence of government intervention. B. results in output being produced at maximum opportunity cost. C. forces all surviving firms to adopt the most efficient technology. D. guarantees each firm economic profits. E. may result in economic losses.

C. forces all surviving firms to adopt the most efficient technology.

An indication of the technological inefficiency of the monopolist, when compared to the perfect competitor, is that: A. the monopolist's price is set above the marginal cost of the good. B. the demand curve facing the monopolist is downward sloping. C. in the long-run, a monopolist is not forced to produce at the minimum point of the average total cost curve. D. a monopolist earns more economic profit in the long-run than does the competitive firm. E. the monopolist has no competition to force him to produce where MC = MR.

C. in the long-run, a monopolist is not forced to produce at the minimum point of the average total cost curve.

When a monopoly firm is operating in a range of output where total revenue is rising as output rises, then marginal revenue: A. is also rising. B. is constant. C. is falling but is greater than zero. D. is falling but is less than zero.

C. is falling but is greater than zero.

The demand curve that confronts a monopolistically competitive firms is: A. less elastic than the demand curve that confronts the industry. B. perfectly inelastic because of numerous substitutes for the firm's product. C. less elastic than the demand curve facing a perfectly competitive firm. D. horizontal, showing that MR = P. E. perfectly elastic in the long-run, driving economic profits to zero.

C. less elastic than the demand curve facing a perfectly competitive firm.

The differences between a monopoly firm and a perfectly competitive firm include all of the following except: A. the demand curve for the monopoly is downward sloping and for the perfectly competitive firm is horizontal. B. marginal revenue is less than price for the monopoly and equal to price for the perfectly competitive firm. C. marginal cost is upward sloping for a monopoly firm and horizontal for a perfectly competitive firm. D. in the short-run, the monopoly will produce such that P > MC while perfectly competitive firms will produce such that P = MC. E. in the long-run monopolies can sustain positive economic profits while perfectly competitive firms cannot.

C. marginal cost is upward sloping for a monopoly firm and horizontal for a perfectly competitive firm.

If the monopolist operated in the inelastic range of its demand curve: A. it could raise total revenue by lowering price. B. the firm would be acting to maximize total revenue rather than profit. C. marginal revenue would be negative. D. it could increase its profit by lowering its price and increasing output. E. it could increase its profit by increasing both price and output.

C. marginal revenue would be negative.

A competitive firm's demand curve is determined by: A. firm demand and firm supply. B. the price set by the individual firm. C. market demand and market supply. D. the level of the firm's short-run average total cost. E. the MC curve above average variable cost.

C. market demand and market supply.

The socially optimal (the allocatively efficient) level of output occurs where: A. marginal revenue is maximized. B. economic profits are maximized. C. price equals marginal cost. D. marginal revenue equals marginal cost. E. total benefit to society is maximized.

C. price equals marginal cost.

One of the identifying characteristics of oligopoly is sticky prices. When economists state that prices are sticky with respect to oligopolistic industries, they mean that: A. prices are set by the market rather than the firm or, in other words, the firm is a price-taker rather than a price-setter. B. the oligopolist sets product prices so that profits are maximized at all times. C. prices are less responsive to changes in demand in oligopolies than in perfectly competitive markets. D. oligopolies practice predatory pricing, so competition in the market is reduced. E. prices are less responsive to changes in costs, either input prices or technology, than in perfectly competitive markets.

C. prices are less responsive to changes in demand in oligopolies than in perfectly competitive markets.

Consider the market for hard red winter wheat. You know that there are numerous firms in the market, all of which are relatively small. Assume further that there are no entry costs that cannot be recovered on exiting the industry. Suppose that a health fad emerges in the U.S. that encourages the consumption of natural grains and cereals. What will be the effect on profits of wheat farmers, the price of wheat and output in both the short-run and the long-run? (Assume that input prices are constant over the relevant range.) A. price, quantity and profits will rise in the short-run but remain constant in the long-run. B. price, quantity and profits will rise in both the short-run and the long-run. C. quantity will rise in both the short and the long-run, price will rise in the short-run but remain constant in the long-run, profits will rise in the short-run but fall to zero in the long-run. D. price and quantity will increase in both the short and the long-run while profits, although initially rising, will fall to zero in the long-run. E. while price, quantity, and profits will rise in the short-run it is impossible to predict what will happen in the long-run.

C. quantity will rise in both the short and the long-run, price will rise in the short-run but remain constant in the long-run, profits will rise in the short-run but fall to zero in the long-run.

The important difference between the characteristics of perfectly competitive and monopolistically competitive markets is that firms in monopolistically competitive industries: A. have a downward sloping and relatively inelastic demand (as compared to market demand.) B. do not try to maximize profits by producing where MR = MC. C. sell similar but not identical products. D. have substantial barriers to deter the entry of competing firms while perfectly competitive firms do not. E. are relatively few in number.

C. sell similar but not identical products.

If an industry is characterized by perfect competition as well as increasing costs then: A. the long-run industry supply curve is perfectly elastic. B. each firm must experience decreasing returns to scale at low levels of production. C. some of the resources used in production have supply curves that are upward sloping. D. some firms are likely to become natural monopolies. E. economies of scale are significant for all firms.

C. some of the resources used in production have supply curves that are upward sloping.

Examples of price discrimination

Chevrolet charges $500 more for a car sold in Idaho Falls, Idaho than for a car sold in Salt Lake City, Utah because of higher transportation costs. Since transportation costs are part of production costs, this is not an example of price discrimination. The SMSU bookstore gives a discount to faculty and staff for textbooks and other items that is not offered to students. It seems reasonable to assume that the costs of production are the same. Hence, this is an example of price discrimination. The local movie theatre charges a lower price to see first run movies for customers who go to matinees (movies shown during the afternoon or early evening hours). It seems reasonable to assume that the costs of production are the same. Hence, this is an example of price discrimination.

perfectly competitive firm long-run industry supply

Constant Cost Increasing Cost Decreasing Cost

A natural monopolist will shut down in the long-run when forced by regulation to set price at the socially optimum price (where P = MC) because at the output level where P = MC: A. the firm's average fixed costs are high. B. the firm may have substantial excess productive capacity. C. marginal revenue may be greater than marginal cost. D. average total cost will be greater than price.

D. average total cost will be greater than price.

The ability to "exploit" labor is minimal when a firm: A. has monopoly power. B. is regulated by the government. C. has monopsony power. D. has vigorous competition in both the output and the labor market. E. has substantial economies of scale in production.

D. has vigorous competition in both the output and the labor market.

If all monopolies and large firms were broken up into a larger number of small competing firms, the most likely result would be: A. decreases in prices in these industries because large firms are invariably less efficient than small firms. B. increases in prices in these industries because large firms are invariably more efficient than small firms. C. lower prices because competition eliminates economic profit. D. higher prices in industries which have large economies of scale.

D. higher prices in industries which have large economies of scale.

A monopolist's marginal revenue: A. is always equal to the price it charges. B. is always less than price the price it charges. C. is less than the price it charges when the monopolist can price discriminate perfectly. D. is less than the price it charges when the monopolist cannot price discriminate.

D. is less than the price it charges when the monopolist cannot price discriminate.

That portion of a monopolist's marginal cost curve lying above its AVC curve has all of the following characteristics except: A. it is upward sloping. B. it intersects the monopolist's ATC at its minimum. C. its intersection with the firm's MR curve determines the firm's profit maximizing output level. D. it is the firm's supply curve. E. all of the above are true.

D. it is the firm's supply curve.

The simple analysis of monopoly that we carried out in class suggested that monopolists are inefficient from society's viewpoint. However, monopolists may not always be inefficient. Which of the following is not an argument which could be used to justify the existence of monopoly power on the basis of economic efficiency? A. entry and exit are almost always relatively costless so that the mere threat of competition will force the monopolist's price to the competitive price. B. when substantial economies of scale exist, the monopolist may be more efficient than any number of smaller firms. C. when substantial economies of scope exist, the monopolist may be more efficient than any number of smaller firms. D. monopolist firms always have more incentive to innovate than perfectly competitive firms.

D. monopolist firms always have more incentive to innovate than perfectly competitive firms.

At present output levels, a firm in a perfectly competitive industry is in the following position: output = 1000 units, market price = $3, total cost = $6000, fixed cost = $2000, marginal cost = $3. To achieve optimum output, the firm should: A. reduce output but keep producing. B. increase its selling price. C. leave output unchanged. D. reduce output to zero. E. increase output but keep its price constant.

D. reduce output to zero.

All of the following are methods that firms in an oligopolistic industry may use to create entry barriers except: A. the proliferation of brands. B. investing in advertising so that entering firms face a high cost of entering the market. C. limit pricing. D. substantial "natural" economies of scale in production. E. all of the above are methods firms may use to deter entry.

D. substantial "natural" economies of scale in production.

demand in a monopoly market

Demand is determined by consumers not by the monopoly firm and depends upon all the normal types of factors that affect consumer choice. firm and market demand are the same because only one firm exists in the market.

monopolistically competitive industry technological efficiency

Does the firm produce at the minimum point of the average total cost curve in the long-run? In other words, we are asking whether the firm takes advantage of all economies of scale. Clearly, the answer is no. Zero profit requires a tangency between the downward sloping demand curve and the long-run average total cost curve. But that tangency ensures that the firm will be producing with long-run costs too high, inefficiency results.

monopolistically competitive firm technological efficiency

Does the firm produce on its cost curves? Clearly, as is true with perfect competition, the firm must produce on its cost curves. Competition requires it do so because if it does not profit becomes negative and the firm is driven out of business. Hence, monopolistically competitive firms will be efficient in this manner.

"Good" monopolies or trusts were exempt from antitrust action under the: A. "per se" approach to antitrust enforcement. B. Webb-Pomerene doctrine. C. Sherman Antitrust Act as amended by the Clayton Act. D. acceptable behavior guideline developed in the Robinson-Patman Act. E. "rule of reason" approach to antitrust enforcement.

E. "rule of reason" approach to antitrust enforcement.

Legal barriers to entry do not include: A. outright government prohibition of entry. B. protection of inventions or creative works by patent and copyright law. C. licensing and bonding restrictions. D. substantial economies of scale in production. E. all of the above are legal barriers to entry.

E. all of the above are legal barriers to entry.

That portion of a perfectly competitive firm's marginal cost curve lying above its AVC curve has all of the following characteristics except: A. it is upward sloping. B. it intersects the firm's ATC curve at minimum ATC. C. its intersection with the firm's MR curve determines the firm's profit maximizing output level. D. it is the firm's supply curve. E. all of the above are true.

E. all of the above are true.

When typical firms in a perfectly competitive industry are making economic profits, then all of the following will take place except: A. new firms will enter the industry. B. the industry supply curve will shift to the right. C. the firm demand curves will shift down. D. the typical firm in the industry will begin to experience a reduction in profits. E. all of the above will occur.

E. all of the above will occur.

Price discrimination: A. tends to decrease the allocative inefficiency of a monopolist. B. will provide more total revenue to the firm than the profit-maximizing price the monopolist would set in the absence of such discrimination. C. generally results in greater output than under a single price monopoly. D. when it is perfect, causes the monopolist to produce where marginal social cost is just equal to marginal social benefit. E. all of the above.

E. all of the above.

Suppose your father, who is a potato farmer in Idaho, has decided that he grows the "best, damn potatoes in the world." In other words, he is claiming that his potatoes are different than potatoes grown by other farmers. If his claim is true (and he can convince consumers of this), then: A. he can make profits in the long-run. B. he can make profits in the short-run by increasing price and quantity. C. he faces a downward sloping demand curve and his quantity decisions will have an effect on market price for his potatoes. D. while he may make a profit in the short-run, in the long-run competition will still force his profits to zero. E. c and d.

E. c and d.

In the long run, the profit-maximizing, monopolistically competitive firm fails to produce a level of output where: A. MR = MC. B. P = ATC. C. P > MC. D. MSB > MSC. E. economic profits are realized.

E. economic profits are realized.

In a monopolistically competitive industry, a firm in long-run equilibrium will be operating where price is: A. greater than average total cost (ATC) but equal to marginal cost (MC). B. greater than ATC and greater than MC. C. equal to both ATC and MC. D. equal to both marginal revenue and MC. E. greater than MC but equal to ATC.

E. greater than MC but equal to ATC.

PIC65 The firm will pay its workers a wage: A. equal to H. B. equal to G. C. equal to F. D. equal to E. E. less than E.

E. less than E.

Assuming constant total costs of production (i.e. marginal cost is equal to zero), economic profits: A. are exactly proportional to the price a monopolist charges. B. rise if price is cut in the inelastic range of a demand curve. C. fall if price is cut in the elastic range of a demand curve. D. rise when price is changed if demand is unitarily elastic. E. none of the above.

E. none of the above.

At present output levels, a perfectly competitive firm is in the following position: output = 4000 units, market price = $1.10, fixed costs = $2000, total variable costs = $1000, marginal cost = $1.00. This firm is: A. not maximizing its profit but could do so by decreasing its output. B. making a zero economic profit. C. losing money, although it could make a profit by increasing its output. D. Producing the output where ATC = MC. E. not maximizing its profit but could do so by increasing its output.

E. not maximizing its profit but could do so by increasing its output.

A monopoly firm will shutdown in the short-run when price is less than average total cost. True or False

False

Monopolies are always more likely to innovate than perfectly competitive firms. True or False

False

T or F: An industry with a concentration ratio of 1 must be a monopoly.

False false because, for example, in a four firm concentration ratio there are four ways to get a concentration ratio equal to 1: (1) the industry is a monopoly, (2) the industry has 2 firms, (3) the industry has 3 firms, (4) the industry has 4 firms.

why collude?

Firms often band together in organizations called cartels in order to reduce competition and gain monopoly/market power. Acting like a monopoly will raise profits collectively for all cartel members.

Technological efficiency occurs when:

Given the output produced, the costs of production (resources used) are minimized. or Given the costs of production (resources used), the output produced is maximized.

perfectly competitive firm long-run industry supply increasing cost industry

If scarcity does apply then: with entry, demand for resources ↑ price of resources ↑ costs of production ↑ with exit, demand for resources ↓ price of resources ↓ costs of production ↓ Therefore the price must rise with increasing output (entry) in the long-run to keep profit equal to zero. In other words, the long-run supply curve must have a positive slope.

monopolistically competitive industry allocative efficiency

Is price (or marginal social benefit) equal to marginal (social) cost? price exceeds marginal cost resulting in allocative inefficiency. Similar to a monopoly, a monopolistically competitive firm produces too little at too high a price.

Technological Efficiency for the Perfectly Competitive Market

Is the firm producing on its cost curves? Yes. First, all profit-maximizing firms wish to minimize the cost of producing a given quantity because reducing costs increase profits. Second, profit equals zero for a perfectly competitive firm in long-run equilibrium. Hence, if the firm did not choose to minimize the cost of producing its output by producing on its cost curves, ATC would increase and profit would be less than zero. In the long-run, the firm would be driven out of business by its more efficient competitors.

Technological Efficiency for the Monopoly Market Firm

Is the firm producing on its cost curves? Yes.. Recall that all profit-maximizing firms wish to minimize the cost of producing a given quantity because reducing costs increase profits.

Allocative Efficiency for the Monopoly Market

Is the firm producing where P = MC? No. Price is greater than ATC. Hence, the firm is producing too little at too high a price. Is the industry producing where MSB (D) = MSC (S)? For monopoly, there exists no supply curve.

What affects the Market Labor Supply?

Labor/Leisure choices by individuals. Population. The wage rate and its structure The Labor Force Participation Rate (LFPR). Education, Training, and Skills of potential workers.

Labor as an investment good.

Leisure is what an individual does when he is not either supplying labor or in regular daily activities, such as sleeping and showering. Hence, leisure is what an individual chooses to do with his free time. Clearly, there exists an inverse relationship between labor and leisure - as a person engages in more leisure, he must necessarily supply less labor.

Short-run profit maximization for a monopolist

MR=MC

one can always tell whether a firm is perfectly competitive or a monopolist in the output market by checking to see whether or not

MRP equals VMP; if MRPL = VMPL then the output market is competitive; if .MRPL < VMPL then the output market is a monopoly

one can always tell whether a firm is perfectly competitive or a monopolist in the output market by checking to see whether or not

MRP equals VMP; if MRPL = VMPL then the output market is competitive; if .MRPL < VMPL then the output market is a monopoly.

Marginal Revenue Product of Labor (MRPL )

MRPL equals the extra revenue generated by hiring an additional unit of labor. As a result, MRPL measures the value to the firm of hiring an additional unit of labor.

Allocative efficiency occurs when

MSB = MSC or P = MC Resources are allocated to the production of a good or goods in such a manner that society is as well off as possible. Marginal Social Cost (MSC) MSC equals the extra cost to society of producing one more unit of output. The law of diminishing returns implies that MSC will be upward sloping. Marginal Social Benefit (MSB) MSB equals the extra benefit to society of producing one more unit of output. The law of diminishing marginal utility implies that MSB will be downward sloping.

Marginal Factor Cost of Labor.

Marginal Factor Cost of Labor (MFCL) = the extra cost to the firm of hiring an additional unit of labor. The MFCL is found by the following equation: D TFCL ¸ D L Where TFCL is the Total Factor Cost of Labor and is given by the wage rate times the amount of labor hired (L).

demand for labor by the perfectly competitive firm equals

Marginal Revenue Product of Labor (MRPL)

market demand in a perfectly competitive market

Market demand is downward sloping Market demand represents the sum of the demands for all the individual consumers in the market. Thus, it is the individual consumers who determine their own demand and, hence, market demand. Their tastes/preferences for the good, income, the number of consumers in the market, prices of related goods, and expectations about future prices all combine to determine the exact characteristics of market demand.

The long-run in monopolistically competitive industries.

Monopolistically competitive industries act like perfectly competitive industries in the long-run. This is because, like perfect competition, firms can freely enter and exit the industry. That is, no entry barriers exist to keep out competition. As a result, similar to perfect competition, profit serves as a signal to firms to either enter or exit the industry in the long-run. If profit > 0 => entry occurs driving down prices and profit. With entry and more competition market demand is split between more competing firms. Hence, market demand falls and becomes more elastic. If profit < 0 => exit occurs driving up prices and profit. With exit and less competition market demand is split between fewer competing firms. Hence, market demand rises and becomes less elastic. Therefore, profit moves to profit = 0 where there exists no entry or exit => profit = 0 is the long-run equilibrium in the market, just as it is in perfect completion.

The short-run in monopolistically competitive industries.

Monopolistically competitive industries look like monopolies in the short-run. The firm has a downward sloping demand curve because of product differentiation. Profit can be positive, negative or equal to zero dependent upon market conditions. The firm produces where MR = MC. Price is given by the demand curve at profit maximizing output and profit equals (p - ATC)Q. The only difference between monopolistic competition and monopoly in the short-run is that firm demand is smaller and more elastic than market demand for monopolistic competition whereas for monopoly firm demand equals market demand.

Price discrimination

Monopoly is not as inefficient as thought Price discrimination is defined to occur whenever a firm charges different customers different prices, even though costs of production are the same for both customers. Hence, charging different prices because costs of production differ is not price discrimination.

Theory of the second best

Monopoly is not as inefficient as thought The theory of the second best focuses on the important concept that the ideal, or the first best, outcome is never achievable. Rather, we may often have to accept an outcome that is achievable even though it is not ideal. This is referred to as a second best outcome.

Contestable markets

Monopoly is not as inefficient as thought A contestable market is one with a single firm that (1) produces a product that has no close substitutes and (2) has no competition from any other firms. However, no barriers to entry prevent other firms from entering the industry. In this situation, no actual competition exists. However, the threat of competition will generally be sufficient to prevent the firm from raising the price to the monopoly level and reducing the quantity produced to the monopoly level. Hence, the monopolist is not as inefficient as thought.

Are Oligopoly Industries Efficient?

More market power in oligopoly industries tends to lead to inefficiencies and for the same reasons as in monopoly and monopolistic competition. In fact, a successful cartel acts like a monopoly and is as inefficient as a monopoly.

collusive game theory oligopoly model

Now apply game theory to the problem of firms who collude, either legally or illegally. Firms often band together in organizations called cartels in order to reduce competition and gain monopoly/market power. Acting like a monopoly will raise profits collectively for all cartel members. However, cartels tend to be unstable because of the large number of problems successful cartels must solve.

labor as a consumption good

One possible reason explaining why people supply labor is that they do so because they enjoy working. Considering labor as a consumption good, one whose consumption yields utility, allows important insights to be gained about why individuals supply labor. For example, if people gain utility from "consuming" or working at some jobs, they just as surely gain disutility (i.e., don't enjoy) working at other types of jobs.

monopolistically competitive loss minimization in the short-run

P < AVC => shutdown P ≥ AVC => produce

what are the characteristics of the monopolistically competitive firm in long-run equilibrium?

P=ATC. MC = MR. P > MC.

Legal Barriers

Patents, copyrights, and trademarks Business Practices - things that business can do to make it more costly for other firms to profitably enter the industry Price Cutting - reducing prices to make it less profitable for competing firms. Only legal if P ≥ ATC Style changes - annual style changes to increases prices for entering firms (e.g., car industry, fashion industry) - entrants have to come up with new styles every year rather than just one time.

Economies of scale (natural monopoly)

Perfect competition is not as efficient as thought A natural monopoly is defined to exist whenever a single firm can produce a given quantity in the market at a lower average cost than can any other number of smaller firms. A natural monopoly has a LRAC curve that is downward sloping (i.e., has economies of scale) for the entire range where demand is positive. Eventually, of course, LRAC will increase due to diseconomies of scale caused by increased communication costs as the firm size increases. However, that point occurs well beyond the point at which demand for the good exists so is irrelevant. Given that a single large firm always has lower average costs than do smaller firms, the larger firm will always be able to drive out smaller, less cost-effective, competitors. A monopolized industry will be the natural result of this process. What happens in this industry if the resultant monopoly is broken up into small competing firms? Each of the competitive firms will have only a small fraction of the total market quantity and, as a result, will produce at a much higher average cost and price than does the monopoly. As a result, even though the monopoly remains inefficient, small competitive firms are even more inefficient. The common prescription for a natural monopoly is to regulate the market price rather than breaking up the monopoly into smaller firms which will compete with each other.

Economies of scope

Perfect competition is not as efficient as thought Economies of scope refer to a similar situation. The scope of production, in contrast to the scale of production, refers not to increasing the quantity produced but to increasing the number of products produced by the firm. Economies of scope, thus, refer to the situation where LRAC decline as the firm produces, not more quantity of a given product, but as the number of products the firm produces increases. Consider a firm that monopolizes the production of two goods. However, only one of these goods is extremely profitable while the other good is either unprofitable or yields a zero profit to the firm. If economies of scope exist in the production of these two goods, then the single firm can produce both goods at a lower average cost than can smaller competitors. What happens in this industry if the resultant monopoly is broken up into small competing firms? Again, the average costs will rise and inefficiency will result. One example of economies of scope, commonly thought to exist, is the wide range of products provided by a hospital. It is common to observe small out-patient surgery clinics which locate around full-service hospitals. These clinics do not provide the full range of services that the hospital itself provides. Rather, they only compete with the hospital in the production of the most profitable good, out-patient surgery. They locate next to the hospital so that, if complications from the procedures they perform arise, they can quickly transport the patient to the hospital where the more complicated, and less profitable, procedures can be performed. However, it may well be the case that the cheapest method of producing both types of services is done by the hospital alone. If so, this would be an example of economies of scope.

Externalities

Perfect competition is not as efficient as thought Externalities defined: In an exchange of a good, there exist two parties internal to the exchange of the good, the buyer and seller of the good. An externality occurs whenever a third party(ies), external to the exchange, is affected by the exchange. If the third party is benefited by the exchange, this is known as a positive externality. In positive externalities, the marginal social benefit, which includes the benefit to the third party, does not equal the demand curve for the good, which includes only the private benefit to buyers of the good. Hence, marginal social benefit exceeds the demand curve. If the third party is harmed by the exchange, this is known as a negative externality. In negative externalities, the marginal social cost, which includes the cost to the third party, does not equal the supply curve for the good, which includes only the private costs of production to sellers/producers of the good. Hence, marginal social cost exceeds the supply curve.

Innovation

Perfect competition is not as efficient as thought and Monopoly is not as inefficient as thought Innovation occurs in the very long run, when technology can change. Consider an innovation, the development of new technology, which reduces the average cost of producing an existing product. For example, a chemical compound might be developed which, when added to ceramic, reduces the time it takes for ceramic products to harden.

Public Policy given this analysis?

Perfectly competitive industries yield efficient outcomes while monopolies yield inefficient outcomes. Hence, an appropriate policy, whose goal is to increase efficiency, would be to reduce monopoly power and by increasing the level of competition in monopoly markets.

Game theory definitions

Players - those who make choices in the game. Strategies - the possible choices the players can make to achieve their goals. Payoffs - the returns or profits to different choices. Payoff matrix - a matrix that shows how different choices affect the payoffs. Cooperative surplus = the extra value gained by cooperating and exchanging dominant strategy game = each party's choice is not dependent upon what the other party decides. Nash Equilibrium = a stable state of a system involving the interaction of different participants, in which no participant can gain by a unilateral change of strategy if the strategies of the others remain unchanged

illegal barriers

Price discrimination Only illegal if differences in P are not the result of differences in cost Price Cutting illegal if P < ATC Threats, violence, coercion, force, duress - note that some threats are legal (e.g., a threat to not buy or do business with someone is usually legal) and some are illegal (e.g., a threat to break someone's leg if they don't buy from you is illegal.)

price (wage) elasticity of the demand for labor

Price elasticity of demand for the product that labor produces. as demand for the good that labor produces becomes more (less) elastic then the demand for labor will also become more (less) elastic. Labor's share of total production costs. as labor's share of total costs increases (decreases) demand for labor will become more (less) elastic. Ease of resource substitution. demand for labor becomes more (less) elastic as it becomes easier (harder) to substitute other resources for labor. The time period. as the time period lengthens (shortens) demand for labor becomes more (less) elastic.

Total Revenue (TR) =

Price x Quantity = P x Q

What is product differentiation?

Product differentiation occurs when firms sell similar but not identical products. Examples Two kinds of product differentiation. Real product differentiation = actual differences exist between the goods produced by different firms. Imaginary product differentiation = no actual differences but consumer believe there are and act as if there were differences between the goods produced by different firms.

examples of monopolies

Public Utility companies (producing electricity, natural gas, and drinking water). The Postal Service (first class mail) Microsoft Corp. (found to be monopoly in both the U.S. and the E.U.) The British East India Company (British company awarded monopoly by the British crown to trade with India and China). Standard Oil Co. (found to be a monopoly and broken up by the courts in 1911). AT&T (found to be a monopoly and broken up by the courts in 1982.)

two kinds of oligopolies

Pure oligopoly - have a homogenous product. Pure because the only source of market power is lack of competition. Impure oligopoly - have a differentiated product. Impure because have both lack of competition and product differentiation as sources of market power.

what is a firm's demand for labor? (MRPL)

Recall that a firm's demand for labor is given by its marginal revenue product of labor curve. MRPL equals a firm's MR times its MPPL. Thus, for a perfectly competitive firm, a firm's Demand for labor is downward sloping because of the law of diminishing returns. That is, the law of diminishing returns ensures that the MPPL will itself be downward sloping. Since the firm's demand consists of the product of MPPL and MR, the demand curve will also be downward sloping.

firm technological efficiency

Recall that for firm technological efficiency we ask the question: Does the firm produce on its cost curves? Clearly, as is true with perfect competition, the firm must produce on its cost curves. Competition requires it do so because if it does not profit becomes negative and the firm is driven out of business. Hence, monopolistically competitive firms will be efficient in this manner.

Short-run total cost for a monopolist

TC = ATC x q

Short-run total revenue for a monopolist

TR = p x q

Major Anti-trust Laws

The Sherman Act (1890) has two major provisions: Section 1: Actions taken by firms ("contract, combination in the form of trust or otherwise, or conspiracy") that restrain trade or competition in markets are illegal. Section 2: forbids individuals from monopolizing, attempting to monopolize or to conspire with others to monopolize trade or commerce. This section, therefore, makes monopolies illegal. The Clayton Act (1914), which amends the Sherman Act and has three major provisions. Section 2 forbids price discrimination that occurs not on the basis of cost or quality. Price discrimination is allowed when it doesn't reduce competition, when there are differences in quality or cost, and for intangible services (e.g., legal or physician services). Section 3 forbids restrictive agreements between firms. That is, it forbids agreements between firms that restrict the actions of firms and reduce competition in the market. This section is referring to practices such as agreements to tie sales of one good to sales of another good that reduce competition. Section 4 forbids mergers where the merge reduces competition. The Federal Trade Commission Act (1914) which created the Federal Trade Commission (FTC) to investigate and challenge in the courts violations of anti-trust law. Robinson-Patman Act (1936), which amends the Clayton Act. Prohibits discounts and other price concessions. Allows price discrimination only when it is (1) based on differences in cost, (2) a good faith attempt to react to competition in the market, and (3) caused by differences in the marketability of the firm's product.

The Capture Theory

The capture theory focuses on a second group that may also benefit from the regulation, the firms in the industry being regulated. The capture theory suggests that firms may try and often succeed in "capturing" the regulation and using it as a barrier to entry to keep out competitors and thereby increase their prices and profits. One example that is often used here is professional licensing.

perfectly competitive markets

The ideal or first best outcome is to have all markets perfectly competitive, which would yield efficiency, both technologically and allocatively. However, it may not be possible to achieve competition in all markets. Hence, it is not clear that making only one, or a few, markets competitive will increase efficiency. Thus, the second best outcome may be keeping monopoly power.

The impact of two markets on equilibrium wages and employment.

The market for the input (the labor market). The input market can be either perfectly competitive or a monopsony. A perfectly competitive labor market is one where the firm is so small relative to the market (similar to a perfectly competitive output market) that they take the price of the input as given and hire as much of the input as they wish at that price. In other words, the firms are "wage takers." Recall that a monopoly occurs when, among other characteristics, there exists a single seller of a good or resource. Conversely, a monopsony occurs when there exists a single buyer of a good or resource. Hence, in a monopsony labor market, in contrast to having many firms hiring labor, only one firm is hiring labor. The market for the output. We will consider below the impact that the level of competition in the output market will have upon equilibrium in the labor market. The equilibrium in the labor market will be examined for the two extremes, either perfectly competitive or monopoly output markets.

The Public Choice Theory

The public choice theory is sometimes known as the political economy theory. This theory focuses on a third party beside the public (consumers) or the industry being regulated (firms). Rather, the public choice theory assumes that the regulation serves the best interest of those individuals who are doing the regulation, either as elected officials or as bureaucrats in a regulatory agency. The theory suggests that the regulators use the regulation, essentially "selling" it in an indirect manner, in order to make themselves better off.

why regulate?

The public interest theory suggests that regulation is in the best interest of the public. Regulating monopoly power, the case of the natural monopoly. Externalities

regulation

The public interest theory suggests that regulation is in the best interest of the public. For example, there are a number of instances where competitive markets fail to act efficiently and where regulation is often used to improve the market's efficiency.

Supreme Court interpretations of anti-trust law

The rule of reason approach to anti-trust. The early judicial interpretation by the U.S. Supreme Court found that the meaning of the Sherman Act meant that monopolies could be "good" or "bad". The court found that only the bad monopolies and bad monopoly practices were illegal under the Sherman Act. Whether a given practice was considered bad or good depended upon things like how much of the market was affected and how long the practice would last. The courts spent much of their time over the next few years ruling on the legality of specific practices. The Per Se Doctrine. The U.S. Supreme Court can change its mind over time, which happened with its interpretation of anti-trust law in 1945 in the case U.S. v. Aluminum Co. of America (ALCOA). The Court found that the Sherman Act does not allow "good" monopolies and monopoly practices and disallow "bad" ones but, rather, simply disallows all monopolies and monopoly practices per se (because they exist).

How do perfectly competitive firms maximize profits (π ) in the short-run?

Total Cost and Total Revenue approach π=TR-TC Total Revenue (TR) = Price x Quantity = P x Q Total Cost (TC) = Average Total Cost x Quantity = P x ATC Hence,π=P x Q-P x ATC=(P-ATC)Q Marginal Cost and Marginal Revenue approach Marginal Cost = the extra cost of producing one more unit of output = Δ TC / Δ q. Marginal Revenue = the extra revenue of producing one more unit of output = Δ TR / Δ q. maximum profit occurs where the distance between the two curves (TC and TR) is at its largest.

A perfectly competitive firm is a price taker. True or False

True

A perfectly competitive firm will shutdown in the long-run whenever price is less than average total cost. True or False

True

T or F: A monopoly will always have a concentration ratio that equals 1.

True true because in a monopoly the single firm is the market. Hence, total sales of 1, 2, 3, or any number of firms will always equal total industry sales.

Value of the Marginal Product of Labor (VMPL )

VMPL equals the extra social (or market) value generated by hiring an additional unit of labor. VMPL measures the value to society of hiring an additional unit of labor.

value of the marginal product of labor

VMPL equals the extra social (or market) value generated by hiring an additional unit of labor. VMPL measures the value to society of hiring an additional unit of labor.

Game theory

a mathematical method of analyzing the outcomes of choices made by people or organizations that are interdependent.

A natural monopoly is defined to exist whenever

a single firm can produce a given quantity in the market at a lower average cost than can any other number of smaller firms.

what affects a firm's demand for labor?

anything that increases (decreases) either MR or MPPL will increase (decrease) the demand curve. Marginal Revenue The source of marginal revenue is the firm's output market. For a perfectly competitive firm, their MR is determined by the price set in the market. Hence, anything that increases market prices will increase the firm's MR and, as a result, increase the firm's demand for labor. Likewise, anything that decreases market prices will have the reverse impact. Marginal Product of Labor Technology: Recall that the way that we defined an increase in technology was as any change in the production process that allowed the same number of resources to produce a larger output. Such an increase in technology can be focused on labor and, hence, make labor more productive which will, in turn, increase the firm's demand for labor. Likewise, a decrease in technology will decrease a firm's demand for labor. Human Capital: human capital represents investment in education or training that increases a worker's productivity. Hence, as workers invest in human capital then the firm's demand for that labor will increase. The reverse will occur if worker's allowed their human capital to deteriorate. In addition to the impact of MR or MPPL, firms will also change their demand for labor based upon the prices of related resources. Demand for labor will change because firms are attempting to minimize the costs of producing a given output by changing their use of inputs based upon the input prices. Resources can be related in two separate manners: Complements - two resources are complements if they must be used together in the production process. If the price of a resource that is a complement to labor rises, then the firm will use less of that resource in the production of the product. Since the two resources are complementary, the firm will also use less labor as well and, hence, demand for labor will fall. If the price of the complementary resource falls, then the demand for labor will rise. Substitutes - two resources are substitutes if they can be substituted for each other in the production process. If the price of a resource that is a substitute for labor rises, then the firm will use less of that resource and more of its substitute, labor. Hence, demand for labor will rise. Likewise, if the price of the substitutable resource falls, then the demand for labor will fall.

Impact of product differentiation on firm demand.

differentiation causes a firm's demand to become larger and less elastic. If that firm can differentiate its product then it will no longer be a price taker. Rather, it can now raise its price and not lose all of its quantity demanded, although it will still lose some.

a natural monopoly has a LRAC curve that is

downward sloping (i.e., has economies of scale) for the entire range where demand is positive.

industry technological efficiency requires that

each firm in the industry produce where its ATC is at its minimum point.

A monopsony firm in the labor market faces the

entire market supply of labor curve and, hence, its labor supply is upward sloping. The labor supply curve determines the wage the firm can pay to a obtain a given amount of labor. However, the firm's MFCL curve exceeds the firm's labor supply curve, although it is also upward sloping.

what happens to an existing firm's demand when firms enter or exit the industry?

entry market demand falls and becomes more elastic exit market demand rises and becomes less elastic.

marginal revenue product of labor

equals the extra revenue generated by hiring an additional unit of labor. As a result, MRPL measures the value to the firm of hiring an additional unit of labor. Hence, demand for labor by the firm equals MRPL.

A monopoly firm in the output market has a price that

exceeds its marginal revenue and, hence, its VMPL curve will exceeds its MRPL curve. Both will be downward sloping, as discussed above, partially because of diminishing returns but also because a monopolist's marginal revenue curve and demand curve (price) are downward sloping.

The difference between the two, VMP minus the wage, equals

exploitation

T or F - A monopoly can charge any price it wants and the consumer must pay that price.

false, even though the first part is correct. In fact, any firm can charge any price it wants as a general rule.

Why do Firms demand labor?

firms only demand labor in order to produce the good that they sell to consumers. As a result, demand for labor, as with all resources, is ultimately derived from the demand for the good being produced by labor. Without any demand for that good there would exist no demand for labor.

Firm technological efficiency

given the quantity produced, the firm is producing on their cost curves.

maximize profit where MR=MC. Why?

if MC<MR you are not producing maximum quantity. if MC>MR you are producing to much quantity. if MC=MR you are producing the maximum quantity.

perfectly competitive firm long-run industry supply constant cost industry

if scarcity does not apply, then with entry, the demand for resources ↑ but the price of resources remains constant and the cost of inputs is also constant. Therefore price of the output remains constant in the long-run to keep profit equal to zero. Assumes neither market entry nor exit affects production costs. During entry input supply ↑ During exit input supply ↓

Why do individuals invest in Human Capital?

individuals view education as a consumption good, one that yields utility. This implies that, all else equal, individuals will tend to choose education in subjects that interest them. Or, conversely, if they are to become educated in a subject that they find less inherently interesting, they must be compensated by a relatively higher wage. Another possibility is that individuals view education as an investment, one that yields a stream of income.

labor vs. leisure

inverse relationship between labor and leisure - as a person engages in more leisure, he must necessarily supply less labor.

A perfectly competitive firm in the labor market is a wage taker and, hence, its

labor supply curve is perfectly elastic at the market wage and equal to its MFCL curve.

Monopolistic Competition

large number of potential buyers and sellers differentiated product (every firm produces a different product) buyers and sellers are small relative to the market no barriers to entry or exit

Oligopoly

large number of potential buyers but only a few sellers homogenous or differentiated product buyers are small relative to the market but sellers are large barriers to entry

characteristics of an oligopoly are:

large number of potential buyers but only a few sellers homogenous or differentiated product buyers are small relative to the market but sellers are large barriers to entry

single large firm always has

lower average costs than do smaller firms, the larger firm will always be able to drive out smaller, less cost-effective, competitors

as long as MSB is less than MSC, society is

made better off by decreasing output

A perfectly competitive firm in the output market has price equal to

marginal revenue and, hence, its MRPL curve equals its VMPL curve. Both will be downward sloping, because of the law of diminishing returns.

Market Demand for Labor.

market demand for labor consists of the summation of all the individual demand curves for individuals consuming in the market. In this case, since it is firms who demand labor, market demand consists of the sum of all the individual firm demand curves.

What does the Market supply of labor look like?

market labor supply curves will tend to remain positively sloped rather than backward bending.

are monopolistically competitive industries efficient?

monopolistically competitive are more efficient than monopolies but less efficient than perfectly competitive firms.

antitrust - the rationale

monopoly power leads to market inefficiencies and must be curtailed to make markets more efficient.

can the market supply curve be backward bending?

no

what is the Monopoly firm's short-run supply curve?

no supply curve exists

what is the Monopoly industry's short-run supply curve?

no supply curve exists

Wage Income Effect

of a wage increase and indicates that an individual's supply of labor curve is downward sloping.

Wage Substitution Effect

of a wage increase and indicates that an individual's supply of labor curve is upward sloping.

firm demand in a perfectly competitive market

perfectly competitive firm has a demand curve that is perfectly elastic at the market price.

what is total revenue?

price times quantity; P x Q

price taker

take the market price as given and decide how much to produce

what is the perfectly competitive firm's short-run supply curve?

the MC curve is the firm's supply curve.

Marginal Cost

the extra cost of producing one more unit of output = Δ TC / Δ q is u-shaped because of the law of diminishing returns.

Marginal Revenue

the extra revenue of producing one more unit of output = Δ TR / Δ q.

Allocative Efficiency for the Perfectly Competitive Market

the firm producing where P(MSB) = MC(MSC)

suppose profit < 0? when will the perfectly competitive firm shutdown? how do fixed costs impact the decision?

the firm should only shut down if it cannot cover those costs that it can avoid by shutting down - the total variable costs. Thus, firms should continue to produce as long as their revenue covers the variable costs. Fixed costs are irrelevant.

perfectly competitive short-run shut down point

the firm should shut down if price falls below AVC. must cover variable costs or else shut down

what is the perfectly competitive industry/market short-run supply curve?

the industry short-run supply curve is also a measure of industry MC.

an individual's supply of labor curve

the supply of labor curve would be backward bending Notice that the Substitution Effect and the Income Effect occur simultaneously as the wage rate changes and that they have exactly opposite impacts upon the quantity supplied of labor. Whether the supply of labor curve is upward sloping or downward sloping depends upon which of these two effects is larger. Which effect dominates is, in fact, an empirical question. Studies of real world behavior tend to demonstrate that the Substitution Effect dominates at low wage levels and that the Income Effect dominates at high wage levels for most people.

compensating wage differential

the worker is being compensated for the unfavorable job aspects with the higher wage.

Average total cost

total cost (TC) / quantity (Q)

maximize profits (π ) =

total revenue (TR) - total cost (TC)

what is mutual interdependence? Why are oligopoly firms mutually interdependent?

what one firm does affect their competitors. In oligopoly markets, other competitors both exist and are large enough that a firm must respond to their actions or be driven out of business.

Why does oligopoly exist? Barriers to entry in oligopoly industries.

when only one firm can produce at the lowest cost or when LRAC is declining over the entire range of demand. For the most part, the artificial barriers to entry discussed under monopoly are still the same for oligopoly. Both legal and illegal business practices do differ between monopoly and oligopoly industries.

natural monopoly

when the LRAC is declining over the entire range of demand exist whenever a single firm can produce a given quantity in the market at a lower average cost than can any other number of smaller firms.

what is a monopsony?

when there exists a single buyer of a good or resource.

Short-run total profit for a monopolist

π = TR - TC π = TR - TC = (p x q - ATC)q = (p - ATC)q.

what is total profit?

π = TR - TC π = TR - TC = p x q - ATC x q = (p - ATC) q

The long-run in competitive markets entry into the market is possible in the long-run when

π > 0, the positive profits attract firms to the market in the long-run More firms increases market supply Increased supply decreases price This process continues until π = 0 If π < 0, the negative profits cause some firms to go out of business / leave industry in the long-run Fewer firms decreases supply Decreased supply increases price This process continues until π = 0 Thus in the long-run π must equal 0

loss minimization and the short-run shut down point for perfectly competitive

π > 0, which occurs whenever P > ATC. In this case firms clearly continue to produce. π = 0, which occurs whenever P = ATC. In this case firms will still continue to produce (zero economic profit implies that all costs, including opportunity costs are covered.) π < 0, which occurs whenever P < ATC.

short-run loss minimization for the monopolist

π > 0, which occurs whenever P > ATC. In this case the firm clearly continues to produce. π = 0, which occurs whenever P = ATC. In this case the firm will still continue to produce (zero economic profit implies that all costs, including opportunity costs are covered.) π < 0, which occurs whenever P < ATC. firms should only shut down if they cannot cover their variable (not fixed) costs. Thus, if price falls below AVC then the firm will shutdown.