Eco ch. 11,12, 15

Suppose a firm has monopoly power in the production of a particular good. If it finds that revenue and cost conditions are such that at all levels of output the price it can charge in order to sell all of the units is less than the average variable costs then it is in the firm's best interest to: A) close down because its operating losses will exceed its shut-down losses at all levels of output B) maximize profits by producing where MR = MC C) close down because its total operating cost will exceed its total revenue D) minimize losses by producing where MR = MC

A

Average revenue (AR)

AR = TR/Q total revenue divided by the quantity of the product sold

Isocost line

All the combinations of two inputs, such as capital and labor, that have the same total cost. The slope of the isocost line remains constant, because it is always equal to the price of the input on the horizontal axis divided by the price of the input on the vertical axis, multiplied by -1.

Collusion

An agreement among firms to charge the same price or otherwise not to compete. illegal

Once we have determined the quantity where MC=MR, we can immediately know whether the firm is making a profit, breaking even, or making a loss.

If P > ATC, the firm is making a profit If P = ATC, the firm is breaking even If P < ATC, the firm is making a loss Even better: these statements hold true at every level of output.

For a uniform-price monopolist _______________; and for a perfectly competitive firm _______________ :

P = AR > MR; P = MR = AR

Profit =

P = TR - TC Total Revenue − Total Cost We assume that all firms try to maximize profits—including perfectly competitive ones.

In the U.S., governments block entry in two main ways:

Patents and copyrights

Why might a car company experience economies of scale?

Production might increase at a greater than proportional rate as inputs increase. Having more workers can allow specialization. Large firms may be able to purchase inputs at lower prices.

Suppose a firms production function is Q = 2K0.5 L0.5. If the level of capital is fixed at 16 units, then the firms short run production function is:

Q = 8L0.5

Consider a firm whose production function is Q = 0.4K0.5 L0.5. Its level of capital is fixed at 100 units, the price of labor is PL = $4 per unit, and the price of capital is PK = $2 per unit. Given this information, the firms total cost function is:

TC = 200 + Q2/4

Consider a perfectly competitive market described by the demand function P = 75 - 0.45Q and supply function P = 15 + 0.3Q. If the market is in equilibrium, then an individual firm's total revenue (TR), average revenue (AR) and marginal revenue (MR) functions are:

TR = 39Q, AR = 39, and MR = 39

In the graph on the left, price never exceeds average cost, so the firm could not possibly make a profit.

The best this firm can do is to break even, obtaining no profit but incurring no loss. The MC=MR rule leads us to this optimal level of production.

marginal cost

The marginal cost of production is the change in total cost that comes from making or producing one additional item. The purpose of analyzing marginal cost is to determine at what point an organization can achieve economies of scale. The calculation is most often used among manufacturers as a means of isolating an optimum production level. 𝑀𝐶=∆𝑇𝐶/∆𝑄

minimum efficient scale.

The minimum efficient scale is the smallest amount of production a company can achieve while still taking full advantage of economies of scale with regards to supplies and costs. In classical economics, the minimum efficient scale is defined as the lowest production point at which long-run total average costs (LRATC) are minimized.

Market Definition

The more broadly defined the market, the smaller (and more harmless) the merger appears. The "appropriate market" is defined as the smallest market containing the firms' products for which an overall price rise within the market would result in total market profits increasing. (If profits would decrease, there must be adequate substitutes available; hence the market is too narrowly defined.) as the sum total of all the buyers and sellers in the area or region under consideration. The area may be the earth, or countries, regions, states, or cities. The value, cost and price of items traded are as per forces of supply and demand in a market. The market may be a physical entity, or may be virtual. It may be local or global, perfect and imperfect.

To make analysis simple, let's consider only two inputs: The pizza ovens, and Workers

The pizza ovens will be a fixed cost; we will assume Jill cannot change (in the short run) the number of ovens she has. The workers will be a variable cost; we will assume Jill can easily change the number of workers she hires.

Technology

The processes a firm uses to turn inputs into outputs of goods and services.

So if P < AVC, the firm should produce

0 units of output

Explain why firms may shut down temporarily. Suppose a firm in a perfectly competitive market is making a loss. It would like the price to be higher, but it is a price-taker, so it cannot raise the price. That leaves two options:

1. Continue to produce, or 2. Stop production by shutting down temporarily If the firm shuts down, it will still need to pay its fixed costs. The firm needs to decide whether to incur only its fixed costs or to produce and incur some variable costs, but obtain some revenue.

For a firm to exist as a monopoly, there must be barriers to entry preventing other firms coming in and competing with it. The four main reasons for these barriers to entry are

1. Government restrictions on entry 2. Control of a key resource 3. Network externalities 4. Natural monopoly

Technological change

A change in the ability of a firm to produce a given level of output with a given quantity of inputs.

Explicit cost

A cost that involves spending money The explicit costs of running a firm are relatively easy to identify: just look at what the firm spends money on.

Long-run supply curve

A curve that shows the relationship in the long run between market price and the quantity supplied.

public franchise

A government designation that a firm is the only legal provider of a good or service These might exist, for example, in electricity or water markets. Sometimes (more commonly in Europe than the U.S.) governments even operate these firms as a public enterprise. A U.S. example of this is the U.S. Postal Service.

Implicit cost:

A nonmonetary opportunity cost The implicit costs are a little harder; finding them involves identifying the resources used in the firm that could have been used for another beneficial purpose. Example: If you own your own firm, you probably spend time working on the firm's activities. Even if you don't "pay yourself" explicitly for that time, it is still an opportunity cost.

Price =

Average Revenue = Marginal Revenue Revenue for a perfectly competitive firm is easy: the firm receives the same amount of money for every unit of output it sells.

The law of diminishing marginal product (or returns) describes the: A) relationship between total costs and total revenues B) profit-maximizing position of a firm C) relationship between resource inputs and product outputs in the short run D) relationship between resource inputs and product outputs in the long run

C.) relationship between resource inputs and product outputs in the short run

constant returns to scale

Constant returns to scale occurs when increasing the number of inputs leads to an equivalent increase in the output. At some point, growing larger does not allow more economies of scale. its long-run average cost remains unchanged as it increases output.

Suppose that a monopolist is producing a level of output (Q) such that AVC = $10, AFC = $2, P = $10, MR = $8, and MC = $6. Based on this information, the firm is realizing: A) a profit which could be increased by reducing price and increasing output B) a loss which could be reduced by increasing price and reducing output C) a profit which could be increased by increasing price and reducing output D) a loss which could be reduced by reducing price and increasing output

D) a loss which could be reduced by reducing price and increasing output

A firm's total variable costs will depend upon: A) the prices of its variable inputs B) the production techniques that are used C) the amount of output produced D) all of the above are correct

D) all of the above are correct

Consider the following production function: Q = 3L*.05 K*.05 where Q = units of output; L = units of labor; K = units of capital Derive the short-run production function if the level of capital (K) is fixed at 16 units.

If capital is fixed at K=16 units, then the short run production function is: Q= 3L*^1/2(16*^1/2) =3L*1/2*4 =12L*^1/2

Suppose you live in a small town with only one pizzeria. Is that pizzeria a monopoly? 1. It has competition from other fast food restaurants 2. It has competition from grocery stores that provide pizzas for you to cook at home

If you consider these alternatives to be close substitutes for pizzeria pizza, then the pizza restaurant is not a monopoly. If you do not consider these alternatives to be close substitutes for pizzeria pizza, then the pizza restaurant is a monopoly. Regardless, the pizzeria's unique position may afford it some monopoly power to raise prices and obtain economic profit.

Antitrust laws

Laws aimed at eliminating collusion and promoting competition among firms.

The monopolist maximizes profit by producing the quantity where the additional revenue from the last unit (marginal revenue) just equals the additional cost incurred from its production (marginal cost).

MC = MR determines quantity for a monopolist.

Because monopolies reduce consumer surplus and economic efficiency, governments regulate their behavior.

Many governments try to stop firms colluding and seek to prevent mergers and acquisitions creating large firms, through antitrust laws.

A firm maximizes profit at the level of output at which marginal revenue equals marginal cost.

The difference between price and average total cost equals profit per unit of output. Total profit equals profit per unit of output, times the amount of output: the area of the green rectangle on the graph.

In fact, monopolists act very much like monopolistic competitors: they face a downward sloping demand curve.

The difference is that barriers to entry will prevent other firms from competing away their economic profit.

Marginal revenue is constant and equal to price for the perfectly competitive firm.

The firm maximizes profit by choosing the level of output where marginal revenue is equal to marginal cost (or just less, if equal is not possible).

economies of scale

The firm's long-run average costs falling as it increases the quantity of output it produces. Here, a small car factory can produce at a lower average cost than a large one, for small quantities. For more output, a larger factory is more efficient.

law of diminishing marginal product (or returns)

The law states that as more of a variable input, such as labor is employed beyond a point, output will increase at a decreasing rate An important relationship between variable inputs and output in the short run is given by the

perfectly competitive market

There are many buyers and sellers, All firms sell identical products, and There are no barriers to new firms entering the market.

Since there are barriers to entry, additional firms cannot enter the market.

There is no distinction between the short run and long run for a monopoly. Then unlike for monopolistic competition, we expect monopolists to continue to earn profits in the long run.

price takers

They are unable to affect the market price. This is because they are tiny relative to the market and sell exactly the same product as everyone else. As you might have already guessed, perfectly competitive markets are relatively rare. By definition, a perfectly competitive firm is too small to affect the market price.

monopolists have no competitors and hence no concern about strategic interactions.

They seek to maximize profit by choosing a quantity to produce, just like perfect and monopolistic competitors.

average total cost

Total cost divided by the quantity of output produced If we divide the total cost of the pizzas by the number of pizzas, we get the average total cost of the pizzas. For low levels of production, the average cost falls as the number of pizzas rises; at higher levels, the average cost rises as the number of pizzas rises. ATC = TC/Q therefore TC= ATC(Q)

Monopolistic Competition

Type of product: Differentiated Type of imperfect competition such that many producers sell products that are differentiated from one another (e.g. by branding or quality) and hence are not perfect substitutes. Examples of industries: Clothing stores Restaurants

Perfect Competition

Type of product: Identical the situation prevailing in a market in which buyers and sellers are so numerous and well informed that all elements of monopoly are absent and the market price of a commodity is beyond the control of individual buyers and sellers. Examples of industries: Growing wheat Poultry farming

Oligopoly

Type of product: Unique a select few companies having significant influence over an industry A state of limited competition, in which a market is shared by a small number of producers or sellers. Examples of industries: First-class mail delivery Providing tap water

The division of time into the short and long run reveals two types of costs

Variable costs Fixed Costs

isoquant

a curve that shows all the combinations of inputs that yield the same level of output. 'Iso' means equal and 'quant' means quantity. Therefore, an isoquant represents a constant quantity of output. a curve showing all combinations of two inputs, such as capital and labor, that will produce the same level of output.

If a production process undergoes a technological improvement then

a given amount of inputs will yield more output the short run production function (or total product curve) will rotate upward total variable cost and average variable cost will be reduced at all positive levels of output a given amount of output may be produced with fewer inputs ALL OF THE ABOVE

Productive efficiency

a situation in which a good or service is produced at the lowest possible cost.

Variable costs

are costs that change as output changes In the long run, all of a firm's costs are variable, since the long run is a sufficiently long time to alter the level of any input.

Fixed costs

are costs that remain constant as output changes

short run

as a period of time during which at least one of a firm's inputs is fixed. Example: A firm might have a long-term lease on a factory that is too costly to get out of.

network externalities

as a product characteristic whereby the usefulness of a product increases with the number of consumers who use it. Examples: Auction sites (like eBay) Computer operating systems (like Windows) Social networking sites (like Facebook)

average product of labor

calculated as the total product (output) produced by a firm divided by the quantity. APL = Q/L With 3 workers, the restaurant can produce 550 pizzas, giving an average product of labor of: 550/3=183.3

The market demand curve for a good that is produced and traded in a perfectly competitive market is ______, while the demand curve for a single competitive firm's good is ______.

downward sloping, perfectly elastic

Consider a perfectly competitive firm that produces and sells 40 units of output per-period (e.g., weekly) at the market price of $6. If average fixed cost is $2, average variable cost is $1, and marginal cost is $6, then the firm: i. is maximizing total profit by producing and selling 40 units of output ii. is earning a per-period total profit of $240 iii. is earning a per-period total profit of $120 iv. should close down in the short run and suffer a loss equal to $80

i. is maximizing total profit by producing and selling 40 units of output iii. is earning a per-period total profit of $120

market is concentrated

if a relatively small number of firms have a large share of total sales in the market. To determine if a market is concentrated, the government uses the Herfindahl-Hirschman Index (HHI) created by squaring the percentage market shares of each firm and adding up the results.

Suppose a monopoly is operating in the short run. Under which of the following situations would it increase its per-period total profits by lowering price and increasing output:

if it were producing a level of output such that MC < MR

A 'natural' monopoly, such as a local electricity provider, is the result of: i. a firm owning or controlling a key input used in the production process ii. long-run total costs declining continuously as output increases iii. long-run average total costs declining continuously as output increases iv. economies of scale existing over a wide range of output

iii and iv

In economics, the difference between the short run and the long run is that

in short run at least one input is fixed whereas in the long run no inputs are fixed

Total cost

is the cost of all the inputs a firm uses in production Total cost = Fixed cost +Variable cost 𝑇𝐶 = 𝐹𝐶 + 𝑉𝐶

natural monopoly

occurs when economies of scale are so large that one firm can supply the entire market at a lower average total cost than can two or more firms. Natural monopolies are most likely when fixed costs are high. Example: A firm producing electricity must make a substantial investment in production and distribution infrastructure; the marginal cost of producing another hour of electricity is low. they face a downward sloping demand curve.

production function

the relationship between the inputs employed and the maximum output from those inputs. Jill Johnson's restaurant has a particular technology by which it transforms workers and pizza ovens into pizzas. With more workers, Jill can produce more pizzas. This is the firm's production function

What do economies of scale, the exclusive ownership of essential raw materials used in the production process, and patents have in common?

they are all barriers to entry

The principle that a firm should produce up to the point where the marginal revenue from the sale of an extra unit of output is equal to the marginal cost of producing the extra unit applies:

to both perfectly competitive firms and monopolies

If a firm employs 1 unit of labor, then 6 units of output will be produced; if it employs 2 units of labor, then 10 units of output will be produced; and if it employs 3 units of labor, then 12 units of output will be produced. It follows that:

total output is increasing at a decreasing rate and the marginal product of labor is decreasing

The relationship between inputs and outputs in the short run is described by the law of diminishing marginal product (or returns). The shapes of which cost curves can be attributed to the law?

total variable cost, total cost, average variable cost, average total cost, and marginal cost

Suppose an entrepreneur rents a facility at which she bakes pizzas using labor, machinery and ingredients. Which of the following best describes one of the entrepreneurs short run variable costs?

total weekly payments made to laborers

vertical mergers

two firms at different stages of the production process.

average variable cost

variable cost divided by the quantity of output produced. AVC = VC/Q

diseconomies of scale

Diseconomies of scale occur when a business grows so large that the costs per unit increase. As output rises, it is not inevitable that unit costs will fall. Sometimes a business can get too big! Diseconomies of scale occur for several reasons, but all as a result of the difficulties of managing a larger workforce. a situation in which a firm's long-run average costs rise as the firm increases output. firms might get so large that they experience diseconomies of scale

11. If the level of technology used in the production of a good improves: A) a given amount of inputs will yield more output B) the total product curve will rotate upward C) total variable cost and average variable cost will be reduced at all positive levels of output D) a given amount of output may be produced with fewer inputs E) all of the above

E) all of the above

DOJ and FTC Merger Guidelines Economists and lawyers at the Department of Justice and the Federal Trade Commission have developed guidelines for themselves and firms to use in evaluating whether a potential merger is acceptable.

1. Market definition 2. Measure of concentration 3. Merger standards

As the monopolist decreases price to expand output, two effects occur

1. Revenue increases from selling an extra unit of output. 2. Revenue decreases, because the price reduction is shared with existing customers So marginal revenue is always below demand for a monopolist.

Rules for Profit Maximization The rules we have just developed for profit maximization are:

1. The profit-maximizing level of output is where the difference between total revenue and total cost is greatest, and 2. The profit-maximizing level of output is also where MR = MC. For perfectly competitive firms, we can develop an additional rule, because for those firms, P = MR; this implies: 3. The profit-maximizing level of output is also where P = MC.

Consider a short run production process where MP increases initially and then decreases. As output continuously increases from zero: A) TVC will increase initially at a decreasing rate but will eventually increase at an increasing rate B) TFC will increase by a constant amount C) the sum of TVC and TFC will increase initially at an increasing rate but will eventually increase at a decreasing rate D) TVC will increase initially at an increasing rate but will eventually increase at a decreasing rate

A) TVC will increase initially at a decreasing rate but will eventually increase at an increasing rate

10. If a firm's total fixed costs increase: A) average fixed costs and average total costs would rise B) marginal costs and average variable costs would both rise C) average fixed costs and average variable costs would rise D) average fixed costs would rise, but marginal costs would fall

A) average fixed costs and average total costs would rise

8. Suppose a pure monopolist is charging a price of $12 and the associated marginal revenue is $9. We thus know that: A) demand is elastic at this price B) demand is inelastic at this price C) the firm is maximizing profits D) total revenue is at a maximum

A) demand is elastic at this price

Suppose that workers at a firm shirk and management does not discourage them from doing so. It follows that: i. the level of output produced per period will be less than the level of output if laborers do not shirk ii. more time will be required to produce a given level of output than if laborers do not shirk iii. the total labor costs required to produce a given level of output will be greater than if laborers do not shirk but total fixed costs will be unaffected

All three i. the level of output produced per period will be less than the level of output if laborers do not shirk ii. more time will be required to produce a given level of output than if laborers do not shirk iii. the total labor costs required to produce a given level of output will be greater than if laborers do not shirk but total fixed costs will be unaffected

12. Suppose a firm's lease agreement (rental contract) on its facility has expired and it is free to move to a new location or to stay in its current location (i.e., it can change both its level of capital and labor). L The firm expects to have a monthly budget of $2000, and the price of labor is expected to be PL = $8 K per unit and the price of capital is expected to be PK = $20 per unit. Given this information, the firm's monthly budget constraint is: A) L = 250 - 0.4K B) L = 250 - 2.5K C) K = 100 - 0.2L D) K = 100 - 2.5L E) Both B and C

B) L = 250 - 2.5K

With respect to the pure monopolist's demand curve it can be said that under uniform pricing: A) the stronger the barriers to entry, the more elastic is the monopolist's demand curve B) price exceeds marginal revenue at all positive levels of output C) demand is perfectly inelastic D) marginal revenue equals price at all levels of output

B) Price exceeds marginal revenue at all positive levels of output

7. Assume a firm closes down in the short run and produces no output. As a result: A) TFC is positive, but TVC and TC are zero B) TFC and TC are positive, but TVC is zero C) TVC is positive, but TFC and TC are zero D) TFC, TVC, and TC will all be positive

B) TFC and TC are positive, but TVC is zero

Suppose that a monopolist is producing a level of output (Q) such that AVC = $8, AFC = $2, P = $12, MC = $10, and MR = $8. Based on this information, the firm is realizing: A) a profit which could be increased by producing more output B) a profit which could be increased by producing less output C) a loss which could be reduced by producing more output D) a loss which could be reduced by producing less output

B) a profit which could be increased by producing less output

A fixed cost is: A) the cost of producing one more unit of capital, say, machinery B) any cost which does not change when the firm changes its output C) average cost multiplied by the firm's output D) usually zero in the short run

B) any cost which does not change when the firm changes its output

If a monopolist successfully engages in perfect (first-degree) price discrimination, then: A) profits to increase and output to fall B) both profits and output to increase C) the demand curve will lie below the marginal revenue curve D) both profits and output to decrease

B) both profits and output to increase

Suppose that at 500 units of output a firm is producing such that marginal revenue is equal to marginal cost. The firm is selling its output at $6 per unit and average total cost at 500 units of output is $5. Given this information we: A) can say that the firm should close down in the short run B) can say that the firm is maximizing profit in the short run C) cannot determine whether the firm should produce or shut down in the short run D) can assume the firm is not using the most efficient technology

B) can say that the firm is maximizing profit in the short run

Suppose that at 500 units of output a firm is producing such that marginal revenue is equal to marginal cost. The firm is selling its output at $6 per unit and average total cost at 500 units of output is $5. On the basis of this information we: A) can say that the firm should close down in the short run B) can say that the firm is maximizing profit in the short run C) cannot determine whether the firm should produce or shut down in the short run D) can assume the firm is not using the most efficient technology

B) can say that the firm is maximizing profit in the short run

10. In which of the following would a perfectly competitive firm increase profits by reducing output: A) if it discovered that it was producing where MC < MR B) if it discovered that it was producing where MC > MR C) if it discovered that it was producing where MC = MR D) none of the above

B) if it discovered that it was producing where MC > MR

Under which of the following situations would a monopolist increase profits by lowering price (and increasing output): A) if it discovered that it was producing where MC = MR B) if it discovered that it was producing where MC < MR C) under none of the above circumstances because a monopolist would never lower price D) if it discovered that it was producing where its MC curve intersects its demand curve

B) if it discovered that it was producing where MC < MR

Which of the following is not correct regarding a short run production process? A) if marginal product is greater than average product, then average product is increasing B) if total product is at a maximum, then average product is also at a maximum C) if marginal product is zero, then total product is at a maximum D) if marginal product is less than average product, then average product is decreasing

B) if total product is at a maximum, then average product is also at a maximum

Which of the following is characteristic of a purely competitive seller's demand curve? A) it lies above the firm's average revenue curve B) it is equal to the firm's marginal revenue and average revenue curves C) it is inelastic (E < 1) at all levels of output D) it is the same as the market demand curve

B) it is equal to the firm's marginal revenue and average revenue curves

If the price of one of the firm's variable inputs decreases, such as the hourly wage rate, then: A) marginal cost, average variable cost, and average fixed cost would all fall B) marginal cost, average variable cost, and average total cost would all fall C) marginal cost would fall, but average variable cost would be unchanged D) average variable cost would fall, but marginal cost would be unchanged E) one could not predict how unit costs of production would be affected

B) marginal cost, average variable cost, and average total cost would all fall

What do economies of scale, the ownership of essential raw materials, and patents have in common? A) they all help explain why a monopolist's demand and marginal revenue curves are identical B) they are all barriers to entry C) they must all be present before a monopolist may practice price discrimination D) they all help explain why a firm's short run average total cost curve is U-shaped

B) they are all barriers to entry

8. Assume that in the short run a firm which is producing 100 units of output (Q) per-period has average total costs (ATC) of $5 and average fixed costs (AFC) of $2. It may be concluded that: A) TFC = $200 TVC = $300 TC = $500 MC = $2 B) TFC = $200 TVC = $500 TC = $700 MC = $3 C) TFC = $200 TVC = $300 TC = $500 D) TFC = $200 TVC = $500 TC = $700

C) TFC = $200 TVC = $300 TC = $500

If production is occurring where price exceeds marginal cost, the purely competitive firm will: A) maximize profits, but inputs will be underallocated to the product (i.e., not enough is produced) B) fail to maximize profits and inputs will be overallocated to the product (i.e., too much is produced) C) fail to maximize profits and inputs will be underallocated to the product (i.e., not enough is produced) D) maximize profits, but inputs will be overallocated to the product (i.e., too much is produced)

C) fail to maximize profits and inputs will be underallocated to the product (i.e., not enough is produced)

7. Suppose a perfectly competitive firm is producing at a level of output where MR=$8.50; ATC=$6.00; AVC=$4.00; MC=$7.50. In order to maximize profit, the firm should _________________. A) increase both output and price B) increase price but not output C) increase output but not price D) shut down

C) increase output but not price

Suppose a perfectly competitive firm is producing a level of output where MR=$8.50; ATC=$6.00; AVC=$4.00; MC=$7.50. In order to maximize profit, the firm should _________________. A) increase both output and price B) increase price but not output C) increase output but not price D) shut down

C) increase output but not price

6. For a pure monopolist the relationship between total revenue and marginal revenue is such that: A) marginal revenue is positive when total revenue is at a maximum B) total revenue is positive when marginal revenue is increasing but turns negative when marginal revenue begins to decrease C) marginal revenue is positive when total revenue is increasing but turns negative when total revenue begins to decrease D) marginal revenue is positive as long as total revenue is positive

C) marginal revenue is positive when total revenue is increasing but turns negative when total revenue begins to decrease

The law of diminishing marginal product (or returns) describes the: A) relationship between total costs and total revenues B) profit-maximizing position of a firm C) relationship between resource inputs and product outputs in the short run D) relationship between resource inputs and product outputs in the long run

C) relationship between resource inputs and product outputs in the short run

The market demand curve in a purely competitive industry is __________, while the demand curve to a single competitive firm is __________. A) perfectly inelastic, perfectly elastic B) sloping downward, perfectly inelastic C) sloping downward, perfectly elastic D) perfectly elastic, sloping downward

C) sloping downward, perfectly elastic

For a monopolist, marginal revenue is less than price because: A) the monopolist's demand curve is perfectly inelastic B) the monopolist's demand curve is perfectly elastic C) when a monopolist lowers price to sell more output, the lower price applies to all units sold D) the monopolist's total revenue curve is linear and upward sloping

C) when a monopolist lowers price to sell more output, the lower price applies to all units sold

For a monopolist, marginal revenue is less than price under uniform pricing because: A) the monopolist's demand curve is perfectly inelastic B) the monopolist's demand curve is perfectly elastic C) when a monopolist lowers price to sell more output, the lower price applies to all units sold D) the monopolist's total revenue curve is linear and upward sloping

C) when a monopolist lowers price to sell more output, the lower price applies to all units sold

The first, second, and third workers employed by a firm add 12, 6, and 3 units to total product, respectively. Therefore: A) marginal product of the third worker is 3 B) average product of the three workers is 7 C) total product of the three workers is 216 D) A and B E) A, B, and C

D) A and B

If the monopolist is operating on the inelastic segment of its demand curve, it can: A) raise total revenue by raising price B) reduce total costs by raising price C) raise profits by raising price D) A, B, and C

D) A, B, and C

Suppose that at 100 units of output a firm is producing such that marginal revenue is equal to marginal cost. The firm is selling its output at a price of $4 per unit and is incurring average total costs of $6 per unit and average variable costs of $1 per unit. On the basis of this information we can conclude that in the short run a purely competitive firm: A) is operating at maximum profit by producing the 100 units of output B) is operating at a loss that could be reduced by shutting down C) is operating at a profit that could be increased by producing more output D) is operating at a loss that is less than the loss incurred by shutting down

D) is operating at a loss that is less than the loss incurred by shutting down

Similar to a firm operating in a purely competitive industry, a monopolist that chooses to produce in the short-run: A) will produce that level of output where marginal cost exceeds marginal revenue by the greatest amount B) will produce that level of output where marginal revenue exceeds marginal cost by the greatest amount C) is always able to earn profits D) may incur losses

D) may incur losses

9. The short-run market supply curve for a purely competitive industry can be found by: A) summing horizontally the AVC curves of all firms B) summing horizontally the segments of the MC curves lying above the ATC curves for all firms comprising the industry C) summing vertically the segments of the MC curves lying above the AVC curves for all firms comprising the industry D) summing horizontally the segments of the MC curves lying above the AVC curves for all firms comprising the industry

D) summing horizontally the segments of the MC curves lying above the AVC curves for all firms comprising the industry

If a firm's total variable costs decrease, then: A)average fixed costs and average total costs will decline B)average fixed costs and average variable costs will decline C)average fixed costs will increase and marginal costs will decline D)marginal cost, average variable cost, and average total costs will decline

D)marginal cost, average variable cost, and average total costs will decline

The 1st, 2nd, and 3rd workers employed by a firm add 12, 6, and 3 units to total product, respectively. Therefore the: A) marginal product of the third worker is 3 B) average product of the three workers is 7 C) total product of the three workers is 216 D) Both A and B are correct

D.) Both A and B are correct

Monopoly

Market situation where one producer (or a group of producers acting in concert) controls supply of a good or service, and where the entry of new producers is prevented or highly restricted. Monopolist firms (in their attempt to maximize profits) keep the price high and restrict the output, and show little or no responsiveness to the needs of their customers. is a market structure consisting of a firm that is the only seller of a good or service that does not have a close substitute. Monopoly exists at the opposite end of the competition spectrum to perfect competition.

Allocative efficiency

a state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.

sunk costs

costs that have already been paid and cannot be recovered; even if they haven't literally been paid yet, the firm is still obliged to pay them.

average fixed cost

fixed cost divided by the quantity of output produced. AFC = FC/Q

Natural monopolies

have the potential to serve customers more cheaply than multiple firms. But the usual market forces that drive price down do not exist. Local and/or state regulatory commissions typically set prices for these natural monopolies, instead of allowing the firms to set their own price. If the natural monopoly were not subject to regulation, it would choose quantity QM and price PM. water and light bill

If P ≥ AVC, then

he MC = MR rule guides production: produce the quantity where MC = MR. For a perfectly competitive firm, this means where MC = P.

A firms marginal cost of production is the: i. change in total variable cost that results from producing each additional unit of output ii. change in total cost that results from producing each additional unit of output iii. change in total fixed cost that results from producing each additional unit of output iv. change in average total cost that results from producing each additional unit of output iv. change in average variable cost that results from producing each additional unit of output vi. change in average fixed cost that results from producing each additional unit of output

i. change in total variable cost that results from producing each additional unit of output ii. change in total cost that results from producing each additional unit of output

As noted in class, marginals and averages are closely related. Which of the following is correct regarding the relationship between the average product of labor and the marginal product of labor? i. if average product is less than marginal product, then marginal product will be decreasing ii. if average product is greater than marginal product, then marginal product will be increasing iii. if marginal product is greater than average product, then average product will be increasing iv. if marginal product is less than average product, then average product will be decreasing

iii. if marginal product is greater than average product, then average product will be increasing iv. if marginal product is less than average product, then average product will be decreasing

Consider a perfectly competitive firm that is producing a level of output such that marginal revenue is equal to marginal cost. The firm is selling its output at a price of $10 per unit and is incurring average variable costs of $5 per unit and average total costs of $8 per unit. Given this information, it may be concluded that the firm:

is operating at maximum total profit

If a perfectly competitive firm is producing and selling that level of output such that P = ATC, we can conclude that:

it will earn zero profit

Law of diminishing returns

level of profits or benefits gained is less than the amount of money or energy invested.

Similar to a monopoly that is operating in the short run, if a perfectly competitive firm wants to know how much additional cost it will incur by producing an extra unit of output, then it will evaluate its:

marginal cost function

If the price of one of the firm's variable inputs increases, such as the hourly wage rate, then:

marginal cost, average variable cost, and average total cost would increase at all levels of output

horizontal mergers

mergers between firms in the same industry or space

If a monopolist's demand curve for the good it produces is not changing over time (i.e., shifting outward or inward), then under uniform pricing the monopolist:

must lower price if it wants to sell more units of output versus fewer units of output

Suppose a perfectly competitive firm is confronted with deciding whether to operate or shut down. Its average fixed cost function is AFC = 30/Q, its average variable cost function is AVC = 6 + 0.1Q, and its marginal cost function is MC = 6 + 0.2Q. The firm optimizes by producing the level of output that maximizes profit or minimizes loss. If the market price of the good is P = $12, then the firm will:

produce 30 units of output and earn a total profit of $60

The principle that a firm should produce up to the point where the marginal revenue from the sale of an extra unit of output is equal to the marginal cost of producing the extra unit is known as the:

profit maximization rule

copyrights

provide the exclusive right to produce and sell creative works like books and films. Unlike patents and copyrights, trademarks never expire.

The "falling-then-rising" nature of average total costs

results in a U-shaped average total cost curve

long-run average cost curve

shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed.

market power

the ability of a firm to charge a price greater than marginal cost. the only firms that do not have market power are perfectly competitive firms, and perfect competition is rare.

marginal product of labor

the change in output associated with a change in that factor, holding other inputs into production constant. the additional output a firm produces as a result of hiring one more worker. The first worker increases output by 200 pizzas; the second increases output by 250.

The marginal product of labor (MPL) is:

the change in output associated with a change in that factor, holding other inputs into production constant. the change in total output attributed to employing an additional worker

Marginal revenue (MR)

the change in total revenue from selling one more unit of a product.

patents

the exclusive right to produce a product for a period of 20 years from the date the patent is filed with the government. Newly developed products like drugs are frequently granted

long run

the firm can vary all of its inputs, adopt new technology, and increase or decrease the size of its physical plant. long period of time that all costs are variable. In the long run, there is no distinction between fixed and variable costs.

As opposed to the long run, if a perfectly competitive firm or a monopolist is in the short run, then:

the firm is not able to change the level of all of the inputs it uses

The total variable cost incurred by a firm will depend upon

the prices of its variable inputs (e.g., the hourly wage rate that workers are paid) the production techniques that are used (i.e., its short run production function) the amount of output produced ALL OF THE ABOVE