ECO211-03 FINAL
Econ is a positive science
"What is" NOT "What it should be"
Refer to Figure 15-12. A profit-maximizing monopolist would create a deadweight loss to society valued at
$12
Refer to Figure 7-5. If the government imposes a price floor of $120 in this market, then consumer surplus will decrease by
$225
Refer to Figure 15-8. The deadweight loss caused by a profit-maximizing monopoly amounts to
$250
Refer to Figure 7-5. At the equilibrium price, consumer surplus is
$300 quantity sold x (max. willingness to pay - actual price) x .5 10 x (150 - 90) x .5 - $300
Monopolies are inefficient because they: (i) eliminate barriers to entry (ii) price their product at a level where marginal revenue exceeds marginal cost (iii) restrict output below the socially efficient level of production
(iii). restrict output below the socially efficient level of production
If a 20% increase in price for a good results in a 15% decrease in quantity demanded, the price elasticity of demand is
.75
When the local used bookstore prices economics books at $15 each, it generally sells 70 books per month. If it lowers the price to $7, sales increase to 90 books per month. Given this information, we know that the price elasticity of demand for economics books is about
0.34, and an increase in price from $7 to $15 results in an increase in total revenue.
Refer to Figure 15-8. To maximize its profit, a monopolist would choose which of the following outcomes and why?
100 units of output and a price of $20 per unit. MR=MC
Refer to Figure 10-2. Suppose that the production of plastic creates a social cost which is depicted in the graph above. What is the socially optimal quantity of plastic?
500 Where quantity meets demand and social cost
Refer to Figure 10-2. Suppose that the production of plastic creates a social cost which is depicted in the graph above. Without any government regulation, how much plastic will be produced?
650 Where quantity meets private cost and demand
Average total cost (ATC) is calculated as follows:
ATC = (total cost) / (quantity of output)
Law of Diminishing Marginal Product
As more labor is combined with a fixed amount of the other input, eventually the marginal product of labor will fall. Short-Run Law since capital is assumed to be fixed. (The efficiency of the labor will decline)
Mixed Market System
Both market and command majority of countries
Long-Run Meaning
Every input is variable.
Which of the following statements is correct?
If duopolists successfully collude, then their combined output will be equal to the output that would be observed if the market were a monopoly. Although the logic of self-interest decreases a duopoly's price below the monopoly price, it does not push the duopolists to reach the competitive price. Although the logic of self-interest increases a duopoly's level of output above the monopoly level, it does not push the duopolists to reach the competitive level.
Under what conditions would a firm be willing to produce in the short-run even if it is making an economic loss? Explain.
If price is below ATC but above AVC, the firm will be making an economic loss, but if it produces where P = MC, it will be minimizing its losses. If the firm "shuts-down" in this situation, it will make a loss = Fixed Costs. But since P>AVC it can shrink its losses by (P-AVC) x Q. (The revenue generated: P X Q, is greater than the added costs: AVC x Q and so by producing it able to cover some of its fixed costs--just not all of them)
Law of Increasing Costs
Incremental costs rise as production continues. A more negative slope = higher costs., hence a bowed frontier curve
Relationship between productivity of inputs and costs of production
Inverse
After the patent runs out on a brand name drug, generic drugs enter the market. What happens next in the market?
Price decreases, and total surplus increases.
Market System
Private ownership of resources Decentralized decisions Unregulated Markets
Command System
Public / Gov't owned Central decision making
Refer to Figure 15-14. To maximize its profit, a monopolist would choose which of the following outcomes?
Q = 30 P = 60
Refer to Figure 15-14. To The quantity and price that maximize total surplus are:
Q = 45, P = 45 where demand meets marginal costs
Economic Profits = 0
Satisfactory Means the firm cannot make any worse decisions or any better decisions. They would be making the same amount if they rented the building or operated it themselves. If economic profits > 0, then they made good decisions for profit-maximization.
Production Function
Shows the highest output a firm can produce for every specified combination of inputs Quantity of output the firm produces depends on the inputs (capital, labor, materials)
Short-Run Meaning
Some input is fixed in 6 months. Majority of the time the fixed input is capital (K) since it is improbable to change capital in the short amount of time.
Marginal Cost (MC)
The additional cost incurred from the consumption of the next unit of a good or service
When the Shaffers had a monthly income of $4,000, they usually ate out 8 times a month. Now that the couple makes $4,500 a month, they eat out 10 times a month. Compute the couple's income elasticity of demand using the midpoint method. Explain your answer. Is a restaurant meal a normal or inferior good to the couple?
The income elasticity of demand for the Shaffers is 1.89. Since the income elasticity of demand is positive, eating out would be interpreted as a normal good. Percentage Change in Quantity Demand DIVIDED BY Percentage Change in Income
Diminishing Marginal Product Relationship
The marginal product of an input declines as the quantity of the input increases The MPl (slope of the production function) diminishes as more labor is used.
Which of the following statements is NOT correct? a. The competitive firm produces where P = MC. b. The monopolist produces where P = MC. c. The competitive firm produces where MR = MC. d. The monopolist produces where MR = MC.
The monopolist produces where P = MC
Accounting Profit
Total Revenue - Accounting Costs
Refer to Figure 15-7. What is the economically efficient price and quantity?
Where MC and D intersect: price = G; quanitity = B
If a competitive firm is currently producing a level of output at which marginal revenue exceeds marginal cost, then
a one-unit increase in output will increase the firm's profit.
One of the defining characteristics of a perfectly competitive market is
a similar product
In a monopolistically competitive industry, firms set price
above marginal cost since each firm is a price setter.
A binding minimum wage
alters both the quantity demanded and quantity supplied of labor.
The amount of money that a wheat farmer could have earned if he had planted barley instead of wheat is
an implicit cost
The value of a business owner's time is an example of
an implicit cost
A firm produces 400 units of output at a total cost of $1,200. If total variable costs are $1,000,
average total cost is 50 cents
If Franco's Pizza Parlor knows that the marginal cost of the 500th pizza is $3.50 and that the average total cost of making 499 pizzas is $3.30, then
average total costs are rising at Q=500
the fundamental source of monopoly power is
barriers to entry
At the profit-maximizing output, a monopoly's marginal cost will
be less than the price per unit of its product
Pete owns a shoe-shine business. His accountant most likely includes which of the following costs on his financial statements? a. wages Pete could earn washing windows b. dividends Pete's money was earning in the stock market before he sold his stock and bought the shoe-shine booth c. the cost of shoe polish d. Both b and C
c. The cost of shoe polish
A monopoly
can set the price it charges for its output but faces a downward-sloping demand curve so it cannot earn unlimited profits.
All externalities
cause markets to fail to allocate resources efficiently.
Price ceilings and price floors that are binding
cause surpluses and shortages to persist because price cannot adjust to the market equilibrium price.
Monopolies use their market power to
charge a price that is higher than marginal cost
An agreement among firms regarding price and/or production levels is called
collusion
Which of the following represents the firm's short-run condition for shutting down? a. TR < TC b. TR < FC c. P < ATC d. TR < VC
d. TR < VC
Which of the following is an example of an implicit cost? a. salaries paid to owners who work for the firm? b. interest on money borrowed to finance equipment purchases c. cash payments for raw materials d. foregone rent on office space owned and used by the firm
d. foregone rent on office space owned and used by the firm
When the marginal product of an input declines as the quantity of that input increases, the production function exhibits
diminishing marginal product
A monopolist
does not have a supply curve because the monopolist sets its price at the same time it chooses the quantity to supply.
Firm decision making is based on
economic costs and economic profits
Refer to Figure 5-8. For price above $5, demand is price
elastic, and lowering price will increase total revenue change in price leads to bigger percentage change in demand (the flatter the graphed demand, the more elastic)
If a monopolist can practice perfect price discrimination, the monopolist will
eliminate consumer surplus eliminate DWL maximize profits
Suppose that in a competitive market the equilibrium price is $2.50. What is marginal revenue for the last unit sold by the typical firm in this market?
exactly 2.50
Suppose a profit-maximizing firm in a competitive market produces rubber bands. When the market price for rubber bands rises above the minimum of its average variable cost, but still lies below the minimum of average total cost, in the short run the firm will
experience losses but will continue to produce rubber bands.
Accounting Costs
explicit costs
Each firm in a monopolistically competitive market
faces a downward-sloping demand curve.
In the long-run equilibrium of a market with free entry and exit, then
firms are operating at their efficient scale
Which of the following is not a characteristic of a perfectly competitive market?
firms have difficulty entering the market
Regardless of the cost structure of firms in a competitive market, in the long run
firms will earn zero economic profit.
The supply of aged cheddar cheese is inelastic, and the supply of bread is elastic. Both goods are considered to be normal goods by a majority of consumers. Suppose that drop in income causes the demand for both goods to decrease by 10%.The change in equilibrium price will be
greater in the aged cheddar cheese market than in the bread market.
Milk has an inelastic demand, and beef has an elastic demand. Suppose that a mysterious increase in bovine infertility decreases both the population of dairy cows and the population of beef cattle by 50 percent. The change in equilibrium price will be
greater in the beef market than in the milk market.
In a competitive market, the actions of any single buyer or seller will
have no impact on the market price
A monopolist's profits with price discrimination will be
higher than if the firm charged just one price because the firm will capture more consumer surplus
Economic Costs
implicit costs + explicit costs
Assume a certain firm regards the number of workers it employs as variable but regards the size of its factory as fixed. This assumption is often realistic
in the short run but not in the long run
Suppose that firms in a competitive industry are earning positive economic profits. All else equal, in the long run, we would expect the number of firms in the industry to
increase
If a profit-maximizing firm in a competitive market discovers that, at its current level of production, price is greater than marginal cost, it should
increase its output
If a market is allowed to adjust freely to its equilibrium price and quantity, then an increase in demand will
increase producer surplus
Consumer surplus
is measured using the demand curve for a product.
A monopolistically competitive industry is characterized by
many firms, differentiated products, and free entry.
ATC is increasing whenever
marginal cost is greater than ATC
Which of the following is the best example of a variable cost?
monthly wage payments for hired labor
Game theory is important for understanding which of the following market types?
oligoplistic but not perfectly competitive markets
Economic profit is equal to total revenue minus the
opportunity cost of producing foods and services
Antitrust laws in general are used to
prevent oligopolists from acting in ways that make markets less competitive.
The deadweight loss associated with a monopoly occurs because the monopolist
produces an output level less than the socially optimal level
For a firm, the production function represents the relationship between
quantity of inputs and quantity of output
For a firm, the production function represents the relationship between
quantity of inputs and quantity of outputs
Explicit costs
require an outlay of money by the firm
The practice of selling a product to retailers and requiring the retailers to charge a specific price for the product is called
resale price maintenance
A similarity between monopoly and monopolistic competition is that in both market structures
sellers are price makers rather than price takers.
Externalities are
side effects passed on to a party other than the buyers and sellers in the market.
When a supply curve is relatively flat, the
supply is relatively elastic.
Sam sells soybeans to a broker in Chicago, Illinois. Because the market for soybeans is generally considered to be competitive, Sam maximizes his profit by choosing
the quantity at which market price is equal to Sam's marginal cost of production
When the price is P1, consumer surplus is
the triangle above P1. A+B+C
In a market that is characterized by imperfect competition,
there are at least a few firms that compete with one another.
An oligopoly is a market in which
there are only a few sellers, each offering a product similar or identical to the products offered by other firms in the market.
Because each oligopolist cares about its own profit rather than the collective profit of all the oligopolists together,
they are unable to maintain the same degree of monopoly power enjoyed by a monopolist.
Economic Profit
total revenue - economic cost Accounting Profit - Implicit Costs the opportunity costs of all inputs used in production
In the long run, a profit-maximizing firm will choose to exit a market when
total revenue is less than total cost
profit is defined as
total revenue minus total cost
A certain firm manufactures and sells computer chips. Last year it sold 2 million chips at a price of $10 per chip. For last year, the firm's
total revenue was $20 million
In the short run, a firm incurs fixed costs
whether it produces output or not
In a market, the marginal buyer is the buyer
who would be the first to leave the market if the price were any higher.
