econ 1b midterm

At 10 units of output in Table 21.2, the total fixed cost is

$40 The total fixed cost is $40 at any unit of output because total cost is $40 at 0 units of output.

Technological improvements cause

ATC to shift down.

Market demand is determined by all of the following except

number of potential sellers

Refer to Table 25.2. Assume there are only four firms in the pool sweeper industry. What is the market share for North Star?

50 percent. Total market sales are equal to $40,000 ($20,000 + $16,000 + $2,000 + $2,000). Therefore North Star has 50 percent ($20,000/$40,000) of the market share.

If the price elasticity of demand is 0.6, then a 10 percent increase in the price of the good will lead to a ________ in the quantity demanded.

6 percent

Which of the following will cause the production possibilities curve to shift inward?

A decrease in the size of the labor force. A decrease in any factor of production will reduce our production possibilities.

Diminishing returns occur because

A firm increases the amount of a variable input without changing a fixed input. In the short run, a production process is characterized by a fixed amount of available land and capital. Typically the only factor that can be varied in the short run is labor. Yet as more labor is hired, each unit of labor has less capital and land to work with.

A monopoly realizes larger profits than a comparable competitive market by

A monopoly receives larger profits than a comparable competitive industry by reducing the quantity supplied and pushing prices up.

A cartel is

A public agreement between firms or countries to restrict production and raise prices. An oligopoly strives to behave like a monopoly to maximize industry profits. A monopoly and an oligopoly produce at an elastic point on the demand curve because on the inelastic portion of the demand curve, higher prices will bring higher revenues and therefore will continue to increase prices and decrease output until the point where demand is elastic.

The shutdown point occurs where price equals the minimum of

AVC A firm should shut down only if the losses from continuing production exceed fixed costs. This happens when price is less than average variable cost.

If demand is elastic, then

An increase in price will reduce total revenue. Total revenue equals price times quantity. With elastic demand, an increase in price will cause a large fall in quantity demanded that is greater than the price increase. The result is that total revenue will fall as the price rises if demand is elastic.

Assume that pencils and pens are substitutes. If the price of pencils rises, then we will see

An increase in the demand for pens.

The decision to start or expand a business is known as the

An investment decision is the decision to build, buy, or lease plants and equipment, or to enter or exit an industry.

explicit costs

Are the sum of actual monetary payments made for resources used to produce a good.

Implicit costs

Are the value of resources used to produce a good but for which no monetary payment is made.

Table 1.2 shows the hypothetical trade-off between different combinations of Stealth bombers and B-1 bombers that might be produced in a year with the limited U.S. capacity, ceteris paribus. Complete the table by calculating the required opportunity costs for both the B-1 and Stealth bombers. On the basis of your calculations in Table 1.2, the law of increasing opportunity costs applies to

Both B-1 and Stealth bombers.

In a competitive market, economic profits will

Cause existing firms to expand production.

Normal profit

Covers the full opportunity cost of the resources used by the firm. Normal profit is the profit made that covers all explicit costs and implicit costs but does not include any profit above and beyond what could have made with those resources used elsewhere.

Refer to Figure 22.2 for a perfectly competitive firm. The profit-maximizing quantity of output is

D. A firm will maximize profit at a quantity where marginal revenue is equal to marginal cost.

The average fixed cost (AFC) curve

Declines as long as output increases. The numerator (fixed costs) is constant and the denominator (quantity) increases as output expands; therefore any increase in output will lower average fixed cost.

Assume two goods are substitutes. Ceteris paribus, a decrease in the price of one good will cause the equilibrium price of the other good to

Decrease and the equilibrium quantity of the other good to decrease. f the price of one good decreases, consumers will substitute the relatively cheaper good, causing the demand for the other good to decrease. A decrease in demand causes equilibrium price and equilibrium quantity to decrease.

In Figure 23.3, diagram "a" presents the cost curves that are relevant to a firm's production decision, and diagram "b" shows the market demand and supply curves for the market. Use both diagrams to answer the following question: In Figure 23.3, at a price of p2 in the long run

Economic profits equal zero.

For a competitive market in the long run,

Economic profits induce firms to enter until profits are normal.If economic profits exist in an industry, more firms will want to enter it. As they do, the market supply curve will shift to the right and cause the market price to drop until profits are normal.

Refer to Figure 22.3 for a perfectly competitive firm. If the market price is $15,

Economic profits will be zero. When the market price is $15, the profit-maximizing output is 31 units. At that point price is equal to ATC, and profits will be zero.

The primary purpose of antitrust policy in the United States is to

Encourage competition.Antitrust laws allow the government to intervene in markets to either alter market structure or prevent abuse of market power with the primary purpose of encouraging competition.

Refer to Figure 23.6 for a perfectly competitive firm. Given the current market price, we expect to see

Exit from this industry. Currently firms are experiencing economic losses (P < ATC), which will cause some firms to exit the market in the long run.

Economies of scale

Explain why average total costs decline as output increases in the long run. Economies of scale (or increasing returns to scale ) exist when all inputs double but output more than doubles, which implies that the average costs have decreased.

A monopolist has market power because it

Faces a downward-sloping demand curve for its own output.

According to the law of increasing opportunity costs,

Greater production of one good requires increasingly larger sacrifices of other goods.

The demand curve confronting a competitive firm is

Horizontal, while market demand is downward-sloping. The market demand curve for a product is always downward-sloping (law of demand). The demand curve confronting a perfectly competitive firm is horizontal (perfectly elastic demand).

A production function shows

How a firm's production increases as it adds more labor.

If the elasticity of demand for cigarettes is 0.4, a seller should

Increase price to increase total revenue.

According to the law of demand, during a given period of time, the quantity of a good demanded

Increases as its price falls, ceteris paribus.

If Microsoft is thinking about building a new factory, it is making a

Long-run decision that may enhance its profit.

If oligopolists start cutting prices to capture a larger market share, the result will be

Lower prices, increased output, and smaller profits. An attempt by one oligopolist to increase its market share by cutting prices will lead to a general reduction in the market price because all of the oligopolists will end up reducing prices to gain (or maintain) market share. This will reduce profits as prices slide down the market demand curve.

A profit-maximizing monopolist produces the rate of output where

MR = MC and determines price based on the demand curve. A firm maximizes total profit at the output rate where MR is equal to MC. If MC is less than MR, the firm can increase profits by producing more. If MC exceeds MR, the firm should reduce output.

Oligopolists will maximize total profits for all of the firms in the market at the rate of output where

MR = MC for the market.

Monopolists are price

Makers, but competitive firms are price takers.Competitive firms must charge the market price because of the perfectly elastic demand curve that they face. On the other hand, monopolists are price makers in that the firm chooses the profit-maximizing output and then charges the price that consumers are willing and able to pay.

The change in total output associated with one additional unit of input is the

Marginal physical product.

Refer to Table 25.2. Assume there are only four firms in the pool sweeper industry. The U.S. Justice Department would most likely

Not allow any mergers among firms in this industry. Not allow any mergers among firms in this industry.

The points on a production possibilities curve show

Potential output; Potential output is the maximum attainable output with our limited resources, and the production possibilities curve shows the limits of our options.

The kinked demand curve explains the observation that in oligopoly markets

Prices may not change even in the face of cost increases.The demand curve will be kinked if rival oligopolists match price reductions but not price increases. If costs increase for oligopolists, firms are unlikely to increase prices because the quantity demanded and revenues will fall, causing profits to decrease.

When a surplus exists for a product,

Producers reduce the level of output and reduce price.

The concentration ratio measures the

Proportion of total output produced by the four largest producers in a specific market.

The exit of firms from a market, ceteris paribus,

Reduces the economic losses of remaining firms in the market. If economic losses exist in an industry, firms will want to exit. As they do, the market supply curve will shift to the left and cause the market price to increase until profits are normal.

A change in the price of a good

Results in a change in quantity supplied. Because the supply curve shows the quantity supplied at different price levels, when the price changes, we can track changes in quantity supplied along the supply curve.

Scarcity

Society's desires exceed the want-satisfying capability of the resources available to satisfy those desires.

The Herfindahl-Hirshman Index is the sum of the

Squared market shares of the firms in the market.

Market power is

The ability to alter the market price of a product.

Market share can be computed by dividing

The amount sold by a single firm by the total sold in the market.

Opportunity Cost

The best alternative that must be given up in order to get something else.

Microeconomics is concerned with issues such as

The demand for bottled water by individuals. The demand for a particular product is a microeconomic topic.

The average variable cost curve slopes upward with a higher rate of output in the short run because of

The effect of diminishing returns. At some point the average variable cost rises because of diminishing returns in the production process.

If demand is price-elastic, then

The elasticity number E is greater than 1. Quantity demanded will be greater than the percentage change in price, so the elasticity number E will be greater than 1 if demand is elastic.

Refer to Figure 22.3 for a perfectly competitive firm. If the market price is $23,

The firm will have above-normal profits. When the market price is $23, the profit-maximizing output is 39 units. At that point price is greater than ATC, and economic profits will be greater than zero (above normal).

The equilibrium price in a market is found where

The market supply curve intersects the market demand curve.

If two goods are substitute goods,

The percentage change in quantity demanded for good X will fall if there is a reduction in price of good Y. When two goods are substitutes, like Coke and Pepsi, if there is a percentage reduction in the price of Coke, the percentage change in quantity demanded of Pepsi will fall.

The formula for cross-price elasticity is

The percentage change in the quantity demanded for one good divided by the percentage change in the price of another good.

A perfectly competitive firm is a price taker because

The price of the product is determined by many buyers and sellers. A perfectly competitive firm risks losing all of its customers, who will shop elsewhere, if it increases the price of its product above the market-established price. Therefore, it is compelled to take the market price that is determined by the interaction of supply and demand.

When firms are interdependent,

The profit of one firm depends on how its rivals respond to its strategic decisions.

The short-run production function shows how output changes when

The quantity of labor changes.

Competitive firms cannot individually affect market price because

Their individual production is insignificant relative to the production of the industry. An individual firm in a perfectly competitive market is so small relative to the entire market that it confronts a horizontal demand curve (perfectly elastic demand) for its output. If it changes the quantity of output, it does not affect the market price.

When firms in a competitive market are experiencing zero economic profits, this is an indication that

There is currently no better way to use society's scarce resources. When the competitive pressure on prices is carried to the limit, we get the right answer to the HOW to produce question. Competition drives costs down to their bare minimum—the hallmark of economic efficiency.

A firm maximizes total profit when

Total revenue exceeds total cost by the greatest amount. One way for a firm to maximize profit is to produce at an output where total revenues exceed total costs by the greatest amount.

Marginal revenue is the change in

Total revenue when output is changed.In general, the contribution to total revenue of an additional unit of output is called marginal revenue.

Economic profit is the difference between

Total revenues and total economic costs. Economic profit refers to revenue minus the value of all costs, both explicit and implicit.

Price-discriminating firms that sell in two markets will charge higher prices in the market, ceteris paribus,

With the more price-inelastic demand. Consumers who have inelastic (or less elastic) demand will not respond significantly to increases in price. Therefore, a price-discriminating monopoly will charge consumers with inelastic demand higher prices, while charging consumers with elastic demand lower prices.

The price ceiling that the federal government placed on human organs caused

a shortage. Price ceilings increase the quantity demanded, decrease the quantity supplied, and create market shortages.

In Figure 24.1 total cost is represented by the area

cdfe

For a monopolist, marginal revenue equals

change in total revenue divided by change in quantity

If the cross-price elasticity of demand for SUVs with respect to the price of gasoline is -0.10, and gasoline prices rise by 18 percent, then SUV sales should, ceteris paribus,

fall by 1.8 percent. To determine the percentage change in SUV sales, multiply the percentage change in gasoline prices by the cross-price elasticity of demand. SUV sales should fall by 1.8 percent (-0.10 × 18 percent).

In the short run, when a firm produces zero output, total cost equals

fixed costs. Fixed costs must be paid even if no output is produced. Variable costs start at zero; therefore when a firm produces zero, total costs are equal to fixed costs.

The demand curve for each perfectly competitive firm is

horizontal. The market demand curve for a product is always downward-sloping (law of demand). The demand curve confronting a perfectly competitive firm is horizontal (perfectly elastic demand).

Which of the following is characteristic of a perfectly competitive market?

identical products

Oligopolists have a mutual interest in coordinating production decisions in order to maximize joint

profits

The period in which at least one input is fixed in quantity is the

short run

Oligopolistic behavior includes

tacit collusion. Tacit collusion is most easily and effectively accomplished in an oligopoly market because there are only a few firms that strive to maximize profits, which can be accomplished if the firms act in unison to set prices and output. Yet each firm will be motivated by its own self-interest.

A market shortage is

the amount by which the quantity demanded exceeds the quantity supplied at a given price; excess demand

When demand is inelastic

the percentage change in price is greater than the percentage change in quantity demanded

The basic formula for price elasticity is

the percentage change in quantity demanded divided by the percentage change in price

The shaded area in Figure 24.1 represents

total profit

If economic profits are earned in a competitive market, then over time

Additional firms will enter the market. If economic profits exist in an industry, more firms will want to enter it. As they do, the market supply curve will shift to the right and cause the market price to drop until profits are normal.

A contestable market is

An imperfectly competitive situation that is subject to entry.

The marginal revenue of a monopolist

Is positive up to the rate of output that maximizes total revenue.

Marginal cost

Is the change in total cost from producing one additional unit of output.

The ultimate market constraint on the exercise of market power

Is the demand curve facing the monopolist. A monopolist must contend with the market demand curve, which is the price consumers are willing and able to pay for various levels of output.

If an economy is producing inside the production possibilities curve, then

It can produce more of one good without giving up some of another good.

Short-run profits are maximized at the rate of output where

Marginal revenue is equal to marginal cost. A competitive firm maximizes total profit at the output rate where MC is equal to MR. If MC is less than MR, the firm can increase profits by producing more. If MC exceeds MR, the firm should reduce output.

The demand curve will be kinked if rival oligopolists

Match price reductions but not price increases.

A profit-maximizing producer seeks to

Maximize total profit.

In a competitive market,

Neither buyers nor sellers have market power.

A firm should shut down production when

P < minimum AVC

The production possibilities curve illustrates which two of the following essential principles?

Scarce resources and opportunity cost.

Game theory is

The study of how decisions are made when interdependence exists between firms.