Econ 2

What happens when marginal utility reaches zero

, total utility is maximized, and when marginal utility becomes negative, total utility decreases

Kim has $24 per week in her entertainment budget. She splits her time between going to the movies and yoga classes. Each movie costs $8 while each yoga class costs $3. The total utility from each of these activities is set out in the table below. Movies Total Utility Yoga Classes Total Utility 0 0 0 0 1 40 1 30 2 75 2 55 3 105 3 76 4 130 4 92 5 160 5 106 6 114 7 116 8 117 What is Kim's total utility maximizing point? Kim should consume _______ [a] movies and ___________ [b] yoga classes

1 and 5

Alex has $18 per week in his entertainment budget. He splits his time between going to the movies and renting video games. Each movie costs $6 while each video game rental costs $3. The measured total utility of each of his activities is shown in the table below. Movies Total Utility Video Game Rentals Total Utility 0 0 0 0 1 40 1 30 2 75 2 55 3 105 3 76 4 130 4 92 5 160 5 106 6 114 7 116 What is Alex's utility maximizing point? Alex should consume ________ [a] movies and ____________[b] video games.

1, 4

Bob budgets $12 a week for entertainment. He splits his time between going to the movies and going to the gym. Each movie costs $3 and each session at the gym also costs $3. The total utility from each of these activities is shown in the table below. Movies Total Utility Gym Costs Total Utility 0 0 0 0 1 30 1 50 2 55 2 85 3 76 3 115 4 92 4 107 5 103 5 111 6 114 7 115 Bob's utility maximizing point is:

3 and 3

51. Refer to the table below. In this instance, how much profit is the firm earning in profit at its optimal level of production? Q P TR MR TC MC 0 $30 0 --- $15 --- 1 $30 $30 $30 $25 $10 2 $30 $60 $30 $40 $15 3 $30 $90 $30 $60 $20 4 $30 $120 $30 $85 $25 5 $30 $150 $30 $115 $30 6 $30 $180 $30 $150 $35

35

51. Refer to the table below. In this instance, what quantity will the firm produce in order to maximize profit? Q P TR MR TC MC 0 $30 0 --- $15 --- 1 $30 $30 $30 $25 $10 2 $30 $60 $30 $40 $15 3 $30 $90 $30 $60 $20 4 $30 $120 $30 $85 $25 5 $30 $150 $30 $115 $30 6 $30 $180 $30 $150 $35

5

1. Refer to the table below. The information pertains to the demand curve and the average cost curve for a natural monopoly firm. What will the price be in this market? Price Quantity Demanded LRAC 50 1 $10.00 35 2 $20.00 20 3 $24.00 5 4 $37.50

50

Equal Marginal Principle

A consumer maximizes their utility is equal across all goods and services Maximized when MU1/Price1=MU2/Price2

Long run profits

A market will settle into long run equilibirum when economic profits are zero. No firms will enter and no firms will exit

Monopolist production and price decision

A monopolist will select an output quantity that corresponds to the profit maximization rules: If MR>MC, increase output and Profits rise If MR<MC, decrease output and profits rise If MR=MC, produce this profit maximizing input

Market Power

Ability to alter the market price of a good or service

Costs in the long run

All resources are adjustable in this scenario A firm is able to make a decision to hire or dismiss workers, expand production facilities, and acquire more land of expansion thus all resources of production are variable and all costs in the long run are variable.

Total Costs

All the costs that are incurred for production. We assume that both explicit and implicit costs are included Different in short run and long run

Firm

An entitity whose function is to produce goods and services Firms act optimally when they maximize profit and minimize costs

Production

Any process that transforms economic inputs into finished goods and services

Why does marginal utility decrease as total utility is increasing

As consumption increases, this good becomes less and less scarce Therefor, the more of a good an individual has consumed the less valuable and improtant it becomes to overall satisfaction

Where can you find the minimum point of the ATC?

At the minimum point of the ATC curve: it is at this output where the firm can produce at the lowest cost per unit; where the firm minimizes the amount of resources being used; but this point may not be where profit is maximized

Economic Profit

Based upon financial earnings, financial costs and opportunity costs Economic Profits=Total Revenue-Explicit costs-Implicit costs

Long run efficiency

Competition drives costs to a minimum ATC and economic profit to zero (resources are used most efficiently)

Monopoly vs perfect competition

Competitive: High profits attract more suppliers With free entry, supply shifts right and price falls Economic profits go to zero P=Mc Profits are squeezed so there is great pressure to reduce costs and improve quality Monopoly: High profits but barriers to entry exclude new suppliers No production change so price does not fall Economic profits do not change P>MC No profit squeeze so no pressure to reduce costs or improve quality

What are the characteristcs of a cost curve?

Decreasing AFC U-shaped AVC and ATC

Economic Cost

Explicit costs + implicit costs

Explicit Costs

Financial expenditure; if transaction has a receipt the cost is explicit

Entry and Exit in Perfect Competition

Firms can enter and exit the market freely. Market profit serves as a signal to all firms on whether or not they should enter or exit in the long run Economic profits draw in new firms: Supply shifts right causing prices to fall, economic profits decrease, slowing new entries, the market stabilizes at a lower price, more producers, and zero economic profits Economic Losses drive out firms: Supply shifts left and prices rise; Economic losses decrease, slowing new exits; The market stabilizes at a higher price, few producers, and zero economic profits.

Production Decision

Firms in perfect competition are price takers and thus MR = P; but the firm could still be operating at losses when MR=P

Supply shifts

If any determinant changes, the marginal cost curve will shift, which causes the supply curve to shift Factors that can do this: price of factor inputs Technology Expectations Taxes and subsidies Number of firms in the industry

Variable costs

Include the costs of labor and raw materials At zero output, these costs are zero As output increases variable costs increase as more resources are needed

Fixed Costs

Includes the cost of basic plants and equiptment Must be paid even if output is zero Do not increase as output increases

Lower costs and improve profits

Improving efficiency and technology can lower a firms costs of production; cost curves fall and MC is shifted right. This encourages and increase in output. Firms will increase profit in the long run

The _____________________ [a] curve will always lie below the curve for average total cost because average total cost includes _____________ [b] in the calculation

Specified Answer for: a average variable cost Specified Answer for: b average fixed cost

In the [a], if profits are not possible, the perfectly competitive firm will seek out the quantity of output where [b].

Specified Answer for: a short run Specified Answer for: b losses are lowest

Mindy's company manufactures rubber balls used by elementary schools for playground activities. The table below sets out her firm's production cost information. Fill in the missing data. Quantity Variable Cost Fixed Cost Total Cost Average Variable Cost ($ per unit) Marginal Cost ($ per unit) 0 0 40 40 0 - 1 5 [b] [c] 5 [f] 2 15 40 [d] [e] [g] 3 [a] 40 60 20 [h]

Specified Answer for: b 40 Specified Answer for: c 45 Specified Answer for: f 5 Specified Answer for: d 55 Specified Answer for: e 7.5 Specified Answer for: g 10 Specified Answer for: a 20 Specified Answer for: h 5

The table below sets out cost information for the production of volleyballs. Some values are missing. Solve for the missing values in the table. Quantity Variable Cost Fixed Cost Total Cost Average Variable Cost ($ per unit) Marginal Cost ($ per unit) 0 0 30 30 0 - 1 12 30 [b] 12 [e] 2 25 30 [c] [d] [f] 3 [a] 30 72 14 [g]

Specified Answer for: b 42 Specified Answer for: e 12 Specified Answer for: c 55 Specified Answer for: d 12.5 Specified Answer for: f 13 Specified Answer for: a 42 Specified Answer for: g 17

Labor-Leisure Budget Constraint

The analysis of the consumption of time divided between working ours and non-work hours

Marginal Cost (MC)

The change in total cost associated with an increase in production MC= change in total cost/change in output

Allocative efficiency

The industry will produce what the consumers want/not want

Production technology

The manner in which resources and economic inputs are converted to final goods and services

Total Cost(TC)

The market value of all resources used to produce a good or service Total costs = fixed + variable

Private Enterprise

The ownership of business by private individuals. Private enterprise implies that ownership of resources, production of technologies, profits, etc. are all owned by the private individuals that own the firm

Imperfect competition

MR=P does not hold Marginal revenue is the change in total revenue caused by the change in quantity Given TR=P*q Revenue increases as q increases Revenue decreases as q increases

MArginal utility per dollar

MU/Price

Defining characteristics of Perfect Competition

Many firms compete for consumer purchases: Each firms output is small relative to the total market amount The products of each firm are identical: Consumers can switch between firms with out cost. Firms have identical costs Low entry/exit barriers: Make it easy to get into or exit the business Price takers: No firm has any market power and cannot manipulate the price

Monopolistic competition

Many firms very little market power

The _____________________________ is used to describe the additional cost of producing one more unit

Marginal Cost

The term _________________ refers to the additional utility provided by one additional unit of consumption.

Marginal Utility

In microeconomic terms, the ability of a good or a service to satisfy wants is called:

Utility

Indifference curve

a line that shows different combos of goods and services that give an individual the same level of satisfaction. When they move along the line they increase consumption of one and decrease it of the other

Perfect competitition

a market in which no buyer or seller had market power

Barriers to entry

characteristics of a market or product to deter entry. Legal, technological, or market forces that discourage or prevent potential competitors from entering a market Significant barriers: Patents, exclusive franchises, political appointments, control of key inputs, acquisition, and economies of scale

variable cost (VC)

costs of production that change when output is altered

Fixed cost (FC)

costs of production that dont change when output is altered

It is said that in a perfectly competitive market, raising the price of a firm's product from the prevailing market price of $179.00 to $199.00,

could likely result in a notable loss of sales to competitors

Copy of Refer to the graph below. Based on the information in the graph, which of the following statements is correct?

average variable cost decreases when marginal cost is less than average variable cost.

Account Profit

based upon cash earnings and cash expenditures Account Profit=Total Revenue-Explicit Costs

Marginal utility can:

be positive, negative, or zero

The marginal revenue curve for a monopolist the market demand curve

always lies beneath

Natural monopoly

an industry in which a single operating firm is more efficient than competing firms; One firm can achieve economies of scale over the entire range of the market verse multiple competing firms; economies of scale act as a natural barrier to entry

The two primary factors determining monopoly market power are the firm's

demand curve and its cost structure

The term ___________________ is used to describe the common pattern whereby each marginal unit of a consumed good provides less of an addition to utility than the previous unit.

diminishing marginal utility

The slope of the demand curve for a monopoly firm is a _________________ line

downward sloping

Benefits of the competitive process

drive products price down and market output goes up. More goods and services are affordable and available to consumers; encourages firms to improve quality and add features while looking for lower costs

In microeconomics, the term ___________________ describes a situation where the quantity of output rises, but the average cost of production falls.

economies of scale

When __________________ exist, doubling of all inputs will result in more than doubling output, which means __________________________________________.

economies of scale; a larger factory can produce at a lower average cost than smaller companies.

Oligopoly

few firms, consolidation of power

A firm's ___________ consist of expenditures that must be made before production starts that typically, over the short run, _______________ regardless of the level of production.

fixed costs; do not change

Individual supply curve

for a firm, the relationship between market price and firm level output; The short run, a firm's supply curve is the marginal cost curve at and above the AVC curve

Why are some producers forced to sell their products at the prevailing market price?

high degree of similarity to competitor's products

When Marietta chooses to only purchase a combination of goods that lie within her budget line, she:

is maximizing utility

Which of the following is most likely to be a monopoly?

local electricity distributor

Diseconomies of Scale

long run ATC increases as output increases; operating efficiency is reduced; if output doubles, costs will more than double

Refer to the graph below. Based on the information in the graph, which of the following statements is correct?

marginal cost intersects average total cost at its minimum point

Under perfect competition, any profit-maximizing producer faces a market price equal to its

marginal costs

_________________________ refers to the additional revenue gained from selling one more unit.

marginal revenue

51. Refer to the table below. In this instance, confirmation that this firm is operating in a perfectly competitive market can readily be ascertained by the fact that its Q P TR MR TC MC 0 $30 0 --- $15 --- 1 $30 $30 $30 $25 $10 2 $30 $60 $30 $40 $15 3 $30 $90 $30 $60 $20 4 $30 $120 $30 $85 $25 5 $30 $150 $30 $115 $30 6 $30 $180 $30 $150 $35

marginal revenue is constant.

Utility

measure of the pleasure or satisfaction obtained from consuming a good or service

The largest cattle rancher in a given region will be unable to have a when a sufficient numbers of smaller cattle ranchers provide sources of competition

monopoly

A exists when the quantity demanded in the market is less than the quantity at the bottom of the long-run average cost curve

natural monopoly

Total Utility

the total amount of satisfaction obtained from the consumption of a series of products

If a firm's revenues do not cover its average variable costs, then that firm has reached its ______________________ point.

shutdown

Profit

total revenue - total cost or (P*Q)-(Land, labor, capital)

______________ include all of the costs of production that increase with the quantity produced.

variable costs

In a free market economy, firms operating in a perfectly competitive industry are said to have only one major choice to make. Which of the following correctly sets out that choice?

what quantity to produce

Monopoly

one firm with all power

Following the assumption that firms maximize profits, how will the price and output policy of an unregulated monopolist compare with ideal market efficiency?

output will be too small and its price too high

Budget Constraint

the Combinations of goods and services

Marginal Revenue

the added revenue recieved from selling one more unit MR=change in total revenue/change in output

Marcella operates a small, but very successful art gallery. All but one of the following can be classified as a variable cost arising from the physical inputs Marcella requires to operate her business. Which is it?

physical space for the gallery

Marginal utility

the change in total utility obtained by consuming one additional marginal unit of a product Marginal utility (MU)= change in total utility / change in number of units

When a business adopts a strategy of reducing and/or discontinuing production in response to a sustained pattern of losses, it is:

preparing to exit operations

If a perfectly competitive firm is a price taker, then

pressure from competing firms will force acceptance of the prevailing market price

A monopolist is able to maximize its profits by

producing output where MR = MC and charging a price along the demand curve.

In monopolies, consumers...

recieve fewer goods and pay more for them

Law of diminishing marginal utility

the marginal utility or additional utility of a good decreases as of more it is consumed over a given time period

Which of the following is considered to be a tell-tale signal that the point with the highest total utility has been found?

the marginal utility per dollar is equal across all goods

Market structure

the number and relative size of the firms in an industry.

In order to determine the average variable cost, the firm's variable costs are divided by _______________________.

the quantity of output

Economies of scale

the relationship between the changes in average costs of production and the change in the level of production; If at economies of scale, it is more optimal for the firm to expand production and increase its size; long run ATC decreases as level of output increases and operating efficiency is increased

The term ______________________ refers to a firm operating in a perfectly competitive market that must take the prevailing market price for its product.

Price taker

Average Total Cost

Total cost divided by the quantity of output in a given time period ATC=TC/q

Average fixed costs

Total fixed cost divided by the quantity of output in a given time period AFC=FC/q

Average variable cost

Total variable cost divided by quantity of outputing given time period AVC=VC/q

Utility is maximized when:

1. A consumer purchases a basket of goods on the budget constraint 2. Basket gives the individual the maximum utility possible

How do you determine if a firm will be profitable?

1. Identify Costs 2. Calculate Account Profit 3. Calculate Economic Profit

Characteristics of Monopoly

1. Total barriers to new entry: if not a new firm can and monopoly 2.There are no substitution 3.there is no competitive pressure 4.A monopolist can operate semi-independent of consumer demand

Profit maximization rule

For all firms, no matter there market structure a firm will maximize proft for a given level of quatity, q, where marginal revenue= marginal cost WHY? if MR>MC: increase output and profits will grow, but there is additional profit to be made if MR<MC: decrease output and losses will decline, prift will be greater with less output if MR=MC: produce this output because it is the quantity at which profits are maximized

Economic inputs

Land Labor and Capital used in the production process

Total Revenue

Price * Quantity sold

Implicit costs

The value of resources used in production, even when no direct payment is made; implicit costs are the opportunity cost of using resoruces for specific purposes.

What decisions can firms make in perfect competition?

There are no pricing decisions There are no quality decisions Only decision is output decision.

Which of the following is most unlikely to present a barrier to entry into a market?

deregulation

The marginal utility of two goods changes ______________.

with the quantities consumed