Econ Final
When the wage rate is $10 per hour and the MPP of a worker is 15 units per hour, the unit labor cost is
$0.67
(Figure 22.1) The total fixed costs for this firm are approximately
$50.
Lashondra is the owner/operator of an interior design firm. Last year she earned $400,000 in total revenue. Her explicit costs were $200,000 (assume that this amount represents the total opportunity cost of these resources). During the year, she received offers to work for other design firms. One offer would have paid her $120,000 per year and the other would have paid her $125,000 per year. Lashondra's economic profit is equal to
$75,000.
(Table 21.5) Total fixed costs are equal to
$15
The major aim of government regulation is to
alter industry behavior.
explicit costs
costs that require a firm to spend money
Accounting costs and economic costs differ because
economic costs include implicit costs and accounting costs do not.
total cost
the market value of the inputs a firm uses in production
Natural monopolies fail to minimize
ATC
fixed costs
Costs of production that don't change when the rate of output is altered, such as the cost of basic plants and equipment.
price-fixing
Explicit agreements among producers regarding the price(s) at which a good is to be sold.
predatory pricing
Temporary price reductions designed to alter market shares or drive out competition.
The impact of higher prices on total revenue depends on the price elasticity of demand.
True
Which of the following is not a barrier to entry?
homogenous products
perfectly competitive INDIVIDUAL demand curve
horizontal
Which of the following is characteristic of a perfectly competitive market?
identical products
Demand is more price-elastic
in the long run
The supply curve is upward-sloping (i.e., it takes a higher price to induce greater production) because of
increasing marginal costs.
If the % change in quantity demanded is < price, demand is
inelastic
If a firm can raise market price by reducing its output, then
it faces a downward-sloping demand curve.
Factors or production
land, labor, capital, entrepreneurship
The behavior expected in a competitive market includes
marginal cost pricing
It is easiest for new firms to enter a
perfectly competitive market
(Figure 23.1) If the market price equaled $10, in the short run this firm should
produce with an economic loss.
A monopolistically competitive firm maximizes profits or minimizes losses in the short run by
producing at the output level where MR equals MC.
A natural monopoly has no incentive to limit its costs of production under which type of regulation?
profit regulation
long-run competitive equilibrium
results in zero economic profits.
(Figure 21.1) The marginal physical product of labor is negative for the
sixth worker.
Which of the following industries is perfectly competitive?
soybean farming
marginal cost
the cost of producing one more unit of a good
A natural monopoly occurs because of
the existence of economies of scale
if income elasticity of demand is positive
the good is normal
Profit motive also encourages businesses to produce the goods and services consumers desire at prices they're
willing to pay
Which of the following characterizes monopolistic competition?
zero long-run profit
Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $70,000 by working elsewhere. The firm earns revenues of $360,000 per year. What is the economic profit for the firm described above?
-$70,000
An elasticity of _____ or unit elastic demand will maximize a firm's revenues.
1
Characteristics of perfect competition
1. Many buyers and many sellers. 2. The goods offered for sale are largely the same. 3. Firms can freely enter or exit the market. 4. MC=p 5. 0 economic profit
Suppose the price of video games falls from $40 to $20, and as a result, the quantity demanded of footballs falls from 40,000 to 10,000 per year. The value of the cross-price elasticity of demand is
1.80
(Figure 20.1) Total revenue is maximized at the unit price of
100
(Figure 21.3) The best estimate of where diminishing marginal returns begin is at an output level of
20
If income falls 4 percent for a year and as a result the quantity of new homes demanded falls from 23 million to 20 million units for the year, the value of the income elasticity of demand for new homes is closest to
3.5
(Figure 22.3) For a perfectly competitive firm, at a market price of $23, the total profits are maximized at an output of
39
(Table 21.2) At 30 units of output, the total variable cost is
40
(Figure 24.1) The profit-maximizing monopolist will charge a price of
A
monopoly
A firm that produces the entire market supply of a particular good or service.
competitive firm
A firm without market power, with no ability to alter the market price of the goods it produces.
cartel
A group of firms with an explicit, formal agreement to fix prices and output shares in a particular market.
oligopoly
A market in which a few firms produce all or most of the market supply of a particular good or service.
monopolistic competition
A market in which many firms produce similar goods or services but each maintains some independent control of its own price.
perfect competition
A market in which no buyer or seller has market power.
long run
A period of time long enough for all inputs to be varied (no fixed costs).
production function
A technological relationship expressing the maximum quantity of a good attainable from different combinations of factor inputs.
The marginal cost curve intersects the minimum of which of the following cost curves?
ATC
(Figure 21.4) A firm that produces over 800 units of output should choose a plant with which short-run average total cost function?
ATC3 only
Which of the following statements about the relationship between economic costs and accounting costs is true?
Accounting costs are always less than or equal to economic costs.
Adam is the owner/operator of a flower shop. Last year he earned $400,000 in total revenue. His explicit costs were $325,000 paid to his employees and suppliers (assume that this amount represents the total opportunity cost of these resources). During the year, he received three offers to work for other flower shops with the highest offer being $75,000 per year. Which of the following is true about Adam's accounting and economic profit?
Accounting profit = $75,000; economic profit = $0.
(Figure 21.5) Diseconomies of scale begin to occur
After the third factory.
Which of the following markets best illustrates the practice of price discrimination?
Airlines
Which of the following actions would be most likely to give the American public more air travel at a lower cost?
Allow foreign airlines to enter the U.S. market
contestable market
An imperfectly competitive industry subject to potential entry if prices or profits increase.
natural monopoly
An industry in which one firm can achieve economies of scale over the entire range of market supply.
price leadership
An oligopolistic pricing pattern that allows one firm to establish the (market) price for all firms in the industry.
(Figure 23.5) A perfectly competitive firm will maximize profits by producing the level of output that corresponds to point
B
Megan used to work at the local pizzeria for $15,000 per year but quit to start her own deli. To buy the necessary equipment, she withdrew $20,000 from her inheritance (which paid 8 percent interest). Last year she paid $25,000 for ingredients and $500 per month rent but had revenue of $50,000. She asked her dad the accountant and her mom the economist to calculate her annual profit for her.
Dad says her profit is $19,000, and Mom says her profit is $2,400.
A monopolist has market power because it
Faces a downward-sloping demand curve for its own output.
product differentiation
Features that make one product appear different from competing products in the same market.
(Figure 26.5) Which firm(s) is(are) least likely to engage in advertising?
Firm B only
(Figure 26.5) Which firm(s) is(are) producing allocated efficient level(s) of output and is(are) using the least amount of economic resources to produce each unit of output?
Firm B only
(Figure 26.5) Which firm(s) is(are) using marginal cost pricing?
Firm B only
Which of the following real-world situations is the result of excess capacity in a monopolistically competitive market?
Gas stations with infrequently used pumps are located at all four corners of an intersection.
The demand curve confronting a competitive firm is
Horizontal, while market demand is downward-sloping.
constant returns to scale
Increases in plant size do not affect minimum average cost; minimum per-unit costs are identical for small plants and large plants.
Which of the following is true about advertising?
It is a form of non-price competition.
Which of the following is true about a monopolistically competitive firm in the long run?
It tends to realize only a normal profit.
A competitive firm can maximize profits by producing at that rate of output where _____ equals ________
MC, price
Monopolists are price
Makers, but competitive firms are price takers.
efficiency
Maximum output of a good from the resources used in production.
When demand is unit elastic, and price increases, what happens to total revenue?
No change
productivity
Output per unit of input—for example, output per labor-hour. When labor productivity increases, it means that each worker can add more to the total output than before.
(Figure 27.2) Regulation designed to achieve allocative efficient pricing for the natural monopoly will result in a price of
PA
profit-maximization rule
Produce at that rate of output where marginal revenue equals marginal cost.
(Figure 26.1) The output that maximizes production efficiency for this firm is
Q3
The exit of firms from a market, ceteris paribus:
Reduces the economic losses of remaining firms in a market.
economies of scale
Reductions in minimum average costs that come about through increases in the size (scale) of plant and equipment.
Price elasticity of demand shows how
Responsive the quantity demanded is to a change in price.
To keep a market from being contested, firms might
Seek to obtain a monopoly franchise from the government.
(Figure 27.3) Which of the following is true about this firm?
Society can benefit from government regulation using marginal cost pricing without a subsidy.
market power
The ability to alter the market price of a good or service.
profit
The difference between total revenue and total cost.
economic profit
The difference between total revenues and total economic costs.
(Figure 23.5) Which of the following is not true for a perfectly competitive firm at a price of $200?
The firm should leave this market in an effort to earn economic profits.
What happens when more firms enter an industry with economic profits?
The market supply curve will shift to the right and cause the market price to drop until profits are normal If it is easy for existing producers to expand production or for new firms to enter an industry, economic profits will not last long
market structure
The number and relative size of firms in an industry.
normal profit
The opportunity cost of capital; zero economic profit.
market share
The percentage of total market output produced by a single firm.
short run
The period in which the quantity (and quality) of some inputs can't be changed. (fixed costs)
concentration ratio
The proportion of total industry output produced by the largest firms (usually the four largest).
price elasticity of demand
The response of consumers to a change in price
game theory
The study of decision making in situations where strategic interaction (moves and countermoves) occurs between rivals.
In economics, the long run is considered to be
The time period when all costs are variable.
If the marginal cost curve is rising, which of the following must be true?
Total cost must be rising
Economies of scale are reductions in average
Total cost that result from using operations of larger size.
In a perfectly competitive market, both allocative and productive efficiency are achieved.
True
Technically, the price elasticity of demand is negative because the demand curve is negative (that is quantity demanded fall when price increases and vice versa)
True
cross-subsidization
Use of high prices and profits on one product to subsidize low prices on another product.
Which of the following is likely to be a monopolist?
a drug firm that has a patent granting it the exclusive right to produce a drug
In a competitive market where firms are earning economic losses, which of the following should be expected as the industry moves to long-run equilibrium, ceteris paribus?
a higher price and fewer firms
(Figure 23.6) If a perfectly competitive firm produces the level of output corresponding to point B in the short run, it will earn
a loss greater than necessary.
competitive market
a market in which there are many buyers and many sellers so that each has a negligible impact on the market price
The equilibrium price of a good or service in a competitive market is
a reflection of the opportunity cost of producing the product.
payoff matrix
a table that shows the payoffs that each firm earns from every combination of strategies by the firms
law of diminishing returns
addition of a variable input (labor) will cause MPP to decline as more variable inputs are employed. It occurs in the short run
In a perfectly competitive market where firms are currently experiencing economic profits in the short run, which of the following is least likely to occur during the long run?
an increase in marginal revenue
Which of the following does not affect marginal costs?
an increase in property taxes
Which of the following is a consequence of competition?
an unrelenting squeeze on prices and profits
For an oligopoly, a few firms cannot dominate in the long run unless
barriers to entry exist.
barriers to entry
business practices that make it difficult for new firms to enter the market
If a perfectly competitive firm is producing a rate of output at which MC exceeds price, then the firm
can increase its profit by decreasing output.
If a competitive firm wanted to maximize its total revenue, it would always produce at ___________
capacity
Open and explicit agreements concerning pricing and output shares transform an oligopoly into a
cartel
When compared to a competitive market, monopolists tend to
charge a higher price and produce alower level of output.
Consumers may not experience the benefits of economies of scale because a natural monopoly
charges prices higher than competitive levels.
Which regulatory cost is borne by the firms that are regulated?
compliance costs
Market failure occurs in natural monopolies because
consumers get inaccurate information about the opportunity cost of the product.
(Table 21.2) Above 10 units of output, the average fixed cost
continues to decline.
Like a competitive industry, a monopoly must
deal with the law of demand.
Market power leads to market failure when it results in
decreased market output.
When demand is elastic, and price increases, what happens to total revenue?
decreases
In a competitive market, if the market price is equal to the minimum point of the firm's ATC curve, the firm may seek to earn economic profits by
decreasing production costs through technological improvements.
(Figure 20.1) Over the price range from $180 to $120, ceteris paribus,
demand is elastic.
perfectly competitive MARKET demand curve
downward sloping
When regulation results in an inferior mix of output, there are
efficiency costs.
Availability of substitutes- more substitutes, more ____ and vice versa
elastic
If the % change in quantity demanded is > price, demand is
elastic
Time - more time goes by, more ______, and vice versa
elastic
E > 1
elastic demand
Therefore, to maximize revenue, a firm should charge the price at the point where elasticity goes from _________ to _________, in other words, is equal to 1.
elastic, inelastic
Examples of fixed costs
employees who are paid on a salary, the cost of renting a facility, or plant and equipment associated with either a lease or long-term borrowing.
The primary purpose of antitrust policy in the United States is to
encourage competition.
In monopolistic competition, a firm's demand curve is tangent to the ATC curve in the long run because
entry eliminates economic profit, and exit eliminates losses.
In a contestable market,
entry occurs when prices rise above average total costs.
When a firm uses marginal cost pricing, it charges a price that is _____ the marginal cost of production.
equal to
Which of the following contributes to a firm maintaining a monopoly?
exclusive franchises
If the price is above the long-run competitive equilibrium level,
firms will enter the market.
If economic losses exist in an industry
firms will want to exit.
In the short run, when a firm produces zero output, the total cost equals
fixed costs
Which of the following is most likely an inferior good?
generic canned food
antitrust
government intervention to alter market structure or prevent abuse of market power
Benefit of market power
greater profit because the firm is far better able to dictate the cost of its inputs and/or the price of its output.
Higher prices result in ______ total revenue only if the demand is inelastic.
higher
If the demand is elastic, lower prices result in ______ revenues
higher
Compared with the profit-maximizing choice of a natural monopolist, output regulation will result in a
higher level of output and a lower price.
Proponents of electric utility industry deregulation argued that deregulation was justified because
improvements in technology allowed the development of high-voltage transmission power lines.
One of the reasons for low cross-price elasticity in monopolistic competition and high cross-price elasticity in perfect competition is that
in monopolistic competition, consumers loyal to particular brands view other available products as poor substitutes.
Assume the price elasticity of demand for MC Pretzel Co. pretzels is 0.8. If the company increases the price of each bag of pretzels, total revenue will
increase because the percentage increase in price is greater than the percentage change in quantity demanded.
There is lack of strong incentives in a monopoly industry, relative to a competitive industry, to
increase innovation.
Price leadership is a method by which oligopolies can
increase prices without explicit price-fixing.
When demand is inelastic, and total revenue increases, what happened to the price?
increased
Which of the following would cause a firm's production function to shift upward?
increased training for the firm's workers
When income falls, the demand for an inferior good
increases
Level of addiction for a product. The more addictive the more _______ and vice versa
inelastic
Price of the good in relation to consumer's income (proportion of income spent on the good) - lower the proportion of income spent, more ________ and vice versa
inelastic
Strength of the brand will be more ________ and vice versa
inelastic
E< 1
inelastic demand
A price-discriminating monopoly will charge consumers with _______ demand higher prices, while charging consumers with ________ demand lower prices.
inelastic, elastic
Demand for necessities is _______; demand for luxuries is _______
inelastic, elastic
If profit regulation is used to control a natural monopolist, the monopolist is likely to
inflate or pad the costs of production.
In the long run, a firm has no fixed costs and can select any desired plant size, which is an ________ decision
investment
The decision to enter or exit an industry is known as the
investment decision.
If the entire output of a market is produced by a single seller, the firm
is a monopoly
Entry into a market characterized by monopolistic competition
is frequent because barriers to entry are low.
If a monopolistic competitor is maximizing profit, it is producing at a point where marginal cost
is less than price.
When a firm is earning positive economic profits, this is an indication that the firm
is using its resources in the best possible way.
If one oligopolist attempts to increase its market share by cutting prices, then this will likely
lead to a general reduction in the market price.
A firm should shut down only if the
losses from continuing production exceed fixed costs. - This happens when total revenue is less than total variable cost or price is less than average variable cost.
Sam owns a taco restaurant, and he conducted a consumer survey that indicates that the price elasticity of demand for his restaurant is 3.5. You would advise Sam to
lower his price to increase revenue.
perfectly competitive market characteristics
many buyers andsellers, identical products, and low entry barriers. Because of the many buyers and sellers, neither buyers nor sellers will have market power
Which of the following may not characterize an oligopoly?
many firms
In monopoly and perfect competition, a firm should expand production when
marginal revenue is above marginal cost.
If a firm must lower its price to sell additional output,
marginal the revenue is less than the price.
What happens when more firms exit an industry with economic losses?
market supply curve will shift to the left and cause the market price to increase until the profits are normal
Marginal cost pricing in competitive markets results in all but which one of the following?
maximization of consumer utility
All of the following are ways a business can earn economic profits except
maximize implicit costs but not explicit costs.
Output regulation for a natural monopolist
may jeopardize equity goals
Which of the following market structures will have only normal profit in the long run?
monopolistic competition
Large cities typically have many drugstores that offer different levels of service and product selection. The drugstore market in big cities can best be classified as
monopolistic competition.
If economic profits exist in an industry,
more firms will want to enter it.
The local baseball team owner hires you to help maximize the team's profits. Assume your task is to maximize revenues from ticket sales. Your advice to the owner should be to
move the price toward unitary elasticity.
If all of your friends use the same instant messaging service provider, you are likely to use it too. This behavior may create
network economy
If incomes fall by 5 percent and the quantity demanded for new cars falls by 10 percent,
new cars are a normal good and the income elasticity is +2.0.
A monopolistically competitive firm can raise its price somewhat without fear of great change in unit sales because
of product differentiation and brand loyalty.
Each of the following is an argument to have less antitrust enforcement except for
oligopolies can lead to less output and higher prices.
The measure of the most desired goods and services that is foregone in order to obtain something else is the
opportunity cost
implicit costs
opportunity costs, do not require money
Regulation seeks to change market outcomes directly by imposing specific limitations on price, _____, or investment decisions.
output
If a market changes from oligopoly to perfect competition, then as a result
output should increase in the long run.
Name the barriers to entry
patents, economies of scale, ownership of key resources, and government regulation.
Negative consequences of profit motive
pollute the environment, restrict competition, or maintain unsafe working conditions.
Temporary price reductions intended to alter market shares or drive out competition are referred to as
predatory pricing.
Antitrust officials will examine a merger in order to
prevent the abuse of market power.
The pricing strategy in which one firm is allowed to establish the market price for all firms in the market is called
price leadership
A kinked demand curve indicates that rival oligopolists match all
price reductions
The pricing strategy in which there is an explicit agreement among producers regarding price is called
price-fixing
The kinked demand curve explains the observation that in oligopoly markets
prices may not change even in the face of cost increases.
Once a plant is built, leased, or purchased, a firm has fixed costs and focuses on short-run output or ________ decisions
production
Advances in technological or managerial knowledge and human or physical capital increase our __________ ____________ and therefore cause the production function to shift ___________ and the production cost curves to shift ___________, in particular the ATC curve
productive capability, upward, downward
The principal motivation of producers is ___________
profit
Price discrimination allows a producer to
reap the highest possible average price for the quantity supplied.
If MC exceeds MR, the competitive firm should ______ its output because the last unit costs more to produce than the revenue that it generates. If _MC > MC, the firm will _________its output because the last unit will contribute more to revenue than the cost it generates
reduce, increase
Other things being equal, as more firms enter a market, the market supply curve
shifts to the right
consumer surplus
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
marginal physical product (MPP)
the change in total output associated with one additional unit of input
investment decision
the decision to build, buy, or lease plants and equipment; to enter or exit an industry Long run is flexible regarding plant size because there are no fixed costs
Each of the following is a determinant of market power, but which is the critical determinant of market power?
the extent of barriers to entry
if income elasticity of demand is negative
the good is inferior
What happens when more firms exit an industry with economic losses (P< ATC)?
the market supply curve will shift to the left and cause the market price to increase. price signal (increase) will indicate to consumers that the opportunity cost was initially greater than the consumer's willingness to pay
When demand is inelastic,
the percentage change in price is greater than the percentage change in quantity demanded
If the demand for a product is elastic, then
the percentage change in quantity demanded is greater than the percentage in price.
Which of the following does not contribute to a firm maintaining a monopoly?
the presence of many close substitutes for its product
Supply is very elastic when
the quantity supplied has a large increase in response to an increase in price.
production decision
the selection of the short-run rate of output (with existing plants and equipment)
Diseconomies of scale are reflected in
the upward-sloping segment of the long-run average total cost curve.
economic cost
the value of all resources used to produce a good or service; opportunity cost
when economic profit = 0
there is no incentive to join
The most desirable rate of output is the one that maximizes _______ ________, that is, the difference between total revenue and total costs
total profit
Which of the following products will have an elastic demand?
travel souvenirs
In making an investment decision, an entrepreneur
treats all costs as variable.
A nationwide concentration ratio is likely to _____ market power when the market is small and local.
understate
If the % change in quantity demanded is = price, demand is
unit elastic
E=1
unitary elastic
Which of the following is a production decision?
whether to increase or decrease output
