ECON problem set 4

Monopoly

- a firm that is the only firm in the market - barriers to entry - Legal barrier: patents and copy rights - Natural barrier: network externalities and economies of scale - the more you sell the lower the price needs to be

Diseconomies of scale

- cost increases as output increases - most firms have this - coffee shops

Profit Maximization

- if MC<MR make less - if MC>MR make more

Perfectly competitive market

- large number of identical firms that all produce the same product - can't chose the price - MR=Price - max profit at MC=P - only one with no deadweight loss

Prisoners Dilemma

- looking about for both: both should stay silent - If your B and knows C will remain silent, you should confess so you get less time

monopolistic competition

- many companies selling slightly different goods - short run: similar to monopoly - long run: similar to perfect competition - no profits but has deadweight loss

Profits in the long run

- more firms enter - supply curve shifts out - price goes down - profits drop

regulating a monopoly

- p=mc; firm makes loss so firm is subsidized by the government - p=AC; lowest price constraint with no loss

Oligopoly

- small number of firms - significant barriers - agree to disagree

Suppose Jan started up a small lemonade stand business last month. Variable costs for Jan's lemonade stand now include the cost of a. lemons and sugar b. paper cups c. the wages paid to her hourly workers d. all of the above are correct

D. All of the above are correct

exit

a long-run decision to leave the market; P<ATC

Shut down

a short-run decision not to produce anything because of market conditions; still pay fixed costs; P<AVC

Nash Equilibrium

a situation in which each firm chooses the best strategy, given the strategies chosen by other firms; both confess and get the same amount of max year (8)

Eileen's Elegant Earrings produces pairs of earrings for its mail order catalogue business. Each pair is shipped in a separate box. She rents a small room for $150 a week in the downtown business district that serves as her factory. She can hire workers for $275 a week. There are no implicit costs Refer to Table 13-12. What is the total cost associated with making 890 boxes of earrings per week? a. $1,250 b. $1,325 c. $1,400 d. $1,575

a. $1,250

Larry's Lunch cart is a small street vendor business. If Larry makes 15 pretzels in his first hour of business and incurs a total cost of $16.50, his average total cost per pretzel is... a. $1.10 b. $6.50 c. $15.00 d. $16.50

a. $1.10

Only two firms, ABC and XYZ, sell a particular product. The table shows the demand curve for their product. each firm has the same constant marginal cost of $8 and zero fixed cost. ABC and XYZ agree to maximize joint profits. However, while ABC produces the agreed upon amount, XYZ breaks the agreement and produces 5 more than agreed. How much profit does XYZ make? a. $140 b. $280 c. $240 d. $90

a. $140

A monopolistically competitive firm faces the following demand schedule for its product: (table) The firm has total fixed costs of $9 and a constant marginal cost of $3 per unit. The firm will maximize profit with a. 15 units of output b. 21 units of output c. 30 units of output d. 9 units of output

a. 15 units of output

Eldin is a house painter. He can paint three houses per week. He is considering hiring his friend Murphy. Together, Eldin and Murphy can paint five houses per week. What is Murphy's marginal product? a. 2 houses b. 3 houses c. 5 houses d. 8 houses

a. 2 houses

If the government regulates the price that a natural monopolist can charge to be equal to the firm's average total cost, the firm will a. earn zero profits b. earn positive profits, causing other firms to enter the industry c. minimize costs in order to lower the price that it charges d. earn negative profits, causing the firm to exit the industry

a. earn zero profits

(Table) Which firm has economies of scale over the entire range of output? a. firm 1 only b. firms 1 and 2 only c.firm 2 only d.firm 3 only

a. firm 1 only

Because a monopolist is the sole producer in its market, it can necessarily alter the price of its good (i) without affecting the quantity sold (ii) without affecting its average total cost (iii) bu adjusting the quantity it supplies to the market

a. iii only

In order to sell more of its product, a monopolist must... a. lower its price b. lobby the government for a subsidy c. advertise d. enact barriers to entry in related markets

a. lower its price

In a long-run equilibrium a. only a perfectly competitive firm operates at its efficient scale b. only a monopolistically competitive firm operates at its efficient scale c. both a perfectly competitive firm and a monopolistically competitive firm operate at their efficient scale of production d. neither a competitive firm nor a monopolistically competitive firm charges a markup over marginal cost

a. only a perfectly competitive firm operates at its efficient scale

A monopolist maximizes profits by.. a. producing an output level where marginal revenue equals marginal cost b. charging a price that is greater than marginal revenue c. both a and b are correct d. earning a profit of (P-MC)xQ

a. producing an output level where marginal revenue equals marginal cost b. charging a price that is greater than marginal revenue

If a monopolists marginal costs increase by $1 for all levels of output, then the monopoly price will... a. rise by less than $1 b. rise by more than $1 c. not change, but profits will decrease d. rise by $1

a. rise by less than one

explicit cost

accounting cost of running a business; salary, rent, cost of inputs

Riva crafts and sells hard cider as a part-time job. She can bottle and sell four cases in a week. She is considering hiring her friend Atul to help her. Together, Riva and Atul can bottle and sell seven cases per week. What is Atul's marginal product? a. 2 cases b. 3 cases c. 5 cases d. 7 cases

b. 3 cases

A firm in a competitive market has the following cost structure: (table) If the market price is $8, how many units of output should the firm produce to maximize profit? a. 5 units b. 6 units c. 7 units d. 8 units

b. 6 units

After the patent runs out on a brand name drug, generic drugs enter the market. What happens next in the market? a. price increases, and total surplus increases b. price decreases, and total surplus increases c. price increases, and total surplus decreases d. price decreases, and total surplus decreases

b. Price decreases, and total surplus increases

A monopolistically competitive firm... a. experiences a zero profit in a long-run equilibrium b. all of the above are correct c. is said to have excess capacity d. has the usual deadweight loss of monopoly pricing

b. all of the above

Average total cost is very high when a small amount of output is produced because... a. average variable cost is high b. average fixed cost is high c. marginal cost is high d. marginal product is high

b. average fixed cost is high

A group of firms that act in unison to maximize collective profits is called a a. monopolistically competitive industry b. cartel c. monopoly d. Nash equilibrium market

b. cartel

A monopolist that practices perfect price discrimination.... a. charges a higher price but produces the same monopoly level of output as when a single price is charged b. creates no deadweight loss c. charges one group of buyers a higher price than another group, such as offering a student discount d. charges some customers a price below marginal cost because costs are covered by the high priced buyers

b. creates no deadweight loss

The average-fixed-cost curve... a. is constant b. is always decreasing c. interests marginal cost at the minimum of average fixed cost d. interests marginal cost at the minimum of marginal cost

b. is always decreasing

Chloe's Cafe sells gourmet cinnamon rolls. In the long run, the cafe incurs a total cost of $500 to produce 1,000 cinnamon rolls. If Chloe's Cafe exhibits economies of scale between 1,000 and 2,000 cinnamon rolls, the long-run average total cost for 1,500 cinnamon rolls is.... a. higher than $0.50 b. Lower than $0.50 c. equal to $0.50 d. higher than $500

b. lower than $0.50

Sonia opened a yoga studio where she teaches classes and sells yoga clothing. Fixed costs for Sonia's yoga studio include the cost of the (i) tank tops. (ii) wages paid to the other yoga instructors. (iii) lease on the studio space. (iv) insurance that the landlord requires Sonia to carry for the studio. a. (i) only b. (i) and (ii) only c. (iii) and (iv) only d. (i), (ii), (iii), and (iv)

c. (iii) and (iv) only

A monopolist faces the following demand curve: (table) If a monopolist faces a constant marginal cost of $5, how much output should the firm produce in order to equate marginal revenue with marginal cost? a. 5 units b. 4 units c. 3 units d. 6 units

c. 4 units

Cold Duck Airlines flies between Tacoma and Portland. The company leases planes on a year-long contract at a cost that averages $600 per flight. Other costs (fuel, flight attendants, etc.) amount to $550 per flight. Currently, Cold Duck's revenues are $1,000 per flight. All prices and costs are expected to continue at their present levels. If it wants to maximize profit, Cold Duck Airlines should a. drop the flight immediately b. continue the flight c. continue flying until the lease expires and then drop the run d. drop the flight now but renew the lease if conditions improve

c. continue flying until the lease expires and then drop the run

For a typical natural monopoly, average total cost is a. rising, often because fixed costs are very large b. rising, often because marginal costs are very large c. declining, often because fixed costs are very large d. declining, often because marginal costs are very large

c. declining, often because fixed costs are very large

which of the following represents the firm's long-run condition for existing a market? a. exit if P>MC b. exit if P<FC c. exit if P<ATC d. exit if MR<MC

c. exit if P<ATC

Diseconomies of scale occur when... a. average fixed costs are falling b. average fixed costs are constant c. long-run average total costs rise as output increases d.long-run average total costs fall as output increases

c. long-run average total costs rise as output increases

The table shows the town of Mauston's demand schedule for gasoline. For simplicity, assume the town's gasoline seller(s) incur no costs in selling gasoline. Suppose there are exactly two sellers of gasoline in Mauston: Shellon and Standstop. If Shellon sells 150 gallons and Standstop sells 200 gallons, then... a. consumers in Mauston are worse off than they would be if the two firms colluded b. the two firms are colluding and earn monopoly profits c. Shellon's profits is $450 and Standstop's profit is $600 d. Shellon's profit is $1,050 and Standstop's profit is $1,200

c. shellon's profit is $450 and standstop's profit is $600

Which of these assumptions is often realistic for a firm in the short run? a. the firm can vary both the size of its factory and the number of workers it employs. b. the firm can vary the size of its factory but not the number of workers it employs. c. the firm can vary the number of workers it employs but not the size of its factory. d. the firm can vary neither the size of its factory nor the number of workers it employs.

c. the firm can vary the number of workers it employs but not the size of its factory.

price discrimination

charging different prices to different customers for the same product - airline tickets, coupons

Economies of Scale

cost decreases as output increases; the water company

Average Cost (AC)

cost divided by quantity of output

Constant returns to scale

cost is constant as output increases; farms

Variable cost (VC)

costs that depends on how much you produce; workers salaries

Fixed costs (FC)

costs that don't depend on how much you produce; rent

implicit cost

opportunity cost of the resources invested in the business; money, time

Suppose executives at an art museum know that 100 adults are willing to pay $12 for admission to the museum on a weekday. Suppose the executives also know that 200 students are willing to pay $8 for admission on a weekday. The cost of operating the museum on a weekday is $2,000. How much profit will the museum earn if it engages in price discrimination? a. $1,200 b. $1,600 c. $2,800 d. $800

d. $800

Which of the following represents the firm's short-run condition for shutting down? a. shut down if TR<TC b. shut down if TR<FC c. shut down if P<ATC d. shut down if TR<VC

d. Shut down if TR<VC

Many economists criticize monopolists because they.... a. charge a price that equals marginal cost rather than a price that equals the average cost b. produce a large quantity of wast c. do not innovate d. produce less than the socially efficient level of output

d. produce less than the socially efficient level of output

marginal product of labor

output that is generated by the last worker in the factory; workers increase and product decreases

product of labor

more workers in the factory the more output there is

Marginal Cost (MC)

the cost of producing the last unit of input; change in cost/change in quantity