Exam 2-econ

In a perfectly competitive market, the demand curve faced by an individual firm is

Perfectly elastic

If demand is inelastic, a monopolist can increase what with out losing sales?

Price

The profit maximizing condition for a perfectly competitive firm is

Price = marginal cost

Suppose a perfectly competitive firm can increase its profits by increasing output. It is true that

Price > marginal cost.

MR/ Price < MC (for competitive firm)

decrease output

what will happen if you raise the price in a competitive firm

demand will fall to zero

List the formula to determine actual dollar profit (or loss) from the monopolist's graph.

(P-ATC)Q

List the formula to determine actual dollar profit (or loss) from the perfectly competitive graph.

(P-ATC)Q

If it costs a firm $2000 to produce 400 shirts and $5000 to produce 900 shirts, then is the firm experiencing economies or diseconomies of scale?

2000/400 = 5.00; 5000/900 = 5.56; Diseconomies of scale

A monopoly is selling textbooks to students in a small town and is currently maximizing profits by charging $50.00 per book. The marginal cost of textbooks

< $50.00 (If it was a competitive firm then it would be = $5000)

What is a monopoly? What does the monopolist's demand curve look like?

A firm that produces the entire market supply of a particular good or service. The demand curve facing the monopoly firm is identical to the market demand curve for the product so the demand curve is downward-sloping.

A significant difference between monopoly and competition is

A monopoly's demand curve is the industry's demand curve, while the competitive firm's demand curve is elastic.

The theory behind a "natural monopoly" is

ATC curves are always falling

If revenue covers explicit costs but not opportunity costs, will accounting profit be positive or negative? Economic profit?

Accounting profit will be positive but economic profit will be negative because economic costs include opportunity (implicit) costs.

barriers to entry

Barriers to entry are reasons why firms are unable to sell their good in a market. They include legal barriers, unfair competition, natural monopolies, econs of scale ect.

How is price determined in a perfectly competitive market?

By supply and demand. (Where they meet at equilibrium)

Marginal revenue is equal to

Change in total revenue when an additional unit is sold.

What are economies of scale? Diseconomies of scale? Can they happen in the short run?

Economies of scale are reductions in minimum average costs from increases in plant and equipment. Diseconomies of scale are increases in plant size that lower operating efficiency. They are terms used only in the long run because they represent size to efficiency rather than diminishing returns which exist in the short run. (EOS; AC down, Q up. DEOS; AC up, Q up)

T or F: For a monopolist P=MR. How about P=D?

False, MR is below the demand curve. (MR intersects quantity axis at half of the demand, in the center, when its at its max) True, price is always read off the demand curve

T or F: For the perfect competitor: P=D=MC

False, P=D=MR MC is a completely different curve.

T or F: Many production processes can be economically efficient but only one can be technically efficient.

False, multiple could be technically efficient and one would be economically efficient.

T or F: Natural monopolies have continuous diseconomies of scale.

False, they have continuous economies of scale. (Natural monopolies have high barriers to entry)

The economically efficient method of production:

Is influenced by scarcity of inputs.

Critics of Microsoft believe that

It was guilty of tie-in practices with operating software and regular software

What is the formula for producing the profit maximizing rate of output?

MR = MC Profit Maximizing Rule (for optimal quantity)

If a monopolist increases sales from 15 to 16 by lowering price from 50 to 48, what is his MR?

MR = change in TR / change in Q; 16 x 48 = 768 15 x 50 = 750 (768-750) / 1 = $18

Can we have economic profits in the long run competitive market? Why or why not?

No, if economic profits exist then more competition will move into the market increasing market supply (by shifting right) and reducing price until economic profit is normal or zero. (Competition is the only way to control the price and it increases)

Can SRACs ever be less than LRACs?

No, not at a given quantity. SRACs can be equal to LRACs, but never less than.

If a competitive firm's price exceeds its marginal cost, then what should be done with respect to output?

Output should increase as they would make more in revenue than they would incur in costs by producing another unit. (If Mc>P then decrease)

Which of the following is most likely to be an example of economies of scale?

Per unit costs on a product fall following a large government order. economies of scale- AC go down as Q increases

economic profit

Revenue - (explicit cost + implicit cost)

accounting profit

Revenue - explicit costs

profit

TR - TC

What is the difference between technical and economic efficiency?

Technical efficiency is when the lowest possible number of inputs are used for production, while economic efficiency is when those inputs are utilized to produce output at the lowest possible cost.

Review surplus redistribution (consumer and producer). What happens when we move away from perfect competition?

We lose the sum of producer and consumer surplus. (net surplus decrease) (when moving towards perfect competition then we gain)

Who makes a hostile takeover hostile? (see Reading Guide)

The management of the firm that is being taken over will most likely lose their positions and lucrative salaries. (stockholders would favor a takeover)

Why was Microsoft always a target for antitrust scrutiny?

Tie in contracts with operating systems and software. (they gave it away for free)

What is the most likely reason for conglomerate mergers?

To achieve economies of scope by diversification.

A merger between a textile mill and a clothing manufacturer would be a

Vertical merger (Horizontal is like companies; Vertical is in the chain of production; Diagonal merger does not exist)

when does production efficiency occur in a natural monopoly?

When P = minimum ATC

How can you determine when a natural monopoly should exist?

When the ATC is continually falling so that even with the monopolist's profit, the price will be lower with the one firm than with two or more making less or no profit. (natural monopoly has a C shaped cost curve instead of a U shaped cost curve)

Which of the following is not a way in which monopolies fight real world competition?

a)Lobbying b)Advertising c)Producing products difficult to copy d)Charge a high price for a product (price discrimination) Answer: D (Monopolies have economic power)

A conglomerate merger might take place for all of the following reasons except

a)To achieve economies of scope b)To ward off a takeover c)To achieve a higher degree of specialization d)To strengthen political or economic influence Answer: C

MR/ Price > MC (for competitive firm)

increase output

MR/ Price= MC (for competitive firm)

maintain output and maximize profit

How do economists define the long run?

no fixed costs; all inputs are variable

elasticity of demand

percentage change in Qd / percentage change in P

What does the Envelope Relationship show us?

the relationship between the long and short run A firm can use one large plant or many small plants to produce a specific output. The lowest cost option in the short run for each output level; the option that equals the long run.

shutdown point

where price = minimum AVC (will shutdown if less than AVC)