Exam 3 Micro 13-17
What are free entry and exit in regards to monopolistic competition?
Firms can enter or exit the market without restriction. Thus, the number of firms in the market adjusts until economic profits are driven to zero
True/False The shut-down point of a perfectly competitive firm is at the minimum point on its short-run average variable cost curve.
true
The efficiency associated with monopoly is due to ___________ of the good
underproduction of the good
3 Lessons about price discrimination:
1). It is rational for profit maximization, leads to increased profit 2). Requires the ability to separate customers according to their willingness to pay. 3). Can raise economic welfare, eliminates the inefficiency inherent in monopoly pricing.
Ralph pays his workers $100 each, at the total cost function point of (6, 1800), and his fixed cost is $800, how many workers are there?
10
Can earn economic profits in the long run? Monopolistic competition
No
Is it a price taker: Monopolistic competition
No
Is it a price taker: Monopoly
No
When 8 weavers are employed, the output is 80 baskets, _____________ is equal to 10 baskets.
Average product
What is a monopoly?
A firm that is the sole seller of a product without close substitues
What is a patent?
A government protection that gives the firm or person exclusive right of production for 20 years.
What are sales taxes?
A major source of tax revenue for state and local governments
What is an Oligopoly?
A market structure in which only a few sellers offer similar or identical products
What is the definition for a competitive market?
A market with many buyers and sellers trading identical products so that each buyer and seller is a price taker
What are natural monopolies?
A monopoly that arises because a single firm can supply a good or service to an entire market than could two or more firms. Arises when there are economies of scale over the relevant range of output.
What are Monopoly Resources?
A single firm owning a key resource. There are few examples of firms that own a resource without close substitutes.
The efficant scale of production is the quantity of output that minimizies ___________
Average total cost
What does the price in the market reflect in perfect competition?
Average total cost of the marginal firm
In the long run, the firms will only continue to operate when price is _________ ATC.
Above
Is this considered an Accounting and Economic Costs or just economic cost? Internet Accesses Eileen bought to begin an online company
Accounting and Economic
Is this considered an Accounting and Economic Costs or just economic cost? The new suit Saul bought for an interview
Accounting and Economic
What are diminishing returns?
An additional worker adds less to total output than the previous worker hired
Assumed in perfect competition or not? Many Sellers
Assumed in perfect competition
Assumed in perfect competition or not? Price Taking behavior
Assumed in perfect competition
The monopoly demand curve and Marginal revenue start ______________.
At the same point
Jackson manages his father's fruit stand. He takes an accounting of all of the company's assets, including equipment, tools, financial assets and inventory. These items are examples of:
Capital
Characteristic of monopoly or perfect competition? Firms can earn positive economic profit in the long-run
Characteristic of monopoly
Characteristic of monopoly or perfect competition? There are significant barriers to entry
Characteristic of monopoly
Characteristic of monopoly or perfect competition? An efficient quantity is produced
Characteristic of perfect competition
Marginal Revenue < Marginal Cost
Decrease production
What is product differentiation?
Each firm produces a product that is slightly different from those of other firms. Thus rather than being a price taker, each firm faces a downward-sloping demand curve.
Annabelle runs a tutoring company. In determining her costs and benefits from the venture, she includes her opportunity costs from choosing to open the tutoring business. She is evaluating the firm's:
Economic Profit
The Sherman act did what?
Elevated agreements among oligopolists from unenforceable contracts to criminal conspiracies
How do you find where the ATC depicts the monopoly earning a positive profit?
First consider: Profit = Q(P-ATC) According to this function, the monopoly will earn a profit if and only if the ATC is less than the per unit price. Therefore, the ATC curve in the graph must be positioned in such a way.
Fixed Cost or Variable Cost? annual salaries of top management
Fixed
Fixed Cost or Variable Cost? interest on current debt
Fixed
The production function gets ________ as the number of workers increases, reflecting diminishing marginal product.
Flatter
Which of the following would closely satisfy the requirements for a competitive market? Electricity cable Gold Bullion soda
Gold Bullion
If a natural monopoly is forced through regulation to charge a price equal to its marginal cost, will the outcome become efficiant?
No the monopolist will generate losses and leave the market
A firm's output is above AVC, but below ATC. Will the firm shut down in the short run? Will it exit the market in the long run?
No, The firm's fixed costs are sunk costs in the short run, so the firm will not shut down because it only needs to cover variable costs. Yes, in the long-run a firm must cover total costs and if P<ATC, the firm generates losses.
Is this a perfectly competitive market? Blue Jeans
No, the products are not identical
Assumed in perfect competition or not? Firms selling similar but differentiated goods
Not assumed in perfect competition
Assumed in perfect competition or not? Significant barriers to entry
Not assumed in perfect competition
How common is perfect competition as an industry type, that is, how many industries are correctly classified as being perfectly competitive?
Not common, diffucult to find firms with perfectly elastic demand curve
What market structure does the following exist in? Air travel from any one airport
Oligopoly
What market structure does the following exist in? Autotires
Oligopoly
What market structure does the following exist in? Breakfast ceral
Oligopoly
What are two types of imperfect competition?
Oligopoly and monopolistic competition
The total cost curve gets _______ as the quantity of output increases because of diminishing marginal prodcut.
Steeper
Because the firm's marginal cost curve determines the quantity of the good the firm is willing to supply at any price, the marginal cost curve is also the competitive firm's?
Supply curve
The graph of market demand and supply curves for wheat, and assume it to be a perfectly (or purely) competitive good. Suppose that it is discovered that wheat farmers are earning positive economic profits. Assuming all else remains the same, show how the market responds to this discovery in the graph below.
Supply increases, shifts right
Why do Target and WalMart not charge the same price for a pack of peanut M&M's? The market faces a _________________ demand curve and can therefore charge different prices.
Target and Walmart offer customer different benefits, thus they face a downward sloping demand curve and can charge different prices.
"Would you like to see another customer purchase from you at your current price?" A perfectly competitive firm would answer:
That it didn't care. Price = marginal cost, so profit from another unit sold is zero.
Joan Robinson, a British economist and Edward Chamberlin, an American economist developed the analysis of the market type known as Monopolistic Competition. What was their basis for adopting this term to describe such markets?
There are many firms with differinated but similar products, but each firm has a monoploy on their own product
What are characteristics of a monopoly (4)?
There is only one firm in the industry, No close substitutes are available, There are significant barriers to entry, Firms are price makers
What is price discrimination?
The business practice of selling the same good at different prices to different custumers.
What is a copyright?
The governments guarantee that no one can produce or sell a certain inenetion.
What is marginal product?
The increase in output that arises from an additional unit of input
What is the goal of a firm?
To maximize profit
Total Revenue -Total Cost =
Total Profit
What is Average Product?
Total output / # of workers
If the firm is in a competitive market, what happens to total revenue if it doubles its output? Why?
Total revenue doubles. This is because in a competitive market, the price is unaffected by the amount sold by any indivual firm
If an input necessary for production is in limited supply so that an expansion of the industry raises costs for all existing firms in the market, the long run market supply could be _________ sloping.
Upward sloping
Fixed Cost or Variable Cost? postage and packaging costs
Variable
What is a sunk cost?
a cost that has already been commited and can not be recovered.
What is a cartel?
a group of firms acting in unison
What is a collusion?
an agreement among firms in a market about quantities to prodice or prices to charge
If the long-run market supply curve for a good is perfectly elastic, an increase in the demand for that good will, in the long run, cause an ______________ in the number of firms, but __________ in the price of the good
an increase in the number of firms in the market but no increase in the price of the good
monopolistically competitive firms produce ____________ their efficent scale
below
When MC is ________ ATC, ATC must be declining. When MC is _________ ATC, ATC must be rising. Therefore, MC crosses ATC at the ___________ of ATC.
below above minimum
The efficient price and quantity are represented by where _____________ crosses _________________.
demand crosses marginal cost
What is perfect price discrimination?
describes a situation in which the monopolist knows exactly each customer's willingness to pay and can charge each customer a different price.
Is this considered an Accounting and Economic Costs or just economic cost? The hour of class Travis missed this morning to sleep in
economic cost
Is this considered an Accounting and Economic Costs or just economic cost? The salary Jacob earned as a dentist that he gave up to be a plumber
economic cost
Considering the relationship between the long-run total cost curve and short run total cost curves: Moving from Moving down the slope starting at Point A to the flat Point B on the LRAC curve illustrates _________________. Moving along the flat line from Point B to Point C illustrates ___________ and moving up the curve from Point C to Point D illustrates __________________.
economies of scale, increasing returns to scale constant returns to scale, constant returns to scale diseconomies of scale, decreasing returns to scale
As in a monopoly market, in a monopolistically competitive market, price _________ marginal cost. This conclusion arises because profit maximization requires _______________ to equal ______________ and because the ________ sloping demand curve makes marginal revenue ________ than the price.
exceeds, marginal revenue, marginal cost , downward, less
When marginal cost is less than average total cost, average total cost is ____________.
falling
True/ False Cooperation is easily maintained in an oligopoly because cooperation maximizes each individual firm's promise.
false
True/ False The greater number of firms in an oligopoly, the more outcome of the market looks like that generated by a monopoly
false
True/False Monopolists always make economic profits.
false
A monopolistically competitive firm could __________ the quantity it produces and ____________ the average total cost. Why does the firm forgo this opportunity?
increase, lower It would need to cut its price to sell the additional output. It is more profitable to operate with excess capacity.
In the case of any firm facing a downward-sloping demand curve, marginal revenue is always __________ than price
less than price
Short run curves _______________ the long run curve
lie on or above
In competitive markets, price equals _______________. In monopolized markets price ___________ marginal cost.
marginal cost exceeds
In a perfectly competitive market, the firms all sell at the ___________________.
market price
a monopolistically competitive market has ___________ deadweight loss of monopoly pricing
normal
Businesses do not pay taxes, only ___________ pay taxes
people: Customers, Employees, Owners
Sales taxes are __________, imposing a heavier tax burden on lower-income taxpayers than on higher- income taxpayers.
regressive
If regulators break up a natural monopoly into many smaller firms, the cost of production will:
rise
What generates the U-shape in Average Total Cost?
the tug of war between average fixed cost and average variable cost
What is the Average Total cost (ATC)?
total cost divided by the quantity of output TC/Q
True/False A profit-maximizing monopolist will never produce a quantity that corresponds to a point on the inelastic portion of its demand curve.
true
True/False A firm should increase expenditures on marketing and product variation up to the point where an additional dollar spent generates a marginal revenue of no less than one dollar.
true
True/False A monopolist that is earning a profit in the short run can be expected to earn at least as much profit in the long run.
true
True/False A monopolist's marginal revenue is below market price.
true
Which of the following is a variable in the short run? -wages paid by factory labor -payment on the lease for factory equipment -rent on the factory -interest payments on borrowed financial capital -salaries paid to management
wages paid by factory labor
Where is the socially efficient quantity found in monopolies?
where the demand curve and the marginal cost curve intersect
In the long run, the firm will shut down if price falls below the minimum _______________.
Average Total Cost
If the price falls below ______________ , the firm shuts down, and the quantity supplied is ______units for all prices below ________.
Average Variable Cost 0 AVC
When the price is between ___________ and _______________, the firm will minimize its loss by operating - until it can get out from under its fixed costs.
Average Variable cost and Average total cost
In a competitive firm, the firm's price equals both its ____________ and its ____________.
Average revenue Marginal revenue
Which is more likely to spend more in advertising? Bayer Asprin or Generic Asprin
Bayer
For a monopolistically competitive firm, why does price exceed marginal cost?
Because the firm has some market power
Why does average fixed cost always decline as output rises?
Because the fixed cost is spread over a larger number of units.
History of social security:
Began in 1937 Supplemental retirement income for those 62 and older Today the program is actuarially unsound.
History of medicare:
Began in 1966 Covers major medical expenses for those 65 and older Costs are exploding: -Population is living much longer than when the program began. -Medical technology is more available and more expensive than ever before.
What costs do economists include when measuring a firm's costs?
Both implicit and explicit
The example of resale price maintenance illustrates an important principle that business practices that appear to _____________ competition may, in fact, have ___________ purposes.
Business practices that appear to reduce competition may, in fact, have legitimate purposes.
You buy a mug for $5, and you value you it at $8. On the way back home, you break the mug. Should you return to the store and buy a new one or go home?
Buy another mug. The marginal benefit $8 still exceeds marginal cost $5. The broken mug is a suken cost and not recoverable. Therefore irrelevant.
Where are Social Security/Medicare Taxes collected?
Collected in addition to the individual income tax and the corporation income tax.
How do you find the profit-maximizing quantity for each unit produced?
Comparing the marginal revenue and marginal cost from each unit produced.
In a zero-profit equilibrium, the firm's revenue must?
Compensate owners for opportunity costs
Competitive or monopoly? P = MR = MC
Competitive
As the number of sellers in an oligopoly grows larger, the market looks more and more like a ______________. The price approaches marginal cost and the quantity produces approaches the socially efficient level.
Competitive market
Double taxation in Corporate taxation
Corporate profits are taxed as income, and then dividends to stockholders and profit sharing with employees (bonuses) are taxed again under the personal income tax
Where does the cost-plus regulation occurs where when the firm makes no profit? why? Cost plus regulation will occur where the ____________ curve and ___________ cross, because here the firm isnt ______________ nor ________________.
Cost-plus regulation will occur where the demand curve and the average cost curve cross, because here the firm is neither losing money nor making an economic profit
What are fixed costs?
Costs that do not vary with the quantity of output produced
What are variable costs?
Costs that vary with the quantity of output produced
which of the following is least likely to be sold in a monopolistic competitive market? Video games Ceral Beer Cotton
Cotton
How do you find area of graph that repersents a monopoly's profit
The height of the rectangle is the distance between price and ATC, or P - ATC, at the profit maximizing quantity, q. The length of the box is q. The area of this box, found by multiplying its height by its length, is identical to the profit equation above.
What is Total Cost?
The market value of the inputs a firm uses in production
What happens in the short run on both The soy-bean market and Roy's soybeans graphs when a new medical study shows soy beans to be highly carcinogenic.
The new medical information will decrease demand for soybeans, shifting market demand to the left.
True/ False Price discrimination is only possible if there is no arbitrage
True
What is monopolistic competition?
a market structure in which many firms sell products that are similar but not identical
In a perfectly (or purely) competitive industry, all firms have the same costs. All firms have a minimum average total cost of $100 at a quantity of 200 and a minimum average variable cost of $46 at a quantity of 100. Initially, the industry is in long-run equilibrium. At the long run equilibrium, the price is?
$100
If the first point on a total cost function is (0,800), the fixed cost would be?
$800
3 solutions for tax reform regarding individual income tax:
-Eliminate many deductions and exemptions -Replace the current income tax with a "Flat Tax" -Replace the current income tax with an expenditure (consumption) tax
4 types of Special Interest groups opposed to tax reform:
-Taxpayers (individuals and businesses) who benefit from current tax policy -Politicians who cater to these individuals and businesses who benefit from the current tax policy -Accountants who are hired by individuals and businesses to insure compliance with tax policy -Attorneys who are hired by individuals and businesses to defend them against tax authorities
Suppose that the demand for the product decreases. Rank the events below in the order that each occurs after demand decreases until price returns to long-run equilibrium. Note, not all of the events need be placed: Demand Decreases, Firms enter, Firms exit, Price Decreases, Supply increases, Price increases, supply decreases.
1. Demand Decreases 2. Price Decreases 3. Firms exit 4. Supply Decreases 5. Price Increases
What are three attributes that describe a monopolstic competition?
1. Many sellers: there are firms competing for the same group of customers. 2. Product differentiation: Each firm produces a product that is slightly different from those of other firms. Thus rather than being a price taker, each firm faces a downward-sloping demand curve. 3. Free entry and exit: Firms can enter or exit the market without restriction. Thus, the number of firms in the market adjusts until economic profits are driven to zero
Policymakers in the government can respond to the problem of monopoly in one of four ways:
1. trying to make monopolized industries more competitive 2. regulating some monopolies behavior 3. turning private monopolies into public enterprises 4. by doing nothing at all
Price __ MC: Perfect competition
=
Price __ MC: Monopolistic competition
>
Price __ MC: Monopoly
>
In the long run, the firm produces on the MC curve if P__ATC, but exits if P__ATC.
>, bigger than <, smaller than
If quantity demand in perfect competition increases, what happens?
Demand curve shifts outward, firms respond to higher price by raising the amount they produce, Short run: firms make positive profit, encourages new firms to enter. Eventually price is driven back down to minimum ATC, profits are zero and firms stop entering.
If Marginal Cost rises as the quantity of output produced increases. This upward slope reflects which property?
Diminishing Marginal Product
Monopolstic competition faces a ___________ sloping demand curve, because ___________.
Downward product is different than what is offered by other firms
What is a Oligopoly with only two members?
Duopoly
What is a concentration ratio?
Economists measure a market's domination by a small number of firms with a statistic, which is the percentage of total output in the market supplied by the four largest firms. Highly concentrated industries are described as oiliopolies
Shut down, stay, enter, or exit? P>ATC
Enter
Shut down, stay, enter, or exit? P<ATC
Exit
Shut down, stay, enter, or exit? TR < TC
Exit
Shut down, stay, enter, or exit? TR/Q < TC/Q
Exit
Explicit or Implicit? wages paid to CEO
Explicit
Hailey decides to buy a pretzel from the cart outside her office. She pays $3.25 in cash for her lunch. The $3.25 is an example of:
Explicit Cost
True or False? In the long run, perfectly competitive firms earn small but positive economic profits
False
True or False? AFC is always higher than AVC
False
True or False? ATC is increasing whenever MC is increasing
False
True or False? The ATC crosses the MC at the lowest point on the MC
False
True/ False A monopolist produces an efficient quantity of output, but it is still inefficient because it charges a price that exceeds marginal cost and the resulting profit is social cost
False
True/ False Brand names allow firms to make economic profits in the long run because they are able to sell inferior products basedon the apperent connection of those products to the firm's unrealated high quality products
False
True/ False Economists generally agree that monopolistically competitive firms should be regulated in order to increase economic efficeincy
False
True/ False In the long run, MC firms charges a price that exceeds average total cost
False
True/ False In the long run, firms in MC markets produce at the minimum of their average total cost curves
False
True/ False Most economists argue that the most efficient solution to the problem of monopoly is that the monopoly should be pubicly owned
False
True/ False Price perfect discrimination is efficient, but all of the surplus is recieved by the customer
False
True/ False The short-run industry supply curve is perfectly elastic
False
True/False An individual firm in a purely competitive market can obtain a higher price for its product by reducing its output.
False
True/False An individual firm in a purely competitive market must lower its price in order to sell more of its product.
False
True/False If a market is perfectly competitive, then the market demand curve must be infinitely price elastic.
False
True/False In general, the market demand curve in a purely competitive market is perfectly elastic
False
Why must the long-run equilibrium in a competitive market (free entry and exit) have all firms operating at their efficent scale?
Firms must be making 0 economic profis so that firms are not entering and exiting the indistry. 0 profits occur when P=ATC, and for the competitive firm P=MC determines the production level. P=ATC = MC only at minimum ATC.
What kind of Monopoly is this? Principle of Economics (textbook)
Government created monopoly
What kind of Monopoly is this? Prozac (brand name drug)
Government created monopoly
Corporate Income Tax is a _________ tax.
Hidden
If a firm is producing a level of output where marginal revenue exceeds marginal cost, would it improve profits by increasing output, decreasing output, or keeping it unchanged? Why?
If MR >MC, increasing output will increase profits because an additional unit of production increases revenue more than it increases costs.
Under what conditions would the long-run market supply curve be upward sloping? If an input necessary for production is _____________________ or if firms have different ______________.
If an input necessary for production is in limited supply or if firms have different costs
Explicit or Implicit? Factory owned outright
Implicit
Ginny works for an investment firm and after reviewing the investment decisions her firm made in the last year, considers other ways the funding could have used. She is considering her:
Implicit costs of capital
Why is the short run market supply curve upward sloping while the standard long run market supply is perfectly elastic?
In the short run, firms can't enter or exit, so market supply is the horizontal sum of the upward-sloping MC curves of existing firms. In the long run, if the price is above or below minimum ATC, firms will either enter or exit the market causing the price to always return to minimum Atc for each firm, but the total quantity supplied in the market rises and falls with the number of firms. Thus, the market supply curve is horizontal.
If a firm is operating in the area of constant returns to scale, what will happen to ATC in the short-run and the long-run if the firm expands production? In the short-run, the size of the production facility is _____________, so the firm will experience _________________ and _____________ average total costs when adding additonal workers. In the long run, the firm will ______________ factory and the number of workers, and if the firm experiences constant returns to scale, ATC will __________________ at the ________________.
In the short run, the size of the production facility is fixed, so the firm will experience diminishing returns and increasing average total costs when adding additional workers. In the long run, the firm will expand the size of the factory and the number of workers together, and if the firm experiences constant returns to scale, ATC will remain fixed at the minimum.
Marginal Revenue > Marginal cost: a firm should __________ production
Increase production
Is or is not a barrier to entry? Boeing already serving a large fraction of the jumbo jet market and is able to produce a lower average cost than any potential competitors.
Is a barrier to entry
Is or is not a barrier to entry? Pfizer being the only company that is legally allowed to produce and sell Lipitor, a best selling drug.
Is a barrier to entry
Is or is not a barrier to entry? Tinseltown Theater shows almost all of the newly popular released movies
Is not a barrier to entry
The monopolistically competitive market follows a monopolist's rule for profit maximization, which chooses to find a price where:
It chooses to price the quantity at which marginal revenue equals marginal cost and then uses its demand curve to find the price at which it can sell that quantity
What constitutes a firm's long run supply curve?
It is the portion of the firm's marginal cost curve that lies above its average total cost curve because the firm maximizes profit where P=MC and in the long run a firm must cover total costs or should exit the market.
What constitutes a firm's short-run supply curve? Portion of the firm's ____________ that lies above its ___________________ because the firm maximizes profit where ____________, and in the short run, fixed or sunk costs are _________________. The firm only has to cover _________________.
It is the portion of the firm's marginal cost curve that lies above its average variable cost curve because the firm maximizes profit where P=MC, and in the short run, fixed or sunk costs are irrelevant and the firm must only cover its variable costs.
What is the shape of the marginal cost curve? The firm often experiences _________ marginal product at very small levels of output, since workers are allowed to ____________ in their duties. At some point, the firm will experience _____________ marginal product, and the marginal cost curve will begin to ________.
It is typically U-shaped. The firm often experiences increasing marginal product at very small levels of output as workers are allowed to specialize in their activities. At some point, the firm will experience diminishing marginal product, and the marginal cost curve will begin to rise.
What are antitrust laws?
Laws aimed at curbing monopoly's power
The monopolist produces ___________ than the socially efficient quantity, creating a ______________.
Less, Deadweight loss
Some companies merge not to reduce competition but to_________________. This is called a synergy.
Lower costs and be more efficient.
Rule of maximizing profit: -Perfect Competition -Monopolistic Competition -Monopoly
MR = MC
Firms maximize profits where Marginal Revenue equals?
Marginal Cost
If hiring Kristen causes average product to increase, Kristen's ___________ has to be above current average product.
Marginal product
If a firm can influence the market price of a good it sells, it is said to have what?
Market power
What is the Cost of production?
Market value of the inputs used in the production of a good or service
The marginal cost curve crosses average total cost curve at its ________________________, why?
Minimum At low levels of output, marginal cost is below average total cost, so average total cost is falling. After the two curves cross, marginal cost rises above average total cost. Average total cost will rise at this output.
What are government created monopolies?
Monopolies that arise because the government has given one person or firm the exclusive right to sell some good or service. Lead to higher prices but provides incentives -Patent -Copyright
What market structure does the following exist in? Econ textbooks
Monopolistic competition
What market structure does the following exist in? Legal services in metropolitan area
Monopolistic competition
What market structure does the following exist in? Resturants in a large city
Monopolistic competition
Competitive or monopoly? P > MR = MC
Monopoly
What market structure does the following exist in? Princples of Micro by Mankiw
Monopoly
What market structure does the following exist in? Retail market for electricity
Monopoly
What kind of Monopoly is this? DeBeers Diamonds
Monopoly Resource
What kind of Monopoly is this? Perrier Spring water
Monopoly resource
What are the barriers to entry in a monopoly? (3)
Monopoly resources Government regulation The production process
What is the output effect? More output is ___________, so Quantity is ____________, which tends to _________ total revenue
More output is sold, so Q is higher, which tends to increase total revenue
Which is more likely to spend more in advertising? John deer farm tractor division or mower dividion
Mower
A situation where oligopolists interacting with each other each chose their best strategy given the strategies that all other oligopolists have chosen is known as
Nash Equilibrium
What is this? a situation in which economic actors interacting with one another each choose their best strategy given the best strategies that all other actors have chosen
Nash equilibrium: a situation in which economic actors interacting with one another each choose their best strategy given the best strategies that all other actors have chosen
What kind of Monopoly is this? Edison Power company
Natural Monopoly
What kind of Monopoly is this? United State Postal Service
Natural monopoly
In a perfect competition the actions of any single buyer or seller has a _______ impact on market price.
Negligible
In perfect competition, If firms in the market are already profitable then what happens in a market?
New firms will have the incentive to enter, increase the quantity supplied, drive down prices and profits.
Can earn economic profits in the long run? Perfect competition
No
Is this likely to be a natural monopoly? A firm that owns all of the world's gold and is therefore the only firm that sells gold jewelry.
No
Produces welfare-maximizing level of output? Monopolistic competition
No
Produces welfare-maximizing level of output? Monopoly
No
Oligopoly departs from perfect competition because there are ______________.
Only a few sellers in the market
What costs do accountants include when measuring a firm's costs?
Only explicit costs because their job is just to track the money flow in and out of the firm.
What market structure does the following exist in? Gold Bullion
Perfect competition
What market structure does the following exist in? Retail market for gasoline
Perfect competition
Where is the competitive firm's long-run supply curve?
Portion of marginal cost that lies above average total cost
In the long run, the competitive firm's supply curve is the portion of the ___________________ that lies _______________ average total cost curve
Portion of the marginal cost curve that lies above average total cost curve
In the short run, the competitive firm's supply curve is the ______________.
Portion of the marginal cost curve that lies above average variable cost curve
Buyers and sellers in competitive markets must accept the price market determines and are therefore ______________.
Price takers
For the firm in perfect competition, several variables converge and are equal at long-run equilibrium. What variables are equal?
Price, Marginal cost, Marginal revenue, Average total cost, Average revenue
(P-ATC) x Q
Profit
(TR/Q-TC/Q) x Q
Profit
TR-TC=
Profit
Maximum profit the monopoly will make is 8 units at $6. Actual cost at 8 units is $4. How much profit will the monopolist make?
Profit = total revenue - total cost P= ($6.00 x 8) - ($4.00 x 8) $16.00
Marginal Revenue = Marginal cost
Profit maximizing level of output
Monopolistic competition departs from perfect competition in that ___________________.
Sellers offer a differentiated product
Shut down, stay, enter, or exit? P < AVC
Shut down
Shut down, stay, enter, or exit? TR < VC
Shut down
Shut down, stay, enter, or exit? TR/Q < VC/Q
Shut down
Why does the Long run supply curve have an upward slope? (2)
Some resources used in production may be available in only limited quantities. Some firms may have different costs
Who is opposed to serious tax reform?
Special interest groups
When a monopoly increases the amount it sells, this action has two effects on revenue. The two effects are called the ______________ and the _______________.
The output effect: More output is sold, so Q is higher, which tends to increase total revenue The price effect: The price falls, so P is lower, which tends to decrease total revenue
How do you find the efficient scale?
The output that minimizes ATC. Also, the place where MC crosses ATC.
What is the price effect? The price _________, so P is _______, which tends to ____________ total revenue
The price falls, so P is lower, which tends to decrease total revenue
What are constant returns to scale? Average total cost ________________ as the quantity of output ______________.
The property whereby average total cost stays the same as the quantity of output changes.
What are economies of scale? The property whereby long-run ATC __________ as the quantity of output ____________.
The property whereby long-run ATC falls as the quantity of output increases
What is diminishing marginal product?
The property whereby the marginal product of an input declines as the quantity of the input increases
What is the production function? The realtionship between _______________ used to make a good and _______________ of that good.
The relationship between quantity of inputs used to make a good and the quantity of output of that good.
What is industrial organization?
The study of how firm's decisions about prices and quantities depend on the market conditions they face.
What is a key feature of Oligopoly?
The tension between cooperation and self interest
Explain the relationship between the production function and total cost curve: Total cost curve reflects the production function. When an input exhibits ________________, the production function gets flatter because additional increments of inputs (increase/decrease) outputs by ever smaller amounts. The total cost curve gets (flatter/ steeper) as the amount produced (rises/falls).
The total cost curve reflects the production function. When an input exhibits diminishing marginal product, the production function gets flatter because additional increments of inputs increase outputs by ever smaller amounts. The total cost curve gets steeper as the amount produced rises.
What are the three characteristics of a competitive market?
There are many buyers and sellers in the market, the goods offered by various sellers are largely the same, Firms can freely enter or exit the market.
What are three conditions that charecterize a competitive market?
There are many buyers and sellers, the goods offered for sale are largely the same, and firms can freely enter and exit the market.
What are the antitrust laws intentions?
These laws are used to prevent oligopolists from acting together in ways that would make their markets less competitive
What is profit?
Total revenue minus total cost
True or False? In a competitive market, both buyers and sellers are price takers
True
True or False? ATC= (FC+VC)/Q
True
True or False? All costs are either fixed or variable
True
True or False? MC refers to the change in total cost associated with the production of another unit
True
True or False? The ATC is always greater than or equal to the AVC
True
True or False? when fixed costs are positive, The average fixed cost curve is downward sloping
True
True/ False The industry is referred to as a "constant cost" because regardless of how large the industry gets (how much is produced) the long-run equilibrium price is the same, and so are marginal and average costs
True
True/ False With free entry and exit within a specific industry, the price elasticity of supply is higher in the long run than in the short run
True
True/False If the firms in an industry are price takers, then every firm in the industry faces a horizontal demand curve.
True
True/False In a purely competitive market the average revenue is equal to the market price.
True
True/False In general, an individual firm in a purely competitive market faces a perfectly elastic demand curve.
True
True/False Oligopoly is a market structure in which there are few sellers of a product and additional sellers cannot easily enter the industry.
True
Features of cost curves: Marginal Cost Curve is __________________. Average Total Cost Curve is _______________. Marginal Cost crosses Average total cost curve at the _____________.
Upward sloping U-shaped minimum average total cost
What is Average Variable cost?
Variable cost divided by the quantity of output
In perfect competition, the process of entry and exit ends when?
When Price and ATC are driven to equality
When does a firm exit the market?
When revenue it would get from producing is less than its total costs
What is an imperfect competition?
Where many industries fall somewhere between the polar cases of perfect competition and monopoly
Where does the point of tangency occur in a monopolistically competitive graph? This particular quantity _____________ profit, which is exactly ______ in the long run.
Where marginal revenue equals marginal cost maximizes 0
Can earn economic profit in the short run? -Perfect Competition -Monopolistic Competition -Monopoly
Yes
Can earn economic profits in the long run? Monopoly
Yes
Is it a price taker: Perfect competition
Yes
Is this a perfectly competitive market? Gasoline
Yes
Is this a perfectly competitive market? Market for common stock of IBM
Yes
Is this likely to be a natural monopoly? A firm that provides electricity to all of the homes in Los Angeles.
Yes
Produces welfare-maximizing level of output? Perfect competition
Yes
"Would you like to see another customer purchase from you at your current price?" a monopolistically competitive firm would answer:
Yes! because price exceeds marginal cost, an extra unit sold means more profit
For firms in perfectly (purely) competitive markets, long-run economic profits are____________. Because firms will ____________ this market if profits are less than that and ________________ this market if profits are greater than that.
Zero exit enter
What is an exit?
a long run decision to leave the market, does not pay any costs at all
What is the buisness stealing externality? WHat market does it refer to?
a monopolistically competitive firm Because other firms lose customers and profits from the entry of a new competitor, entry of a new firm imposes a negative externaltity on exsisting firms.
What is the product variety externality? What market does it refer to?
a monopolistically competitive market Because consumers get some consumer surplus from the introduction of a new product, entry of a new firm conveys a positive externality on consumers
If oligopolists engage in collusion, the market outcome looks more like ___________
a monopoly
What is a shut down?
a short run decision not to produce anything during a specific period of time because of current market conditions, still has to pay fixed costs
A natural monopoly refers to a monopoly that is defended from direct competition by a. economies of scale over a broad range of output. b. a government franchise. c. control over a vital input. d. a patent or copyright.
a. economies of scale over a broad range of output
Marginal revenue is equal to price for which one of the following types of market structure? a. Monopoly b. Perfect competition c. Monopolistic competition d. Oligopoly
b. Perfect competition
The demand curve faced by a monopolistically competitive firm is a. perfectly elastic. b. elastic. c. unit elastic. d. inelastic.
b. elastic
When a monopolist produces another unit, the marginal revenue generated by that unit must be
below the price because the price effect outweighs the output effect
Which of the following types of firms is likely to be a monopolistic competitor? a. A local telephone company. b. An automobile manufacturer. c. A restaurant. d. All of the above are likely to be monopolistic competitors.
c. A restaurant.
If one perfectly competitive firm increases its level of output, market supply a. will increase and market price will fall. b. will increase and market price will rise. c. and market price will both remain constant. d. will decrease and market price will rise.
c. and market price will both remain constant
If an imperfectly competitive firm is producing a level of output where marginal cost is equal to marginal revenue, marginal revenue is below average variable cost, and price is equal to average total cost, then the firm is a. in long-run equilibrium. b. in short-run equilibrium. c. minimizing short-run average total cost. d. breaking even.
c. minimizing short-run average total cost
Oligopolists would be better off doing what illegal tactic? Yet because they follow their own self-interests, they do not end up maximizing their joint profit. Each oligopolist is tempted to _________ production and capture a ___________ share of the market. As each of them tries to do this, total production __________ and the price __________.
cooperating and reaching monopoly outcome to raise production and capture a larger share of the market. As each of them tries to do this, total production rises and the price falls.
When a perfectly competitive industry is in long-run equilibrium, all firms in the industry a. earn zero economic profits. b. produce a level of output where short-run marginal cost is equal to short-run average total cost. c. produce a level of output where long-run marginal cost is equal to long-run average cost. d. All of the above are correct.
d. All of the above are correct
A perfectly competitive firm should reduce output or shut down in the short run if market price is equal to marginal cost and price is a. greater than average total cost. b. less than average total cost. c. greater than average variable cost. d. less than average variable cost.
d. less than average variable cost
In the short run, a monopolist will shut down if it is producing a level of output where marginal revenue is equal to short-run marginal cost and price is a. greater than average total cost. b. less than average total cost. c. greater than average variable cost. d. less than average variable cost.
d. less than average variable cost
Under monopolistic competition, the firms produce on the ______________ sloping portion of their ________________.
downward slpoing portion of their average total cost curves.
Losses ___________ exit, and exit shifts the demand curves faced by monopolistically competitive firms ___________. As demand rises, this firms experience _____________.
encourage, to the right, rising profits
Profit ___________ entry, and entry shifts the demand curves faced by monopolistically competitive firms ___________. As demand falls, this firms experience _____________.
encourages, to the left, declining profit
As in a competitive market, in a monopolistically competitive market price ______ average total cost. This arises because ____________ drive economic profit to zero.
equals, free entry and exit.
True/False A monopolist will shut down in the short run if price is everywhere less than average total cost.
false
True/False A market that is monopolistically competitive will tend to have fewer firms than would be the case if the same market was perfectly competitive.
false
True/False A natural monopoly is one that results from exclusive control of a crucial natural resource.
false
True/False Commodities that sell for the same price are referred to as homogeneous.
false
True/False If a perfectly competitive firm is producing a level of output where its marginal cost is greater than market price, it should raise its price.
false
True/False Monopolistically competitive firms attempt to minimize selling expenses.
false
True/False Monopolists are price takers.
false
True/False The short-run supply curve for a monopolistically competitive firm is identical to the upward-sloping portion of the firm's marginal cost curve above average variable cost.
false
True/False The supply curve of a perfectly competitive firm is identical to the portion of its marginal cost curve that is above its average total cost curve.
false
True/False Under perfect competition, changes in market supply do not affect market price.
false
What is Average Fixed cost?
fixed cost divided by the quantity of output
The long run ATC curve is much ___________________ than the short run ATC.
flatter U-shape
A monopoly firm can control the price of a good it sells, but because _______________, monoply's profits are not unlimited
high price reduces the quantity customers buy
If a competitive firm is producing a level of output where marginal revenue exceeds marginal cost, the firm could increase profits if it ___________.
increased production
Public ownership of natural monopolies tends to be _______________.
inefficient
What are implicit costs?
input costs that do not require an outlay of money
What are explicit costs?
input costs that require an outlay of money by the firm
Long run industry supply curve is _________.
perfectly elastic
Total revenue is ___________ to the amount of output.
porportional
Marginal revenue is the same as________ in a perfectly competitive market, so the quantity supplied at each price will be found along the ________________.
price Marginal Cost curve
When marginal cost is greater than average total cost, average total cost is __________________.
rising
Considering the relationship between the long-run total cost curve and short run total cost curves: The SRAC1 curve placed on a point of economies of scale on the long run curve represents a plant size that is ______ than the plant size represented by the SRAC3 curve, placed on a point of constant returns to scale. The minimum point on the SRAC1 curve has a ______ cost/ unit than the minimum point on the SRAC3 curve.
smaller, higher
What is Total Revenue?
the amount a firm receives for the sale of its output. It equals the quantity of output the firm produces times the price at which it sells its output
What is the marginal firm?
the firm that would exit the market if the price were any lower.
What is Marginal Cost?
the increase in total cost that arises from an extra unit of production ΔTC/ΔQ
What is a firms efficient scale? the level of ____________ with the lowest ____________.
the level of production with lowest average total cost
Short run Industry supply curve is less elastic than _______________.
the long run supply curve
If the output effect is larger than the price effect in an oligopoly, the owner will ___________ production.
the owner will increase production
If the price effect is larger than the output effect in an oligopoly, the owner will not _______ production
the owner will not raise production
Where is a competitive firm's short run supply curve?
the portion of its marginal cost curve that lies above average variable costs
A monopolist's marginal revenue is always less than ___________________.
the price of its good
What is arbitrage?
the process of buying low and selling high to profit from the price difference
What are diseconomies of scale? The property whereby long-run ATC ___________ as the quantity of output ___________
the property whereby long run ATC rises as the quantity of output increases
What is the efficiency scale? the quantity of output that (minimizes or maximizes) (AVC or ATC)
the quantity of output that minimizes average total cost
What is game theory?
the study of how people behave in strategic decisions
True/False A perfectly competitive firm is in long-run equilibrium when all inputs are earning their opportunity costs.
true
True/False A perfectly competitive firm maximizes profit by producing a level of output where marginal cost is equal to price.
true
True/False All monopoly power that is based on barriers to entry is subject to decay in the long run that based on government franchise.
true
True/False As firms leave a monopolistically competitive industry, the remaining firms' demand curves shift to the right and become less elastic.
true
True/False If a firm in a perfectly competitive industry charges a higher price than that charged by other firms in the industry it will be unable to sell any of its output.
true
True/False If a monopolist has a linear demand curve, then it has a linear marginal revenue curve.
true
True/False If a monopolistically competitive firm is in long-run equilibrium, then its short-run average total cost curve is tangent to its demand curve.
true
True/False If a perfectly competitive firm is in long-run equilibrium, then it is earning an economic profit of zero.
true
True/False If an imperfectly competitive firm has a linear demand curve, then its marginal revenue curve has the same price intercept as its demand curve.
true
True/False If firms in a perfectly competitive industry are earning economic profits greater than zero, then more firms will enter the industry.
true
True/False In the long run, monopolistically competitive firms earn zero economic profit.
true
True/False Monopolistically competitive firms operate with excess capacity.
true
True/False One problem with the theory of monopolistic competition is that it is difficult to define a market and to identify the firms that comprise it.
true
True/False Selling expenses include any marketing expenditures that are intended to increase the demand for a product.
true
True/False The combination of product homogeneity and perfect knowledge ensure that a single price will prevail in a perfectly competitive market.
true
True/False The demand curve faced by a perfectly competitive firm is horizontal.
true
True/False When compared to perfect competition, monopoly results in a deadweight loss.
true
A grocery store should close at night if the:
variable costs of staying open are greater than the total revenue due to staying open
