Micro Econ 500 - Chapter 9 and 10
What is the difference in implicit and explicit cost?
- Accountants calculate profits by subtracting only explicit cost (labor, capital, and depreciation) from revenue. - Economist calculate profits by not only subtracting explicit cost, but also opportunity cost (the forgone income by not choosing to produce the next best alternative).
What are 6 sources of Monopoly power?
1) Barriers of entry 2) Economies of scale 3) Locatoin 4) Sunk Cost 5) Restricted Ownership of Raw Materials and Inputs 6) Government Restrictions
What are 4 characteristics of a monopoly?
1) No rivals 2) No close substitues of goods 3) No easy entry 4) Price Setters
What is the equation for total profit?
Total Profit = Qm(Pm - ATCm)
How is total revenune calculated?
Total Revenue = Price x Quantity Note: Quantity is the only thing a firm can vary in perfectly competitive market.
How is economic profit calculated?
Economic profit = Profit per unit x quantity produced Economic profit per unit is the difference between price and average total cost .
On graph that includes the total revenue and total cost curves in a perfectly competitive market, where is econonmic profit maximized?
Economic profit is maximized where the total cost and total revenue curves have the same slope. - The slope of the total cost curve is equal to that of the total revenue curve where it's tangent line intersects -The slope of the total cost curve is marginal cost, the slope of the total revenue curve is marginal revenue
Given a monopoly can choose what quantity to produce knowing the price they sell at will decrease as quantity increases, at which quanity will they maximize total revenue; profit?
- A monopoly will maximize total revenue where the demand curve is unit elastic; change in price equals -1. - This is the midpoint on the demand curve - A firm will maximize profit when it chooses a price and quantity on the demand curve that is in the elastic portion (top) of the demand curve
What are the characteristics of a total revenue curve?
- It is a straight line coming out of the orgin - The slope of the total revenue curve is the marginal revenue
What is unique about marginal revenue, average revenue, and price, in a perfectly competitive market?
- Marginal Revenue = Average Revenue = Price; in a perfectly competitive market - This is show on a graph as a perfectly horizontal line at the market price - It is also a perfectly elastic demand curve
What are the characteristics of a marginal revenue curve of a monopoly?
- Marginal Revenue curve is twice as steep as the demand curve - Marginal Revenue curve bisects any line drawn from the vertical axis to the demand curve.
What are the differences in supply and demand between a perfectly competitive market and a monopoly?
- Perfectly competitive market can sell goods only at market price and the quantity are equilibrium (where demand = supply) will maximize there profits. - A monopoly only faces a downward sloping demand curve because they are the only supply. It can sell any quantity along the demand curve, as it's quantities increase it's prices falls.
What is the shutdown point for a firm?
- This is the point where the average variable cost intersects with the marginal cost. - Also the minimum point of the average variable cost curve
What is the relationship between marginal revenue and price elasticity?
- When marginal revenue is positive, demand is price elastic. - When marginal revenue is negative demand is price inelastic - When marginal revenue is zero, demand is unit elastic
What are the 3 steps to dertermine a monopoly firms profit maximizing price and output?
1) Determine the demand, marginal revenue, and marginal cost curves 2) Select the output level at which marginal revenue = marginal cost 3) Determine from the demand curve the price at which the output can be sold
What are the 5 assumptions made when assessing a perfectly competitive market?
1) Everyone is Price Takers 2) Identical Goods 3) A large number of buyers and sellers 4) Ease of entry and exit 5) Complete Information
Whati is Marginal Revenue?
The increase in total revenue from a 1 unit increase in quantity.
On a graph including marginal cost, marginal revenue, and average total cost, where is econmic profit maximized?
Where marginal revenue = marginal cost.
