micro econ test 4

Does the market system result in productive​ efficiency? In the long​ run, perfect competition

results in productive efficiency because firms enter and exit until they break even where price equals minimum average cost.

Economists generally agree that efficiency losses due to monopolies in the economy are

small because true monopolies are very rare.

According to Joseph​ Schumpeter, what does economic progress depend​ on?

technological change in the form of new products

What is the relationship between a perfectly competitive​ firm's marginal cost curve and its supply​ curve?

A​ firm's marginal cost curve is equal to its supply curve for prices above average variable cost.

What is the relationship between a​ monopolist's demand curve and the market demand​ curve? What is the relationship between a​ monopolist's demand curve and its marginal revenue​ curve?

A​ monopolist's demand curve is the same as the market demand curve. A​ monopolist's marginal revenue curve has twice the slope of its demand​ curve, because to sell more​ output, a monopoly must lower price.

Compared to perfect​ competition, when a consumer purchases a product from a monopolistically competitive​ firm, the consumer benefits from purchasing a product

that is appealing because it is differentiatedis appealing because it is differentiated.

When are firms likely to enter an​ industry? When are they likely to​ exit?

Economic profits attract firms to enter an​ industry, and economic losses cause firms to exit an industry.

difference between productive and allocative efficiency

Productive efficiency pertains to production within an industry while allocative efficiency pertains to production across all industries.

Which of the following is an expression of profit for a perfectly competitive​ firm? Profit for a perfectly competitive firm can be expressed as

Profit equals (P- ATC) x Q​, where P is​ price, Q is​ output, and ATC is average total cost.

Suppose a second seafood restaurant opens in​ Stonington, Maine. Consumer surplus and economic efficiency will

increase so long as the two firms compete

Which of the following statements is true when the difference between TR and TC is at its maximum positive​ value?

both A and B MR​ = MC Slope of TR​ = Slope of TC

How does perfect competition lead to allocative and productive​ efficiency?

both a and b.

How is the market supply curve derived from the supply curves of individual​ firms? The market supply curve is derived

by horizontally adding the individual​ firms' supply curves.

Suppose Farmer Lane grows and sells cotton in a perfectly competitive industry. The market price of cotton is ​$1.54 per​ kilogram, and his marginal cost of production is ​$1.56 per​ kilogram, which increases with output. Assume Farmer Lane is currently earning a profit. Can Farmer Lane do anything to increase his profit in the short​ run? Farmer Lane

can increase his profit by producing less output.

Assume that an industry that began as a perfectly competitive industry becomes a monopoly. Compared to when the industry was perfectly​ competitive, the monopolist will

charge a higher price and produce less output.

Unlike perfectly competitive​ firms, in the long run monopolistically competitive firms

charge a price greater than marginal cost and do not produce at minimum average total cost.

Explain why market power leads to deadweight loss.

charge a price that is greater than marginal cost to maximize profits.

In​ 2017, Apple reported that since its iTunes App Store had opened in​ 2008, third-party app developers had earned more than​ $60 billion and currently employed 1.4 million people.​ Yet, as​ we've seen, because of intense​ competition, many game developers can only break even on the games they develop. If game companies can only break even on the mobile games they​ develop, in the long​ run, we would expect them to

continue to develop mobile games because they can cover all costs of production if they break even.

It is possible for profits to increase even if revenue decreases if how can GE maximize its profit

costs decrease more than revenue decreases increase revenues and increase costs

Network externalities

create barriers to entry because if a firm can attract enough customers​ initially, it can attract additional customers as its​ product's value increases by more people using​ it, which attracts even more customers. AND serve as barriers to entry because new products are less useful.

Suppose that a perfectly competitive industry becomes a monopoly. As a​ result, consumer surplus will ____, producer surplus will ___ and deadweight loss will___

decrease increase increase

A natural monopoly

develops automatically due to economies of scale.

Does a monopolist have a supply​ curve?

does not have a supply curve because it is a price maker with one​ profit-maximizing price-quantity combination.

Suppose the market for cotton is perfectly competitive and that input prices decrease as the industry expands. Characterize the​ industry's long-run supply curve. The cotton​ industry's long-run supply curve will be

downward sloping because the​long-run average cost of production will be decreasing

Market power results in

economic profits that can be spent on research to develop new products.

Compared to perfect​ competition, consumer welfare with monopolistic competition is

enhanced by products more closely suited to consumer tastesproducts more closely suited to consumer tastes.

Explain why it is true that for a firm in a perfectly competitive market that P​ = MR​ = AR

firms can sell as much output as they want at the market price

Unlike in perfectly competitive​ markets, in monopolistically competitive​ markets,

firms face​ downward-sloping demand​ curves, and the products competitors sell are differentiated.

According to an article in the New York Times​, interest payments on bank loans make up more than half the costs of the typical solar panel manufacturer. The owner of a firm that imports solar panels made this observation about solar panel​ manufacturers: ​"So as long as companies can cover their variable costs and earn at least some revenue to put toward interest​ payments, they will continue to operate even at a​ loss." The interest payments these firms make are a The quote describes logical behavior of solar panel firms in the

fixed cost since they do not vary with output. short run

In a perfectly competitive industry with constant​ costs, the​ long-run supply curve will be

horizontal

What is the supply curve for a perfectly competitive firm in the short​ run? The supply curve for a firm in a perfectly competitive market in the short run is

that​ firm's marginal cost curve for prices at or above average variable cost.

How should firms in perfectly competitive markets decide how much to​ produce?

the difference between total revenue and total cost is as large as possible.

The four main reasons a firm becomes a monopoly​ are:

the government blocks​ entry, control of a key​ resource, network​ externalities, and economies of scale.

What is the​ government's policy on collusion in the United​ States? Explain the rationale for this policy. In the United States

the government makes collusion illegal with antitrust laws because monopolies reduce economic efficiency

How are prices determined in perfectly competitive markets?

the interaction of market demand and supply because firms and consumers are price takers.

Which of the following is a characteristic of perfectly competitive​ markets?

the products sold by all firms in the market will be identical

A firm is likely to be a monopoly if

there are important network externalities in supplying the good or service.

The federal government grants patents

to encourgae firms to spend money on research to create new products

In a perfectly competitive industry with increasing average​ costs, the​ long-run supply curve will be

upward sloping

What is meant by productive​ efficiency? Productive efficiency is

when a good or service is produced at lowest possible cost.

A monopolist is a price maker because

when a monpolist raises its​ prices, it loses some but not all customers.

When is a firm a​ monopoly, or are monopolies only theoretical concepts that do not​ exist?

A firm is a monopoly if its economic profits are not competed away in the long run.

Why would a firm produce in the short run while experiencing​ losses?

A firm would not shut down if by producing it would lose an amount less than its total fixed costsit would lose an amount less than its total fixed costs.

Which of the following best explains why firms​ don't maximize revenue rather than profit? If a firm decided to maximize​ revenue, would it be likely to produce a smaller or a larger quantity than if it were maximizing​ profit?

At the point where revenue is​ maximized, the difference between total revenue and total cost may not be maximized. larger

Why are consumers so powerful in a market​ system?

Because it is​ consumers' demand that influences the market price and dictates what producers will supply in the market.

A student​ argues: ​"To maximize profit​, a firm should produce the quantity where the difference between marginal revenue and marginal cost is the greatest. If a firm produces more than this​ quantity, then the profit made on each additional unit will be​ falling." Is the above statement true or​ false?

False. Profit is maximized at the output level where marginal revenue equals marginal cost.

Which of the following is not likely to happen in the pencil​ market?

Firms will charge a price above marginal cost in the long run.

Would the only restaurant that sells British food in Palo​ Alto, or any other​ city, be considered a​ monopoly? What criteria would you use to determine if the restaurant is a​ monopoly?

It could be according to the broad​ definition, but would not be according to the narrow definition. The ability to ignore the actions of other​ firms, the persistence of economic​ profits, and the availability of close substitutes.

When a​ firm's demand curve slopes downward and the firm decides to cut​ price, which of the following​ happens?

It sells more units but receives lower revenue per unit.

"In a perfectly competitive​ market, in the long run consumers benefit from reductions in​ costs, but firms​ don't." ​Don't firms also benefit from cost reductions because they are able to earn greater​ profits?

No. Because​ short-run profits encourage​ entry, firms earn zero economic profit in the long run.

If marginal revenue slopes​ downward, which of the following is​ true?

The firm must decrease its price to sell a larger quantity.

A student in a principles of economics course makes the following​ remark: ​"The economic model of perfectly competitive markets is fine in theory but not very realistic. It predicts that in the long​ run, a firm in a perfectly competitive market will earn no profits. No firm in the real world would stay in business if it earned zero​ profits." Is this remark correct or​ incorrect?

The remark is incorrect because the student has confused accounting profit and economic profit. Firms in a perfectly competitive market earn accounting​ profit, but no economic profit.

The chapter​ states, ​"Firms will supply all those goods that provide consumers with a marginal benefit at least as great as the marginal cost of producing​ them." A student objects to this statement by making the following​ argument: "I doubt that firms will really do this. After​ all, firms are in business to make a​ profit; they​ don't care about what is best for​ consumers." After reminding the class that we are assuming a competitive​ market, your professor would most likely give the following reply.

While​ it's true that firms​ don't care about consumer​ welfare, they do maximize profits by producing the efficient level of output.

Why do single firms in perfectly competitive markets face horizontal demand​ curves?

With many firms selling an identical​ product, single firms have no effect on market price.

Are perfectly competitive markets allocatively efficient in the long​ run?

Yes comma because firms produce where the marginal benefit to consumers equals the marginal cost of production.

If you own the only hardware store in a small​ town, do you have a​ monopoly?

Yes. You would have a monopoly if your profits are not competed away in the long run.

A public franchise is

a firm designated by the government as the only legal provider of a good or service

An example of a public franchise is

a firm that is the​ sole, government-designated provider of electricity​, and an example of a public enterprise is the government directly providing sewage service.

what is a price taker? when are firms likely to be price takers?

a firm that is unable to affect the market price it sells a product that is exactly the same as every other firm

A cartel is The NCAA acts like a cartel because it As a result of the NCAA acting like a​ cartel, If you are a student who does not play intercollegiate sports but who is enrolled at a​ school, such as the University of Alabama or Ohio State​ University, with prominent sports​ teams, the NCAA acting as a cartel makes you

a group of firms that collude by agreeing to restrict output to increase prices and profits. restricts the number of games that the member​ schools' teams can play. athletic departments benefit because they have lower​ costs, but athletes lose because they cannot be compensated for playing. worse off because you would have fewer games to watch and have to pay more to watch them.

The​ long-run supply curve is

a horizontal line equal to the minimum point on the typical​ firm's average total cost curve.

Which of the following terms best describes a state of the economy in which production reflects consumer​ preferences?

allocative efficiency

What is the difference between a​ firm's shutdown point in the short run and its exit point in the long​ run? In the short​ run, a​ firm's shutdown point is the minimum point on the Why are firms willing to accept losses in the short run but not in the long​ run?

average variable cost​ curve, while in the long​ run, a​ firm's exit point is the minimum point on the average total cost curve.

Substitutes exist for just about every​ product, so can a firm ever really be a​ monopoly? A firm can

be a monopoly if it can ignore the actions of other firms.

When a monopoly maximizes​ profit, deadweight loss will be larger if demand is

inelastic because price will be farther from marginal cost.

A monopoly that maximizes profit

is not also maximizing revenue because revenue is highest when marginal revenue equals zero. AND is not also maximizing production because price must be reduced to sell additional output.

What is meant by allocative​ efficiency? Allocative efficiency is when every good or service

is produced up to the point where price equals marginal cost.

A​ monopoly's demand curve

is the same as the demand curve for the product.

Economists could find that a firm is a monopoly if

it earns profis in the long run

Despite the fact that few firms sell identical products in markets where there are no barriers to​ entry, economists believe that the model of perfect competition is important because

it is a benchmark a market with the maximum possible competition that economists use to evaluate actual markets that are not perfectly competitive.

What are the three conditions for a market to be perfectly​ competitive? For a market to be perfectly​ competitive, there must be

many buyers and sellers all firms selling identical products no barriers to new firms entering the market

The increase in total revenue that results from selling one more unit of output is What is the relationship between​ price, average​ revenue, and marginal revenue for a firm in a perfectly competitive​ market?

marginal revenue Price is equal to both average revenue and marginal revenue.

In the long​ run, monopolistically competitive firms

may continue to earn profit by improving their product.

Compared to​ monopolies, perfectly competitive markets are

more economically efficient because they result in more economic surplus.

What determines entry and exit of firms in a perfectly competitive industry in the long​ run? In a perfectly competitive industry in the long​ run,

new firms will enter if existing firms are making a profit and existing firms will exit if they are experiencing losses.

The following questions are about​ long-run equilibrium in the market for​ cage-free eggs. As described in the chapter​ opener, the market for cage​-free eggs in 2015 was In the long run in the market for cage​-free ​eggs, we would expect With the stricter​ guidelines, other things​ equal, the market price of​ cage-free eggs would ____ as the minimum​ long-run average cost ___ At the new market​ price, the​ long-run equilibrium quantity will be_____

not in equilibrium because farmers who were raising​ cage-free chickens were earning higher profits than farmers who raised chickens using more traditional methods. the equilbrium price to decrease and the equilibrium quantity to​ increase, as more firms enter. increase, increases, smaller

An industry is a natural monopoly when

one firm can satisfy the entire market at the lowest cost

The distribution of electric power might be a natural monopoly because The generation of electric power would not be a natural monopoly because

only one distrubution network is needed to transmit the power generation can be done in various ways and in various​ locations, so there are no inefficiencies associated with multiple providers.

A monopolistically competitive firm is not allocatively efficient because

price exceeds marginal costs

A monopolistically competitive firm produces where​ _________, while a perfectly competitive firm produces where​ _________.

price is greater than marginal​ cost; price is equal to marginal cost

Which of the following terms best describes the result of the forces of competition driving the market price to the minimum average cost of the typical​ firm?

productive efficiency

Would a firm earning zero economic profit continue to​ produce, even in the long​ run? In​ long-run competitive​ equilibrium, a firm earning zero economic profit

will continue to produce because such profit is as high a return as could be earned elsewhere

When new firms enter a monopolistically competitive​ market, the economic profits of existing firms

will decrease because their demand curves will shift to the left. shift to the left and become more elastic.

If the demand for oranges​ increases, then the market

will supply additional oranges because producers seek the highest return on their investments.

In a situation in which the consumers in a housing development have only one cable company​ available, is the price really at the whim of the​ company? Would a company in this situation be likely to​ charge, say,​ $500 per month for basic cable​ services? Explain why or why not. A cable company in this situation

would not be free to charge any price it chooses because it would still be constrained by consumer demand.

In perfect​ competition, long-run equilibrium occurs when the economic profit is

zero

In the long​ run, the monopolist can earn

zero or positive economic profit.

Is zero economic profit inevitable in the long run for a monopolistically competitive​ firm?

​No, a firm could try to continue making a profit in the long run by reducing production costs and improving its products.

Suppose you decide to open a copy store. You rent store space​ (signing a​ one-year lease), and you take out a loan at a local bank and use the money to purchase 10 copiers. Six months​ later, a large chain opens a copy store two blocks away from yours. As a​ result, the revenue you receive from your copy​ store, while sufficient to cover the wages of your employees and the costs of paper and​ utilities, doesn't cover all of your rent and the interest and repayment costs on the loan you took out to purchase the copiers. Should you continue operating your​ business?

​Yes, because you are covering your variable costs.

With a​ downward-sloping demand​ curve, average revenue is equal to price With a​ downward-sloping demand​ curve, marginal revenue is below price

​actually, average revenue is always equal to​ price, whether demand is downward sloping or not. because the firm must lower its price to sell additional units.