Microeconomics Tania Jordan Test 3
Which of the following statements is false?
b. Since (total) fixed costs are constant as output changes in the short run, it follows that average fixed cost is constant in the short run.
Total revenue is __________times quantity, total cost is ______________ times quantity, and average variable cost is average total cost minus ____________.
b. price, average total cost, average fixed cost
Interdependence implies that each firm in an industry
is aware that its actions influence the others and that the actions of the other firms affect it.
Maximizing profit is the same as maximizing _________________ if _____________.
total revenue, TVC is zero
If two firms in the same industry (but at different stages of the production process) merged, this would be a(n) __________ merger.
vertical
Which of the following is the best example of a homogeneous good?
wheat
For a single-price monopoly firm, price is ____________ marginal revenue. For a perfectly price discriminating monopoly, price is ______________ marginal revenue.
Greater than, equal to
Total industry sales are $530 million. The top four firms (W, X, Y, and Z) account for sales of $150 million, $95.6 million, $22 million and $8 million, respectively. What is the four-firm concentration ratio?
.52
Refer to the exhibit. What quantity does the profit-maximizing or loss-minimizing firm produce?
b. Q2, where the difference between "what is coming in" on the last unit and "what is going out" is zero.
Consider the following data: equilibrium price = $15, quantity of output produced = 10,000 units, average total cost = $12, and average variable cost $7. Given this data, total revenue is __________, total cost is __________, and total fixed cost is __________.
$150,000; $120,000; $50,000
Refer to Exhibit 22-1. The dollar amounts that go in blanks (C) and (D) are, respectively,
$21 and $21.
A monopolist can sell 26,000 units at a price of $30 per unit. Lowering price by $1 raises the quantity demanded by 1,000 units. What is the change in total revenue resulting from this price change?
$3,000
Total industry sales are $20 million. The top four firms account for $2 million, $1 million, $500,000 and $300,000, respectively. What is the four-firm concentration ratio?
0.19
Theory of perfect completion predicts...
1) Economic profits will be squeezed out of the industry in the long run by the entry of new firms; that is, zero economic profit exists in the long run. 2) In equilibrium, firms produce the quantity of output at which price equals marginal cost. In the short run, firms will stay in business as long as price covers average variable costs. 3) In the long run, firms will stay in business as long as price covers average total costs. In the short run, an increase in demand will lead to a rise in price; whether the price in the long run will be higher than, lower than, or equal to the original price depends on whether the firm is in an increasing-, decreasing-, or constant-cost industry.
Perfect Competition in the SHORT RUN
1) If P>ATC(AVC) the firm earns economic profits and will continue to operate in the short run. 2) if P<ATC(AVC) Firm takes losses. It will shut down because the alternative(Continuing to produce) increases losses 3) if ATC>P>AVC the firm takes losses. Nevertheless, it will continue to operate in the short run because the alternative (shutting down) increases the losses. 4) The firm produces in the short run only when price is greater than average variable cost. Therefore, the portion of its marginal cost curve that lies above the average variable cost curve is the firm's short-run supply curve.
Monopolistic Competition assumptions
1) There are many sellers and buyers. 2) Each firm in the industry produces and sells a slightly differentiated product. 3) Entry and exit are easy. They are price searchers P>MR, and MR is below demand curve Does not exhibit resource allocative efficiency. firm does not earn profits in the long run (because of easy entry into the industry), unless it can successfully differentiate its product (e.g., by brand name) in the minds of buyers.
Theory of perfect competition (4 assumptions)
1) There are many sellers and many buyers, none of whom is large in relation to total sales or purchases. 2) Each firm produces and sells a homogeneous product. 3) Buyers and sellers have all relevant information with respect to prices, product quality, sources of supply, and so on. 4) Entry into, and exit from, the industry is easy.
The Theory of Monopoly
1) There is one seller 2) The single seller sells a product for which there are no close substitutes 3) The barriers to enter the industry are extremely high
Perfectly Competitive Frim
1) is a price taker, It only sells products at the market established equilibrium price 2) Faces a horizontal demand curve (perfectly elastic) Demand curve and marginal revenue curve are the same 3) Maximizes profits/minimizes losses by producing the quantity of output which MR=MC 4) Price=Marginal Revenue 5) Reseroce allocative efficient because it produces the quantity of output which P=MC
Refer to the exhibit. What quantity of output would the profit-maximizing firm produce?
15
Refer to Exhibit 22-3. Based upon the information provided in this table, what is the maximum profit this firm can earn?
16
Oligopoly Assumptions
All of the many different oligopoly theories are built on the following assumptions: There are few sellers and many buyers. Firms produce and sell either homogeneous or differentiated products. The barriers to entry are significant. One of the key characteristics of oligopolistic firms is their interdependence.
Refer to Exhibit 23-2. A profit-maximizing single-price monopolist will set the price of its product at
18.5 eedback: Incorrect. A profit-maximizing firm will produce the quantity of output at which marginal revenue is equal to marginal cost. For this firm, marginal cost is equal to marginal revenue when the firm produces the fourth unit of the good. Since total revenue is equal to $74 when the firm produces four units of the good, the price of four units must be equal to: $74/4 = $18.50.
At the quantity of output (100 units) at which MR = MC, price is $7, ATC is $4, and AVC is 3. It follows that profit is
300 Profit= TR-TC 700-400=300
If an industry consists of 20 firms holding equal market shares, the Herfindahl index is
500 divide 100% shares by 20, then get 5% holdings for each firm. Square 5% to get 25%, then multiply it by 20 firms
Refer to the exhibit. The perfectly competitive, profit-maximizing firm will produce ____ units of output, charge a price of _______ per unit, and earn a profit of _____________.
60, 6, 60
Based on the information in the table , how many units should the profit-maximizing perfectly competitive firm produce?
74 units MR=MC maximize profits at the level of output where marginal revenue equals marginal cost. In perfect competition, where the firm faces a horizontal demand curve, price is constant and is equal to marginal revenue. The profit-maximizing level of output would occur at the level of output where marginal cost equals $10. The marginal cost of the 74th unit is $10, thus the firm is maximizing profits at that level of production.
Dealing with Monopoly Power
A ___________produces less than a perfectly competitive firm produces (assuming the same revenue and cost conditions), charges a higher price, and causes a deadweight loss. These factors represent the ______________ problem, and solving it is usually put forth as a reason for antitrust laws and/or government regulatory actions. Some economists note, though, that government antitrust and regulatory actions do not always have their intended effect. In addition, such actions are sometimes implemented when there is no _________ problem to solve.
public franchise
A firm's government-granted right that permits the firm to provide a particular good or service and that excludes all others from doing so.
Network good
A good whose value increases as the expected number of units sold increases
In the accompanying figure, what area(s) represent(s) the following at
A graph shows "Quantity" on the horizontal axis and "Price and cost" on the vertical axis. The point Q1 is marked on the horizontal axis and P1 is marked on the vertical axis. A straight line "d, MR" is drawn parallel to the horizontal axis from the point "P1" on the vertical axis represents "demand, marginal revenue." The two points ATC and AVC are plotted on the graph connecting the horizontal line at the point Q1 and vertical line by dotted lines. The region between ATC and AVC is labeled as 3, the region above the straight line is 2 and the region below the straight line is 1.
Long Run (industry) supply (LRS) Curve
A graphic representation of the quantities of output that an industry is prepared to supply at different prices after the entry and exit of firms are completed.
Contestable Market
A market in which entry is easy and exit is costless, new firms can produce the product at the same cost as current firms, and exiting firms can easily dispose of their fixed assets by selling them.
Vertical Merger
A merger between companies in the same industry but at different stages of the production process.
Second-Degree Price Discrimination
A price structure in which the seller charges a uniform price per unit for one specific quantity, a lower price for an additional quantity, and so on.
Price Discrimination
A price structure in which the seller charges different prices for the product it sells and the price differences do not reflect cost differences.
Perfect Price Discrimination
A price structure in which the seller charges the highest price that each consumer is willing to pay for the product rather than go without it.
Public Interest Theory of Regulation
A theory holding that regulators are seeking to do—and will do through regulation—what is in the best interest of the public or society at large.
Public Choice Theory of Regulation
A theory holding that regulators are seeking to do—and will do through regulation—what is in their best interest (specifically to enhance their power and the size and budget of their regulatory agencies).
Capture theory of regulation
A theory holding that, no matter what the motive is for the initial regulation and the establishment of the regulatory agency, eventually the agency will be captured (controlled) by the special interests of the industry being regulated.
Monopoly
A theory of market structure based on three assumptions: There is one seller, it sells a product that has no close substitutes, and the barriers to entry are extremely high.
Which of the following statements is false?
A. The monopolistic competitor is a price searcher. b. The demand curve facing a monopolistic competitor is less elastic than the demand curve facing a monopolist. c. There are many substitutes in a monopolistic competitive industry. d. The monopolistic competitor produces an output at which price is greater than marginal cost.
Refer to Exhibit 23-10. The profit-maximizing single-price monopolist earns total revenue equal to what area?
ABCD
In order for a firm to continue producing, price must exceed __________ and total revenue must exceed __________.
AVC; total variable costs
rent seeking
Actions of individuals and groups that spend resources to influence public policy in the hope of redistributing (transferring) income to themselves from others.
Rent seeking
Activity directed at competing for and obtaining transfers is referred to as _________. From society's perspective, ____________is a socially wasteful activity. People use resources to bring about a transfer of income from others to themselves instead of producing goods and services.
What, if anything, do all firms in all four market structures have in common?
All firms, no matter what the market structure, produce the quantity of output at which marginal revenue equals marginal cost
Herfindahl Index
An index that measures the degree of concentration in an industry, equal to the sum of the squares of the market shares of each firm in the industry.
Decreasing Cost Industry
An industry in which expansion through the entry of firms lowers the prices that firms in the industry must pay for resources and therefore decreases their production costs.
Arbitrage
Buying a good at a low price and selling it for a higher price.
A seller that practices perfect price discrimination ....
Charges maximum price for each unit of product sold. Sells the quantity of output at P=MC. This kind of seller exhibits resource allocative efficiency
Which antitrust legislation made price discrimination illegal?
Clayton Act
Rent seeking is individually rational but socially wasteful. Explain.
Consider a monopolist whose profits (rents) are being sought after through the rent seeking actions of persons A, B, and C. From the point of view of A, B, and C, it makes sense to go after the monopoly profits (rents); after all, profit is profit. However, from a social perspective, rent seeking does not produce any more goods. It is simply a transfer activity, not a production activity; resources that could be used to produce goods are instead used to affect a transfer of profits from one entity to another. Resources that go into lobbying, knocking on the doors of members of Congress, taking politicians out to dinner, and so on could be used to build houses, television sets, or water slides for children.
Consider a perfectly competitive market and a monopoly market, each with the same demand and marginal cost curves.
Consumers' surplus is greater in the perfectly competitive market.
Which of the following assumptions contributes to a perfectly competitive firm being a price taker
Each firm in the market supplies such a small part of the market that each firm has no influence over price. b. Firms sell a homogeneous product. c. Buyers and sellers have all relevant information abt prices, product, quality, and sources of supply
Increasing Cost Industry
Entry of new firms shifts the cost curves for all firms upward
Regulation
Even if we assume that the intent of regulation is to serve the public interest, we may not assume that it will in fact do so. To work as desired, regulation must be based on complete information (e.g., the regulatory body must know the cost conditions of the regulated firm) and must not distort incentives (e.g., to keep costs down). Many economists are quick to point out that neither condition is likely to be fully met.
"Excess capacity is the price we pay for product differentiation." Evaluate this statement in terms of monopolistic competition.
Excess capacity occurs when a firm's maximum production level is higher than its current production level. This is a problem for an economy as it means that resources are going to waste.
Oligopoly
Few Interdependent firms Highly concentrated industry Few Q firms that have control over the market
Refer to Exhibit 22-6. A perfectly competitive firm operating in the market depicted in graph (1) faces the demand curve depicted in
Graph 3
Explain why defining a market narrowly or broadly can make a difference in how antitrust policy is implemented.
If a market is defined narrowly, a given firm is more likely to be dominant and more likely to violate antitrust acts
Industry Adjustment To A Change in Demand
In a constant-cost industry, an increase in demand will result in a new equilibrium price equal to the original equilibrium price (before demand increased). In an increasing-cost industry, an increase in demand will result in a new equilibrium price higher than the original one. In a decreasing-cost industry, an increase in demand will result in a new equilibrium price lower than the original one. The long-run supply curve for a constant-cost industry is horizontal (flat, perfectly elastic). The long-run supply curve for an increasing-cost industry is upward sloping. The long-run supply curve for a decreasing-cost industry is downward sloping.
Suppose that a decreasing-cost industry is initially in long-run competitive equilibrium, and then demand increases. After full adjustment, the new equilibrium price will be
Lower than the initial equilibrium price
The perfectly competitive firm produces that quantity at which
MC=MR
Marginal Cost
MC=TC/Q
A perfectly competitive firm that seeks to either maximize profit or minimize losses will produce the level of output at which
MR = MC
A profit-maximizing perfectly competitive firm will seek to produce the level of output at which
MR=MC
The monopoly firm produces the quantity of output at which
MR=MC
Refer to the exhibit. A profit-maximizing single-price monopolist will set the price at
MR=MC 95
Is it possible for a perfectly competitive firm to be maximizing profits, but not achieving resource allocative efficiency?
No, it is not possible, because the output at which MR = MC is also the output at which P = MC.
A firm in a monopolistic competitive market will produce a level of output at which
P > MR
Refer to Exhibit 25-4. If marginal-cost pricing regulation were imposed, the firm would be forced to set price at the level of
P3
Refer to exhibit 23-3. At the profit-maximizing level of output, total revenue for this single-price monopolist is equal to the area of rectangle
P3
Single price monopolist
P>MR: so demand curve lies above marginal revenue curve. Sells at price higher than marginal cost and therefore is to resource allocative efficient
total reveune
Price x Quantity TR=P*Q
3 types of regulation
Price(P=MC) , profit(zero economic profit), output regulation(what natural monopoly must produce).
MR=MC
Profit maximizing
Refer to Exhibit 25-4. What is the productive-efficient level of output?
Q5
Refer to Exhibit 25-4. If marginal-cost pricing regulation were imposed, the firm would be forced to set price at the level of
Q5?
The antitrust act that says, "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations, is hereby declared to be illegal" is the
Sherman Act
Consider the following data: equilibrium price = $8, quantity of output where MR equals MC = 500 units, average total cost = $10, average variable cost = $9. What will the perfectly competitive firm do in the short run and why?
Shut down. Price<AVC
Why might a producer use a designer label to differentiate her product from that of another producer?
Successful product differentiation may give a producer some degree of monopoly power.
Total cost
TC=TFC+TVC
Refer to Exhibit 23-4. What dollar amounts go in blanks (A), (B), (C), (D), and (E), respectively?
TC=TFC+TVC TVC=TFC-TC c. $8; $85; $0; $45; and $80
Excess Capacity Theorem
The __________ ___________ _________states that a monopolistic competitor will, in equilibrium, produce an output smaller than that at which average total costs (unit costs) are minimized. Thus, the monopolistic competitor is not productive efficient.
Why is the marginal revenue curve for a perfectly competitive firm the same as its demand curve?
The answer is that for a perfectly competitive firm price equals marginal revenue (P = MR). A demand curve plots price and quantity and a marginal revenue curve plots marginal revenue and quantity. If price equals marginal revenue, then both curves are plotting the same dollar amount against the same quantity.
Cartel Theory
The cartel theory assumes that firms in an oligopolistic industry act in a manner consistent with there being only one firm in the industry. Four problems are associated with cartels: the problem of forming the cartel, the problem of formulating policy, the problem of entry into the industry, and the problem of cheating. Firms that enter into a cartel agreement are in a prisoner's dilemma situation, where individually rational behavior leads to a jointly inefficient outcome.
Price Searcher
The condition in which economies of scale are so pronounced that only one firm can survive.
natural monopoly
The condition in which economies of scale are so pronounced that only one firm can survive.
The Theory of Contestable Markets
The conditions for a__________________ are as follows: Entry into the market is easy, and exit from it is costless. New firms entering the market can produce the product at the same cost as current firms. Firms exiting the market can easily dispose of their fixed assets by selling them elsewhere (less depreciation). Compared with orthodox market structure theories, the theory of _____________________places more emphasis on the issue of entry into and exit from an industry and less emphasis on the number of sellers in an industry.
For many years in California, car washes would advertise Ladies' Day: On one day during the week, a woman could have her car washed for a price lower than what a man would pay. Some people argued that this was a form of sexual discrimination. A California court accepted the argument and ruled that car washes could no longer have a Ladies' Day. Do you think that this was a case of sexual discrimination or price discrimination? Explain your answer.
This is an opinion question. I would argue it's more likely a price discrimination question than sexual discrimination question. My rationale is that, in most cases, males are more likely to either wash cars or have cars washed. By offering Ladies Day, the car washing firms are attempting to attract a segment of the market they normally would not have. By offering Ladies Day, the firms get more revenue than they would have gotten otherwise. As long as the price or additional revenue is greater than the marginal cost of providing a car wash to additional customers, the car wash firms increase their profits.
X-inefficiency
The increase in costs, due to the organizational slack in a monopoly, resulting from the absence of competitive pressure to push costs down to their lowest possible level.
Market Structure
The nature and degree of competition among firms operating in the same industry.
Deadweight Loss of Monopoly
The net value (the value to buyers over and above the costs to suppliers) of the difference between the competitive quantity of output (where P=MCand the monopoly quantity of output (where P>MC) ; the loss due to not producing the competitive quantity of output.
Regulatory Lag
The period between the time that a natural monopoly's costs change and the time that the regulatory agency adjusts prices to account for the change.
Short Run(firm) supply curve
The portion of the firm's marginal cost curve that lies above the average variable cost curve.
Coupons tend to be more common on small-ticket items than they are on big-ticket items. Explain why
This is because of price discrimination. Potential purchasers of small-ticket items vary more in their willingness to spend time trying to save money.
Productive efficiency
The production of a good in the least costly way; occurs when production takes place at the output at which average total cost is a minimum and marginal product per dollar's worth of input is the same for all inputs.
Lock in effect
The situation in which a product or technology becomes the standard and is difficult or impossible to dislodge from that role
Resource Allocative Efficiency
The situation when firms produce the quantity of output at which price equals marginal cost: P=MC
Which of the following is an assumption of the theory of monopoly?
There are extremely high barriers to entry.
If a perfectly competitive firm is producing the level of output at which marginal revenue equals marginal cost, the firm is earning
There is not enough information provided to determine whether or not the firm is earning a profit or a loss.
If the perfectly competitive firm is producing an output level at which price equals marginal cost, it is
There is not enough information to answer the question.
In the short-run, if P < ATC, a perfectly competitive firm should
There is not enough information to answer the question.
Fast-food stores often charge higher prices for their products in high-crime areas than they charge in low-crime areas. Is this an act of price discrimination? Why or why not?
This is not price discrimination because the costs are often different in the two areas.
Refer to Exhibit 23-4. What dollar amounts go in blanks (P), (Q), (R), and (S), respectively?
Total cost = 28 MC=TC/Q 28/1=28 a. $10; $0; $28; and $19
antitrust laws
Two major criticisms have been directed at the antitrust acts. First, some argue that the language in the laws is vague; for example, even though the words "restraint of trade" are used in the Sherman Act, the act does not clearly explain what actions constitute a restraint of trade. Second, it has been argued that some antitrust acts appear to hinder, rather than promote, competition; an example is the Robinson-Patman Act. Antitrust policy has a few unsettled points. One centers on the proper definition of a market—specifically, whether it should be defined narrowly or broadly. How this question is answered has an impact on which firms are considered monopolies. In addition, the use of concentration ratios for identifying monopolies or deciding whether to allow two firms to enter into a merger has been called into question. Recently, for purposes of implementing antitrust policy, concentration ratios have been largely replaced with the Herfindahl index, which is subject to some of the same criticisms as the concentration ratios. Antitrust authorities are also beginning to consider the benefits of innovation in ruling on proposed mergers.
Because the monopolist is a single seller of a product with no close substitutes, can it obtain any price for its good that it wants? Why or why not?
X
Total industry sales are $20 million. The top four firms account for $2 million, $1 million, $500,000 and $300,000, respectively. What is the four-firm concentration ratio?
X
Game Theory
_______________is a mathematical technique used to analyze the behavior of decision makers 1) who try to reach an optimal position through game playing or the use of strategic behavior, 2) who are fully aware of the interactive nature of the process at hand, and 3) who anticipate the moves of other decision makers. The prisoner's dilemma game illustrates individually rational behavior leading to a jointly inefficient outcome.
Short Run Market Supply Curve
a curve showing the relationship between the market price and quantity supplied in the short run
A firm maximizes its total revenue. Does it automatically maximize its profit too? Why or why not?
a firm only maximizes its total revenue and automatically maximizes its profits when there are no variable costs in the firm. Therefore, as at that point, maximizing profits can be said to be the same as maximizing revenues.
Price Taker
a firm that faces a given market price and whose quantity supplied has no effect on that price; a perfectly competitive firm
Conglomerate Merger
a merger between companies in different industries
Horizontal merger
a merger between firms that are selling similar products in the same market
If market demand rises in a perfectly competitive market, it follows that
a perfectly competitive firm's marginal revenue will rise
The monopoly firm charges
a price per unit that is greater than MC. the highest price per unit it can charge and still sell the quantity of output it produces.
Third-Degree Price Discrimination
a price structure in which the seller charges different prices in different markets or charges different prices to various segments of the buying population
Refer to Exhibit 21-3. The total cost of producing 45 units of output is
a. $1,100.
Refer to Exhibit 23-4. What dollar amounts go in blanks (P), (Q), (R), and (S), respectively?
a. $10; $0; $28; and $19
Refer to the exhibit. The dollar amounts that go in blanks A through D are, respectively,
a. $12, $12, $12, $12
Refer to Exhibit 23-4. What dollar amounts go in blanks (K), (L), (M), and (N), respectively?
a. $133; $45; $35; and $25
Refer to Exhibit 23-4. What dollar amounts go in blanks (K), (L), (M), and (N), respectively?
a. $133; $45; $35; and $25 MR=total rev/quantity
Refer to Exhibit 21-3. What is the average total cost of producing 45 units of output?
a. $24.44
Which of the following statements is false?
a. A monopolistic competitive firm produces a quantity of output at which price is greater than marginal cost. b. An oligopolist produces that quantity of output at which price is equal to marginal cost. c. A perfectly competitive firm is resource-allocative efficient, but a monopolistic competitive firm is not. d. An oligopolistic firm is not resource-allocative efficient
Which of the following statements is true?
a. As output increases, the average variable cost curve gets closer to the average total cost curve.
In maximizing profits, a single-price monopolist will charge a price that is _____________ and therefore the monopolist ____________________.
above marginal cost, does not achieve resource-allocative efficiency
The price at which a perfectly competitive firm sells its product is determined by
all sellers and buyers of the product, collectively.
Constant Cost Industry
an industry that can expand or contract without affecting the long run per-unit cost of production; the long-run industry supply curve is horizontal
An increasing-cost industry is characterized by _________________ long-run supply curve.
an upward-sloping
Refer to Exhibit 23-1. If the product is produced under single-price monopoly, what do profits equal at the profit maximizing level of output?
area P1P2CB
In order for a monopolist to be earning a profit, price must be greater than
average total cost
Refer to Exhibit 21-3. The marginal cost figures in blanks (F) and (G), respectively, are
b. $20.00 and $13.33.
The short-run industry or market supply curve is the
horizontal summation of the short-run supply curves for all firms in the industry.
Diane's Donuts will begin selling donuts next week. Diane figures that the average variable cost to make each donut will be constant at $0.30. She has already paid $20,000 for the donut-making machinery and one year's rent. ———————————————————— Refer to Situation 21-l. What will Diane's total costs be if she sells 2,500 donuts in her first week and then goes out of business?
c. $20,750
Refer to Exhibit 23-4. What dollar amounts go in blanks (A), (B), (C), (D), and (E), respectively?
c. $8; $85; $0; $45; and $80
The theory of perfect competition generally assumes that
c. buyers and sellers act independently of other buyers and sellers.
Suppose that a decreasing-cost industry is initially in long-run competitive equilibrium, and then demand increases. After full adjustment, the new equilibrium price will be
c. lower than the initial equilibrium price.
Which of the following industries is the best real-world example of monopolistic competition?
computer software
Diane's Donuts will begin selling donuts next week. Diane figures that the average variable cost to make each donut will be constant at $0.30. She has already paid $20,000 for the donut-making machinery and one year's rent. Refer to Situation 21-1. What will Diane's total variable costs be if she sells 36,500 donuts in one year?
d. $10,950
Refer to Exhibit 21-3. The average fixed cost of producing 25 units of output is
d. $20.00.
Refer to Exhibit 23-1. If the product is produced under single-price monopoly, what quantity will be produced and what price will be charged in order to maximize profit?
d. Q1 units at P2
Refer to Exhibit 22-4. The firm sells its product at P1 and produces Q1. Given this situation,
d. total cost is equal to area 1 + area 2 + area 3.
For a perfectly competitive firm, the
demand curve is the same as the marginal revenue curve.
The market demand curve in a perfectly competitive market is ___________ while the individual firm's demand curve (that it faces) is _______________.
downward sloping; horizontal
A natural monopoly exists when
economies of scale are so large that only one firm can survive and achieve low unit costs.
In long run equilibrium, a monopolistic competitive firm's price will
exceed MC but equal ATC.
Perfectly Competitive LONG RUN Competitive equilibrium
exists when there is no incentive for firms: to enter or exit the industry, to produce more or less output, and to change their plant size. We formalize these conditions as follows: 1) Economic profits are zero. Firms have no incentive to enter or exit the industry. 3) Firms are producing the quantity of output at which price is equal to marginal cost. (Firms have no incentive to produce more or less output. After all, when P=MC , it follows that MR=MC for the perfectly competitive firm, and thus the firm is maximizing profits.)SRATC=LRATC at the quantity of output at which P=MC Firms do not have an incentive to change their plant size.) A perfectly competitive firm exhibits productive efficiency because, in the long run, it produces its output at the lowest possible per-unit cost (lowest ATC).
Monopolistic competitive firms and perfectly competitive firms are similar in that both
face no barriers to entry or exit.
If an industry is in long-run competitive equilibrium and experiences a decrease in demand, then as a result the equilibrium price will __________, which will cause the representative firm's __________ curve to shift downward and some firms will __________ the industry.
fall; demand; exit
Resources are allocated efficiently when
firms produce the quantity of output at which price is equal to marginal cost.
If a perfectly competitive firm and a single-price monopolist face the same demand and cost curves, then the competitive firm will produce a
greater output and charge a lower price than the monopolist.
theory of regulation
holds that, no matter what the motive is for the initial regulation and the establishment of the regulatory agency, eventually the agency will be captured (controlled) by the special interests of the industry being regulated. The public interest theory holds that regulators are seeking to do—and will do through regulation—what is in the best interest of the public or society at large. The public choice theory holds that regulators are seeking to do—and will do through regulation—what is in their best interest (specifically, enhance their own power, size, and budget).
The long-run (industry) supply curve in a constant-cost industry is
horizontal
Compared to the perfectly competitive firm, the monopolistic competitor faces a demand curve that is ___________________ elastic because the monopolistic competitor ______________________.
less, produces and sells a differentiated product rather than a homogeneous product
The perfectly competitive firm will seek to produce the level of output for which
marginal cost equals marginal revenue
The perfectly competitive firm charges a price equal to __________ while the monopolist charges a price __________.
marginal cost; greater than marginal cost
A perfectly competitive firm should increase its level of production as long as
marginal revenue is greater than marginal cost
The excess capacity theorem is associated with _________________ and states that the firm in equilibrium will produce a level of output that is _______________ than the level of output that minimizes its average total cost.
monopolistic competition, smaller
Price discrimination
occurs when a seller charges different prices for its product and the price differences are not due to cost differences. Before a seller can price discriminate, certain conditions must hold: The seller must be a price searcher. The seller must be able to distinguish among customers who are willing to pay different prices. Reselling the good to others must be impossible or too costly for a buyer.
Natural monopoly exists when
one firm can supply an entire market at a lower average total cost than can two or more firms.
The demand curve facing a perfectly competitive firm is
perfectly horizontal
For a monopolist
price is greater than marginal revenue
Profit Maximization Rule
produce at that rate of output where marginal revenue equals marginal cost
Profit maximizing monopolist
produces an output level at which MR=MC and charges the highest price per unit at which this quantity of output can be sold.
When the perfectly competitive firm produces the quantity of output at which marginal revenue equals marginal cost, it naturally
produces the quantity of output at which marginal cost equals price, since for the perfectly competitive firm price equals marginal revenue.
Resource allocative efficiency occurs when a firm
produces the quantity of output at which price equals marginal cost.
single-price monopolist
produces too little output because it produces less than would be produced under perfect competition. This is not the case for a perfectly price-discriminating monopolist.
MR=MC
profit maximization
A right granted to a firm by government that permits the firm to provide a particular good or service and excludes others from doing the same is called
public franchise
Perfectly competitive industries are
relatively easy to enter or exit.
Individuals who spend resources to influence public policy in a way that will redistribute income to themselves are engaging in
rent seeking
_________________________ is the organizational slack that is associated with the monopolist operating at a cost that is higher than the lowest possible cost, resulting from an absence of competition.
rent seeking
A perfectly competitive firm will continue to increase its production as long as marginal
revenue is greater than marginal cost
The perfectly competitive firm should produce in the
short run if price is below average total cost but above average variable cost.
The demand curve facing a monopolistic competitive firm will be __________ than the demand curve facing a perfectly competitive firm because the price elasticity of demand for the monopolistic competitive firm's product is __________ than that for the perfectly competitive firm.
steeper; lower
A cartel is an organization of firms
that reduces output and increases price in an effort to increase joint profits.
Marginal revenue
the additional income from selling one more unit of a good; sometimes equal to price
Marginal Revenue
the additional income from selling one more unit of a good; sometimes equal to price MR=TR/q
Which of the following cost curves is never U-shaped?
the average fixed cost curve
As the marginal physical product of a variable input increases,
the marginal cost decreases.
The perfectly competitive firm's short-run supply curve is the
the portion of its marginal cost curve that lies above its average variable cost curve
Long Run Competitive Equilibrium
the situation in which the entry and exit of firms has resulted in the typical firm breaking even. When P = SRMC = SRAC = LRAC and profits are zero.
Why was the Robinson-Patman Act passed? The Wheeler-Lea Act? the Celler-Kefauver Antimerger Act?
to combat unfair trade practices that allowed chain stores to purchase goods at lower prices than other retailers. It was the first legislation to attempt to prevent price discrimination. It required that the seller offer the same price terms to customers at a given level of trade.
