quiz 4-bh
Marginal Revenue (MR)
Change in total revenue from selling one more unit of a product
to maintain product differentiation and earn economic profits in the short run
Companies use brand management
enhanced by products more closely suited to consumer tastes
Compared to perfect competition, consumer welfare with monopolistic competition is
it sells a product that is exactly the same as every other firm
a firm is likely to be a price taker when
With many firms selling an identical product, single firms have no effect on market price
Why do single firms in perfectly competitive markets face horizontal demand curves?
make its demand curve more inelastic
A monopolistically competitive firm would advertise to
Incorrect. The commentator is confusing the market demand for wheat with the demand line facing the representative firm
"According to the model of perfectly competitive markets1, the demand for wheat should be a horizontal line. But this can't be true: When the price of wheat rises, the quantity of wheat demanded falls, and when the price of wheat falls, the quantity of wheat demanded rises. Therefore, the demand for wheat is not a horizontal line."
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 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?
False. Profit is maximized at the output level where marginal revenue equals marginal cost
"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."
price is greater than marginal cost; price is equal to marginal cost
A monopolistically competitive firm produces where _________, while a perfectly competitive firm produces where _________.
P exceeds MR for a monopolistically competitive firm, and it's MR that must equal MC for profit maximization.
A monopolistically competitive firm doesn't produce where P = MC like a perfectly competitive firm because
Yes, because firms produce where the marginal benefit to consumers equals the marginal cost of
Are perfectly competitive markets allocatively efficient in the long run?
finding new ways of lowering the cost of producing its product and discovering new ways of differentiating its product
As new firms enter the market, a monopolistically competitive firm can maintain profits by
Wheat and corn are sold in perfectly competitive markets and Starbucks coffee and Gap clothing are sold in monopolistically competitive markets
Give two examples of products sold in perfectly competitive markets and two examples of products sold in monopolistically competitive markets.
by horizontally adding the individual firms' supply curves
How is the market supply curve derived from the supply curves of individual firms?
larger
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? The firm would produce a
The firm must decrease its price to sell a larger quantity.
If marginal revenue slopes downward,
No
If McDonald's raises the price it charges for Quarter Pounders above the prices charged by other fast-food restaurants, won't it lose all its customers?
firms can sell as much output as they want at the market price
In a perfectly competitive market, P = MR = AR because
changing the price affects the quantity sold because firms sell differentiated products
In monopolistically competitive markets,
zero
In perfect competition, long-run equilibrium occurs when the economic profit is
the interaction of market demand and supply because firms and consumers are price takers
In perfectly competitive markets, prices are determined by
average variable cost curve, while in the long run, a firm's exit point is the minimum point on the average total cost curve
In the short run, a firm's shutdown point is the minimum point on the
No bc MC cannot be negative
Is it possible for marginal revenue for a firm operating in a perfectly competitive industry to be negative?
the difference between total revenue and total cost is as large as possible
Perfectly competitive firms should produce the quantity where
Profit = (P Q) − (ATC Q), where P is price, Q is output, and ATC is average total cost
Profit for a perfectly competitive firm can be expressed as
Farmer Lane can increase his profit by producing less output
Suppose Farmer Lane grows and sells cotton in a perfectly competitive industry. The market price of cotton is $1.52 per kilogram, and his marginal cost of production is $1.72 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?
Profit
TR-TC
each will have a smaller share of the existing market; consumers will have additional choices
The entry of new firms cause the demand curve of an existing firm in a monopolistically competitive market to shift to the left because ______ and become more elastic since ______.
marginal revenue
The increase in total revenue that results from selling one more unit of output is
fixed cost since they do not vary with output
The interest payments these firms make are a
a differentiated; a downward-sloping
The monopolistically competitive firm sells _________ product and faces _________ demand curve.
could be to remain loyal to Jerry's and pay the higher price
There are about 400 wineries in California's Napa Valley. Suppose the owner of one of the winerieslong dash—Jerry's Wine Emporiumlong dash—raises the price of his wine by $5.00 per bottle. If the industry is monopolistically competitive, the reaction of consumers
buy wine from another winery.
There are about 400 wineries in California's Napa Valley. Suppose the owner of one of the winerieslong dash—Jerry's Wine Emporiumlong dash—raises the price of his wine by $5.00 per bottle. If the industry is perfectly competitive, the reaction of consumers would be to
Wheat is a homogeneous good, while Chipotle is able to differentiate its food from other restaurants.
There are many wheat farms in the United States, and there are also more than 1,800 Chipotle restaurants. Why, then, does a Chipotle restaurant face a downward-sloping demand curve when a wheat farmer faces a horizontal demand curve?
they are able to purchase a differentiated product that more closely suits their tastes
Though monopolistically competitive markets are not allocatively or productively efficient, consumers benefit in that
firms face downward-sloping demand curves, and the products competitors sell are differentiated
Unlike in perfectly competitive markets, in monopolistically competitive markets,
charge a price greater than marginal cost and do not produce at minimum average total cost
Unlike perfectly competitive firms, in the long run monopolistically competitive firms
new firms will enter if existing firms are making a profit and existing firms will exit if they are experiencing losses
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,
market supply will increase, decreasing price.
What effect will firms entering have on the market price? When firms enter,
A firm's average cost of production relative to that of competing firms, differentiation of a firm's product from other products, factors affecting a firm's entire market, and chance events.
What is a key factor that determines a firm's profitability?
advertising the product, monitoring how changes in consumer tastes affect demand for the product, designing the product, and deciding how to distribute the product.
What is marketing to an economist?
Zero economic profit includes a firm's implicit costs but zero accounting profit does not
What is the difference between zero accounting profit and zero economic profit?
Price is equal to both average revenue and marginal revenue
What is the relationship between price, average revenue, and marginal revenue for a firm in a perfectly competitive market?
right; inelastic
When a firm advertises a product, it is trying to shift the demand curve for the product to the ________ and make it more ________.
Economic profits attract firms to enter an industry, and economic losses cause firms to exit an industry
When are firms likely to enter an industry? When are they likely to exit?
the marginal revenue curve for a perfectly competitive firm is the same as its demand curve
When maximizing profits, MR = MC is equivalent to P = MC because
will decrease because their demand curves will shift to the left
When new firms enter a monopolistically competitive market, the economic profits of existing firms
At the point where revenue is maximized, the difference between total revenue and total cost may not be maximized
Which of the following best explains why firms don't maximize revenue rather than profit?
Firms will charge a price above marginal cost in the long run
Which of the following is not likely to happen in the pencil market?
There are sunk costs in the short run but not in the long run
Why are firms willing to accept losses in the short run but not in the long run?
actually, average revenue is always equal to price, whether demand is downward sloping or not
With a downward-sloping demand curve, average revenue is equal to price
because the firm must lower its price to sell additional units
With a downward-sloping demand curve, marginal revenue is below price
price taker
a firm that is unable to affect the market price
it is a benchmark—a market with the maximum possible competition—that economists use to evaluate actual markets that are not perfectly competitive
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
many buyers and sellers, with all firms selling identical products, and no barriers to new firms entering the market
for a market to be competitive, there must be
