AP Econ Words to Know

Prisoners' Dilemma

A game where the two rivals achieve a less desirable outcome because they are unable to coordinate their strategies.

Cartel

A group of firms that agree not to compete with each other on the basis of price, production, or other competitive dimensions. Carte members operate as a monopolist to maximize their joint profits.

Monopolistic competition

A market structure characterized by a few small firms producing a differentiated product with easy entry into the market

Four-firm concentration ration

A measure of industry market power. If the combined market share of the four largest firms is above 40 percent, it is a good indicator of oligopoly

Dominant Strategy

A strategy that is always the best strategy to pursuer, regardless of what a rival is doing

Oligopoly

A very diverse market structure characterized by a small number of interdependent large firms, producing a standardized or differentiated product in a market with a barrier to entry

1. Using the information in the table, when quantity equals four, total variable cost equals: a. 48 b. 38 c. 58 d. 28 e. 68

A. 48

18. Zoe's Bakery determines that P < ATC and P > AVC. Zoe should: a. continue to operate even though she is experiencing an economic loss b. continue to operate as she is making an economic profit c. shut down immediately as she is experiencing an economic loss d. raise the price until she has maximized her profits e. continue to operate because economic profit is equal to zero

A. continue to operate even though she is experiencing an economic loss

Profit Maximizing Rule

All firms maximize profit by producing where MR = MC.

Normal profit

Another way of saying that firms are earning zero economic profits or a fair rate of return on invested resources.

Constant Cost Industry

Entry (or exit) of firms does not shift the cost curves of firms in the industry

Decreasing Cost Industry

Entry of new firms shifts the cost curves for all firms downward

Increasing Cost Industry

Entry of new firms shifts the cost curves for all firms upward

Collussive Oligopoly

Models where firms agree to mutually improve their situation

Non-collusive oligopoly

Models where firms are competitive rivals seeking to gain at the expense of their rivals

Perfectly competitive long-run equilibrium

Occurs when there is no more incentive for firms to enter or exit. P = MR = MC = ATC and I-I= 0

Monopoly long-run equilibrium

Pm > MR = MC, which is not allocatively efficient and deadweight loss exists. Pm > ATC, which is not productively efficient. I-Im > 0 so consumer surplus is transferred to the monopolist as profit.

Monopolistic competition long-run equilibrium

Pmc > MR = MC and Pmc > minimum ATC, so the outcome is not efficient, but I-Imc = 0

Market Power

The ability to set the price above the perfectly competitive level

Natural Monopoly

The case where economies of scale are so extensive that it is less costly for one firm to supply the entire range of demand

Excess Capacity

The difference between the monopolistic competition output Qmc and the output at minimum ATC. Excess capacity is underused plant and equipment.

Monopoly

The least competitive market structure; it is characterized by a single producer, with no close substitutes, barriers to entry, and price-making power.

Perfect Competition

The most competitive market structure is characterized by many small price-taking firms producing a standardized product in an industry in which there are no barriers to entry or exit

Breakeven Point

The output where ATC is minimized and economic profit is zero

Shutdown Point

The output where AVC is minimized. If the price falls below this point, the firm chooses to shut down or produce zero units in the short run

Price discrimination

The practice of selling essentially the same good to different groups of consumers at different prices.

25. The market for corn is perfectly competitive, and an individual corn farmer faces the cost curves shown in the figure. If the price of a bushel of corn in the market is 14, then the farmer will produce ___ of corn and earn an economic ____ equal to ____ a. 4 bushels; profit; $0 b. 4 bushels; profit; just less than $80 per bushel c. 2 bushels; profit; $0 d. 2 bushels; loss; just more than $80 per bushel e. 4 bushels; loss; just less than $20 per bushel

a. 4 bushels; profit; $0

7. Suppose Bonnie spends $300 per month to rent the building, $100 per month to pay for insurance for her business, and $100 per worker per month for every worker she hires. given this information, Bonnie's fixed costs equal: a. 400 b. 300 c. 500 d. 100 e. 600

a. 400

19. Consider the following data for a perfectly competitive firm: price is $9, output is 30 units, and average total cost is $7. The firm's profits are qual to: a. 60 b. 270 c. 2 d. 210 e. 180

a. 60

22. The figure shows cost curves for a firm operating in a perfectly competitive market. The ATC curve is represented by which of the following curves in the figure? a. Curve N b. Curve M c. Curve O d. none of the curves e. Price Pi-

a. Curve N

11. An assumption of the model of perfect competition is: a. identical goods b. difficult entry and exit c. few buyers and sellers d. cooperation and interdependence between sellers e. extensive advertising and product differentiation

a. idential goods

17. A competitive firm operating in the short run is producing at the output level at which ATC is at a minimum. If ATC = $8 and MR = $9, in order to maximize profits (or minimize losses), this firm should: a. increase output b. reduce output c. shut down d. do nothing: the firm is already maximizing profits e. liquidate assets and exit the industry

a. increase output

3. The marginal cost curve intersects the average variable cost curve at: a. its lowest point b. its maximum c. no point; the curves don't intersect e. all points; the curves are the same

a. its lowest point

12. The two theoretical extremes of the market structure spectrum are occupied on one end by perfect competition and on the other end by: a. monopoly b. duopoly c. oligopoly d. monopolistic competition e. monopsony

a. monopoly

5. The sum of fixed and variable costs is a. total cost b. marginal cost c. variable cost d. average cost e. average variable cost

a. total cost

27. The profit-maximizing firm in this figure will produce ____ units of output per week a. 160 b. 220 c. 250 d. 300 e. 0

b. 220

28. The profit- maximizing quantity is the one indicated by the distance: a. W b. J c. K d. L e. N

b. J

9. The U-shape of the long-run average total cost curve is primarily due to: a. technological change b. economies and diseconomies of scale c. increasing and then diminishing marginal returns d. sunk costs e inefficient management at all levels of output

b. economies and diseconomies of scale

10. If a local California avocado stand operates in a perfectly competitive market, that stand owner will be a: a. price-maker b. price-taker c. price-discriminator d. price-maximizer d. cost-maximer

b. price-taker

20. If price is greater than average total cost at the profit-maximizing quantity of output in the short run, a perfectly competitive firm will: a. produce at a loss b. produce at a profit c. shut down production d. produce more than the profit-maximizing quantity e. liquidate the firm and exit the industry

b. produce at a profit

24. The figure shows a perfectly competitive firm that faces demand curve d, has the cost curves shown, and maximizes profit. Given the market price, the firm's total revenue per day is: a. 475 b. 600 c. 900 d. 1,200 e. 300

c. 900

15. Control of a scare resource or input, economies of scale, technoligcla superiority, and government-created barriers are forms of: a. market structure b. pricing behavior c. barriers to entry d. public policy e. antitrust law

c. barriers to entry

13. Suppose that you build a high-speed, magnetically powered transportation system from New York to Los Angeles. High fixed costs resulting form the enormous quantity of capital used in this system enable decreasing average cost for any conceivable level of demand. Your monopoly would result from: a. control of scarce resource or input. b. technological superiority c. increasing returns to scale d. government-created barriers e. diseconomies of scale

c. increasing returns to scale

16. The marginal revenue received by a firm in a perfectly competitive market: a. is greater than the market price b. is less than the market price c. is equal to its average revenue d. increases with the quantity of output sold e. decreases with the quantity of output sold

c. is equal to its average revenue

6. Marginal cost is the change in: a. total product resulting from one-unit change in a variable input b. total cost resulting from a one-unit change in quantity of a variable input. c. total cost divided by the change in output d. average cost resulting from a one-unit in quantity of output e. total variable cost resulting from a one-unit change in quantity of variable input

c. total cost divided by the change in output

23. A perfectly competitive firm will continue producing in the short run as long as it can cover its: a. total cost b. average fixed cost c. variable cost d. fixed cost e. marginal cost

c. variable cost

2. In the figure, he total cost of producing `0 pairs of boots is approximately: a. 13 b. 54 c. 131 d. 1,308 e. 1,150

d. 1,308

21. The figure shows cost curves for a firm operating in a perfectly competitive market. O is the ___ curve. a. ATC b. MR c. MC d. AVC e. Profit

d. AVC

4. Curve 3 is the ___ cost curve a. average total b. total c. marginal. d. average variable e. toal variable

d. average variable

29. The demand curve facing a monopolist is: a. vertical, the same as that facing a perfectly competitive firm b. perfectly inelastic, the same as that facing a perfectly competitive firm c. upward-sloping, the same as that facing a perfectly competitive firm d. downward-sloping, like the industry demand curve in perfect competition e. horizontal, the same as that facing a perfectly competitive firm

d. downward-sloping, like the industry demand curve in perfect competition

30. Marginal revenue for a monopolist is: a. equal to price b. greater than price c. unrelated to price d. the change in total revenue divided by the change in output e. total revenue divided by output

d. the change in total revenue divided by the change in output

8. When an increase in the firms's output reduces its long-run average total cost, it experiences: a. diminishing returns to scale b. diseconomies of scale c. constant returns to scale d. variable returns to scale e. economies of scale.

e. economies of scale

26. The ability of a monopolist to raise the price of a product above the competitive level by reducing the output is known as: a. product differentiation b. barrier to entry c. economics of scale d. patents and copyrights e. market power

e. market power

14. A firm that experiences economies of scale: a. at lower levels of output and then encounters diseconomies of scale at higher levels of output is a natural monopoly b. has a continually horizontal long-run average cost curve. c. at any particular level of output is called a natural monopoly d. has a continually rising long-run average cost curve. ever the entire range of outputs demanded is called a natural monopoly

e. over the entire range of outputs demanded is called a natural monopoly