Chapter 8
A decreasing cost industry has a downward sloping
Long run industry supply curve
A firm maximizes profits by operating at the level of output where
Marginal revenue equals marginal cost
If current output is less than the profit maximizing output which must be true
Marginal revenue is greater than marginal cost
Marginal profit is equal to
marginal revenue minus marginal cost
Marginal profit is negative when
output exceeds the profit maximizing level.
Producer surplus in a perfectly competitive industry is
the difference between revenue and variable cost.
Firms often use a patent right as a
Barrier to exit
In an increasing cost industry expansion of output
Causes input prices to rise as demand for them grows
The "perfect information" assumption of perfect competition includes all the following except
Consumers can anticipate price changes
If price is between AVC and ATC the best and most practical thing for a perfectly competitive firm to do is
Continue operating but plan to go out of business
Bettes breakfast, a perfectly competitive eatery sells its breakfast special for $5. The costs of waiters, cookies, power, food etc average out to $3.95 per meal; the costs of the lease, insurance and other such expenses average out to $1.25 per meal. Bette should
Continue producing in the short run but plan to go out of business in the long run
An association of businesses that are jointly owned and operated by members for mutual benefit is a
Cooperative
At the profit maximizing level of output, what is true of the total revenue and total cost curves
They must have the same slope
Higher input price results in
Upward shifts of MC and reductions in output
A few sellers may behave if they operate in a perfectly competitive market is the market demand is
Very elastic
If current output is less than the profit maximizing output then the next unit produced
Will increase revenue more than it increases cost
Imposition of an output tax on all firms in a competitive industry will result in
A leftward shift in the market supply curve
What happens in a perfectly competitive industry when economic profit is greater than 0?
All of the above may occur, existing firms may get larger,new firms may enter industry, firms may move along their LRAC curves to new outputs, there may be pressure on prices to fall
In the short run a perfectly competitive firm earning negative economic profit
Is on the upward sloping portion of its AVC
In the short run a perfectly competitive profit maximizing firm that has not shut down
Is operating on the upward sloping portion of it's AVC curve
A firm never operates
On the downward sloping portion of its AVC curve
In the short run a perfectly competitive firm earning negative economic profits is
On the downward sloping potion of its ATC curve
In the short run, a perfectly competitive firm earning positive economic profit is
On the upward sloping portion of its ATC
If the market price for A competitive firms output doubles then
The marginal revenue doubles
Short run supply curves for perfectly competitive firms tend to be upward sloping because
There is diminishing marginal product for one or more variable inputs, marginal costs increase as output increases
When the TR and TC curves have the same slope
They are the furthest from eachother
An improvement in technology would result in
downward shifts of MC and increases in output.
Marginal revenue, graphically is
the slope of the total revenue curve at a given point.
An industry has 1000 competitive firms each producing 50 tons of output. At the current market price of $10 half of the firms have short run supply curve with a slope of 1; the other half each have short run supply curves with slope of 2. The short run elasticity of market supply is
3/10
Which of the following cases are example of industries that have potentially increasing costs due to scarce inputs?
All of the above, petroleum production, legal services, medical care
The authors note that the goal of maximizing the market value of the firm may be more appropriate than maximizing short run profits because
All of the above; the market value of the firm is based on long run profits, managers will not focus on increasing short run profits at the expense of long run profits, this would more closely align the interests of owners and managers
Although the long run equilibrium price of oil is $80 per barrel, some producers have much lower costs because their oil reserves are relatively close to the surface and are easier to extract. If the low cost producers have a minimum LAC equal to $20 per barrel, then the difference ($60 per barrel) is
An economic rent due to the scarcity of low cost oil reserves
In a constant cost industry an increase in demand will be followed by
An increase in supply that will bring price down to the level it was before the demand shift
In a supply and demand graph producer surplus can be pictured as the
Area between the equilibrium price line and the supply curve to the left of equilibrium output
Which of the following does not occur when market demand shifts leftward in an increasing cost industry
As firms exit, the market price rises and attract other firms to enter the market
Suppose a technological innovation shifts the marginal cost curve downward. Which one of the following cost curves foes not shift
Average fixed cost curve
Which of the following is a key assumption of a perfectly competitive market
Each seller has a very small share of the market
Economic rents are typically counted as
Economic costs but not accounting costs
In the long run competitive equilibrium a firm that owns factors of production will have an
Economic profit=$0 and accounting profit >$0
In the long run a firms producer surplus is equal to the
Economic rent it enjoys from scarce inputs
Suppose your firm has a u shaped average variable cost curve and operates in a perfectly competitive market. If you produce where the product price (marginal revenue) equals average variable cost (on the upward sloping portion of the AVC curve) then your output will
Exceed the profit maximizing level of output
A firms producer surplus equals its economic profit when
Fixed costs are 0
Which of the following is an example of a homogeneous product
Gasoline, copper
Generally long run elasticities of supply are
Greater than short run elasticities because firms can make alterations to plant size and input combinations to be more flexible in production
The long run supply curve in a constant cost industry is linear and
Horizontal
The perfectly competitive firms marginal revenue curve is
Horizontal
At the profit maximizing level of output marginal profit
Is zero
The supply curve for a competitive firm is
It's MC curve above the minimum point of the AVC curve
If a competitive firms marginal cost curve is u shaped then
It's short run supply curve is the upward sloping portion of the marginal cost curve that lies above the short run average variable cost curve
In a constant cost industry price always equals
LRMC and minimum LRAC
Owners and managers
May be different people with different goals but in the long run forms that do best are those in which managers pursue the goal of the owners
In many rural areas electric generation and distribution utilities were initially set up as cooperatives in which the electricity customers were member owners. Like most cooperatives the object of these firms was to
Operate at zero profit in order to provide low electricity prices for the member owners
Because of the relationship between as perfectly competitive firms demand curve and its marginal revenue curve, the profit maximization condition for the firm can be written as
P=MC
Suppose all firms have constant marginal costs that are the same for each firm in the short run. In those case, the market level supply curve is blank and producer surplus equals?
Perfectly elastic, 0
The demand curve facing perfectly competitive firm is
Perfectly horizontal
If as competitive firms marginal costs always increase with output, then at the profit maximizing output level producer surplus is
Positive because price exceeds average variable costs
Several years ago Alcoa was effectively the sole seller of aluminum because the firm owned nearly all of the aluminum ore reserves in the world. This market was not perfectly competitive because this situation violated the
Price taking assumption and free entry assumption
Revenue is equal to
Price times quantity
Which of the following is not a necessary condition for long run equilibrium under perfect competition?
Prices are relatively low
The shutdown decision can be restated in terms of producer surplus by saying that as firm should produce in the short run as long as
Producer surplus is positive
If a graph of a perfectly competitive firm shows that MR=MC point occurs where MR is above AVC but below ATC
The firm is earning negative profit but will continue to produce where MR=MC in the short run
An industry analyst observes that in response to a small increase in price, a competitive firms output sometimes rises a little and sometimes a lot. The best explanation for this finding is that
The firms marginal cost curve is horizontal for some rangers of output and rises in steps
The amount of output that a firm decides to sell has no effect on the market price in a competitive industry because
The firms output is a small fraction of the entire industry's output
An increasing cost industry is so named because of the positive slop of which curve
The industry's long run supply curve
One practical implication of a kinked market supply curve is that
The market supply for elasticity for a price increase may be different than the market supply elasticity for a price decrease in the kink point
When the price faced by a competitive firm was $5 the firm produced nothing in the short run. However when the price rose to $10 the firm produced 100 tons of output. From this we can infer that
The minimum value of the firms average variable cost lies between $5 and $10
If a competitive firm has a U-shaped marginal cost curve then
The profit maximizing output is found where MC=MR and MC is increasing
The demand curve facing a perfectly competitive firm is
The same as its average revenue curve and its marginal revenue curve
If managers do not choose to maximize profit but pursue some other goal such as revenue maximization or growth
They are more likely to become takeover targets of profit maximizing firms
If Any of the assumptions of perfect competition are violated
They may still be enough competition in the industry to make the model of perfect competition usable