Econ 201 Chapter 14 & 15

low point of LRATC is called

minimum efficient scale

characteristics of the monopoly market structure: one ?

seller

mono -

seller

poly-

seller

many ?

sellers or firms

Identify whether or not each of the following scenarios describes a competitive market, along with the correct explanation of why or why not The government has granted a patent to a pharmaceutical company for an experimental AIDS drug. That company is the only firm permitted to sell the drug

No, no free entry

Identify whether or not each of the following scenarios describes a competitive market, along with the correct explanation of why or why not There are hundreds of colleges that serve millions of students each year. The colleges vary by location, size, and educational quality, which enables students with diverse preferences to find schools that match their needs.

No, not an identical product

Identify whether or not each of the following scenarios describes a competitive market, along with the correct explanation of why or why not A few major airlines account for the vast majority of air travel. Consumers view all airlines as providing basically the same service and will shop around for the lowest price.

No, not many sellers

if Pe < AVC the firm will ?

Shut down

Identify whether or not each of the following scenarios describes a competitive market, along with the correct explanation of why or why not Dozens of companies produce plain white socks. Consumers regard plain white socks as identical and don't care who manufactures their socks.

Yes, meets all assumptions

characteristics of the monopoly market structure: ? - the production process (natural monopoly)

economies of scale

free ?

entry and exit- no barriers to entry or exit such as exclusive control of a resource or unusually high start up costs

characteristics of the monopoly market structure: ? of a resource (monopoly resources)

exclusive control

The part of MC curve above AVC is the

firms short run supply curve

characteristics of the monopoly market structure: ? monopoly ( legal- monopoly)

government created

characteristics of the monopoly market structure: ? - such as patents, copyrights, and granting a public franchise

government regulation

complete ?

information

characteristics of the monopoly market structure: no ? for the good

close substitutes

Scenario 1: Converse has been fairly successful selling denim colored UK sportswear. Lydia, wanting to get in on the profit, has also entered this market. After producing her profit maximizing level of output she finds that her average total cost per unit is $40, her average variable cost per unit is $30, and her selling price (forced upon her by the market), is $35. What is the value of average fixed cost when Lydia produces her profit-maximizing output level? Also, how much of the average fixed cost is she covering at the current market price? A) $10, $5 B) $10, $10 C) $70, $5 D) $40, $10

A) $10, $5 (Average fixed costs = ATC-AVC or $40-$30 = $10. At a price of $35 she is covering $5 of that fixed cost.)

In a competitive market, a firm will produce at the point where A) Marginal revenue equals marginal cost B) Marginal revenue equals average total cost C) Marginal revenue equals average fixed cost D) Marginal revenue equals average variable cost

A) Marginal revenue equals marginal cost (For firms in a competitive market, the profit-maximizing quantity to produce is located where the marginal revenue curve equals the marginal cost curve.)

Suppose that the market for eggs is perfectly competitive in Fayette County and that a study is released indicating that the cholesterol absorbed in consuming eggs is not as detrimental to one's health as previously thought. As a result, a permanent rise in the market demand for eggs occurs. As a result of this change: A) The short run profits of a typical egg farmer will rise; the typical egg farmer will increase egg production in the short run; and the long run market output will be higher B) The short run profits of a typical egg farmer will rise; the typical egg farmer will decrease egg production in the short run; and the long run market output will be higher C) The short run profits of a typical egg farmer will fall; the typical egg farmer will increase egg production in the short run; and the long run market output will be higher D) The short run profits of a typical egg farmer will fall; the typical egg farmer will decrease egg production in the short run; and the long run market output will be higher

A) The short run profits of a typical egg farmer will rise; the typical egg farmer will increase egg production in the short run; and the long run market output will be higher (In the long run, the profits will return back down as other people become egg farmers.)

in a competitive market, the actions of any single buyer or seller will A) have a negligible impact on the market price B) have little effect on market equilibrium quantity but will affect market equilibrium price C) affect marginal revenue and average revenue but not price D) adversely affect the profitability of more than one firm in the market

A) have a negligible impact on the market price

Louise sells hot dogs downtown. if she finds that for the last hot dog she sold that marginal cost exceeds marginal benefit, then she should A) Increase her production level of hot dogs B) Decrease her production level of hot dogs C) Continue to produce the same number of hot dogs

B) Decrease her production level of hot dogs (When marginal revenue is less than marginal cost, you can increase profits by producing less, so that the difference between marginal revenue and marginal cost shrinks. If marginal revenue is less than marginal cost, you take a loss on selling that marginal item. You would be better off having not sold it.)

The entry of new firms into a competitive market will A) Increase market supply and increase market price B) Increase market supply and decrease market price C) Decrease market supply and increase market price D) Decrease market supply and decrease market price

B) Increase market supply and decrease market price (The more firms, the more supply, but also the more competition and thus a lower market price.)

Which of the following statements about a monopoly is FALSE? A) A monopoly is the only supplier of the good B) Monopolies have no barriers to entry or exit C) The good produced by a monopoly has no close substitutes

B) Monopolies have no barriers to entry or exit

Why would a competitive firm stay in business if it made 0 economic profit? A) it knows that others will exit the market B) accounting profits are positive C) there are no alternatives for the inputs used D) it knows that the demand will increase in the future

B) accounting profits are positive (Economic profit takes into account opportunity costs, while accounting profits do not. If a firm is making zero economic profit it is still paying the entrepreneur his or her opportunity cost, so they will choose to stay in business.)

If a firm in a competitive market doubles its number of units sold, total revenue for the firm will A) more than double B) double C) increase but by less than double D) may increase or decrease depending on the price elasticity of demand

B) double (This is because the price will remain the same. The price will remain the same because it is a competitive market.)

In comparison with a perfect competition, a single price monopolist with the same costs A) generates a larger consumer surplus and a larger economic profit B) generates a smaller consumer surplus but a larger economic profit C) generates a larger consumer surplus and a smaller economic profit D) generates a smaller consumer surplus and a smaller economic profit

B) generates a smaller consumer surplus but a larger economic profit

A firm that shuts down temporarily has to pay A) its variable costs but not its fixed costs B) its fixed costs but not its variable costs C) both its variable costs and its fixed costs D) neither its variable costs nor its fixed costs

B) its fixed costs but not its variable costs

A firm that shuts down temporarily has to pay A) its variable costs but not its fixed costs B) its fixed costs but not its variable costs C) both its variable costs and its fixed costs D) neither its variable costs nor its fixed costs

B) its fixed costs but not its variable costs (Variable costs are only incurred when production is taking place.)

Converse has been fairly successful selling denim colored UK sportswear. Lydia, wanting to get in on the profit, has also entered this market. After producing her profit maximizing level of output she finds that her average total cost per unit is $40, her average variable cost per unit is $30, and her selling price (forced upon her by the market), is $35. In the short run Lydia should: A) go back to college and shut down her denim UK sportswear business B) stay in business even though she is suffering a loss C) expand production since she is making a positive economic profit D) burn down the converse factory so she can capture their share of the market and make even bigger profits than the profit she is already making

B) stay in business even though she is suffering a loss

During the summer many businesses in Lexington stay open even though they are largely empty. why is this? A) they have to serve those still in Lexington for the summer B) their variable costs are covered if they stay open C) their fixed costs are covered if they stay open D) it gives an opportunity to try out new products before students return

B) their variable costs are covered if they stay open

Suppose that in a competitive market the equilibrium price to see Jim Gaffigan at Singletary Center is $2.50. What is marginal revenue for the last ticket sold in this market? A) less than $2.50 B) more than $2.50 C) exactly $2.50 D) The marginal revenue cannot be determined without knowing the actual quantity sold

C) exactly $2.50

Which of the following is not a characteristic of a perfectly competitive market? A) there are many buyers and sellers B) firms can freely enter and exit the market C) many firms have market power D) firms sell very similar products

C) many firms have market power (When there are many firms, as in the case of a perfectly competitive market, no one firm has market power.)

The firm's supply curve is its A) marginal cost curve, at all points above the minimum average fixed cost curve B) marginal revenue curve, at all points above the minimum average total cost curve C) marginal cost curve, at all points above the minimum average variable cost curve D) marginal revenue curve, at all points above the minimum average revenue curve

C) marginal cost curve, at all points above the minimum average variable cost curve

which of the following statements best expresses a firm's profit- maximizing decision rule? A) If marginal revenue is greater than marginal cost, the firm should increase its output B) If marginal revenue is less than marginal cost, the firm should decrease its output C) If marginal revenue equals marginal cost, the firm should continue producing its current level of output D) All of the above are correct

D) All of the above are correct

Which of the following is NOT a defining characteristic of perfectly competitive industries? A) consumer have complete knowledge about prices charged by each firm B) many buyers and sellers C) unrestricted entry and exit D) higher prices being charged for certain name brands

D) higher prices being charged for certain name brands

In a competitive market with free entry and exit, which of the following is NOT true? A) at the end of the process of entry and exit, all firms make zero economic profit B) at the end of the process of entry and exit, price is equal to average total cost C) in the long run, firms operate at the efficient scale D) in the long run, firms determine the price at which goods are sold

D) in the long run, firms determine the price at which goods are sold

Pe = MC

allocative efficiency

implies that the firm is putting their resources into best paying use

allocative efficiency

all firms sell ?

an identical (homogeneous) product

characteristics of the monopoly market structure: ? to entry - sources of monopoly market power

barriers

the loss in producer and consumer surplus that results from the presence of a monopoly is called

deadweight loss or welfare loss

if Pe > AVC the firm will ?

keep operating (suffers loss, but sill pays some fixed costs)

characteristics of the monopoly market structure: ? buyers

many

the demand curve may also be considered a ?

marginal benefit curve (MB)

the supply curve may also be considered a ?

marginal cost curve (MC)

each firms demand curve is ?

perfectly elastic

characteristics of the monopoly market structure: firms are ?

price makers (also called price searchers)

firms are ?

price takers

Pe = min. ATC

productive efficiency

must be at minimum of LRATC so that expansion of plant size will not lower costs

productive efficiency

firms maximize ?

profits- no firms operating charitably

MR = MC

the profit maximizing condition

when Pe < ATC ( loss)

the shut down rule

market forces operate ?

unimpeded