ECON 2103 Final review

Normative Statements

Answer the questions like "What will happen if..." Modern economics is defined by normative analysis

If a competitive firm is currently producing a level of output at which marginal revenue exceeds marginal cost, then

a one-unit increase in output will increase the firm's profit.

Efficiency, Market Power

a single buyer or seller has substantial influence on market price [e.g. monopoly]

Assume a certain firm in a competitive market is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit. At Q=999, the firm's total costs equal

$10,985

John has decided to start his own lawn-mowing business. To purchase the mowers and the trailer to transport the mowers, John withdrew $1,000 from his savings account, which was earning 3% interest, and borrowed an additional $2,000 from the bank at an interest rate of 7%. What is John's annual opportunity cost of the financial capital that has been invested in the business?

$170

A firm in a monopolistically competitive market is similar to a monopoly in the sense that

- they both face downward-sloping demand curves. - they both charge a price that exceeds marginal cost.

T/F (1) The firm maximizes profits by equating marginal revenue with marginal cost. (2) Average revenue equals price.

1. True 2. True

Equality

Cannot be illustrated by the production possibilities frontier

Marginal product of labor

Change in Output divided by the change in labor.

T/F Monopolists typically produce larger quantities of output than competitive firms

False

T/F Unlike monopolies and monopolistically competitive markets, oligopolies prices do not exceed their marginal revenues.

False

municipal water and sewer

Industries that is least likely to exhibit the characteristic of free entry

If Iowa's opportunity cost of corn is lower than Oklahoma's opportunity cost of corn, then

Iowa has a comparative advantage in the production of corn

A monopoly is an inefficient way to produce a product because

It produces a smaller level of output than would be produced in a competitive market.

Suppose that Jay-Z and Beyonce are duopolists in the music industry. In January, they agree to work together as a monopolist, charging the monopoly price for their music and producing the monopoly quantity of songs. By February, each singer is considering breaking the agreement. What would you expect to happen next?

Jay-Z and Beyonce will each break the agreement. The new equilibrium quantity of songs will increase, and the new equilibrium price will decrease.

Example of an explicit cost of production

Lease payments for the land on which a firm's factory stands.

Suppose that a firm operating in perfectly competitive market sells 200 units of output at a price of $3 each. Which of the following statements is correct?

Marginal revenue equals $3.

How are the gains from trade shared among the parties to a trade?

One of those questions is that the principle of comparative advantage does not provide answers to.

Wiladee used to work as an office manager, earning $25,000 per year. She gave up that job to start a tailoring business. In calculating the economic profit of her tailoring business, the $25,000 income that she gave up is counted as part of the tailoring firm's

Opportunity Cost

In choosing among alternative courses of action In the language of game theory, how must Raj think strategically?

Raj must consider how others might respond to the action he takes

Invisible hand

Smith assumed that individuals try to maximize their own good (and become wealthier), and by doing so, through trade and entrepreneurship, society as a whole is better off. Furthermore, any government intervention in the economy isn't needed because the invisible hand is the best guide for the economy

If a firm uses labor to produce output, the firm's production function depicts the relationship between

The number of workers and the quantity of output.

Welfare economics

The study of how the allocation of resources affects economic well-being

T/F Game theory is not necessary for understanding competitive or monopoly markets.

True

T/F Assuming that implicit costs are positive, accounting profit is greater than economic profit.

True

T/F average total cost = (total cost)/(quantity of output)

True

Walter used to work as a high school teacher for $40,000 per year but quit in order to start his own painting business. To invest in his painting business, he withdrew $20,000 from his savings, which paid 3 percent interest, and borrowed $30,000 from his uncle, whom he pays 3 percent interest per year. Last year Walter paid $25,000 for supplies and had revenue of $60,000. Walter asked Tyler the accountant and Greg the economist to calculate his painting business's costs.

Tyler says his costs are $25,900, and Greg says his costs are $66,500.

opportunity cost

What you give up to get that item

For a monopolistically competitive firm..

average revenue and price are the same.

The free entry and exit of firms in a monopolistically competitive market guarantees that

both economic profits and economic losses disappear in the long run.

Price discrimination

business practice of selling the same good at different prices to different customers.

A monopoly

can set the price it charges for its output but faces a downward-sloping demand curve so it cannot earn unlimited profits.

To maximize its profit, a monopolistically competitive firm

chooses its quantity and price, just as a monopoly does.

When a firm operates under conditions of monopoly, its price is

constrained by demand.

If the total cost curve gets steeper as output increases, the firm is experiencing

diminishing marginal product.

The defining characteristic of a natural monopoly is occurs when

economies of scale over the relevant range of output.

Difference between explicit and implicit costs

explicit costs must be greater than implicit costs.

For two individuals who engage in the same two productive activities, it is impossible for one of the two individuals to

have a comparative advantage in both activities.

A typical firm in the US economy would be classified as

imperfectly competitive.

A firm has market power if it can

influence the market price of the good it sells.

In the long run,

inputs that were fixed in the short run become variable.

A dominant strategy is one that

is best for the player, regardless of what strategies other players follow.

When a factory is operating in the short run,

it cannot adjust the quantity of fixed inputs.

Suppose Jan started up a small lemonade stand business last month. Variable costs for Jan's lemonade stand now include the cost of

lemons and sugar

What is a principle concerning how people interact?

markets are usually a good way to organize economic activity.

A benefit of a monopoly is

profit that can be invested in research and development.

A perfectly competitive market

promotes general economic well-being, whereas a monopoly market may not be in the best interests of society.

The accountants hired by the Brookside Racquet Club have determined total fixed cost to be $75,000, total variable cost to be $130,000, and total revenue to be $125,000. Because of this information, in the short run, the Brookside Racquet Club should

shut down because staying open would be more expensive.

Consumer surplus

the amount a buyer is willing to pay for a good minus the cost of producing the good

Which of these curves is the competitive firm's short-run supply curve?

the marginal cost curve above average variable cost

Because economic models omit many details..

they allow us to see what is truly important.

Efficiency, externality

when the production or consumption of a good affects bystanders [e.g. pollution]