Econ exam 3
Market share
% of total market sales accruing to one specific firm Equation: Divide each company sale by the industry total
Accounting profit
Total revenue - Explicit costs
T/F As long as marginal products are positive, total product will increase
true A profit maximizing firm should never find itself operating where marginal products are negative
T/F Diminishing marginal products are inevitable when plant capacity and capital are fixed, but it does not necessarily mean negative marginal products
true For example, diminishing marginal returns can start to set in although marginal products remain positive
Average variable cost? equation?
variable cost per unit total variable cost/ output
How do you determine the dominant strategy of a firm?
1. Look to see what the particular firm would choose based on what it thinks the other firm might do -Example: If coke were to choose a no ad strategy, pepsi would generate economic profit by choosing the ad strategy 2. The dominant strategy would be what the firm would chose regardless of the other firm's strategy
Which of the following characteristics differentiates a firm in an oligopolistic market from a firm in a perfectly competitive market? A firm in an oligopolistic market does not maximize profits. A firm in an oligopolistic market does not face competition from other firms. Firms in oligopoly markets do not reach a profit maximum when marginal revenue equals marginal cost. A firm in an oligopolistic market has to consider its own impact on price when making production decisions
A firm in an oligopolistic market has to consider its own impact on price when making production decisions
Cartel
A group of competing companies that aim to maximize joint profits by coordinating their policies to fix prices, manipulate output, or restrict competition
Long run equilibrium
A market condition in which firms do not face incentives to enter or exit the market and firms earn a normal profit. Generally, it occurs when the market price is equal to the minimum average total cost faced by firms.
monopoly
A market structure characterized by a single seller, selling producing a good/service without close substitutes, in a market with relatively block entry. Monopoly is a price maker
Regulated competitive price
A regulated price that is equal to the marginal cost of production. The competitive price can be found where the marginal cost curve intersects the demand curve, and it is allocatively efficient.
Mutual interdependence
A situation in which a change in the strategy followed by one producer will likely affect the sales, profits and behavior of another producer
Dominant strategy? Example?
A situation in which a particular strategy yields the highest payoff for a decision maker regardless of the other decision makers' strategy If 2 large airline companies decide, independently, that their best strategy is to offer low-price fares regardless of the fares offered by the other company, offering low price fares becomes the companies dominant strategy
Collusion
A situation in which decision makers coordinate their actions to achieve a desired outcome Generally used to achieve an outcome that wouldnt be possible in the absence of coordinated actions, and it is typically associated w/ illegal or anticompetitive behaviors
Payoff matrix
A table showing the potential outcomes arising from the choices made by decision makers (looks like a large square with 4 smaller squares inside, each square split into 2 triangles. The different firms are on vertical and horizontal sides of the large square, two different options are on the smaller squares (like "ad" or "no ad"). The triangles in each small square then contain the profit the firm would make with that decision. Typically the triangles are different colors to represent each firm)
Which of the antitrust laws do these scenarios violate? A. The CEOs of 2 major soft drink companies meet and agree to never discount their regular prices B. The only 2 satellite radio companies in existence propose to merge into one, giving the new company a monopoly on satellite radio C. A popular TV doctor promotes a weight loss drug that has never been proven to actually help people lose weight D. The dominant firm in the photocopy equipment market requires that all users who lease its equipment buy their paper from the company, which charges significantly more per paper ream than other paper vendors
A. Sherman act: bans fixing prices B. Clayton act: bans mergers if the effect is significantly decreased competition in the market C. Federal trade commission act: prevent unlawful or deceptive business practices (false testimonials or endorsements) D. Clayton act: tying arrangement, forcing customers to purchase paper and pay more for it
What does 0 profit mean for both accounting and economic profit?
Accounting: you're bringing in just enough revenue to cover all the monetary payments you have to make -if still zero after taking in implicit costs, the value of your economic profit is negative which is bad Economic: means your revenues are covering all the monetary payments you have to make but also of implicit costs
Marginal cost? Equation?
Additional cost associated with one more unit of an activity. For production it is the change in total cost due to production of one more unit of output Change in total (variable) cost/ change in output
Nash equilibrium
An outcome in which decision makers choose their dominant strategy and each has no incentive to independently change his or her strategy
Barriers to entry
Any impediments that prevent firms from entering a market or industry
How do you calculate the change in consumer surplus if a company stops producing at the profit maximizing level of output and produces at the allocatively efficient level of output?
Calculate the consumer surplus for the profit maximizing level (the space above the point found on the demand curve and across the the price, but below the demand curve) and subtract it from the consumer surplus calculated for the allocatively efficient level of output with the same method
Marginal revenue? equation?
Change in a firms total revenue that results from a one unit change in output produced and sold change in total revenue/ change in quantity BEcause marginal revenue is usually calculated for a change in quantity of a single unit, the denominator generally is 1, meaning the marginal revenue is equal to the difference between the new total revenue and the old
If looking at a graph with marginal cost and average total cost lines and asked how much you will produce when the market price is ... per unit, how do you determine an answer
Draw a straight line from the y-axis at the market price asked in the question. Your answer will be the quantity at the point where your new line intersects the marginal cost line -this is your maximizing quantity of output at a specific market price
From here how would you determine profit generated at that market price?
Draw a vertical line at the quantity of output already found until it hits the ATC curve. Draw a horizontal line from this point on the ATC curve to the y-axis and this will give your the average total cost Now solve for profit using the equation Profit= (price - average total cost) x quantity If the final answer is positive, it is an economic profit
How would these directions change if asked to find the normal profit value?
Draw the horizontal marginal revenue line at the minimum average total cost given in your table. At the point where this marginal revnue line intersects the marginal cost line, the price and quantity for a normal profit will be given
What are the likely reason(s) that the market for electricity is not perfectly competitive? Select all that apply. Electricity is not a standardized (homogeneous) product. There are few buyers in the market. There are few sellers in the market. It is difficult to enter or exit the industry as a supplier.
Electricity is not a standardized (homogeneous) product. There are few sellers in the market It is difficult to enter or exit the industry as a supplier.
Calculate the short run profit
Find the profit per unit by subtracting average total cost (at the specific amount of units the MR line intersects the MC line) from the price at that same intersection point Now multiply this number by the number of units If its a positive number, you have economic profit (which means firms are entering the market)
If an industry has an economic profit, explain how the constant cost industry would change as the long run equilibrium occurred
Firms enter the market, shifting the market supply curve to the right and reducing the market price Market price will continue to decrease until reaching the point the firm generates a normal profit (price per unit for this long run equilibrium should be given in question)
Example question: The market price of spinach is $3 per pound. If Emma chooses to produce spinach, how much output would she produce? At that level of output, will she generate an econmic profit or incur a loss, and what would be the value of that economic profit or loss? How would you find the loss generated if she decided to shut down her farm in the short run?
First draw a horizontal line at $3 and see what quantity is at the intersection point of the marginal cost line. Go to the original table to find the average total cost at this quantity. Compare this cost to the $3, it is $4.16, which is higher than the market price This means she will incur a loss per pound of $1.16. The total loss is 1.16 x 60 pounds to get $69.60 Find the average fixed cost by subtracting the average total cost at 60 pounds by the average variable cost at 60 pounds Next multiply this average fixed cost by the quantity produced to get the total fixed cost, which is equal to the loss of shut down -She should produce in the short run because she will lose less than if she shut down
Average fixed cost? equation?
Fixed cost per unit Total fixed cost/ output
How do you determine if a monopolistically competitive firm is generating an economic profit
If the average total cost curve intersects the demand curve, it will generate an economic profit -if ATC is above the demand curve then there is no quantity at which the firm can generate an economic profit. The ATC will always be higher than the price consumers will be willing and able to pay at all levels of output
Antitrust laws? Name 3 in the US?
Laws designed to prevent firms from engaging in behaviors that would lessen competition in a market 1. Sherman act: Made every contract, combination, or conspiracy in restraint of trade illegal 2. Federal trade commission act: Made unfair methods of competition and unfair or deceptive acts or practices illegal 2. Clayton act: prohibits mergers that would substantially lessen competition or create a monopoly, as well as some specific business practices such as price-fixing and tying contracts
Where can the nash equilibrium be found in the payoff matrix? Where can the collusion be found in the payoff matrix?
Lower right cell (often the situation that maximizes the payoffs) upper left cell
Four firms concentration ratio (CR4)? Equation?
Measures the percentage of sales by the four largest firms in a particular industry CR4= sales of four largest firms/total sales of industry x 100 Expressed as a percentage between 0 and 100 where 100% represents a pure monopoly
Herfindahl-Hirschman Index (HHI)? Equation?
Measures the sum of the squared percentage of sales from all firms in a particular industry HHI= S1%^2 + S2%^2 + S3%^2.... -Take the market share of each firm, square it, and then add all the results (sum of the squared market shares for all firms in the industry) Expressed between 0 and 10,000 where 10,000 represents a pure monopoly
Explicit costs
Monetary payments made by individuals, firms, and governments for the use of land, labor, capital, and entrepreneurial ability owned by others. Also known as accounting costs. example: wages
How is monopolistic competition different from a monopoly?
Monopoly involved only one firm -entry and exit in this type of market it relatively blocked monopolistic competition involves many firms producing slightly different products -entry and exit is relatively easy
To find profit after calculating profit per unit:
Multiply profit per unit by the quantity where MR=MC (maximum profit quantity)
Can these products be seen as perfectly competitive? Running shoes cucumber cellphones cotton chlorine
NO: not standardized Yes No, different companies offer different features at different price ranges Yes yes
Is there only one nash equilibrium?
No, every game (strategic behavior of decision makers) has its own mixed strategy nash equilibrium in which each player's best strategy is to randomize his or her actions
Can these items below be considered a pure monopoly? Running shoes tap water Synthroid- medication that treats hypothyroidism Cotton
No, many producers with good substitutes Yes, company may not be a price maker but there is only one provider per city Yes, there are no close substitutes for this drug No, many producers with different firms who are price takers not price makers, also no significant barriers preventing a farmer from growing something else
Why do oligopolies tend to result in inefficient market outcomes?
Not subject to intense competitive pressures and tend to generate sustained economic profits over time by pricing above marginal and average total costs of production
Profit per unit
Price - average total cost Can find this for a pure monopoly by: (profit maximizing price - price where MC=MR) Then overall profit will be this number multiplied by the number of units (quantity where profit is maximized)
What does the graph look like for demand and marginal revenue curves for a perfectly competitive firm?
Price on y axis, quantity on x axis The Marginal revenue line would be straight horizontal Demand is a flat and horizontal line originating at the market price (perfectly elastic)
Explain the production/shut down rule
Produce at a loss if: AVC <(or equal to) price < average total cost Shut down if: Price < average variable cost
Profit maximizing rule
Produce at the quantity at which marginal revenue = marginal cost
Productive efficiency
Producing output at the lowest possible average total cost of production using the fewest resources possible to produce a good or service Where the marginal cost curve and average total cost curves intersect
Allocative efficiency
Producing the goods and services that are most wanted by consumers in such a way that their marginal benefit equals their marginal cost When the marginal benefit (demand curve) of the last unit is equal to its marginal cost
What percentage concentration is considered oligopoly?
Ratios at or above 40% until 99%
Average revenue? Equation?
Revenue per unit sold Total revenue/ quantity
Which of the following best represents the pricing behavior of firms in a monopolistically competitive industry? Looking Over Your Shoulder Handbag Co. chooses the price it charges by estimating what its rivals are most likely to do and then taking their responses into consideration. Teen Angle Hardware looks for a niche to sell its hardware products to teens but finds it difficult to earn anything more than normal profits due to other hardware stores also looking for niches. Unykdrugs, Inc. produces where its marginal revenue is equal to its marginal cost and prices on its downward-sloping demand curve such that the market for its product clears, knowing it will not face competition due to patents it holds on its products. Stay*Put Clothespins takes the market price of clothespins as given and produces the amount of clothespins where marginal revenue equals marginal cost.
Teen Angle Hardware looks for a niche to sell its hardware products to teens but finds it difficult to earn anything more than normal profits due to other hardware stores also looking for niches.
Monopoly power
The ability of a monopoly to influence prices by controlling the quantities that it produces in the market
How do you find deadweight loss on a monopoly graph?
The area between the demand curve and the marginal cost curve, from the profit maximizing quantity to the quantity used to be allocatively efficient
What changes about the demand curve in a first degree price discrimination?
The demand curve becomes the marginal revenue curve because the marginal revenue generated with each additional unit sold is equal to the price the pure monopoly can charge for it (shown on demand curve)
What are the two most common numerical indicators of market concentration?
The four firm concentration ratio Herfindahl-Hirschman index
Normal profit
The level of profit that occurs when total revenue is equal to total cost. This level indicates that a firm is doing just as well as it would have if it had chosen to use its resources to produce a different product or compete in a different industry. Normal profit is also known as zero economic profit.
Define Loss
The level of profit that occurs when total revenue is less than total cost
Minimum efficiency scale
The lowest level of output at which the long run average total cost is minimized
Which of the following markets is most likely to be perfectly competitive? The market for rocket fuel The market for U2 concert tickets The market for rock salt The market for emergency room visits
The market for rock salt Rock salt is sold at many locations, and many consumers buy it.
How would you find how many firms should be producing in the market in a new long run equilibrium?
The normal price will hit the MC line at a point. Divide the total output at that price (number of firms producing in this market) by the quantity for normal price point (number of unites produced by each firm)
First degree price discrimination
The practice of charging each and every consumer the price that she is willing and able to pay for a good or service -perfect price discrimination or personal pricing Generates the best outcome for a pure monopoly by extracting all surplus from consumers and yielding higher profits than any other pricing method Example: If Alex is willing to pay $50 for a product, you charge him $50. But if John is willing to pay $30, you charge him $30 instead.
Price discrimination
The practice of selling the same good or service to different consumers at different prices
Product differentiation
The strategy of distinguishing one firms product from the competing products of other firms
Game theory
The study of the strategic behavior of decision makers
Excess capacity
The under utilization of resources that occurs when the quantity of output a firm chooses to produce is less than the quantity that minimizes average total cost -not able to produce the quantity needed for minimum average total cost of production
Deadweight loss
The value of the economic surplus that is forgone when a market is not allowed to adjust to its competitive equilibrium
You are asked to explain the long run expectations for a specific market currently generating economic profits
These economic profits will create an incentive for other firms to enter the market the result being an increase in market supply, generating a lower market price. The market price (marginal revenue of the firm) will decrease up to a point at which the economic profits previously generated by firms disappear in the long run As firms exit, market prices rise and cycle repeats In the presence of economic profits, firms enter until the market reaches the point at which the firms are generating a normal profit, then entry stops and the market settles into long run equilibrium In presence of losses, firms exit until the market reaches the point at which the firms are generating a normal profit, then exit stops and the market settles down into its long run equilibrium
Total cost equation?
Total cost= Total fixed cost + total variable cost
Economic profit
Total revenue - economic costs The level of profit that occurs when total revenue is greater than total cost
If a firm is making an economic profit, what does that mean?
Total revenue is greater than total cost, so the firm is doing better than it would operating in another industry or producing a different good/service If economic profit is 0, there are no incentives to exit or enter the industry. But this normal profit covers all the explicit costs of production and the opportunity costs of owned resources
Variable costs
costs that change with the amount of output produced, increasing as production increases and decreasing as production decreases
Example: If the market demand changes to earn a normal profit, what does this mean graphically?
We shift the new demand and marginal revenue curves to the right until the new demand curve is tangent to the average total cost curve (where those two intersect) This is when a normal profit is generated because price (demand curve) intersects the ATC curve
Give an example highlighting the difference between implicit costs and opportunity costs
When running a business, you dont pay yourself a salary which incurs an implicit cost the implicit cost is the opportunity cost of your labor, which could be used earning a salary while working for someone else
Explain if the following products are in a monopolistically competitive market Software Jumbo jets First class mail frozen food wine
Yes: easy to enter the market, many different softwares No: differentiate products, but very expensive to enter the market No: this is a pure monopoly Yes: many frozen food manufacturers, entry and exit is easy Yes: many manufacturers, different products, variety of prices, entry not restricted
Marcel leases a garage. He must pay $500 every week for his lease regardless of how many cars he fixes. The number of cars he fixes each week depends on how many mechanics he hires. The table below summarizes his cost information. a. Complete the table Output Total Fixed Cost (dollars) Total Variable Cost (dollars) Total Cost (dollars) 0 $500 $0 $500 10 500 500 --- 20 -- 1000 --- 30 -- 1500 --- 40 -- --- 2,500 50 -- --- 3,000
a. Output Total Fixed Cost (dollars) Total Variable Cost (dollars) Total Cost (dollars) 0 $500 $0 $500 10 500 500 1,000 20 500 1000 1,500 30 500 1500 2,000 40 500 2000 2,500 50 500 2500 3,000 TC= TFC+TVC
Fixed costs
costs that do not change with the amount of output produced
A firm is operating in the United States with only two other competitors in the industry. a. It is likely this industry would be characterized as: pure monopoly. perfectly competitive. monopolistically competitive. oligopoly. b. Firms in this industry will likely earn: an economic profit. an economic loss. a normal profit. c. If foreign firms begin supplying the product, increasing the number of competitors, it is likely that: economic profits will fall. economic profits will increase. normal profits will increase. economic losses will become smaller.
a. oligopoly b. a economic profit c. economic profits will fall.
a. Natural monopolies are often regulated by government through the use of: price floors. price ceilings. taxes. subsidies. b. Normal profits for natural monopolies occur at the intersection of what two curves? Marginal revenue and marginal cost Marginal cost and demand Marginal revenue and average variable cost Demand and average total cost
a. price ceilings. b. Demand and average total cost
The table below shows the monthly cost of producing vintage model cars for collectors for quantities 0, 100, 250, and 500. a. Complete the table by filling in the average fixed cost, average variable cost, and average total cost. Output Total Fixed Cost (dollars) Total Variable Cost (dollars) Total Cost (dollars) Average Fixed Cost (dollars) Average Variable Cost (dollars) Average Total Cost (dollars) 0 $2,500 $0 $2,500 — — — 100 2,500 700 3,200 ? ? ? 250 2,500 1,500 4,000 ? ? ? 500 2,500 4,000 6,500 ? ? ?
a.Output Total Fixed Cost (dollars) Total Variable Cost (dollars) Total Cost (dollars) Average Fixed Cost (dollars) Average Variable Cost (dollars) Average Total Cost (dollars) 0 $2,500 $0 $2,500 — — — 100 2,500 700 3,200 25 7 32 250 2,500 1,500 4,000 10 6 16 500 2,500 4,000 6,500 5 8 13 AFC = TFC/output AVC = TVC/output ATC = TC/output
Natural monopoly
an industry in which economies of scale are so great that a single firm can produce the product at a lower average total cost than would be possible if more than one firm produced the product market better served by a single firm Examples: trash collection, electricity services, water distribution (one company gets the right to be the sole provider because it makes more sense)
Constant cost industry
an industry in which the firms' cost structures do not vary with changes in production
When graphing average variable cost and total costs, what do the lines look like? What is the vertical distance between these two line equal to?
both are curved lines average fixed cost
Give some examples of oligopolies
cable television, soft drinks in the US, video game systems
economic costs
costs associated with the use of resources explicit + implicit costs
One common feature of monopolistically competitive markets is that firms invest heavily in ______
development and innovation
What do the demand curves look like for monopolistically competitive markets?
downward sloping because each firm produces a differentiated and unique product
If profit is greater than 0, the firm generates an _____ profit If the profit is equal to 0, the firm generates a _____ profit If the profit is less than 0, the firm generates a _____
economic normal loss
The demand experienced by a firm operating in a monopolistically competitive market is more ___ than a monopoly due to the presence of more _________
elastic substitutes
Price takers
firms that take or accept the market price and have no ability to influence that price
Implicit costs
opportunity costs of using owned resources -costs for which no monetary payment is explicitly made example: owned resources
The marginal product of a variable resource tends to ______ at first and then ____ when diminishing returns set in. When the marginal product ____ the marginal cost of production declines
increase, decrease increases
Relationship between marginal cost (MC), average total cost (ATC) and average variable costs (AVC) If MC > ATC then ATC ____________ If MC> AVC, then AVC ____________ If MC<ATC then ATC _________ If MC< AVC, then AVC ______
increases increases decreases decreases
Increasing marginal returns vs diminishing marginal returns
increasing: the marginal product of the next unit of a variable resource utilized is greater than that of the previous variable resource diminishing: the marginal product of the next unit of a variable resource utilized is less than that of the previous variable resource
The minimum average variable cost curve occurs at a ______ level of output than the minimum of the average total curve. Why?
lower When adding in additional fixed costs, it takes more output to minimize the average total cost than it does to minimize the average variable cost
Second degree price discrimination
practice of charging different prices per unit for different quantities of the same good or service -block pricing Example: When a laundry detergent company sells a 20-ounce bottle for $4 and a 50-ounce bottle for $7 is 2nd degree price discrimination, because the average price per ounce decreases when the consumer buys the larger bottle
If MC = ATC, then ATC ___________ If MC = AVC, then AVC _________
remains unchanged remains unchanged
Short run average total cost curve vs long run average total cost curve
short: curve showing the average total cost for different levels of output when at least one input of production is fixed (usually plant capacity) long: curve showing the lowest average total cost possible for any given level of output when all inputs of production are variable
marginal product? equation?
the additional output produced as a result of utilizing one more unit of a variable resource MP= change in total product/ change in variable resource
Average product? Equation?
the average amount of output produced per unit of a resource employed Total product/ units of resource
product differentiation
the strategy of distinguishing one firm's product from the competing products of other firms
Long run
the time period in which all inputs of production can be changed
total product
the total amount of output produced with a given amount of resources Total product = total output
Short run
time period in which at least one input of production is fixed but other inputs can be changed
Average total cost? equation?
total cost per unit total cost/ output
General profit equation
total revenue - total cost
T/F A regulated normal profit price is equal to the average total cost of production and a regulated competitive price is equal to the marginal cost of production and is allocatively efficient
true
T/F An oligopoly only has a few large producers, but this does not guarantee that these producers are able to generate significant economic profits (due to strong price competition). Producers can generate normal profits and even losses in the short run
true
T/F As firms transition from economies of scale to constant returns to scale, they reach the minimum level of output necessary to achieve the lowest possible long-run average total cost, the minimum efficiency scale. The firm will then experience diseconomies of scale when the firms long-run average total cost increases as output increases
true
T/F Because monopolistically competitive firms charge higher prices and offer lower quantities of output than do perfectly competitive firms, their long run equilibrium is neither productively nor allocatively efficient
true
How do you calculate daily economic profit? Can you apply this method to finding economic loss?
1. Identify ATC for the price maximizing quantity (found at the quantity where MC intersects MR) -pinpoint where this quantity hits the ATC curve and go across to the left to see the corresponding price 2. The rectangle defined by the area between the price charged, the average total cost and the quantity where price is maximized is the economic profit -from price the quantity hits the demand curve and the price it hits the ATC Yes, its just seen as loss because the ATC curve will be above the demand curve, so the area is at the quantity where price is maximized and the price where this quantity hits the demand curve and the ATC curve
What are the four characteristics of a perfectly competitive market
1. Number of buyers and sellers is large 2. Product is standardized 3. Producers are price takers 4. Easy entry and exit into market
How do monopolies positively impact dynamic growth?
1. Potential economic profits give incentives to develop new production processes and products 2. Successful monopolies, once earning economic profit, have additional financial capital to develop more innovations
What are the four characteristics needed for a market to be monopolistically competitive?
1. Relatively large number of producers in the market 2. A differentiated product 3. Sellers with some control over the prices they charge 4. Relatively easy market exit and entry
What are the steps to determine graphically whether a pure monopoly is generating an economic profit?
1. Set marginal revenue equal to marginal cost to figure out at what quantity the profit is maximized 2. Project this quantity on the demand curve and then look across at the price associated with this point. This identifies the price consumers are willing and able to pay for the amount of output available 3. See where this quantity hits the average total cost curve and look across at the price associated with this point to find the average total cost 4. Draw the economic profit or loss rectangle It has a height equal to the difference between the price charged by the monopolist and its average total cost (price- ATC) and a base equal to the profit maximizing quantity of output 5. If Price is greater than ATC, the rectangle represents an economic profit. If price is less than ATC, this rectangle represents a loss
What are the two pieces of information a firm needs to determine how much output is should produce to maximize profits?
1. The extra cost associated with producing an additional unit of output, or the marginal cost 2. The extra benefit associated with producing that unit of output, or marginal revenue
How do you graph for third degree price discrimination?
1. find the quantity at which MR=MC for the first group and find the price this group will pay at that quantity 2. do this separately for each group 3. To find the additional profit made by price discriminating subtract the lesser price from the higher price. Then multiply this by the profit maximizing quantity for the higher value group
Oligopoly
A market structure characterized by a few large sellers, either standardized (like oil) or differentiated products (like soft drinks), operating in industries with extensive entry barriers. These producers are price makers and behave strategically when making decisions related to the features, prices, and advertising of their products
Contestable market
A market with only one firm but no real barriers to entry
Pete's Electronics is a small company that produces 8 gigabyte flash drives in a perfectly competitive market. The market price for 8 gigabyte flash drives is $15 each. a. Complete the table below with the total revenue (TR), marginal revenue (MR), and average revenue (AR) for Pete's Electronics.
Since the flash drive market is a competitive market, a supplier can sell any quantity for the market price of $15. Therefore, total revenue can be calculated as price ($15) times quantity. Average revenue is the average revenue per unit sold, and is calculated as total revenue divided by quantity. No matter what the current quantity is, if a supplier increases the quantity sold by one unit, revenue will increase by the price this unit is sold for, which is the market price of $15. Therefore, marginal revenue is also $15 for all quantities.
What is the prisoner's dilemma?
Situation in which the nash equilibrium is not the outcome that maximizes the payoffs to both players
How do you calculate total revenue?
TR= Price x quantity
Unregulated monopoly price
The profit maximizing price that will result from an unregulated monopolistic market
Economies of scale
a condition in which the long-run average total cost of production decreases as production increases
monopolistic competition
a market structure characterized by a relatively large number of sellers producing a differentiated product, for which they have some control over the price they charge, in a market with relatively easy market entry and exit
The graph below depicts the revenue and cost curves for Pike's Flower Shop. a. What is the market price for a bouquet of flowers? b. What is the profit-maximizing level of output for Pike's? c. What are Pike's weekly profits at the profit-maximizing level of output? d. At what market price is a normal profit generated?
a. $14 market price is equal to MR b. 150 Quantity at intersection of MR and MC c. $600 MR- ATC= 14-10= $4 profit per unit 150 x $4= $600 d. $8 Price where MC and ATC curves intersect
The table below shows the total cost (TC) and marginal cost (MC) for Baker Street, a perfectly competitive firm producing different quantities of apple pies. The market price of apple pies is $4.00 per pie. a. Fill in the marginal revenue (MR) and average revenue (AR) columns.
a. $4 for all MR and AR Since the apple pie market is assumed to be a competitive market, a supplier can sell any quantity for the market price of $4.00. If a supplier increases the quantity sold by one unit, revenue will increase by the price this unit is sold for, which is the market price of $4.00. Therefore, marginal revenue is also $4.00. Average revenue is the average revenue per unit sold, and is calculated as total revenue divided by quantity.
The graph below represents the costs and revenues for a firm operating in the athletic apparel industry. The industry is considered to be monopolistically competitive a. The profit-maximizing level of output for the firm is ____ units. The firm will charge consumers ____ per unit. b. If instead the firm operates in a purely competitive market, the profit-maximizing level of output is 50 50 Correct units. The firm will charge consumers $ 30 30 Correct per unit. c. Indicate the deadweight loss generated by the monopolistically competitive industry.
a. 40 units, $35 quantity where MC=MR, then where this quantity hits the demand curve b. 50 units, $30 price and quantity where MC intersects the demand curve c. deadweight loss is space to the right of the max output (where MC=MR), below the demand curve and above the MC curve
Major Tom's Space Flights offers commercial space flights to people willing to pay for a seat on his rocket ship. Major Tom currently has a monopoly on commercial space travel. The demand for seats on his rocket ship and the cost information are shown in the table and graph below. Price (millions of dollars) Quantity Demanded (seats) Marginal Revenue (millions of dollars) Marginal Cost(millions of dollars) $34 0 — — 32 1 $32.00 $5.60 30 2 28.00 6.00 28 3 24.00 6.40 26 4 20.00 6.80 24 5 16.00 7.20 22 6 12.00 7.60 20 7 8.00 8.00 18 8 4.00 8.40 16 9 0.00 8.80 14 10 -4.00 9.20 12 11 -8.00 9.60 10 12 -12.00 10.00 a. For Major Tom's Space Flights, the profit-maximizing level of output is ___ seats and the profit-maximizing price is ____ b. In the market for Major Tom's Space Flights, the allocatively efficient level of output is __seats and the allocatively efficient price is ___ c. If the market for space flight seats were to go from the monopoly solution to the allocatively efficient solution, the change in consumer surplus would be _____ d. Using the graph, identify the area of deadweight loss that results from Major Tom having a monopoly in commercial space flight.
a. 7 seats,$ 20 million. where MR=MC b. 12 seats, $ 10 million. where demand and MC curve intersect c. $ 95 million. Consumer surplus can be found by taking the area below the demand curve and above the price charged. To find the amount of consumer surplus, find the triangle of consumer surplus and use the equation for the area of a triangle to calculate the amount. Find the difference in consumer surplus between the monopoly solution and allocatively efficient solution d. Deadweight is between demand and MC curve at the max profitable quantity to the right
T/F Firms will enter a market if current producers are earning economic proifts, and will exit a market if current producers are realizing losses
true
T/F For a perfectly competitive firm, average revenue and marginal revenue are always equal
true
T/F If the marginal cost is constant at all levels of output, then MC = ATC
true
T/F If you choose to use a resource you own to produce a good, the value of that resource is an implicit cost
true
T/F In a perfect competition market the price equals marginal revenue, so to maximize profits we look for the intersection of MR and MC because this is also setting P=MC and allocative efficiency results
true
T/F Consumers will not purchase an item that falls to the right of their demand curve
true
T/F Monopolistically competitive markets are not allocatively efficient. This market produces less output than the allocatively efficient level of output (where demand intersects MC) because it produces at the point where MR intersects MC
true
T/F The average fixed cost always decliens a sa firm produces more output, meaning the distance between average variable cost and total cost should be smaller as more output is produced
true
T/F The more output the firm produces, the more it spreads out its total fixed cost
true
T/F The point where MR intersects MC tells you the quantity needed for profit maximization. You then have to look at what price this quantity hits the DEMAND curve to know the profit maximizing price the pure monopoly should charge for its output
true
T/F When calculating the average total cost, make sure you use the average total cost at the actual amount of output being produced
true
T/F Your marginal cost curve must intersect both the average variable cost and average total cost curves at their respective minimum points
true
Which of the following scenarios best represents the pricing behavior of a monopolist? Our Drugs Inc. produces where its marginal revenue is equal to its marginal cost and prices on its downward-sloping demand curve, such that the market for its product clears knowing it will not face competition due to patents it holds on its products. Teen Angle Hardware looks for a niche to sell its hardware products to teens, but finds that it is difficult to turn an economic profit due to other hardware stores also looking for niches. Stay*Put Pins takes the market price of clothespins as given and produces the amount of clothespins where marginal revenue equals marginal cost. Copycat Handbag Co. chooses the price it charges by estimating what its rivals are most likely to do and then taking their responses into consideration when pricing its products.
Our drugs inc.
How do you find the area of the deadweight loss generated by an oligopolistic firm producing the profit maximizing level of output instead of the allocatively efficient level of output?
Space to the right of the "profits earned" rectangle, to the left of the point where MC intersects demand curve, shade in below the demand curve and above the MC curve
How do you graph the average total cost
Start at where demand and supply intersect, this is the "Price" point Draw a flat horizontal marginal revenue curve originating at this price point Quantity of output can be found by setting marginal revenue (our price point) equal to marginal cost Draw a striaght vertical line on the graph starting at this quantity of output, up to the point where it intersects the average total cost curve Extend the line horizontally at this point to the y-axis to find the average total cost at the output being produced
Describe a short run supply curve? How do you graph it?
Supply curve representing the short run relationship between price and quantity supplied. For a perfectly competitive firm, the portion of the marginal cost curve that is at or above the minimum point of the average variable cost curve Draw a line along the points where the market prices asked for intersect with the marginal cost line. End the line where the marginal cost curve inersects the average variable cost curve and draw a horizontal line at this intersection to find the price and then vertical to find the quantity
Third degree price discrimination
The practice of dividing consumers into groups based on their elasticities of demand in order to charge each group a different price for the same good or service Example: A software company charges businesses more for their product than students because businesses tend to be willing to pay more for the software and their demand also tends to be relatively more inelastic (businesses must buy the product in order to use it, but students can not buy it and use the software on the school computers if they cant afford it)
Shutdown point
The price below which a firm will choose not to operate in the short run. Numerically, this point occurs when marginal revenue equals marginal cost at the minimum average variable cost. Graphically, this point occurs where the price/marginal revenue curve intersects the marginal cost curve at the minimum point of the average variable cost curve (AVC)
At what price is the allocatively efficient level of output achieved?
The price of the point where the marginal cost curve intersects the demand curve this is the perfectly competitive outcome
The graph below represents the weekly market demand and market supply for soybeans. Soylent Green is a perfectly competitive firm that produces soybeans. According to the graph, what is Soylent Green's marginal revenue for an extra bushel of soybeans sold?
The price where supply and demand curves intersect
What is dynamic efficiency?
The rate of technological progress and innovation in the economy: Are firms developing new products and processes, reducing their costs and improving existing products or are they just continuing to produce the same products the same way?
economies of scale
a condition in which the long run average total cost of production decreases as production increases -can result from productivity gains from more specialized labor and lower costs of inputs as firms purchase larger quantities and benefit from bulk pricing
diseconomies of scale
a condition in which the long-run average total cost of production increases as production increases
Constant returns to scale
a condition in which the long-run average total cost of production remains constant as production increases
Perfect competition
a market structure characterized by the interaction of large numbers of buyers and sellers, in which the sellers produced standardized/homogenous products These sellers are price takers, can sell as much output as they choose to produce at the market price, and have the ability to easily enter or exit an industry
Regulated normal profit price
a regulated price that is equal to the average total cost of production Perfectly competitive firm: where MC and ATC intersect Monopolistically competitive firm: where demand curve and ATC intersect
Long run supply curve
a supply curve that represents the long run relationship between price and quantity supplied In a constant cost industry is looks like a flat and horizontal line originating at the market price that generates normal profits for the firm
The following graph shows the cost curves for a firm producing cell phone cases. The firm operates in a perfectly competitive market. a. The firm will not produce any output if the price is less than: b. If the market price is $30, the firm will produce output of: c. The short-run supply curve for the firm begins once the price reaches $____, then follows the ___ curve
a. $10 Price where MC and AVC intersect b. 175 cell phone cases Quantity where MR=MC c. $10, MC curve
A local restaurant offers an all-you-can-eat buffet. The graph shows the marginal revenue and demand curves for two segments of the market: average consumers and senior citizens. a. Suppose the firm has the ability to be a price maker. What is the profit-maximizing level of output and price? The firm should charge ___, will sell ___ meals b. What will be the firm's profit if the profit-maximizing level of output is produced? c. How many meals will the restaurant sell to senior citizens if it charges the profit-maximizing price determined in part a? d. Suppose the firm has the ability to price discriminate. What is the profit-maximizing level of output and price? e. What is the profit generated from the sale of senior citizen meals? What will be the total profit for the firm, assuming the firm can price discriminate between average consumers and senior citizens?
a. $12, 25 meals quantity where MC=MR, price where this quantity hits the demand curve b. $150 In this question, MC=ATC so the profit per unit is the price where MC=MR. $6 x 25 meals= 150 c. 0 because in the new graph if you look where MC=MR and then where $12 hits the demand curve, it is beyond the demand curve d. $9 and will sell 15 meals quantity where MC=MR and then where this quantity hits the demand curve is the price e. $45 profit from senior citizens $195 total profit for the firm The profit per meal generated from senior citizens will be $3 ($9 − $6). The total profit generated by senior citizens is $45 ($3 × 15). The firm will generate profits of $150 from average consumers and $45 from senior citizens, for a total profit of $195.
Barney decides to quit his job as a corporate accountant, which pays $10,000 a month, and goes into business for himself as a certified public accountant. He runs his business from his converted garage apartment, which he could rent out for $300 a month if he wasn't using it as a home office. He must purchase office supplies worth $75 a month, and his monthly electricity bill has increased by $50 now that he is working out of his home office. After six months of working from home, Barney has earned an average of $12,000 per month. a. What are Barney's monthly explicit costs? b. What are Barney's monthly implicit costs? c. What are Barney's monthly economic costs? d. What are Barney's average monthly accounting profits? e. What are Barney's average monthly economic profits?
a. $125 (50+75) b. $10,300 (10000+300) c. $10,425 (10300+125) d. $11875 (revenue- explicit costs= 12000-125) e. $1575 (revenue- economic cost= 12000-10425)
Acme Anvils has a newly patented anvil that is ready for the market. While there are plenty of other anvil producers, Acme's anvils are unique. Past models have been featured in a number of animated short films over the years. The weekly demand and cost information for Acme Anvils are described in the graph below a. To maximize its profits, Acme should produce __ anvils and charge a price of ___ per anvil. b. At its profit-maximizing level, Acme's weekly profits are ___ per week. c. Even though Acme has a patent on its particular type of anvil, there are many other potential anvil makers out there. Which of the following is most likely to happen in the long run? Other firms will leave the market because of Acme's patent. Other firms will copy Acme's anvils exactly and hope they do not get caught for violating Acme's patent. Other firms will simply take Acme's price as being the market price and sell as many anvils as they can at that price. Other firms will look for other innovations to try to capture some of Acme's profits.
a. 100 anvils, $600 quantity where MC=MR and price where this quantity hits the demand curve b. $10000 profit per unit can be found by taking price minus average total cost and total profit can be found by taking profit per unit multiplied by quantity. If the price is $600 per anvil, average total cost is $500 per anvil and quantity is 100 anvils. Then, profit per unit is $600 - $500 = $100. Taking profit per unit times quantity gives total profits of $100 × 100 = $10,000. Thus, Acme is earning profits of $10,000 per week. c. Other firms will look for other innovations to try to capture some of Acme's profits.
The table below shows the marginal revenue and costs for a monopolist. Demand, Costs, and Revenues Price (dollars) Quantity Demanded Marginal Revenue (dollars) Marginal Cost (dollars) Average Total Cost(dollars) $85 50 $85 $25 $139.00 79 150 76 85 103.30 73 250 64 64 87.50 67 350 52 61 80.00 61 450 40 67 77.00 55 550 28 77 77.00 a. What is the monopolist's profit-maximizing level of output? b. What is the monopolist's profit at the profit-maximizing level of output?
a. 250 (where MC=MR) b. $-3625 if the price is $73 per unit, average total cost is $87.50 per unit, and quantity is 250 units, then profit per unit is $73 - $87.50. Taking profit per unit times quantity gives total profits of ($73 - $87.50) × 250 = $-3,625. Thus, the monopolist is earning profits of $-3,625
The table below shows the weekly marginal cost (MC) and average total cost (ATC) for Smitten, a perfectly competitive firm that produces children's mittens in a competitive market. Quantity (pairs of mittens) Marginal Cost (dollars) Average Total Cost (dollars) 5 $1.50 $8.00 10 2.00 5.00 15 2.50 4.50 20 3.50 4.00 25 4.00 4.00 30 5.00 4.50 35 6.00 5.00 40 8.50 5.50 a. If the market price of children's mittens is $6.00 per pair, how many pairs of children's mittens should Smitten produce per week to maximize its profits? b. What is Smitten's average total cost at the profit-maximizing quantity of children's mittens? c. What are Smitten's weekly profits if the market price is $6.00 per pair and the firm produces the profit-maximizing quantity of mittens? d. What are Smitten's weekly profits if the market price is $5.00 per pair and the firm produces the profit-maximizing quantity of mittens? e. At what price would Smitten earn a normal profit?
a. 35 b. $5 If you move vertically up from the profit-maximizing quantity of 35 units until you reach the ATC curve and then move horizontally to the left, you will see that ATC is $5.00 c.$35 Smitten can sell its mittens for $6.00 and the cost per pair of mittens is $5.00. Given that it produces a quantity of 35 pairs of mittens, its profit is ($6.00 - $5.00) × 35 = $35.00 d. $15 If the market price is $5.00, the MR curve is a horizontal line at $5.00. This line intersects the MC curve at a quantity of 30, which is the profit-maximizing quantity because MR = MC. If you move vertically up from the profit-maximizing quantity of 30 units until you reach the ATC curve and then move horizontally to the left, you will see that ATC is $4.50. This value can be found in the table showing Smitten's production costs. Thus, profit per unit is $0.50 ($5.00 - $4.50). Since 30 pairs of mittens are produced, Smitten generates a weekly economic profit of $15.00 (30 × $0.50). e. $4 At a price of $4.00, MR intersects MC at a quantity of 25. At this quantity, ATC is $4.00. Smitten generates a normal profit by producing 25 pairs of mittens, since for this quantity price is equal to ATC.
The table below shows the daily costs of Cathy's Corn Stand. Cathy sells her corn cobs in a perfectly competitive market. Cathy's Corn Stand's Production Costs Quantity (corn cobs) AVC (dollars) ATC (dollars) MC(dollars) 10.00 $2.50 $5.00 $2.50 20.00 2.25 3.50 2.00 30.00 2.00 2.83 1.50 40.00 1.81 2.44 1.25 50.00 1.70 2.20 1.25 60.00 1.67 2.08 1.50 70.00 1.68 2.04 1.75 80.00 1.75 2.06 2.25 90.00 1.86 2.14 2.75 a. If the market price of corn is $1.75 per corn cob, in the short run how much corn should Cathy produce each day to maximize profits? b. What are Cathy's profits/losses per day if she produces the profit-maximizing quantity of corn in the short run (losses are expressed as a negative number)? c. In the short run, assuming nothing else changes, Cathy should: produce a lower quantity of corn per day. produce a greater quantity of corn per day. produce the same quantity of corn per day. shut down, because the market price is above the AVC. d. If the short-run price of corn falls to $1.25 per corn cob, Cathy should: shut down, because the market price is below the AVC. produce a greater quantity of corn per day. produce the same quantity of corn per day. produce a lower quantity of corn per day.
a. 70 corn cobs per day For a market price of $1.75 per corn cob, the horizontal MR curve would intersect the MC curve at a quantity of 70 corn cobs b. $-20.00 ± 1 When quantity is 70 corn cobs, ATC is $2.04. The total loss is $20 [70 × (1.75 - $2.04)]. c. produce the same quantity of corn per day When producing a quantity that is to the right of the minimum of the MC curve and where MR = MC, a firm maximizes its profit (or minimizes its loss). Therefore, producing at another quantity will always be suboptimal d. shut down, because the market price is below the AVC. For a market price of $1.25, the horizontal MR curve would intersect the MC curve at a quantity of 40 and 50 cobs. At both quantities, ATC and AVC are greater than price. Cathy's Corn Stand would incur a loss and not even cover its variable costs. Therefore, its loss would be greater than its total fixed cost. If Cathy's Corn Stand shuts down temporarily, it would only have a loss equal to its total fixed cost. This is because at a production of zero, total revenue and total variable cost are also zero, but total fixed cost will still occur. Consequently, by shutting down, it is possible to reduce the loss.
Estella decides to set up a lemonade stand on a hot summer day. Before long, Estella's friends all decide they would like to help. The table below shows what happens to the number of glasses of lemonade Estella and her friends can make in an hour. a. Complete the average product and marginal product columns in the table Labor (workers) Total Product Average Product Marginal Product 1 (Estella) 9 2 18 3 24 4 28 5 25 b. How many additional glasses of lemonade can Estella produce if she has one friend help her make lemonade instead of making lemonade by herself? c. How many additional glasses of lemonade can Estella produce if she has five friends help her rather than having four friends help her? d. If Estella has four friends help her, on average how many glasses of lemonade can each her and her friends make per hour?
a. Labor (workers) Total Product Average Product Marginal Product 1 (Estella) 9 9 9 2 18 9 9 3 24 8 6 4 28 7 4 5 25 5 -3 b. 9 glasses (marginal product for two workers is 9) c. - 3 glasses (marginal product for 5 friends) d. 5 glasses (The average product for 5 workers is 5 (25/5))
The graph shows the payoff matrix for two competing firms in an oligopolistic market. The columns represent the potential strategies of Producer A and the rows represent the potential strategies of Producer B. The upper-right payoffs in each box represent the payoffs for Producer A and the lower-left payoffs represent the payoffs for Producer B. Graph numbers in left column from top to bottom: 4,4,9,1 right column: 1,12,10,10 a. Does Producer A have a dominant strategy? No b. Does Producer B have a dominant strategy? Yes c. The Nash equilibrium is: Producer A: Low price; Producer B: Low price. Producer A: High price; Producer B: Low price. Producer A: High price; Producer B: High price. Producer A: Low price; Producer B: High price.
a. No Producer A does not have a dominant strategy because he or she prefers Low Price if Producer B chooses Low Price (4 is better than 1) but High Price if Producer B chooses High Price (10 is better than 9). Thus, Producer A's preference depends on what Producer B chooses. b. Yes No matter if the other producer chooses Low Price or High Price, it is always best for Producer B to choose Low Price. This is because 4 is better than 1 if the other player chooses Low Price and 12 is better than 10 if the other player chooses High Price. Thus, Low Price is a dominant strategy for Producer B. c. Producer A: Low price; Producer B: Low price.
T/F Members of cartel estimate demand for the industry as a whole to determine the profit maximizing level of output, then divide that output between the cartel members and agree to charge the pure monopoly price.
true
a. Which of the following statements about the intersection of the average variable cost and marginal cost curves is true? The intersection occurs at the minimum of the marginal cost curve. The intersection occurs at the minimum of the average total cost curve. The intersection occurs at the minimum of the average variable cost curve. b. Which of the following statements about the intersection of the average total cost and marginal cost curves is true? The intersection occurs at the minimum of the marginal cost curve. The intersection occurs at the minimum of the average total cost curve. The intersection occurs at the minimum of the average variable cost curve. c. If the level of output is greater than the point at which the marginal cost curve and the average variable cost curves intersect, it must be the case that: average variable cost is constant. average variable cost is decreasing. average variable cost is increasing. d. If the level of output is less than the point at which the marginal cost curve and the average total cost curves intersect, it must be the case that: average total cost is constant. average total cost is decreasing. average total cost is increasing.
a. The intersection occurs at the minimum of the average variable cost curve. b. The intersection occurs at the minimum of the average total cost curve c. average variable cost is increasing d. average total cost is decreasing
a. The Herfindahl-Hirschman Index and four-firm concentration ratio are used to measure: wages and resource costs within an industry. competition within an industry. wages and resource costs within a firm. competition within a firm. b. An industry with one seller producing and selling 100% of the output, a pure monopoly, would experience a four-firm concentration ratio of: 10%. 100%. 1,000%. 10,000%. c. An industry with one seller producing and selling 100% of the output, a pure monopoly, would experience a Herfindahl-Hirschman Index of: 100. 10. 10,000. 1,000.
a. competition within an industry. b. 100% c. 10,000
Suppose a new, rare metal was found that could provide electricity to a large number of households very inexpensively. Four firms control the land in which this rare metal can be mined. a. The market for this rare metal is most similar to: monopolistic competition. a pure monopoly. an oligopoly. perfect competition. b. Suppose the firms decide to work together to restrict output, therefore increasing price. It is said these firms are operating as a ___ and engaging in ____ c. These firms will likely earn: economic losses. normal profits. economic profits. d. In the long run, it is likely: government will break up the group. government will subsidize the group. the firms will combine into a single firm. the firms will continue to restrict output.
a. oligopoly b. cartel, collusion c. economic profits d. government will break up the group.
Sergei is one of many lawnmower producers in a competitive market. His cost curves are shown in the graph below. a. Given the market price of lawnmowers, if Sergei wants to maximize profits he should: produce 10 lawnmowers per week. go out of business. produce 5 lawnmowers per week. produce 11 lawnmowers per week. b. If Sergei's production costs are typical of all perfectly competitive firms in the lawnmower industry, over time: firms will start to enter the market because economic profits are greater than normal economic profits. there will be no change in the number of firms in the market because economic profits are equal to normal economic profits. firms will start to exit the market because there are negative economic profits in the industry. firms will start to leave the market because there are bigger economic profits in other industries. c. If Sergei's production costs are typical of all perfectly competitive firms in the lawnmower industry, we would expect that in the long run: the market price would fall to $200 per lawnmower and each firm in the market would produce 10 lawnmowers per week. the market price would rise to $650 per lawnmower and each firm in the market would produce 15 lawnmowers per week. the market price would fall to $400 per lawnmower and each firm in the market would produce 10 lawnmowers per week. the market price would remain at $500 per lawnmower and each firm in the market would produce 12 lawnmowers per week.
a. produce 11 lawnmowers per week. The demand and supply curves for the lawnmower market intersect at a market price of $500. In a perfectly competitive market, a profit-maximizing quantity requires that P = MC. In the cost diagram, a horizontal line at a price of $500 intersects the MC curve at a quantity of 11 lawnmowers. b. firms will start to enter the market because economic profits are greater than normal economic profits. The cost diagram also shows that the ATC for 11 lawnmowers is $400, which generates a profit per unit of $100 and a total economic profit of $1,100 (11 × $100). The positive economic profit would attract other firms to the market. c. the market price would fall to $400 per lawnmower and each firm in the market would produce 10 lawnmowers per week. As long as other firms enter the market, supply would increase and price would fall. When the price falls to $400, the profit-maximizing quantity is 10 lawnmowers. At 10 lawnmowers, MC equals $400 and thus equals the price. ATC for 10 lawnmowers is $400. Consequently, firms would make zero economic profit and new firms would stop entering the market. The price would stop falling.
a. The ability of firms to segment the market into two or more groups with different willingness and ability to pay is known as: second-degree price discrimination. first-degree price discrimination. third-degree price discrimination. b. The ability of firms to charge a different price to each and every customer is known as: second-degree price discrimination. third-degree price discrimination. first-degree price discrimination. c. The ability of firms to charge different per-unit prices based on the quantity of a good or service purchased is known as: third-degree price discrimination. second-degree price discrimination. first-degree price discrimination. d. Which of the following is an example of second-degree price discrimination? The local gym offers a "first month free" promotion. A grocery store offers a "case discount" when purchasing items by the case rather than individually. An insurance company offers a "safe driver discount."
a. third degree b. first degree c. second degree d. A grocery store offers a "case discount" when purchasing items by the case rather than individually.
The graph shows the payoff matrix for two competing firms in an oligopolistic market. The columns represent the potential strategies of Producer A and the rows represent the potential strategies of Producer B. The upper-right payoffs in each box represent the payoffs for Producer A and the lower-left payoffs represent the payoffs for Producer B. Graph numbers in left column from top to bottom: 4,4,12,1 right column: 1,12,10,10 a. Does Producer A have a dominant strategy? Yes b. Does Producer B have a dominant strategy? Yes c. The Nash equilibrium is: Producer A: High price; Producer B: Low price. Producer A: High price; Producer B: High price. Producer A: Low price; Producer B: Low price. Producer A: Low price; Producer B: High price.
a. yes No matter if the other producer chooses Low Price or High Price, it is always best for Producer A to choose Low Price. This is because 4 is better than 1 if the other player chooses Low Price and 12 is better than 10 if the other player chooses High Price. Thus, Low Price is a dominant strategy for Producer A. b. yes No matter if the other producer chooses Low Price or High Price, it is always best for Producer B to choose Low Price. This is because 4 is better than 1 if the other player chooses Low Price and 12 is better than 10 if the other player chooses High Price. Thus, Low Price is a dominant strategy for Producer B c. Producer A: Low price; Producer B: Low price.
T/F In the short run, a firm's decision is whether to continue producing at a loss or to shut down and incur its total fixed cost of production. Only in the long run can a firm exit an industry once all its inputs (costs of production) become variable
true
T/F By advertising and branding, monopolistically competitive firms increase the demand for their products and make those demands relatively more inelastic, allowing them to charge higher prices and maximize their profits
true
T/F In a perfectly competitive market the market price of an object is equal to the marginal revenue. Since profit is maximized at the quantity at which marginal revenue is equal to marginal cost, you would produce the amount of objects that has a marginal cost value equal to the market price in the question
true
T/F In a perfectly competitive market, the consumers have to believe the output produced by each firm is essentially the same. If they believe one output is better than the other, we cant use the model of perfect competition to explain the workings of the market since some companies have the ability to mark up their prices (avoiding the price taker behavior in perfectly competitive markets)
true
T/F In monopolistically competitive markets, there are competitors making close substitutes, so demand curves are more elastic than those faced by monopolies and less elastic than those faced by perfectly competitive firms
true
T/F In regards to CR4 and HHI, the higher the number, all else held constant, the more concentrated the industry
true
T/F Monopolies restrict output and charge a higher price than would prevail in a competitive market, likely to hire less labor at lower wages. Overall they reduce the availability of goods and services and your ability to buy them
true
T/F Monopolistically competitive firms produce less output than what would be productively efficient
true
T/F Zero economic profit is a sustainable position for a firm
true
T/F When demand is elastic, a firm's total revenue increases when the firm lowers the price of its product. This increase occurs because the revenue gained from the additional sale of output is greater than the revenue lost due to the lower price
true If the marginal revenue is negative, the total revenue will decrease which means the demand must be inelastic over that price range A profit maximizing monopolist would never chose to operate on the inelastic portion of a linear demand curve
T/F The closer the subtitutes are for a product, the more horizontal its demand will be. And the more unique a product is, the more vertical its demand will be
true this is why a perfect competition market has a straight horizontal demand curve (more elastic) and a pure monopoly has the greatest downward sloping demand curve (less elastic)
T/F A more concentrated industry (higher number on the HHI or CR4) means higher prices and fewer choices for consumers, creating a less competitive market
true, which is why governments don't allow some industries to complete actions that would increase their concentration
