econ exam ch 6-9

which of the following industries does not fit the natural monopoly model: natural gas, electricity, cable TV, or fast food restaurants

fast food restaurants

reasons for economies of scale

high start-up costs adopt mass production techniques specialization and division of labor learning by doing quantity discounts economies of scope

theory of the invisible hand

states that the actions of independent, self-interested buyers and sellers will often result in the most efficient allocation of resources

game theory provides tools that are used to model

strategic interdependencies

no-cash-on-the-table principle

Economic metaphor for unexploited gains from exchange. When people have failed to take advantage of all mutually beneficial exchanges, we often say that there is cash on the table.

imperfect price discrimination

Groups of consumers are charged different prices

if the firms in a market are earning profit, then, in the long run, the market ___ curve; will shift to the ___

supply; right

fixed cost

a cost that does not change, no matter how much of a good is produced

natural monopoly

a monopoly that results from economies of scale

short run is best defined as

a period of time sufficiently short that at least one factor of production is fixed

economy of scale

a proportionate saving in costs gained by an increased level of production.

a price ceiling that is set below the equilibrium price will result in

a shortage of the good

a pure monopoly exists when

a single firm produces a good with no close substitutes

assumptions for perfectly competitive markets

all forms sell identical products consumers are indifferent to different sellers many sellers or firms firms are price takers free entry and exit- no barriers to do so instantaneous entry and exit complete info firms maximize profits

a good is characterized by network economies if it

becomes more valuable as more people own it

fixed factor

cannot be changed in the short run

in an industry with free entry and exit, positive economic profit

cannot be sustained indefinitely

variable costs

costs that vary with the quantity of output produced

economic profit

difference between a firms total revenue and the sum of its explicit and implicit costs

normal profit

difference between accounting profit and economic profit

constant returns to scale

doubling all inputs doubles output

the most important and enduring source of market power is

economies of scale

for perfectly competitive firms, marginal revenue ___ price; for monopolists marginal revenue __ price

equals; is less than

if it is possible to make a change that will help some people without harming others, then the situation is

inefficient

variable factor

it can be changed in the short run

what is a characteristic of economic rent

it can never be negative

both a perfectly competitive firm and a monopolist find that

it is best to expand production until the benefit and the cost of the last unit produced are equal

cartel agreements are difficult to maintain because

it's a dominant strategy for each cartel member to cheat on the cartel agreement

a firm is most likely to experience economies of scale if its start-up costs are high and its marginal cost

low

Given the demand curve it faces, if an imperfectly competitive firm wants to sell another unit of output, it must:

lower its price

In general, when the price of a variable factor of production increases:

marginal cost rises

if a production process exhibits diminishing returns, then as output rises

marginal cost will eventually increase

subsidies are most likely to

reduce total economic surplus

explicit costs are

measure the payments made to the firm's factors of production

as the market price of a service increases, more potential sellers will decide to perform that service because

more potential sellers will find that the market price exceeds their reservation price

airlines that charge higher prices for seats in the first class cabin are

not price discriminating because the product is not the same

network economies

occur when the value of the product increases as the number of users increases

adam smith coined the term "invisible hand" to describe the process by which the actions of independent, self-interested buyers and sellers will

often lead to the most efficient allocation of resources

monopoly

one business runs the whole thing

profit maximizing rule P=MC applies to

perfectly competitive firms only

allocative function

price directs resources away from overcrowded markets to markets that are under-reserved

imperfect price discrimination occurs when a monopolist

price discriminated but some buyers pay less than their reservation price

rationing function

price distributes scarce goods to the consumers who value them most highly

because monopolies charge a price in excess of marginal cost, it must be the case that monopolists

produce less than the socially optimal level of output

if a perfectly competitive firm produces an output level at which price is less than marginal costs; then the firm should

reduce output to earn greater profits or smaller losses

low-hanging fruit principle

the easiest attainable goals

suppose a firm produces a level of output at which the marginal cost of the last unit produced equals the price of the good. What statement is always true?

the firm should shut down if its total revenue is less than its variable cost

price discriminating

the monopolists charges different prices for the same product

a prisioner's dilemma is a game in which

the players payoff are smaller when both play their dominant strategy compared to when both play a dominated strategy

economic rent

the portion of a payment to a factor of production that exceeds the owner's reservation price

average total cost

total cost divided by total output

economic profit is equal to

total revenue minus the sum of explicit and implicit costs

monopoly profit

total revenue- total cost

individual supply curves generally slope ___ because ___

upward; of increasing opportunity costs

even when a firm produces the level of output at which price equals marginal cost, it should shut down if its total revenue is less than its

variable cost

law of diminishing returns

when some factors of production are fixed, increased production of the good eventually requires even larger increases in the variable factor