ECON Review 2

Assume that in a monopolistically competitive industry, firms are earning economic profit. This situation will

attract other firms to enter the industry, causing the existing firms' profits to shrink.

Monopolistic competitive firms are productively inefficient because production occurs where

average total cost is not at its lowest.

Consumers who clip and redeem discount coupons _____.

exhibit a relatively higher price elasticity of demand for a given product than consumers who do not clip and redeem coupons

Monopolistic competition is characterized by firms

producing differentiated products.

Which idea is inconsistent with perfect competition?

product differentiation

The short-run supply curve for a perfectly competitive firm is the

segment of the MC curve lying at and above the AVC curve.

Marginal cost can be defined as the change in

total cost resulting from the production of an additional unit of output.

Economic profit is equal to

total revenue minus the explicit and implicit costs of production.

A business owner makes 50 items by hand in 40 hours. She could have earned $20 an hour working for someone else. Her total explicit costs are $200. If each item she makes sells for $15, her economic profit equals:

$-250 The business owner has explicit costs of $200. In addition, there are implicit costs since she does not have the time to work at her regular job and forgoes income of $800 (40 hours × $20). These are implicit costs because they do not involve a payment now or in the future. Economic profit is the difference between revenue (50 × $15 = $750) and economic cost, which is the sum of explicit and implicit costs ($1,000). The business owner makes a negative economic profit of -$250, which is a loss ($750 - $1,000).

Bobby decides to sell lemonade on a hot summer day. If Bobby sells 20 glasses of lemonade for $0.20 per cup, and his average total cost is $0.17, what are Bobby's economic profits for the day?

$0.60 Since ATC is $0.17 and Bobby sells each glass for $0.20, his profit per glass is $0.03. He sold 20 glasses and therefore made an economic profit of $0.60 (20 × $0.03).

A young Thomas Edison produces and sells 20 light bulbs a week in his dorm room. The parts for each light bulb cost $2.00. He sells each light bulb for $5.00. General Electric offers Thomas an executive job that pays $50.00 a week. Thomas's weekly economic profit from making light bulbs is equal to:

$10 Edison has explicit costs of $40 (20 × $2) for materials. In addition, there is an implicit cost since he cannot take the offer to work as an executive, so he forgoes income of $50. This is an implicit cost because it does not involve a payment now or in the future. Economic profit is the difference between revenue (20 × $5 = $100) and economic cost, which is the sum of explicit and implicit costs ($40 + $50 = $90). Edison makes an economic profit of $10 ($100 - $90).

If you know that total fixed cost is $200, total variable cost is $600, and total product is 4 units, then average total cost must be

$200.

The sole proprietor of the Milwaukee Machine Company generates an annual accounting profit of $78,000. She has a standing salary offer of $35,000 a year to work for a large corporation. If she had invested her capital outside her own company, she estimates it would have returned $22,000 this year. What is the sole proprietor's economic profit?

$21,000

f average variable cost is $74 and total fixed cost is $100 at 5 units of output, then average total cost at this output level is

$94.

What are the likely reason(s) that the market for electricity is not perfectly competitive? Select all that apply.

-There are few sellers in the market. -It is difficult to enter or exit the industry as a supplier. Producing electricity requires high start-up costs for power plants and power lines. This will prevent companies from entering the market. In addition, the government usually issues permits to sell electricity (and usually only to one company in a region).

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 has to consider its own impact on price when making production decisions Firms in competitive markets as well as firms in oligopoly markets face competition and try to maximize profits. In both markets firms reach a profit maximum when marginal revenue equals marginal cost. A firm in a competitive market can choose its production quantity without considering an impact on the market price because its market share is extremely small. In contrast, the market share of a firm in an oligopoly market is big enough that a change of production quantity can influence the market price.

What is one difference between a firm in a perfectly competitive industry and a firm in a monopolistically competitive industry?

A monopolistically competitive firm faces competition from firms producing close substitutes. Both firms in a perfectly competitive industry and firms in a monopolistically competitive industry choose output where marginal revenue and marginal cost are equal. Neither monopolistically nor perfectly competitive firms are guaranteed to make more than normal profits in the long run. However, since monopolistically competitive firms compete against other firms that produce close substitutes, they face a downward-sloping demand curve.

Which of the following suppliers is most likely to be a monopolist?

A water company A water company is most likely to be a monopolist. Because there is a desire to keep a limited number of pipes underground and governments restrict the market to one firm, most localities tend to have only one supplier of water. Lettuce farmers, shirt producers, and cereal producers face other competitors, with multiple companies in the market.

If marginal cost exceeds average total cost in the short run, then which is likely to be true?

Average total cost is increasing.

Which is not true for a monopolistically competitive industry?

Firms operate at the lowest point of their ATC curves in the long run.

Which of the following is most likely to be an implicit cost for Company X?

Forgone rent from the building owned and used by Company X

Which of the following is most likely to be a variable cost of production in the short run?

Fuel and power payments

If you owned a small farm, which of the following would most likely be a fixed cost of production in the short run?

Hail insurance

Which of the following best represents the pricing behavior of firms in an oligopolistic market?

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. An oligopoly market consists of only a few firms. Therefore, the market price depends on each individual firm's behavior and cannot be "taken as given." Firms set their own prices by considering the prices of their competitors. Firms in an oligopoly market are able to make a profit higher than a normal profit.

Which is necessarily true for a perfectly competitive firm in short-run equilibrium?

Marginal revenue minus marginal cost equals zero.

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. In a monopoly, there is only one firm that has the ability to affect price and quantity. This is due to barriers to entry in the market. In this case, Our Drugs Inc. has a barrier to entry with its patent and faces no competitors. Therefore, it is able to choose output where marginal revenue is equal to marginal cost and then choose its price based on its downward-sloping demand curve. So, Our Drugs Inc. best represents a monopoly.

In the long-run equilibrium of a monopolistically competitive industry

P > minimum (ATC).

Which of the following best represents the pricing behavior of firms in a monopolistically competitive industry?

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. In monopolistic competition, there are many firms competing against one another that are trying to find their own niches. This is the market characteristic that allows firms to have some market power. Because there are no barriers to entry, most firms in a monopolistically competitive industry will only earn normal profits since other firms can enter the market if there are above-normal profits. In this case, Teen Angle Hardware is most representative of a monopolistically competitive firm.

What is the meaning of the phrase "dilemma of regulation"?

The competitive price achieves allocative efficiency but may produce economic losses; the normal profit price yields a normal profit but may not be allocatively efficient.

Which of the following would be an implicit cost for a firm?

The cost of wages foregone by the owner of the firm

Which of the following is not a necessary characteristic of a perfectly competitive industry?

The industry or market demand is highly elastic.

Which of the following is an example of an oligopolistic market with a standardized product?

The market for aluminum Different brands and types of automobiles, cereal, and jewelry are not perceived by consumers as the same good. For example, there is quite a bit of difference between a Porsche and a Kia. In contrast, a metric ton of a certain type of aluminum is nearly the same regardless of which company produces it.

Which of the following is an example of an oligopolistic market with a differentiated product?

The market for cell phone services While certain types of copper, electricity, or beef have nearly the same properties and are even traded at exchanges, different cell phone providers offer a quite differentiated product when it comes to features, abilities, and data options.

Which of the following markets is most likely to be perfectly competitive?

The market for mushrooms Mushrooms are sold at many locations, and many consumers buy mushrooms. In contrast, touring motorcycles are only sold by a few companies and Three Musketeers candy bars are sold by only one company. Although Saturday matinee movies are sold by many companies, the ones that are relevant for a market are the ones that are close to consumers and these are usually only a few.

Which of the following markets is most likely to be perfectly competitive?

The market for rock salt Rock salt is sold at many locations, and many consumers buy it. In contrast, only very few companies sell rocket fuel. Tickets to a U2 concert are only sold at a few locations, and are limited by how often the band tours in a city near you. And although there are many emergency rooms in the country, only the closest one is relevant for a person in need of immediate care.

Which of the following is an implicit cost of owning and operating a farm?

The money a farmer could earn by working for someone else Money that the farmer receives is considered revenue, not cost. Money that the farmer pays for fertilizer or repairs is considered an explicit cost because a payment is made. If the farmer had not worked at his farm but worked somewhere else, he would have received a salary for his work. The loss of this salary does not include a payment now or in the future, but it is still a cost of production, which is called an opportunity cost or implicit cost.

Which of the following best approximates a pure monopoly?

The only bank in a small town

The characteristic most closely associated with oligopoly is

a few large producers.

One feature of pure monopoly is that the firm is _____.

a price maker

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: b. Firms in this industry will likely earn: c. If foreign firms begin supplying the product, increasing the number of competitors, it is likely that:

a. oligopoly. b. an economic profit c.economic profits will fall. a. It is likely this industry would be characterized as an oligopoly. b. Firms in this industry will likely earn an economic profit. c. If foreign firms begin supplying the product, increasing the number of competitors, it is likely economic profits will fall.

To practice third-degree price discrimination, a pure monopoly must _____.

be able to separate buyers into different groups with different price elasticities

Marginal product of labor refers to the

change in total product resulting from employing one more unit of labor.

A price-discriminating monopolist can increase profits by:

charging a higher price to those with less elastic demand and a lower price to those with more elastic demand than it would if it could not price discriminate. When a firm—in this case, a monopolist—price discriminates in the third degree, it separates consumers into different groups based on elasticity. The monopolist can then charge higher prices to those with less elastic demand and lower prices to those with more elastic demand. Charging higher prices to less elastic consumers results in a much smaller decrease in the quantity demanded compared to the increase in the price. Since price is increasing by a higher percentage, the total revenue will increase as well.

When firms in an industry reach an agreement to fix prices, divide up market share, or otherwise restrict competition, they are practicing the strategy of

collusion.

Mutual interdependence means that each firm in an oligopoly

considers the reactions of its rivals when it determines its pricing policy.

A firm finds that whether it produces 30,000 vases or 40,000 vases, its average total cost is $180. This observed pattern might be explained by:

constant returns to scale In this case, the average total cost of production remains constant at $180 while production increases by 33 percent. This represents constant returns to scale, and is graphically the flat portion of the long-run average total cost curve.

Variable costs are

costs that change with the amount of output a firm produces.

A firm sells a product in a perfectly competitive market. The marginal cost of the product at the current output level of 500 units is $1.50. The minimum possible average variable cost is $1. The market price of the product is $1.25. To maximize profits, the firm should

decrease production to less than 500 units.

The price elasticity of a monopolistically competitive firm's demand curve varies

directly with the number of competitors but inversely with the degree of product differentiation.

The upward-sloping portion of the long-run average cost curve is a result of:

diseconomies of scale. Along the long-run average cost curve not only quantity but also firm size increases. If a larger firm size leads to higher average total cost, we have a case of diseconomies of scale. In this case, marginal productivity is decreasing too.

Which set of characteristics below best describes the basic features of monopolistic competition?

easy entry, many firms, and differentiated products

The downward-sloping portion of the long-run average cost curve is a result of:

economies of scale Along the long-run average cost curve not only quantity but also firm size increases. If a larger firm size leads to lower average total cost, we have a case of economies of scale. In this case, marginal productivity is increasing too.

A decrease in the long-run average total cost as output increases is due to

economies of scale.

In perfect competition, the demand faced by a single firm is perfectly

elastic, because many other firms produce the same standardized product.

Marginal cost

equals both average variable cost and average total cost at their respective minimums.

To an economist, the economic costs associated with the use of resources include

explicit and implicit costs.

Accounting profit equals total revenue minus

explicit costs.

Monetary payments a firm makes to pay for resources are called

explicit costs.

Natural monopolies result from ____

extensive economies of scale in production

A firm encountering economies of scale over some range of output will have a

falling long-run average total cost curve.

A monopolistically competitive firm has a

highly elastic demand curve.

The main difference between the short run and the long run is that

in the short run, some inputs are fixed and some are variable.

The marginal revenue curve faced by a perfectly competitive firm

is horizontal at the market price.

A pure monopoly will find that marginal revenue _____

is less than price

When compared with a perfectly competitive market with identical costs of production, a pure monopoly will produce _____.

less output and charge a higher price

At long-run equilibrium in monopolistic competition, there is

neither allocative nor productive efficiency.

Oligopolies are considered to be:

neither allocatively nor productively efficient Oligopolies are considered to be neither allocatively nor productively efficient. Oligopolies receive a price above the marginal cost of production; therefore, the market is not allocatively efficient. Oligopolies are also not productively efficient since firms are not producing at the lowest average total cost.

In perfect competition, if the market price of the product is initially higher than the minimum average total cost faced by the firms, then

other firms will enter the industry and the industry supply will increase.

Demand and marginal revenue curves are downward-sloping for monopolistically competitive firms because

product differentiation allows each firm some degree of monopoly power.

If a third-degree price-discriminating pure monopoly sells the same product in two markets but charges a higher price in market X and a lower price in market Y, the pricing difference indicates that demand is _____.

relatively less elastic in market X than market Y

Suppose that the market for corn is perfectly competitive. If corn farmers are currently generating losses, then we would expect that in the long run the market

supply curve will shift to the left.

According to the law of diminishing marginal returns

the additional product generated by additional units of an input will eventually diminish.