Micro Final

Antonio sells cell phone cases in a perfectly competitive market. If Antonio sells 40 cell phone cases at a price of $40 per unit, his marginal revenue is

$40

For a monopolistically competitive firm operating in the hotel industry, the demand curve is given by Q = 160 - P, and the firm's cost functions are MC = 20 + 2Q and TC = 20Q + Q2

$80 = Optimal Price

Midpoint method

(Q2-Q1)/[(Q2+Q1)/2] / (P2-P1)/[(P2+P1)/2]

Two types of decision making

- Alternatives(Either-or) - How much(marginal)

Three reasons people might rationally choose a worse payoff

- Concerns about fairness: providing for others sometimes trumps self-interest - Bounded rationality- "good enough": Making a choice that is close to but not exactly the highest possible profit may make sense because the effort of finding the best payoff is too costly - Risk aversion: willingness to sacrifice some economic payoff in order to avoid a potential loss is fairly common

Marginal Costs/Benefits are subjective

- From a consumer's point of view, marginal benefit is additional satisfaction from one more item purchased - From a business' point of view, it's the revenue from swelling one more - It's you in the end

Six Mistakes

- Misperceptions of opportunity costs - Overconfidence - Unrealistic expectations about future behavior - Counting dollars unequally - Loss Aversion - Status Quo Bias

The quantity demanded

: the quantity that buyers are willing (and able) to purchase at a particular price

Price elasticity of demand interpretation

< 1 = inelastic, > 1 = elastic, = 1 - unit elastic, = 0 - perfectly inelastic, = infinity - perfectly elastic

Equity

A condition in which everyone gets his or her "fair share"

Sunk Cost

A cost that has already been incurred and is not recoverable

Which statement describes a monopoly?

A single firm produces a product with no close substitutes and control over the market price

Concept of Utility

A way of representing the fact that when people consume, they take into account their preferences and tastes in a more or less rational way

Which of the following describes the equity-efficiency trade off?

Actions intended to make economic outcomes fairer can cause efficiency to decrease

Budget Constraints

BIG IMPORTANCE

Marginal Product of labor

Change in quantity of output/Change in quantity of labor

T/F: Perfect price discrimination occurs when perfectly competitive firms charge some people higher prices than others

False

T/F: Price discrimination is illegal under all circumstances

False

T/F: Price discrimination only occurs with natural monopolies

False

Total Cost

Fixed costs + variable costs

Which of the following will cause an increase in the demand for autos

Gasoline prices drop by 50% when OPEC nations increase production

HHI

HHI of < 1,000 = strongly competitive market HHI of 1,000-1,800 = somewhat competitive market HHI of >1,800 = oligopoly

Supply Shifters

Input prices, the prices of related goods or services, technology, expectations, the number of producers

Does a power strip generate network externalitiess?

No

Since a firm operating in a monopolistically competitive market faces a downward-sloping demand curve, it is generally the case that

P > MR

Under monopoly, the firm produces the output where _____, and in perfect competition, the firm produces the output where _____.

P > MR = MC; P = MR = MC

Price elasticity of demand

Percentage change in quantity demanded divided by the percentage change in price, put it in absolute value to always be positive

Behavioral Economics

Rationality - branching psychology and economics with human behavior

Profit

TR-TC (TR/Q - TC/Q) x Q (P - ATC) x Q

Identify the first antitrust law and its purpose

The Sherman Act of 1890 prohibits price fixing, collusion, and monopolization

Income Effect

The change in quantity consumed of a good that results from a change in the consumer's purchasing power

Subtitution effect

The change in the quantity consumed of a good as the consumer substitutes the good that has become relatively cheaper for the good that has become relatively more expenseive

Consumption Bundle

The collection of all the goods and services consumed by that individual - Different from person to person

AFC (Average Fixed Cost)

The fixed cost per unit of output produced Formula: TFC/Q

Spreading Effect

The larger the output, the more output over which fixed cost is spread, leading to lower AFC

The diminishing returns effect

The larger the output, the more variable input required to produce additional units, which leads to higher AVCw

Free-rider problem

The problem faced by unions and other groups when people do not join because they can benefit from the group's activities without officially joining. The bigger the group, the more serious the problem.

Production

The process of turning inputs into outputs

Status quo bias

The tendency to avoid making a decision all together

ATC (Average Total Cost)

Total cost per unit of output produced Formula: TC/Q

T/F: Airlines are often able to price discriminate

True

T/F: All else being equal, single price monopolists earn lower profits than firms that can price discriminate

True

T/F: In the short term, a monopolistic competitor will make a profit if the demand curve is above the average total cost curve at some point

True

T/F: Monopolistically competitive industries are more likely to make use of advertising to create products that catch on in mainstream popularity than industries in perfect competition

True

T/F: Oligopolies exist in a market that has a small number of producers that may or may not exhibit product differentiation.

True

AVC (Average Variable Cost)

Variable Cost per unit of output produced Formula: TVC/Q

A firm's _____ are costs that increase as quantity produced increase. These costs often show ______ illustrated by the increasingly steeper slope of the total cost curve

Variable costs; diminishing marginal returns

prisoners' dilemma

a game based on two premises: (1) each player has an incentive to choose an action that benefits itself at the other player's expense; and (2) both players are then worse off than if they had acted cooperatively.

Unit elastic

a given change in price causes a proportional change in quantity demanded

Elastic

a given change in price causes a relatively larger change in quantity demanded

Inelastic

a given change in price causes a relatively smaller change in the quantity demanded

perfectly competitive market

a market in which all participants are price-takers

imperfect competition

a market structure in which no firm has a monopoly, but producers nonetheless have market power they can use to affect market prices

What is the primary difference between accounting profits and economic profits? The primary difference is that

accounting profits ignore implicit costs; economic profits consider them

noncooperative behavior

actions by firms that ignore the effects of those actions on the profits of other firms

strategic behavior

actions taken by a firm that attempt to influence the future behavior of other firms

dominant strategy

an action that is a player's best action regardless of the action taken by the other player

cartel

an agreement among several producers to obey output restrictions in order to increase their joint profits

zero-profit equilibrium

an economic balance in which each firm makes zero profit at its profit-maximizing quantity.

Equilibrium

an economic situation in which no individual would be better off doing something different or taking a different action

perfectly competitive industry

an industry in which all producers are price-takers

Oligopoly

an industry with only a small number of producers

duopoly

an oligopoly consisting of only two firms

external benefits

an uncompensated benefit that an individual or firm confers on others; also known as positive externality

A monopoly is an industry structure characterized by

barriers to entry and exit

firms maximize profits by operating where marginal revenue equals marginal cost

both monopoly and perfect competition

If a perfectly competitive firm is producing a quantity where MC > MR, then profit

can be increased by decreasing production

price discrimination

charging different prices to different consumers for the same good

nonprice competition

competition in areas other than price to increase sales, such as new product features and advertising; especially engaged in by firms that have a tacit understanding not to compete on price

If a firm is producing a quantity where marginal cost exceeds marginal revenue, the firm should ____ existing levels of production in order to ____.

decrease ; increase profitability

An increase in the price of good X while holding income and the price of good Y constant will

decrease the marginal utility per dollar spent on good X

A monopoly responds to a decrease in marginal cost by _____ price and _____ output

decreasing; increasing

Inferior good

demand decreases when income increases

Normal good

demand increases when income increases

Which of the following makes monopolistic competition different than perfect competition? Monopolistically competitive firms

differentiate their products

An industry with a large number of relatively small firms producing _____ products in a market with easy entry and exit is _____

differentiated; monopolistically competitive

In a monopolistically competitive market, firms

earn zero economic profits in the long run

Whoever pays tax is also determined by

elasticity

Private goods

excludable and rival

positive externality

external benefit

In comparison to oligopolies, firms in monopolistic competition

face competition from many other firms

In industries characterized by a few firms that dominate the market, product differentiation is MOST likely to occur when firms

have tacit agreements not to engage in price wars

Progressive Tax

if your income/ability to pay is higher, you pay more tax

Demand side failures

impossible to charge consumers what they are willing to pay for the product some can enjoy benefits without paying

Nash Equilibrium

in game theory, the equilibrium that results when all players choose the action that maximizes their payoffs given the actions of other players, ignoring the effect of that action on the payoffs of other players; also known as noncooperative equilibrium.

payoff

in game theory, the reward received by a player

If the long-run market supply curve for a perfectly competitive market is upward sloping, then this industry exhibits _____ costs

increasing

In the short run, fixed cost

is constant

OPEC is a(n) _____ cartel that includes _____ national governments

legal; 17

For a monopolistically competitive firm, marginal cost is _________ in long run equilibrium

less than price

price regulation

limits the price that a monopolist is allowed to charge

The period of time when a firm is able to change all of inputs, or factors of production, is called the:

long run

Normative economics

makes prescriptions about the way the economy should work

A monopolistic competitor wishing to maximize profit will select a quantity where

marginal revenue equals marginal cost

The profit-maximizing rule, MC = MR, is followed by firms operating in

monopolistic competition, monopoly, and perfect competition

Firms can earn positive economic profit in the long run

monopoly

there are significant barriers to entry

monopoly

Nonrival good

more than one person can consume the same unit of the good at the same time

common resources

non-excludable but rival

Jennifer's Sunglass Hut operates in a perfectly competitive industry and has standard cost curves. The variable costs at Jennifer's Sunglass Hut decrease, so all the cost curves (except fixed cost) shift downward. The demand for Jennifer's sunglasses does not change, nor does the firm shut down. To maximize profits after the variable cost decrease, Jennifer's Sunglass Hut will _____ its price and _____ its level of production.

not change; increase

duopolist

one of the two firms in a duopoly

The effect of product differentiation is to

reduce the intensity of competition among firms in an oligopoly

Economic Profit

revenue - explicit costs - implicit costs

Accounting profit

revenue-explicit cost

Super Snacking Services is a typical monopolistically competitive firm. Initially, the market is in long-run equilibrium, and then there is an increase in the market demand for snacks. In the short run, the price of snacks will _____, and the market output of snacks will _____

rise; rise

Income tax

tax on earnings

product differentiation

the attempt by firms to convince buyers that their products are different from those of other firms in the industry. If firms can so convince buyers, they can charge a higher price.

positive econmics

the branch of economic analysis that describes the way the economy actually works

public ownership

the case in which goods are supplied by the government or by a firm owned by the government to protect the interests of the consumer in response to natural monopoly

marginal revenue

the change in total revenue generated by an additional unit of output

Rival good

the same unit of the good cannot be consumed by more than one person at the same time

Specialization

the situation in which each person specializes in the task that he or she is good at performing, leads to good trade

game theory

the study of behavior in situations of interdependence. Used to explain the behavior of an oligopoly.

Total surplus

the sum of the producer and consumer surpluses

Utility function

the total utility generated by his or hers consumption bundle

Tacit collusion is relatively easy for oligopolists if

there are only a few firms in the industry

Ability to pay principle

those with greater ability to pay a tax should pay more tax

Optimal Consumption Bundle

- The bundle that maximizes a consumer's total utility given their budget constraint - MUx .MUy ---------- = ---------- Pu .Py

Just Some info about taxes

- They distort incentives of the market - Are essential for governments to function(generates revenue) - Have to be broad -Correct Market imperfection -CREATE DWL -Increasing tax rate does not necessarily increase revenue -Efficiency vs. Equity as in insulin vs. salt

Total cost and marginal cost

- They do not always move in the same direction - Total cost = the full cost Marginal cost = the additional cost incurred by producing one more unit of that good or service

Sandy owns a firm with annual revenues of $1,000,000. Wages, rent, and other costs are $900,000. Suppose that instead of being an entrepreneur Sandy could get a job with an annual salary of $250,000. Assume that a job would be as satisfying to Sandy as being an entrepreneur. Calculate Sandy's economic profit.

-$150,000

Opportunity cost

whatever must be given up to obtain some item

Statutory incidence

who legally pays the tax

tax incidence

who pays the tax

For firms in perfectly competitive markets, long‑run economic profits are ____ because firms will _____ the market if profits are negative and _____ the market if profits are positive

zero; enter; exit

Two identical firms compose the surfboard industry. The market demand curve is Q = 5,000 - 4P, where Q is quantity demanded, and P is price per unit. Marginal cost is constant at $650, and fixed cost is zero

180,000

Which of the statements is true regarding advertising?

Advertising is only potentially effective if a firm has some market power

A society allocates its scarce resources to various jobs. These scarce resources include

All of the above(land, machinery, people)

Fixed input

An input whose quantity is fixed for a period and cannot be varied Ex. Land/Machinery

Variable Output

An input whose quantity the firm can vary at any time Ex. Labor, Energy, Fuel

loss aversion

An oversensitivity to loss that leads to unwillingness to recognize a loss and move on

Quota

An upper limit, set by the government, on the quantity of some good that can be bought or sold

Anything that interrupts market equilibrium prices creates

DWL

DWL/Elasticity Relationship

DWL is larger when demand is elastic, DWL is smaller when demand is inelastic

Regressive tax

Everyone pays a certain percentage of their income

Coors is a widely recognized brand name. During the World Series each year, this beer company has many of the most successful ads. Which statement is TRUE about advertising for Coors?

It is designed to increase the demand for Coors

Theory of Comparative Advantage

It makes sense to produce the things you're especially good at producing, and buy everything else from others.

Calculating HHI

It's the sum of the squares of each firm's share of market sales.

he price is higher than in other market structures

Monopoly

In the short run, a perfectly competitive firm produces output and earns ZERO economic profit if

P = ATC

In monopolistic competition, long-run equilibrium is characterized by

P > MR

Economy's potential

The total amount of goods and services it can produce

Utility

The value of satisfaction from consumption

Util

a unit of utility

Suppose the GoLogos logo monopoly is broken up. and the logo industry becomes perfectly competitive. We would expect _____ surplus to increase and _____ surplus to decrease after the breakup

consumer and total; producer

collusion

cooperation among producers to limit production and raise prices so as to raise on another's profits

Giffen good

demand increases when price increases

Increasing marginal cost

each additional unit costs more to produce than the previous one

Constant marginal cost

each additional unit costs the same to produce as the previous Ex. AT&T

The demand for air travel in the tourism industry tends to be relatively ______. Thus, small _____ in air fares will result in relatively _____ in air travel

elastic; reductions; large increases

artificially scarce goods

excludable but not rival

If a firm is producing a quantity where marginal revenue exceeds marginal costs, the firm should ____ existing levels of production in order to ____.

expand ; increase profitability

externalities

external benefits and external costs

negative externality

external costs

For a firm producing at a quantity of output below the profit-maximizing quantity of output, an increase in output adds

more to total revenue than to total cost

Generally, when preferences for a good rise, demand for the good rises. If a perfectly competitive market starts in long-run equilibrium, holding all else constant, this will result in a higher market price, which will lead to _____ in the industry and _____ the market. This causes price to _____.

positive economic profits; attracts new firms into; fall

barrier to entry

something that prevents other firms from entering an industry. crucial in protecting the profits of a monopolist. there are five types of barriers to entry: control over scarce resources or inputs, increasing returns to scale, technological superiority, network externalities, and government-created barriers

Perfectly competitive industries are characterized by

standardized goods

Types of Product Differentiation

style/type, location, quality

When firms in a particular industry informally agree to charge the same price as the largest firm in that industry, it is called

tacit collusion

Efficient

taking all opportunities to make some people better off without making other people worse off

market power

the ability of a firm to raise prices

Absolute advantage

the ability to produce a good using fewer inputs than another producer

Marginal benefit

the additional benefit derived from producing one more unit of that good or service

Marginal Cost

the additional cost incurred by producing one more unit of that good or service

Marginal Utility

the change in utility from consuming an additional unit

The Wedge, or Quota, rent

the difference between the demand price and the supply price at the quota limit. Equal to the market price of the license when the license is traded.

Which of the markets is the best example of monopolistic competition?

the fast food industry

When a monopolistically competitive firm earns zero economic profits, it produces at an output at which the average total cost curve is tangent to its demand curve. At this output

the firm is maximizing profits, and marginal cost must equal marginal revenue

market share

the fraction of the total industry output accounted for by producer's output

Economic growth

the increase in living standards over time

network externality

the increase in the value of a good or service to an individual is greater when a large number of others own or use the same good or service

Implicit cost of capital

the opportunity cost of the use of one's own capital - the income earned if the capital had been employed in its next best alternative use ie. investing/saving instead of spending

perfect price discrimination

the price discrimination that results when a monopolist charges each consumer the maximum that the consumer is willing to pay

price-taking firm's optimal output rule

the principle that a price-taking firm's profit is maximized by producing the quantity of output at which the market price is equal to the marginal cost of the last unit produced

optimal output rule

the principle that profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost

Law of diminishing returns

the principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline

Law of demand

the quantity demanded of a good falls when the price of the good rises

law of supply

the quantity supplied of a good rises when the price of the good rises

In the short run, perfectly (or purely) competitive firms will maximize their profit by producing which of the choices? Select all that apply

the quantity where marginal revenue = marginal cost | the quantity where price equals marginal cost

What does the total product curve show?

The quantity of output depending on the quantity of the variable input for a given quantity of the fixed input

Marginal Comparison

The right marginal decision that sets the marginal utility per dollar equal for each good

Does a Facebook account generate network externalities?

Yes

Since Boeing already serves a large fraction of the jumbo jet market and is able to produce at a lower average cost than any potential competitors, is there a barrier to entry?

Yes

price war

a collapse of prices when tacit collusion breaks down

price-taking consumer

a consumer whose actions have no effect on the market price of the good or service that consumer buys

Implicit cost

a cost that does not require an outlay of money; measured by what's lost

Explicit Cost

a cost that involves spending money

PPF (Production Possibilities Frontier)

a curve that shows the maximum quantity of one good that can be produced for each possible quantity of another good produced

James is one of two producers of doodads in the city of Hooville. Because the industry consists of two firms, he is operating in

a duopoly

oligopolist

a firm in an industry with only a small number of producers

Monopolist

a firm that is the only producer of a good that has no close substitutes

monopolistic competition

a market structure in which there are many competing producers in an industry, each producer sells a differentiated product, and there is free entry and exit into and from the industry in the long run.

Price ceiling

a maximum price sellers are allowed to charge, usually set below equilibrium

Price floor

a minimum price buyers are required to pay for a good or service, usually set above equilibrium

What is a natural monopoly?

a monopoly that results when one firm is able to produce at a lower cost than multiple firms, giving large firms with higher levels of output an advantage over smaller competitors

A market in which there is one buyer is

a monopsony

price leadership

a pattern of behavior in which one firm sets its price and other firms int he industry follow

Price-taking producer

a producer whose actions have no effect on the market price of the good or service it sells

T/F: Advertising can play a role as an indirect signal of product quality to customers

true

Demand shifters

Changes in... prices of related goods or services, income, tastes, expectations, number of consumers

Classify the assumptions according to whether or not each item is an assumption made under perfect competition (also known as pure competition or competitive industry

Assumed in perfect competition: price-taking behavior Not assumed in perfect competition: A small number of producers, significant barriers to entry, firms selling a similar but differentiated good

A group of sellers who agree to restrict their collective output in order to drive up prices above marginal costs is a

Cartel

Utility maximization

Choosing the affordable bundle of goods and services that returns the highest utility

In which situation does overt collusion occur

Coke and Pepsi openly agree on production and price in an effort to achieve monopoly profits

Decreasing marginal cost

Each additional unit costs less to produce than the previous one

Diminishing marginal utility

Each additional unit of a good adds less utility than the previous

Two sides of taxation

Efficiency: too high/too many taxes which limit economic growth Equity: people who earn more should pay more for total good

T/F: A monopolistic competitor, much like a firm in perfect competition, sells its product at a pointwhere the price is equal to the marginal cost

False

T/F: Firms do not have an incentive to price discriminate because it results in some groups paying a lower price than others

False

T/F: In the long run, monopolistic competitors make a similar amount of profit to monopolists, since, in both cases, the firm's demand curves are downward sloping, and at the profit maximizing point, the marginal cost is equal to the marginal revenue

False

T/F: Monopolies produce differentiated products.

False

T/F: Monopolistic competition is a market structure that consists of a small number of producers.

False

T/F: Perfect (pure) competition is characterized by product differentiation.

False

What are antitrust laws?

Laws meant to eliminate collusion and promote competition among firms

Nikos' lawn-mowing service is a profit-maximizing, competitive firm. If Nikos mows ten lawns per day at a price of $27 per lawn and has a total cost of $280, of which $30 is a fixed cost, what should Nikos do in the long run?

Leave the industry, since he is not covering his fixed costs

Optimal Point

MC = MB

A monopolist with a linear demand curve will not produce on the inelastic portion of the demand curve, since in that range

MR<0

Which firm is most likely to be a natural monopoly?

Municipal Power Light, the local supplier of electricity

Which of the following advertisements is LEAST economically useful?

NFL player Aaron Rodgers is shown throwing a football in a Crest toothpaste commercial

In the classic Prisoners' Dilemma featuring two accomplices in crime, the equilibrium of the game is for both accomplices to confess. In game theory, this is what would be called a

Nash equilibrium

Do plastic grocery bags generate network externalities?

No

Does steel production, which results in air pollution generate network externalities?

No

Tinseltown Theaters shows almost all the most popular newly-released movies, is there a barrier to entry?

No

Supply side failures

Occurs when a firm does not pay the full cost of producing its output External costs of producing the good are not reflected in supply

Benefits Principle

Those who benefit from public spending should bear the burden of the tax that pays for that spending

Interdependence

a relationship among firms in which their decisions significantly affect one another's profits; characteristic of oligopolies

An increase in price and an ambiguous change in quantity are most likely caused by:

a shift to the left of the supply curve and a shift to the right of the demand curve

tit for tat

a strategy that involves playing cooperatively at first, then doing whatever the other player did in the previous period

Excise Tax

a tax on the production or sale of a good

Different consumption bundles have different utilities

We all assign numbers/utils to different things and have preferences

Economic Incidence

Who actually pays the tax - who has a lower surplus

Which scenario is an example of an industry in monopolistic competition?

Within walking distance from your home, there are a plethora of fast-food restaurants including Koala Express,Cabo Bob's Burritos, Oodles of Noodles, and Hanz's Hearty Hamburgers

The price of good X falls and the demand for good Y decreases. We can conclude that:

X and Y are substitutes

Does Pfizer, the only firm that is legally allowed to produce and sell Lipitor, a best-selling cholesterol drug, have a barrier to entry?

YEs

Since DeBeers owns nearly all of the world's diamond mines, is there a barrier to entry?

YEs

Do operating systems generate network externalities?

Yes

The demand curve for a monopoly is

above the marginal revenue curve

An efficient quantity is produced

perfect competition

firms have no market in

perfect competition

The concept of elasticity applies to:

both supply and demand

Florists in the town of Minerva, Illinois, operate in a monopolistically competitive market. The price in long-run equilibrium for a flower shop is _____, and output is _____, than would be the case for a perfectly competitive firm with an identical production function and cost curves

higher; lower

An example of a monopolistically competitive industry is the _____ industry

perfume

Alexandra notices that if the marginal utility of working with a tutor seems to fall with each hour the tutor helps her study. If Alexandra keeps the tutor until her grade actually begins to fall, her marginal utility for the last hour of tutoring will be

negative

For the Texas beef industry to be considered perfectly competitive, ranchers in Texas must have _____ on prices, and beef must be a _____ product

no noticeable effect; standardized

Public goods

non-excludable and non-rival

standardized product

output of different producers regarded by consumers as the same good; also referred to as a commodity

commodity

output of different producers regarded by consumers as the same good; also referred to as a standardized product

Monopolies and monopolistically competitive firms differ in that monopolies

participate in markets where barriers to entry are present

A(n) ______ gives an inventor a temporary monopoly on the use or sale of an invention

patent

Excludable good

people who don't pay can be easily prevented from using a good

Nonexcludable good

people who don't pay cannot be easily prevented from using the good

The MAIN reason a monopoly engages in price discrimination is

to increase its profits

In perfect competition

total revenue is found by multiplying the market price by the firm's quantity of output