Microeconomics Study Plan CH 13
The entry of new firms cause the demand curve of an existing firm in a monopolistically competitive market to shift to the left because ______ and become more elastic since ______.
each will have a smaller share of the existing market; consumers will have additional choices
Which type of efficiency does a monopolistically competitive firm achieve in the long run?
neither allocative nor productive efficiency
Is it possible for marginal revenue for a firm operating in a perfectly competitive industry to be negative?
no
What effect does the entry of new firms have on the economic profits of existing firms? When new firms enter a monopolistically competitive market, the economic profits of existing firms
will decrease because their demand curves will shift to the left.
Is zero economic profit inevitable in the long run for a monopolistically competitive firm?
No, a firm could try to continue making a profit in the long run by reducing production costs and improving its products.
At the profit-maximizing level of output, how much economic profit is this firm earning?
Zero, because at the profit-maximizing output level, the price equals average total cost.
A monopolistically competitive firm has excess capacity in the sense that if it increased output beyond the quantity associated with profit maximization, it could produce at a lower _____________ cost.
Average
Stephen runs a pet salon. He is currently grooming 100 dogs per week. If instead of grooming 100 dogs, he grooms 101 dogs, he will add $69.69 to his costs and $66.04 to his revenues. What will be the effect on his profits of grooming 101 dogs instead of 100 dogs?
Stephen's profits will change by $-3.65
Which of the following statements is true?
The firm is not allocatively efficient because the profit-maximizing price exceeds marginal cost.
Which of the following statements is true?
The firm is not productively efficient because the profit-maximizing price is not at the minimum of average total cost
Consider the graph to the right. Is it possible to say whether this firm is a perfectly competitive firm or a monopolistically competitive firm?
Yes. This is a monopolistically competitive firm because its demand curve is downward sloping. The graph shows a short-run equilibrium because the firm is making positive economic profits. What quantity on the graph represents long-run equilibrium if the firm were perfectly competitive? 6 burritos per week.
Suppose Angelica opens a small store near campus, selling beef brisket sandwiches. Use the graph to the right, which shows the demand and cost for Angelica's beef brisket sandwiches, to answer the questions that follow.
a. If Angelica wants to maximize profits, she should sell 55 beef brisket sandwiches per day and charge $4.50 b. At the above price and quantity she is making an economic profit (or loss) of $−55. What is Angelica likely to do in the long run? Exit the industry
A monopolistically competitive firm is not productively efficient because it produces a level of output where
average total cost is not at a minimum.
What are the key factors that determine the profitability of a firm in a monopolistically competitive market? Monopolistically competitive firms will be profitable to the extent that they
differentiate their product and produce at lower average cost than competitors.
Chipotle Mexican Grill restaurants have been a very popular "fast-casual" dining optionlong dash—with better food choices than fast-food restaurants like McDonald's, and faster service and lower prices than traditional restaurants. Chipotle's profit per restaurant is much greater than McDonald's. Looking forward to ten years from now, you would expect Chipotle's economic profit per restaurant to be
lower because more firms will imitate Chipotle.
When a firm advertises a product, it is trying to shift the demand curve for the product to the ________ and make it more ________.
right; inelastic
As new firms enter the market, a monopolistically competitive firm can maintain profits by
A and C only
With a downward-sloping demand curve, marginal revenue is below price
because the firm must lower its price to sell additional units.
How might a monopolistically competitive firm continually earn economic profit greater than zero? To earn economic profit greater than zero, a monopolistically competitive firm must
differentiate its product and produce at lower average cost than competitors.
Which of the following terms is missing in the box on the right?
Profitablility
Some companies have done a poor job at protecting the images of their products LOADING... . For example, Hormel's Spam brand name is widely ridiculed and is associated with annoying commercial messages received via e-mail. You might have heard of other cases where companies have failed to protect their brand names. What can firms do in such cases?
All of the above are possible.
7-Eleven, Inc., operates more than 20,000 convenience stores worldwide. Edward Moneypenny, 7-Eleven's chief financial officer, was asked to name the biggest risk the company faced. He replied, "I would say that the biggest risk that 7-Eleven faces, like all retailers, is competition. . . .because that is something that you've got to be aware of in this business." Source: Company Report, "CEO Interview: Edward Moneypennylong dash—7-Eleven Inc.," The Wall Street Transcript Corporation. Which of the following statements is true?
All of these statements are true.
Why are many companies so concerned about brand management? Companies use brand management
to maintain product differentiation and earn economic profits in the short run.
In the figure to the right, consider the marginal revenue of the fifteenthfifteenth unit sold. When the firm cuts the price from $8.00 to $ 7.80$ to sell the fifteenthfifteenth unit, the area in the graph denoting the output effect is given by C .
In dollars, this effect is $7.80. When the firm cuts the price from $8.00 to $ 7.80$7.80 to sell the fifteenth unit, the area in the graph denoting the price effect is given by B . In dollars, this effect is $2.80 The marginal revenue of the fifteenth unit is therefore equal to $5
Would a firm selling in a monopolistically competitive market ever produce where marginal revenue is negative?
No because marginal cost cannot be negative.
A monopolistically competitive firm doesn't produce where P = MC like a perfectly competitive firm because
P exceeds MR for a monopolistically competitive firm, and it's MR that must equal MC for profit maximization
If Daniel sells 250 Big Macs at a price of $3.50, and his average cost of producing 250 Big Macs is $3.25 what is his profit?
Profit equals= $62.5
Competition from Amazon and other online booksellers has resulted in some brick-and-mortar bookstores suffering losses. According to an article in the New York Times, over the past 15 years, the number of bookstores in the borough of Manhattan in New York City has declined by 30 percent. Source: Julie Bosman, "Literary City, Bookstore Desert," New York Times, March 25, 2014. As some bookstores exit the market, the demand curve faced by a remaining bookstore will shift to the right . The demand curve may also become less elastic because consumers will have fewer other stores to buy from. After the exit of the competing stores, this store is expected to break even .
Right Less Fewer Breakeven
In 2010, Domino's launched a new advertising campaign admitting that its pizzas had not tasted very good, but claiming that they had developed a new recipe that greatly improved the taste. If Domino's succeeded in convincing consumers that its pizza was significantly better than competing pizzas, would its demand curve become flatter or steeper?When a product becomes moremore differentiated from other products, its demand curve becomes steeper . This happens because the slope of the demand curve reflects buyer responsiveness to a price change, which is determined in part by the availability of substitutes. Thus, when a product becomes moremore differentiated from other products, buyers perceive it as having fewer good substitutes, and this altered perception induces buyers to be less responsive to price.
Steeper Fewer Less
A student remarks: "If firms in a monopolistically competitive industry are earning economic profits, new firms will enter the industry. Eventually, the representative firm will find its demand curve has shifted to the left, until it is just tangent to its average cost curve and it is earning zero profit. Because firms are earning zero profit at that point, some firms will leave the industry, and the representative firm will find its demand curve will shift to the right. In long-run equilibrium, price will be above average total cost by just enough so that each firm is just breaking even." Is the analysis correct or incorrect?
The analysis is incorrect. Firms will not leave the industry when earning zero economic profit. When the firm's demand curve is tangent to its average cost curve it is still earning zero economic profit
A firm that is first to the market with a new product frequently discovers that there are design flaws or problems with the product that were not anticipated. For example, the ballpoint pens made by the Reynolds International Pen Company often leaked. What effect do these problems have on the innovating firm, and how do these unexpected problems open up possibilities for other firms to enter the market?
The design flaw will harm the firm's reputation, which will be costly to restore. This will create opportunities for competitors to enter the market with a better product. Often the first firm to market is not the most successful over the long term.
An increase in the price of cappuccino will increase the quantity of cappuccinos demanded
True
William Germano previously served as the vice president and publishing director at the Routledge publishing company. He once gave the following description of how a publisher might deal with an unexpected increase in the cost of publishing a book: "It's often asked why the publisher can't simply raise the price [if costs increase]... It's likely that the editor [is already]... charging as much as the market will bear. ... In other words, you might be willing to pay $50.00 for a ... book on the Brooklyn Bridge, but if... production costs [increase] by 25 percent, you might think $62.50 is too much to pay, though that would be what the publisher needs to charge. And indeed the publisher may determine that $50.00 is this book's ceilinglong dash—the most you would pay before deciding to rent a movie instead." Source: William Germano, Getting It Published: A Guide to Scholars and Anyone Else Serious about Serious Books, Chicago: University of Chicago Press, 2001, pp. 110-111. According to the graph on the right and what you have learned in this chapter, a monopolistically competitive firm responds to an increase in cost by adjusting the price upward . This model does not fit Germano's description because he assumes what? A. Demand is very, though not perfectly, elastic. B. Demand is unit-elastic. C. Demand is perfectly elastic. Your answer is correct.D. Demand is perfectly inelastic. If a publisher does not raise the price of a book following an increase in its production cost, the result will be A. economic losses. B. a negative economic profit. C. less than maximum profit. Your answer is correct.D. All of the above. The ability of a publishing company to raise book prices when costs increase would be greater, the lower is the elasticity of demand for published books.
Upward Demand is perfectly elastic Less than maximum profit Lower
What is the difference between zero accounting profit and zero economic profit?
Zero economic profit includes a firm's opportunity costsopportunity costs but zero accounting profit does not.
Michael Korda for many years was editor-in-chief at the Simon & Schuster book publishing company. He has described the many books that have become bestsellers by promising to give readers financial advice that will make them wealthy, by, for example, buying and selling real estate. Korda is very skeptical about how useful the advice in these books is: "I have yet to meet anybody who got rich by buying a book, though quite a few people got rich by writing one." Source: Michael Korda, Making the List: A Cultural History of the American Bestseller, 1900-1999, New York: Barnes & Noble Books, 2001, p. 168.
a. On the basis of the analysis in this chapter, which of the following statements is true? All of the above b. Refer to the figure to the right. Note that P and Q are the profit-maximizing price and quantity. This firm was first in the market. It is currently earning what? An economic profit c. Refer to the figure to the right. What will happen if there is entry into the market? Demand curve will shift to the left
With a downward-sloping demand curve, average revenue is equal to price
actually, average revenue is always equal to price, whether demand is downward sloping or not.
Define marketing. Is marketing just another name for advertising? Marketing is
all the activities necessary for a firm to sell a product including advertising, product design, and product distribution.
What term describes the actions of a firm intended to maintain the differentiation of a product over time?
brand management
Ben and Jerry are managers at the company, and they have this discussion: Ben: We should produce 4,000 lamps per month because that will minimize our average costs. Jerry: But shouldn't we maximize profits rather than minimize costs? To maximize profits, don't we need to take demand into account? Ben: Don't worry. By minimizing average costs, we will be maximizing profits. Demand will determine how high the price we can charge will be, but it won't affect our profit-maximizing quantity. Evaluate the discussion between the two managers Ben's assertion that the firm should produce the quantity of lamps where average costs are minimized is
incorrect because profits are instead maximized at the quantity where marginal cost equals marginal revenue, which may be different since marginal revenue depends on consumer demand
Does the fact that monopolistically competitive markets are not allocatively or productively efficient mean that there is a significant loss in economic well-being to society in these markets? Though monopolistically competitive markets are not allocatively or productively efficient, consumers benefit in that
they are able to purchase a differentiated product that more closely suits their tastes
