Second Midterm Exam Econ
(Table: The Utility of Pecan Rolls) Look at the table The Utility of Pecan Rolls. The marginal utility for the second roll is:
15 (35-20); MU begins to diminish at the second roll
(Figure: Short-Run Costs) Look at the figure Short-Run Costs. C is the _____ cost curve.
Shutdown point - where MC crosses AVC Zero-profit point - MC crosses AC Average Total Cost (ATC) is the total cost per unit of output. Average Fixed Cost (AFC) is the total fixed cost per unit of output. Average Variable Cost (AVC) is the total variable cost per unit of output. Marginal Cost (MC) is the cost added by producing one additional unit of a product.
The marginal revenue curve for a monopolist _________ the market demand curve.
always lies beneath
How are the company's fixed costs represented in this graph?
as the point where the total cost curve touches the vertical axis
If a monopolistically competitive firm or a monopolist increases their prices, then
decline in quantity demanded will be larger for the monopolistic competitor. (will lose fewer customers than perfect comp. but more customers than a monopoly)
The term ___________________ is used to describe the common pattern whereby each marginal unit of a consumed good provides less of an addition to utility than the previous unit.
diminishing marginal utility
If prices fall below average variable cost some firms in this industry will ___________ causing prices to ___________.
exit, increase
If price equals marginal cost and average cost, then _________.
firm breaks even
The step-by-step process of finding the choice with highest total utility involves a comparison of the:
marginal utility gained and lost from different choices along the budget constraint.
In a perfectly competitive market in long-run equilibrium, a decrease in demand creates economic ________ in the short run and _________________ in the long run.
losses, forces some firms to exit
When a natural monopoly exists in a given industry, the per-unit costs of production will be
lowest when a single firm generates entire output of industry natural monopoly occurs when Qd is less than min quantity it takes to the at bottom of LRAC
Variable inputs refer to __________ that can easily be increase or decreased in a __________ period.
inputs; (that increase or decrease with production) Fixed input: unchangeable, physical capital such as rent; unaffected by production
A firms supply curve is equal to _________________ above the minimum point on the ________________curve.
marginal cost; average variable cost
In situations in which there are substantial economies of scale, the ___________ of adding an additional customer is very _________ once the fixed costs of the overall system are in place.
marginal cost; low
The term ____ refers to the additional utility provided by one additional unit of consumption
marginal utility
Average profit/profit margin
profit divided by Qproduced; average revenue minus average cost
product differentiation
packaging and materials locations where product is sold intangible aspects (ex. service guarantees) advertising and branding product design
factors of production
natural resources (land & raw materials), labor (human effort), technology (process of production), entrepreneurship (creator's ideas), capital (machinery, equip, buildings)
collusion
secret/informal agreement or cooperation between firms to reduce output and keep prices high
Which of the following will present the least amount of concern to a firm that has a monopoly over a particular industry?
the competitive actions of other business firms
If a firm's revenues do not cover its average variable costs, then that firm has reached its _______ .
shutdown point (MC crosses AVC); firms still pay fixed costs until they exit)
What effect is at play when faced with a change in price of a good, a consumer has an incentive to consume less of the good with a higher price and more of the good with a lower price?
substitution effect
Which of the following accurately explains why firms in perfectly competitive markets are price takers?
the pressure of competition forces all firms to accept the prevailing equilibrium price in the market.
If the firm is producing at a quantity of output where marginal revenue exceeds marginal cost, then,
the firm should continue expanding production
Which of the following denotes the typical shape of the monopolist's total cost curve?
total costs rise and grow steeper as output rises Total revenue curve will start low, rise, then decline
profit
total revenue - total cost revenue (income a firm generates from selling its products [price*quantity sold]
The typical pattern revealed in a budget constraint model shows that as the quantity consumed rises,
total utility rises, but MU falls
A firm sells peanuts in a perfectly competitive market. Upon increasing production output from 60 packages to 75 packages, the total revenue increased from $300 to $375. What was the marginal revenue of this increase in production?
$5 (375-300)/(75-60)
barriers to entry in oligopoly
Economies of scale & market demand, ownership of a key input, and government imposed barriers (ex. patents), minimum size before they have enough to spend on advertising and marketing
In perfect competition, the firm produces the output such that _____, and in monopoly, the firm produces the output such that _____.
P = MR = MC; P > MR = MC
The demand curve facing a monopolist is:
downward-sloping, like the industry demand curve in perfect competition.
When __________________ exist, doubling of all inputs will result in more than doubling output, which means __________________________________________.
economies of scale; a larger factory can produce at a lower average cost than a smaller company.
A monopolistically competitive industry does not display ____________ in either the short-run, when firms are making ____________, nor in the long-run, when firms are earning ____________.
productive and allocative efficiency; profits and losses; zero profits
allocative efficiency
when the mix of goods being produced represents the mix that society most desires
If Veronica is producing where she is facing diminishing marginal returns, then the marginal costs will be:
increasing
Duopoly
an oligopoly consisting of only two firms - result of a prisoner's dilemma is: the two firms may well end up in a situation where they each end up with lower profits
total utility =
sum of marginal utilities
In a perfectly competitive industry the market is in long-run equilibrium, when:
P=MR=MC=AC
productive efficiency
a situation in which a good or service is produced at the lowest possible cost (point on PPF)
In order for a firm producing and selling kitchen tables to be operating at allocative efficiency, when price equals $800, marginal cost must equal _____.
$800 (P=MC)
Kim has $22 per week in her entertainment budget. She splits her time between going to the movies and yoga classes. Each movie costs $10 while each yoga class costs $6. The total utility from each of these activities is set out in the table below. What is Kim's total utility maximizing point?
1 movie, 2 yoga classes
_____________________ help to explain why every economy, as it develops, has an increasing proportion of its population living in urban areas.
Agglomeration factors
Look at the figure Budget Lines for Tea and Scones. For months now, Agnes has had $20 per month to spend on tea and scones. The price of each cup of tea and each scone has been $1. Which of the charts shows what will happen to her budget line if the price of a cup of tea falls to $0.50?
D (rightwards arrow, # of tea increases from 20 to 40 on y axis; # of scones remains the same on x axis)
Which of the following is true about firms exiting a perfectly competitive market?
Exiting the market occurs in response to a sustained pattern of losses.
Monopoly
If a firm produces a product without close substitutes, then we can consider the firm a monopoly producer in a single market. - Price decision constrained only by market demand
In a perfectly competitive market, a profit maximizing company will produce an output level where the market price equals to its
Marginal costs (MR = MC)
What is the comparison between the elasticity of demand for a monopolist and the elasticity of demand for a monopolistic competitor?
Monopolists face a more inelastic elasticity of demand than monopolistic competitors.
income effect
The idea that a higher price means the buying power of income has been reduced.
Suppose that a member firm in an oligopoly cartel faces a kinked demand curve. What will happen if the firm decides to raise its price?
The other oligopolists will not raise their prices. Kinked Demand Curve: competing oligopoly firms commit to price cuts but not price increases
utility maximizing rule
The price ratio and marginal utilities ratio of two goods are equal
Cartel
a formal organization of producers that agree to coordinate prices and production
monopolistic competition
a market structure in which many companies sell products that are similar but not identical - large # of firms in the industry - certain level of customer loyalty through branding and advertising
imperfect competition
a market type which falls between the extremes of monopoly and perfect competition; firms have more influence over the price they charge than perfectly competitive firms, but not as much as a monopoly would
Prisoner's Dilemma
a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial - Dominant strategy - both prisoners confess to the crime
If monopolists are able to produce fewer goods and sell them at a higher price than they could under perfect competition, the result will be
abnormally high profits; why monopoly is inefficient
An entrepreneur decided to leave a job that pays $50,000 a year to start a business. These lost wages would be considered ______________ .
an implicit cost
In the case of Snack Corp, when the price they sell their product at is _______ average cost of production, profits are ______ due to ________ average profit.
below; negative; negative
(Figure: Long-Run and Short-Run Average Cost Curves) Look at the figure Long-Run and Short-Run Average Cost Curves. If a firm is producing at point C on the ATC2 but anticipates increasing output to 225,000 units in the long run, the firm will build a _____ plant and have _____ of scale.
bigger; diseconomies
If a perfectly competitive firm is producing a quantity where P < MC, then profit:
can be increased by decreasing production.
Which of the following could be considered barriers to entry that would prevent potential competitors from entering a monopoly market?
control of a critical scarce physical resource
A firm was producing 20,000 units of output at the total cost of $40,000. It now produces 30,000 units and the corresponding total cost is $50,000. This firm is experiencing ____________________.
economies of scale
Which of the following is a not characteristic of a perfectly competitive market? Select all that apply.
firms produce similar, but not identical products. (in perfectly competitive markets: - sellers and buyers have all relevant information to make rational decisions about the product. - firms can enter and exit market w/o restrictions - many buyers and sellers - many firms make identical products
total cost
fixed costs plus variable costs
The Law of Diminishing Marginal Product says that in the short-run, the marginal product __________ at first, but sooner or later additional workers will have a __________ marginal product.
increasing; decreasing effect on
A perfectly competitive firm perceives demand to be a horizontal line because _______.
it can choose to sell any quantity at the given price
If a monopolist increases quantity by one unit, but sells the increased output at a slightly lower price,
marginal revenue is affected by adding one additional unit sold at the new price.
A decrease in consumer preference for a product, other things being equal, will cause:
market demand to shift to the left (left is lesser/decrease; right is more/increase)
Suppose you earn $50 working at the ice cream shop for 5 hours. On your way home, you find $50 next to a garbage can. You are excited for the extra money and decide to spend it on new shoes as soon as you can, whereas you are saving your paychecks to pay off your credit card debt. This scenario of viewing money differently is an example of ________________________.
mental accounting
At the current level of output, Becca Furniture's marginal cost curve is above the average total cost curve. This means Becca Furniture's average total cost curve:
must be rising (if MC curve is below ATC, the ATC must be falling; if MC = AV curve then break-even point is reached)
In a perfectly competitive market when economic profit, that firms are experiencing, is greater than zero?
new firms may enter the industry, firms may move along their LRAC curves to new outputs, existing firms may expand their operations, there may be pressure on the market price to fall
Productive efficiency occurs when
price equals minimum of the long-run average cost curve. (average cost is minimized)
In perfect competition, a firm's short-run profits are zero when:
price intersects marginal cost at a level equal to the average cost
In a monopolistically competitive market, the rule for maximizing profit is to set MR = MC, which means
price is higher than marginal revenue P>MR=MC
A monopolistic company has the ability to maximize its profits by
producing output where MR = MC and charging a price along the demand curve.
Monopolistic competitors can make a ____________ in the short-run, but in the long run, ____________ will drive these firms toward ____________.
profit or loss; entry and exit; a zero-profit outcome (Profit = more firms enter; pushing market price down) (Loss = more firms exit, bringing market price up)
According to the substitution effect, a decrease in the price of a product leads to an increase in the quantity of the product demanded because buyers:
purchase more of the now less expensive good.
Highest total utility is located where:
the MU/$ is the same for both goods
Refer to the diagram above. Based on the information illustrated in the graph, which of the following is correct?
the transition point between where MC is pulling down and pulling up AC always occurs at the minimum point of the AC curve
behavioral economics
the study of situations in which people make choices that do not appear to be economically rational
Monopolistically competitive firms are not productively efficient because
they produce below the quantity level at which average total cost is minimum. (do not display productive & allocative efficiency)
If monopolistically competitive firms face conditions, where there are free entry and exit similar to perfectly competitive firms, then
they will be unable to earn higher-than-normal profits in the long run
Where diseconomies of scale are present, the long run average cost curve will be
upward sloping
The marginal cost curve is generally ______________, because diminishing marginal returns implies that additional units are ________________________.
upward-sloping; more costly to produce
