BA 315 Midterm 2

Sunk cost

- a cost that cannot be changed or recovered, it has happened in th past - it represents what happens in the past and should be ignored in making economic decision moving forward - it is always a FC - a FC doesn't need to be a sunk cost e.g: past rents are sunk costs; future rents are not; they are fixed

Perfect Competition Characteristics

- many firms - produces efficient level of output (since P= MC) - cannot earn long-run (+) economic profits - has no market power (is a price taker) - free entry and exit - very similar goods, can't distinguish one seller's product from another - e.gs: oranges, strawbetries, milk

monopoly characteristics

- one firm - produce less than the efficient level of output (since P>MC) - may earn long-run economic profits - has significant market power (price maker) e.gs: DeBeers Diamonds

Suppose that at the current level of production, the price of a monopolist's product is equal to $37.50 per unit. Marginal revenue is equal to $15 per unit, and marginal cost is equal to $10 per unit. This monopoly Choose one: A. can increase its profit by producing and selling more units of its product. B. can increase its profit by producing and selling fewer units of its product. C. has maximized profit and should keep production the same. D. should set price equal to marginal revenue.

A. can increase its profit by producing and selling more units of its product.

Firms producing an identical product in a competitive market are producing at an output level that maximizes profit. The current market price is $4.50 per unit, and the firms are producing at a long-run average cost of $4.00 per unit. Over the long run, one should expect Choose one: A. entry of new firms into this market. B. exit of firms from this market. C. no change in the number of firms in this market. D. More information is needed to answer this question.

A. entry of new firms into this market.

"A firm will make a profit when the price it charges exceeds the average total cost of production at the chosen output level." A. true B. false

A. true

"If economic profits are negative, firms will exit the industry in the long run." A. true B. false

A. true

"The marginal cost curve intersects the average variable cost curve and average total cost curve at the minimum of the AVC and ATC curves." A. true B. false

A. true

Which statements are true regarding economies of scale? Choose one or more: A.A firm that has economies of scale sees its average total costs decrease when production increases. B.To maximize profits, a monopoly that occurs because of economies of scale should produce an output so that marginal revenue equals marginal costs. C.Economies of scale typically cause an industry to be perfectly competitive. D.When a firm has a natural monopoly, it has that type of monopoly because of economies of scale.

A.A firm that has economies of scale sees its average total costs decrease when production increases. B.To maximize profits, a monopoly that occurs because of economies of scale should produce an output so that marginal revenue equals marginal costs. D.When a firm has a natural monopoly, it has that type of monopoly because of economies of scale.

Which of these statements regarding the differences between monopoly and a competitive market are true? Choose one or more: A.A monopolist can earn profits in the long run, but a firm in a perfectly competitive market cannot. B.A monopoly is a price maker, while a competitive firm is a price taker. C.There are more firms in a competitive market than in a monopoly. D.A monopolist will produce less than the output produced in a perfectly competitive market.

A.A monopolist can earn profits in the long run, but a firm in a perfectly competitive market cannot. B.A monopoly is a price maker, while a competitive firm is a price taker. C.There are more firms in a competitive market than in a monopoly. D.A monopolist will produce less than the output produced in a perfectly competitive market.

Suppose that Joey's Hot Dog Stand opens up outside of a baseball stadium. Given that many other small competitors sell hot dogs, this is a perfectly competitive market. What can we say about Joey's Hot Dog Stand?Choose one or more: A.Joey's Hot Dog Stand faces a horizontal demand curve. B.Because this is a perfectly competitive market, Joey's Hot Dog Stand has no control over the price. C.Joey's Hot Dog Stand is a price taker. D.Joey's Hot Dog Stand should expect to earn zero profits in the long run.

A.Joey's Hot Dog Stand faces a horizontal demand curve. B.Because this is a perfectly competitive market, Joey's Hot Dog Stand has no control over the price. C.Joey's Hot Dog Stand is a price taker. D.Joey's Hot Dog Stand should expect to earn zero profits in the long run.

In the LR, a firm in a perfectly competitive market earns (more than one can apply) A. positive accounting profits B. zero accounting profits C. positive economic profits D. zero economic profits

B. zero accounting profits D. zero economic profits

In the short run, profits when a competitive firm shuts down are -$8200, and they are -$300 when the firm continues to produce. This firm will minimize losses in the short run by Choose one: A. either shutting down or continuing to produce. B. shutting down. C. continuing to produce. What is the firm's fixed costs?

C. continuing to produce FC= 8200 *** shutting down eliminates only variable costs

Consider a competitive market for a consumer product. Suppose a tax levied on consumers. This tax will _________ the effective market demand. As a result, the market equilibrium will __________ in the short run. In response, some firms will ______ this market in the long run.

Consider a competitive market for a consumer product. Suppose a tax levied on consumers. This tax will DECREASE the effective market demand. As a result, the market equilibrium will DECREASE in the short run. In response, some firms will EXIT this market in the long run.

Consider a competitive market for a consumer product. Suppose this product gains a sudden popularity among consumers. How will this sudden popularity affect the profit of an individual firm in this market in the long run? Choose one: A. The profit of an individual firm decreases from zero, and the firm will incur a loss in the long run. B. The profit of an individual firm increases from a smaller positive value to a larger positive value in the long run. C. The profit of an individual firm increases from zero to a positive value in the long run. D. The profit of an individual firm stays at zero in the long run.

D. The profit of an individual firm stays at zero in the long run.

Steve runs a competitive sandwich shop. Right now, he is producing output at a level where MR > MC. To increase his profits, Steve should A. try to use more capital in his production B. try to use more labor in his production C. produce less output D. produce more output

D. produce more output

Lecture 9 Notes: suppose the wage rate that a company pays its workers increases. In terms of the cost equations, which of the following is true? A. TC will increase, but ATC will decrease B. TVC will increase, but AVC will decrease C. The MC curve will become hill-shaped D. the TFC and the AFC will not change.

D. the TFC and the AFC will not change.

At the current level of output the following data exists: P=$20, MC = $6, AVC= $10 ATC= $13, what must be true at this level of output? A. the firm should lower the price B. the firm should stay at the same level of output C. the firm should shut down D. the firm should increase output E. the firm should decrease output

D. the firm should increase output

A competitive firm maximizes profit at an output level of 500 units, market price is $15.00, and ATC is $15.75. At what range of AVC values for an output level of 500 would the firm choose not to shut down in the short run? Choose one: A. AVC > $15 B. ATC > $15.75 C. ATC < $15.75 D. AFC < $15 E. AVC < $15 F. AFC > $15.75

E. AVC < $15

In its simplest form, the long-run market supply curve in a perfectly competitive industry is a(n): Choose one: A. upward-sloping line equal to the marginal cost curve only above the minimum average variable cost (AVC). B. horizontal line at the price where accounting profits equal zero. C. vertical line at the quantity produced by the firm. D. upward-sloping line equal to the marginal cost curve.E. horizontal line at the minimum average total cost (ATC). E. horizontal line at the minimum average total cost (ATC)

E. horizontal line at the minimum average total cost (ATC)

In general, the marginal cost pricing is problematic with a natural monopoly because Choose one: A. the price is too high. B. the quantity is too high. C. economic profit is negative. D. the quantity supplied of the good is greater than the quantity demanded.

c. economic profit is negative

How does the monopolist's decision compare to the efficient price and output? Choose one: A. The monopolist charges less and produces less. B. The monopolist charges more and produces less. C. The monopolist charges more and produces more. D. The monopolist charges less and produces more.

B. The monopolist charges more and produces less.

A firm increases all of its inputs by 10%. As a result, output increases by 25%. This firm experiences _______________. A. diseconomies of scale B. economies of scale C. constant returns to scale

B. economies of scale

Movies, sold online and delivered electronically, have a marginal cost of nearly zero. For instance, people can download movies instantly through many providers. As a result, these products exhibit: A. constant returns to scale. B. economies of scale. C. diseconomies of scale.

B. economies of scale.

"If the marginal cost of producing one more unit is smaller than the marginal revenue of producing that unit, the firm should produce less, because MR is not equal to MC." A. true B. false

B. false

"To maximize profits in the short run, a firm must minimize its costs." A. true B. false

B. false

Converse, a college apparel company, has been fairly successful in its market. Lydia sees an opportunity for profit and enters the market. After producing her profit-maximizing level of output, she finds that her average total cost per unit is $40, her average variable cost per unit is $30, and the market price is $35. In the short run, Lydia should A. expand production because she is making a positive economic profit. B. stay in business even though she is suffering a loss. C. shut down her business.

B. stay in business even though she is suffering a loss

TC =

FC + VC ATC x Q

If the prices are below the ATC of production in the long run firms will ______ the market, driving the market price ______ until the remain firms earn ________

If the prices are below the ATC of production in the long run firms will EXIT the market, driving the market price UP until the remain firms earn ZERO ECONOMIC PROFIT

Profit Maximizing Rule

MR > MC: produce more MR< MC: produce less MR=MC (profit is maximized)

Operating or Shutting down in SR

P>ATC the firm makes a profit ATC>P>AVC the firm will operate to minimize loss AVC<P the firm will temporarily shut down

Operating or Shutting down in LR

P>ATC the firm makes a profit P<ATC the firm should shut down

Consider that your profit-maximizing quantity of 600 can be produced at an average cost per unit of $8 and sold for a market price of $12 What is your profit per unit and your total profit?

Profit per unit— $4 Total profit— $2400 *** profit per unit= market price - average cost per unit total profit= profit per unit x number of units sold (Q)

firm's short run supply curve begins where______ firm's long run supply curve begins where_______

SR supply curve begins where P IS ABOVE AVC LR supply curve begins where PIS ABOVE ATC

government created barriers

licenses, qualifications, patents, copyright law

natural barriers to entry

the situation in which new firms are prevented from entering an industry because other firms already own all a vital natural resource necessary for the business

At a market price of $5 your artisanal lightbulb business maximizes profits by producing 484 lightbulbs per day. When you produce this quantity of lightbulbs per day, your average cost per unit is $4. What is the total rev per day? What is the cost per day? What is your daily profit?

total rev- $2420 total cost per day- $1936 daily profit- $484 *** total rev= quantity produced x the price total cost= quantity produced x average cost per unit daily profit = total rev- total cost

monopoly barriers to entry

very high

constant returns to scale

(decreasing return to scale) - input x 2 -> output < x2 - too big, service, sector, hospital - LR-ATC doesn't change when production expands

economies of scale

(increasing return to scale) - input x 2-> output > x2 - mass production technique, buy bulk, huge assembly lines - long run ATC falls when production expands

diseconomies of scale

- input x 2 -> output x2 - chain restaurant like Olive Garden - LR-ATC rises when production expands

If competitive firms experience a loss, what will happen to the number of firms in a competitive industry and the market supply in the long run? Choose one: A. Market supply will decrease, and firms will exit the market. B. Market supply will increase, and firms will enter the market. C. Market supply will decrease, and firms will enter the market. D. Market supply will increase, and firms will exit the market.

A. Market supply will decrease, and firms will exit the market.

Consider the market for baseball caps. There are many producers in this market, and we assume that the technology of production is identical among these producers. A typical producer in this market has a U-shaped average variable cost curve with the minimum average variable cost at $2.50, and a U-shaped average total cost curve with the minimum average total cost at $3.50. We assume that the market demand for baseball caps is moderately elastic. Which of the following statements is true? Choose one: A. The market demand intersects the long-run market supply at $3.50. B. The market demand intersects the long-run market supply at $2.50. C. The individual firm's demand intersects its long-run supply at $2.50. D. none of the above

A. The market demand intersects the long-run market supply at $3.50.

"A firm that receives a price greater than its average variable costs but less than its average total costs should shut down in the short run." A. false B. true

A. false

Which of the following are common barriers to entry in a market that has a monopoly? Choose one or more: A.A monopolist could charge a higher price than potential competitors. B.A monopolist could control a vital resource. C.A monopolist could enjoy economies of scale. D.A monopolist could enjoy the benefits of a government-imposed barrier.

B.A monopolist could control a vital resource. C.A monopolist could enjoy economies of scale. D.A monopolist could enjoy the benefits of a government-imposed barrier.

Why would a producer decide to produce in a competitive market in which she will earn zero profit in the long run? Choose one: A. Because in the short run, her profit is always positive. B. Because the producer has a high cost of exiting this market, and it is better for her to continue operating at zero profit. C. Because at zero profit, with her revenue, she can cover all her costs—explicit and implicit (opportunity cost). D. Because the zero profit in the long run is, in fact, zero accounting profit, and it matters only in the books.

C. Because at zero profit, with her revenue, she can cover all her costs—explicit and implicit (opportunity cost).

Suppose two cities are considering tearing down their stadiums to build new ones. In one city, the old stadium cost $5 million to build, while in the other city, the old stadium cost $50 million to build. If all else is equal, what can we say about how the costs of the old stadiums should affect the cities' decisions? Choose one: A. They should be more willing to tear down the $5 million stadium, because it cost less to build. B. They should be more willing to tear down the $50 million stadium, because it cost more to build. C. The cost tterm-20o build the old stadium shouldn't be considered.

C. The cost to build the old stadium shouldn't be considered. ****the expenses represent costs and shouldn't be considered

Consider a competitive market for a consumer product. Suppose this product goes out of fashion with consumers. How will this sudden drop in popularity affect the profit of an individual firm in this market in the long run? Choose one: A. The profit of an individual firm stays at zero in the long run. B. The profit of an individual firm increases from a smaller positive value to a larger positive value in the long run. C. The profit of an individual firm decreases from zero, and the firm will incur a loss in the long run. D. The profit of an individual firm increases from zero to a positive value in the long run.

D. The profit of an individual firm increases from zero to a positive value in the long run.

Assume that the market is originally in equilibrium. Now suppose that this product gains a sudden popularity among consumers. How will this sudden popularity affect the profit of an individual firm in this market in the short run? Choose one: A. The profit of an individual firm decreases from zero, and the firm will incur a loss. B. The profit of an individual firm decreases from a positive value to zero. C. The profit of an individual firm increases from a smaller positive value to a larger positive value. D. The profit of an individual firm increases from zero to a positive value.

D. The profit of an individual firm increases from zero to a positive value.

Consider a competitive market for a consumer product. Suppose this product gains a sudden popularity among consumers. How will this sudden popularity affect the profit of an individual firm in this market in the long run? Choose one: A. The profit of an individual firm increases from a smaller positive value to a larger positive value in the long run. B. The profit of an individual firm increases from zero to a positive value in the long run. C. The profit of an individual firm decreases from zero, and the firm will incur a loss in the long run. D. The profit of an individual firm stays at zero in the long run.

D. The profit of an individual firm stays at zero in the long run.

Profit =

TR-TC or (P-ATC) x Q

short run vs long run

The main difference between long run and short run costs is that there are no fixed factors in the long run; there are both fixed and variable factors in the short run . In the long run the general price level, contractual wages, and expectations adjust fully to the state of the economy.

Suppose a competitive firm is faced with a price in the SR that is below ATC but above AVC. In the SR, this firm would A. shut down B. exit the industry c. raise the price of the good d. produce at output level where MR= MC

d. produce at output level where MR= MC