ECON 2102 Test 3 (Chapters 7/8)

number of firms in the market formula:

(entire market revenue) / (single representative firm revenue)

economic profit can also be equal to ___ on a graph

(marginal cost x Q) - (ATC x Q)

the lowest amount of shortage there can be is ___

0 > any negative amount is also just 0

5 sources of market power:

1.) EXCLUSIVE CONTROL OVER IMPORTANT INPUTS 2.) PATENTS AND COPYRIGHTS 3.) GOVERNMENT LICENSES OR FRANCHISES 4.) ECONOMIES OF SCALE AND NATURAL MONOPOLIES 5.) NETWORK ECONOMIES

If the market equilibrium is efficient. then:

1.) economic surplus Is maximized. enabling society easily achieve its goals 2.) It's not possible to f‌ind a transaction that will make some people better off without harming others

If the market for soccer balls is in a long run equilibrium, and the demand for soccer balls fails, then we would expect:

1.) f‌irms to exit the market in the long run 2.) the price of soccer balls to fall in the short run

The market equilibrium is only eff‌icient if:

1.) the market is perfectly competitive 2.) the market demand curve captures all of the relevant benefits of buying another unit of the good 3.) the market supply curve captures all of the relevant costs of producing another unit of the good

//Problems I don't understand

7.1 #12/14 7.2 # 1/10 8 #

A price maximum (ceiling) that is set above the equilibrium price or a price minimum (floor) set below the equilibrium will result in:

> NO deadweight loss > NO reduction in total economic surplus and

When supply is more elastic than demand, the tax burden falls on ___. If demand is more elastic than supply, ___ will bear the cost of the tax.

> buyers > producers

A price minimum (floor) that is set above the equilibrium price or a price maximum (ceiling) set below the equilibrium will result in:

> deadweight loss > reduction in total economic surplus

The allocative function of price cannot operate unless f‌irms can ___

> enter new markets and leave existing ones at will > If new f‌irms could not enter a market in which existing f‌irms were making a large economic prof‌it. economic prof‌it would not tend to fall to zero over time, and price would not tend to gravitate toward the marginal cost of production.

invisible hand theory

Adam Smith's theory that the actions of independent, self-interested buyers and sellers will often result in the most efficient allocation of resources

A single-priced, profit-maximizing monopolist:

Always charges a price above the marginal cost of production.

Suppose Emily is an exceptionally talented architect. Her opportunity cost of working as an architect is $60,000 per year, and her salary at the architectural f‌irm where she works is $150,000 per year. Thus, Emily's economic rent from being an architect is:

Economic rent is the part of the payment for a factor of production that is above the owner's reservation price: $150,000-$60,000=$90,000

In a monopoly market, P = MR at the monopoly output. (T/F)?

False

True or false: Economists do not believe that it's important to address poverty and inequality because all that matters is whether the market Is eff‌icient.

False

NETWORK ECONOMIES

Firmly entrenched network economies can be as persistent a source of natural monopoly as economies of scale. Indeed, network economies are essentially similar to economies of scale. When network economies are of value to the consumer, a product's quality increases as the number of users increases, so we can say that any given quality level can be produced at lower cost as sales volume increases. Thus network economies may be viewed as just another form of economies of scale in production, and that's how we'll treat them here

EXCLUSIVE CONTROL OVER IMPORTANT INPUTS

If a single f‌irm controls an input essential to the production of a given product, that f‌irm will have market power. For example. to the extent that some US. tenants are willing to pay a premium for off‌ice space in the country's tallest building, One World Trade Center, the owner of that building has market power.

Why is market equilibrium pareto efficient?

The answer is that it is always possible to construct an exchange that helps some without harming others whenever a market is out of equilibrium

What is the socially desirable price for a monopoly to charge?

The price at which the marginal benefit to the consumer equals the marginal cost of production.

ECONOMIES OF SCALE AND NATURAL MONOPOLIES

When a f‌irm doubles all its factors of production, what happens to its output? If output exactly doubles, the f‌irm's production process is said to exhibit constant returns to scale. If output more than doubles. the production process is said to exhibit increasing returns to scale. or economies of scale. When production is subject to economies of scale, the average cost of production declines as the number of units produced increases. For example, in the generation of electricity, the use of larger generators lowers the unit cost of production. The markets for such products tend to be served by a single seller, or perhaps only a few sellers, because having a large number of sellers would result in signif‌icantly higher costs. A monopoly that results from economies of scale is called a natural monopoly.

In a market where government has set the price below the equilibrium price, one might expect

a black market to develop as individuals try to take advantage of unexploited opportunities.

In a market where government has set the price below the equilibrium price, one might expect ___

a black market to develop as individuals try to take advantage of unexploited opportunities.

price setter

a firm with at least some latitude to set its own price > Ex. The holder of a copyright

market power

a firm's ability to raise the price of a good without losing all its sales

price taker

a f‌irm with no influence over the price of its product

perfectly elastic demand is ___

a horizontal line

constant returns to scale

a production process is said to have constant returns to scale it, when all inputs are changed by a given proportion, output changes by the same proportion

increasing returns to scale (or economies of scale)

a production process is said to have increasing returns to scale if, when all inputs are changed by a given proportion, output changes by more than that proportion

eff‌icient (or Pareto efficient)

a situation is eff‌icient if no change is possible that will help some people without harming others > if you change from pareto efficiency (equilibrium) then somebody will be hurt for the benefit of another

normal profit

accounting profit - implicit costs > to make a normal profit the minimum is 0

The profit maximizing rule MR = MC applies to:

all firms.

The fact that f‌irms enter industries in response to positive economic prof‌it and leave industries in response to economic loss illustrates the:

allocative function of price.

government revenue equals

amount of tax * new equilibrium quantity

taxes don't change the ___

amount that the seller receives from transactions

economic loss

an economic prof‌it that is less than zero

monopolistic competition

an industry structure in which a large number of f‌irms produce slightly differentiated products that are reasonably close substitutes for one another > Ex. local gasoline retailing > not perfect competition

oligopoly

an industry structure in which a small number of large f‌irms produce products that are either close or perfect substitutes

producer surplus

area of the triangle left of the equilibrium point and below the price line

Any force that prevents f‌irms from entering a new market is called a ___ to entry

barrier

allocative function of price

changes in prices direct resources away from overcrowded markets and toward markets that are underserved

rationing function of price

changes in prices distribute scarce goods to those consumers who value them most highly

Suppose farmers in a given market can either grow soy beans or corn on their land. In addition, suppose an increase in the demand for corn causes the price of corn to increase. As a result of the increase in the price of corn, farmers who were already growing corn will earn an:

economic profit in the short run.

The deadweight loss due to monopoly:

exists because the monopoly restricts output.

In perfectly competitive markets, an implication of entry and exit in response to economic profit and loss is that:

firms will produce the quantity that minimizes average total costs in the long run.

an issue monopolisticially competitive firms face is

how to differentiate their products from those of existing rivals. > Should a product be made to resemble a rival's product, be different from it, or something in between?

In general, the eff‌icacy of the invisible hand depends on ___

how well the individual costs and benefits of actions in the marketplace coincide with the costs and benefits of those actions of society

The fact that f‌irms are free to enter or leave an industry at any time ensures that ___

in the long run, all f‌irms in the industry will tend to earn zero economic profit > Their goal is not to earn zero profit. Rather, the zero-profit tendency is a consequence of the price movements associated with entry and exit.

One reason that f‌irms have a strong incentive to develop cost-saving innovations is that these innovations enable the f‌irm to earn an economic prof‌it ___

in the short run

If a tax of one dollar per unit is imposed on the producers of this commodity, the price consumers will pay in the market will ___

increase by less than one dollar.

Suppose it's possible to f‌ind a transaction that will make some people better off without hurting others. In this case, we know the market equilibrium ____

isn't socially optimal

If a per unit tax is imposed, the more elastic demand is, the ___

larger the deadweight loss.

Suppose farmers in a given market can either grow soy beans or corn on their land. In addition, suppose an increase in the demand for corn causes the price of corn to increase. In the long run, this increase in the demand for corn is likely to ______ the price of soy beans.

lead to an increase in

Consider a tax on cigarettes. The tax incidence will fall more heavily on the side of the market that is:

less elastic, which is likely to be the demand (consumer) side because of the addictive nature of the product.

Price-setters face ___

less than perfectly elastic demand.

In the short run, firms in a market will shut down if the market price is:

less than the average variable cost

in the long run, oligopolists ___ earn a positive economic prof‌it.

might or might not

moving towards the equilibrium is ___ because ___ and moving away from the equilibrium is ___ because ___

more efficient, more people can buy and sellers can sell more less efficient, either fewer people can buy or sellers have to sell too much

At equilibrium, all ___

mutually beneficial transactions have taken place.

To sell an extra unit of output, a perfectly competitive firm ___ and an imperfectly competitive firm ___

need not alter its price; must lower its price

if all of the f‌irms in a market earn zero economic prof‌it, then we would expect:

neither entry into nor exit from the market.

When the market is in equilibrium, there are ___ opportunities for gain available to individuals.

no further

In the long run, new f‌irms will enter a market if existing firms are earning a ___

positive economic profit

A monopoly that attempts to charge the socially desirable price will invariably reduce their economic profit because ___

price and marginal cost is higher than marginal revenue.

When perfectly competitive firm decides to shut down it is most likely that:

price is below the firm's average variable cost

Which ordering best describes how a perfectly competitive industry would respond to a sudden increase in popularity of the product? The market demand function will shift to the right causing the market ___

price to increase. > Increased profits will encourage new firms to enter, shifting the market supply function to the right. Long-run market equilibrium will be at a higher quantity but at the same price as before the surge in popularity.

The reason economists consider monopoly to be socially undesirable is that monopolists:

produce less than the socially optimal level of output.

subsidies ___ the total economic surplus

reduce

If the total economic surplus from a market is thought of as a pie to be divided among the participants in the market, then imposing price controls will:

reduces the size of the pie

The Equilibrium Principle (No-Cash-on-the-Table Principle)

tells us that when a market reaches equilibrium, no further opportunities for gain are available to individuals. > This principle implies that the market prices of resources that people own will eventually reflect their economic value.

economic rent

that part of the payment for a factor of production that exceeds the owner's reservation price.

explicit costs

the actual payments a f‌irm makes to its factors of production and other suppliers

loss in total economic surplus:

the difference between the producer and consumer surplus > always a positive number i think

When the firm lowers price from $8 to $7, marginal revenue is less than $7 because:

the firm is charging $1 less for each of the first three units of output.

deadweight loss

the loss of consumer and producer surplus caused by disparity between price and marginal cost

pure monopoly

the only supplier of a unique product with no close substitutes > Ex. producer of Magic trading cards

Implicit costs

the opportunity costs of the resources supplied by the firm's owners

the price that the profit maximizing monopolist charges is ___

the point on the demand curve directly above the intersection of MC and MR

Tax incidence depends on:

the relative elasticity of the supply and demand curves in a market.

Tax incidence is:

the relative tax burden borne by buyers and sellers.

tax revenue is included in:

the total surplus along with consumer and producer surplus

If all firms in a perfectly competitive industry are earning a normal profit, then:

there is no incentive for firms to enter or exit the industry.

accounting profit

total revenue - explicit costs

economic profit (or excess profit)

total revenue - explicit costs - implicit costs

If the f‌irms in a market are earning a positive economic prof‌it, then in the long run, ___ the market will lead economic prof‌it to ___.

> entry into > fall

if the f‌irms in a market are earning an economic loss, then in the long run there will be ___ the market, leading the equilibrium price to ___

> exit from > rise

steeper slope means ___ elastic flatter slope means ___ elastic

> less > more

whereas the perfectly competitive f‌irm faces a ___ demand curve for its product, the imperfectly competitive f‌irm faces a ___ demand curve.

> perfectly elastic > downward-sloping

When a perfectly competitive firm sells additional units of output, ___ and when a monopolist sells additional units of output, ___

> total revenue always rises > total revenue could rise, fall, or remain unchanged

True or false: The market equilibrium is always eff‌icient.

False > The market equilibrium may not be eff‌icient if the market is not perfectly competitive or if the market supply curve and the market demand curve do not capture all of the relevant costs and benef‌its of a good.

GOVERNMENT LICENSES OR FRANCHISES

Yosemite Concession Services Corporation has an exclusive license from the US. government to run the lodging and concession operations at Yosemite National Park. One of the government's goals in granting this monopoly was to preserve the wilderness character of the area to the greatest degree possible. And indeed. the inns and cabins offered by Yosemite Concession Services Company blend nicely with the valley's scenery. No garish neon signs mar the national park as they do in places where rivals compete for the tourist's dollars.

perfectly inelastic demand is ___

a vertical line

the pursuit of individual self interest doesn't ___

always coincide with society's interest > Ex. pollution/fraud

In the perfectly competitive industry, the supply and demand curves intersect to ___

determine an equilibrium market price

The market equilibrium typically will not be socially optimal when the costs and benefits to individual participants in the market ___ those experienced by society as whole.

differ from

if the average cost of production declines as the number of units produced increases, then the production process exhibits ___

economies of scale

monopolistically competitive f‌irms can't expect to earn positive economic prof‌its in the long run because ___

entry and exit of firms is similar to perfect competition, since entry and exit from the market ensures the invisible hand is in effect since there isn't a complete monopoly

In the long run. in a market in which firms are earning a positive economic profit, entry will occur until all f‌irms earn

zero economic prof‌it.

PATENTS AND COPYRIGHTS

Patents give the inventors or developers of new products the exclusive right to sell those products for a specif‌ied period of time. By insulating sellers from competition for an interval, patents enable innovators to charge higher prices to recoup their product's development costs. Pharmaceutical companies, for example, spend millions of dollars on research in the hope of discovering new drug therapies for serious illnesses. The drugs they discover are insulated from competition for an interval—currently 20 years in the United States—by government patents. For the life of the patent, only the patent holder may legally sell the drug. This protection enables the patent holder to set a price above the marginal cost of production to recoup the cost of the research on the drug. In the same way, copyrights protect the authors of movies. software. music. books. and other published works.