Econ Exam 2
What does the Envelope relationship show us?
A firm can use one large plant or many small plants to produce a specific output. The lowest cost option in the short run for each output level; the option that equals the long run.
List the formula to determine actual dollar profit (or loss) from the monopolist's graph.
(P-ATC)Q
List the formula to determine actual dollar profit (or loss) from the perfectly competitive graph.
(P-ATC)Q
If it costs a firm $2000 to produce 400 shirts and $5000 to produce 900 shirts, then is the firm experiencing economies or diseconomies of scale?
2000/400 = 5.00; 5000/900 = 5.56; Diseconomies of scale
What is a monopoly? What does the monopolist's demand curve look like?
A firm that produces the entire market supply of a particular good or service. The demand curve facing the monopoly firm is identical to the market demand curve for the product so the demand curve is downward-sloping.
If revenue covers explicit costs but not opportunity costs, will accounting profit be positive or negative? Economic profit?
Accounting profit will be positive but economic profit will be negative because economic costs include opportunity (implicit) costs.
How do economists define the long run?
All inputs are variable, no fixed costs
How is price determined in a perfectly competitive market?
By supply and demand.
What are economies of scale? Diseconomies of scale? Can they happen in the short run?
Economies of scale are reductions in minimum average costs from increases in plant and equipment. Diseconomies of scale are increases in plant size that lower operating efficiency. They are terms used only in the long run because they represent size to efficiency rather than diminishing returns which exist in the short run. (EOS; AC down, Q up. DEOS; AC up, Q up)
T or F: For a monopolist P=MR. How about P=D?
False, MR is below the demand curve.True, price is always read off the demand curve.
T or F: For the perfect competitor: P=D=MC
False, P=D=MR would be true. MC is a completely different curve.
T or F: Many production processes can be economically efficient but only one can be technically efficient.
False, the opposite is true.
T or F: Natural monopolies have continuous diseconomies of scale.
False, they have continuous economies of scale.
Who makes a hostile takeover hostile? (see Reading Guide)
The management of the firm that is being taken over will most likely lose their positions and lucrative salaries.
If a monopolist increases sales from 15 to 16 by lowering price from 50 to 48, what is his MR?
MR = change in TR / change in Q; (768-750) / 1 = $18
What is the formula for producing the profit maximizing rate of output?
MR=MC
Can we have economic profits in the long run competitive market? Why or why not?
No, if economic profits exist then more competition will move into the market increasing market supply and reducing price until economic profit is normal or zero.
Can SRACs ever be less than LRACs?
No, not at a given quantity.
If a competitive firm's price exceeds its marginal cost, then what should be done with respect to output?
Output should increase as they would make more in revenue than they would incur in costs by producing another unit.
What is the difference between technical and economic efficiency?
Technical efficiency is when the lowest possible number of inputs are used for production, while economic efficiency is when those inputs are utilized to produce output at the lowest possible cost.
Why was Microsoft always a target for antitrust scrutiny?
Tie in contracts with operating systems and software.
What is the most likely reason for conglomerate mergers? (see Reading Guide)
To achieve economies of scope by diversification.
Review surplus redistribution (consumer and producer). What happens when we move away from perfect competition?
We lose the sum of producer and consumer surplus.
How can you determine when a natural monopoly should exist?
When the ATC is continually falling so that even with the monopolist's profit, the price will be lower with the one firm than with two or more making less or no profit.
