Econ Exam Three

Under what conditions will a firm exit a market?

A firm will exit a market if the revenue it would get from remaining in business is less than its total cost. This occurs if price is less than average total cost.

Monopoly

A market where there is only 1 seller of a good.

The practice of selling the same goods to different customers at different prices, but with the same marginal cost, is known as... a. price segregation. b. price discrimination. c. arbitrage. d. monopoly pricing.

b. price discrimination.

monopoly resources

one firm has access to the key inputs needed for production

What characteristics does a perfectly competitive market have?

• Many buyers and sellers • Homogeneous/identical products • Each buyer and seller is a price taker • No barriers to entry or exit • Perfect information

Profit =

Total Revenue (TR) - Total Cost (TC),

Natural Monopolies

utility industries like water, electricity—cheaper to only have one firm due to economies of scale (long run total average costs decrease as outputs increase, the most realistic reason for an economy to have a monopoly)

Under what conditions will a firm shut down temporarily?

A firm will shut down temporarily if the revenue it would get from producing is lower than the variable costs of production. This occurs if price is less than average variable cost.

If Bradley's Butcher Shop sells its product in a competitive market, then... a. the price of that product depends on the quantity of the product that Bradley's ButcherShop produces and sells because the firm's demand curve is downward sloping. b. Bradley's Butcher Shop's total cost must be a constant multiple of its quantity of output. c. Bradley's Butcher Shop's total revenue must be proportional to its quantity of output. d. Bradley's Butcher Shop's total revenue must be equal to its average revenue.

Answer is c because total revenue equals price times quantity sold. In a competitive market all firms are price takes, so the price doesn't vary by quantity sold. This means total revenue is proportional to the quantity sold.

A fundamental source of monopoly market power arises from... a. perfectly elastic demand. b. perfectly inelastic demand. c. barriers to entry. d. availability of "free" natural resources, such as water or air.

c. barriers to entry.

For any competitive market, the supply curve is closely related to the... a. preferences of consumers who purchase products in that market. b. income tax rates of consumers in that market. c. firms' costs of production in that market. d. interest rates on government bonds. Answer is c

c. firms' costs of production in that market.

Suppose a firm in each of the two markets listed below were to increase its price by 15percent. In which pair would the firm in the first market listed experience a dramatic decline in sales, but the firm in the second market listed would not? a. cotton and soybeans b. gasoline and corn c. #2 lead pencils and college textbooks d. electricity and cable television

Answer is c because #2 lead pencils is perfectly competitive. If the firm increases the price, it will lose customers and sales, because all other firms are producing the same product at a lower price.

For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $7 and a marginal cost of $10. It follows that the... a. production of the 100th unit of output increases the firm's profit by $3. b. production of the 100th unit of output increases the firm's average total cost by $7. c. firm's profit-maximizing level of output is less than 100 units. d. production of the 101st unit of output must increase the firm's profit by more than $3.

Answer is c because MR<MC so the firm should decrease production

Are market supply curves typically more elastic in the short run or long run? Explain

Market supply curves are typically more elastic in the long run than in the short run. (In a competitive market, because entry or exit occurs until price equals average total cost, quantity supplied is more responsive to changes in price in the long run.)

Does a competitive firm's price equal the minimum of its average total cost curve in the short run, long run, or both?

The competitive firm's price must equal the minimum of its average total cost only in the long run. In the short run, price may be greater than average total cost (in which case the firm is earning a profit), price may be less than average total cost (in which case the firm is incurring a loss), or price may be equal to average total cost (in which case the firm is breaking even).

For a profit-maximizing monopolist, a. P > MR = MC. b. P = MR = MC. c. P > MR > MC. d. MR < MC < P.

a. P > MR = MC.

A monopolist that practices perfect price discrimination... a. creates no deadweight loss. b. charges one group of buyers a higher price than another group, such as offering a studentdiscount. c. charges a higher price but produces the same monopoly level of output as when a singleprice is charged. d. charges some customers a price below marginal cost because costs are covered by thehigh-priced buyers.

a. creates no deadweight loss.

In the short-run, a firm's supply curve is equal to the... a. marginal cost curve above its average variable cost curve. b. marginal cost curve above its average total cost curve. c. average variable cost curve above its marginal cost curve. d. average total cost curve above its marginal cost curve.

a. marginal cost curve above its average variable cost curve.

Which of the following governmental actions would eliminate some or all of the inefficiency that results from monopoly pricing? The government could... a. regulate the monopoly. b. prohibit the monopoly from price discriminating. c. force the monopoly to operate at a point where its marginal revenue is equal to its marginalcost. d. None of the above would eliminate any inefficiency associated with a monopoly.

a. regulate the monopoly.

The profit-maximization problem for a monopolist differs from that of a competitive firm in whichof the following ways? a. A competitive firm maximizes profit at the point where marginal revenue equals marginal cost;a monopolist maximizes profit at the point where marginal revenue exceeds marginal cost. b. A competitive firm maximizes profit at the point where average revenue equals marginal cost;a monopolist maximizes profit at the point where average revenue exceeds marginal cost. c. For a competitive firm, marginal revenue at the profit-maximizing level of output is equal tomarginal revenue at all other levels of output; for a monopolist, marginal revenue at the profit-maximizing level of output is smaller than it is for larger levels of output. d. For a profit-maximizing competitive firm, thinking at the margin is much more important than it isfor a profit- maximizing monopolist.

b. A competitive firm maximizes profit at the point where average revenue equals marginal cost; a monopolist maximizes profit at the point where average revenue exceeds marginal cost.

Antitrust laws... a. prevent firms from maximizing profits. b. allow the government to prevent mergers, even ones that would benefit consumers. c. require the government to measure both the benefits and costs of a potential merger. d. All of the above are correct.

b. allow the government to prevent mergers, even ones that would benefit consumers.

A restaurant that has market power can... a. minimize costs more efficiently than its competitors. b. influence the market price for the meals it sells. c. reduce its marketing budget more than its competitors. d. ignore profit-maximizing strategies when setting the price for its meals.

b. influence the market price for the meals it sells.

The deadweight loss associated with a monopoly occurs because the monopolist... a. maximizes profits. b. produces an output level less than the socially optimal level. c. produces an output level greater than the socially optimal level. d. equates marginal revenue with marginal cost.

b. produces an output level less than the socially optimal level.

Does a competitive firm's price equal its marginal cost in the short run, in the long run or both?

both (A competitive firm's price equals its marginal cost in both the short run and the long run. In both the short run and the long run, price equals marginal revenue. The firm should increase output as long as marginal revenue exceeds marginal cost, and reduce output if marginal revenue is less than marginal cost. Profits are always maximized when marginal revenue equals marginal cost.)

A market is competitive if (i) firms have the flexibility to price their own product. (ii) each buyer is small compared to the market. (iii) each seller is small compared to the market. a. (i) and (ii) only b. (i) and (iii) only c. (ii) and (iii) only d. (i), (ii), and (iii)

c. (ii) and (iii) only

Monopolies are inefficient because they (i) eliminate barriers to entry. (ii) price their product at a level where marginal revenue exceeds marginal cost. (iii) restrict output below the socially efficient level of production. a. (i) and (ii) only b. (ii) and (iii) only c. (iii) only d. (i), (ii), and (iii)

c. (iii) only

Which of the following is not a characteristic of a competitive market? a. Buyers and sellers are price takers. b. Each firm sells a virtually identical product. c. Entry is limited. d. Each firm chooses an output level that maximizes profits.

c. Entry is limited.

Which of the following is a characteristic of a natural monopoly? a. Average cost exceeds marginal cost over large regions of output. b. Increasing the number of firms increases each firm's average total cost. c. One firm can supply output at a lower cost than two firms. d. All of the above are correct.

c. One firm can supply output at a lower cost than two firms.

Microsoft faces very little competition from other firms for its Windows software. Why isn't theprice of the software $1,000 per copy? a. because the government would not allow such a high price b. because stockholders would not allow such a high price c. because the company would sell so few copies that they would earn higher profits byselling at a lower price d. All of the above are correct.

c. because the company would sell so few copies that they would earn higher profits byselling at a lower price

In the long run the market supply... a. must always be horizontal. b. could be upward sloping if the cost of production falls as new firms enter the market. c. could be upward sloping if the cost of production rises as new firms enter the market. d. could be upward sloping if technological improvements lower the cost of producing inthe market. Answer is c

c. could be upward sloping if the cost of production rises as new firms enter the market.

When a monopolist increases the amount of output that it produces and sells, the price of its output... a. stays the same. b. increases. c. decreases. d. may increase or decrease depending on the price elasticity of demand.

c. decreases.

If a competitive firm is currently producing a level of output at which marginal cost exceedsmarginal revenue, then a. average revenue exceeds marginal cost. b. the firm is earning a positive profit. c. decreasing output would increase the firm's profit. d. All of the above are correct.

c. decreasing output would increase the firm's profit.

Which of the following statements is true? (i) When a competitive firm sells an additional unit of output, its revenue increases by anamount less than the price. (ii) When a monopoly firm sells an additional unit of output, its revenue increases by anamount less than the price. (iii) Average revenue is the same as price for both competitive and monopoly firms. a. (ii) only b. (iii) only c. (i) and (ii) only d. (ii) and (iii) only

d. (ii) and (iii) only

A movie theater can increase its profits through price discrimination by charging a higher price to adults and a lower price to children if it... a. can prevent children from buying the lower-priced tickets and selling them to adults. b. has some degree of monopoly pricing power. c. can easily distinguish between the two groups of customers. d. All of the above are correct.

d. All of the above are correct.

Why does a firm in a competitive industry charge the market price? a. If a firm charges less than the market price, it loses potential revenue. b. If a firm charges more than the market price, it loses all its customers to other firms. c. The firm can sell as many units of output as it wants to at the market price. d. All of the above are correct.

d. All of the above are correct.

In a competitive market with identical firms,... a. an increase in demand in the short run will result in a new price above the minimum ofaverage total cost, allowing firms to earn a positive economic profit in both the short runand the long run. b. firms cannot earn positive economic profit in either the short run or long run. c. firms can earn positive economic profit in the long run if the long-run market supply curveis upward sloping. d. free entry and exit into the market requires that firms earn zero economic profit in the long run even though they may be able to earn positive economic profit in the short run.

d. free entry and exit into the market requires that firms earn zero economic profit in the long run even though they may be able to earn positive economic profit in the short run.

Government regulations

patents—giving one firm the exclusive right to sell (used to protect intellectual property)

Perfect Price Discrimination

this is when the monopoly charges each customer their willingness to pay