Final Exam
Marginal benefit is called marginal revenue...
-Change in total revenue from a one-unit change in output -Equal to price for the perfectly competitive firm -Less than price for the monopolist
In the short run under perfect competition, an individual firm will increase output as long as a. marginal revenue exceeds marginal cost b. total revenue exceeds total cost c. price exceeds marginal revenue d. total revenue is rising e. marginal revenue is rising
A
Accounting Profit
Accounting Profit = total revenue - explicit costs may include sunk costs easy to compute and compare across firms
If one firm sets the market price a. the market is perfectly competitive b. the market is not perfectly competitive c. there are a large number of buyers who can buy from a wide range of competitors d. there is free entry into the market e. its product must be a standardized commodity, produced by many competitors
B
The above graph shows the cost curves for a perfectly competitive firm. This firm's shutdown price is a. $5 b. $7 c. $10 d. $14
B
Figure 8-1 shows the marginal cost and average total cost curves for a perfectly competitive firm. If the market price is $10, then a. the firm earns $10 profit on each unit sold b. the firm earns $8 profit on each unit sold c. marginal revenue equals $10 d. the firm is losing money in the short run e. marginal cost always equals marginal revenue
C
In the long run, a perfectly competitive firm can earn _______ economic profit. a. positive b. negative c. zero d. positive or negative
C
In the long-run equilibrium for a perfectly competitive market, firms will choose the level of output where a. profit is minimized b. short-run average total cost is minimized c. long-run average total cost is minimized d. short-run profit is maximized e. long-run average fixed cost is minimized
C
A perfectly competitive firm a. can increase total revenue by raising its price b. can sell more goods by lowering its price c. can sell more goods by raising its price d. cannot increase sales or total revenue by changing its price e. typically tries to offer lower prices than rival firms
D
In short-run equilibrium, the perfectly competitive firm of Figure 8-3 will produce a. zero units of output b. 200 units of output c. 275 units of output d. 475 units of output e. 575 units of output
D
In the short run, a perfectly competitive firm may earn economic profits that are a. positive b. positive but very small c. negative d. all of the above
D
The entry of new firms into a perfectly competitive market in the long run is most likely the result of a. temporarily above-normal profit, despite the presence of barriers to entry b. continued above-normal profit, despite the presence of barriers to entry c. temporarily above-normal profit, combined with the absence of barriers to entry d. continued above-normal profit, combined with the absence of barriers to entry e. either temporarily or continued above-normal profit, despite the presence of barriers to entry
D
Hurdle method
Discounts for identifiable groups for different demand schedules
All of the following are characteristics of a perfectly competitive market, except one. Which is the exception? a. a large number of sellers b. a standardized product c. no barriers to entry d. sellers can easily exit the market e. an intensive rivalry among the sellers
E
Firms in a perfectly competitive market cannot influence a. the quantity of the good that they produce b. how much labor to use in production c. how much capital to employ in production d. the level of advertising that they use e. the price of the product they sell
E
Important Equations about Profit
Profit = total revenue - total cost total cost = ATC x Q Profit = P x Q - ATC xQ Profit = (P- ATC) x Q If P > ATC then the firm earns a profit If P < ATC then the firm suffers a loss
economic profit equation
accounting profit - normal profit (implicit costs)
Barrier to entry
any force that prevents firms from entering a new industry free entry and exit is required for the invisible hand to work
Benefits of Invisible hand
cost benefit principle applies P=MC
Flower method
different batch sizes
allocative function of price
directs resources away from overcrowded markets and toward markets that are unstaffed
What are the 5 sources of market power?
economies of scale (natural monopolies) exclusive control over inputs patents and copyrights government licenses or franchises network economies
total revenue equation
explicit costs + accounting profit
Non equilibrium opportunities benefit individuals
exploiting opportunities moves the market toward equilibrium
Oligopoly
has a small number of large firms producing products that are close substitutes
Monopolistic competition
has many firms producing slightly different products that are reasonably close substituted
the monopolist marginal revenue curve
has the same intercept as the straight line demand curve has twice the slope of the demand curve lies below the demand curve
Will the firm remain in business in the long run?
if it covers ALL of its costs
Equilibrium leaves no opportunities for...
individuals to gain
normal profit
is the difference between accounting profit and economic profit normal profits keep the resources in their current use normal profit=implicit costs
Markets in which firms are suffering economic losses will...
lose resources
A monopolist...
maximizes profit applies the cost benefit principle
Perfect Discrimination
negotiate separate deals with each customer
Network economies
occur when the value of the product increases as the number of users increases
monopoly
only has one seller, no close substitutes
Efficiency conditions include
perfectly competitive markets no costs or benefits shifted
Profit Motive
produces highly valued goods and services allocates resources to their highest value use
deciding quantity
profit is maximized at the level of output where marginal cost + marginal revenue
Firms that earn positive economic profit...
recover more than their opportunity cost
invisible hand theory
states that the actions of independent, self-interested buyers and sellers will often result in the most efficient allocation of resources
fixed costs
sum of payments made to the fixed factors
variable cost
sum of payments made to the variable factors
Market Power
the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
price discrimination
the business practice of selling the same good at different prices to different customers
MR is always less than...
the corresponding price to sell another unit, the monopolist must lower price
Economic Profit
the difference between a firm's total revenue and the sum of its explicit and implicit costs
Cost Increase for talent will remove...
the economic profit
implicit costs
the opportunity costs of the resources supplied by the firm's owners
Economic rent
the portion of a payment to a factor of production that exceeds the owners reservation price
Economies of scale
the property whereby long-run average total cost falls as the quantity of output increases
Imperfect competition
they are price setters
rationing function of price
to distribute scarce goods to those consumers who value them most highly
Average total costs
total cost divided by the quantity of output a good whose production has a large start up cost and low variable cost is subject to economics of scale
Markets in which firms are earning economic profit will..
will attract resources
three ways to earn a big pay off
work really hard have a unique skill or talent be lucky
