KSU Microeconomics: Midterm 2
Suppose the market price for a cup of coffee is $1.25. If coffee express's marginal cost of making that cup of coffee is $0.75, its producers surplus from that cup of coffee is.
$0.50
Suppose the price of a box of pop tarts is $3. If Michael is willing to pay $4 for that box of pop tarts, his consumer surplus.
$1
The average cost for providing off-street parking is $30 per space per day, and as a monopolist you could charge $35 per space per day for 200 spaces. The maximum amount that you are willing to pay for a monopoly is
$1000 per day
A firm produces 10 units of output at a market price of $9, a marginal cost of $8 and an average cost of $4. What are the firm's profits and is the firm maximizing profits?
$50 profit, not maximizing profits Profit = Q(P-ATC) = 10(9-4)
Short run vs long run
--> Have at least one fixed cost (fixed input) --> have diminishing returns If in a perfectly competitive market: shutdown rule: operate if P>AVC & TR> VC P-shutdown= min AVC In LR--> No fixed input means no fixed cost.
Three conditions for markets to work efficiently
1. Perfect competition 2. Perfect information 3. No externalities
A potential new drug, NoSmak, cures lip-smacking with one dose, but research and development would cost $90 million. The monopoly profit (earned while a single firm produces the product) will be $5 million per year. After a patent expires, the original developer of the drug will have sufficient brand loyalty to earn $3 million per year for another 10 years. a. What is the shortest patent length required to induce a firm to develop the drug B. What is the shortest patent length required to induce a firm to develop the drug if we ignore the profit earned after the patent expires?
12 years 18 years
Suppose at Q=1, a company has a fixed cost of $5, a variable cost of $8 and a total cost of $13. What is the ATC?
13/1 = 13
Suppose a firm has a fixed cost of 14 and is producing Q=0. What is the total cost?
14
Suppose that there are five firms in the market, each controlling %2o of the market. The HHi would equal:
2,000 (20^2)^5 =2000
Based on the figure, if the perfectly competitive firm faces a price of $10 and maximizes profits, what are the profits?
20
Suppose your firm produces a branded drug at an average cost of $5 per dose and a price of $8 per dose. You sell 1 comma 500 doses per day. If a generic version of the drug were introduced, your daily sales would decrease to 800 doses. How much are you willing to pay each day to prevent the entry of the generic version?
2100 per day
You are willing to pay $4,500 to have your house painted, and Doug's marginal cost of painting a house is $4,000. If you an Doug agree to split the difference, the price is $____, your consumer surplus is $____, and Doug's producer surplus is $____.
4250; 250; 250
Guaranteed price matching
A company will match the price of another businesses lower cost of a product, to their own product.
An electrician licensing program in the state of North Carolina requires each electrician to obtain a license and renew it each year. Which of the following is a result of having the licensing program in North Carolina?
A decrease in total surplus increase in quality electricians excess demand for electrical service All the above are a result of the licensing program
Example of economies of scale
A firm increases in size and therefore is able to lower its health insurance cost because as the size of the insured group increases, the premium per person decreases
The four-firm concentration ratio for the cigarette market is 93%. That means that:
A high degree of concentration in the Cigarette Market The market is an oligopoly ( It exceeds 40%) the four largest firms in the market produce 93% of the total market output. D all the above ^
ssume a firm in a perfectly competitive market has a cost structure as shown by the figure. If there is a new policy put into place that causes an increase in the fixed cost, which of the curves would change?
ATC
Suppose that Company A is playing a grim trigger strategy. That means if Company B picks a lower price to undercut Company A, Company A will respond by
Always pick P=ATC
The break even point is when price equals
Average Total Cost (ATC)
The shutdown point is when price is below the what
Average Variable Cost (AVC)
If the government intervenes in the market while the market meets the efficiency conditions, then the government
Causes inefficiency
Consider a college that has only ever had one on-campus bookstore. Over the last two years, you have observed that bookstore prices are %20 lower. You can conclude that
Competition from online stores has encouraged the bookstore to behave as an insecure monopolist.
Consequences of Price matching
Competitors have accessible information to allow them to match prices, so they can have the ability to have a higher price Eliminates competition, thus driving up higher prices
According to Naked Economics "Modern economies cannot survive without_"
Credit
What is a characteristic of a perfectly competitive firm that causes it to be a price taker A. Many buyers and sellers B. Homogeneous product C. Free entry and exit D. Both A and B are correct
D 1. Many buyers and sellers 2. Homogenous product
Suppose there is only one airline company in the city. The marginal cost of a flight is given by MC=200+98Q. The demand for flights is given by P=700-Q. What is the profit- price of airline flights?
D: P=700 - Q =700-5. = 695
What do economists call lost surplus in a market?
Deadweight loss (DWL)
Consider a switchgrass farmer whose initial break-even price is $76 = $36 explicit cost + $40 opportunity cost for land. If the market price of alfalfa decreases, the break-even price will [increase or decrease?].
Decrease
At the current output level, a farmer's marginal cost of producing sugar is $.36. If the price of sugar is $0.31 per pound, the farmer should ______________ production. If the price of sugar is $0.40 per pound, the farmer should ______________ production.
Decrease & increase
An insecure monopolist can
Deter entry if the minimum entry quantity is relatively large.
Consider the following statement from a member of a city council: "Several of the merchants in our city offer discounts to our senior citizens. These discounts obviously decrease the merchants' profits, so we should decrease the merchants' taxes to offset their losses on senior citizen discounts." Do you agree or disagree?
Disagree
Accounting costs and economic costs differ because
Economic costs: include the opportunity costs of all resources used (Explicit + Implicit) Accounting Cost: Explicit cost
Average Fixed Cost (AFC)
FC/Q fixed cost divided by the quantity
True or False: Accounting profits are lower than economics profits because of the difference in the way economists and accountants calculate costs.
False
The National Park service grants a single firm the right to sell food and other goods in Yosemite National Park. a. What are the trade-offs associated with this policy? Who gains and who loses? b. Does your answer to part (a) depend on whether the monopoly is granted as a political favor or auctioned to the highest bidder?
Fewer goods will be sold at higher prices. The firm will gain, consumers will lose, and there will be a deadweight loss. Yes. With an auction, monopoly profits will go to the government.
Based on the figure that shows each company's profits under different strategies, what is the Nash Equilibrium? numbers in game box: 3,4 6,2 5,7. 3,5
Firm 1: Strategy 2, Firm 2: Strategy 1 ( firm 1 picks 2, firm 2 picks 1)
Long Run
Firms have no fixed cost or input. Instead they are able to change all factors of production or enter/exit the industry.
Monopolistic Competition
Firms in this market have market power and differentiate their products. There are no barriers to entry.
Short Run:
Fixed factor of production and thus a fixed cost
Suppose there are three firms in an industry with market shares of 60%, 30% and 10%. What is the Herfindahl-Hirschman Index?
HH1: Sum the squared market share 60^2+30^2+10^2 =4600
A guaranteed price match or meet the competition policy leads to _ prices for consumers
Higher
Booksellers are able to charge____ prices to consumers who buy hardback books because their demand for the book is more______ than consumers who wait until the paperback comes out.
Higher, inelastic.
Which of the following is the most accurate about a monopoly?
In all cases, competitive markets yield more consumer surplus than would be enjoyed in a monopoly market with the same cost structure.
Patents:
Incentive to innovate Short run = ACT Monopolist -> charge higher price --> Better of by having new products
Consider a switchgrass farmer whose initial break-even price is $76 = $36 explicit cost + $40 opportunity cost for land. If the cost of fertilizer increases, the break-even price will [increase or decrease?].
Increase
According to Naked Economics, it is better to have investments that are
Independent
Long Run Average Cost
LAC = LTC / Q
Suppose that your city imposes a tax of $100 per apartment and the supply curve is a vertical line at Q=10,000. Then:
Landlords pay the whole amount of tax.
The aspirin sold in airports is more expensive than aspirin sold in grocery stores because the demand for aspirin in airports is relatively
Less elastic
Relatively to a perfectly competitive market, a monopoly produces
Less output charges higher prices and earns economic profits
T/F. The short-run supply curve is steeper than the long-run supply curve. Why?
Long run -> more elastic
Your firm has a total revenue of $1,000, a total cost of $1,500 and a variable cost of $500. What does this tell us about your profits and whether or not you should operate or shut down?
Losing money, keep operating
Dead Weight Loss (DWL) of a monopoly
Lost surplus due to higher prices and lower quantities
Monopoly section: How to find the Marginal revenue?
MR = Take the demand curve + double the slope (Intercept remains the same)
Suppose a monopolist faces a demand curve of P=20-.5Q and a constant marginal cost of $4. What is the profit maximizing quantity?
MR= 20-Q 20-Q=4 =16
perfect competition
Many sellers that have no market power and sells a standardized product in a market with no barriers to entry
A firms short run supply curve is the firms
Marginal cost curve above the minimum point of the average variable cost
Suppose there is only one airline company in the city. The marginal cost of a flight is given by MC=200+98Q. The demand for flights is given by P=700-Q. What is the profit maximizing quantity of airline flights?
Mc = 200 + 98Q. D: P=700-Q Marginal Revenue = 700-2Q 200+98Q=700-2Q -200+2Q - 200+2Q 100 Q=500 - ---> Q=500/100= 5
Many hotel chains offer senior citizen discounts to members of AARP. This suggests that the hotels believe that senior citizens have a ________ demand for hotel rooms than non-seniors
More Elastic
s the long run supply curve more or less inelastic than the short run supply curve?
More inelastic
If the government imposes a price ceiling above the equilibrium price what happens in the market?
No change in total surplus
In the long run diminishing returns would
Not exist because no input is held
Monopoly
One seller that has market power and produces a unique product. There are barriers to entry.
Your firm has a price of $8, an average total cost of $10, and an average variable cost of $7. In the short run, should you operate or shut down? Why?
Operate if P > AVC Exit because profit < 0
Your firm has a total revenue of $800, a total cost of $1,200 and a variable cost of $500. Should you operate or shut down? Why?
Operate if Price > AVC, TR>VC = 800 > 500
Producer Surplus (PS)
P - MC (Price - supply curve)
Long Run Equilibrium for a Perfectly Competitive industry occurs when:
P = MC = ATC
If a monopolist charges the same price for all of the units of the good that it sells, then beyond the first unit sold:
P > MR Because the monopolist must decrease price on all the units in order to sell another unit.
Suppose a monopolist faces a demand curve of P=20-.5Q and a constant marginal cost of $4. What is the profit maximizing price?
P=20-.5(16) = 12
Since perfectly competitive market result in no market power, what does this tell us about the demand curve?
Perfectly elastic
For a perfectly competitive firm, marginal revenue equals [average cost, price, or marginal cost?], and to maximize profit, the firm produces the quantity of output at which [marginal revenue or marginal cost?] equals [price or average cost?].
Price, Marginal cost, price
Profits Formula:
Profit = Q (P-ATC)
A firm produces 20 units of output at a market price of $7, a marginal cost of $7, and an average cost of $5. What is the firm's economic profit? Is the firm maximizing profit?
Profit = Q (P-ATC): = 20( 7-5) = 40 YES MR = MC
In a perfectly competitive market
Profits = 0 in Long Run (LR) P=MR = MC = ATC Break-even P=ATC (profits=0) Monopoly --> can have profits >0 in SR + LR Because there exist barriers to entry.
LR Barriers to entry
Profits > 0
For profit maximizing:
Q = Apply the marginal principle: MR = MC p = Plug Q into the demand curve
Suppose a firm has a mixed cost of 10. At A=3, the ATC is 50. What is the variable cost at Q=3? You must show your work to receive credit
Q FC ATC VC TC 3. 10. 50 140. 150 50 x 3 = 150 = total cost VC = TC-FC VC = 150-10=140 The variable cost at Q = 3 is $140
According to Naked Economics, politicians often believe that the Laffer curve says we can always cut taxes and increase _
Revenue
If the government sets a minimum price above the equilibrium price
Some consumers gain at the expense of producers and the total surplus increases
Marginal Cost (MC)
TC / Change in quantity
Average Total Cost (ATC)
TC / Q total costs divided by the quantity
In a Nash Equilibrium, each player is doing the best he or she can given
The action of other players
consumer surplus equals
The amount that a consumer is willing to pay minus the amount actually paid
If the price a firm charges in a perfectly competitive market is greater than its average total cost:
The firm is earning economic profit greater than zero
Compare the two markets. In one market, the HHI is 500, in the other market, the HHI is 1500. What must be true about these two markets?
The firms in the market in which the HHI is 1500 have greater market power than do the firms in the market in which the HHI is 500.
Which of the following is an example of something that economist would consider a cost but accountants would not?
The interest income foregone by the firms owner because the owner invested funds into the firm
A firms short run supply curve is the firms
The marginal cost curve above the minimum point on the average variable cost curve.
Suppose that the government imposes a maximum price on rental apartments and the market price of apartments does not change. The most likely explanation is that
The maximum price set by the government was at or above the equilibrium price.
Which of the following is NOT a condition of perfect competition?
The product is differentiated.
Consider a delivery firm that delivers packages by bicycle, charging $13 per package and paying each of its workers $12 per hour. One day, one of the workers was two hours late to work, and the number of packages delivered that day decreased by one package.
The tardiness of the worker = increased the firm's profit. B. Based on the new information provided by the tardy worker, the firm should produce fewer deliveries by reducing its workforce because the marginal cost is = greater than the price.
Assume that there is rent control in Chicago. Which of the following is true?
The total surplus will fall because there will be a shortage of apartments.
Oligopoly
There are a few large firms and barriers to entry. The products may be differentiated but are similar enough consumers can switch to the competition. One firm's profits depend on the other firm's behavior.
In the long run, the main reason that a monopolist can earn positive economic profits while a perfectly competitive firm cannot is
There are no barriers to entry in a perfectly competitive market.
If the government imposes a price ceiling in a mark above the equilibrium price:
Total surplus in the market decreases
If the government imposes a quantity restriction on how many shoes can be imported into a country, and the total quantity is below the market equilibrium
Total surplus in the market decreases
Economic cost:
Typically exceeds accounting cost, Accounting profit exceeds economic profit
Average Variable Cost (AVC)
VC / Q variable cost divided by the quantity
consumer surplus
WTP-P(demand curve - price)
Your firm has a price of $8, an average total cost of $10, and an average variable cost of $7. In the long run should you stay in business or exit the market? Why?
Zero
Explicit cost
a monetary payment
A single from selling its output in a contestable market will
be threatened constantly by the entry of new firms
The rational outcome of a guaranteed price matching or "meet-the-competition" policy is that:
both firms will set at the high price
total surplus
consumer surplus + producer surplus
A natural monopoly occurs when
economies of scale are large enough so that one firm can produce the good at a lower cost
True or False: Quantity restrictions such as licensing are good for consumers.
false
One can tell that figure 8.4 shows short run costs because:
graph: Total cost and variable cost are the exact same type of line. But are separate two separate lines.
To maximize profit, a monopolist picks the quantity at which
marginal revenue equals marginal cost
Your firm wants to expand production. If your long run average cost decreases as you increase output what should you do? If your long run average cost increases as you increase output what should you do?
one large facility, multiple small facilities
Your firm has a price of $10, an average total cost of $12, and an average variable cost of $9. In the short run, you should
operate because price exceeds average variable cost In the long run, you should exit the market because average total cost exceeds price .
our firm has a price of $10, an average total cost of $12, and an average variable cost of $9. In the short run, you should
operate. In the long run, you should: exit the market because average total cost exceeds price
Implicit Cost:
opportunity cost
What three conditions must hold for a market to work
perfect competition, no externalities, informed decision makers.
LR Perfectly competitive market
profits = 0
In some cases, a patent is socially beneficial because it
provides a valuable product that would not otherwise be developed.
Senior citizens pay less than everyone else for admission to a movie, but pay the same as everyone else for popcorn because popcorn is
resalable but admission is not.
producer surplus equals
the amount sellers receive for their goods minus their costs of production,
Dead Weight Loss (DWL)
the fall in total surplus that results from a market distortion, such as a tax
Suppose a tax is imposed on energy drinks that have a price elasticity of demand equal to 2, and price elasticity of supply equal to 1. We would expect that
the producers of energy drinks containing sugar would pay a larger portion of the tax
Marginal cost formula
total cost / change in quantity
Short run can be shown on a graph when
total costs are positive when output is zero implying fixed cost
A price set below the equilibrium price
will do nothing to the market
