MICRO- Exam 2
three ways to earn a big pay off
1. work exceptionally hard 2. have some unique skill/talent 3. be lucky
Firms in perfectly competitive markets: a. simultaneously choose price and the level of output to max. profits. b. choose the price that max. the number of units sold. c. has no control over price, and instead choose the level of output to max. profits.
C
if output can be varied continuously, then firms in a perfectly competitive market max. their profits by choosing the level of output such that __________
Price = marginal cost
imperfectly competitive firm
a firm that has at least some control over the market price of its product
profit-maximizing firm
a firm whose primary goal is to maximize its profit
long run
a period of time of sufficient length that all the firm's factors of production are variable
short run
a period of time sufficiently short that at least some of the firm's factors of production are fixed
law of diminishing returns
a property of the relationship between the amount of a good or service produced and the amount of a variable factor required to produce it; the law says that when some factors of production are fixed, increased production of the good eventually requires ever-larger increases in the variable factor
factor of production
an input used in the production of a good or service
variable factor of production
an input whose quantity can be altered in the short run
fixed factor of production
an input whose quantity cannot be altered in the short run
1.All firms sell identical (homogeneous) product 2.Consumers are indifferent to different sellers 3.Many sellers or firms 4.Firms are price takers 5.Free entry and exit - no barriers to entry or exit 6.Instantaneous entry and exit 7.Complete Information 8.Firms maximize profits
assumptions for perfectly competitive markets
any force that prevents firms from entering a new industry (legal constraints & practical factors)
barrier to entry
doubling all inputs doubles output
constant returns to scale
average costs _____ as the output increases
decreases
the profit max. quantity ________ depend on fixed cost
doesnt
one that yields a higher payoff no matter what the other player does
dominant strategy
a firm should increase output ONLY if the extra benefit (price) _______ the extra cost (marginal cost)
exceeds (cost-benefit principle)
economic profit is also called ________ ______
excess profits
payments firms make to purchase (resources & products from other firms)
explicit costs
1.Exclusive control over inputs 2.Patents and copyrights 3.Government licenses or franchises 4.Economies of scale (natural monopolies) 5.Network economies
five sources of market power
a firm's profit-max. level of output will not change when the firm's _______ cost changes.
fixed
start up costs can be thought of as a _____ ______
fixed cost
decrease output if marginal benefit is ______________ than marginal cost
greater
discounts for identifiable groups
hurdle method (students, AARP, etc)
in shrinking economic profits, supply __________
increases
output increases by a greater percentage than the increase in inputs
increasing returns to scale
free entry and exit is required for the ______ _______ to work
invisible hand
in a perfectly comp. market, the supply curve for a firm
is the portion of the marginal cost curve that lies above the AVC curve
oligopoly has a small number of ____ _______ producing products that are _______ substitutes.
large firms, close
market power comes from factors that _________ __________
limit competition
increase output if _______ _______ is at least as great as the ___________ ______
marginal benefit, marginal cost
change in total cost divided by change in output=
marginal cost
suppose a professional artist decides to paint one additional painting, the resulting increase in her total cost is the _________ of producing an additional painting.
marginal cost
the amount by which total cost increases when production rises
marginal cost
at each point along a market supply curve, price measures each seller's ________-
marginal cost of production
the firm's ability to raise its price without losing all its sales
market power
perfectly competitive markets
markets in which individual firms have no influence over the market prices of the products they sell
if a firm in a perfectly competitive market chooses the level of output such that price equals marginal cost, then the firm is:
maximizing its profits
the quantity that places a firm at the lowest point on its LRATC curve
min. efficient scale of production
Three types of imperfect competition
monopoly, oligopoly, monopolistic competition
a monopoly that results from economies of scale
natural monopoly
monopoly has _____ ______, no close substitutes
one seller
implicit costs are the _______________ _______ of the resources supplied by the firm's owners
opportunity costs
ATC declines sharply, as ______ ________
output increases
Firms in perfectly competitive markets face demand curves that are __________
perfectly elastic
a game in which each player has a dominant strategy, and when each plays it, the resulting payoffs are smaller than if each had played a dominated strategy
prisoner's dilemma
Tit-for-tat is ________ observed in the market
rarely
1. high start up costs 2. adopt mass production techniques 3. specialization and division of labor 4. learning by doing 5. quantity discounts 6. economies of scope (producing two or more similar products @ the same time)
reasons for economies of scale
the percentage change in output from a given percentage change in ALL inputs
returns to scale
as the number of suppliers in the market increases, the market supply curve will shift to the ______
right
when diminishing returns apply, marginal cost _____ as production increases
rises
imperfectly comp. firms are price ________
setters (long-run economic profits possible & they reduce economic surplus)
the period of time sufficiently short that at least some of the firm's factors of production are fixed is known as the ____________
short run
monopolistic competition has many firms producing __________ _________ products that are reasonably ______ substitutes.
slightly differentiated, close
___________ is a recipe for production
technology
in the short run, a profit-max firm will not produce anything if
the firm's revenue is less than its variable cost at all levels of production
market equilibrium, there are _____ economic profits
zero
supply will increase as the number of _____________. a. sellers increase b. sellers decrease c. buyers decrease d. buyers increase
A
when some of a firm's factors of prod. are fixed, the law of DMR states that increased production of the good eventually requires: A. even-larger increases in the variable factor. B. even smaller increases in the variable factor
A
supply curves are upward sloping in part because as prices rise... a. firms with a higher opp. cost of producing the product will be willing to start supplying the product. b. the marginal benefit to consumers of consuming the product increases as price increases. c. individual suppliers already in the market will be willing to turn to more costly production techniques to supply more of the product.
A & C
if the marginal cost of producing the 500th unit of a good is greater than price of that good, then the firm should: a. produce the 500th unit b. not produce the 500th unit
B
which of the following capture conditions under which firms will shutdown? a. if the firm's revenue is less than the firm's total cost at all levels of output. b. if price is less than average variable cost even when the firm produces at the level of output that minimizes average variable cost. c. if the firm's revenue is less than the firm's variable cost at all levels of output.
B, C (short-run shutdown condition: P x Q < VC for all levels of Q)
normal profit is the difference between ______________ and ______________
accounting profit, economic profit
the marginal cost curve must intersect both the _______________ AND ______________
average variable cost curve (AVC) & average total cost curve (ATC)
in a repeated prisoner's dilemma, both players _____ from collaboration
benefit
When timing matters, a ________ _______ is a more useful way of representing payoffs
decision tree or game tree
in the law of diminishing returns, if the variable factor goes up, the fixed factor must ________ as it progresses
decrease (3 workers, 20 cakes, 4 workers, 30 cakes, 5 workers, 35 cakes)
accounting profit is _____ to compute and _____ to compare across firms
easy
the demand curve facing a perfectly competitive firm, is perfectly __________ at the market price.
elastic
the competitive firm produces where price ____ marginal cost
equals
average total cost (ATC)=
total cost/output
accounting profit= ___________ - __________
total revenue- explicit costs
a good whose production has a large start-up cost and low _____ ______ is subject to economies of scale.
variable cost
________ ________ occur when the value of the product increase as the number of users increases
network economies (DVDs, telephones, eBay, facebook & instagram)
says my move in this round it whatever your move was in the last round
tit-for-tat strategy
a firm's fixed cost is the sum of all payments made...
to the firm's fixed factors of production
a firm is profitable if its total revenue exceeds its __________
total cost
a firm is profitable if its total revenue exceeds its _______________
total cost
fixed cost + variable cost=
total cost
measuring profit graphically
(profit-ATC)(# of item sold) subtract top of rectangle from bottom on the cost side then multiply by number at the end of the rectangle
Advantages of second mover
1. learn from first mover's mistakes 2. play around 1st mover
4 characteristics of a perfectly competitive market
1. all firms sell the same standardized product. 2. the market has many buyers and sellers, each of which buy a small fraction of the total quantity exchanged. 3. productive resources are mobile. 4. buyers and sellers are well informed.
Advantages of first mover
1. name recognition 2. create barriers
at each point along a market supply curve, _____ measures each seller's marginal cost of production
price
a firm that has no influence over the price at which it sells its product is a _____________.
price taker
actions have payoffs that depend on:
1. the actions 2. when they are taken 3. actions of others
