MicroEcon Exam #3
With perfect price discrimination the monopoly
eliminates deadweight loss
Assume a firm in a competitive industry is producing 800 units of output, and it sells each unit for $6. Its average total cost is $4. Its profit is
$1,600
Tony's Taco Truck has average variable costs of $1 and average fixed costs of $2 when it produces 50 units of output (tacos). The truck's total cost at 50 units of output is,
$150
In a competitive market the price is $8. A typical firm in the market has ATC = $6, AVC = $5, and MC = $8. How much economic profit is the firm earning in the short run?
$2 per unit
When a certain monopoly sets its price at $8 it sells 64 units. When the monopoly sets its price at $9 it sells 62 units. The marginal revenue for the firm over this range is
$23
Ellie has been working for an engineering firm and earning an annual salary of $80,000. She decides to open her own engineering business. Her annual expenses will include $15,000 for office rent, $3,000 for equipment rental, $1,000 for supplies, $1,200 for utilities, and a $35,000 salary for a secretary/bookkeeper. Ellie will cover her start-up expenses by cashing in a $20,000 certificate of deposit on which she was earning annual interest of $500. Ellie's annual accounting costs will equal
$55,200
Suppose that a firm has only one variable input, labor, and firm output is zero when labor is zero. When the firm hires 6 workers it produces 90 units of output. Fixed costs of production are $6 and the variable cost per unit of labor is $10. The marginal product of the seventh unit of labor is 4. Given this information, what is the total cost of production when the firm hires 7 workers?
$76
Because a monopolist is the sole producer in its market, it can necessarily alter the price of its good (i) Without affecting the quantity sold (ii) Without affecting its average total cost (iii) By adjusting the quantity it supplies to the market
(iii) only
A firm produces 400 units of output at a total cost of $1,200. If fixed costs are $200,
Average variable cost is $2.50
Bev is opening her own court-reporting business. She financed the business by withdrawing money from her personal savings account. When she closed the account, the bank representatives mentioned that she would have earned $300 in interest next year. If Bev hadn't opened her own business, she would have earned a salary of $25,000. In her first year, Bev's revenues were $30,000, and she spent $1,000 on materials and supplies. Which of the following statements is correct?
Bev's economic profit is $3,700
Susan quit her job as a teacher, which paid her $36,000 per year, in order to start her own catering business. She spent $12,000 of her savings, which had been earning 10 percent interest per year, on equipment for her business. She also borrowed $12,000 from her bank at 10 percent interest, which she also spent on equipment. For the past several months she has spent $1,000 per month on ingredients and other variable costs. Also, for the past several months she has taken in $3,500 in monthly revenue. In the short run, Susan should
Continue to operate her business, but in the long run she should exit the industry
Consider a firm that operates in a perfectly competitive market. Currently the firm is producing 300 units of output and the price is $20. If marginal cost at 300 units is $22, the firm
Could increase profits by reducing output from 300 units
When firms are neither entering nor exiting a perfectly competitive market
Economic profits must be zero
When do entry and exit occur perfect competition? In the short-run, the long-run, both, or neither?
In the long-run because if market price drops below the minimum of ATC the firm will exit the industry. (A firm may shut-down in the short-run, but they cannot exit because exiting means getting rid of fixed assets, leases and other long-run contracts)
If a profit-maximizing firm in a competitive market discovers that, at its current level of production, price is greater than marginal cost, it should
Increase its output
If all existing firms and all potential firms have the same cost curves, there are no inputs in limited quantities, and the market is characterized by free entry and exit, then the long-run market supply curve
Is horizontal and equal to the minimum of long-run average cost for each firm
Diseconomies of scale occur when
Long-run average total costs rise as output increases
The monopolist's profit-maximizing quantity of output is determined by the intersection of which of the following two curves?
Marginal cost and marginal revenue
If marginal cost is rising,
Marginal product must be falling
Should a firm shut down immediately if it is making losses?
Not if the firm is still able to cover some of its fixed costs in the short-run. (A firm can minimize losses by operating at a loss in the short-run, but in the long-run a firm should shut down if they are making losses.)
The cost functions graphed with q (output) and cost get their shape from:
The production function (The key is how variable inputs are combined with fixed inputs to make production, which depends on the full production function with both fixed and variable inputs.)
Which of the following formulas would correctly calculate a monopolist's profit?
Profit = (price - average total cost) x quantity
Imagine a monopolist could charge a different price to every customer based on how much he or she were willing to pay. How would this affect monopoly profits?
Profits would the highest possible
The MC curve intersects the AVC and ATC at their minimum because:
The AVC and ATC follow the MC, so they decrease when MC is lower and Increase when MC is higher..
On a 100-acre farmer is able to produce 3,000 bushels of wheat when he hires 2 workers. He is able to produce 4,400 bushels of wheat when he hires 3 workers. Which of the following possibilities is consistent with the property of diminishing marginal product?
The farmer is able to produce 5,600 bushels of wheat when he hires 4 workers
What two rules does a perfectly competitive firm apply to determine its profit-maximizing quantity of output?
The output rule (MR = MC) and the zero-profit rule (Price = min ATC) (MR = MC identifies the optimal quantity, and Price = min ATC identifies positive profits.)
Monopolist use the output rule MR = MC, but unlike Perfect Competition P > MR because
The statement is true, P > MR = MC for a monopolist, which is how they make monopoly profits (P > MR for a monopolist because if they raise price they lose some business and if they decrease price they lose revenue on the units of output they sell)
Perfect competitive markets have the characteristics that:
There are many firms competing with each other (Competitive markets have many firms that compete against each other, with products that are the same, and it is easy to enter/exit the market)
In the short run, a firm incurs fixed costs
Whether it produces output or not
Juan Pablo and Zak are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on radio or not at all. If they both advertise on TV, each will earn a profit of $8,000. If they both advertise on radio, each will earn a profit of $14,000. If neither advertises at all, each will earn a profit of $20,000. If one advertises on TV and other advertises on radio, then the one advertising on TV will earn $12,000 and the other will earn $10,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will earn $22,000 and the other will earn $4,000. If one advertises on radio and the other does not advertise, then the one advertising on radio will earn $24,000 and the other will earn $8,000. If both follow their dominant strategy, then Juan Pablo will
advertise on radio and earn $14,000
Assume that the countries of Irun and Urun are the only two producers of crude oil. Further assume that both countries have entered into an agreement to maintain certain production levels in order to maximize profits. In the world market for oil, the demand curve is downward sloping. The fact that both countries have colluded to earn higher profit shows their desire to keep their combined level of output
below the Nash Equilibrium level.
Which of the following statements is not correct? a. Marginal cost is always less than average total cost in a natural monopoly b. Discount coupons available free to the public are a type of price discrimination c. Part of the deadweight loss associated with monopoly is measured by the monopolist's economic profit. d. Anti-trust laws make it harder for firms to create synergies
c. Part of the deadweight loss associated with monopoly is measured by the monopolist's economic profit.
Which of the following is not a difference between monopolies and perfectly competitive markets? a. Monopolies can earn profits in the long run while perfectly competitive firms break even b. Monopolies charge a price higher than marginal cost while perfectly competitive firms charge a price equal to marginal cost c. Monopolies face downward sloping demand curves while perfectly competitive firms face horizontal demand curves d. Monopolies choose to produce the quantity at which marginal revenue equal marginal cost while perfectly competitive firms do not.
d. Monopolies choose to produce the quantity at which marginal revenue equal marginal cost while perfectly competitive firms do not.
When the marginal revenue curve is drawn for a monopolist, the curve
is below the monopolist's demand curve, beyond the initial unit produced.
Because a monopolist does not face competition from other firms, the outcome in a market with a monopoly
is often not in the best interest of society
Game theory is necessary for understanding
oligopoly, but it is not necessary for understanding monopoly or competition
When a monopolist increases the number of units it sells, there are two effects on revenue. They are the
output effect and the price effect.
Like monopolists, oligopolists are aware that an increase in the quantity of output always
reduces the price of their product
Antitrust laws may
restrict the ability of firms to merge