Microeconomics Exam 3

Zero profit equilibrium

-Economic profit is zero -Accounting profit is positive

cartel

A group of firms that act in unison to maximize collective profits is called a

(c) marginal revenue is equal to marginal cost.

A profit-maximizing monopolist will produce the level of output at which (a) average revenue is equal to average total cost. (b) average revenue is equal to marginal cost. (c) marginal revenue is equal to marginal cost. (d) total revenue is equal to opportunity cost.

Identical Costs

All existing firms and potential entrants have

True

As P rises, firms with lower costs enter the market before those with higher costs

Decreases

As a monopolist increases the quantity of output it sells, the price consumers are willing to pay for the good

in the short run but not in the long run.

Assume a certain firm regards the number of workers it employs as variable but regards the size of its factory as fixed. This assumption is often realistic

Subnormal Profit

Economists call negative profit a

Supernormal Profit

Economists call positive profit a

Normal Profit

Economists call zero profit a

total cost

Explicit Cost + Implicit Cost

Third Degree Price Discrimination

Firms divide customers into groups based on some observable trait that is likely related to willingness to pay

Total Cost

Fixed Cost + Variable Cost

production function

For a firm, the relationship between the quantity of inputs and quantity of output is called the

(b) the cost of the steel that is used in producing automobiles

For a large firm that produces and sells automobiles, which of the following costs would be a variable cost? (a) the $20 million payment that the firm pays each year for accounting services (b) the cost of the steel that is used in producing automobiles (c) the rent that the firm pays for office space in a suburb of St. Louis (d) All of the above are correct.

(d) marginal revenue must decrease.

If a monopoly lowers its price, its (a) total revenue must increase. (b) total revenue must decrease. (c) marginal revenue must increase. (d) marginal revenue must decrease.

-New firms enter, SR market supply shifts right -P falls, reducing profits and slowing entry

If existing firms earn positive economic profit:

Some firms exit, SR market supply shifts left P rises, reducing remaining firms' losses

If exiting firms earn negative economic profit:

(a) price is less than average total cost.

In the long run, all of a firm's costs are variable. In this case the exit criterion for a profit-maximizing firm is to shut down if (a) price is less than average total cost. (b) price is greater than average total cost. (c) average revenue is greater than average fixed cost. (d) average revenue is greater than marginal cost.

• All firms have identical costs • Costs do not change as other firms enter or exit the market

Long run supply curve is horizontal if

• Firms have different costs • Costs rise as firms enter the market • Costs fall as firms exit the market

Long run supply curve might slope upward if

$75

Ryan sells 200 plastic ball point pens at $0.50 each. His total costs are $25. His profits are

Increase

Suppose that firms in a competitive industry are earning positive economic profits. All else equal, in the long run, we would expect the number of firms in the industry to

Average Revenue

TR/Q

(c) stay open because shutting down would be more expensive.

The accountants hired by the Brookside Racquet Club have determined total fixed cost to be $75, 000, total variable cost to be $130, 000, and total revenue to be $145, 000. Because of this information, in the short run, the Brookside Racquet Club should (a) shut down. (b) exit the industry. (c) stay open because shutting down would be more expensive. (d) stay open because the firm is making a supernormal economic profit.

marginal cost

The amount by which total cost rises when the firm produces one additional unit of output is called

True

The entry of new firms increases demand for this input, causing its price to rise

(b) provides insight into why cooperation is difficult.

The prisoners' dilemma game (a) provides insight into why cooperation is individually rational. (b) provides insight into why cooperation is difficult. (c) is a game in which neither player has a dominant strategy. (d) is a game in which exactly one of the two players has a dominant strategy.

duopoly

The simplest type of oligopoly is

its fixed cost in the short run and zero in the long run

The total cost to the firm of producing zero units of output is

Long Run

Time period over which all inputs are variable

Short Run

Time period over which some inputs are fixed and others are variable

price discrimination

What do economists call the business practice of selling the same good at difference prices to different customers?

(a) buyers will go elsewhere.

When firms are said to be price takers, it implies that if a firm raises its price, (a) buyers will go elsewhere. (b) buyers will pay the higher price in the short run. (c) competitors will also raise their prices. (d) firms in the industry will exercise market power.

P=ATC

Zero economic profit when

Natural monopoly

a single firm can produce the entire market Q at a lower cost than could several firms

Marginal change

proportionally small addition or subtraction to an existing quantity of a variable

Average

dividing the sum of values in a set by their number

Exit

existing firms close and stop selling in a market in the LR

Variable inputs

firm is able to change the amount of the input

Fixed inputs

firm is unable to change the amount that it currently has

Entry

new firms open up and begin selling in a market in the LR

Price Taker

take price as given, choose only how much to make and sell

Marginal revenue

the additional revenue a firm receives from selling one more unit • Not always equal to price

Accounting Profit

total revenue - explicit costs

Economic Profit

total revenue - total cost

Price x Quantity

total revenue =

Price Maker

you can choose the price to charge

Variable Cost

• A cost that can change in the SR and LR • Costs associated with the variable inputs

Fixed Cost

• A cost that cannot change in the SR (can change in the LR) • Costs associated with the fixed inputs

Sunk Cost

• A cost you can't get rid of • Costs can be sunk in the SR, but not in the LR

Oligopoly

• A few sellers • Very close substitutes • Barriers to entry/exit in LR

Cartel

• A group of firms acting in unison

Collusion

• Agreement among firms in a market about quantities to produce or prices to charge • AT&T and Verizon could agree to each produce half of the monopoly output

Competitive Firm

• Can keep increasing its output without affecting the market price • So, each one-unit increase in Q causes revenue to rise by P I.e., MR=P

Perfect (First Degree) Price Discrimination

• Charge each customer a different price based on their willingness to pay • Monopoly firm gets the entire surplus (profit) • No deadweight loss • Closest example: auctions

Implicit costs

• Do not require a cash outlay E.g., the opportunity cost of the owner's time

Marginal Product (MP)

• Increase in output that arises from an additional unit of input -All other inputs held constant • Slope of the production function

Marginal Cost (MC)

• Increase in total cost arising from extra production • Increase in total cost from producing an additional unit of output

Economies of Scale

• LRATC falls as the quantity of output increases -Increasing specialization among workers -More common when Q is low

Diseconomies of Scale

• LRATC rises as the quantity of output increases • Increasing coordination problems in large organizations -E.g., management becomes stretched, can't control costs -More common when Q is high

Constant Returns to Scale

• LRATC stays the same as the quantity of output changes

Perfect Competition (PC)

• Many buyers and sellers • Identical products/close substitutes • Full information • Entry/exit in LR

Monopoly

• One seller • No close substitutes • Barriers to entry/exit in LR

The prisoners' dilemma

• Particular "game" between two captured prisoners • Illustrates why cooperation is difficult to maintain even when it is mutually beneficial

Explicit costs

• Require an outlay of money E.g., paying wages to workers

Production Function

• Shows the relationship between -The quantity of inputs used to make a good - The quantity of output of that good • Gets flatter as production rises

Dominant Strategy

• Strategy that is best for a player in a game, regardless of the strategies chosen by the other players • Stick to one action

Long run equilibrium

• The process of entry or exit is complete • Remaining firms earn zero economic profit

Payoff Matrix

• Tool used to determine Nash Equilibrium (Nash Equilibria) • 2x2 matrix that shows players' strategies, outcomes, and payoffs

Marginal Revenue

∆TR/∆Q