Microeconomics Final, Chapter 14 - Oligopoly, Econ: Chapter 17 Oligopoly, Oligopoly APecon Chapter 17, Monopoly Quizlet for Ch. 15, Chapter 13 Natural Monopoly, Chapter 15: Monopoly, Chapter 15 Monopoly, Chapter 14: Firms in Competitive Markets, Chap...
What is Total Cost (TC)?
"Expenses" of inputs in firm production (i.e. Wages)
What is Total Revenue (TR)?
"Income" received from sale of firm's outputs
What is Profit?
"Net Amount" from Total Revenue minus Total Cost
13.)
For a profit-maximizing monopoly that charges the same price to all consumers, what is the relationship between price P, marginal revenue MR, and marginal cost MC?
Sherman Antitrust Act (1890)
Forbids collusion between competitors (Restraint of trade and antitrust laws)
6.)
Give an example of a government-created monopoly. Is creating this monopoly necessarily bad public policy? Explain
4.)
Give two examples of price discrimination. How does perfect price discrimination affect consumer surplus, producer surplus, and total surplus?
9.)
Give two examples of price discrimination. In each case, explain why the monopolist chooses to follow this business strategy.
53. A large oligopoly—that is, an oligopoly with a large number of firms—is essentially a a. large monopolist. b. large monopolistically competitive market. c. group of competitive firms. d. violator of antitrust laws.
: c. group of competitive firms.
61. To increase their individual profits, members of a cartel have an incentive to a. decrease price. b. increase production. c. cheat. d. All of the above are correct.
: d. All of the above are correct.
Nash equilibrium equation
= n / (n+1)
profit
=total rev-total cost
accounting profit
=total rev.- explicit costs
economic profit
=total rev.-total costs
Examples of Price Discrimination:
Admission Rates, Movie Tickets, Discounts, Cellphone Providers
technology
Advance ____ destroys the reasons for regulation
loss, subsidy
Again the firm operates at a ___ and would need a ____.
Dominant strategy
An action when it is the player's best action regardless of the action taken by the other player Not all games have a dominant strategy - it depends on the structure of payoffs in the game
positive economics
An approach to economics that seeks to understand behavior and the operation of systems without making judgments. It describes what exists and how it works.
Product Differentiation
An attempt by a firm to convince buyers that its product is different from the products of other firms in the industry
command economy
An economy in which a central government either directly or indirectly sets output targets, incomes, and prices
What is a copyright?
An exclusive right granted to the author or composer of a literary, musical, dramatic or artistic work so the author can profit from that work
What is a patent?
An exclusive right granted to the inventor of a product or service so the inventor can make, use, and sell the product for a certain amount of time.
What is an Externality?
An impact compensated well-being of a by stander (Positive or Negative)
imperfectly competitive industry
An industry in which single firms have some control over the price of their output
Duopoly
An industry in which there are only two producing firms If this were a perfectly competitive industry, each firm would have an incentive to produce more as long as the market price was above marginal cost.
Oligopoly
An industry with only a few sellers
2 Approaches of Public Policies:
Command & Control, and Market Based
15.)
Compared to the social optimum, a monopoly firm chooses
What are Implicit Costs?
Costs that do not require money spending. (Time, Opportunity Cost)
What are Explicit Costs?
Costs that requires money use and spending. ($)
7.)
Define natural monopoly. What does the size of a market have to do with whether an industry is a natural monopoly?
5.)
Describe the ways policymakers can respond to the inefficiencies caused by monopolies. List a potential problem with each of these policy responses.
11.)
Describes the two problems that arise when regulators tell a natural monopoly that it must set a price equal tc marginal cost.
2.)
Explain how a monopolist chooses the quantity of output to produce and the price to change.
Regulation:
Government Interference sets the Monopoly Price
undesired; cost
Government failures alters the mix of output in ____ ways, causing a ____ to society
Transaction Costs:
Lengthy process of agreeing on a bargain, makes a difficult mutually beneficial agreement
Four factors that make it hard for an industry to coordinate on high prices
Less concentration Complex Products and Pricing Schemes Differences in Interests Bargaining power of buyers
What are some market barriers created by the government?
Licensing, patents, and copy right
What are the 3 government created barriers?
Licensing, patents, and copyrights
Which Cost is more efficient?
Long Run; smallest ATC.
What is LRATC?
Long-Run Average Total Cost.
To sell at a Larger Q, Monopoly must:
Lower Price from all units sold = MR < P
Socially Optimal Q maximizes welfare:
Lower Q: Social Value > Cost Higher Q: Social Value < Cost
Marginal Cost Formula:
MC = Change in TC /Change in Q
Two forms of imperfect competition
Oligopoly and monopolistic competition
lower
One firm can provide the good or service at a ____ cost than several competing firms
Price Leadership
One firm tacitly sets its price first and other firms then follow This sets the industry as a whole
theory of comparative advantage
Ricardo's theory that specialization and free trade will benefit all trading parties, even those that may be absolutely more efficient producers.
The ideal corrective tax is equal to:
The external cost
diseconomies of scale
The property whereby long-run average total cost rises as the quantity of output increases (right-most upward sloping part of the long-run ATC)
Payoff
The reward received by a player in a game Such as the profit earned by an oligopolist
moral hazard
The risk that the behavior of one party may change to the detriment of another after a contract has been agreed upon. Example: Those with insurance may be less likely to guard against loss than those without insurance.
Reasons why Private Solution aren't that efficient:
Transaction Costs, Stubbornness, Coordination Problems
What is an example of licensing?
Trash collection in municipals. Other gov't created monopolies include public transit, highway road construction, public education, etc.
indifference curve
a curve showing the combinations of two goods that leave the consumer with the same level of utility.
product differentiation
a positioning strategy that many firms use to distinguish their products from those of competitors
positive relationship
a relationship between two variables which a decrease in one is associated with a decrease in another. and a increase in one is associated with an increase in another
negative relationship
a relationship between two variables which a decrease in one is associated with an increase in another or vice versa
As a general rule, when accountants calculate profit they account for explicit costs but usually ignore a. certain outlays of money by the firm. b. implicit costs. c. operating costs. d. fixed costs.
b. implicit costs.
Internalizing a negative externality will cause the supply curve of an industry to a. shift to the right. b. shift to the left. c. expand. d. remain unchanged.
b. shift to the left.
atc
bath tub graph
fixed cost
does not vary with the output or quantity produced
If the government were to impose a fee of $10,000 for each unit of air-pollution released by a steel mill, this policy would be considered a a. subsidy. b. regulation. c. Pigovian tax. d. command-and-control policy.
c. Pigovian tax.
implicit costs
do not require cash, opportunity cost; like not advertising
Since restored historic buildings convey a positive externality, local governments may choose to a. provide tax breaks to owners who restore them. b. restrict the destruction of historic buildings. c. increase property taxes in historic areas. d. All of the above are correct. e. Both a and b are correct.
e. Both a and b are correct.
suppose the socially-optimal quantity of good x is 2500 units and the market-equilibrium quantity of good x is 3000. When 2,500 units of good x are produced, the social cost of good x
equals the private value of good x
average fixed cost
fc/Q (q quantity produced (that your firm is making))
free rider problem
getting the benefits of something without having to contribute.. this problem also arises when individuals receive the benefit whether they contributed or not (Cleaner air).
inferior goods
good that demand falls when income rises
outputs
goods and services of value to households
consumer goods
goods produced for present consumption
substitues
goods that can serve as replacements for one another; wen the price of one increases demand for the other increases
capital
goods used to produce other goods
normal goods
goods which demand goes up when income is higher and goes down when income is lower
command-and-control policy
gov. option to regulate -set specific amount -ex; set limit on how much pollution a firm can emit
laissez faire economy
government has zero to no control over the economy
government failure
government intervention that fails to improve economic conditions.
antitrust
government intervention to alter market structure or prevent abuse of market power. This alters an entire market
Regulation
government intervention to alter the behavior of firms- for example, in pricing, output, or advertising. This alters certain firms
Game theory
helps us understand oligopoly and other situations where "players" interact and behave strategically -dominant strategy -prisoner's dilemma
diminishing marginal product
hiring another worker, total output increasing but total cost is diminishing
over short periods of time-
it is often difficult to enter and exit a market so we make the assumption of having a fixed # of firms in the short run
by contrast, if a firm can influence the market price of the good it sells,
it is said to have market power
worse; regulated
market outcomes after regulations may be ____ than before the industry was _____
monopolistic competition
market structure of an industry in which there are many firms and freedom of entry and exit but in which each firm has a product somewhat differentiated from the others, giving it some control over its price
a firm in a competitive market, like other firms, tries to...
maximize profit (total revenue-total cost)
Split
means leaving the decision up to someone else
cross price elasticity of demand
measures the responsiveness of the quantity demand of a good to a change in the price of another good.
income elasticity of demand
measures the responsiveness of the quantity demanded of a good to the change in the income of the people demanding the good. Formula: (%change in quantity demanded) / (%change in income)
What are the welfare effects of price discrimination?
monopolist is better off, consumers are worse off. Increases welfare of society, encourages economic activity, reduces deadweight loss
What is the firm demand curve like for a monopoly?
monopoly firm demand curve slopes downward.
marginal revenue (mr)
the additional revenue that a firm takes in when it increases output by one additional unit
producer surplus
the amount a seller is paid for a good minus the seller's cost of providing it.
quantity supplied
the amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period.
total revenue is proportional to
the amount of output;
total revenue (tr)
the amount received from the sale of the product; the price per unit X the quantity of output the firm decides to produce
for all type sof firms...
the average revenue equals the price of the good
microeconomics
the branch of economics that studies the economy of consumers or households or individual firms
macroeconomics
the branch of economics that studies the overall working of a national economy
movement along the demand curve
the change in quantity demanded brought about by a change in price
marginal revenue
the change in total revenue from the sale of each additional unit of output
movement along a supply curve
the change quantity supplied brought about by a change in price
shift of a supply curve
the change that takes place in a supply curve corresponding to a new relationship between quantity supplied of a good and the price of that good. The shift is brought about by a change in the original conditions.
imperfect; flawless
the choice society has is not between ______ markets and _____ government intervention
law of supply
the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises
pos hoc, ergo propter hoc
the common misconception that if event a happens before event b that event b happened because of event a
marginal cost
the increase in total cost that arises from an extra unit of production; MC=TC/Q
marginal cost (mc)
the increase in total cost that results form producing one more unit of output
budget constraint
the limits imposed on household choices by income, wealth, and product prices.
income
the money a person gets from salary or wages, profits, interest, investments, and other sources
price regulation
the monopoly will not be allowed to charge its profit maximizing price
Tacit collusion
the normal state of oligopoly rarely allows an industry to push prices all the way up to their monopoly level Collusion is usually far from perfect "firms undergo actions that are likely to minimise a response from another firm, e.g. avoiding the opportunity to price cut an opposition. Put another way, two firms agree to play a certain strategy without explicitly saying so"
complements
two goods for which an increase in the price of one leads to a decrease in the demand for the other and vice versa
homogenous products
undifferentiated products; products that are identical to, or indistinguishable from, one another
externality
unintended side effect that either benefits or harms a third party not involved in the activity that caused it
12.Typical firms in our economy are classified as a.perfectly competitive. b.imperfectly competitive. c.duopolists. d.oligopolists.
b.imperfectly competitive.
Ad Wars
Two firms spend millions on TV ads to steal business from each other. Each firm's ad cancels out the effect of the other, and both firms' profits fall by the cost of the ads (example of prisoner's dilemma)
Prisoners' dilemma
Type of game in which the pay off matrix implies the following: Each player has an incentive, regardless of what the other player does, to cheat—to take an action that benefits it at the other's expense. When both players cheat, both are worse off than they would have been if neither had cheated. Ex: Thelma and Louise
Monopoly Characteristics:
Ultimate Market Power, a barrier to other entering market firms, no Supply Curve, "Price-Maker"
What is Variable Cost (VC)?
Unstable Costs as quantity produced (i.e. wages)
What is External Benefit?
Value of the positive impact on bystanders
What is the Private Value?
Value to the buyers, or price they are willing to pay
What are Long Run Costs?
Variable Costs. (e.g. more factories built or sold)
cooperation
When the game is repeated many times, _____ may be possible.
Payoff matrix
When there are two players - duopoly - the interdependence between the players can be represented with a payoff matrix Each row corresponds to an action by one player each column corresponds to an action by the other Matrix contains four boxes divided by a diagonal line Each box shows the payoff to the two firms that results from a pair of choices
What are Short Run Costs?
Fixed input costs. (e.g. factories and land)
Monopolist Profit Formula:
(P-ATC)*Q where P > ATC
negative externality: Pigouvian Tax
(corrective tax) -when gov. set a tax on a good producing a negative externality, that is = to the externality -this tax will fix the problem because it causes firms to INTERNALIZE the externality
equity
(n.) the state of being just, fair, or impartial; fair and equal treatment; something that is fair; the money value of a property above and beyond any mortgage or other claim
rate; approved
--- increase requests must be ____ by a competent board
measuring profit in a graph for a competitive market
--profit= TR-TC divide and multiply right side by Q profit= (TR/Q - TC/Q) x Q --profit = (P-ATC) x Q
Reasons Monopolies arise:
-Govt created monopoly-Granted permission by gov't to produce good - Natural Monopoly - economies of scale or network externalities or ownership of a key resource
incentive to cheat
-Want to function as if they are a monopoly -Incentive to be the first cheater -Produce more price goes down -If want to sell more have to lower the price, sometimes it earns you more sometimes it earns you less depending if you were in the elastic or inelastic region -Producers are interacting, my response depends on the other person's actions -Always steal for a dominant strategy
when choosing to produce,
-a firm compare the price it receives for the typical unit to the average variable cost that it must spend to produce that typical unit.
marginal cost and the firm's supply decision
-a firm will reach profit maximize at Q when MR=MC (marginal cost =marginal revenue); LOOK AT Qa, Qb, Q1 PIC ON PHONE
at the end of the process of entry and exit though,
-all of of the firms that remain in the market must be making zero economic profit -recall: profit= (P-ATC) x Q -the equation above shows that a firm will producing zero profit, IF AND ONLY IF, the price of the good equals ATC. -if the price is bigger than ATC, then they will be making a profit, if its smaller, they will make losses
the short run: market supply w/ a fixed # of firms
-as long as price is bigger than the average variable cost , each firm will produce the profit maximizing where price (marginal revenue)=marginal cost -recall: at each price, the market quantity supplied is the sum of the quantities supplied by all firms
a shift in demand in the short run and long run
-b/c firms can enter an exit the market in the long run and not the short run, the response of a market to a change in demand depends on the time horizon. SEE PHONE PIC
Public Policy: 2 options gov. uses to deal with externalities
-command and control policies -market-based policies
positive externality: corrective subsidy
-corrective subsidies are an amount paid to an individual for consuming a good or service -corrective subsidy will give the consumer money = to the market value of the positive externality from a transaction -common example: free flu shots
market-based policies
-corrective taxes (pigouvian tax) -corrective subsidies -trade-able permits
a firm's long run decision to exit the market
-cost of exiting the market: even loss (TR) like shutting down -benefit of exiting the market: cost savings: TC (0 FC in the long run) -firm exits if: TR < TC
2)costs change as firms enter and exit the market
-ex. farm products 1)in some markets, the resources used in production may be available only in limited quantities. 2)as more people become farmers, the price of farmland increases which also raises the costs of all farmers in the market 3)an increase in demand for farm products cannot increase the quantity supplied w/o rising the farmers costs which altogether raises the price 4)this ten makes the curve slope upward even w/ free entry into the market
1)if firms have different costs:
-ex. market for painters 1)anyone can enter the market but not everyone has the same costs 2)for any given price, those w/ lower costs are more willing to enter the market than those w/ higher costs 3)in order to increase the market of painters, you must encourage more painter to enter the market. b/c these are the ones w/ higher costs, you must raise the price so that it is worthwhile for them 4)this then leads to the curve sloping upward even w/ free entry into the market
the long run:market supply w/ entry and exit
-firms deciding to enter or exit a market depend on the incentives existing and possibly new owners face. -in the long run, the # of firms can change -if firms that are already in the market are profitable, new firms will want to enter the market:this will expand the # of firms, increase the quantity of the good supplied and drive down prices and profits. -if firms already in the market are making losses, then some of this existing firms will exit the market, this will reduce the quantity supplied for that good and drive up prices and profits.
marginal cost and the firm's supply decision conti.
-if price rises to P2, then the profit-maximizing quantity rises to Q2 -the MC curve determines the firm's quantity at any price -hence, the MC curve is the firm's supply curve SEE PHONE PIC
what determines a firm's decision to shut down?
-if the firm shits down, it loses all revenue from the sale of its product. at the same time, it saves the variable costs of making the product while still having to pay the fixed costs. -the firm shuts down if the revenue that it would earn from producing is less than its variable costs of production
a new firm's decision to enter the market
-in the long run, a new market will chose to enter the market if it s profitable to do so. if TR > TC
the zero profit condition
-long run equilibrium:occurs when the process of enter and exit stop;remaining firms in the market make a profit of 0 -zero economic profit occurs when P= ATC -since firms produce where P=MR=MC the zero profit condition is where P=MC=ATC -recall that MC intersects ATC at its minimum -hence in the long run P=minimum ATC
why do firms stay in business of they make zero profit?
-recall: economic profit is revenue minus ALL of the costs, including implicit costs like the opportunity cost of the owner's time and money -in the zero profit equilibrium: 1)firms make enough revenue to cover for these costs 2)accounting profit is positive; we have seen that economists and accountants measure costs differently. accountants do not take into account implicit costs
difference between a shutdown and permanent exit of a firm
-shutdown refers to a short run decision not to produce anything during a specific period of time b/c of current market conditions -exit refers to a long-run decision to leave the market -the firm's short run and long run decisions are different b/c most firms cannot avoid their fixed costs in the short run but can do so in the long run
in negative externalities:
-social cost curve is above private cost curve -market equilibrium quantity is greater than socially optimal quantity
if firms have different costs,
-some firms can make a profit even in the long run. -in this case, the price in the market is the ATC of the marginal firm, the firm that would exit if the prices got any lower. this firm would earn zero profit but firms w/ lower costs earn positive profit. -firms entering the market does not take away this profit b/c firms that would later enter have higher costs than the firms that already exist in the market and they will only enter if it is profitable for them
if the price doesn't cover the average variable costs,
-the firm is better off stopping production altogether, -it will still lose money (bc it has to pay the fixed costs) but it will lose even more money by staying open. -the firm can reopen in the future if conditions change so that price exceeds the average variable cost.
a graph showing a firm with losses (negative profit)
-the firm maximizes profit by minimizing losses which is again producing the quantity at which price equals marginal cost. -look at the shaded rectangle -the height of the rectangle is (ATC-P) and the width is Q. -the area of the rectangle is (ATC-P) x Q which is the firm's loss -b/c a firm in this situation is not making enough revenue on each unit to cover its ATC,it would choose to exit the market in the long run
graph showing a firm earning positive profit
-the firm maximizes profit by producing the quantity at which price equals marginal cost. -look at the shaded rectangle -the height of the rectangle is (P-ATC), the difference between price and average total cost -the width of the rectangle is Q, the quantity produced. -the area of the rectangle is (P-ATC) x Q which is the firm's profit
a competitive firm's short run supply curve
-the firm's short run supply curve is the portion of the MC above the AVC -if P > AVC, then firm produces Q where P=MC -if P < AVC, the firm shuts down (produces Q=0) SEE PHONE PIC
therefore,
-the process of entry and exit ends only when price and ATC are equal
why the long run supply curve might slope upward
-we have seen that entry and ext cause he long run market supply to be perfectly elastic this is b/c we assume that there are a large # of potential entrants, each w/ the same costs -as a result, the long run market supply curve is horizontal at the minimum of the ATC -when the demand of the good increases, the long run result is an increase in the # of firms and in the total quantity supplied without changing the price
this analysis has a surprising implication:
-we noted earlier that competitive firms maximize profit by choosing a quantity at which price equals marginal cost. we have just discovered that free entry and exit force price to equal ATC. if price is to equal both marginal cost and ATC, these 2 costs must be equal -they are equal but only when the firm is operating at the minimum of ATC -last chapter we had seen that the minimum of ATC is called the firm's efficient scale -therefore, in the long run equilibrium of a competitive market w/ free entry and exit, firms must be operating at their efficient scale
profit maximization
-what Q maximizes the firm's profit? -in order to find this, we must "think at the margin" -if Q increases by 1 unit, revenue rises by MR and cost rises by MC -if MR>MC, then it increases Q to raise profit -if MR<MC, then it reduces Q to raise profit -as long as marginal revenue is bigger than marginal cost, increasing the quantity produced raises profit -if marginal revenue is less than marginal cost, the firms should decrease production
short run
1 variable
continued...
1) At any Q with MR > MC, increasing Q raises profit. 2) At any Q with MR < MC, reducing Q raises profit.
3 Reasons Monopolies arise:
1) Single Firm owns key resource 2) Granted permission by gov't to produce good 3) Natural Monopoly - Absolute Advantage (Q) to produce at a lower cost
3 general rules for profit maximization
1) if marginal revenue is greater than marginal cost, the firm should increase its output 2)if marginal revenue is less than the marginal cost, the firm should decrease its output 3)at the profit-maximizing level of output, marginal revenue and marginal cost are exactly equal
market supply: assumptions
1)all existing firms and potential entrants have identical costs 2)each firm's cost does not change as other firms exit or leave the market 3)the # of firms in the market: -is fixed in the short run (bc of fixed costs) -variable in the long run (bc of free entry and exit)
the long run market supply curve is horizontal if:
1)all firms have identical costs 2)costs do not change as other firms enter or leave the market -if any of these are not true, then the long run market supply will slope upward
characteristics of a perfectly competitive market
1)many buyers and many sellers 2)the goods offered for sale are largely the same 3)firms can freely enter or exit the market
cost curves have 3 features that describe most firms
1)the marginal cost curve is upward sloping (MC) 2)the average total cost curve is u-shaped (ATC) 3)the average total cost curve crosses the marginal cost curve at its minimum
What are the three conditions necessary for price discrimination?
1. market power 2. Firm must be able to distinguish groups of buyers with different willingness to pay (by gender, age, location, preference, etc). 3. Firm must be able to prevent resale (have to make sure the consumers who pay relatively lower price won't be able to sell their products to the consumers who have to pay relatively higher price).
12.)
A firm is a natural monopoly if it exhibits the following as its output increases:
Oligopolist
A firm in an oligopoly industry Each firm has some market power
What is a monopoly?
A firm that is the single seller of a product without close substitutes
Definition of perfect price discrimination:
A firm with market power could collect the entire consumer surplus if it could charge each customer exactly the price that that customer was willing and able to pay.
Definition of price discrimination:
A firm with market power is able to charge different customers different prices.
Strategic behavior in oligopoly
A firm's decision about P or Q can affect other firms and cause them to react. The firm will consider these reactions when making decisions
market
A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade
1.What are the three reasons that a market might have a monopoly? Give two examples of monopolies and explain the reason for each.
A market might have a monopoly because: (1) a key resource is owned by a single firm; (2) the government gives a single firm the exclusive right to produce some good; or (3) the costs of production make a single producer more efficient than a large number of producers.
Definition of Monopoly:
A market structure in which there is only one supplier of a product.
producing an additional unit of a good has two effects:
A positive quantity effect A negative price effect
unitary elasticity
A situation in which total revenue remains the same when prices change.
Marginal Product:
A small change in input unit (additional unit) - all other inputs constant
economic theory
A statement or set of related statements about cause and effect, action and reaction
Tit for tat
A strategy that involves playing cooperatively at first then doing whatever the other player did in the previous period Offers a reward to the other player for cooperative behavior - if you behave cooperative so will i it also punishes for cheating - if you cheat, don't expect me to be nice in the future
lorenz curve
A widely used graph of the distribution of income, with cumulative percentage of families plotted along the horizontal axis and cumulative percentage of income plotted along the vertical axis.
What are Constant Returns to Scale?
ATC - Constant, Q - Increases
Average Total Cost in relation to FC and VC:
ATC = AFC + AVC TC/Q = FC/Q + VC/Q
Average Total Cost Formula:
ATC = TC/Q
What is market power?
Ability to set the market price
Common resources
All would be better off if everyone conserved common resources, but each person's dominant strategy is overusing the resources (example of prisoner's dilemma)
What is Internalizing the externality?
Altering incentives so that people take account of the external effects from actions
Stubbornness:
Although beneficial agreements are possible, there may be a better deal held out
MR= MC
An unregulated natural monopoly produces output where profit hits demand and charges at that price so that equals ___ _____
Definition of barrier to entry:
Anything that impedes the ability of firms to begin a new business in an industry in which existing firms are earning positive economic profits.
increases
As the number of firms in the market ______, -the price effect becomes smaller -the oligopoly looks more and more like a competitive market -P approaches MC -the market quantity approaches the socially efficient quantity
law of diminishing marginal utility
As the quantity of a good consumed increases the extra satisfaction gained decreases
When marginal revenue is greater than average revenue, _______________________.
Average revenue rises.
positive externality
BENEFIT received by an outside party when a transaction takes place
collusion v. self-interest
Both firms would be better off if both stick to the cartel agreement But each firm has incentive to renege on the agreement Lesson: it it difficult for oligopoly firms to form cartels and honor their agreements
Increase Competition:
Breaks up monopoly through policy and antitrust laws
reduced quality
By doing an output regulation there is a risk of ___ ____ if the firm cuts costs to increase profits
Marginal revenue equation:
Change in total revenue divided by change in quantity.
negative externality
COST imposed on on outside party when a transaction takes place
What is Marginal Product of Labour (MPL)?
Change in Quantity divided by Change in Labour (Q/L)
What is consumer surplus under perfect price discrimination?
Consumer surplus is zero
Single Price Monopoly Graph:
Contains all of Monopoly Profit (Pm*Qm), DWL and CS
How can a monopoly limit competition?
Control a resource that is essential in the production process, lobby for government created barriers to competition such as patents or copyrights, control market share, produce a product that has economies of scale, take advantage of network externalities
What are some market barriers that exist naturally in the market?
Control of resources, raising capital, economy of scale
Tying
Critics argue that ______ gives firms more market power by connecting weak products to strong ones. Others counter that _____ cannot change market power: Buyers are not willing to pay more for two goods together than for the goods separately.
In any market, the industry demand curve is _______________________.
Downward-sloping
Welfare Cost of Monopoly:
Increases TS with larger Q since Monopoly Q is too low Monopoly results with DWL
Arms race between military superpowers
Each country would be better off if both disarm, but each has a dominant strategy of arming (example of prisoner's dilemma)
Duopolist
Each firm in a duopoly
economies of scale
Economic profits lure in new firms, but only one can achieve _____ of _____
p= MC
Efficiency calls for marginal cost prices ____ ____
Public Ownership:
Eradicates Privatization transforming in to Public
higher ; lower
Even though oligopolists can maximize profits if they form a cartel and act like a monopolist, self-interest leads each oligopolist to a _____ quantity and _____ price than under the monopoly outcome.
In the real world, perfect price discrimination is very hard to implement because of what?
Firm does not know every buyer's WTP and buyers do not share this information with sellers
What is the demand curve like for a competitive firm?
Firm's demand curve is horizontal. No matter how much Q is produced, does not change market price. MR = P = Demand
Differences in Interests
Firms often differ both in their perceptions about what is fair and in their real interests.
Nonprice competition
Firms that have a tacit agreement not to compete on price often engage in vigorous non price competition Using advertising and other means to try to increase their sales
marginal cost; subsidy
Government regulations well the options are conflicting; ideally we want ___ ____ pricing no _____, full service, and quality service
MPL is beneficial if:
Graph is presented in a Positive Slope
3.)
How does a monopolist's quantity of output compare to the quantity of output that maximizes total surplus? How does this difference relate to the concept of dead-weight loss?
cheat
However, there is an incentive to ____ if you benefit
Output effect
If P > MC, increasing output raises profits
14.)
If a monopoly's fixed cost increase, its price will ____ and it's profit will _____.
benefits; costs; rejected
If anticipated added ____ do not exceed added _____ then the added regulation should be _____
Why would a monopolist suspend operations in the short run?
If its price does not exceed the average variable cost at the quantity the firm produces.
inelastic oligopoly
If one person cuts the price then everyone else cuts the price and you don't make any more money or market share.
increases
If output effect > price effect, the firm ________ production.
reduces
If price effect > output effect, the firm ________ production.
Why would a monopolist shut down permanently?
If revenue is not likely to equal or exceed all costs in the long run.
What is Marginal Cost (MC)?
Increase of Total Cost from an additional product
Two strategies that may lead to cooperation
If your rival reneges in one round, you renege in all subsequent rounds. (renege = go back on promises) "Tit-for-tat" Whatever your rival does in one round (whether renege or cooperate), you do in the following round.
Less concentration
In a less concentrated industry, the typical firm will have a smaller market share than in a more concentrate industry tilts firms toward noncooperative behavior because when a smaller firm cheats and increases its output, it gains for itself all of the profit from the higher output if its rivals retaliate by increasing their output, the firm's losses are limited because of its relatively modest market share indication that there are low barriers to entry
low ; high
In oligopolies, production is too ____ and prices are too _____, relative to the social optimum.
social welfare
In other prisoners' dilemmas, the inability to cooperate may reduce _______ ex) arms race, overuse of common resources
What are the Public Policy - Monopolies:
Increase Competition, Regulation, Public Ownership, and No Policy
What are Economies of Scale?
Increasing Production = Greater Specialization (Narrow Task) ATC - Decreases, Q - Increases
Production Function:
Inputs and Outputs of producing a good. (i.e. workers, products, equipment)
Solution to these externality effects:
Internalize the externality: tax the negative, and subsidize the positive
Interdependence
Involves two or more firms, when each firm's decision significantly affects the profit of the other firms The two firms are playing a "game" in which the profit of each player depends on its own actions and those of the other player(s)
What is Social Cost?
Is the Private + External Cost (Supply Curve)
What are Diseconomies of Scale?
Large Organization Coordination problems. ATC - Increases, Q - Increases
Coordination Problems:
Large parties make coordination more challenging, costly and impossible to organize
If the Price effect is Greater than Output effect:
MR can possibly be negative
How is the MR and demand curve situated on a monopoly graph?
MR is always below the demand curve.
For monopoly, what is the relationship between MR and P?
MR is always less than price (because the price has to be lowered on all previous units sold in order to sell one more unit).
natural monopoly
Many times, a regulated industry no longer is a _____ _____ as substitutes of its good or service become available
Negative Externality effect:
Market Quantity > Socially desirable
Positive Externality effect:
Market Quantity< Socially desirable
Definition of monopoly power:
Market power, the power to set prices
Profit Maximization - Monopoly:
Maximizes Q at MR = MC Sets Highest P where Consumers are WTP Finds P on D Curve
Profit Maximization - Monopoly:
Maximizes Q at MR = MC Sets Highest P where Consumers are willing to pay so Finds P on D Curve
What are the characteristics of a monopoly?
May be small or large, only one supplier of the product, and sells a product where there are no close substitutes.
OPEC
Member countries try to act like a cartel, agree to limit oil production to boost prices and profits. But agreements sometimes break down when individual countries renege. (example of prisoner's dilemma)
What is an example of a patent?
New drug
Does a monopoly have or don't have market power?
Monopoly has market power
Is a monopoly a price taker or price maker?
Monopoly is price maker
illegal
Most people agree that price-fixing agreements among competitors should be _____. (Some economists are concerned that policymakers go too far when using antitrust laws to stifle business practices that are not necessarily harmful, and may have legitimate objectives.)
In order to sell a larger quantity, a firm must reduce what? What law still holds here?
Must reduce price, law of demand still holds here
No Policy:
No action carried out
Does a monopolist produce as much social welfare as competitive firms do?
No it does not produce as much
Negative Externality Examples:
Noise Levels, Pollution
Predatory Pricing
Occurs when a firm cuts prices to prevent entry or drive a competitor out of the market, so that it can charge monopoly prices later Illegal under antitrust laws, but hard for the courts to determine when a price cut is predatory and when it is competitive & beneficial to consumers Many economists doubt that this is a rational strategy It involves selling at a loss, which is extremely costly for the firm (practice / antitrust policies)
Tying
Occurs when a manufacturer bundles two products together and sells them for one price (e.g., Microsoft including a browser with its operating system) Critics argue that this gives firms more market power by connecting weak products to strong ones. Others counter that this cannot change market power: Buyers are not willing to pay more for two goods together than for the goods separately. Firms may use this for price discrimination, which is not illegal, and which sometimes increases economic efficiency.
Resale price maintenance ("Fair Trade")
Occurs when a manufacturer imposes lower limits on the prices retailers can charge. Is often opposed because it appears to reduce competition at the retail level. Yet, any market power the manufacturer has is at the wholesale level; manufacturers do not gain from restricting competition at the retail level. The practice has a legitimate objective: preventing discount retailers from free-riding on the services provided by full-service retailers. (practice / antitrust policies)
Price war
Occurs when tacit collusion breaks down and prices collapse
Nash equilibrium
Of the competitive output, where N is the number of suppliers as the number of suppliers in an oligopoly market increases, the market Q quickly approaches the competitive outcome. Each actor's move makes them worse off, so they have an incentive to not move
Bargaining Power of Buyers
Often oligopolists sell not to individual consumers but to large buyers—other industrial enterprises, nationwide chains of stores, and so on These large buyers are in a position to bargain for lower prices from the oligopolists: they can ask for a discount from an oligopolist and warn that they will go to a competitor if they don't get it
number of firms ; cooperative
Oligopolies can end up looking like monopolies or like competitive markets, depending on the ________ and how ______ they are.
maximize profits
Oligopolists can _____ if they form a cartel and act like a monopolist.
elastic oligopoly
Oligopolists keep their price when other raises price to increase market share.
a firm's decision rule is
P < AVC
Monopoly Equilibrium Quantity Formula:
P > MC
Monopoly Equilibrium Formula:
P > MR = MC
Solve for the TR, MR, equilibrium price, and equilibrium quantity for the following assuming that this individual firm is producing output: P Q MC TR MR 10 0 20 9 1 15 8 2 8 7 3 6 6 4 16
P Q MC TR MR 10 0 10 0 --- 9 1 6 9 9 8 2 8 16 7 7 3 3 21 5 6 4 5 24 3 Compare MC and MR. We want to produce each unit where MC>MR so we will make units 1 and 2 and 3. We will stop at Q*=3 P*=7 because if we produced one more unit of output then our MC (5) would exceed our MR (3) and we would lose money.
A monopolist compared with perfect competitive firm does what?
Produce at a smaller quantity, charges a higher price, can earn positive long run profit
Solve for the TR, MR, equilibrium price, and equilibrium quantity for the following assuming that this individual firm is producing output: P Q MC TR MR 20 0 20 17 1 15 14 2 8 11 3 6 8 4 16
P Q MC TR MR 20 0 20 0 --- 17 1 15 17 17 14 2 8 28 9 11 3 6 33 5 8 4 16 32 -1 Compare MC and MR. We want to produce each unit where MC>MR so we will make units 1 and 2. We will stop at Q*=2 P*=14 because if we produced one more unit of output then our MC (6) would exceed our MR (5) and we would lose money.
efficient, loss
P= MC price equals to opportunity cost. _____ but generates a _____ to the firm p< ATC
How can governments watch monopolies closely?
Passing laws to give government the right to break up monopolist, promoting competition to benefit consumers, regulating market in general
A Corrective Tax is also known as:
Pigovian Tax
antitrust laws
Policymakers use ________ to regulate oligopolists' behavior. The proper scope of these laws is the subject of ongoing controversy.
anticompetitive ; price-fixing.
Policymakers use the antitrust laws to prevent oligopolies from engaging in _____ behavior such as ______--
Positive Externalities Examples:
Positive Health Effects, Environmental factors
Profit Formula
Profit = Total Revenue - Total Cost
Role for policymakers
Promote competition, prevent cooperation to move the oligopoly outcome closer to the efficient outcome.
Market-Based:
Provides Incentives; Corrective taxes and subsidies, pollution permits
total revenue
PxQ
Price effect
Raising output increases market quantity, which reduces
compliance costs
Regulated firms have huge ____ ____
Command and Control:
Regulates Behaviour; Limits pollution quantity, adopting alternative technology methods
balance; cost
Regulatory intervention must ___ the anticipated improvements in market outcomes against the economic ____ of regulation
What are market barriers?
Restrictions that make it difficult for new firms to enter a market.
What is price discrimination?
Selling the same good at different prices to different buyers
What is Price Discrimination?
Sells same good to different people at different prices.
real income
Set of opportunities to purchase real goods and services available to a household as determined by prices and money income.
Price Discrimination is defined by:
The buyer's WTP which also increases Profit.
market failure
Situation in which an unregulated competitive market is inefficient because prices fail to provide proper signals to consumers and producers
Imperfect Competition
Situation in which firms compete but also possess market power - which enables them to affect market prices
Perfect Price Discrimination Graph:
Solely makes Monopoly Profit, no DWL or CS
What is Fixed Cost (FC)?
Stable Costs as quantity produced (i.e. equipment cost, loans and rent)
Clayton Antitrust Act (1914)
Strengthened rights of individuals damaged by anticompetitive arrangements between firms (Restraint of trade and antitrust laws)
Total Cost Formula:
TC = FC +VC
a firm will shut down if
TR < VC
if you divide both sides by Q,
TR/Q < VC/Q
Strategic Behavior
Taking account of the effects of the action it chooses today on the future actions of other players in the game
What are Corrective Taxes?
Taxes that allow decision makers to take accountability of a social cost from a negative externality
What is an example of a copyright?
Textbook or music CDs.
p = min ATC
The ATC curve slopes downward; by increasing output we lower costs more.
Efficient Sale:
The Point where ATC is Minimal (on graph)
What is the External Cost?
The Value of the negative impact on bystanders
larger
The _____ the number of firms, the closer will be the quantity and price to the levels that would prevail under competition.
shift of a demand curve
The change that takes place in a demand curve corresponding to a new relationship between quantities demanded of a good and price of that good. The shift is brought about by a change in the original conditions.
Collusion
The companies will cooperate to raise their joint profits
What is the Private Cost?
The cost directly incurred by sellers
16.)
The deadweight loss from monopoly arises because
The ideal corrective subsidy is equal to:
The external benefit
consumer surplus
The difference between the maximum amount a person is willing to pay for a good and its current market price.
Nash equilibrium
The equilibrium in game theory in which each player takes the action that is best for them given the actions taken by other players and vice versa Also known as non cooperative equilibrium
less
The higher the concentration ratio, the ______ competition
consumer sovereignty
The idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to purchase (and what not to purchase).
fallacy of composition
The incorrect belief that what is true for the individual, or part, must necessarily be true for the group, or whole.
opportunity cost
The next best alternative given up when making a choice
MR=MC rule
The principle that a firm will maximize its profit (or minimize its losses) by producing the output at which marginal revenue and marginal cost are equal, provided product price is equal to or greater than average variable cost. (true for all firms)
What is a Monopoly?
The only market seller of a product without substitutes
Cartel
The strongest form of collusion An arrangement between producers that determines how much each is allowed to produce Most famous cartel (OPEC) - Organization of Petroleum Exporting Countries
Game theory
The study of behavior in situations of interdependence Deals with any situation in which the payoff depends on their own actions and the actions of others
What is Total Cost (TC)?
The sum of Fixed Cost and Variable Cost.
In perfect price discrimination, the price that a monopolist charges to each customer is equal to what?
The willingness to pay of each customer
One shot game
They play the game with each other only once
high fixed costs
This firm would also have ____ ____ ___ that is a large capital input and low marginal costs
If a monopoly is able to drive out potential competitors due to low average cost, what is this known as and define it?
This is known as natural monopoly which is where one firm can satisfy the entire market demand with the lowest cost due to economies of scale
ATC - p
To get the firm to produce, it must be provided a subsidy that equals the loss ____ ____
benefit of international trade
Trade increases the number of firms competing, increases Q, brings P closer to marginal cost
What is Average Total Cost (ATC)?
Total Cost divided by output quantity
Economic Profit:
Total Revenue minus Total Cost (Explicit and Implicit)
Accounting Profit:
Total Revenue minus Total Explicit Cost, higher in profit - does not include Implicit Costs.
average total cost (ATC)
Total cost divided by the number of units of output ATC = TC/Q or ATC = AFC + AVC
average fixed cost (AFC)
Total fixed cost divided by the number of units of output; a per-unit measure of fixed costs. AFC = FC/Q
Prisoner's' dilemma
a "game" between two captured criminals that illustrates why cooperation is difficult even when it is mutually beneficial
10.)
What gives the government the power to regulate mergers between firms? Give a good reason and a bad reason (from the perspective of society's welfare) that two firms might want to merge.
Diminishing Marginal Product:
When Marginal Product input Decreases while all other inputs Equally Increase.
What is the Coase Theorem?
When Private Parties bargain their resource allocation without cost, their externality problems can be solved
What is perfect price discrimination?
When a firm can differentiate every customer by selling the same good at a price unique to that customer
short run
a period of time sufficiently short that at least one of the firm's factors of production cannot be varied
17.)
When a monopolist switches from charging a single price to perfect price discrimination, it reduces
Prisoner's dilemma
When oligopolies form a cartel in hopes of reaching the monopoly outcome, they become players in a prisoners' dilemma.
society ; socially efficient ; MC
Why a noncooperative oligopoly equilibrium is good for _____ Q is closer to the ________ output P is closer to ____
8.)
Why is a monopolist's marginal revenue less than the price of its good? Can marginal revenue ever be negative? Explain.
p= ATC
Zero economic profits occur at the point where ___ _____
deregulating
____ an industry grants more firms more freedom to compete in the widened market
resale price maintenance (Fair Trade)
_____ is often imposed because it appears to reduce competition at the retail level
Increasing output
_______ has two effects on a firm's profits: Output effect Price effect
Predatory Pricing
________ involves selling at a loss, which is extremely costly for the firm
the price line on the profit maximization graph is a horizontal line bc
a competitive firm is a is a price taker;in a competitive market, the firm's price equals both the marginal revenue (MR) and average revenue (AR)
variable cost
a cost that depends on the level of production chosen
fixed cost
a cost that does not change, no matter how much of a good is produced. there are none in the long-run
what is a sunk cost?
a cost that has already been committed and cannot be recovered
Heckscher-Ohlin theorem
a country has a comparative advantage in the production of a product if that country is relatively well endowed with inputs used intensively in the production of that product.
ceteris paribus
a devise used to analyze the relationship between two variable while the values of other variables are held unchanged.
that means,
a firm chooses to shut down if the price of the good is less than the average variable costs of production
if we divide both sides by Q: the firms decision rule is
a firm will exit the market if: P< ATC
market power
a firm's ability to raise the price of a good without losing all its sales
supply curve
a graph illustrating how much of a product a firm will sell at different prices
isoquant
a graph that shows all the combinations of capital and labor that can be used to produce a given amount of output
demand curve
a graph that shows the amount of a product that would be bought at all possible prices in the market
Cartel
a group of firms acting in unison e.g., T-Mobile and Verizon in the outcome with collusion
cartel
a group of firms that gets together and makes joint price and output decisions to maximize joint profits
law of diminishing returns
a law affirming that to continue after a certain level of performance has been reached will result in a decline in effectiveness
entrepreneur
a person who organizes, manages, and takes on the risks of a business
oligopoly
a market in which control over the supply of a commodity is in the hands of a small number of producers and each one can influence prices and affect competitors
Oligopoly
a market structure in which only a few sellers offer similar or identical products Ex. tennis ball makers
perfect competition
a market structure that is characterized by a large number of small firms, a homogeneous product,freedom of entry and exit
price ceiling
a maximum price that sellers may charge for a good
price elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price
elasticity
a measure of responsiveness that tells us how a dependent variable such as quantity responds to a change in an independent variable such as price
variable
a measure that can change from time to time or form observation to observation
slope
a measurement that indicates weather the relationship between variables is positive or negative and how much of a response there is
price floor
a minimum price below which exchange is not permitted
natural monopoly
a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms
oligopoly firms ; monopoly profits
a noncooperative oligopoly equilibrium is bad for ________ because it prevents them from achieving ________
Nash equilibrium
a situation in which economic participants interacting with one another each choose their best strategy given the strategies that all the others have chosen
Dominant strategy
a strategy that is best for a player in a game regardless of the strategies chosen by the other players -Which outcome is best for him regardless of what the other player decides to do
When Q is raised, Revenue (MR) either:
a) raised from a Higher Output = Output Effect b) reduced from a Lower Price = Price Effect
Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government gives each firm 20 pollution permits, which it can either use or sell to the other firm. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. After the two firms buy or sell pollution permits from each other, we would expect that Firm A will dump a. 10 fewer tons of pollution into the river and Firm B will dump 50 fewer tons of pollution into the river. b. 50 fewer tons of pollution into the river and Firm B will dump 10 fewer tons of pollution into the river. c. 30 fewer tons of pollution into the river and Firm B will dump 30 fewer tons of pollution into the river. d. 10 more tons of pollution into the river and Firm B will dump 50 fewer tons of pollution into the river.
a. 10 fewer tons of pollution into the river and Firm B will dump 50 fewer tons of pollution into the river.
Chad's maple tree hangs over Amy's fence and drops leaves into her yard each autumn. The benefit to Chad of lower utility bills is about $300. The cost to Amy of having her lawn cleaned and reseeded is $350. Based on the Coase theorem a. Amy should pay Chad $325 to cut down the tree. b. Chad should pay Amy $350 to have her lawn repaired and cleaned. c. Chad should pay Amy $400 to keep the tree. d. Amy should build a higher fence.
a. Amy should pay Chad $325 to cut down the tree.
Which of the following is one problem that keeps people from privately solving externalities? a. Each party involved holds out for a better deal. b. The externality is large. c. Only problems with a sufficiently large number of parties can be solved. d. There is a lack of government intervention.
a. Each party involved holds out for a better deal.
Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government gives each firm 20 pollution permits, which it can either use or sell to the other firm. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. It is likely that a. Firm A will buy all of Firm B's pollution permits. Each one will cost between $50 and $100. b. Firm B will buy all of Firm A's pollution permits. Each one will cost between $50 and $100. c. Both firms will use their own pollution permits. d. Firm A will buy all of Firm B's pollution permits. Each one will cost less than $50.
a. Firm A will buy all of Firm B's pollution permits. Each one will cost between $50 and $100.
A long-run supply curve that is flatter than a short-run supply curve results from which of the following? a. Firms can enter and exit a market more easily in the long run than in the short run. b. Long-run supply curves are sometimes downward sloping. c. Competitive firms have more control over demand in the long run. d. Firms in a competitive market face identical cost structures.
a. Firms can enter and exit a market more easily in the long run than in the short run.
Which of the following is true concerning government attempts to internalize externalities? a. Government should tax goods with negative externalities and subsidize goods with positive externalities. b. Government should tax goods with either positive or negative externalities. c. Government should subsidize goods with either positive or negative externalities. d. Government should tax goods with positive externalities and subsidize goods with negative externalities.
a. Government should tax goods with negative externalities and subsidize goods with positive externalities.
Which of the following is true of the Coase theorem? a. Interested parties can reach an outcome in which everyone is better off. b. The outcome reached will be inefficient. c. Interested parties will need an arbitrator in order to reach an agreement that is efficient. d. None of the above is correct.
a. Interested parties can reach an outcome in which everyone is better off.
A positive externality occurs when a. Jack receives a benefit from John's consumption of a certain good. b. Jack receives personal benefits from his own consumption of a certain good. c. Jack's benefit exceeds John's benefit when they each consume the same good. d. Jack's consumption is not beneficial to John.
a. Jack receives a benefit from John's consumption of a certain good.
Which of the following is the best statement about markets? a. Markets are usually a good way to organize economic activity. b. Markets are generally inferior to central planning as a way to organize economic activity. c. Markets fail and are therefore not an acceptable way to organize economic activity. d. Markets are a good way to organize economic activity in developed nations, but not in less-developed nations.
a. Markets are usually a good way to organize economic activity.
Two ways to reduce pollution which require firms to pay to pollute are a. Pigovian taxes and pollution permits. b. Pigovian taxes and a command-and-control policy. c. pollution permits and a command-and-control policy. d. pollution regulations and pollution permits.
a. Pigovian taxes and pollution permits.
Which of the following statements is most correct? a. Pigovian taxes are often preferred over direct regulation because they typically reduce externalities at a lower cost. b. Pigovian taxes are less preferred than direct regulation because they typically reduce externalities at a higher cost. c. Pigovian taxes are often preferred over direct regulation because they typically reduce externalities at a faster rate. d. Pigovian taxes are less preferred than direct regulation because they typically reduce externalities at a slower rate.
a. Pigovian taxes are often preferred over direct regulation because they typically reduce externalities at a lower cost.
Which of the following expressions is correct? a. Profit = (Price of output - Average total cost) x Quantity of output. b. Profit = (Price of output x Quantity of output) - Average total cost. c. Profit = Total revenue - (Average total cost/Quantity of output). d. Profit = Total revenue - (Average variable cost x Quantity of output).
a. Profit = (Price of output - Average total cost) x Quantity of output.
In which of the following cases is the Coase Theorem most likely to work to solve the externality? a. Richard is annoyed because his roommate smokes. b. Chemicals from farms in the Mississippi Valley are polluting the Gulf of Mexico. c. Car exhaust in a small town is making one of its residents ill. d. Industrialization around the world is causing acid rain.
a. Richard is annoyed because his roommate smokes.
When a competitive market experiences an increase in demand that induces an increase in producer costs, which of the following is most likely to arise? a. The long-run market supply curve will be upward sloping. b. The condition of free entry into the market will be violated. c. Producer profits must fall in the long run. d. All of the above are likely to arise.
a. The long-run market supply curve will be upward sloping.
Dick owns a dog whose barking annoys Dick's neighbor Jane. Suppose that the benefit of owning the dog is worth $700 to Dick and that Jane bears a cost of $500 from the barking. Assuming Dick has the legal right to keep the dog, a possible private solution to this problem is that a. There is no private solution that would improve this situation. b. Jane pays Dick $650 to get rid of the dog. c. Jane pays Dick $800 to get rid of the dog. d. Dick pays Jane $600 for her inconvenience.
a. There is no private solution that would improve this situation.
Duopoly
an oligopoly with two firms
The difference between a Pigovian tax and pollution permits is a. a Pigovian tax sets the price of pollution and permits set the quantity of pollution. b. a Pigovian tax provides a more efficient outcome than permits. c. a Pigovian tax sets the quantity of pollution and permits set the price of pollution. d. permits provide a more efficient outcome than a Pigovian tax.
a. a Pigovian tax sets the price of pollution and permits set the quantity of pollution.
When a firm has little ability to influence market prices it is said to be in what kind of a market? a. a competitive market b. a strategic market c. a thin market d. a power market
a. a competitive market
62. Once a cartel is formed, the market is in effect served by a. a monopoly. b. an oligopoly. c. imperfect competition. d. monopolistic competition.
a. a monopoly.
If a competitive firm is currently producing a level of output at which marginal revenue exceeds marginal cost, then a. a one-unit increase in output will increase the firm's profit. b. a one-unit decrease in output will increase the firm's profit. c. total revenue exceeds total cost. d. total cost exceeds total revenue.
a. a one-unit increase in output will increase the firm's profit.
The term market failure refers to a. a situation in which the market, on its own, fails to allocate resources efficiently. b. an unsuccessful advertising campaign which reduces demand. c. a situation in which competition among firms becomes ruthless. d. a firm which is forced out of business because of losses.
a. a situation in which the market, on its own, fails to allocate resources efficiently.
41. When a firm operates with excess capacity, a. additional production would lower the average total cost. b. additional production would increase average total cost. c. it must be a perfectly competitive firm. d. it must be a monopolistically competitive firm.
a. additional production would lower the average total cost.
A Pigovian tax a. allocates pollution to those factories that face the highest cost of reducing it. b. is a form of regulation. c. works well for all types of externalities. d. is deemed inferior to regulatory policy by most economists.
a. allocates pollution to those factories that face the highest cost of reducing it.
When externalities are present in a market, the well-being of market participants a. are directly affected and market bystanders are indirectly affected. b. and market bystanders are both directly affected. c. and market bystanders are both indirectly affected. d. are indirectly affected and market bystanders are directly affected.
a. are directly affected and market bystanders are indirectly affected.
Internalizing an externality refers to making a. buyers and sellers take into account the external effects of their actions. b. certain that all market transaction benefits go to only buyers and sellers. c. certain government does not disrupt the internal workings of the market. d. buyers pay the full price for the products they purchase.
a. buyers and sellers take into account the external effects of their actions.
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.
a. buyers will go elsewhere.
Transaction costs a. can keep private parties from solving externality problems. b. are incurred in the production process due to externalities. c. result from transaction complications between buyers and sellers due to externalities. d. will be eliminated in a market with externalities with government assistance.
a. can keep private parties from solving externality problems.
Regulations to reduce pollution a. cause each factory to reduce pollution to the same maximum level. b. are a less costly solution to society than a Pigovian tax. c. cause pollution levels to drop below the regulated amount. d. are a better solution for the environment than a Pigovian tax.
a. cause each factory to reduce pollution to the same maximum level.
According to an article in The Economist children can a. cause negative externalities. b. cause positive externalities. c. be allocated in a market setting, making the adoption process efficient. d. increase costs to families much like taxes increase costs to firms.
a. cause negative externalities.
Two types of private solutions to the problem of externalities are a. charities and the Golden Rule. b. charities and subsidies. c. the Golden Rule and taxes. d. taxes and subsidies.
a. charities and the Golden Rule.
The difference between social cost and private cost is a measure of the a. cost of a negative externality. b. loss in profit to the seller as the result of a negative externality. c. cost reduction when the negative externality is eliminated. d. cost incurred by the government from market intervention.
a. cost of a negative externality.
A local cafe which allowed patrons to smoke was recently forced to close its doors because it did not comply with local clean air standards. This decision provides an example of a. direct regulation of an externality. b. Pigovian taxes. c. a Coase theorem solution to an externality. d. unjustified discrimination against smokers.
a. direct regulation of an externality.
39. In a particular town, Metrovision and Cableview are the only two providers of cable TV service. Metrovision and Cableview constitute a a. duopoly, whether they collude or not. b. cartel, whether they collude or not. c. Nash industry, whether they collude or not. d. All of the above are correct.
a. duopoly, whether they collude or not.
in which of the cases is the Coase thrm most likely to solve the externality? a. Ed is allergic to his roommate's cat b. Chemicals from manufacturing plants in the Midwest are causing acid rain in Canada c. Polluted water runoff from farms is making residents of a nearby town sick d. industrialization around the world causes global warming
a. ed is allergic to his roommate's cat
If making computer chips yields greater spillovers than making potato chips, some economists would argue that government should a. encourage the production of computer chips with subsidies. b. discourage the production of potato chips with taxes. c. encourage the production of potato chips with subsidies. d. discourage the production of computer chips with taxes.
a. encourage the production of computer chips with subsidies.
Pigovian taxes differ from most taxes in that Pigovian taxes a. enhance economic efficiency. b. do not raise revenue from the government. c. cause deadweight loss. d. cannot be divided between the buyer and seller.
a. enhance economic efficiency.
For a firm in a perfectly competitive market, the price of the good is always a. equal to marginal revenue. b. equal to total revenue. c. greater than average revenue. d. All of the above are correct.
a. equal to marginal revenue.
Externalities cause markets to a. fail to allocate resources efficiently. b. cause price to be different than the equilibrium price. c. benefit producers at the expense of consumers. d. cause markets to operate more equitably.
a. fail to allocate resources efficiently.
A market might have an upward-sloping long-run supply curve if a. firms have different costs. b. consumers exercise market power over producers. c. all factors of production are essentially available in unlimited supply. d. All of the above are correct.
a. firms have different costs.
In a competitive market, the actions of any single buyer or seller will a. have a negligible impact on the market price. b. have little effect on overall production but will ultimately change final product price. c. cause a noticeable change in overall production and a change in final product price. d. adversely affect the profitability of more than one firm in the market.
a. have a negligible impact on the market price.
48. Equilibrium quantities of output in markets characterized by oligopoly are a. higher than in monopoly markets and lower than in perfectly competitive markets. b. higher than in monopoly markets and higher than in perfectly competitive markets. c. lower than in monopoly markets and lower than in perfectly competitive markets. d. lower than in monopoly markets and higher than in perfectly competitive markets.
a. higher than in monopoly markets and lower than in perfectly competitive markets.
Consider a competitive market with a large number of identical firms. The firms in this market do not use any resources that are available only in limited quantities. In this market, an increase in demand will a. increase price in the short run, but not in the long run. b. increase price in the long run, but not in the short run. c. increase price both in the short and the long run. d. not affect price in either the short or the long run.
a. increase price in the short run, but not in the long run.
Entry into a market by new firms will a. increase the supply of the good. b. increase profits of existing firms. c. increase the price of the good. d. all of the above.
a. increase the supply of the good.
Josiah installed a metal sculpture in his front yard, a positive externality arises if the sculpture: a. increases the value of other properties in the neighborhood b. increases the value of josiah's home c. is visually unappealing to Josiah's neighbors d. creates a safety hazard for neighborhood children
a. increases the value of other properties in the neighborhood
With industrial policy, the belief is that a. industries yielding the largest positive externalities should receive the biggest subsidies. b. any industry which produces negative externalities should be heavily taxed. c. any production process which produces negative externalities must be shut down. d. any industry which produces a positive externality should be encouraged with subsidies.
a. industries yielding the largest positive externalities should receive the biggest subsidies.
Externalities tend to cause markets to be a. inefficient. b. unequitable. c. unnecessary. d. overwhelmed.
a. inefficient.
A negative externality a. is an adverse impact on a bystander. b. causes the product in a market to be under-produced. c. is an adverse impact on market participants. d. is present in markets in which the good or service is undesirable for society.
a. is an adverse impact on a bystander.
An externality a. is characterized as a form of market failure. b. causes markets to allocate resources efficiently. c. strengthens the role of the invisible hand in the marketplace. d. requires the producer to compensate society.
a. is characterized as a form of market failure.
When the government chooses an externality policy that aligns private incentives with social efficiency to solve an externality, a. it provides incentives to private decision makers to induce them to solve the externality problem on their own. b. it typically uses command-and-control techniques. c. the use of taxes is strictly forbidden. d. subsidies are always the best policy.
a. it provides incentives to private decision makers to induce them to solve the externality problem on their own.
If a competitive firm is (i) selling 1,000 units of its product at a price of $9 per unit and (ii) earning a positive profit, then a. its total cost is less than $9,000. b. its marginal revenue is less than $9. c. its average revenue is greater than $9. d. All of the above are correct.
a. its total cost is less than $9,000.
When a competitive firm triples the amount of output it sells, a. its total revenue triples. b. its average revenue triples. c. its marginal revenue triples. d. All of the above are correct.
a. its total revenue triples.
In the absence of externalities the invisible hand of the marketplace a. leads to a market outcome that maximizes total benefit to society. b. is unable to resolve inherent inefficiencies in the market system. c. induces people to act in a manner inconsistent with self interest. d. increases the transactions cost of contracting between parties to an exchange.
a. leads to a market outcome that maximizes total benefit to society.
A positive externality will cause a private market to produce a. less than is socially desirable. b. more than is socially desirable. c. more than market equilibrium. d. less than market equilibrium.
a. less than is socially desirable.
60. If duopolists individually pursue their own self-interest when deciding how much to produce, the price they are able to charge for their product will be a. less than the monopoly price. b. equal to the perfectly competitive market price. c. greater than the monopoly price. d. possibly less than or greater than the monopoly price.
a. less than the monopoly price.
Dog owners do not bear the full cost of the noise their barking dogs create and, therefore, tend to take too few precautions to prevent their dogs from barking. Local governments address this problem by a. making it illegal to "disturb the peace." b. having a well-funded animal control department. c. subsidizing local animal shelters. d. encouraging people to buy cats.
a. making it illegal to "disturb the peace."
In a competitive market, no single producer can influence the market price because a. many other sellers are offering a product that is essentially identical. b. consumers have more influence over the market price than producers do. c. government intervention prevents firms from influencing price. d. producers agree not to change the price.
a. many other sellers are offering a product that is essentially identical.
As a general rule, profit-maximizing producers in a competitive market produce output at a point where a. marginal cost is increasing. b. marginal cost is decreasing. c. marginal revenue is increasing. d. price is less than marginal revenue.
a. marginal cost is increasing.
Without government intervention, the market equilibrium for oranges will a. maximize total surplus in the market. b. be both efficient and equitable. c. not adjust, even if demand or supply changes. d. not allocate resources efficiently.
a. maximize total surplus in the market.
55. There are two types of markets in which firms face some competition yet are still able to have some control over the prices of their products. The names given to these market structures are a. monopolistic competition and oligopoly. b. duopoly and triopoly. c. perfect competition and monopolistic competition. d. duopoly and imperfect competition.
a. monopolistic competition and oligopoly.
In a competitive market, a. no single buyer or seller can influence the price of the product. b. there is a small number of sellers. c. the goods offered by the different sellers are markedly different. d. All of the above are correct.
a. no single buyer or seller can influence the price of the product.
Assume that your roommate, Vanessa, is very messy, which is not a crime at your campus. Suppose she gets a $100 benefit from being messy but imposes a $200 cost on you. The Coase theorem would suggest that an efficient solution would be for you to a. pay your roommate at least $100 but no more than $200 to clean up after herself. b. pay your roommate at least $201 to clean up after herself. c. charge your roommate at least $100 to have you clean up after her. d. charge your roommate at least $200 but no more than $300 to keep you from complaining about the mess.
a. pay your roommate at least $100 but no more than $200 to clean up after herself.
A Pigovian tax a. places a price on the right to pollute. b. assigns a legal pollution limit for firms. c. causes each factory to reduce pollution by the same amount. d. causes higher cost to society than pollution regulations.
a. places a price on the right to pollute.
In the long run all of a firm's costs are variable. In this case the exit criterion for a profit-maximizing firm is a. price < average total cost. b. price > average total cost. c. average revenue > average fixed cost. d. average revenue > marginal cost.
a. price < average total cost.
A profit-maximizing firm will shut down in the short run when a. price < average variable cost. b. price < average total cost. c. average revenue > marginal cost. d. average revenue > average fixed cost.
a. price < average variable cost.
According to the Coase theorem a. private parties can bargain to reach an efficient outcome. b. government assistance is necessary for markets with externalities to reach an efficient outcome. c. externalities, both positive and negative, will always cause markets to be inefficient. d. no market will experience long-term externalities, since normal market adjustments will eliminate externalities.
a. private parties can bargain to reach an efficient outcome.
According to the Coase theorem, private markets will solve externality problems and allocate resources efficiently as long as a. private parties can bargain without cost. b. government assigns property rights to the harmed party. c. the externalities that are present are positive and not negative. d. businesses determine an appropriate level of production.
a. private parties can bargain without cost.
Shrimp Galore, a shrimp harvesting business in the Pacific Northwest, has a 30-year loan on its shrimp harvesting boat. The annual loan payment is $25,000 and the boat has a market (salvage) value that exceeds its outstanding loan balance. Prior to the 2001 shrimp harvesting season, Shrimp Galore's accountant predicted that at expected market prices for shrimp, Shrimp Galore would have a net loss of $75,000 dollars after paying all 2001 expenses (including the annual loan payment). In this case, Shrimp Galore should a. produce nothing and experience a loss of $25,000. b. produce nothing and experience a loss of $75,000. c. continue to operate because expected profits will rise in the future. d. continue to operate even though it predicts a loss of $75,000.
a. produce nothing and experience a loss of $25,000.
In a market that allows free entry and exit, the process of entry and exit ends when, for the typical firm in the market, a. profit is zero. b. total revenue is equal to average total cost. c. average revenue exceeds marginal cost. d. All of the above are correct.
a. profit is zero.
When new firms enter a perfectly competitive market, a. profits of existing firms will fall. b. entering firms will earn zero profit as soon as they enter. c. existing firms will see their costs rise. d. consumers will likely observe increasing prices.
a. profits of existing firms will fall.
The best remedy for market failure is often a. properly redirected market forces. b. central planning. c. government regulations. d. ignoring externalities.
a. properly redirected market forces.
Research into new technologies a. provides positive externalities because it creates knowledge others can use. b. results in negative externalities because government funding for research causes less government spending in other areas. c. causes too many resources to be used for the small benefits received by society. d. should only be funded by the corporations which will receive the profits from the research.
a. provides positive externalities because it creates knowledge others can use.
Pigovian taxes are preferred over regulations to deal with pollution because Pigovian taxes a. reduce pollution at a lower cost to society. b. raise revenue and reduce pollution simultaneously, although efficiency is reduced. c. obtain faster results than regulations. d. allow for an accurate monitoring of pollution levels.
a. reduce pollution at a lower cost to society.
46. Oligopolists are aware that increases in the quantity of output they produce a. reduce the price of their product, and in this respect they are like monopolists. b. reduce the price of their product, and in this respect they are like competitive firms. c. increase the price of their product, and in this respect they are like monopolists. d. increase the price of their product, and in this respect they are like competitive firms.
a. reduce the price of their product, and in this respect they are like monopolists.
If the government were to limit the release of air-pollution produced by a steel mill to 10,000 units, this policy would be considered a a. regulation. b. Pigovian tax. c. subsidy. d. market-based policy.
a. regulation.
In 1999, sheepherders in the western United States slaughtered 10,000 sheep and buried them in large open pits rather than truck them to the market to be sold. This behavior is most likely explained by a. sheepherders making a shut-down decision to save the variable cost of transporting sheep to a slaughter house. b. sheepherders making an exit decision to recover the fixed cost of raising the sheep. c. the rising marginal cost of producing sheep. d. irrational behavior of sheepherders.
a. sheepherders making a shut-down decision to save the variable cost of transporting sheep to a slaughter house.
Internalizing a positive externality will cause the supply curve of an industry to a. shift to the right. b. shift to the left. c. become more elastic. d. remain unchanged.
a. shift to the right.
When price is below average variable cost, a firm in a competitive market will a. shut down and incur fixed costs. b. shut down and incur both variable and fixed costs. c. continue to operate as long as average revenue exceeds marginal cost. d. continue to operate as long as average revenue exceeds average fixed cost.
a. shut down and incur fixed costs.
When a firm makes a short-run decision not to produce anything during a specified period of time because of current market conditions, the firm is said to a. shut down. b. exit. c. withdraw. d. leave the industry.
a. shut down.
Which of these types of costs can be ignored when an individual or a firm is making decisions? a. sunk costs b. marginal costs c. variable costs d. information costs
a. sunk costs
Assume that Sarah places a $70 value on seeing her college football team play in the Rose Bowl. She purchases a ticket to the game for $50 but when she arrives at the game she discovers that her ticket is missing. A ticket scalper outside the stadium is selling tickets for $65 dollars. If Sarah purchases a ticket from one of the scalpers for $65, she is best demonstrating the principle that a. sunk costs are irrelevant to many personal decisions. b. the price of tickets cannot be explained by economic principles. c. the assumption of rational behavior does not easily apply to the purchase of college football game tickets. d. rational consumers do not always respond to incentives.
a. sunk costs are irrelevant to many personal decisions.
When dealing with externalities, the market equilibrium can be moved closer to the social equilibrium by a. taxing negative externalities and subsidizing positive externalities. b. taxing both positive and negative externalities. c. subsidizing both positive and negative externalities. d. None of the above are correct because government has no corrective policy with regards to externalities.
a. taxing negative externalities and subsidizing positive externalities.
According to the Coase theorem, private parties can solve the problem of externalities if a. the cost of bargaining is small. b. the initial distribution of rights favors the person being adversely affected by the externality. c. the number of parties involved is sufficiently large. d. All of the above are correct.
a. the cost of bargaining is small.
When a market experiences a positive externality, a. the demand curve does not reflect the value to society of the good. b. too much of the good is being produced. c. the government can internalize the externality by imposing a tax on the product. d. the private value is greater than the social value.
a. the demand curve does not reflect the value to society of the good.
When parties who are bargaining to eliminate an externality problem hold out for a better deal a. the inefficient outcome persists. b. the eventual outcome will maximize total well-being. c. transaction costs must be low. d. one party will gain more than the other party.
a. the inefficient outcome persists.
When entry and exit behavior of firms in an industry does not affect a firm's cost structure, a. the long-run market supply curve must be horizontal. b. the long-run market supply curve must be upward-sloping. c. the long-run market supply curve must be downward-sloping. d. we can't tell anything about the shape of the long-run market supply curve.
a. the long-run market supply curve must be horizontal.
For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $10 and a marginal cost of $7. It follows that a. the production of the 100th unit of output increases the firm's profit by $3. b. the production of the 100th unit of output increases the firm's average total cost by $7. c. the firm's profit-maximizing level of output is less than 100 units. d. All of the above are correct.
a. the production of the 100th unit of output increases the firm's profit by $3.
The assumption of a fixed number of firms is appropriate for analysis of a. the short run, but not the long run. b. the long run, but not the short run. c. both the short run and the long run. d. neither the short run nor the long run.
a. the short run, but not the long run.
Changes in the output of a perfectly competitive firm, without any change in the price of the product, will change the firm's a. total revenue. b. marginal revenue. c. average revenue. d. All of the above are correct.
a. total revenue.
Private solutions often are not possible due to the costs of negotiating and enforcing these solutions. Such costs are called a. transaction costs. b. opportunity costs. c. deadweight loss. d. Pigovian taxes.
a. transaction costs.
The demand curve for a product reflects the a. value of the product to consumers. b. cost of the product to consumers. c. quantity consumers are able to purchase. d. price the product will sell for in the market.
a. value of the product to consumers.
At any given quantity, the willingness to pay in the market for automobile fuel is reflected in the a. value to the consumer of the last unit of automobile fuel bought. b. height of the supply curve at each quantity. c. value to the producer of the last unit of automobile fuel sold. d. total quantity of automobile fuel exchanged in the market.
a. value to the consumer of the last unit of automobile fuel bought.
Since air pollution creates a negative externality, a. welfare will be enhanced when some, but not all air pollution is eliminated. b. social welfare is optimal when all air pollution is eliminated. c. governments should encourage all private firms to consider only private costs. d. the free market result maximizes social welfare.
a. welfare will be enhanced when some, but not all air pollution is eliminated.
The Coase theorem suggests that private markets may not be able to solve the problem of externalities a. when the number of interested parties is large and bargaining costs are high. b. if government does not actively become involved in the process. c. if the firm in the market is a monopoly. d. if some people benefit from the externality.
a. when the number of interested parties is large and bargaining costs are high.
Children can be thought of as imposing negative externalities on airplane passengers because a. when they cry, passengers bear a portion of the cost. b. their tickets are free or obtained at reduced cost. c. children (and their parents) are typically isolated in the rear of the airplane. d. All of the above are correct.
a. when they cry, passengers bear a portion of the cost.
The Coase theorem suggests that private solutions to the externality problem a. will always allocate resources efficiently if private parties can bargain without cost. b. are effective under all conditions. c. are only efficient when there are negative externalities. d. may not be possible because of the distribution of property rights.
a. will always allocate resources efficiently if private parties can bargain without cost.
A profit-maximizing firm in a competitive market produces small rubber balls. When the market price for small rubber balls falls below the minimum of its average total cost, but still lies above the minimum of average variable cost, the firm a. will experience losses but it will continue to produce rubber balls. b. will shut down. c. will be earning both economic and accounting profits. d. should raise the price of its product.
a. will experience losses but it will continue to produce rubber balls.
18.The typical firm in the economy a.has some degree of market power. b.sells its product for a price that is equal to the marginal cost of producing the last unit. c.is perfectly competitive. d.is a monopoly.
a.has some degree of market power.
8.In markets characterized by oligopoly, a.the oligopolists are best off cooperating and behaving like a monopolist. b.collusive agreements will always prevail. c.collective profits are always lower with cartel arrangements than they are without cartel arrangements. d.pursuit of self-interest by profit-maximizing firms always maximizes collective profits in the market.
a.the oligopolists are best off cooperating and behaving like a monopolist.
2.An oligopoly is a market in which a.there are only a few sellers, each offering a product similar or identical to the others. b.firms are price takers. c.the actions of one seller in the market have no impact on the other sellers' profits. d.All of the above are correct.
a.there are only a few sellers, each offering a product similar or identical to the others.
clayton act
act outlawed specific monopolistic behaviors such as tying contracts
marginal utility (mu)
additional satisfaction gained by the consumption or use of one more unit of a good or service
payoff
an advantage or profit that you get as a result of doing something
Collusion
an agreement among firms in a market about quantities to produce or prices to charge -it's illegal
north american free trade agreement
an agreement signed by the united states, canada, and mexico in which it was agreed that north america be a "free-trade" zone
natural monopoly
an industry in which one firm can achieve economies of scale over the entire range of market supply
firm
an organization that comes into being when a person or a group of people decides to produce a good or service to meet a perceived demand. transforms inputs into outputs. primary producing unit in a market economy
inputs
anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants
economies of scale
as a company produces larger numbers of a particular product, the cost of each of these products goes down aka increasing returns to scale
ATC
average fixed cost+ average variable cost ATC=AFC+AVC
atc stands for
average total cost
Assume a firm is producing 800 units of output, and it sells each unit for $6. Its average total cost is $4. Its profit is a. $-1,600. b. $1,600. c. $3,200. d. $8,000.
b. $1,600.
When a firm in a competitive market receives $500 in total revenue, it has a marginal revenue of $10. What is the average revenue, and how many units were sold? a. $5 and 100 b. $10 and 50 c. $10 and 100 d. The answer cannot be determined from the information given
b. $10 and 50
Suppose you bought a ticket to a football game for $30, and that you place a $35 value on seeing the game. If you lose the ticket, then what is the maximum price you should pay for another ticket? a. $30 b. $35 c. $60 d. $65
b. $35
Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. The government gives each firm 20 pollution permits. Government officials are not sure whether to allow the firms to buy or sell the pollution permits to each other. What is the total cost of reducing pollution if firms are not allowed to buy and sell pollution permits from each other? What is the total cost of reducing pollution if the firms are allowed to buy and sell permits from each other? a. $3,000; $1,500 b. $4,500; $3,500 c. $4,500; $4,000 d. $4,500; $2,500
b. $4,500; $3,500
A firm's marginal cost has a minimum value of $2; its average variable cost has a minimum value of $4; and its average total cost has a minimum value of $5. Then the firm will shut down if the price of its product falls below a. $2. b. $4. c. $5. d. There is not enough information given to answer the question.
b. $4.
Comparison of marginal revenue to marginal cost (i) reveals the contribution of the last unit of production to total profit. (ii) is helpful in making profit-maximizing production decisions. (iii) tells a firm whether its fixed costs are too high. a. (i) only b. (i) and (ii) only c. (ii) and (iii) only d. All of the above are correct.
b. (i) and (ii) only
A competitive market is comprised of firms that face identical cost structures. The firms experience an increase in demand that results in positive profits for the firms. Which of the following events are then most likely to occur? (i) New firms will enter the market. (ii) In the short run, price will rise; in the long run, price will rise further. (iii) In the long run, all firms will be producing at their efficient scale. a. (i) and (ii) only b. (i) and (iii) only c. (ii) and (iii) only d. (i), (ii) and (iii)
b. (i) and (iii) only
Of the following characteristics of competitive markets, which are necessary for firms to be price takers? (i) There are many sellers. (ii) Firms can freely enter or exit the market. (iii) Goods offered for sale are largely the same. a. (i) and (ii) only b. (i) and (iii) only c. (ii) only d. All are necessary.
b. (i) and (iii) only
When a restaurant stays open for lunch service even though few customers patronize the restaurant for lunch, which of the following principles is (are) best demonstrated? (i) Fixed costs are sunk in the short run. (ii) In the short run, only fixed costs are important to the decision to stay open for lunch. (iii) If revenue exceeds variable cost, the restaurant owner is making a profitable strategic decision to remain open for lunch. a. (i) and (ii) only b. (ii) and (iii) only c. (i) and (iii) only d. All are demonstrated.
b. (ii) and (iii) only
Dick owns a dog whose barking annoys Dick's neighbor Jane. Dick receives personal benefit from owning the dog, and Jane bears a cost of Dick's ownership of the dog. Assuming Dick has the legal right to keep the dog, which of the following choices are true? a. A private solution can always be arranged. b. A private solution can be arranged only if the cost Jane bears exceeds the benefit Dick gets from his dog. c. A private solution can be arranged only if Jane's cost equals Dick's benefit from the dog. d. A private solution can be arranged only if Dick's benefit from his dog exceeds Jane's cost.
b. A private solution can be arranged only if the cost Jane bears exceeds the benefit Dick gets from his dog.
If ABC Company sells its product in a competitive market, then a. the price of that product depends on the quantity of the product that ABC Company produces and sells. b. ABC Company's total revenue is proportional to its quantity of output. c. ABC Company's total cost is proportional to its quantity of output. d. ABC Company's total revenue is equal to its average revenue.
b. ABC Company's total revenue is proportional to its quantity of output.
The irrelevance of sunk costs is best described by which of the following business decisions? a. New airlines enter the market and earn profits. b. Airlines continue to sell tickets even though they are reporting large losses. c. Airlines exit the market when they report losses. d. All of the above are correct.
b. Airlines continue to sell tickets even though they are reporting large losses.
43. When firms have agreements among themselves on the quantity to produce and the price at which to sell output, we refer to their form of organization as a a. Nash arrangement. b. cartel. c. monopolistically competitive oligopoly. d. perfectly competitive oligopoly.
b. Cartel
Dick owns a dog whose barking annoys Dick's neighbor Jane. Dick receives personal benefit from owning the dog, and Jane bears a cost of Dick's ownership of the dog. Assuming Jane has the legal right to peace and quiet, which of the following statements is true? a. If Dick's benefit exceeds Jane's cost, government intervention is necessary. b. Dick will pay to keep his dog if his benefit exceeds Jane's cost. c. If Jane's cost exceeds Dick's benefit, Dick will pay Jane to keep his dog. d. If Jane has legal right to peace and quiet, she only has to pay Dick when her cost is below his benefit.
b. Dick will pay to keep his dog if his benefit exceeds Jane's cost.
Which of the following statements is false? a. Patents help internalize the externalities associated with technological advances. b. Economists typically prefer regulations to Pigovian taxes because regulations provide more incentives for firms to seek continued reductions in pollution. c. Allowing firms to trade pollution permits will lower the total cost of reducing pollution. d. A big impediment to implementing the Coase Theorem in many cases is high transactions costs.
b. Economists typically prefer regulations to Pigovian taxes because regulations provide more incentives for firms to seek continued reductions in pollution.
Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government will sell 40 pollution permits for $75 each. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. It is likely that between the cost of permits and the cost of additional pollution abatement, a. Firm B will spend $3,500. b. Firm A will spend $4,000. c. Firm A will spend $4,500. d. Firm B will spend $3,000.
b. Firm A will spend $4,000.
Two firms, A and B, each currently dump 20 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government gives each firm 10 pollution permits, which it can either use or sell to the other firm. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. After the two firms buy or sell pollution permits from each other, we would expect that a. Firm A will no longer pollute and Firm B will not reduce its pollution at all. b. Firm B will no longer pollute and Firm A will not reduce its pollution at all. c. Firm A will dump 10 tons of pollution into the river and Firm B will dump 10 tons of pollution into the river. d. Firm A will increase its pollution and Firm B will reduce its pollution.
b. Firm B will no longer pollute and Firm A will not reduce its pollution at all.
Which of the following is NOT a characteristic of a perfectly competitive market? a. Firms are price takers. b. Firms have difficulty entering the market. c. There are many sellers in the market. d. Goods offered for sale are largely the same.
b. Firms have difficulty entering the market.
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. a. In the short run, Susan should shut down her business and in the long run she should exit the industry. b. In the short run, Susan should continue to operate her business, but in the long run she should exit the industry. c. In the short run, Susan should continue to operate her business, but in the long run she will probably face competition from newly entering firms. d. In the short run, Susan should continue to operate her business, and she is also in long-run equilibrium.
b. In the short run, Susan should continue to operate her business, but in the long run she should exit the industry.
Which of the following statements about internalizing a negative externality is most correct? a. Internalizing a negative externality will cause an industry to decrease the quantity it supplies to the market and decrease the price of the good produced. b. Internalizing a negative externality will cause an industry to decrease the quantity it supplies to the market and increase the price of the good produced. c. Internalizing a negative externality will cause an industry to increase the quantity it supplies to the market and decrease the price of the good produced. d. Internalizing a negative externality will cause an industry to increase the quantity it supplies to the market and increase the price of the good produced.
b. Internalizing a negative externality will cause an industry to decrease the quantity it supplies to the market and increase the price of the good produced.
The tax on gasoline is an example of a/an a. consumption tax. b. Pigovian tax. c. income tax. d. command and control policy.
b. Pigovian tax.
Which of the following statements is most correct about a market which is characterized by a negative production externality? a. The equilibrium quantity of output is equal to the socially optimal quantity. b. The equilibrium quantity of output is greater than the socially optimal quantity. c. Government intervention is not required to achieve a socially optimal quantity of output. d. The cost to the producer exceeds the cost to society.
b. The equilibrium quantity of output is greater than the socially optimal quantity.
Which of the following statements best reflects the production decision of a profit-maximizing firm in a competitive market when price falls below the minimum of average variable cost? a. The firm will continue to produce to attempt to pay fixed costs. b. The firm will immediately stop production to minimize its losses. c. The firm will stop production as soon as it is able to pay its sunk costs. d. The firm will continue to produce in the short run but will likely exit the market in the long run.
b. The firm will immediately stop production to minimize its losses.
Which of the following is an example of a positive externality? a. A college student buys a new car when she graduates. b. The mayor of a small town plants flowers in the city park. c. Local high school teachers have pizza delivered every Friday for lunch. d. An avid fisherman buys new fishing gear for his next fishing trip.
b. The mayor of a small town plants flowers in the city park.
Which of the following statements about a market that is affected by a positive externality is correct? a. The optimum level of output is less than the free market level of output and the optimum price is greater than the free market price. b. The optimum level of output is greater than the free market level of output and the optimum price is less than the free market price. c. The optimum level of output is greater than the free market level of output and the optimum price is greater than the free market price. d. The optimum level of output is less than the free market level of output and the optimum price is less than the free market price.
b. The optimum level of output is greater than the free market level of output and the optimum price is less than the free market price.
42. Which of these situations produces the largest profits for oligpolists? a. They reach a Nash equilibrium. b. They reach the monopoly outcome. c. They reach the competitive outcome. d. They produce a quantity of output that lies between the competitive outcome and the monopoly outcome.
b. They reach the monopoly outcome.
Which of the following statements is false? a. In long-run equilibrium, marginal firms make zero economic profit. b. To maximize profit, firms should produce at a level of output where price equals marginal revenue. c. The amount of gold in the world is limited. Therefore, the gold jewelry market probably has a long-run supply curve that is upward sloping. d. Long-run supply curves are typically more elastic than short-run supply curves.
b. To maximize profit, firms should produce at a level of output where price equals marginal revenue.
If it is illegal for a biochemical manufacturer to release its waste into a nearby stream, then this is an example of a. a market-based policy. b. a command-and-control policy. c. pollution permits. d. transaction costs.
b. a command-and-control policy.
Technology spillover occurs when a. a firm passes the high costs of technical research on to society through higher prices. b. a firm's research yields technical knowledge that is used by society as a whole. c. the government subsidizes firms engaged in high-tech research. d. copyright laws prohibit firms from profiting from the research of others.
b. a firm's research yields technical knowledge that is used by society as a whole.
Technology spillover means that a. it is the government's responsibility to subsidize firms which are engaged in high-tech research. b. a firm's research yields technological knowledge that can then be used by society as a whole. c. those firms engaged in technology research may be taxed by the government if that research causes negative externalities in the market. d. when firms invest in the latest production technology, the cost of that technology "spills over" to the prices consumers must pay for the product.
b. a firm's research yields technological knowledge that can then be used by society as a whole.
When the social cost curve is above a product's supply curve we know that a. government has intervened in the market. b. a negative externality exists in the market. c. a positive externality exists in the market. d. the market reached equilibrium on its own.
b. a negative externality exists in the market.
In a competitive market that is characterized by free entry and exit, a. all firms will operate at efficient scale in the short run. b. all firms will operate at efficient scale in the long run. c. the price of the product will differ across firms. d. the number of sellers in the market will steadily decrease over time.
b. all firms will operate at efficient scale in the long run.
To ensure the market reaches the social optimum in presence of a technology spillover, the government should subsidize producers by a. use of a Pigovian tax b. an amount equal to the value of the technology spillover c. helping those companies that are adversely affected by the new technology. d. transferring income to the low-income portion of the population.
b. an amount equal to the value of the technology spillover
The Wheeler Wheat Farm sells wheat to a grain broker in Seattle, Washington. Since the market for wheat is generally considered to be competitive, the Wheeler Farm does not a. choose the quantity of wheat to produce. b. choose the price at which it sells its wheat. c. have any fixed costs of production. d. All of the above are correct.
b. choose the price at which it sells its wheat.
Emission controls on automobiles are an example of a a. Pigovian tax on automobiles, based on how much they pollute. b. command-and-control policy to increase social efficiency. c. policy that reduces pollution by allocating resources through market mechanisms. d. policy to reduce congestion on urban freeways.
b. command-and-control policy to increase social efficiency.
The Wheeler Wheat Farm has a long-term lease on 5,000 acres of land in South Dakota. The annual lease payment is $250,000. Prior to planting in the spring of 2001, the Wheeler Farm economist predicted that the Farm would have $135,000 dollars left after paying all of its costs except the annual lease payment. In this case, the Wheeler Wheat Farm should a. continue to operate because total revenue exceeds total cost. b. continue to operate even though it predicts an accounting loss of $115,000. c. shut down and experience an accounting loss of $135,000. d. exit the market and experience an accounting loss of $250,000.
b. continue to operate even though it predicts an accounting loss of $115,000.
Pigovian taxes are enacted to a. raise revenue from those most able to pay. b. correct the effects of negative externalities. c. discourage production of undesirable products. d. adjust markets with positive externalities.
b. correct the effects of negative externalities.
When the government reverts to a command-and-control policy to solve an externality, it a. is usually the most effective policy option available. b. creates policies that directly regulate behavior. c. usually involves taxing consumption of a commodity. d. typically refers to the Coase theorem to structure the policy.
b. creates policies that directly regulate behavior.
Whenever a perfectly competitive firm chooses to change its level of output, holding the price of the product constant, its marginal revenue a. increases if MR < ATC and decreases if MR > ATC. b. does not change. c. increases. d. decreases.
b. does not change.
When new firms have an incentive to enter a competitive market, their entry will a. increase the price of the product. b. drive down profits of existing firms in the market. c. shift the market supply curve to the left. d. All of the above are correct.
b. drive down profits of existing firms in the market.
If a paper manufacturer does NOT bear the entire cost of the dioxin it emits it will a. emit lower levels of dioxin than is socially efficient. b. emit higher levels of dioxin than is socially efficient. c. emit an acceptable level of dioxin. d. not emit any dioxin in an attempt to avoid paying the entire cost.
b. emit higher levels of dioxin than is socially efficient.
Market failure can be caused by a. foreign competition. b. externalities. c. low consumer demand. d. scarcity.
b. externalities.
Once tradable pollution permits have been allocated to firms, a. the government controls the price of permits. b. firms that can reduce pollution only at high cost will be willing to pay the most for the pollution permits. c. the value of pollution-saving technology is always lower than the market value of a pollution permit. d. the total amount of pollution governed by the permit will always decrease.
b. firms that can reduce pollution only at high cost will be willing to pay the most for the pollution permits.
Firms that shut down in the short run still have to pay their a. variable costs. b. fixed costs. c. total cost. d. All of the above are correct.
b. fixed costs.
One of the most important determinants of the success of free-market capitalism is a. enlightened governments selecting firms that should not be allowed to exit a market. b. free entry and exit in markets. c. government regulation of market participants. d. having a few large firms rather than thousands of small ones.
b. free entry and exit in markets.
If education produces positive externalities we would expect a. government to tax education. b. government to subsidize education. c. people to realize the benefits and therefore cause demand for education to increase. d. colleges to relax admission requirements.
b. government to subsidize education.
Hikers frequently claim that livestock grazing in Wilderness Recreation Areas reduces the satisfaction of their recreational hiking experience. An explanation would be that a. hikers don't eat beef. b. grazing cows create negative externalities which make hiking less pleasant. c. ranchers are insensitive to the recreational use of public lands. d. cattle should not be allowed to graze on public property.
b. grazing cows create negative externalities which make hiking less pleasant.
44. Equilibrium quantity in markets characterized by oligopoly are a. higher than in monopoly markets and higher than in perfectly competitive markets. b. higher than in monopoly markets and lower than in perfectly competitive markets. c. lower than in monopoly markets and higher than in perfectly competitive markets. c. lower than in monopoly markets and lower than in perfectly competitive markets.
b. higher than in monopoly markets and lower than in perfectly competitive markets.
The entry of new firms into a competitive market will a. increase market supply and increase market prices. b. increase market supply and decrease market prices. c. decrease market supply and increase market prices. d. decrease market supply and decrease market prices.
b. increase market supply and decrease market prices.
Firms that are involved in more than one type of business could be evidence of an attempt to a. increase private profit at the expense of consumers. b. internalize some forms of positive externalities. c. reduce the impact of government regulation on their business. d. increase the marginal external cost of production.
b. internalize some forms of positive externalities.
The Golden Rule can be used as a private solution for a. reducing crime. b. internalizing externalities. c. coping with overproduction. d. coping with scarcity.
b. internalizing externalities.
Consider a competitive market with a large number of identical firms. The firms in this market do not use any resources that are available only in limited quantities. In long-run equilibrium, market price a. is determined by demand. b. is determined by the minimum point on the firms' average total cost curve. c. is determined by the minimum point on the firms' average variable cost curve. d. depends on how many firms exist in the industry.
b. is determined by the minimum point on the firms' average total cost curve.
Since externalities tend to keep markets from reaching a socially optimal equilibrium, government action a. is always needed, because private solutions can never be attained. b. is needed when private solutions fail to arise. c. will be needed only to correct for positive externalities. d. will be needed only to compensate consumers.
b. is needed when private solutions fail to arise.
When a profit-maximizing firm in a competitive market has zero economic profit, accounting profit a. is negative (accounting losses). b. is positive. c. is also zero. d. could be positive, negative or zero.
b. is positive.
The market for craft art used in home decoration is a very competitive market. In this market, costs vary since some people work faster than others and have more artistic talent in producing craft art. In this competitive market, we would expect to observe a. firms that are generally unresponsive to change in demand. b. little exit and entry. c. a short-run supply curve more elastic than the market's long-run supply curve. d. an upward sloping long-run supply curve.
b. little exit and entry.
By comparing marginal revenue and marginal cost, a firm in a competitive market is able to adjust production to the level that achieves its objective, which we assume to be a. maximization of total revenue. b. maximization of profit. c. minimization of variable cost. d. minimization of average total cost.
b. maximization of profit.
When marginal revenue equals marginal cost, the firm a. should increase the level of production to maximize its profit. b. may be minimizing its losses, rather than maximizing its profit. c. must be generating economic profits. d. must be generating economic losses.
b. may be minimizing its losses, rather than maximizing its profit.
One drawback to industrial policy is that a. technology spillovers often appear equivalent to policymakers. b. measuring the size of spillovers from different markets is difficult. c. spillovers often occur in industries that produce undesirable products for society. d. positive side effects are often outweighed by negative side effects.
b. measuring the size of spillovers from different markets is difficult.
A negative externality will cause a private market to produce a. less than is socially desirable. b. more than is socially desirable. c. more than market equilibrium. d. less than market equilibrium.
b. more than is socially desirable.
All remedies for externalities share the goal of a. moving the allocation of resources toward the market equilibrium. b. moving the allocation of resources toward the social optimum. c. increasing the allocation of resources. d. decreasing the allocation of resources.
b. moving the allocation of resources toward the social optimum.
Pigovian taxes are typically advocated to correct for the effects of a. positive externalities. b. negative externalities. c. regulatory burden. d. All of the above are correct.
b. negative externalities.
When existing firms in a competitive market are profitable, an incentive exists for a. new firms to seek government subsidies that would allow them to enter the market. b. new firms to enter the market, even without government subsidies. c. existing firms to raise prices. d. existing firms to increase production.
b. new firms to enter the market, even without government subsidies.
Reaching an efficient bargain is difficult when the a. externality is large. b. number of interested parties is large. c. externality is negative. d. government becomes involved.
b. number of interested parties is large.
When negative externalities are present in a market a. producers will be affected, but not consumers. b. overproduction will occur. c. demand will be too high. d. the market will still maximize total benefits.
b. overproduction will occur.
Assume that your roommate, Vanessa, is very messy, and according to campus policy, you have a right to live in an uncluttered apartment. Suppose she gets a $200 benefit from being messy but imposes a $100 cost on you. The Coase theorem would suggest that an efficient solution would be for your roommate to a. stop her messy habits or else move out. b. pay you at least $100 but less than $200 to live with the clutter. c. continue to be messy and force you to make other living arrangements elsewhere. d. demand payment of at least $100 but no more than $200 to clean up after herself.
b. pay you at least $100 but less than $200 to live with the clutter.
With a Pigovian tax, the supply curve for pollution rights is a. elastic. b. perfectly elastic. c. inelastic. d. perfectly inelastic.
b. perfectly elastic.
Technology spillover is one type of a. negative externality. b. positive externality. c. subsidy. d. producer surplus.
b. positive externality.
Suppose that a steel factory emits a certain amount of air pollution, which constitutes a negative externality. The social cost of producing the steel includes the a. private costs of the steel producers and the price consumers pay for the steel. b. private costs of the steel producers and the costs to the bystanders affected by the pollution. c. costs to the bystanders effected by the pollution only. d. price consumers pay for the steel.
b. private costs of the steel producers and the costs to the bystanders affected by the pollution.
When externalities cause markets to be inefficient a. government action is always needed to solve the problem. b. private solutions can be developed to solve the problem. c. given enough time, externalities can be solved through normal market adjustments. d. there is no way to eliminate the problem of externalities in a market.
b. private solutions can be developed to solve the problem.
An optimal tax on pollution (a negative externality) would be one in which a. producers choose not to produce any pollution. b. producers internalize the cost of the pollution. c. a benevolent social planner is able to maximize production. d. the value to consumers at market equilibrium exceeds the cost of production (including tax).
b. producers internalize the cost of the pollution.
an optimal tax on pollution would result in which of the following? a. producers will choose not to produce any pollution b. producers will internalize the cost of the pollution c. producers will maximize production d. the value to consumers at market equilibrium will exceed the social cost of production
b. producers will internalize the cost of the pollution
37. Oligopolists are always best off, in terms of their profits, a. operating in a Nash equilibrium. b. producing a total quantity of output that falls short of the Nash-equilibrium total quantity. c. producing a total quantity of output that exceeds the Nash-equilibrium total quantity. d. charging a price that falls short of the Nash-equilibrium price.
b. producing a total quantity of output that falls short of the Nash-equilibrium total quantity.
When the government intervenes in markets with externalities it does so to a. increase production when negative externalities are present. b. protect interests of bystanders. c. make certain all benefits are received by market participants. d. better coordinate the action of buyers and sellers.
b. protect interests of bystanders.
If a firm in a competitive market reduces its output by 20 percent, then as a result the price of its output is likely to a. increase. b. remain unchanged. c. decrease by less than 20 percent. d. decrease by more than 20 percent.
b. remain unchanged.
Policymakers have chosen to solve the problem of too much car exhaust pollution by a. setting emission standards and limiting driving by commuters. b. setting emission standards and taxing gasoline. c. taxing car producers and limiting driving by commuters. d. taxing gasoline and taxing car producers.
b. setting emission standards and taxing gasoline.
When negative externalities are present in a market a. private costs will be greater than social costs. b. social costs will be greater than private costs. c. government regulation to resolve the problem is always necessary. d. the market will not be able to reach any equilibrium situation.
b. social costs will be greater than private costs.
Since almost all forms of transportation produce some type of pollution a. the government should ban all transportation. b. society has to weigh the cost and benefits and decide how much pollution to allow. c. corporations should voluntarily reduce pollution levels with new car models. d. the government should tax the types of transportation that pollute most to eliminate it altogether.
b. society has to weigh the cost and benefits and decide how much pollution to allow.
A firm that shuts down temporarily a. still has to pay its variable costs, but not its fixed costs. b. still has to pay its fixed costs, but not its variable costs. c. still has to pay both its variable costs and its fixed costs. d. has to pay neither its variable costs nor its fixed costs.
b. still has to pay its fixed costs, but not its variable costs.
A fertilizer plant emits a very foul odor during the production process. If the government forces the plant to internalize this negative externality, then the a. supply curve for fertilizer would shift to the right (down). b. supply curve for fertilizer would shift to the left (up). c. demand curve for fertilizer would shift to the right (down). d. demand curve for fertilizer would shift to the left (up).
b. supply curve for fertilizer would shift to the left (up).
Regardless of the cost structure of firms in a competitive market, in the long run a. firms will experience rising demand for their products. b. the marginal firm will earn zero economic profit. c. firms will experience a less competitive market environment. d. exit and entry is likely to lead to a horizontal long-run supply curve.
b. the marginal firm will earn zero economic profit
When new firms enter a perfectly competitive market, a. demand increases. b. the short-run market supply curve shifts right. c. the short-run market supply curve shifts left. d. existing firms will increase prices in response to the entry of the new firms.
b. the short-run market supply curve shifts right.
The height of the demand curve shows a. how much each buyer in the market is willing to pay. b. the willingness to pay of the marginal buyer. c. the maximum price all buyers will pay for a product. d. the lowest price buyers will pay for a product.
b. the willingness to pay of the marginal buyer.
If there are no externalities, the "invisible hand" leads a market to maximize a. producer profit from that market. b. total benefit to society from that market. c. both equity and efficiency in that market. d. output of goods or services in that market.
b. total benefit to society from that market.
When some resources used in production are only available in limited quantities, it is likely that the long-run supply curve in a competitive market is a. downward sloping. b. upward sloping. c. horizontal. d. vertical.
b. upward sloping.
When calculating marginal cost, what must the firm know? a. sunk cost b. variable cost c. fixed cost d. All of the above are correct.
b. variable cost
The complete description of a competitive firm's short-run supply curve is as follows: The competitive firm's short-run supply curve is that portion of the marginal cost curve that lies above average a. fixed cost. b. variable cost. c. total cost. d. revenue.
b. variable cost.
Tradable pollution permits a. prices are set by the government. b. will be bought by firms which can reduce pollution only at high costs. c. are likely to create a higher level of total pollution. d. are less desirable than Pigovian taxes in reducing pollution.
b. will be bought by firms which can reduce pollution only at high costs.
One way to internalize a technology spillover is a. with taxes. b. with patents. c. with government regulations. d. allowing free markets to work.
b. with patents.
11.One key difference between an oligopoly market and a competitive market is that oligopolistic firms a. are price takers while competitive firms are not. b. are interdependent while competitive firms are not. c. sell completely unrelated products while competitive firms do not. d. sell their product at a price equal to marginal cost while competitive firms do not.
b. are interdependent while competitive firms are not.
The general term for market structures that fall somewhere in-between monopoly and perfect competition is a.incomplete markets. b.imperfectly competitive markets. c.oligopoly markets. d.monopolistically competitive markets.
b.imperfectly competitive markets.
19.If there are many firms participating in a market, the market is either a.an oligopoly or monopolistically competitive. b.perfectly competitive or monopolistically competitive. c.an oligopoly or perfectly competitive. d.All of the above are possible
b.perfectly competitive or monopolistically competitive.
why are the fixed costs sunk costs?
b/c the firm must pay the fixed cost regardless whether its producing goods or shuts down, therefore, firms should ignore them when deciding how much to produce or to shut down
when a negative externality exists in a market, the cost to producers will:
be less than the cost to society
in a competitive market,
both buyers and sellers are price takers; they must accept the price the market determines
Suppose that at present there are no laws to restrict pollution produced by the widget industry. The market price of a widget is $20. If the government imposes a tax equal in value to the cost of the pollution, then firms would continue to produce widgets if a. the cost imposed by the pollution is less than $20 per widget produced. b. the private cost of producing a widget equals the cost of the pollution generated per widget. c. $20 minus the private cost of producing a widget is greater than the cost of the pollution generated per widget. d. $20 minus the private cost of producing a widget is less than the cost of the pollution generated per widget.
c. $20 minus the private cost of producing a widget is greater t
When a firm in a competitive market produces 10 units of output, it has a marginal revenue of $8.00. What would be the firm's total revenue when it produces 6 units of output? a. $4.80 b. $6.00 c. $48.00 d. $60.00
c. $48.00
When a profit-maximizing firm is earning profits, those profits can be identified by a. P x Q. b. (MC - AVC) x Q. c. (P - ATC) x Q. d. (P - AVC) x Q.
c. (P - ATC) x Q.
In a particular market, there are 500 firms. Each firm has a marginal cost of $30 when it produces 200 units of output. One point on the market supply curve is a. (Quantity = 200, Price = $30). b. (Quantity = 500, Price = $30). c. (Quantity = 100,000, Price = $30). d. (Quantity = 100,000, Price = $15,000).
c. (Quantity = 100,000, Price = $30).
A market is competitive if (i) firms have the flexibility to price their own product. (ii) each buyer is small compared to the market. (iii) each seller is small compared to the market. a. (i) and (ii) only b. (i) and (iii) only c. (ii) and (iii) only d. All of the above are correct.
c. (ii) and (iii) only
Which of the following illustrates the concept of a negative externality? a. A college professor plays a vigorous game of racquet ball with the racquet he recently purchased. b. A flood wipes out a farmer's entire corn crop. c. A college student plays his new stereo system at 2:00 a.m. d. A janitor eats a Big Mac during his lunch break.
c. A college student plays his new stereo system at 2:00 a.m.
Dick owns a dog whose barking annoys Dick's neighbor Jane. Suppose that the benefit of owning the dog is worth $500 to Dick and that Jane bears a cost of $700 from the barking. Assuming Dick has the legal right to keep the dog, a possible private solution to this problem is that a. Jane pays Dick $500 to get rid of the dog. b. Dick pays Jane $650 for her inconvenience. c. Jane pays Dick $650 to get rid of the dog. d. There is no private solution that would improve this situation.
c. Jane pays Dick $650 to get rid of the dog.
If children impose a negative externality, the following must be true: a. Parents would rather have fewer children. b. Parent's costs exceed the benefits associated with having children. c. Parents do not bear the full cost imposed by their children. d. All of the above are true.
c. Parents do not bear the full cost imposed by their children.
Anita enjoys growing flowers in her yard and has a lot of spare time, but can't afford the $100 it costs to buy flower seeds, fertilizer and water. Sally, who has a good view of Anita's yard, would also enjoy Anita's flowers. Sally has plenty of money but has no time to plant flowers. According to the Coase Theorem, a. the city government should give Anita the $100 needed to grow flowers. b. the city government should require Anita to grow flowers. c. Sally and Anita might both be better off if Sally gave $100 to Anita to plant flowers. d. Sally and Anita would definitely both be better off if Sally gave $100 to Anita to plant flowers.
c. Sally and Anita might both be better off if Sally gave $100 to Anita to plant flowers.
Which of the following is true of positive externalities? a. Social value exceeds private value and market quantity exceeds the socially optimal quantity. b. Social value is less than private value and market quantity exceeds the socially optimal quantity. c. Social value exceeds private value and market quantity is less than the socially optimal quantity. d. Social value seldom exceeds private value and therefore social quantity is less than private quantity.
c. Social value exceeds private value and market quantity is less than the socially optimal quantity.
Which of the following statements is correct regarding a firm's decisionmaking? a. The decision to shut down and the decision to exit are both short-run decisions. b. The decision to shut down and the decision to exit are both long-run decisions. c. The decision to shut down is a short-run decision, whereas the decision to exit is a long-run decision. d. The decision to exit is a short-run decision, whereas the decision to shut down is a long-run decision.
c. The decision to shut down is a short-run decision, whereas the decision to exit is a long-run decision.
To begin, a competitive firm is selling its output for $10 per unit and it is maximizing its profit. Now, the price rises to $14 and the firm makes whatever adjustments are necessary to maximize its profit at the now-higher price. Once the firm has adjusted, which of the following statements is correct? a. The firm's marginal revenue is lower than it was previously. b. The firm's marginal cost is lower than it was previously. c. The firm's quantity of output is higher than it was previously. d. All of the above are correct.
c. The firm's quantity of output is higher than it was previously.
Suppose that large-scale pork production has the potential to create ground water pollution. Why might this type of pollution be considered an externality? a. The groundwater pollution reduces the cost of large-scale pork production. b. The economic impact of a large-scale pork production facility is localized in a small geographic area. c. The pollution has the potential for creating a health risk for water users in the region surrounding the pork production facility. d. Consumers will not reap the benefits of lower production cost from large-scale pork production.
c. The pollution has the potential for creating a health risk for water users in the region surrounding the pork production facility.
Which of the following would NOT be considered a negative externality? a. Smelter, Inc. creates steel and pollution in Anytown, U.S.A. b. Your friend buys a new puppy that barks every night. c. You have an adverse reaction to a medication your doctor prescribed for you. d. Your neighbor buys the most powerful stereo money can buy for his patio.
c. You have an adverse reaction to a medication your doctor prescribed for you.
47. When oligopolistic firms interacting with one another each choose their best strategy given the strategies chosen by other firms in the market, we have a. a cartel. b. a group of olipolists behaving as a monopoly. c. a Nash equilibrium. d. All of the above are correct.
c. a Nash equilibrium.
52. If, to begin, a market is perfectly competitive, and then it is taken over by three or four firms, we would expect, as a result, a. an increase in market output and an increase in the price of the product. b. an increase in market output and an decrease in the price of the product. c. a decrease in market output and an increase in the price of the product. d. a decrease in market output and a decrease in the price of the product.
c. a decrease in market output and an increase in the price of the product.
If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then a. average revenue exceeds marginal cost. b. the firm is earning a positive profit. c. a one-unit decrease in output would increase the firm's profit. d. All of the above are correct.
c. a one-unit decrease in output would increase the firm's profit.
Nancy loves to landscape her yard, but her neighbor Lee places a low value on his landscaping. When Lee's grass is neglected and gets long, Nancy will mow it for Lee. This is an example of a. a situation in which the Coase theorem fails to explain the lawn mowing arrangement. b. improper allocation of resources. c. a private solution to a negative externality problem. d. an exploitation of a common resource.
c. a private solution to a negative externality problem.
If only a few people are affected by an externality, then it is likely that a. Pigovian taxes will provide the most efficient solution to the externality. b. command and control regulation will provide the most efficient solution to the externality. c. a private solution to the inefficiency will occur. d. a private solution will be very difficult to negotiate.
c. a private solution to the inefficiency will occur.
In a perfectly competitive market, the process of entry and exit will end when, for firms in the market, a. price is equal to average variable cost. b. marginal revenue is equal to average variable cost. c. economic profits are zero. d. All of the above are correct.
c. economic profits are zero.
38. In order to be successful, a cartel must a. find a way to encourage its members to produce more than they would otherwise produce. b. agree on the total level of production for the cartel, but they need not agree on the amount produced by each member. c. agree on the total level of production and on the amount produced by each member. d. agree on the prices charged by each member, but they need not agree on amounts produced.
c. agree on the total level of production and on the amount produced by each member.
When firms in a perfectly competitive market face the same costs, in the long run they must be operating a. under diseconomies of scale. b. with small, but positive, levels of profit. c. at their efficient scale. d. All of the above are correct.
c. at their efficient scale.
59. If duopolists individually pursue their own self-interest when deciding how much to produce, the amount they will produce collectively will a. be less than the monopoly quantity. b. be equal to the monopoly quantity. c. be greater than the monopoly quantity. d. any of the above are possible.
c. be greater than the monopoly quantity.
When dealing with externalities, government a. can correct the market failure only in the case of positive externalities. b. can correct the market failure only in the case of negative externalities. c. can correct the market failure in both the positive and negative externalities by inducing market participants to internalize the externality. d. cannot correct for externalities due to consumer rights laws.
c. can correct the market failure in both the positive and negative externalities by inducing market participants to internalize the externality.
Private contracts between parties with mutual interests a. can only reduce the well-being of society. b. will always lead to market outcomes in which the public interest is sacrificed for personal gain. c. can solve some inefficiencies associated with positive externalities. d. will always cause negative externalities to arise.
c. can solve some inefficiencies associated with positive externalities.
57. A group of firms that are acting in unison to maximize collective profits is called a a. market structure. b. coalition. c. cartel. d. Nash market.
c. cartel.
58. An agreement among firms over production and price is called a. an antitrust market. b. a trade arrangement. c. collusion. d. a Nash conspiracy.
c. collusion.
The supply curve for a product reflects the a. value of the product to suppliers. b. quantity buyers will ultimately purchase of the product. c. cost to sellers of producing the product. d. seller's profit of producing the product.
c. cost to sellers of producing the product.
The height of the supply curve at any given quantity of coal shows the a. value to the consumer of the last unit of coal bought. b. consumer's willingness to pay for coal at each quantity. c. cost to the producer of the last unit of coal sold. d. total quantity of coal exchanged in the market.
c. cost to the producer of the last unit of coal sold.
Private markets fail to account for externalities because a. externalities don't occur in private markets. b. sellers include costs associated with externalities in the price of their product. c. decisionmakers in the market fail to take account of the external effects of their behavior. d. the government can easily correct any adverse effect on the market that externalities may cause.
c. decisionmakers in the market fail to take account of the external effects of their behavior.
The exit of existing firms from a competitive market will a. increase market supply and increase market prices. b. increase market supply and decrease market prices. c. decrease market supply and increase market prices. d. decrease market supply and decrease market prices.
c. decrease market supply and increase market prices.
Local governments address the problem of barking dogs by imposing a. leash laws. b. dog registration. c. disturbing the peace laws. d. All of the above are correct.
c. disturbing the peace laws.
AtC rise
diseconomies of scale
One consideration that applies to the analysis of the long run, but not to the analysis of the short run, is a. changes in the price of the product. b. changes in firms' profits. c. entry and exit of firms. d. All of the above are correct.
c. entry and exit of firms.
If a firm in a perfectly competitive market triples the number of units of output sold, then total revenue will a. more than triple. b. less than triple. c. exactly triple. d. All of the above are potentially true.
c. exactly triple.
A competitive market is in long-run equilibrium. If demand decreases, we can be certain that price will a. fall in the short run. All firms will shut down and some of them will exit the industry. Price will then rise. b. fall in the short run. No firms will shut down, but some of them will exit the industry. Price will then rise. c. fall in the short run. All, some, or no firms will shut down, and some of them will exit the industry. Price will then rise. d. not fall in the short run because firms will exit to maintain the price.
c. fall in the short run. All, some, or no firms will shut down, and some of them will exit the industry. Price will then rise.
49. As the number of firms in an oligopoly market a. decreases, the market approaches a cartel equilibrium. b. decreases, the market approaches a competitive market equilibrium. c. increases, the market approaches a competitive market equilibrium. d. increases, the market approaches a monopoly market equilibrium.
c. increases, the market approaches a competitive market equilibrium.
Two ways that private markets can solve the problem of externalities is with a. integrating businesses and subsidies. b. contracts and patents. c. integrating businesses and contracts. d. subsidies and patents.
c. integrating businesses and contracts.
One reason private solutions to externalities do not always work is because a. government participation in such solutions complicates the process. b. some people benefit from externalities. c. interested parties incur costs in the bargaining process. d. the actual costs and benefits of the problem are difficult to see.
c. interested parties incur costs in the bargaining process.
A positive externality will cause a market to produce a. more than is socially desirable. b. more than is market optimal. c. less than is socially desirable. d. less than is market optimal.
c. less than is socially desirable.
45. Equilibrium prices in markets characterized by oligopoly are a. higher than in monopoly markets and higher than in perfectly competitive markets. b. higher than in monopoly markets and lower than in perfectly competitive markets. c. lower than in monopoly markets and higher than in perfectly competitive markets. d. lower than in monopoly markets and lower than in perfectly competitive markets.
c. lower than in monopoly markets and higher than in perfectly competitive markets.
The complete description of a competitive firm's supply curve is as follows: The competitive firm's short-run supply curve is that portion of the a. average variable cost curve that lies above marginal cost. b. average total cost curve that lies above marginal cost. c. marginal cost curve that lies above average variable cost. d. marginal cost curve that lies above average total cost.
c. marginal cost curve that lies above average variable cost.
For any given price, a firm in a competitive market will maximize profit by selecting the level of output at which price intersects the a. average total cost curve. b. average variable cost curve. c. marginal cost curve. d. marginal revenue curve
c. marginal cost curve.
At the profit-maximizing level of output, a. marginal revenue = average total cost. b. marginal revenue = average variable cost. c. marginal revenue = marginal cost. d. average revenue = average total cost.
c. marginal revenue = marginal cost.
When new entrants to a competitive market have higher costs than existing firms, a. accounting profits will be the primary signal for entrance. b. sunk costs become an important determinant of short-run entrance strategy. c. market price must be rising. d. None of the above are correct.
c. market price must be rising.
50. Assume oligopoly firms are profit maximizers, they do not form a cartel, and they take other firms' production levels as given. Then the output effect a. must dominate the price effect. b. must be smaller than the price effect. c. must balance with the price effect. d. can be larger or smaller than the price effect.
c. must balance with the price effect.
When externalities exist, buyers and sellers a. neglect the external effects of their actions but the market equilibrium is still efficient. b. do not neglect the external effects of their actions and the market equilibrium is efficient. c. neglect the external effects of their actions and the market equilibrium is not efficient. d. do not neglect the external effects of their actions and the market equilibrium is not efficient.
c. neglect the external effects of their actions and the market equilibrium is not efficient.
Because decisions in a market economy are guided by individual self-interest, there is a. a strong need for government intervention in the market. b. less efficiency in market economies than in command economies. c. nevertheless the ability to achieve desirable economic well-being for society as a whole. d. more need for a strong legal system to control individual greed.
c. nevertheless the ability to achieve desirable economic well-being for society as a whole.
When profit-maximizing firms in competitive markets are earning profits, a. market demand must exceed market supply at the market equilibrium price. b. market supply must exceed market demand at the market equilibrium price. c. new firms will enter the market. d. the most inefficient firms will be encouraged to leave the market.
c. new firms will enter the market.
An externality is the impact of a. society's decisions on the well-being of society. b. a person's actions on that person's well-being. c. one person's actions on the well-being of a bystander. d. society's decisions on the well-being of one person in the society.
c. one person's actions on the well-being of a bystander.
When all firms and potential firms in a market have the same cost curves, the long-run equilibrium of a competitive market with free entry and exit will be characterized by firms a. earning small levels of economic profit. b. facing the prospect of future losses. c. operating at efficient scale. d. that band together to raise market prices.
c. operating at efficient scale.
65. For the oligopolist that does not collude with its competitors , there are two factors that affect the decision to raise production. These factors are the a. production effect and the output effect. b. output effect and the cost effect. c. output effect and the price effect. d. cost effect and the price effect.
c. output effect and the price effect.
66. When price is above marginal cost, selling one more unit of output at the going price will increase profit. This concept is known as the a. income effect. b. price effect. c. output effect. d. cartel effect.
c. output effect.
When a perfectly competitive firm makes a decision to shut down, it is most likely that a. marginal cost is above average variable cost. b. marginal cost is above average total cost. c. price is below the minimum of average variable cost. d. fixed costs exceed variable costs.
c. price is below the minimum of average variable cost.
A competitive market has a horizontal long-run supply curve and is in long-run equilibrium. If demand decreases, we can be certain that in the short-run, a. at least some firms will shut down. b. price will fall below marginal cost. c. price will fall below average total cost. d. at least some firms will exit the industry.
c. price will fall below average total cost.
Patents do NOT a. provide firms an incentive to research. b. assign property rights to inventors. c. protect the rights of inventors for their lifetime. d. internalize externalities.
c. protect the rights of inventors for their lifetime.
With technology spillover, to ensure that the market equilibrium equals the social optimum, government should a. impose a tax greater than the value of the technology spillover. b. not allow production of any product that causes a technology spillover. c. provide a subsidy equal to the value of the technology spillover. d. require producers to "clean up" any spillover that results from their production process.
c. provide a subsidy equal to the value of the technology spillover.
When firms have an incentive to exit a competitive market, their exit will a. lower market price. b. necessarily raise the costs of firms that remain in the market. c. raise profits for firms that remain in the market. d. All of the above are correct.
c. raise profits for firms that remain in the market.
In class action lawsuits interested parties to the lawsuit are not required to pay attorney fees directly. This is an example of an attempt to a. increase attorney fees from a final judgment. b. reduce the incentive of attorneys to take on class-action law suits. c. reduce the transaction costs of finding a private solution to an externality. d. regulate attorney fees in class action lawsuits.
c. reduce the transaction costs of finding a private solution to an externality.
in positive externalities
market equilibrium quantity < socially optimal quantity
When managers of firms in a competitive market observe falling profits, they are likely to infer that the market is characterized by a. a violation of conventional market forces. b. over-investment. c. rising prices. d. too few firms in the market.
c. rising prices.
Dioxin emission that results from the production of paper is a good example of a negative externality because a. self-interested paper firms are generally unaware of environmental regulations. b. there are fines for producing too much dioxin. c. self-interested paper producers will not consider the full cost of the dioxin pollution they create. d. toxic emissions are the only form of an externality.
c. self-interested paper producers will not consider the full cost of the dioxin pollution they create.
Internalizing a positive externality through a government subsidy will cause the industry's supply curve to a. remain unchanged. b. shift down by an amount less than the subsidy. c. shift down by an amount equal to the subsidy. d. shift down by an amount greater than the subsidy
c. shift down by an amount equal to the subsidy.
When total revenue is less than variable costs, a firm in a competitive market will a. continue to operate as long as average revenue exceeds marginal cost. b. continue to operate as long as average revenue exceeds average fixed cost. c. shut down. d. always exit the industry.
c. shut down.
Markets are often inefficient when negative externalities are present because a. private costs exceed social costs at the private market solution. b. externalities can never be corrected without government regulation. c. social costs exceed private costs at the private market solution. d. production externalities lead to consumption externalities.
c. social costs exceed private costs at the private market solution.
Private markets fail to reach a socially optimal level when negative externalities are present because a. social costs equal private costs at the private market solution. b. private costs exceed social costs at the private market solution. c. social costs exceed private costs at the private market solution. d. they internalize externalities.
c. social costs exceed private costs at the private market solution.
Private markets fail to reach a socially optimal level when positive externalities are present because. a. private benefit equals social benefit at the private market solution. b. private costs exceed private benefits at the private market solution. c. social value exceeds private value at the private market solution. d. private costs exceed social benefit at the private market solution.
c. social value exceeds private value at the private market solution.
Which of the following policies is government most inclined to use when faced with a positive externality? a. taxation b. permits c. subsidies d. usage fees
c. subsidies
If the government wanted to ensure that the market reaches the social optimum in the presence of a technology spillover, it should a. impose a Pigovian tax on any firm producing a technology spillover. b. offer tax credits to consumers who are adversely affected by the new technology. c. subsidize producers by an amount equal to the value of the technology spillover. d. provide research grants to those firms not currently engaging in research to increase competition in the industry.
c. subsidize producers by an amount equal to the value of the technology spillover.
When fixed costs are ignored because they are irrelevant to a business's production decision, they are called a. explicit costs. b. implicit costs. c. sunk costs. d. opportunity costs.
c. sunk costs.
To enhance the well-being of society, a social planner will encourage firms to increase production when a. the firms are producing basic goods. b. there is a shortage in the market. c. technology spillovers are associated with production. d. any negative externalities associated with production are imposed only upon consumers.
c. technology spillovers are associated with production.
Which of the following choices suggests that the private market can be effective in dealing with externalities? a. the "invisible hand" b. the law of diminishing social returns c. the Coase theorem d. technology policy
c. the Coase theorem
If a sawmill creates too much noise for local residents a. it will be up to the residents to either adapt or move. b. a sense of social responsibility will cause owners of the mill to reduce noise levels. c. the government can raise economic well-being through noise-control regulations. d. the government can raise economic well-being by providing free hearing screening for residents who live closest to the sawmill.
c. the government can raise economic well-being through noise-control regulations.
One advantage of allowing a market for pollution permits to control the total amount of pollution released in an area is that a. the government knows exactly how much each firm is allowed to pollute. b. government revenue from the sale of permits is greater than revenue from a Pigovian tax. c. the initial allocation of permits to firms does not affect the efficiency of the market. d. firms will work together to eventually eliminate pollution.
c. the initial allocation of permits to firms does not affect the efficiency of the market.
Which of these curves is the competitive firm's supply curve? a. the average variable cost curve above marginal cost b. the average total cost curve above marginal cost c. the marginal cost curve above average variable cost d. the average fixed cost curve
c. the marginal cost curve above average variable cost
A competitive firm's marginal cost curve is regarded as its supply curve because a. the position of the marginal cost curve determines the price for which the firm should sell its product. b. among the various cost curves, the marginal cost curve is the only one that slopes upward. c. the marginal cost curve determines the quantity of output the firm is willing to supply at any price. d. the firm is aware that marginal revenue must exceed marginal cost in order for profit to be maximized.
c. the marginal cost curve determines the quantity of output the firm is willing to supply at any price.
Suppose that a steel factory emits a certain amount of air pollution, which constitutes a negative externality. If this market is not required to internalize this externality, a. the supply curve would adequately reflect the marginal social cost of production. b. consumers will be required to pay a higher price for steel than they would have if the externality were internalized. c. the market equilibrium would not be the socially optimal quantity. d. producers will produce less steel than they otherwise would have if the externality were internalized.
c. the market equilibrium would not be the socially optimal quantity.
In long-run equilibrium of a competitive market, the number of firms in the market adjusts so that all of the market demand is satisfied at a price equal to a. sunk cost. b. the maximum value of marginal cost. c. the minimum value of average total cost. d. the minimum value of average variable cost.
c. the minimum value of average total cost.
When price is greater than marginal cost for a firm in a competitive market, a. marginal cost must be falling. b. the firm must be minimizing its losses. c. there are opportunities to increase profit by increasing production. d. the firm should decrease output to maximize profit.
c. there are opportunities to increase profit by increasing production.
54. Cartels are difficult to maintain because a. antitrust laws are difficult to enforce. b. cartel agreements are conducive to monopoly outcomes. c. there is always tension between cooperation and self-interest in a cartel. d. All of the above are correct.
c. there is always tension between cooperation and self-interest in a cartel.
The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average a. fixed cost. b. variable cost. c. total cost. d. revenue.
c. total cost.
A firm will shut down in the short run if the total revenue that it would get from producing and selling its output is less than its a. opportunity costs. b. fixed costs. c. variable costs. d. total costs.
c. variable costs.
When a negative externality exists in a market the cost to producers a. is greater than the cost to society. b. will be the same as the cost to society. c. will be less than the cost to society. d. and society will be different regardless of whether an externality is present.
c. will be less than the cost to society
15.Crude oil is supplied to the world market primarily by a few Middle Eastern countries. Such a market is an example of a(n) (i)imperfectly competitive market. (ii) monopoly market. (iii)oligopoly market. a.(i) and (ii) b.(ii) and (iii) c.(i) and (iii) d.(iii) only
c.(i) and (iii)
16.If, in a particular market, firms sell identical products, then the market is (i)perfectly competitive. (ii)monopolistically competitive. (iii)an oligopoly. a.(i) or (ii) b.(ii) or (iii) c.(i) or (iii) d.(i) only
c.(i) or (iii)
35.When an oligopoly market is in Nash equilibrium, a.market price will be different for each firm. b.firms will not behave as profit maximizers. c.a firm will choose its best pricing strategy, given the strategies that it observes other firms taking. d.a firm will not take into account the strategies of competing firms.
c.a firm will choose its best pricing strategy, given the strategies that it observes other firms taking.
20.As a group, oligopolists would always be better off if they would act collectively a.as if they were each seeking to maximize their own individual profits. b.in a manner that would prohibit collusive agreements. c.as a single monopolist. d.as a single perfectly competitive firm.
c.as a single monopolist.
21.As a group, oligopolists would always be best off if they would a.produce the perfectly competitive quantity of output. b.produce more than the perfectly competitive quantity of output. c.charge the same price that a monopolist would charge if the market were a monopoly. d.operate according to their own individual self-interests.
c.charge the same price that a monopolist would charge if the market were a monopoly.
14.When an industry has many firms, the industry is a.an oligopoly if the firms sell differentiated products; it is monopolistically competitive if the firms sell identical products. b.an oligopoly if the firms sell differentiated products; it is perfectly competitive if the firms sell identical products. c.monopolistically competitive if the firms sell differentiated products; it is perfectly competitive if the firms sell identical products. d.perfectly competitive if the firms sell differentiated products; it is monopolistically competitive if the firms sell identical products.
c.monopolistically competitive if the firms sell differentiated products; it is perfectly competitive if the firms sell identical products.
9. Firms in industries that have competitors but, at the same time, do not face so much competition that they are price takers, are operating in either a(n) a.oligopoly or perfectly competitive market. b.oligopoly or monopoly market. c.oligopoly or monopolistically competitive market. d.monopoly or monopolistically competitive market.
c.oligopoly or monopolistically competitive market.
4.In a market that is characterized by imperfect competition, a.firms are price takers. b.there is always a large number of firms. c.there are at least a few firms that compete with one another. d.the actions of one firm in the market never have any impact on the other firms' profits.
c.there are at least a few firms that compete with one another.
Players
can be people, firms, countries, or other entities.
social capital
capital that provides services to the public
mpl=
change in output(Q)/ change in labor (L)
long run
changing labor or production cost; more than one variable changing something that requires a fixed cost
price discrimination
charging different prices to different buyers
private solution to externalities
coase theorem: as long as property rights are defined, and transaction costs are low, the efficient outcome will arise
if the government were to limit the release of air pollution produced by a glue factory to 75 parts per million, this policy would be considered a
command-and-control policy
antitrust policy
consists of efforts undertaken by the government to prevent oligopolistic industries from becoming or behaving like monopolies Ex: Sherman antitrust act of 1890- intended both to prevent the creation of more monopolies and to break up existing ones
atc constant
constant returns to scale
law of demand
consumers buy more of a good when its price decreases and less when its price increases
average revenue
the total revenue divided by the amount of output(quantity sold)
marginal cross with average total cost
crosses
average variable cost
curve, hire more workers might help; avc=vc/q
7.A special kind of imperfectly competitive market that has only two firms is called a.a two-tier competitive structure. b.an incidental monopoly. c.a doublet. d.a duopoly.
d. A duopoly
Which of the following statements about a well-maintained yard best conveys the general nature of the externalities? a. A maintained yard conveys a positive externality because it increases the home's market value. b. A maintained yard conveys a negative externality because it increases the property tax liability of the owner. c. A maintained yard conveys a negative externality because it makes other property owners in the neighborhood feel like their homes are less valuable. d. A maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighborhood.
d. A maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighborhood.
40. The concept of a Nash equilibrium, when applied to an oligopoly situation, a. illustrates the tension between self-interest and cooperation. b. relies on the logic of firms pursuing their own self-interests. c. relies on the notion that each firm chooses its best strategy, given the strategies that other firms have chosen. d. All of the above are correct.
d. All of the above are correct.
51. For cartels, once the number of firms (members of the cartel) increases, a. the monopoly outcome becomes less likely. b. the magnitude of the price effect decreases. c. the less concerned each seller is about its own impact on the market price. d. All of the above are correct.
d. All of the above are correct.
A certain competitive firm sells its output for $20 per unit. The 50th unit of output that the firm produces has a marginal cost of $22. It follows that the production of the 50th unit of output a. increases the firm's total revenue by $20. b. increases the firm's total cost by $22. c. decreases the firm's profit by $2. d. All of the above are correct.
d. All of the above are correct.
A firm will exit a market if, for all positive levels of output, a. its total revenue is less than its total cost. b. its profit is negative. c. the price of its product is less than its average total cost. d. All of the above are correct.
d. All of the above are correct.
A firm will shut down in the short run if, for all positive levels of output, a. its loss exceeds its fixed costs. b. its total revenue is less than its variable costs. c. the price of its product is less than its average variable cost. d. All of the above are correct.
d. All of the above are correct.
A profit-maximizing firm in a competitive market is currently producing 100 units of output. It has average revenue of $10, and its average total cost is $8. It follows that the firm's a. average total cost curve intersects the marginal cost curve at an output level of less than100 units. b. average variable cost curve intersects the marginal cost curve at an output level of less than 100 units. c. profit is $200. d. All of the above are correct.
d. All of the above are correct.
Assuming transaction costs are small, the Coase Theorem is likely to be helpful in articulating a solution to a a. neighborhood problem with unattended dogs running loose. b. neighbor who doesn't care for his yard. c. neighbor who deals drugs out of his house. d. All of the above are correct.
d. All of the above are correct.
At the end of a process of entry and exit, for the marginal firm a. price is equal to average total cost. b. total revenue is equal to total cost. c. economic profit is zero. d. All of the above are correct.
d. All of the above are correct.
In a competitive market, a. each seller can sell all he wants to sell at the going price. b. buyers and sellers are price takers. c. the goods offered by the different sellers are largely the same. d. All of the above are correct.
d. All of the above are correct.
In the long-run equilibrium of a market with free entry and exit, marginal firms are operating a. at the point where average total cost equals marginal cost. b. at the minimum point on their average total cost curves. c. at their efficient scale. d. All of the above are correct.
d. All of the above are correct.
The additional revenue a firm in a competitive market receives if it increases its production by one unit equals its a. marginal revenue. b. average revenue. c. price per unit of output. d. All of the above are correct.
d. All of the above are correct.
To begin, a competitive firm is selling its output for $20 per unit and it is maximizing its profit, which is positive. Now, the price rises to $25 and the firm makes whatever adjustments are necessary to maximize its profit at the now-higher price. Once the firm has adjusted, which of the following statements is correct? a. The firm's quantity of output is higher than it was previously. b. The firm's average total cost is higher than it was previously. c. The firm's average revenue is higher than it was previously. d. All of the above are correct.
d. All of the above are correct.
When calculating economic profit, total costs include a. opportunity costs. b. fixed costs. c. variable costs. d. All of the above are correct.
d. All of the above are correct.
When firms are neither entering nor exiting a perfectly competitive market, a. total cost must equal total revenue. b. economic profits must be zero. c. average revenue must equal average total cost. d. All of the above are correct.
d. All of the above are correct.
Which of the following expressions is correct for a competitive firm? a. Profit = Total revenue - Total cost. b. Marginal revenue = (Change in total revenue)/(Change in quantity of output). c. Average revenue = Total revenue/Quantity of output. d. All of the above are correct.
d. All of the above are correct.
Which of the following statements best reflects a price-taking firm? a. If the firm were to charge more than the going price, it would sell none of its goods. b. The firm has no incentive to charge less than the going price. c. The firm can sell as much as it wants to sell at the going price. d. All of the above are correct.
d. All of the above are correct.
For a competitive firm, a. Total revenue = Average revenue. b. Total revenue = Marginal revenue. c. Total cost = Marginal revenue. d. Average revenue = Marginal revenue.
d. Average revenue = Marginal revenue.
64. If an oligopolist is part of a cartel that is collectively producing at the monopoly level of output, then that oligopolist has the incentive to lower production with the aim of a. lowering prices. b. increasing profits for the group of firms as a whole. c. increasing profits for itself, regardless of the impact on profits for the group of firms as a whole. d. None of the above are correct.
d. None of the above are correct.
A competitive firm might choose to set its price below the market price, because a. this would result in higher average revenue. b. this would result in higher profits. c. this would result in lower total costs. d. None of the above are correct.
d. None of the above are correct.
If a competitive firm is currently producing a level of output at which profit is not maximized, then it must be true that a. marginal revenue exceeds marginal cost. b. marginal cost exceeds marginal revenue. c. total cost exceeds total revenue. d. None of the above are correct.
d. None of the above are correct.
When one firm sells its pollution permit to another firm, which of the following does NOT occur? a. Both firms benefit. b. The total amount of pollution remains the same. c. Social welfare is enhanced. d. Over time, pollution will be eliminated.
d. Over time, pollution will be eliminated.
Starting from a situation in which a firm in a competitive market produces and sells 500 door knobs for a price of $10 per doorknob, which of the following events would decrease the firm's average revenue? a. The firm increases its output above 500 doorknobs. b. The firm decreases its output below 500 doorknobs. c. The market price of doorknobs rises above $10. d. The market price of doorknobs falls below $10.
d. The market price of doorknobs falls below $10.
63. A situation in which economic actors interacting with one another each choose their best strategy given the strategies the others have chosen is called a. a competitive equilibrium. b. an open market solution. c. a socially optimal solution. d. a Nash equilibrium.
d. a Nash equilibrium
An externality exists when a. the government intercedes in the operation of private markets by forcing the market to adjust to the balance of supply and demand. b. markets are not able to reach equilibrium. c. a firm sells its product in a foreign market. d. a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives payment for that effect.
d. a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives payment for that effect.
Employing a lawyer to draft and enforce a private contract between parties wishing to solve an externality problem is an example of a. an opportunity cost. b. an implicit cost. c. a sunk cost. d. a transaction cost.
d. a transaction cost.
Negative externalities occur when one person's actions a. cause another person to lose money in a stock market transaction. b. cause his or her employer to lose business. c. reveal his or her preference for foreign-produced goods. d. adversely affect the well-being of a bystander who is not party to the action.
d. adversely affect the well-being of a bystander who is not party to the action.
The impact of one person's actions on the well-being of a bystander is called a. an economic dilemma. b. deadweight loss. c. the third-party problem. d. an externality.
d. an externality.
56. In what type of market do the actions of any one seller have a significant impact on the profits of all other sellers? a. a monopoly b. perfect competition c. monopolistic competition d. an oligopoly
d. an oligopoly
One advantage market economies have over other types of economies is that market economies a. provide an equal distribution of goods and services to consumers. b. establish government economic control. c. solve the problem of scarcity. d. are more efficient.
d. are more efficient.
A patent is used to a. disseminate information. b. restrict ownership. c. protect inventors for as long as they live. d. assign property rights.
d. assign property rights.
For a competitive firm, a. average revenue equals the price of the good, but marginal revenue is different. b. marginal revenue equals the price of the good, but average revenue is different. c. average revenue equals marginal revenue, but the price of the good is different. d. average revenue, marginal revenue, and the price of the good are all equal to one another.
d. average revenue, marginal revenue, and the price of the good are all equal to one another.
When a beekeeper places his hives of bees in an orchard so that the bees can gather nectar to produce honey, the bees pollinate the orchard, which increases the yield of fruit. This benefits a. only the beekeeper. b. the beekeeper, but creates a negative externality because the bees are a hazard to the orchard owner. c. only the owner of the orchard. d. both the beekeeper and the orchard owner.
d. both the beekeeper and the orchard owner.
When a profit-maximizing firm's fixed costs are considered sunk in the short run, then the firm a. can set price above marginal cost. b. must set price below average total cost. c. will never show losses. d. can safely ignore fixed costs when deciding how much output to produce.
d. can safely ignore fixed costs when deciding how much output to produce.
According to an article in The Economist, negative externalities in the form of noise pollution can be caused by a. barking dogs. b. mobile phones. c. public transportation. d. children.
d. children.
When a profit-maximizing firm in a competitive market is unable to generate enough revenue to pay all of its fixed costs it should, in the short run, a. shut down and incur a loss equal to its fixed costs. b. shut down until it is able to produce where average revenue exceeds average fixed cost. c. continue to produce as long as marginal cost is less than average revenue. d. continue to produce as long as total revenue is sufficient to pay variable costs.
d. continue to produce as long as total revenue is sufficient to pay variable costs.
At any given quantity, the height of the supply curve for pliers shows the a. willingness to pay of the marginal supplier. b. willingness to pay of the marginal buyer. c. cost of the marginal buyer. d. cost of the marginal seller.
d. cost of the marginal seller.
The height of the supply curve shows the a. maximum cost a seller will pay to produce a product. b. price a seller can expect to receive for a certain quantity of a product. c. maximum amount buyers are willing to pay for a product. d. cost to the producer of the last unit sold.
d. cost to the producer of the last unit sold.
In the long-run equilibrium of a market with free entry and exit, a. marginal cost exceeds average total cost. b. the price of the good exceeds average total cost. c. average total cost exceeds the price of the good. d. firms are operating at their efficient scale.
d. firms are operating at their efficient scale.
In many countries, one of the most heavily taxed goods is a. food. b. clothing. c. hotel/recreation services. d. gasoline.
d. gasoline.
Pigovian taxes a. encourage consumers to avoid sales taxes by shopping online. b. are frequently used to discourage imports. c. are rarely preferred to direct regulation. d. give factory owners an economic incentive to reduce pollution.
d. give factory owners an economic incentive to reduce pollution.
If an externality is present in a market, economic efficiency may be enhanced by a. increased competition. b. weakening property rights. c. better informed market participants. d. government intervention.
d. government intervention.
A firm that exits its market a. still has to pay its variable costs, but not its fixed costs. b. still has to pay its fixed costs, but not its variable costs. c. still has to pay both its variable costs and its fixed costs. d. has to pay neither its variable costs nor its fixed costs.
d. has to pay neither its variable costs nor its fixed costs.
In Singapore, littering fines are strictly enforced. This is an example of a policy a. in which moral codes and social sanctions reduce the pollution externality. b. that relies on the Coase Theorem. c. that discriminates against foreigners. d. in which private incentives are used to reduce the pollution externality in Singapore.
d. in which private incentives are used to reduce the pollution externality in Singapore.
The gas tax is imposed to correct each of the following EXCEPT a. congestion. b. accidents. c. pollution. d. income inequality.
d. income inequality.
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 a. shut down. b. reduce its output, but continue operating. c. keep output the same. d. increase its output
d. increase its output
Government intervention that aims to promote technology-enhancing industries is called a. assisted technology. b. intervention policy. c. industrial technology assistance. d. industrial policy.
d. industrial policy.
Too few resources are generally devoted to research in new technologies in developing countries because a. new technologies cannot be patented. b. government research grants are not easily obtainable. c. negative externalities are created from some research. d. inventors cannot capture the full benefits of their inventions.
d. inventors cannot capture the full benefits of their inventions.
A positive externality a. causes the product to be overproduced. b. provides an additional benefit to market participants. c. benefits consumers because it results in a lower equilibrium price. d. is a benefit to a market bystander.
d. is a benefit to a market bystander.
The short-run supply curve for a firm in a perfectly competitive market is a. likely to be horizontal. b. likely to slope downward. c. determined by forces external to the firm. d. its marginal cost curve (above average variable cost).
d. its marginal cost curve (above average variable cost).
A profit-maximizing firm in a competitive market is able to sell its product for $9. At its current level of output the firm's average total cost is $11. Its marginal cost curve crosses the marginal revenue curve at an output level of 10 units. Then the firm experiences a a. profit of more than $20. b. profit of exactly $20. c. loss of more than $20. d. loss of exactly $20.
d. loss of exactly $20.
A firm's short-run supply curve is part of which of the following curves? a. marginal revenue b. average variable cost c. average total cost d. marginal cost
d. marginal cost
When a profit-maximizing firm finds itself minimizing losses because it is unable to earn a positive profit, this task is accomplished by producing the quantity at which price is equal to a. sunk cost. b. average fixed cost. c. average variable cost. d. marginal cost.
d. marginal cost.
If marginal cost exceeds marginal revenue, the firm a. is most likely to be at a profit-maximizing level of output. b. should increase the level of production to maximize its profit. c. must be experiencing losses. d. may still be earning a profit.
d. may still be earning a profit.
Pigovian taxes are unlike most other taxes because they a. distort incentives. b. move the allocation of resources away from the social optimum. c. raise revenue for the government. d. move the allocation of resources closer to the social optimum.
d. move the allocation of resources closer to the social optimum.
Many times the problems of externalities are solved by each of the following EXCEPT a. self-interest. b. moral codes and social sanctions. c. charity. d. normal market adjustments.
d. normal market adjustments.
In calculating accounting profit, accountants typically don't include a. long-run costs. b. sunk costs. c. explicit costs of production. d. opportunity costs that do not involve an outflow of money.
d. opportunity costs that do not involve an outflow of money.
One of the Ten Principles of Economics is that "markets are usually a good way to organize market behavior." Use of the word "usually" does NOT reflect the fact that a. some markets produce negative externalities. b. the invisible hand of the marketplace does not always lead buyers and sellers to maximize total benefit to society. c. some markets are characterized by market failure. d. other types of economies are more efficient than market economies.
d. other types of economies are more efficient than market economies.
With pollution permits, the supply curve for pollution rights is a. elastic. b. perfectly elastic. c. inelastic. d. perfectly inelastic.
d. perfectly inelastic.
67. Increasing production will increase quantity sold, which will decrease the price of all units sold. This concept is known as the a. income effect. b. cost effect. c. output effect. d. price effect.
d. price effect.
Profit-maximizing firms enter a competitive market when, for existing firms in that market, a. total revenue exceeds fixed costs. b. total revenue exceeds total variable costs. c. average total cost exceeds average revenue. d. price exceeds average total cost.
d. price exceeds average total cost.
A profit-maximizing firm in a competitive market will always make marginal adjustments to production as long as a. average revenue is greater than average total cost. b. average revenue is equal to marginal cost. c. marginal cost is greater than average total cost. d. price is above or below marginal cost.
d. price is above or below marginal cost.
When buyers in a competitive market take the selling price as given, they are said to be a. market entrants. b. monopolists. c. free riders. d. price takers.
d. price takers.
In a market economy, economic activity is guided by a. the government. b. businesses. c. central planners. d. prices.
d. prices.
The intersection of a firm's marginal revenue and marginal cost curves determines the level of output at which a. total revenue is equal to variable cost. b. total revenue is equal to fixed cost. c. total revenue is equal to total cost. d. profit is maximized.
d. profit is maximized.
When managers of firms think at the margin and make incremental adjustments to the level of production, they are naturally led to a level of production where a. average variable cost exceeds marginal cost. b. total cost is less than average revenue. c. costs are minimized. d. profit is maximized.
d. profit is maximized.
The entry and exit decisions of firms in a competitive market are signaled by a. high or low demand for a firm's product. b. high capital costs. c. low capital costs. d. profits and losses.
d. profits and losses.
Because the goods offered for sale in a competitive market are largely the same, a. there will be few sellers in the market. b. there will be few buyers in the market. c. buyers will have market power. d. sellers will have little reason to charge less than the going market price.
d. sellers will have little reason to charge less than the going market price.
A market that experiences a positive externality will also experience a a. smaller market output and a higher market price than is optimal. b. greater market output and lower market price than is optimal. c. greater market output and higher market price than is optimal. d. smaller market output and lower market price than is optimal.
d. smaller market output and lower market price than is optimal.
When firms in a competitive market have different costs, it is likely that a. free entry and exit in the market is likely to be violated. b. the market will no longer be considered competitive. c. long-run market supply will be downward sloping. d. some firms will earn economic profits in the long run.
d. some firms will earn economic profits in the long run.
A local laundry advertises that clothes it washes smell "sunshine fresh" because it line dries everything outside. Then a steel factory moves in next door and emits black smoke which stains the clothes drying at the laundry. According to the Coase Theorem, granting the a. steel factory the right to pollute would be efficient, but granting the laundry the right to clean air would be equitable. b. laundry the right to clean air would be efficient, but granting the steel factory the right to pollute would be equitable. c. steel factory the right to pollute has the same effect on equity as granting the laundry the right to clean air. d. steel factory the right to pollute has the same effect on efficiency as granting the laundry the right to clean air.
d. steel factory the right to pollute has the same effect on efficiency as granting the laundry the right to clean air.
The government can internalize a positive externality by a. taxing production which would decrease supply. b. taxing production which would increase supply. c. subsidizing production which would decrease supply. d. subsidizing production which would increase supply.
d. subsidizing production which would increase supply.
In a market with 1,000 identical firms, the short-run market supply is the a. marginal cost curve (above average variable cost) for a typical firm in the market. b. quantity supplied by the typical firm in the market. c. sum of the prices charged by each of the 1,000 individual firms. d. sum of the quantities supplied by each of the 1,000 individual firms.
d. sum of the quantities supplied by each of the 1,000 individual firms.
When economists refer to a production cost that has already been committed and cannot be recovered, they use the term a. implicit cost. b. explicit cost. c. variable cost. d. sunk cost.
d. sunk cost.
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 a. market supply curve is equal to the sum of marginal cost. b. supply curve for the market must slope downward. c. market supply curve must slope upward. d. supply curve for the market is horizontal and equal to the minimum of long-run average cost for each firm.
d. supply curve for the market is horizontal and equal to the minimum of long-run average cost for each firm.
Which of the following best defines the situation where one firm's research yields knowledge that is used by society as a whole? a. social cost b. opportunity cost of technology c. internalization of an externality d. technology spillover
d. technology spillover
Some environmentalists argue that we should protect the environment as much as possible, regardless of cost. The implication of such a disregard for cost is likely to lead to each of the following EXCEPT a. lower levels of nutrition, health care, and housing. b. a lower standard of living. c. slowing or reversing technological advancement. d. the elimination of all pollution.
d. the elimination of all pollution.
In some cases, pollution permits may be better than a Pigovian tax because a. pollution permits allow for a market solution while a Pigovian tax does not. b. pollution permits generate more revenue for the government than a Pigovian tax. c. Pollution permits are never preferred over a Pigovian tax. d. the government can set a maximum level of pollution using permits.
d. the government can set a maximum level of pollution using permits.
When externalities are present in a market a. the established equilibrium maximizes the total benefit to society as a whole. b. market participants lose some market benefits to bystanders. c. both equity and efficiency are maximized. d. the market fails to allocate resources efficiently.
d. the market fails to allocate resources efficiently.
The Wheeler Wheat Farm sells wheat to a grain broker in Seattle, Washington. Since the market for wheat is generally considered to be competitive, the Wheeler Wheat Farm maximizes its profit by choosing a. to produce the quantity at which average total cost is minimized. b. to produce the quantity at which average fixed cost is minimized. c. to sell its wheat at a price where marginal cost is equal to average total cost. d. the quantity at which market price is equal to the farm's marginal cost of production.
d. the quantity at which market price is equal to the farm's marginal cost of production.
The production decisions of perfectly competitive firms follow the principle of economics, which states that rational people a. consider sunk costs. b. equate prices to the average costs of production. c. will eventually leave markets that experience zero profit. d. think at the margin.
d. think at the margin.
In the long run, a profit-maximizing firm will choose to exit a market when a. average fixed cost is falling. b. variable costs exceed sunk costs. c. marginal cost exceeds marginal revenue at the current level of production. d. total revenue is less than total cost.
d. total revenue is less than total cost.
Total profit for a firm is calculated by a. marginal revenue minus average cost. b. average revenue minus average cost. c. marginal revenue minus marginal cost. d. total revenue minus total cost.
d. total revenue minus total cost.
13.Given that there are approximately 12 companies currently selling cars in the United States, the car market is classified as a.perfectly competitive. b.monopolistically competitive. c.oligopolistic. d.the classification is open to debate.
d.the classification is open to debate.
perfectly inelastic demand
demand in which quantity demanded does not respond at all to a change in price
perfectly elastic demand
demand in which quantity drops to zero at the slightest increase in price
inelastic demand
demand that responds a little bit to change in price. always has a numerical value between 0 and -1
When a market is in equilibrium and the marginal consumer values a commodity at less than the social cost of producing it, then a. at market equilibrium the demand curve lies below the social cost curve. b. reducing production to a level below the equilibrium level could possibly raise total economic well-being. c. the equilibrium price is higher than necessary to insure maximum economic well-being. d. All of the above are correct. e. Both a and b are correct.
e. Both a and b are correct.
quantity demanded
how much people are willing to buy at a given price, only changes when price changes (move along curve)
what doe the average revenue tell us?
how much revenue a firm receives for the typical unit sold
perfect substitutes
identical products
A negative price effect
in order to sell one more unit, the monopolist must cut the market price on all units sold. Oligopolistic industry faces a smaller price effect from an additional unit of output than does a monopolist The marginal revenue that a firm calculates is higher
ockham's razor
irrelevant detail should be cut away
strategy
is a decision or decision-plan chosen by a player, which takes into account the behavior and likely reactions of other players.
game
is a situation in which players interact.
most important source of oligopoly
is the existence of increasing returns to scale, which give bigger producers a cost advantage over smaller ones
marginal cost
is the increase in total cost form producing one more unit
Compared to perfect competitive market, a single price monopoly market has
less quantity produced, higher price, and more deadweight loss
scarce
limited
if education produces positive externalities and the government does not intervene in the market, we would expect the equilibrium quantity to be
lower than the optimal level
costs of production
machinery, cost of workers, cost of materials, advertising, taxes, opp. cost
for only competitive firms..
marginal revenue equals the price of the good
deadweight loss of monopoly
net loss to society when a firm uses its market power to restrict output and increase price
Complex Products and Pricing Schemes
oligopolists often sell thousands or even tens of thousands of different products keeping track of what other firms are producing and the prices they are charging is difficult makes it hard to determine whether a firm is cheating on the tacit agreement
monopoly
one firm that produces a product which there are no close substitutes for and in which significant barriers exist to prevent new firms from entering the industry
A positive quantity effect
one more unit is sold, increasing total revenue by the price at which that unit is sold.
because nothing can be done about sunk costs,
one should ignore them when making decisions, including business strategies
the rule for entry is the _____________ of the rule to exit
opposite
the firm's long run supply curve is the
portion of its marginal cost that is above the average total cost SEE PHONE PIC
efficiency
producing what people want at the least possible cost
mr=mc
profit maximum level of output for all firms
shortage
quantity demanded exceeds quantity supplied
surplus
quantity supplied exceeds quantity demanded
output regulation
since only one firm is allowed, it must serve all customers
explicit costs
require a outlay of money- show up on a balance sheet
profit regulation
requires the firm to produce certain output and charge certain price
the cost of shutting down is
revenue loss (TR)
short v long run
short- only change 1 variable labor; long run- more than 1 variable changing something that requires some change in a fixed cost, changing labor or production cost
prisoners' dilemma
shows how difficult it is for firms to maintain cooperation, even when doing so is in their best interest.
production function chart
shows relationship between the quantity of inputs used to produce a good and the output of that good
prisoners' dilemma
shows that self-interest can prevent people from cooperating, even when cooperation is in their mutual interest.
a firm will choose to exit if
the revenue its producing id less than the total costs
a firm that shuts down permanently in the short run ... and if a firm exits the market in the long run
still as to pay its fixed costs where a firm that exits the market does not have to pay any costs, fixed or variable.
even if equal
still hire because of competition. unless its a monopoly; its a wash, 0 $ dollars; if theres a change in the market you miss out
market demand
sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service
the price does not depend on
the # of gallons a firm produces or sells
comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
absolute advantage
the ability to produce a good using fewer inputs than another producer
the difference between social cost and private cost is a measure of:
the cost of an externality
depreciation
the decline in an asset's economic value over time
profit
the difference between revenues and cost
atc fall
the economies of scale
depending on the state of your production (in the long run)
the fixed can fall, rise and stay the same
free enterprise
the freedom of individuals to start and operate private businesses in search of profits
marginal product of labor
the increase in output arising from an additional unit of labor
normative economics
the part of economics involving value judgments about what the economy should be like; focused on which economic goals and policies should be implemented; policy economics
elastic demand
the percentage change in quantity demanded is greater than the percentage change in price in absolute value
Concentration ratio
the percentage of the market's total output supplied by its four largest firms
equilibrium
the point at which quantity demanded and quantity supplied are equal
diminishing marginal utility
the point reached when an additional unit of a product consumed is less satisfying than the one before
resale price maintenance (Fair Trade)
the practice of _______ has a legitimate objective: preventing discount retailers from free-riding on the services provided by full-service retailers.
interest
the price paid for the use of borrowed money
marginalism
the process of analyzing the additional or incremental costs or benefits arising from a choice or decision
if a firm produces anything, it chooses
the quantity at which marginal cost equals the price of the good. if the price of the good is less than the average total cost at that quantity, the firm will exit.
efficient scale
the quantity that minimizes ATC(most efficient unit)
less; regulation
the regulated industry is ____ productive than desired due to ____
a firm will choose to shut down if
the revenue its making is less than its variable costs of production and will reopen if the conditions change so that the price exceeds AVC
utility
the satisfaction a product yields
trade surplus
the situation when a country exports more than it imports
trade deficit
the situation when a country imports more than it exports
economics
the study of how individuals and nations make choices about ways to use scarce resources to fulfill their needs and wants
Game theory
the study of how people behave in strategic situations
marginal social cost (msc)
the total cost to society of producing an addiotnal unit of a good or service
total fixed cost (tfc)
the total of all costs that do not change with output even if output is zero
total variable cost (tvc)
the total of all costs that vary with output in the short run
suppose that flu shots create a positive externality equal to $9 per shot. Further suppose that the gov. offers a $9-per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?
they are equal
if you divide both sides by Q: the firms decision rule to enter is
they will enter if P> ATC
p=ATC
this is zero economic profits; no subsidy is needed and allows a normal profit
downward-sloping
this type of firm has a _____ ____ ATC Curve
total utility
total amount of satisfaction obtained form consumption of a good or service
total cost
total cost- variable cost+ fixed cost; the market value of all the inputs that a firm uses in production
total cost (tc)
total fixed costs plus total variable costs TC = TFC + TVC
average variable cost (AVC)
variable cost divided by the number of units of output AVC = VC/Q
benefit of shutting down is
variable costs savings (VC) but still have to pay FC
variable costs
vary with the quantity produced
which of the following is a difference between corrective taxes and tradable pollution permits
with a corrective tax, the government sets the price for pollution; with tradable pollution permits, demand and supply set the price of pollution
noncooperative behavior
with each firm acting in its own self-interest, even though this has the effect of driving down everyone's profits
6.Monopolistically competitive firms are typically characterized by a.many firms selling products that are similar, but not identical. b.many firms selling identical products. c.a few firms selling products that are similar, but not identical. d.a few firms selling highly different products.
a.many firms selling products that are similar, but not identical.
10.One characteristic of an oligopoly market structure is: a.firms in the industry are typically characterized by very diverse product lines. b.firms in the industry have some degree of market power. c.products typically sell at a price that reflects their marginal cost of production. d.the actions of one seller have no impact on the profitability of other sellers.
b.firms in the industry have some degree of market power.
37.Oligopolists are always best off, in terms of their profits, a.operating in a Nash equilibrium. b.producing a total quantity of output that falls short of the Nash-equilibrium total quantity. c.producing a total quantity of output that exceeds the Nash-equilibrium total quantity. d.charging a price that falls short of the Nash-equilibrium price.
b.producing a total quantity of output that falls short of the Nash-equilibrium total quantity.
36.In a duopoly situation, the logic of self-interest results in a total output level that a.equals the output level that would prevail in a competitive market. b.equals the output level that would prevail in a monopoly. c.exceeds the monopoly level, but falls short of the competitive level. d.falls short of the monopoly level.
c.exceeds the monopoly level, but falls short of the competitive level.
34.Assuming that oligopolists do not have the opportunity to collude, once they have reached the Nash equilibrium, it a.is always in their best interest to supply more to the market. b.is always in their best interest to supply less to the market. c.is always in their best interest to leave their quantities supplied unchanged. d.may be in their best interest to do any of the above, depending on market conditions.
c.is always in their best interest to leave their quantities supplied unchanged.
5.There are two types of imperfectly competitive markets: a.monopoly and monopolistic competition. b.monopoly and oligopoly. c.monopolistic competition and oligopoly. d.monopolistic competition and cartels.
c.monopolistic competition and oligopoly.
17.In which of the following markets is economic profit driven to zero in the long run? a.oligopoly b.monopoly c.perfect competition d.All of the above are correct.
c.perfect competition
Markets with only a few sellers, each offering a product similar or identical to the others, are typically referred to as a.competitive markets. b.monopoly markets. c.monopolistically competitive markets. d.oligopoly markets.
d.oligopoly markets.
