Microeconomics Test 2

implicit

costs you don't actually have to pay for, but are still opportunity costs (subjective)

profit maximization

marfinal revenue=marginal cost

allocative efficiency

marginal benefits(demand)= marginal costs yes in short run and long run for perfect competition

supply=

marginal cost at prices above AVC

in perfect competition, what three things equal each other?

market price=marginal revenue= marginal cost

What could it do to improve the loss situation and make a profit in the long run?

market their product to get more people to want it

productive efficiency

minimum ATC short run only productively efficient at breakeven, long run always because we breakeven at minimum of ATC in perfect competition

price discrimination

need to distinguish different customers- mechanism of charging different prices - more profits, worse for customers (higher prices), higher quantity sold (some customer benefit)

economists want to make most amount, not biggest

percentage

monopoly produces at higher _____ and lower ____ than perf. comp

prices and quantity

increasing marginal returns

production going up very fast

in monopoly, it is not

productively efficient (cost is above min of ATC) and not allocative efficient MB don't equal MC

diminishing marginal returns

total production going up at a slower rate (if negative, starts going down) just a short run concept

economic profit=

total revenues- explicit costs- implicit costs

accounting profit=

total revenues-explicit costs

in monopoly market marginal revenue is always

twice as steep as demand

inputs in the short run are

variable, at least one input is fixed

why a patent?

will promote people to come up with ideas, spur innovation

Explain why a firm would stay in business even though it isn't making any profit.

you are making your opportunity cost as much as you could somewhere else - not better off or worse off, firm is at profit maximization, MR=MC

If no budget constraint (no scarcity), you consume until total utility is maximized, which means marginal utility equals

zero

Some restaurants offer "all you can eat" meals. How is this practice related to Diminishing Marginal Utility? What restrictions must the restaurant impose on the customer to make a profit?

A customer's satisfaction (utility) decreases as they eat more which prevents them from eating so much that the restaurant won't make profit. Restrictions: Can't take food home- must eat in restaurant, no sharing, some have time limits

why does demand slope downward- income effect (price independent, quantity dependent)

as price goes down, real income goes up, buy more NORMAL goods

why does demand slope downward - diminishing marginal utility

as quantity goes up, you get less additional satisfaction from each additional unit and therefore you are less willing to pay

diminishing marginal returns

as we add more and more of an input, we get less and less additional output

law of diminishing utility

as you have more of a good (not a thing, something you like), total utility increases, marginal utility decreases

Perfect competition assumptions

- identical products (commodities) - there are many buyers and sellers - ease of entry and exit - perfect information

barriers to entry

- patent- exclusive right to produce product (20 years), then people can copy - economies of scale (natural)- as quantity produced increases, cost per unit decreases (these are businesses where a lot of capital can make production cheaper) - control of natural resources - license - trademark- can't copy logo or name -copyright- legal right to creative work (music)

perfect competition implications

- price taker- everyone prices at the market price because products are identical - no long run profits

Monopoly Assumptions:

-one supplier -barriers to entry -unique product (no close substitutes) - imperfect information

Monopoly implications

-price maker- firms set the price within the limits of consumer demand -long fun profits are possible- barriers to entry--> don't get entry of new firms so can make profit

Is it possible for marginal utility to be negative while total utility is positive? If yes, under what circumstances is it possible?

Marginal Utility can be negative while total utility is positive because total utility increases at a decreasing rate of marginal utility. Marginal Utility will most likely not bring down totally utility to negative right away.

in a perfect competitive market with shut down- Explain why a firm might still choose to operate in the short run at this point or at less of a loss. Will it shut down if the price is lower?

The firm is no better off operating in the short run than shutting down.. firms will break even in LR when firms leave. if price goes below AVC, firm should definitely shut down because aren't even covering their variable cost of operating and will lose more staying open

diminishing marginal returns happens because

additional outputs (labor) have to share a fixed input (capital)--- short run

variables in the long run are

all inputs are variable

substitution effect (price independent, quantity dependent)

as price goes down, consume more of this good because relatively cheaper than other goods

if marginal utility turns negative, the good becomes a ____

bad

why should firms stay in long run if never making profit?

because they are making as much as they could in their next best alternative

Why can't monopolists charge any price they want?

because they have to listen to demand- what consumers are WTP- willing to walk away if price gets too high

explicit

cash payment, actually have to pay for

supply curve slopes upward because

diminishing marginal returns

monopoly- MR is twice as steep as demand for a monopolist, explain why this is the case thinking about the revenue brought in by each additional customer

each additional consumer is less willing to pay so monopolists must lower their price to sell them and that means lower price for everyone

MUx/Px = MUy/Py means

get the most bang your your buck

generally AP is

greater than EP

Qr always ____ than profit max

higher- MR-0 profit max

why is marginal revenue=marginal cost profit maximization?

if MR>MC... then the next unit will bring in more revenue/profit than the extra cost, so we should sell it

in a perfect competitive market with loss- if firm is losing money, why is it still operating?

if the firm closes doors, they still have to pay for fixed cost in short run, so if loosing less than fixed cost, they should stay open to help pay fo fixed cost

total costs=

implicit costs + explicit costs

dynamic efficiency

incentive to innovate- monopoly has this over perf. comp. because profit incentives drive innovation

natural monopoly

it's cheaper for just 1 firm to produce because isn't enough demand for 2 or more firms

economic profit

job is to make decisions- use both explicit and implicit costs

accountants

just looking at explicit costs- have to have proof

if we increase all inputs, production more than proportionally increase, so

long run average cost decreases

utility-

satisfaction a consumer gets from having a good or service

diminishing marginal returns is responsible for

the increasing marginal costs