ECON 201

If marginal revenue exceeds marginal cost, the firm should

Increase its output to increase profit

If marginal cost exceeds marginal revenue, the firm should

Decrease output to increase profit

At the profit-maximizing level of output,

Marginal revenue and marginal cost are exactly equal

Competitive firms

Competitive firms

For a competitive firm, marginal revenue is

A. Equal to the price of the good sold
B. Average revenue divided by the quantity sold
C. Total revenue divided by the price
D. Equal to the quantity of the good sold

A. Equal to the price of the good sold Remember, MR=P for a competitive firm

The competitive firm maximizes profit when it produces output up to the point where

A. Marginal cost equals total revenue
B. Marginal revenue equals average revenue
C. Marginal cost equals marginal revenue
D. Price equals average variable cost

C. Marginal cost equals marginal revenue Remember, MR=MC is max profit for a competitive firm

If a competitive firm is producing a level of output where marginal revenue exceeds marginal cost, the firm could increase profits if it

A. Increased production
B. Decreased production
C. Maintained production at the current level
D. Temporarily shut down

A. Increased production Remember, MR>MC then increase production

A competitive market has two characteristics

There are many buyers and sellers in the market The goods offered for sale are largely the same

Profit formula for a competitive market

Profit= Total revenue – total cost

Total revenue formula for a competitive market

TR= P x Q

For all firms, average revenue equals

The price of the good

Marginal revenue formula

The change in total revenue from the sale of an addition unit of output Change in total revenue / change in quantity

For competitive firms, MR equals

Price

Profit formula

(P-ATC) x Q

A firm will temporarily shut down in the short run in a competitive market if

Revenue is less than variable costs P less than AVC

A firm will shut down in the long run in a competitive market if

P < ATC

In the long run, the competitive firm’s supply curve is the

A. Portion of the MC curve that lies above the ATC curve
B. Portion of the MC curve that lies above the AVC curve
C. Upward sloping portion of the ATC curve
D. Upward sloping portion of the AVC curve

A. Portion of the marginal cost curve that lies above the average total cost curve

In the short run, the competitive firm’s supply curve is the

A. Portion of the MC curve that lies above the ATC curve
B. Portion of the MC curve that lies above the AVC curve
C. Upward sloping portion of the ATC curve
D. Upward sloping portion of the AVC curve

B. Portion of the marginal cost curve that lies above the average variable cost curve

the long run market supply curve is always more _______ than the short run market supply curve

Elastic

In the long run, some firms will exit the market if the price of the good offered for sale is less than

Average total cost ATC

If all firms in a market have identical cost structures and if inputs used in the production of the good in that market are readily available, then the long run market supply curve for that good should be

Perfectly elastic

If an input necessary for production is in limited supply so that an expansion of the industry raises costs for all existing firms in the market, then the long run market supply curve for a good could be

Upward sloping

If the long run market supply curve for a good is perfectly elastic, an increase in the demand for that good will, in the long run, cause

An increase in the number of firms in the market but no increase in the price of the good

In the long run equilibrium in a competitive market, firms are operating at

their efficient scale

Monopoly

Monopoly

Monopoly characteristics are

Sole seller with no close substitutes

The monopoly is able to remain the only seller in a market only if there are

Barriers to entry

MR &lt;

P MR < P for a monopoly

The profit maximizing equi requires that P &gt;

MR = MC P > MR = MC

Price exceeds _______ in a monopolized market

Marginal cost

RECALL : In a competitive market, price _____ marginal cost

Equals

Which of the following is not a barrier to entry in a monopolized market

A. The gov gives a single firm the exclusive right to produce some good
B. The costs of production make a single producer more efficient than a large number of producers
C. A key resource is owned by a single firm
D. A single firm is very large

D. A single firm is very large

A firm whose average total cost continually declines at least to the quantity that could supply the entire market is known as a

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

Natural monopoly

A monopolist maximizes profit by producing the Q at which

MR = MC

Statement about price and MC in competitive and monopolized markets :

In competitive markets, P = MC, in monopolized markets, P ____ MC

Exceeds Monopoly : P > MC

The inefficiency associated with monopoly is due to

Underproduction of the good

Compared to a perfectly competitive market, a monopoly market will usually generate

Higher prices and lower output

A monopolist’s supply curve

Doesn’t exist

Using government regulations to force a natural monopoly to charge a price equal to MC will

cause the monopolist to exit the market

The purpose of antitrust laws is to

Increase competition in an industry by preventing mergers and breaking up larger firms

Public ownership of natural monopolies

Tends to be inefficient Private ownership is better

Which of the following statements about price discrimination is not true

A. It can raise economic welfare
B. It requires that the seller be able to separate buyers according to their willingness to pay
C. Perfect price discrimination generates a dead weight loss
D. It increases a monopolist’s profits
E. For a monopolist to participate in it, buyers must be unable to engage in arbitrage

C. Perfect price discrimination generates a dead weight loss It’s just like buying a car

If regulators break up a natural monopoly into many smaller firms, the cost of production

Will rise

A monopoly is able to continue to generate economic profits in the long run because

There is some barrier to entry in that market

If MR exceeds MC, a monopolist should

Increase output

Monopolistic competition

Monopolistic competition

Monopolistic competition characteristics

Many sellers Product differentiation Free entry and exit

Monopolist competition’s demand curve is

Downward facing

Which of the following is not a characteristic of a monopolistically competitive market

A. Many sellers
B. Differentiated products
C. LR economic profits
D. Free entry and exit

C. LR economic profits No LR profits for monopolistic competitor

The monopolist makes ______ in the long run while the monopolistic competitor makes ______ in the long run

Economic profits Zero economic profits

In the short run, if the price is above average total cost in a monopolistically competitive market, the firm makes

Profits and firms enter the market Monopolistic competitive P>ATC profit so enters market

P&lt;ATC means

Losses

Monopolistically competitive firms choose the quantity at which MC equals

MR and then use demand curve to determine the price consistent with this quantity

A graph showing P=ATC means

Its generating zero profits in the long run

Monopolistic competitive firms produce with

Excess capacity and charge a price above MC

Once source of inefficiency in monopolistic competition is that

Because P>MC some units are not produced that buyers value in excess of the cost of production and this causes a deadweight loss

The use of the word competition in the name of the market structure called monopolistic competition refers to the fact that

There are many sellers in a monopolistically competitive market and there is free entry and exit in the market just like a competitive market

The use of the word monopoly in the name of the market structure called monopolistic competition refers to the fact that

A monopolistically competitive firm faces a downward sloping demand curve for its differentiated product and so does a monopolist

ADVERTISING

ADVERTISING

Which of the following firms is most likely to spend a large percentage of their revenue on advertising

A. The manufacturer of an undifferentiated commodity
B. A perfect competitor
C. A manufacturer of an industrial product
D. The producer of a highly differentiated consumer product
E. The producer of a low quality product that costs the same to produce as a similar high quality product

D

Expensive TV commercials that appear to provide no specific info about the product being advertised

May be useful bc they provide a signal to the consumer about the quality of the product Its more expensive

Defenders of the use of brand names argue that brand names

Provide info about the quality of the product Give firms an incentive to maintain high quality Are useful even in socialist economies such as the former soviet union

Which of the following has the least incentive to advertise

A. A manufacturer of home heating and AC
B. A manufacturer of breakfast cereal
C. A wholesaler of crude oil
D. A restaurant

C. A. A manufacturer of home heating and AC Industrial B. A manufacturer of breakfast cereal Consumer C. A wholesaler of crude oil Undifferentiated D. A restaurant Consumer

RECALL : A competitive firms demand curve is

Horizontal at the market price

Oligopoly

Oligopoly

A market structure in which only a few sellers offer similar or identical products

Oligopoly

The market for hand tools such as hammers &amp; screwdrivers is dominated by Black &amp; Decker, stanley &amp; craftsman. This market is best described as an

Oligopoly

A market structure in which many firms sell products that are similar but not identical is

A. Perfect comp.
B. Monopoly
C. Oligopoly
D. N/A

D

If oligopolists engage in collusion and successfully form a cartel, the market outcome is

The same as if it were served by a monopoly

As the number of sellers in an oligopoly grows larger, and oligopolistic market looks more like

A competitive market

When an oligopolist individually chooses its level of production to maximize its profits, it produces an output that is

More than the level produced by a monopoly and less than the level produced by a competitive market

When an oligopolist individually chooses its level of production to maximize its profits, it charges a price that is

Less than the price charged by a monopoly and more than the price charged by a competitive market

As the number of sellers in an oligopoly increases

The price in the market moves closer to MC

A situation in which oligopolists interacting with one another each choose their best strategy given the strategies that all the other oligopolists have chosen is known as

Nash equilibrium

Collusion is difficult for an oligopoly to maintain because

Antitrust laws make it illegal Because self interest is in conflict with cooperation If additional firms enter of the oligopoly

Laws that make it illegal for firms to conspire to raise prices or reduce production are known as

Antitrust laws

Externalities

Externalities

The uncompensated impact of one person’s actions on the well being of a bystander

An externality

Generates a social cost curve that is above the supply curve (private cost curve) for a good

a negative externality

Generates a social cost curve that is above the demand curve (private value curve) for a good

a positive externality

A negative externality (that has not been internalized) causes the

equilibrium quantity to exceed the optimal quantity

A positive externality (that has not been internalized) causes the

optimal quantity to exceed the equilibrium quantity

when an individual buys a car in a congested urban area, it generates

a negative externality

the most efficient pollution control system would ensure that

the polluters with the lowest cost of reducing pollution reduce their pollution the greatest amount

according to the coase theorem, private parties can solve the problem of externalities if

there are no transaction costs

which of the following is not considered a transaction cost incurred by parties in the process of contracting to eliminate a pollution externality

A. Costs incurred to reduce the pollution
B. Costs incurred due to lawyers’ fees
C. Costs incurred to enforce the agreement
D. Costs incurred due to a large number of parties affected by the externality

A. Costs incurred to reduce the pollution

Bob and Tom live in a university dorm. Bob values playing loud music at a value of 100$. Tom values peace and quiet at 150$. What is efficient

It is efficient for bob to stop playing loud music regardless of who has the property right to the level of sound

Corrective taxes and tradable pollution permits create an efficient market for

Pollution

The gas guzzler tax is places on new vehicles that get very poor mileage is an example of

an attempt to internalize a negative externality

A corrective tax on pollution

Sets the price of pollution

Tradable pollution permits

Set the quantity of pollution

When wealthy alumni provide charitable contributions to their alma mater to reduce the tuition payments of current students, it is an example of

an attempt to internalize a positive externality

Elasticity

Elasticity