Economics

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Exam 3

Which of the following is not a characteristic of a perfectly competitive market?

Substantial barriers to entry

The firm's shut down price is where price equals minimum:

AVC

In a perfectly competitive market, if the market price is greater than average cost, in the long-run we can expect:

firms to enter the market.

Markets approximating perfect competition are likely to be characterized by

High levels of advertising

For the perfectly competitive firm, marginal revenue is always equal to:

price.

A firm will shut down in the short run, when:

price is below average variable costs

The short-run profit-maximizing production rule for a perfectly competitive firm is to produce the rate of output that makes:

marginal revenue just equal marginal cost

If price remains constant as sales increase, the AR schedule will be:

horizontal

Perfect competition requires the existence of many sellers. Many sellers can best be described as a situation in which:

no one seller has a control of price.

Firm-specific demand curve under perfect competition is:

horizontal

The type of product under perfect competition is:

homogeneous

The firm's shut down price is where price equals minimum:

AVC

Suppose that Andrew sells golf balls in a perfectly competitive market. At its current level of golf ball production, Andrew has marginal costs equal to $1. If the market price of golf balls is $2, Andrew should:

increase the production of golf balls

Which one of the following is true for a monopolist?

price greater than marginal revenue

Monopolies are more likely than competitive firms to engage in

Price discrimination

The short-run profit-maximizing production rule for a monopoly firm is to produce the rate of output at which:

marginal cost equals average revenue

Natural monopoly refers to a firm that:

can supply the entire market on a declining portion of its LR average cost curve

Product differentiation is the main characteristic of a market that is:

Monopolistically competitive

The term "rent seeking" best describes a situation in which:

firms employ agents to secure or preserve an exclusive contract to provide a good or service

A market in which there are many firms each selling differentiated products is called a:

Monopolistically competitive market.

A contestable market is one where:

There is the legitimate threat of entry

An outcome of a game in which each player is doing the best it can, given the actions of other players, is known as the:

Nash equilibrium

Price leadership, an informal arrangement in which one firm is the first to announce a price change and then others quickly announce similar changes, is most likely to be found in:

An oligopoly

The calculation for contribution margin is sales revenue less total:

Variable expenses

All of the following information is needed to calculate the break-even point, I units, for a product EXCEPT:

total revenue

Toothbrushes, music stores and groceries are examples of products in a market that is:

Monopolistic competition

Product differentiation is the main characteristic of a market that is:

Monopolistically competitive

Price discrimination is related to the price elasticity of demand because:

The firm can increase revenues by charging customers with elastic demands lower prices and charging customers with inelastic demands higher prices

When firms already in the market are constantly threatened by new entry because of low barriers of entry and exit, the market is called:

Contestable

A kinked demand curve assumes that oligopolists:

Follow price decreases but not price increases of other competitors

Which one of the following gives rise to a natural monopoly?

economies of scale

The average cost of a music video is $223 if 1,000 copies are distributed, and drops to $0.23 if one million copies are distributed. If consumers can download the music video at a price of $1, how many copies should be distributed for the company to break even?

223,000

Consider a corn farmer who has the break-even price at $0.72 per bushel, the market price at $0.92 per bushel, and the shut-down price at $0.44 per bushel. If the market price falls below $0.92 but stays above $0.44 per bushel, the farmer should:

continue to produce.

The typical music artist gets 15 percent of the revenue from sale of a CD that averages $15. In 2007, Radiohead released its album "In Rainbows" for downloading directly from its website. The band, however, allowed each customer to decide how much to pay. It turned out that roughly 60 percent of U.S. customers downloaded the music for free, and other 40 percent voluntarily paid an average of $8.05. At least in the U.S. market, Radiohead made a decision that:

made a sense since it made more revenue than from sale of CDs

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

substantial barriers to entry

Examples of monopolistically competitive firms include all of the following except:

corn farms

Which one of the following tends to lead to a natural monopoly?

economies of scale

The existence of a contestable market requires:

Low barriers to entry and pricing flexibility

Which one of the following is an example of an oligopolistic industry?

Navy ship-builders

The city's sole gas station pumped 20,000 gallons of gasoline for sale. Since studies indicated that the quantity at the minimum efficient scale was 5,000 gallons per station, the city allowed other gas stations to enter the market. When the market settled down, the text indicates that there were:

six gas stations

Assume, for the following eleven (11) problems, that your AC is constant at $2 per toy; that current monopoly price is $5 per toy and you sell 120 toys per day; and that you can prevent the entry of the second firm by lowering the price to $4 per toy and selling 150 toys. If the second firm enters the market, the price falls to $3 per toy and you will be able to sell only 80 toys per day.
Before the entry of the second firm, your total revenue is:

600

Assume, for the following eleven (11) problems, that your AC is constant at $2 per toy; that current monopoly price is $5 per toy and you sell 120 toys per day; and that you can prevent the entry of the second firm by lowering the price to $4 per toy and selling 150 toys. If the second firm enters the market, the price falls to $3 per toy and you will be able to sell only 80 toys per day.
Before the entry of the second firm, your total cost is:

240

Assume, for the following eleven (11) problems, that your AC is constant at $2 per toy; that current monopoly price is $5 per toy and you sell 120 toys per day; and that you can prevent the entry of the second firm by lowering the price to $4 per toy and selling 150 toys. If the second firm enters the market, the price falls to $3 per toy and you will be able to sell only 80 toys per day.
Before the entry of the second firm, therefore, your total profit is:

360

Assume, for the following eleven (11) problems, that your AC is constant at $2 per toy; that current monopoly price is $5 per toy and you sell 120 toys per day; and that you can prevent the entry of the second firm by lowering the price to $4 per toy and selling 150 toys. If the second firm enters the market, the price falls to $3 per toy and you will be able to sell only 80 toys per day.
After the entry of the second firm, your total revenue is:

240

Assume, for the following eleven (11) problems, that your AC is constant at $2 per toy; that current monopoly price is $5 per toy and you sell 120 toys per day; and that you can prevent the entry of the second firm by lowering the price to $4 per toy and selling 150 toys. If the second firm enters the market, the price falls to $3 per toy and you will be able to sell only 80 toys per day.
After the entry of the second firm, your total cost is:

160

Assume, for the following eleven (11) problems, that your AC is constant at $2 per toy; that current monopoly price is $5 per toy and you sell 120 toys per day; and that you can prevent the entry of the second firm by lowering the price to $4 per toy and selling 150 toys. If the second firm enters the market, the price falls to $3 per toy and you will be able to sell only 80 toys per day.
After the entry of the second firm, your profit is:

80

Assume, for the following eleven (11) problems, that your AC is constant at $2 per toy; that current monopoly price is $5 per toy and you sell 120 toys per day; and that you can prevent the entry of the second firm by lowering the price to $4 per toy and selling 150 toys. If the second firm enters the market, the price falls to $3 per toy and you will be able to sell only 80 toys per day.
Before the entry of the second firm, if you charge the price that can prevent the entry of the second firm, your total revenue is:

600

Assume, for the following eleven (11) problems, that your AC is constant at $2 per toy; that current monopoly price is $5 per toy and you sell 120 toys per day; and that you can prevent the entry of the second firm by lowering the price to $4 per toy and selling 150 toys. If the second firm enters the market, the price falls to $3 per toy and you will be able to sell only 80 toys per day.
Before the entry of the second firm, if you charge the price that can prevent the entry of the second firm, your total cost is:

300

Assume, for the following eleven (11) problems, that your AC is constant at $2 per toy; that current monopoly price is $5 per toy and you sell 120 toys per day; and that you can prevent the entry of the second firm by lowering the price to $4 per toy and selling 150 toys. If the second firm enters the market, the price falls to $3 per toy and you will be able to sell only 80 toys per day.
Before the entry of the second firm, if you charge the price that can prevent the entry of the second firm, your total profit is:

300

Assume, for the following eleven (11) problems, that your AC is constant at $2 per toy; that current monopoly price is $5 per toy and you sell 120 toys per day; and that you can prevent the entry of the second firm by lowering the price to $4 per toy and selling 150 toys. If the second firm enters the market, the price falls to $3 per toy and you will be able to sell only 80 toys per day.
By preventing the entry of the second firm, your profit is greater than that under having the second firm competing against you by:

220

Assume, for the following eleven (11) problems, that your AC is constant at $2 per toy; that current monopoly price is $5 per toy and you sell 120 toys per day; and that you can prevent the entry of the second firm by lowering the price to $4 per toy and selling 150 toys. If the second firm enters the market, the price falls to $3 per toy and you will be able to sell only 80 toys per day.
According to this calculation, your profit is higher when you:

prevent the second firm from entering the market

Perfect competition

Market situation in which there are numerous buyers and sellers, and no single buyer or seller can affect price.

price takers.

buyers and sellers in competitive markets must accept the price the market determines

The central characteristic of the model of perfect competition is the fact that -

price is determined by the interaction of demand and supply; buyers and sellers are price takers.

The perfect competition model assumes:

a large number of firms producing identical (homogeneous) goods or services, a large number of buyers and sellers, easy entry and exit in the industry, and complete information about prices in the market.

The model of perfect competition underlies -

the model of demand and supply

total revenue

the total amount of money a firm receives by selling goods or services

marginal revenue.

The change in total revenue from an additional unit sold

average revenue.

total revenue divided by quantity

average revenue equation

AR=TR/Q=P×Q/Q=P

Economic profit per unit

the difference between price and average total cost
P − ATC

economic loss

The amount by which a firm's total cost exceeds its total revenue.

shutdown point

the minimum point on a firm's average variable cost curve; if the price falls below this point, the firm shuts down production in the short run.

Price in a perfectly competitive industry is determined by

the interaction of demand and supply.

In a perfectly competitive industry, a firm's total revenue curve is

a straight, upward-sloping line whose slope is the market price. Economic profit is maximized at the output level at which the slopes of the total revenue and total cost curves are equal, provided that the firm is covering its variable cost.

To use the marginal decision rule in profit maximization,

the firm produces the output at which marginal cost equals marginal revenue.

Economic profit per unit=

price minus average total cost

total economic profit equals

economic profit per unit times quantity.

If price falls below average total cost, but remains above average variable cost, the firm will-

continue to operate in the short run, producing the quantity where MR = MC doing so minimizes its losses.

If price falls below average variable cost, the firm will -

shut down in the short run, reducing output to zero.

The firm's supply curve in the short run is

its marginal cost curve for prices greater than the minimum average variable cost.

Explicit costs

The actual payments a firm makes to its factors of production and other suppliers

accounting profit.

profit computed using only explicit costs

implicit cost.

input costs that do not require an outlay of money by the firm

constant-cost industry.

an industry in which expansion by the entry of new firms has no effect on the prices firms in the industry must pay for resources and thus no effect on production costs

increasing-cost industry.

industry in which the entry of new firms raises the prices for resources and thus increases their production costs

decreasing-cost industry.

Industry in which production costs fall in the long run as firms enter.

long-run industry supply curve

A curve that shows the relationship between price and quantity supplied by the industry once firms adjust fully to any change in market demand

The accounting concept deals only with explicit costs, while the economic concept of profit

incorporates explicit and implicit costs

The existence of economic profits attracts entry, economic losses lead to exit, and in long-run equilibrium, firms in a perfectly competitive industry will earn

zero economic profit.

The long-run supply curve in an industry in which expansion does not change input prices (a constant-cost industry) is

a horizontal line.

The long-run supply curve for an industry in which production costs increase as output rises (an increasing-cost industry) is

upward sloping

The long-run supply curve for an industry in which production costs decrease as output rises (a decreasing-cost industry) is

downward sloping

In a perfectly competitive market in long-run equilibrium, an increase in demand creates

economic profit in the short run and induces entry in the long run

a reduction in demand creates

economic losses (negative economic profits) in the short run and forces some firms to exit the industry in the long run.

When production costs change,

price will change by less than the change in production cost in the short run. Price will adjust to reflect fully the change in production cost in the long run.

A change in fixed cost

will have no effect on price or output in the short run. It will induce entry or exit in the long run so that price will change by enough to leave firms earning zero economic profit.

monopoly

An industry with a single firm, in which entry is blocked

price setter

a firm that has some control over the price at which its product sells

monopoly power

the ability of a monopoly to dictate what takes place in a given market//include economies of scale, locational advantages, high sunk costs associated with entry, restricted ownership of key inputs, and government restrictions, such as exclusive franchises, licensing and certification requirements, and patents.

barriers to entry

obstacles companies must overcome to enter a market

natural monopoly

A firm that confronts economies of scale over the entire range of output demanded in an industry is

sunk costs

Costs that cannot be avoided because they have already been incurred.

network effects

increases in the value of a product to each user, including existing users, as the total number of users rises

demand curve facing a monopoly firm equation

Q=10−P

When marginal revenue is ...(+)

then demand is ...
price elastic.

When marginal revenue is ... (-)

then demand is ...
price inelastic.

When marginal revenue is ...(0)

then demand is ...
unit price elastic

we can determine a monopoly firm's profit-maximizing price and output by following three steps:

o Determine the demand, marginal revenue, and marginal cost curves.
o Select the output level at which the marginal revenue and marginal cost curves intersect.
o Determine from the demand curve the price at which that output can be sold.

If a firm faces a downward-sloping demand curve, marginal revenue is less than price.

its marginal revenue curve is also linear, lies below the demand curve, and bisects any horizontal line drawn from the vertical axis to the demand curve.

To maximize profit or minimize losses, a monopoly firm produces the quantity

at which marginal cost equals marginal revenue.

The demand curve faced by the firm is downward-sloping.

monopoly

The demand curve and the marginal revenue curves are the same.

perfect competition

Entry and exit are relatively difficult.

monopoly

The firm is likely to be concerned about antitrust laws.

monopoly

Consumer surplus would be increased if the firm produced more output.

monopoly

Imperfect competition

is a market structure with more than one firm in an industry in which at least one firm is a price setter., a market structure that does not meet the conditions of perfect competition

perfect competition

a market structure in which a large number of firms all produce the same product

olgiopoly

the market is dominated by a few firms, each of which recognizes that its own actions will produce a response from its rivals and that those responses will affect it.

Monopolistic competition

market structure in which a large number of firms produce differentiated goods; nonprice competition is present; relatively easy to exit and enter the market

The term "monopolistic competition" is easy to confuse with the term "monopoly." Remember, however, that the two models are characterized by quite different market conditions.

A monopoly is a single firm with high barriers to entry. Monopolistic competition implies an industry with many firms, differentiated products, and easy entry and exit.

excess capacity.

A firm that operates to the left of the lowest point on its average total cost curve

A monopolistically competitive industry features some of the same characteristics as perfect competition

a large number of firms and easy entry and exit.

The characteristic that distinguishes monopolistic competition from perfect competition is differentiated products;

each firm is a price setter and thus faces a downward-sloping demand curve.

Short-run equilibrium for a monopolistically competitive firm is identical to that of a monopoly firm.

The firm produces an output at which marginal revenue equals marginal cost and sets its price according to its demand curve.

In the long run in monopolistic competition
any economic profits or losses will be eliminated by entry or by exit,

leaving firms with zero economic profit.

A monopolistically competitive industry will have some excess capacity;

this may be viewed as the cost of the product diversity that this market structure produces.

Herfindahl-Hirschman Index (HHI).

An index of market concentration found by summing the square of percentage shares of firms in the market.

concentration ratio,

percentage of an industry's total output produced by its largest firms

duopoly

an oligopoly consisting of only two firms

overt collusion

Two companies meet and agree to raise the price

cartel

a group of firms acting together to limit output, raise price, and increase economic profit

tacit collusion

when firms in an industry indirectly coordinate their production and pricing decisions by observing other firm's actions and responses

strategic choice

Organization's strategy; the ways an organization will attempt to fulfill its mission and achieve its long-term goals

Game theory

(economics) a theory of competition stated in terms of gains and losses among opposing players

payoff

The outcome of a strategic decision.

dominant strategy

a strategy that is best for a player in a game regardless of the strategies chosen by the other players

dominant strategy equilibrium.

An equilibrium in which the best strategy of each player is to cheat (confess) regardless of the strategy of the other player

tit-for-tat strategy

A pricing strategy in game theory in which firms continue to match each others' pricing strategy.

trigger strategy

Situation in which a firm makes clear that it is willing and able to respond to cheating by permanently revoking an agreement.

price discrimination.

the business practice of selling the same good at different prices to different customers

The potential for price discrimination exists in all market structures except

perfect competition

Monopoly power is one thing that enables price determinations what are the others?

-A Price-Setting Firm
-Distinguishable Customers
-Prevention of Resale

A Price-Setting Firm

The firm must have some degree of monopoly power—it must be a price setter.

Distinguishable Customers

The market must be capable of being fairly easily segmented—separated so that customers with different elasticities of demand can be identified and treated differently.

Prevention of Resale

he various market segments must be isolated in some way from one another to prevent customers who are offered a lower price from selling to customers who are charged a higher price. If consumers can easily resell a product, then discrimination is unlikely to be successful.

If advertising reduces competition, it tends to raise prices and reduce quantities produced. If it enhances competition,

it tends to lower prices and increase quantities produced.

he price-discriminating firm will adjust its prices how?

so that customers with more elastic demand pay lower prices than customers with less elastic demand.

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