EREC 411 exam 2

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the short run is the time period during which

some of the firms input decisions are constrained by previous commitments

in the long run

all of the firms input quantities are variable

the total physical product of an input is the same thins as its


marginal physical product can tell a producer

how much the last input added to the total amount of production

what is equivalent to the law of diminishing marginal returns?

too many cooks spoil the broth

the rule for the optimal use of any input says that

when MRP is greater than price, it pays to expand resource use

what indicates an input is being overused relative to the optimal level?

MRP<P of input

the optimum quantity of an input occurs when

marginal revenue product equals input price

average physical product

total physical product / quantity of output

a firm practices input substitution when it

replaces unskilled labor with automated machinery

at a given level of wheat output, one more unit of labor would generate a marginal revenue product equal to $10 and one more unit of seed would generate MRP equal to $30. A unit of labor cost $6 and a unit of seed costs $12. The farmer would like to minimize the cost of production. She should

buy more seed and less labor

a firm uses two inputs A and B. it the firm uses the combination of A and B that minimizes cost then

(MRP of A/price of A)=(MRP of B/price of B)

a firm is using the optimal combination of inputs. suddenly the price of one input rises. the firm should

buy less of that input and more of the other input

to determine total cost, the business person must know

input quantity and input price

marginal cost is the

change in total cost resulting from the production of one more unit of output

what is a variable cost for an airline?

jet fuel

the typical average cost curve

first declines to a minimum and then increases as output increases

in the typical AC curve, the downward-sloping part is attributable to

spreading fixed costs over larger outputs and increasing returns to the variable inputs

whn economies of scale are present

cost per unit decline as output expands

economies of scale

pertain to the long run only

economies of sale is another term for

increasing returns to scale

if doubling the quantity of inputs more than doubles the quantity of outputs, the firm is experiencing

increasing returns to scale

if a firm increases inputs by 15% and output increases by 12.5% the firm is experiencing

decreasing returns to scale

total cost

total fixed cost + total variable cost

average fixed cost

total fixed cost/ quantity

average variable cost

total variable cost/quantity

marginal cost

change in total cost/ change in output quantity

monopolistic competition is characterized by

many firms selling slightly different products

monopolistic competitors and perfect competitors are alike in

zero economic profit in the long run

monopolistic competition is different from perfect competition in that every manufacturer

has a small monopoly and differentiates the product

the demand curve for a monopolistic competitor slopes downward because

there are close but not perfect substitutes for the product

the force that leads to zero economic profits for monopolistically competitive firms in the long run is

entry by new firms

what is the long run effect on the demand curve of a monopolistically competitive firm when more firms enter the market

demand curve shifts to the left

a firm in a monopolistically competitive market makes no economic profit in the long run because

long run price will be equal to long run average cost

to maximize its profit, a monopolistically competitive firm produces at the output level at which


a monopolistically competitive firm in the long run will

have a demand curve tangent to its AC curve

according to the access capacity theorem, if every firm under monopolistic competition expanded its output

cost per unit of output would decrease

an oligopoly is a market

dominated by a few sellers

the difficulty in analyzing oligopolistic behavior arises from the

interdependent nature of oligopolistic decisions

if a firm decides to ignore the reactions of its rivals to its policies, the appropriate model to analyze its behavior is


in an economists view, a cartel usually offers to society

none of the cost benefits of large-scale production and all of the allocative inefficiencies of monopoly

cartels usually succumb to divisive forces caused by

members cheating by giving secret discounts

in the cigarette industry either R.J Reynolds or Phillip Morris, for a time, raised prices twice a year by about 50% cents per carton. the other firms in the industry raised their prices by the same amount. economists call this

price leadership

a sales maximizing firm produces the output level at which


firms have the option of maximizing sales revenue or maximizing profits. if a firm chooses to maximize sales then it will produce

more output and charge a lower price

according to the kinked demand curve model an oligopolist may face

more elastic demand if she raises her price than if she lowers her price

the theory of the kinked demand curve is used to explain

sticky prices in oligopolies

when firms are faced with making strategic choices in order to maximize profit, economists typically use

game theory to model their behavior

when strategic interactions are important to pricing and production decisions a typical firm will

consider how competing firms might respond to its actions

the prisoners dilemma provides insight into the

difficulty of maintaining cooperation

the likely outcome of the standard prisoners dilemma is that

both prisoners confess

in a game a dominant strategy is by definition

the best strategy for a player to follow, regardless of the strategies followed by other players

very often the reason that players can solve the prisoners dilemma and reach the most profitable outcome is that

the players play the game not once but many times

production indifference curves bow inward toward the graphs origin because of

the law of diminishing returns to a single input

production costs for a given output will be minimized when the

product indifference curve and the budget line are tangent

in arriving at the quantity of output and price of its product a company

chooses wither output or price, and consumer demand determines the other

the difference between economic profit and accountants definition of profit is that an economists total cost counts the --of inputs

opportunity cost

for nay firm, price always equals

acerage revenue

total profit is maximized where

marginal profit is zero
the slope of the total profit curve is zero

once the profit maximizing output where MR=MC is determines, price is set by

the demand curve

if MC>MR

output should be reduced

if the marginal profit from increasing output by one unit is negative, then to attain an optimum the firm shoul

reduce output until marginal profit equals zero

once the profit maximizing output where MR=MC is determined, price is set by

the demand curve

if fixed cost rises

the profit maximizing level of output would not change

in a market with perfectly competitive firms, the market demand curve is usually -- and the demand curve facing each individual firm --

downward sloping; horizontal

for a perfectly competitive firm, marginal revenue equals average revenue because the

firms demand curve is horizontal

the competitive firm has no influence over price because

its output is so insignificant relative to the market as a whole

at a perfectly competitive firms short run equilibrium level of output


a firm in short run equilibrium always earns positive profits of


a firm earns a profit of exactly zero at its optimal output level in the short run only if


a perfectly competitive firm should continue to expand output until

marginal revenue equals marginal costs

the perfectly competitive firms short run shutdown rule is to shut down immediately if

TR<total variable cost

a firm will shut down in the short run if


if a firm shuts down in the short run, its losses are equal to

total fixed cost

the short run supply curve of the perfectly competitive firm is the firms

MC curve above the minimum point on the AVC curve

in the short run, if the price falls below minimum AVC the quantity supplied by the firm will be


the market for a perfectly competitive industry clears at a price of $3 and the minimum average cost for all firms is $2.50 in the long run, we would expect an increase in

the number of firms

firms entering a perfectly competitive industry will cause the price of the product to


a perfectly competitve firm would be willing to remain in the industry in the long run at zero economic profit because

revenue is equal to all costs, including the opportunity cost of capital and labor

the process of adjustment to a new long run equilibrium in a perfectly competitive industry is complete when

no firms want to enter or exit the industry
every firm had adjusted its production process to make the most efficient use of its resources
investors in the industry receive the standard economy wide rate of return on their investments

the long run supply curve of an industr equals the industrys

long run average cost curve

a perfectly competitive industry in long run equilibrium is described as efficient because firms

produce at the low point on their average cost curve

pure monopoly

is defines as having only one supplier
has no close substitutes for its product
exists when entry and survival of potential competitors is extremely unlikely

--mean that the costs involved cannot be recouped for a considerable period of time

sunk cost

a natural monopoly is defined as an industry in which one firm

can produce the entire industry output at a lower average cost than a larger number of firms could

the marginal revenue curve for a monopolist is

always below the demand curve

a monopoly firm

does not have a supply curve

compared to perfect competition, monopoly

provides less output
charges a higher price
results in higher cost (inefficient) producton

providing medical services for smaller fees to the poor than to the rich is an example of

price descrimination

a price discriminating firm will always maximize profit by following the condition that


firms that engage in price discrimination

will earn more profit than those that do not discriminate

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