# 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

output

### 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

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

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

MR=MC

### 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

monopoly

### 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

MR=0

### 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

opportunity cost

acerage revenue

### total profit is maximized where

MR=MC
marginal profit is zero
the slope of the total profit curve is zero

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

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

P=MR=MC

P>AC

P=AC

### 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

P<AVC

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

zero

### 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

fall

### 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

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

MRa=MRb=MC

### firms that engage in price discrimination

will earn more profit than those that do not discriminate

Example: