module 4 final exam

76 terms by bgargis88

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The primary purpose of antitrust legislation is to

protect the competitiveness of U.S. markets.

The Sherman Antitrust Act prohibits price-fixing in the sense that

competing executives cannot even talk about fixing prices

As the number of firms in an oligopoly increases,

the total quantity of output produced by firms in the market gets closer to the socially efficient quantity.

In the prisoners' dilemma game with Bonnie and Clyde as the players, the likely outcome is one

in which both Bonnie and Clyde confess.

Cartels are difficult to maintain because

there is always tension between cooperation and self-interest in a cartel.

In a duopoly situation, the logic of self-interest results in a total output level that

exceeds the monopoly level of output, but falls short of the competitive level of output.

Under which of the following market structures would consumers likely receive the most product variety?

monopolistic competition

Which market structure would likely have the highest concentration ratio?

Monopoly

T/F Defenders of advertising argue that firms use advertising as a signal of quality, even if the advertising delivers little helpful information about the product

True

To maximize its profit, a monopolistically competitive firm chooses its level of output by looking for the level of output at which

marginal revenue equals marginal cost.

T/F For a profit-maximizing firm in a monopolistically competitive market, when price is equal to average total cost, price must lie above marginal cost.

True

T/F Monopolistic competition and monopoly are examples of a market structure called imperfect competition.

False

If "too much choice" is a problem for consumers, it would occur in which market structure(s)?

monopolistic competition

T/F When advertising is used to relay information about price, each firm is able to enhance market power.

False

T/F Suppose a profit-maximizing monopolist faces a constant marginal cost of $10, produces an output level of 100 units, and charges a price of $50. The socially efficient level of output is 200 units. Assume that the demand curve and marginal revenue curve are the typical downward-sloping straight lines. The monopoly deadweight loss equals $2,000.

True

Which of the following is not an example of a barrier to entry?

A college student starts a part-time tutoring business.

If the government regulates the price that a natural monopolist can charge to be equal to the firm's marginal cost, the firm will

earn negative profits, causing the firm to exit the industry.

T/F A monopolist can charge any price and sell any quantity that it chooses.

False

T/F Deadweight loss measures the loss in society's welfare that occurs because a monopolist does not produce the socially efficient level of output.

True

Compared to the monopoly outcome with a single price, imperfect price discrimination
(i)
sometimes raises total surplus.
(ii)
sometimes lowers total surplus.
(iii)
always leads to a lower quantity of output.

(i) and (ii) only

If government regulation sets the maximum price for a natural monopoly equal to its marginal cost, then the natural monopolist will

earn economic losses.

Suppose a firm in a competitive market earned $1,000 in total revenue and had a marginal revenue of $10 for the last unit produced and sold. What is the average revenue per unit, and how many units were sold?

$10 and 100 units

The assumption of a fixed number of firms is appropriate for analysis of

the short run but not the long run.

uppose that a firm operating in perfectly competitive market sells 300 units of output at a price of $3 each. Which of the following statements is correct?
(i)
Marginal revenue equals $3.
(ii)
Average revenue equals $100.
(iii)
Total revenue equals $300.

(i) only

A firm's marginal cost has a minimum value of $50, its average variable cost has a minimum value of $80, and its average total cost has a minimum value of $90. Then the firm will shut down once the price of its product falls below

$80.

A long-run supply curve is flatter than a short-run supply curve because

firms can enter and exit a market more easily in the long run than in the short run.

T/F In the long run, a competitive market with 1,000 identical firms will experience an equilibrium price equal to the minimum of each firm's average total cost.

True

Profit-maximizing firms in a competitive market produce an output level where

marginal cost equals marginal revenue

T/F A firm operating in a perfectly competitive industry will continue to operate if it earns zero economic profits because it is likely to be earning positive accounting profits.

True

When a perfectly competitive firm decides to shut down, it is most likely that

price is below the firm's average variable cost.

Suppose that a given firm experiences decreasing marginal product of labor with the addition of each worker regardless of the current output level.

Refer to Scenario 13-17. Average total cost will be

U-shaped.

Zach has decided to start his own photography studio. To purchase the necessary equipment, Zach withdrew $10,000 from his savings account, which was earning 3% interest, and borrowed an additional $5,000 from the bank at an interest rate of 8%. What is Zach's annual opportunity cost of the financial capital that has been invested in the business?

$700

T/F Implicit costs are costs that do not require an outlay of money by the firm.

True

Chelsea wants to start her own Christmas ornament business. She can purchase a suitable factory that costs $100,000. Chelsea currently has $150,000 in the bank earning 3 percent interest per year.

Refer to Scenario 13-2. Suppose Chelsea purchases the factory using her own money. What is Chelsea's annual implicit opportunity cost of purchasing the factory?

$3,000

T/F
Average total cost and marginal cost express information that is already contained in a firm's total cost.

True

Average total cost (ATC) is calculated as follows:

ATC = (total cost)/(quantity of output).

industrial organization:

the study of how firms decisions about prices and quantities depend on the market conditions they face.

total revenue:

the amount that the firm receives fro the sale of its output.

total cost:

the amount that the firms pay to buy inputs.

profit:

a firms total revenue minus its total cost.

explicit costs:

input costs that require an outlay of money by the firm ( wages & products )

implicit costs:

input costs that do not require an outlay of money by the firm (forgone income)

economic profit:

an economist measures this as total revenue minus total cost, including both explicit and implicit costs.

accounting profit:

an accountant measures this as total revenue minus total explicit costs.

fixed costs:

do not vary with the quantity of output produced (rent or bookkeeper)

variable costs:

change as the firm alters the quantity of output produced (ingredients: milk, sugar, paper cups, more workers)

total cost:

fixed + variable costs

the total cost curve gets ______ as the amount produced rises, whereas the production function gets ______ as production rises; which, deflects diminishing marginal product.

steeper; flatter

average total cost

total cost / quantity of output

average fixed cost

fixed cost/ quantity of output

the tug of war between average fixed cost and average variable cost generates the what shape in the average total cost?

U-shape

efficient scale

the bottom of the U-shape occurs at the quantity that minimized average total cost.

the marginal cost curve crosses the average total cost curve at its

minimum

marginal cost eventually _____ with the quantity of ______.

rises; output

the cost of factories is a fixed cost in the

short run

the cost of factories is a variable cost in the

long run

competitive market- sometimes called a "perfectly competitive market"

* there are many buyers & many sellers
* the goods offered by the various sellers are largely the same
* firms can freely enter or exit the market

marginal cost curve

upward sloping

average total cost curve

U-shaped

the price line is horizontal bc the firm is a

price taker : the price of the firms output is the same regardless of the quantity that the firm decides to produce.

rules for profit maximization

* if marginal revenue is greater than marginal cost, the firms should increase its output
* if marginal cost is greater than marginal revenue, the firm should decrease its output.
* at the profit maximizing level of output, marginal revenue and marginal cost are exactly the same.

in the long run equilibrium of a competitive market with free entry and exit, firms must be operating at their

efficient scale: the level of production with lowest average total cost.

2 reasons long-run market supply curve might slope upwards:

*resources may have limited quantities
* firms may have different costs

the long run supply curve is typically more _____than the short run supply curve.

elastic

imperfect competition

industries that fall somewhere between the polar cases of perfect competition and monopoly.

concentration ratio

the %age of total output in the market supplied by the 4 largest firms.
--economists use this to measure a market's domination by a small # of firms.

monopolistic competition

*many sellers
*product differentiation
*free entry and exit

profit maximization

choose to produce the quantity at which marginal revenue equals marginal costs & then uses its demand curve to find the price at which it can sell that quantity.

2 differences between monopolistic & perfect competition

*excess capacity
* the markup

oligopoly

a market structure in which only a few sellers offer a similar or identical products
* the actions of any one seller in the market can have a large impact on the profits of all other sellers
*profits also depend on how much the other firms produce

key feature of an oligopoly is the

tension between cooperation and self-interest.

duopoly

oligopoly with only 2 members

collusion

an agreement among firms in a market about quantities to produce or prices to charge.

cartel

a group of firms acting in unison
* must agree on total level of production & amount produced by each member

Nash equilibrium

a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen.

controversial business practices

*resale price maintenance
*predatory pricing
*tying

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