91 terms

# 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
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
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
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
if a firm decides to ignore the reactions of its rivals to its policies, the appropriate model to analyze its behavior is
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
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
a sales maximizing firm produces the output level at which
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
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
MR=MC
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
P=MR=MC
a firm in short run equilibrium always earns positive profits of
P>AC
a firm earns a profit of exactly zero at its optimal output level in the short run only if
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
a firm will shut down in the short run if
P<AVC
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
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
firms entering a perfectly competitive industry will cause the price of the product to
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
--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
MRa=MRb=MC
firms that engage in price discrimination
will earn more profit than those that do not discriminate