104 terms

Micro Test 3

Price discrimination
a pricing practice whereby a seller charges different consumers different prices for the same product or service
Contestable Market
a market in which the costs of entry and exit are low, so a firm incurs little risk by entering
Competitive price searcher market
a market in which the firms have a downward- sloping demand curve, and entry into and exit from the market are relatively easy; also known as monopolistic competition
Marginal revenue
the incremental change in total revenue derived from the sale of one additional unit of a product
a temporary halt in the operation of a firm; variable costs are eliminated but fixed costs remain
Going out of business
the sale of a firm's assets and its permanent exit from the market; both variable and fixed costs are eliminated
External costs
spillover effects that reduce the well-being of nonconsenting third parties; costs imposed on others who are not part of the market transaction; also known as neighborhood effects
External benefits
spillover effects that increase the well-being of nonconsenting third parties; benefits accrued to others who are not part of the market transaction
Public goods
goods for which satisfy two conditions: (1) non-rival, meaning more than one person can consume the good simultaneously, and (2) non-excludable, meaning those who didn't pay for the good can't be stopped from consuming it
Free rider
a person who receives the benefit of a good without paying for it
Economic efficiency
a situation that occurs when (1) all activities generating more benefits than costs are undertaken, and (2) no activities are undertaken for which the costs exceeds the benefits
private markets would not produce the efficient quantity of the goods
The government sometimes provides public goods because
it nearly always makes sense to stop an activity well before perfection is achieved
Economic efficiency indicates that
too much of a polluting good
As a general rule, if pollution costs are external, firms will produce
less output than is efficient
If production of a good creates external benefits, a competitive market may produce
the market will devote too few resources to the production of the good
When the free-rider problem exists
more of the good will be produced than the amount consistent with economic efficiency
When external costs are present in a market
Public goods tend to be undersupplied through the market since it is difficult for potential suppliers to withhold such goods from nonpaying consumers, while the government can use taxes to overcome this problem
Which of the following is a valid reason for government provision rather than market provision of certain economic goods and services?
the lack of well-defined or enforced property rights
Externalities are fundamentally the result of
because some of the costs and benefits of producing a good are not reflected in the market price
Markets fail when externalities are present
too few resources devoted to its production
When production of a good provides external benefits, there will be
property rights are poorly enforced or not well established
Markets fail to allocate resources efficiently when
T/F: It is extremely difficult to limit the benefits of a public good to only the people who pay for it
decline; increases
As new firms enter a competitive price-searcher market, profits of existing firms _________ and product diversity in the market ________
the demand curve be tangent to the average cost curve
Long-run equilibrium in a competitive price-searcher market requires that
average total cost, and profits are zero
When a profit-maximizing firm in a competitive price-searcher market is in long-run equilibrium, price equals
equal to average total cost
When a competitive price-searcher market is in long-run equilibrium, the firms will charge a price that is
rise and product diversity in the market decreases
As firms exit a competitive price-searcher market, profits of remaining firms
There was nothing to prevent the students from reselling the fruit juice to other consumers
A major fruit juice manufacturer failed in its attempt to engage in price discrimination between students and all other consumers. What is the most likely explanation for this failure?
marginal revenue equals marginal cost
A profit-maximizing price searcher will expand output to the point where
It must be easy to distinguish consumer groups with differing responses to higher prices
Which of the following is a necessary condition for price discrimination to be profitable?
the opportunity to bring new and different products and services to the market
A competitive market economy with low barriers to entry faces an entrepreneur with
more profit than those that do not discriminate
Firms that engage in price discrimination will earn
have at least two distinguishable groups of consumers
In order for effective price discrimination to occur, a seller must
Each firm will expand production as long as marginal revenue _______ marginal cost
T/F: In the short run, a firm may earn positive or negative profit
With negative profits, some existing firms will ______ the industry
With positive profits, some new firms will _______ the industry
In the long run, profit will be pushed to ______ as the process of competition unfolds
by discovering new products and innovative means of production
In what way does the entrepreneur play a critical role in the development of new products and economic progress?
greater; more
With many firms in the market, product differentiation is _________ which leads to _________ choices for consumers
limited; lower
With fewer firms in the market, consumers have _______ choices but costs are _________
high; low
Firms participate in price discrimination by charging inelastic demanders a relatively ________ price while charging elastic demanders a relatively ______ price
A firm should continue to operate as long as revenues are ________ than variable costs
A firm will temporarily suspend operations if revenues do not ________ variable costs and the owners think market conditions will improve
rewards to businesses that produce goods for which consumers' value is greater than the cost of the resources used to make those goods
penalties for not producing enough value to consumers
Continue to engage in an activity as long as the marginal benefit is ________ than the marginal cost
lack of competition, information problems, externalities and public goods
The biggest obstacles for the market to overcome to achieve an efficient outcome are
higher; lower
With a lack of competition, fewer firms operate in a market which usually results in a price that is _______ and quantity _______ than the efficient amount
Information problems usually lead to __________ amounts of goods to be produced
lower; higher
With external costs; price is ________ and quantity ________ than the efficient amount
lower; lower
With external benefits, price is _______ and quantity _______ than the efficient amount
Markets usually produce ______ than the efficient amount of public goods
T/F: Externalities can be either positive (benefits) or negative (costs)
flu shot because more than just the recipient benefit from the shot
Example of external benefit:
pollution because more people than just the producer incur costs from pollution
Example of external cost
protecting consumers by imposing legally mandated price ceilings
An example of something that would reduce the efficiency of the market process:
it will be difficult to get potential consumers to pay for such goods because there is not a direct link between payment or and receipt of good
It is difficult for the market process to provide public goods because
brand names, franchising, private sector certification firms and consumer report magazines
Ways in which the private market provides consumers with valuable information to help them make better decisions:
public goods, externalities, lack of competition, poorly informed buyers or sellers
Four major factors that may undermine the ability of the invisible hand to produce market efficiency:
all actions generating more social benefit than cost be undertaken
Economic efficiency requires that:
In the absence of government intervention, goods with external costs tend to be
causes difficulties for society due to externalities
The absence of well-defined and enforceable private property rights often
nonexcludable and nonrival in consumption
The major distinction between private and public goods is that public goods are
The flu shot reduces likelihood of others catching the flu
An external benefit resulting from an individual's purchase of a flu shot:
little of the good that generates external benefits and too much of the good that generates the external cost
Consider two goods--one that generates external benefits and another that generates external costs. A competitive market economy would tend to produce too
poorly defined or enforced private property rights
What usually creates an externality?
free-rider problem
The problem created when it is difficult to exclude nonpaying customers is called the
Price takers produce identical goods, whereas competitive price searchers produce goods that are differentiated from the goods produced by their competitors
Major difference between a competitive price searcher and a price taker?
exceed; equal; zero
For the competitive price searcher, price will _______ marginal cost at the profit-maximizing level of output, price will ______ average total cost in the long run, and economic profit will be driven to ______ in the long run by the entry and exit of firms
the level of output to produce, the amount of advertising to undertake, and the level of product quality
Only undertaking an activity when it adds more to revenue than to cost is the decision rule a profit-maximizing firm will use when deciding upon
being able to choose their price and no barriers preventing firms from entering or leaving the market
A competitive price-searcher market is characterized by firms
exit; increase
The fact that barriers to entry are low in competitive price-searcher markets means that if current firms are making economic losses, firms will _____ the market, causing the demand curves that face the other firms to ________
the entry of additional firms into the market and the eventual restoration of zero long-run
economic profits.
In competitive price-searcher markets, short-run economic profits will lead to
unlike price takers, price searchers do not produce at the minimum of their average total cost curves
Some economists have argued that competitive price-searcher industries are inefficient relative to price-taker industries because
competition from new entrants would occur until the economic profits had been eliminated
If economic profits were present in a competitive price-searcher industry
they will pay higher prices
The practice of price discrimination has what effect on groups with the lower elasticity of demand?
with low entry barriers, the entry and exit of firms result in prices that are equal to per-unit costs in the long run
Competitive price searchers will be able to earn long-run economic profit because
E and charging a price equal to A
This firm will maximize profits by producing a quantity of output equal to
profit equal to the area CKGA
The firm is currently earning an economic
I and charging a price equal to C
This firm will maximize profits by producing a quantity of output equal to
loss equal to the area CFED
This firm is currently earning an economic
exit; zero
In the long run, we would expect firms to _______ this industry until _____ economic profits are restored
price of $7, output of 4 units
Given the data shown in the table, what price and output level would a profit-maximizing price searcher choose?
In a price-taker market, the firms all produce ________ products
marginal cost equals marginal revenue
To maximize profits, a firm should always produce the level of output where
could increase your profit by expanding output
If you were the owner of a price-taker firm operating at an output level where the marginal cost of producing another unit was $5, and the market price was $7, then you
A price-taker firm is currently producing 50 units of output at an average total cost of $3 per unit. If the market price is $7, then the firm's total economic profit is
is doing as well as typical firms in other markets
If a firm in a price-taker market is earning zero economic profit, it
producing and selling an additional unit will add more to total revenue than it adds to total cost
If marginal revenue exceeds marginal cost at the current level of output, profit will increase when output is expanded because
purely competitive markets
Historically, most economists have referred to markets where firms are price takers as
T/F: In order to maximize profits in the short run, a price taker should always produce at the
output level where marginal cost is equal to price.
In long-run equilibrium, a price taker will produce at an output level where average total
cost is at its minimum.
A price taker will remain open in the short run, even if it is earning an economic loss, so
long as price is sufficient to cover average variable cost.
If firms in a price-taker industry were forced to install antipollution devices that increased their production costs, we should expect that the firms in the industry would earn _________ economic profits in the long run, as the higher production costs were passed along to consumers in the form of higher prices
to maximize profits, you should remain open in December
You are the owner of an ice cream shop that earns a profit most of the year except during the cold winter months. During the month of December, your rent and other fixed costs amount to a total of $200. If you remain open, your total variable costs (workers, ice cream cones, etc.) will amount to $300. If you would be able to sell 100 ice cream cones at $4 each during December, then
continue operating the truck until the lease expires, then not renew the lease for next year.
FYI Sanitation is currently eight months into a year-long lease contract on a garbage truck at a cost that averages $500 per month. Other variable costs (fuel, workers, etc.) for operating the truck amount to $300 per month. If the monthly revenue from operating the truck is $400, and these conditions are expected to continue into the future, to maximize its profit, FYI Sanitation should
The schedule of total cost for a firm in a price-taker market is given in the table. If the market price for this product is $50, which of the following output levels should this firm produce if it wants to maximize its profit?
To maximize profit in a price-taker market, the firm should produce an output level of
profit if BIFC
At the profit-maximizing level of output, the firm will earn an economic
To maximize profit in a price-taker market, the firm should produce an output level of
loss of AHEB
At the profit-maximizing level of output, the firm will earn an economic
this firm should shut down immediately
The figure shows a representative firm in a price-taker market. Which of the following is true regarding the situation depicted in the figure?