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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?

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