microecon test 4
Terms in this set (67)
By comparing marginal revenue and marginal cost, a firm in a competitive market is able to adjust production to the level that achieves its objective, which we assume to be
After the patent runs out on a brand name drug, generic drugs enter the market. What happens next in the market?
Price decreases, and total surplus increases
A sunk cost is one that
was paid in the past and will not change regardless of the present decision.
A key characteristic of a competitive market is that
producers sell nearly identical products
Because a monopolist must lower its price in order to sell another unit of output
marginal revenue is less than price
If the monopoly firm perfectly price discriminates, then consumer surplus amounts to
If a monopolist can practice perfect price discrimination, the monopolist will
eliminate consumer surplus, eliminate deadweight loss, and maximize profits.
For a firm to price discriminate
it must have some market power
A market structure in which there are many firms selling products that are similar but not identical is known as
For a monopolistically competitive firm, at the profit-maximizing quantity of output
price exceeds marginal cost
Cold Duck Airlines flies between Tacoma and Portland. The company leases planes on a year-long contract at a cost that averages $600 per flight. Other costs (fuel, flight attendants, etc.) amount to $550 per flight. Currently, Cold Duck's revenues are $1,000 per flight. All prices and costs are expected to continue at their present levels. If it wants to maximize profit, Cold Duck Airlines should
continue flying until the lease expires and then drop the run.
A fundamental source of monopoly market power arises from
barriers to entry
"In a long-run equilibrium, price is equal to average total cost." This statement applies to
competitive and monopolistically competitive markets, but not to monopolies
measures monopoly inefficiency
In the long run, each firm in a competitive industry earns
zero economic profits.
A book store that has market power can
influence the market price for the books it sells
A seller in a competitive market
can sell all he wants at the going price, so he has little reason to charge less; will lose all his customers to other sellers if he raises his price; considers the market price to be a "take it or leave it" price.
A profit-maximizing monopolist will produce the level of output at which
marginal revenue is equal to marginal cost.
Marcia is a fashion designer who runs a small clothing business in a competitive industry. Marcia specializes in making designer dresses. Marcia sells 10 dresses per month. Her monthly total revenue is $5,000. The marginal cost of making a dress is $500. In order to maximize profits, Marcia should
continue to make 10 dresses per month
A monopolist produces
less than the socially efficient quantity of output but at a higher price than in a competitive market.
Examples of monopolistically competitive markets include the markets for
restaurants and furniture.
If a firm operating in a competitive industry shuts down in the short run, it can avoid paying
Because monopolistically competitive firms produce differentiated products, each firm
has some control over product price
In the long run, a firm will exit a competitive industry if
average total cost exceeds the price
Competitive markets are characterized by
free entry and exit by firms.
Economists assume that monopolists behave as
Consumers' willingness to pay for a good minus the amount they actually pay for it equals
Firms operating in competitive markets produce output levels where marginal revenue equals
price; average revenue; total revenue divided by output
A monopolist that practices perfect price discrimination
creates no deadweight loss
Christopher is a professional tennis player who gives tennis lessons. The industry is competitive. Christopher hires a business consultant to analyze his financial records. The consultant recommends that Christopher give fewer tennis lessons. The consultant must have concluded that Christopher's
marginal cost exceeds his marginal revenue.
A firm cannot price discriminate if
it operates in a competitive market.
In a competitive market with identical firms
free entry and exit into the market requires that firms earn zero economic profit in the long run even though they may be able to earn positive economic profit in the short run
If there is an increase in market demand in a perfectly competitive market, then in the short run
profits will rise.
A monopolist's profits with price discrimination will be
higher than if the firm charged just one price because the firm will capture more consumer surplus
As a general rule, when accountants calculate profit they account for explicit costs but usually ignore
A benefit to society of the patent and copyright laws is that those laws
encourage creative activity.
A market structure with only a few sellers, each offering similar or identical products, is known as
A monopolistically competitive industry is characterized by
many firms, differentiated products, and free entry.
Consider a monopolistically competitive firm in a market in long-run equilibrium. This firm is likely earning
no economic profit since it is charging a price equal to it average total cost.
A benefit of a monopoly is
profit that can be invested in research and development.
A firm that is the sole seller of a product without close substitutes is
Competitive firms have
horizontal demand curves, and they can sell as much output as they desire at the market price.
A firm that exits its market has to pay
neither its variable costs nor its fixed costs.
A firm will shut down in the short run if, for all positive levels of output,
its losses exceed its fixed costs; its total revenue is less than its variable costs; the price of its product is less than its average variable cost.
A firm operating in a monopolistically competitive market can earn economic profits in
the short run but not in the long run.
Each firm in a monopolistically competitive market
faces a downward-sloping demand curve.
Entry by new firms into a monopolistically competitive market
creates additional consumer surplus.
A firm that is a natural monopoly
is not likely to be concerned about new entrants eroding its monopoly power; is taking advantage of economies of scale; would experience a higher average total cost if more firms entered the market.
As new firms enter a monopolistically competitive market, profits of existing firms
decline, and product diversity in the market increases.
Economic welfare is generally measured by
In order to sell more of its product, a monopolist must
lower its price.
If a firm in a competitive market doubles its number of units sold, total revenue for the firm will
A monopolistically competitive market could be considered inefficient because
price exceeds marginal cost.
A monopolistically competitive firm
experiences a zero profit in the long run.
Drug companies are allowed to be monopolists in the drugs they discover in order to
A competitive firm's short-run supply curve is part of which of the following curves?
A natural monopoly arises when
there are economies of scale over the relevant range of output.
In reality, perfect price discrimination is
A firm will shut down in the short run if the total revenue that it would get from producing and selling its output is less than its
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
A firm in a monopolistically competitive market faces a
downward-sloping demand curve because the firm's product is different from those offered by other firms.
A firm that shuts down temporarily has to pay
its fixed costs but not its variable costs.
In the long run, assuming that the owner of a firm in a competitive industry has positive opportunity costs, she
will earn zero economic profits but positive accounting profits.
In the short-run, a firm's supply curve is equal to the
marginal cost curve above its average variable cost curve.
In the long run, a monopolistically competitive firm produces a quantity that is
less than the efficient scale.
If there is an increase in market demand in a perfectly competitive market, then in the short run prices will
For any given price, a firm in a competitive market will maximize profit by selecting the level of output at which price intersects the
marginal cost curve
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