Chapter 12

Question 1

Short Run

Answer 1

period of time where factors of production are fixed (land, labor, capital)

Question 2

Long run

Answer 2

period of time where all factors of PRODUCTION are variable.

Question 3

Short Run:
Items sold more than variable cost, what should business do?

AR > AC

Answer 3

Keep going even if it has losses.

Question 4

Short Run:
Items sold less than average variable cost, what should business do?

AR<AC

Answer 4

Shut down

Question 5

Econ Profit zero means what?

Answer 5

total sales (tot rev) jsut covers both fixed and variable cost.
Price of AR and AC are equal.

Question 6

Long run, cost are all what?

Answer 6

Variable.

Question 7

Long run:

AR< AC what does business do?

Answer 7

Shut down

Question 8

Economies of scale

Answer 8

More units of goods or services can be produced on larger scale with less cost ..
like costco

Result from factors like mass production, more efficient equipment and tech.

Question 9

Diseconomies of scale

Answer 9

company grows so big that the cost per unit increase.

Result from increasing bureaucracy of larger firm that leads to inefficiency, problems motivating large workforce.

Think of having three people with one pizza oven.. having two is better because the third person just gets in the way.

Question 10

Law of diminishing returns

Answer 10

as more resources are added, holding the quantities of other resources are fixed (like pizza oven) , output increases at decreasing rate. because more workers with fixed resource = inefficiency

law of diminishing marginal returns is a theory in economics that predicts that after some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output.

Question 11

To max profit what doe MC and MR need to be?

Answer 11

MC = MR

Question 12

Kinked Demand

Answer 12

The assumption that competitors are unlikely to match a price increase by a competitor, but very likely to match a price decrease by a competitor.

Question 13

Elastic demand

Answer 13

Elastic demand refers to degree to which demand responds to a change in economic factor like price.

Demand changes with price.

change in quantity DEMANDED due to change in price is large

Question 14

Inelastic Demand

Answer 14

Change in quantity DEMANDED due to change in price is small .

Demand stays constant regardless of economic change/price.

Question 15

Cournot Model

Answer 15

Firms with same MC choose price based on price other firm had in previous period.

Question 16

Stackelberg

Answer 16

price decisions are made at same time … its simultaneous

Question 17

Nash

Answer 17

The choice of all firms are such that no other choice makes any of the firms better off.

Question 18

N-Firm Concentration Ratio

Formula
What does lower ratio mean?
what does higher ratio mean?

Answer 18

Market Share = Firm sales/ tot market sales

Low = competitive market
High = oligopoly

Question 19

HHI
Herfindahl-Hirschman Index

Answer 19

Sum of squared market shares of N largest firms in the market.

More sensitive to mergers
Ignores barriers of entry.

Question 20

Perfect competition is characterized by the following

Answer 20

Many firms, each small relative to the market

Very low barriers to entry into or exit from the industry

Homogeneous products that are perfect substitutes; no advertising or branding

No pricing power

Question 21

Monopoly is characterized by the following:

Answer 21

A single firm that comprises the whole market

Very high barriers to entry into or exit from the industry

Advertising used to compete with substitute products

Significant pricing power

Question 22

Monopolistic competition is characterized by the following:

Answer 22

Many firms

Low barriers to entry into or exit from the industry

Differentiated products; heavy advertising and marketing expenditure

Some pricing power

Question 23

Oligopoly markets are characterized by the following

Answer 23

Few sellers

High barriers to entry into or exit from the industry

Products that may be homogeneous or differentiated by branding and advertising

Firms that may have significant pricing power

Question 24

Perfectly inelastic

Answer 24

When the demand remains constant despite price fluctuations

Question 25

Perfectly elastic demand

Answer 25

Perfectly elastic demand is when the demand for the product is entirely dependent on the price of the product. This means that if any producer increases his price by even a minimal amount, his demand will disappear. Customers will then switch to a different producer or supplier.