Chapter 9

Question 1

What’s perfect competition? (4)

Answer 1

perfect competition

1. many independent and small producers and consumers
2. make the same product
3. no barriers to entry or exit
4. firms are PRICE TAKERS

Question 2

what’s a price taker?

Answer 2

a price taker accepts the market price and produces as much as they want at that price

Question 3

What’s the demand curve like for each perfectly competitive firm?

Answer 3

the demand curve is PERFECTLY ELASTIC

- horizontal line

Question 4

How do you calculate the economic profit with total values?

Answer 4

economic profit = total revenue - total economic cost

Question 5

What is the demand curve of perfectly competitive firms?

Answer 5

the demand curve is equal to PRICE and MARGINAL REVENUE

Question 6

What’s the shut down point?

Answer 6

the shut down point is the lowest AVERAGE VARIABLE COST price

Question 7

When does a firm continue to produce and when does it shut down?

Answer 7

1. if total revenue is greater than or equal to the total variable cost, it continues
2. if total revenue is less than the total variable cost, it SHUTS DOWN

Question 8

What happens in short run equilibrium?

Answer 8

firms can’t exit or enter the industry

Question 9

What happens in long run equilibrium?

Answer 9

firms can enter and exit the industry

Question 10

What’s normal profit?

Answer 10

zero economic profit

Question 11

What’s a constant cost industry?

Answer 11

the entry an exit of firms has NO IMPACT on cost curves of other firms in the market.

Question 12

What’s an increasing cost industry?

Answer 12

the entry of new firms increases the price of resources

Question 13

What’s a decreasing cost industry?

Answer 13

the entry of new firms decreases the price of resources

Question 14

What’re the characteristics of a monopoly? (3)

Answer 14

monopoly:

1. no close substitutes
2. barriers to entry
3. market power

Question 15

What’s a natural monopoly?

Answer 15

when it’s less costly for one firm to supply the entire demand

Question 16

example of a natural monopoly

Answer 16

power plants

Question 17

Monopolies are price ____

Answer 17

monopolies are PRICE MAKERS.

- they have complete control over the price.

Question 18

What’re the demand curves like in perfect competition and monopolies?

Answer 18

1. perfect competition: demand is HORIZONTAL

2. monopoly: demand is DOWNWARDS SLOPING.

Question 19

What’s price discrimination?

Answer 19

the selling of the same good at different prices to different consumers

Question 20

What conditions make it possible to price discriminate?

Answer 20

price discriminating power:

1. the firms has monopoly pricing power
2. firm can separate groups of consumers
3. firm can prevent resale.

Question 21

What’re the characteristics monopolistic competition? (3)

Answer 21

monopolistic competition:

1. there’s a relatively LARGE number of firms
2. there sell DIFFERENT products
3. there are NO BARRIERS to entry and exit

Question 22

What’s EXCESS CAPACITY?

Answer 22

excess capacity is the difference between the monopolistic competition output and the output at minimum ATC

Question 23

How do you calculate excess capacity?

Answer 23

excess capacity

- monopolistic competition output - minimum ATC

Question 24

What’re the characteristics of an oligopoly? (4)

Answer 24

oligopoly:

1. a few large producers
2. can sell either same or different products
3. barriers to entry and exit
4. mutual interdependence

Question 25

What’s a cartel?

Answer 25

a formal agreement firms have not to compete with each other.

Question 26

What’s the marginal revenue product of labor?

Answer 26

the marginal revenue product of labor measures how much each additional resource contributes to revenue

Question 27

How to calculate the marginal revenue product of labor?

Answer 27

MRPL=
change in total revenue
———————————-
change in the number of resources.

Question 28

in competitive markets, the marginal revenue product is ____

Answer 28

firm’s DEMAND curve

Question 29

in competitive markets, wage is the ____

Answer 29

firm’s SUPPLY curve

Question 30

How does an increase in demand increase the amount of labor hired?

Answer 30

1. demand increases for product
2. price of product increases
3. marginal revenue product increases
4. firm hires more labor

Question 31

How to find the best cost minimizing combination of two inputs?

Answer 31

marginal product of labor of good A MPL of good B
—————————————————- = ———————-
price price

Question 32

What happens in a monopsony?

Answer 32

the employer must increase the wage to increase the quantity of labor that’s supplied
- supply is upwards sloping.

Question 33

What’re private goods?

Answer 33

rival and excludable

Question 34

what’re public goods?

Answer 34

nonrival and non excludable