Econ Chapter 8

Question 1

Four Major Market Structures

Answer 1

1) Perfect Competition
2) Monopoly
3) Monopolistic Competition
4) Oligopoly

Question 2

Perfect Competition

Answer 2

• Firms sell a homogeneous or standardized product
• Products are all the same
• New firms can easily enter
• ex, wheat market

Question 3

Monopoly

Answer 3

• Only one firm that produces a good or service
• No substitutes
• Significant barriers to potential entrants into the market

Question 4

Monopolistic Competition

Answer 4

• Falls between perfect competition and monopoly
• Monopolistic competition is a market structure where firms both have an element of competition and monopoly
• Each firm sells slightly different products so they have some monopoly
• Many firms so they have to compete

Question 5

Oligopoly

Answer 5

• Falls between perfect competition and monopoly
• Exists when firms produce similar or identical goods
• Allows for some competition
• Significant share in market
• Firms behave closely to their competitors

Question 6

Price Taker

Answer 6

A perfectly competitive firm takes the price that it is given by the intersection of the market demand and market supply curves

Question 7

3 Factors of a Perfectly Competitive Market

Answer 7

1) Many buyers and sellers
2) Identical Products
3) Entry and Exit Easily

Question 8

Total Revenue

Answer 8

The product price times the quantity sold

Question 9

Average Revenue

Answer 9

The total revenue divided by the number of units sold

Question 10

Marginal Revenue

Answer 10

The increase in total revenue that results from the sale of one more unit

Question 11

Profit Maximizing output Rule

Answer 11

Always produce at MC=MR

Question 12

Three step method to finding if a firm is gaining or losing

Answer 12

1) Find the profit maximizing output level q*
2) Find the profit maximizing output level price P, and find total revenue
3) Find the Total Costs. go straight up rom q to the ATC curve, and then left to find average total cost per unit, multiply ATC by output levels to find total costs

Question 13

When should a firm run at a loss?

Answer 13

• When price is above Average variable cost

- The firm can still make money to cover some of the fixed costs

Question 14

When Should a firm Shut down?

Answer 14

• When price is below average variable cost

- The is losing more money then their fixed cost so it is smart to shut down

Question 15

Short Run Supply Curve

Answer 15

Shows the marginal cost of producing any given output, above the AVC curve

Question 16

Short Run Market Supply Curve

Answer 16

A horizontal summation of the individual firms supply curves

Question 17

If a business is profitable what happens in the long run?

Answer 17

Supply curve shifts to the right as more firms enter the industry and as existing firms expand

Question 18

Do firms profit in the long run?

Answer 18

No

Question 19

What are normal economic returns in the long run?

Answer 19

Zero economic profit

Question 20

What happens when firms leave / enter the market?

Answer 20

When they leave the price raises and firms losses are minimized
When they enter the price drops and firms get a loss

Question 21

When is there no economic tendency for firms to enter / exit the industry?

Answer 21

When there is zero economic profit

Question 22

Cost-Constant Industry

Answer 22

• Input prices do not change as industry output changes

- They don’t buy enough to change the price of inputs

Question 23

Increasing Cost Industry

Answer 23

• Input prices rise and cost curves rise as industry output rises

Question 24

Decreasing Cost Industry

Answer 24

Expansion in the output of an industry can lead to a reduction in input costs and shift the MC and ATC curves downward

Question 25

Productive Efficiency

Answer 25

Where a good or service is produced at the lowers possible cost

Question 26

Allocative Efficiency

Answer 26

Were p = MC and production is allocated to reflect consumer preferences