Exam 3 Flashcards
If a single supplier produces a good with many good substitutes, then
it will have little control over the market price.
The short run is defined as
the period before entry or exit can occur.
In the long run, demand is ______ the short run.
more elastic than in
Price times quantity minus total cost equals
profit.
Which of the following statements is TRUE?
- Unlike implicit costs, explicit costs require monetary outlays.
- Implicit costs equal explicit costs for for-profit firms.
- Knowledge about explicit costs is more useful for making business decisions than knowledge about implicit costs.
- Accounting profit is usually smaller than economic profit.
Unlike implicit costs, explicit costs require monetary outlays
If marginal revenue is less than marginal cost, a firm should
decrease output.
Price equals marginal revenue for a competitive firm because
the price does not change when the firm changes output.
Programs such as Steam distribute more and more video games. Purchasers buy the game, and download it immediately to their computer. If the entire system is automated, estimate the marginal cost of producing and selling video games this way (ignore electricity costs).
zero
Which of the following is an example of a fixed cost?
Research and development costs for a new medicine.
Perfectly competitive firms produce at the quantity where marginal revenue ______ marginal cost.
equals
(P – AC) × Q =
profit
In a competitive equilibrium, firms earn ______ economic profits.
zero
In the short run, if price is less than average cost, a firm
might shut down, but might stay open.
Competitive firms want to enter industries in which
P > AC
Consider two farms. Farm 1 produces the first bushel for $5 each but marginal cost rises gradually as the quantity increases. Farm 2 produces the first bushel for $7, but marginal cost also rises gradually as the quantity increases. With a market price of $10 a bushel, how should production be allocated between these two farms?
Produce on both farms until the marginal cost on each farm rises to $10.
In the long run, firms will enter industries where price is
greater than average cost.
In a perfectly competitive market, each firm sells at
the same price.
In a perfectly competitive market, each firm produces
a potentially different quantity.
Above-normal profits are eliminated by ______, and below-normal profits are eliminated by ______.
entry; exit
What happens in a competitive industry when more firms enter?
Supply increases and the price declines, which in turn lowers profits.
In competitive markets,
firms will earn zero economic profits in the long run.
To maximize profit a firm in a competitive market increases output until:
P = MC.
Profit is defined as total revenue minus total cost.
True
Firms in a perfectly competitive industry maximize profits by:
setting a price equal to the market price.
As the price of a good fluctuates, a profit-maximizing firm will expand or contract production along its:
marginal cost curve.
The marginal revenue (MR) for a firm is a constant $45, and the firm’s marginal cost (MC) is given by MC = 1.5Q (where Q is quantity of output). What is the firm’s profit-maximizing level of output?
30
Stating that marginal revenue equals price is equivalent to saying that marginal revenue equals marginal cost at all levels of output.
False
Average cost is equal to total cost divided by quantity.
True
Which of the following statements is correct?
-When the marginal cost curve is above the average cost curve, the average cost curve must be rising.
- When the marginal cost curve is below the average cost curve, the average cost curve must be rising.
- When MR = MC, the average cost curve is at its minimum point.
- When MR = P, the average cost curve is at its minimum point.
When the marginal cost curve is above the average cost curve, the average cost curve must be rising.
In a decreasing industry:
cost falls as the industry expands.
Profit is defined as:
total revenue minus total cost.
Damien produces 400 gallons of milk a day in a very competitive industry. The market price for a gallon of milk is $2. Damien’s marginal revenue per gallon of milk is:
$2.
Firms in competitive industries:
I. can only charge a price equal to the market price.
II. cannot charge any more than the market price.
III. will earn less profit if they charge less than the market price.
I, II, and III
In a competitive industry, entry and exit decisions:
ensure that labor and capital move across industries to optimally balance production.
The amount of money that the firm pays for its inputs is called:
variable cost.
Which of the following statements about cost is correct?
Marginal cost is constant.
Marginal cost is always falling.
Average total cost is U-shaped.
Average total cost always declines.
Average total cost is U-shaped.
According to the elimination principle:
resources are always moving toward an increase in consumer welfare.
Which of the following statements is TRUE regarding profit maximization in competitive markets?
I. When all firms pursue profits, none of them achieve profits.
II. When all firms pursue profits, only the most innovative will achieve profits.
III. Production is divided in such a way that total costs of production are minimized.
I and III only
A baker wants to establish a pie factory. The cost of leasing the factory is $1,000 per day. The profit maximizing quantity of pies is 1,000 pies a day. Each pie sells for $3 and costs only $2.10 to make. Which of the following is a correct conclusion based on this data?
The baker should not enter the industry.
A firm should exit an industry if:
P – AC < 0.
A firm pays a monthly lease of $10,000 and generates $8,000 of revenue a month. Which of the following is true?
This firm will exit the industry in the long run.
The elimination principle:
Says that above-normal profits are eliminated by entry and below-normal profits are eliminated by exit.
Total profit for a given quantity of output can be calculated as:
Total Revenue – Total Costs.
When there are many buyers and sellers of a good, and the product sold is identical across firms:
the demand curve for each firm’s output is perfectly elastic.
What condition is necessary in a constant cost industry?
Prices of the industry’s inputs do not change as the industry expands.
In their calculation of profit, accountants typically do not take into account:
opportunity costs.
Adults have more money than teenagers and perhaps more inelastic demand for video games than teenage video gamers. Why might it be difficult to price discriminate based on this fact?
Teenage gamers could exploit arbitrage opportunities, buy games at the low price, and re-sell them to adult gamers.
Haircuts for men are often cheaper than haircuts for women, even when they are offered by the same stylist. Why might this be price discrimination?
Demand for haircuts for women might be more inelastic than demand for haircuts for men, and haircuts are impossible to arbitrage.
Two months after Apple introduced the iPhone in 2007, the company reduced the price from $600 to $400. How is this drop of price an example of price discrimination?
Early adopters are less sensitive to price than late adopters.
In the case of a perfectly price-discriminating monopoly, there is
zero consumer surplus
Which of the following would be most difficult to arbitrage?
tax preparation services
DVDs may be encoded with one of six region codes, preventing videos sold in one region of the world from being used in another region. Why might film distributors use region codes?
to prevent people from buying videos in a low-price region and then reselling them in a high-price region
Why are the prices of hardcover books more expensive than paperback?
Consumers who can’t wait for the paperback version have a greater willingness to pay and buy the hardback upon its release
In which of the following industries may price discrimination be good?
industries with high fixed costs of production
Gillette’s practice of selling razors at a relatively low cost, but marking up price significantly on its blades when Gillette razors will only work with Gillette blades is an example of
tying.
Bundling is most likely to be beneficial when fixed costs are ______ and marginal costs are ______.
high; low
OPEC is a
group of oligopolistic producers that try to behave like a monopoly.
The prisoner’s dilemma refers to a situation in which
the pursuit of individual interests leads to an outcome that is in the best interest of no one.
If your economics class was graded on a curve and everyone agrees to study only half as much, everyone would get the same grade that they otherwise would earn. You, however, will earn an A if you study more than the others, a C if you study the same amount as others, and an F if everyone else studies more than you. You don’t like studying, but you’d rather study and get an A than get a C without studying, or study and get a C than get an F without studying. All the students in your class get together and agree not to study, but have no way of verifying if anyone does study. Do you think that this cartel will succeed?
No, some (and maybe all) participants will cheat on the agreement.
A dominant strategy is a strategy that
has a higher payoff than any other strategy, no matter what the other player does.
Cartels tend to be more successful when
the cartel is producing a good for which there are few substitutes.
Another possible source of why cartels break down is the growth potential of the industry. Although industries with a lot of potential are more willing to invest in the time to form a collusive agreement, such growth potential also deters them from making this investment. Why would that be?
High-growth industries are more likely to have lots of entrants.
The NBA and NCAA are examples of
a buyer’s cartel, keeping the salaries of players lower than they would be in a competitive market.
Oligopolies typically
price above competitive levels.
Monopolistically competitive firms earn zero profits on average because
positive profits cause competitors to enter the market, decreasing demand.
