Exam 3

Question 1

What is Economic Profit

Answer 1

π = TR –TC

Question 2

What is Total Cost

Answer 2

The cost incurred by the firm may be either explicit or implicit

Question 3

What is Explicit Cost

Answer 3

An actual monetary payment, outlay, or an expense (for market-supplied resources)

Question 4

What is Implicit Cost

Answer 4

The firm’s implicit cost is the return the firm’s resources could have earned elsewhere (normal profit)

Question 5

What is an Accounting Profit

Answer 5

TR –Explicit Cost

Question 6

What is the Profit Maximizing Output

Answer 6

MR = MC (or MR = SMC)

Question 7

(P–ATC)×Q, if P > ATC, what happens?

Answer 7

The firm earns an economic profit.

Question 8

(P–ATC)×Q, if P < ATC, what happens?

Answer 8

The firm is incurring an economic loss

Question 9

(P–ATC)×Q, If P = ATC, what happens?

Answer 9

The firm breaks even.

Question 10

What is Market Structure?

Answer 10

It is the characteristics of the economic environment in which the firm operates

Question 11

What are the key factors in analyzing market structures

Answer 11

Number of firms, Type of products, Barriers to entry

Question 12

What are the four main market structures?

Answer 12

Perfect Competition, Monopolistic Competition, Oligopoly, Monopoly

Question 13

What are the factors of Perfect Competition

Answer 13

Many firms 
Each firm sells a homogenous product
No control over market price (firms are price takers) 
No barriers to entry/exit
Perfect information

Question 14

What is the demand curve facing each individual firm?

Answer 14

It is perfectly elastic

Question 15

If the firm is a price taker then the demand function is what?

Answer 15

MR= change in TR divided by the change in Q which equals dTR divided by the dQ that = P

Question 16

What is the firm’s shut down point

Answer 16

P= minimum AVC, (the firm’s shut-down point

Question 17

What is the firm’s supply curve?

Answer 17

The upward-sloping portion of the firm’s SMC curve above minimum AVC is the firm’s supply curve.

Question 18

Is it possible for perfect competition firms to have long run economic profts?

Answer 18

In the long run, economic profits are zero (due to no barriers to entry/exit)

Question 19

Marginal Revenue Product (MRP)

Answer 19

MR * MP = P * MP

Question 20

The profit-maximizing input level, L*, is found where?

Answer 20

MRP = w

Question 21

The firm shuts down if?

Answer 21

w > ARP

Question 22

ARP=?

Answer 22

ARP= TR/L= P * AP

Question 23

What is Market Power?

Answer 23

Ability of a firm to raise its price without losing all sales

Question 24

Which type of firms have Market Power

Answer 24

Monopolisitc firms and Monopoly firms.

Question 25

What are the factors of a Monopoly?

Answer 25

1 single firm
barriers to entry (prohibitive)
no close substitutes

Question 26

What are the factors of a Monopolistic Firm?

Answer 26

many firms
each firm is producing a differentiated product
low barriers to entry/exit (not prohibitive)

Question 27

Marginal revenue is ______ as steep as the demand curve

Answer 27

Twice

Question 28

MR=?

Answer 28

Change in TR over Change in Q is equal to dTR/dQ

Question 29

Is there economic profit in the long run for monopolistic competition?

Answer 29

In monopolistic competition, in the long run, all economic profits are zero, due to competition from new firms P = ATC.

Question 30

Is there economic profit in the long run for a monopoly?

Answer 30

In monopoly, economic profit is possible (but not guaranteed!) in the long-run.