Exam 3 Material Flashcards
Monopoly
is one firm supplying 100 percent of a product to a specific market
The three main reasons monopolies exist:
- sole ownership of a resource. 2. Created by government (i.e. patent or copyright). 3. Natural monopoly.
A patent is a right to the exclusive ____ of the production of a good
ownership
True or False. Patents are a way for the government to create monopolies.
true
For a natural monopoly, the long run average cost curve slopes ____
downward.
What is the efficient number of firms when there is a natural monopoly?
one
How does a monopolist maximize profit?
By producing at an output where marginal revenue equals marginal cost.
Revenue is maximized by producing where MR= ___
$0
True or False. Monopolists want to maximize revenue.
False. Firms want to maximizes profit.
For a monopolist, the marginal revenue curve always lies ___ the demand curve.
beneath
When a monopolist maximizes profit, the price it charges is ____ than marginal revenue.
greater
On a graph, the rule for a monopolist is to find the point where
marginal revenue intersects with marginal cost.
After the point where MR=MC, the additional cost of the marginal unit ____ the additional revenue brought in.
exceeds
True or False. Monopolists produce where the demand curve intersects with the marginal cost curve.
False. Monopolists want to produce where marginal revenue intersects with marginal cost.
The formula for profit is
TR-TC
P*Q=
TR
ATC*Q
TC
(P-ATC)*Q=
profit
Which curve is necessary to find total revenue?
demand
Which curve is necessary to find TC?
ATC
Do monopolists always make a positive economic profit?
no
If the ATC curve lies above the demand curve, the firm is making a ____.
loss
If the profit maximizing price is greater than ATC, the firm is making a
profit
The result of having a monopolistic market as opposed to a competitive market is a higher ___ and lower ___
price; output
Monopoly creates a social cost, also called ____
deadweight loss
On a graph of monopoly, deadweight loss appears as a ____.
triangle
Can government increase economic value by regulating natural monopolies?
yes.
Oligopoly
is a market that has only a few sellers and is characterized by mutual interdependence of sellers.
Sometimes economists use the ___ ____ model to describe oligopolistic outcomes.
prisoner’s dilemma
Nash equilibrium
The outcome of a prisoner’s dilemma in which each player does the best they can given what the other player is doing.
Which outcome is better for the players in the in the prisoner’s dilemma? a. when both players confess or b. when both players don’t confess.
b. when both players don’t confess.
What is the nash equilibrium of the prisoner’s dilemma?
Both players confess.
Cartel
Is an oligopoly in which the members try to collude to behave as a monopoly by setting prices and output to maximize collective profit.
The predicted outcome for a cartel is for each firm to ___
cheat
The predicted outcome of a cartel is similar to the ____
prisoner’s dilemma
In a cartel situation, the best outcome for firms is to
cooperate
In a cartel situation, there is an incentive for firms to
cheat
Externality
is an external cost or external benefit from a transaction that can be passed on to any person or group who is not a party to the transaction.
True or false. The demand and supply curves accurately reflect the costs and benefits to society when there is an externality.
false
External cost
is a transaction cost that is borne by persons outside the transaction.
External benefit
is a transaction benefit that is received by a person outside of the transaction.
A flu shot is an example of a
positive externality.
When externalities are present you ___ rely on the market to maximize economic value.
cannot
Pollution is often a sign of a
negative externality.
When a negative externality is present, the free market will produce
too much of the good.
When a positive externality is present, the free market will produce
too little of the good.
When a negative externality is present, the good might be produced even when the social benefit is
less than the social cost.
When a positive externality is present, the good might NOT be produced even though the social benefits are
bigger than the social costs.
True social cost is the sum of
private and external costs.
Which principle can help us correct for externalities?
the principle of the second best
Principle of the Second Best
Says you can correct for an externality by the method that most precisely corrects for the original problem.
A tax can be used to help correct for ___
a negative externality.
A subsidy can be used to help correct for a ___
a positive externality.
Average variable cost (AVC) is the variable cost per unit of
total product (TP)
The formula for AVC=
VC/TP
If AVC is lower than the price, then the firm ____ make a profit
could
AVC is at a minimum where it intersects with
the marginal cost curve
when the MC curve is above the AVC curve, AVC is
rising
where MC is below AVC, AVC is
falling
Total fixed costs (FC)
short-run costs that do not vary with output
Average fixed costs (AFC)
fixed costs divided by total output. AFC= FC/TP
Average variable costs (AVC)
variable costs divided by total output. AVC= VC/TP
Average total costs (ATC)
summation of AFC and AVC
Does FC increase or decrease when the firm produces more?
neither, it stays the same. Fixed costs do not vary with output.
Does average fixed cost (AFC) increase or decrease as a firm produces more?
it decreases. note the formula: AFC= FC/TP
As output approaches infitity, AFC approaches ____
zero
Average total cost (ATC) has 2 primary formulas. What are they?
ATC= TC/TP; ATC= AVC+AFC
When TP=5, AFC= $30 and AVC= $12. What is ATC?
$42
When TP= 10, TC= $70. What is ATC?
$7
The average variable cost curve is a mirror image of the
average product curve
when average variable cost is at its minimum, the average product curve is at its _____
maximum
In our examples, what shape is the average total cost curve?
U shaped
In the decreasing portion of the average total cost curve, costs fall for the following 2 reasons:
- increasing output is spreading the fixed costs over more units; 2. additional workers are becoming more productive (through specialization)
In the increasing portion of the average total cost curve, costs rise for the following reason:
additional workers are becoming less productive. It is declining productivity that forces the ATC curve up
If the next unit costs less than the average of the previous units, it pulls the average ____
down
If the next unit costs more than the average of the previous units, it pulls the average ____
up
Are there fixed costs in the long run?
no. All costs are variable.
Can a small company transform into a large company in the short run?
no
Can a small company transform into a large company in the long run?
yes
Once the profit-maximizing output level is found, compare the price with the ____ to determine if it is making a profit or loss.
average total cost (ATC)
If the price exceeds the ATC at the profit-maximizing output, is the firm making a profit or loss?
profit
If the ATC is greater than the price at the profit maximizing output, is the firm making a profit or loss?
loss (i.e. negative profit)
At the profit maximizing quantity of 7 units, P= $7 and ATC= $5. What is profit?
$14
At the profit maximizing quantity of 10 units, P= $5 and ATC= $6. What is profit?
-$10
On a graph, the profit maximizing quantity is where price intersects with ____
marginal cost (and marginal cost is increasing)
On a graph, what shape is ATC?
a rectangle
On a graph, what shape is profit?
a rectangle
How do you find ATC on a graph?
- Find the profit maximizing quantity (y*). 2. Draw a line up to ATC. 3. Draw a line over to complete the rectangle.
If price is above ATC at the profit maximizing output the firm is making a ____
profit
