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Principles of Microeconomics > Exam 3 Material > Flashcards

Exam 3 Material Flashcards

1
Q

Monopoly

A

is one firm supplying 100 percent of a product to a specific market

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2
Q

The three main reasons monopolies exist:

A
  1. sole ownership of a resource. 2. Created by government (i.e. patent or copyright). 3. Natural monopoly.
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3
Q

A patent is a right to the exclusive ____ of the production of a good

A

ownership

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4
Q

True or False. Patents are a way for the government to create monopolies.

A

true

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5
Q

For a natural monopoly, the long run average cost curve slopes ____

A

downward.

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6
Q

What is the efficient number of firms when there is a natural monopoly?

A

one

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7
Q

How does a monopolist maximize profit?

A

By producing at an output where marginal revenue equals marginal cost.

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8
Q

Revenue is maximized by producing where MR= ___

A

$0

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9
Q

True or False. Monopolists want to maximize revenue.

A

False. Firms want to maximizes profit.

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10
Q

For a monopolist, the marginal revenue curve always lies ___ the demand curve.

A

beneath

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11
Q

When a monopolist maximizes profit, the price it charges is ____ than marginal revenue.

A

greater

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12
Q

On a graph, the rule for a monopolist is to find the point where

A

marginal revenue intersects with marginal cost.

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13
Q

After the point where MR=MC, the additional cost of the marginal unit ____ the additional revenue brought in.

A

exceeds

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14
Q

True or False. Monopolists produce where the demand curve intersects with the marginal cost curve.

A

False. Monopolists want to produce where marginal revenue intersects with marginal cost.

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15
Q

The formula for profit is

A

TR-TC

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16
Q

P*Q=

A

TR

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17
Q

ATC*Q

A

TC

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18
Q

(P-ATC)*Q=

A

profit

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19
Q

Which curve is necessary to find total revenue?

A

demand

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20
Q

Which curve is necessary to find TC?

A

ATC

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21
Q

Do monopolists always make a positive economic profit?

A

no

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22
Q

If the ATC curve lies above the demand curve, the firm is making a ____.

A

loss

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23
Q

If the profit maximizing price is greater than ATC, the firm is making a

A

profit

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24
Q

The result of having a monopolistic market as opposed to a competitive market is a higher ___ and lower ___

A

price; output

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25
Q

Monopoly creates a social cost, also called ____

A

deadweight loss

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26
Q

On a graph of monopoly, deadweight loss appears as a ____.

A

triangle

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27
Q

Can government increase economic value by regulating natural monopolies?

A

yes.

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28
Q

Oligopoly

A

is a market that has only a few sellers and is characterized by mutual interdependence of sellers.

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29
Q

Sometimes economists use the ___ ____ model to describe oligopolistic outcomes.

A

prisoner’s dilemma

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30
Q

Nash equilibrium

A

The outcome of a prisoner’s dilemma in which each player does the best they can given what the other player is doing.

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31
Q

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.

A

b. when both players don’t confess.

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32
Q

What is the nash equilibrium of the prisoner’s dilemma?

A

Both players confess.

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33
Q

Cartel

A

Is an oligopoly in which the members try to collude to behave as a monopoly by setting prices and output to maximize collective profit.

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34
Q

The predicted outcome for a cartel is for each firm to ___

A

cheat

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35
Q

The predicted outcome of a cartel is similar to the ____

A

prisoner’s dilemma

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36
Q

In a cartel situation, the best outcome for firms is to

A

cooperate

37
Q

In a cartel situation, there is an incentive for firms to

A

cheat

38
Q

Externality

A

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.

39
Q

True or false. The demand and supply curves accurately reflect the costs and benefits to society when there is an externality.

A

false

40
Q

External cost

A

is a transaction cost that is borne by persons outside the transaction.

41
Q

External benefit

A

is a transaction benefit that is received by a person outside of the transaction.

42
Q

A flu shot is an example of a

A

positive externality.

43
Q

When externalities are present you ___ rely on the market to maximize economic value.

A

cannot

44
Q

Pollution is often a sign of a

A

negative externality.

45
Q

When a negative externality is present, the free market will produce

A

too much of the good.

46
Q

When a positive externality is present, the free market will produce

A

too little of the good.

47
Q

When a negative externality is present, the good might be produced even when the social benefit is

A

less than the social cost.

48
Q

When a positive externality is present, the good might NOT be produced even though the social benefits are

A

bigger than the social costs.

49
Q

True social cost is the sum of

A

private and external costs.

50
Q

Which principle can help us correct for externalities?

A

the principle of the second best

51
Q

Principle of the Second Best

A

Says you can correct for an externality by the method that most precisely corrects for the original problem.

52
Q

A tax can be used to help correct for ___

A

a negative externality.

53
Q

A subsidy can be used to help correct for a ___

A

a positive externality.

54
Q

Average variable cost (AVC) is the variable cost per unit of

A

total product (TP)

55
Q

The formula for AVC=

A

VC/TP

56
Q

If AVC is lower than the price, then the firm ____ make a profit

A

could

57
Q

AVC is at a minimum where it intersects with

A

the marginal cost curve

58
Q

when the MC curve is above the AVC curve, AVC is

A

rising

59
Q

where MC is below AVC, AVC is

A

falling

60
Q

Total fixed costs (FC)

A

short-run costs that do not vary with output

61
Q

Average fixed costs (AFC)

A

fixed costs divided by total output. AFC= FC/TP

62
Q

Average variable costs (AVC)

A

variable costs divided by total output. AVC= VC/TP

63
Q

Average total costs (ATC)

A

summation of AFC and AVC

64
Q

Does FC increase or decrease when the firm produces more?

A

neither, it stays the same. Fixed costs do not vary with output.

65
Q

Does average fixed cost (AFC) increase or decrease as a firm produces more?

A

it decreases. note the formula: AFC= FC/TP

66
Q

As output approaches infitity, AFC approaches ____

A

zero

67
Q

Average total cost (ATC) has 2 primary formulas. What are they?

A

ATC= TC/TP; ATC= AVC+AFC

68
Q

When TP=5, AFC= $30 and AVC= $12. What is ATC?

A

$42

69
Q

When TP= 10, TC= $70. What is ATC?

A

$7

70
Q

The average variable cost curve is a mirror image of the

A

average product curve

71
Q

when average variable cost is at its minimum, the average product curve is at its _____

A

maximum

72
Q

In our examples, what shape is the average total cost curve?

A

U shaped

73
Q

In the decreasing portion of the average total cost curve, costs fall for the following 2 reasons:

A
  1. increasing output is spreading the fixed costs over more units; 2. additional workers are becoming more productive (through specialization)
74
Q

In the increasing portion of the average total cost curve, costs rise for the following reason:

A

additional workers are becoming less productive. It is declining productivity that forces the ATC curve up

75
Q

If the next unit costs less than the average of the previous units, it pulls the average ____

A

down

76
Q

If the next unit costs more than the average of the previous units, it pulls the average ____

A

up

77
Q

Are there fixed costs in the long run?

A

no. All costs are variable.

78
Q

Can a small company transform into a large company in the short run?

A

no

79
Q

Can a small company transform into a large company in the long run?

A

yes

80
Q

Once the profit-maximizing output level is found, compare the price with the ____ to determine if it is making a profit or loss.

A

average total cost (ATC)

81
Q

If the price exceeds the ATC at the profit-maximizing output, is the firm making a profit or loss?

A

profit

82
Q

If the ATC is greater than the price at the profit maximizing output, is the firm making a profit or loss?

A

loss (i.e. negative profit)

83
Q

At the profit maximizing quantity of 7 units, P= $7 and ATC= $5. What is profit?

A

$14

84
Q

At the profit maximizing quantity of 10 units, P= $5 and ATC= $6. What is profit?

A

-$10

85
Q

On a graph, the profit maximizing quantity is where price intersects with ____

A

marginal cost (and marginal cost is increasing)

86
Q

On a graph, what shape is ATC?

A

a rectangle

87
Q

On a graph, what shape is profit?

A

a rectangle

88
Q

How do you find ATC on a graph?

A
  1. Find the profit maximizing quantity (y*). 2. Draw a line up to ATC. 3. Draw a line over to complete the rectangle.
89
Q

If price is above ATC at the profit maximizing output the firm is making a ____

A

profit

Principles of Microeconomics (3 decks)

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