Test 2 Flashcards
For most producing firms
Average total costs decline as output is carried to a certain level, and then begin to rise
Which of the following is most likely to be a fixed cost
Property insurance premiums
Which of the following is a short-run adjustment
A local bakery hires two additional bakers
To teh economist, total cost includes
Explicit and implicit costs
Economies and diseconomies of scale explain
Why the firm’s long-run average total cost curve is U-shaped
The law of diminishing returns describes the
Relationship between resource inputs and product outputs in the short run
If the law of dimishing returns applies to study time
The tenth hour of study will likely be less productive than the third
Normal profit is
The return to the entrepreneur when economic profits are zero
The long-run average total cost curve
Indicates the lowest unit costs achievable when a firm has had sufficient time to alter plant size
If a firm describes to produce no output in the short run, its costs will be
Its fixed costs
In the short run, which of the following statements is correct
Total cost will exceed variable cost
If an industry’s long-run average total cost curv has an extended range of constant returns to scale, this implies that
Both relatively small adn relatively large firms can be viable in the industry
Marginal cost
Equals both average variable cost and average total cost at their respective minimums
In the short run
TVC will increase for a time at a dimishing rate, but then beyond some point will increase at an increasing rate
To economists, the main difference between the short run and the long run is that
In the long run all resources are variable, while in the short run at least one resource is fixed
Fixed cost is
Any cost that does not change when the firm changes its output
The vertical distance between a firms ATC and AVC curves represents
AFC, which decreases as output increases
Diseconomies of scale arise primarily because
Of the difficulties involved in managing and coordinating a large business enterprise
An explicit cost is
A money payment made for resources not owned by the firm itself
A purely competitive firms short run supply curve is
Upsloping and equal to the oration of the marginal cost curve that lies above the average carina level cost curve
For a purely competitive firm, total revenue
Has all
The short run supply curve of a purely competitive producer is based primarily on its
Mc curve
On a per unit basis, economic profit can be determined as the difference between
Product price and average cost
The short run supply curve for a purely competitive industry can be found by
Summing horizontally the segments of the mc curves lying above the avc curve for all firms
Curve 1 in the dollars(y) vs. quantity(x) is a rely competitive firms
Total economic profit curve
An industry comprised of a small number of firms, each of which considers the potential reactions of its rivals in making price-output decisions, is called
Oligopoly
Refer to the $ vs. output diagram which pertains to a purely competitive firm. Curve c represents
Average revenue and marginal revenue
If a firm in a purely competitive industry is confronted with a n equilibrium price of $5, its marginal revenue
Will also be $5
Curve 3 in the dollars vs. quantity diagram is teh purely competitive firms
Total revenue curve
Which of the following is not a characteristic of pure competition
Price strategies by firms
In which of the following industry structures is the entry of new firms the most difficult
Pure monopoly
A purely competitive seller is
A price taker
Which of the following statements is correct
Chapter 10
The demand curve for a purely competitive firm is perfectly elastic, but the demand curve for a purely competitive industry is downsloping
Curve 4 in the dollars vs. quantity diagram is
Total cost curve
If a firm is confronted with economic losses in the short run, it will decide whether or not to produce by comparing
Price and minimum average variable cost
A perfectly elastic demand curve implies that the firm
Can sell as much output as it chooses at the existing price
The demand schedule or curve confronted by teh individual, purely competitive firm is
Perfectly elastic
Refer to the $ vs. output diagram. Curve A represents
Total revenue only
Assume a graph in which dollars are on the vertical axis and output on the horizontal axis. For a purely competitive firm, total revenue graphs as a
Straight upsloping line
When a firm is maximizing profit, it will necessarily by
Maximizing the difference between total revenue and total cost
The demand curve in a purely competitive industry is ____, while the demand curve to a single firm in that industry is _____
Downsloping, perfectly elastic
Firms seek to maximize
Total profit
The MR=MC rule can be restated fora purely competitive seller as P=MC bc
Each additional unit of output adds exactly its price to total revenue
A purely competitive firm should produce inteh short run if its total revenue is sufficient to cover its
Total variable costs
If a purely competitive firm is producing at the P=MC output and realizing an economic profit, at that output
Marginal revenue exceeds ATC
In a dollars vs. output graph, for a purely competitive firm, marginal revenue graphs as a
Straight line , parallel to the horizontal axis
A firm reaches a break-even point (normal profit position) where
Total revenue and total cost are equal
In the short run, the individual competitive firms supply curve is that segment of the
Marginal cost curve lying above the average variable cost curve
Which of the following is not a basic characteristic of pure competition
Considerable nonprice competition
A purely competitive seller should produce (rather than shut down) in the short run
If total revenue exceeds total cost or if total cost exceeds total revenue by some amount less than total fixed cost
An unprofitable motel will stay open in the short run if
Price(average nightly room rate) exceeds average variable cost
In the figure 1,2,3,4 represent
Mc, ATC, avc, and ATC curves
In the costs vs. output diagram, curves 1,2,3 represent
Total fixed, cost, total variable cost, and total cost
Suppose a purely competitive, increasing cost industry is in the long run equilibrium. Now assume that a decrease in consumer demand occurs. After all reassuring adjustments have been complete, the new equilibrium price
And industry output will be less that the initial price and output
In the price vs. quantity diagram, at output level Q2
Resources are over allocated to this product and productive efficiency is not realized
Which of the following distinguishes the short run from the long run in pure competition
Firms can enter and exit the market in the long run but not in the short run
A constant cost industry is one in which
Resource prices remain unchanged as output is increased
Which of the following is true concerning purely competitive industries
In the short run, firms may incur economic losses or earn economic profits, but in the long run they earn normal profits
We would expect an industry to expand if firms in that industry are
Earning economic profits
A decreasing cost industry is one in which
Input prices fall or technology improves as the industry expands
Which of the following will not hole true for a competitive firm in the long-run equilibirum
P=AFC
In the unit costs vs. q diagram, line 2 reflect the long run supply curve for
A constant cost industry
The primary force encouraging the entry of new firms into a purely competitive industry is
Economic profits earned by firms already in the industry
Innnovations that lower production costs or create new products
Often generate short-run economic profits that do not last into the long run
Creative destruction is
The process by which new firms and new products replace existing dominant firms and products
Suppose a firm in a purely competitive market discover that the price of it product is above its minimum AVC pint but everywhere below ATC. Given this, the firm
Should continue producing in the short run but leave the industry in the long run if the situation persists
If the long-run supply curve of a purely competitive industry slopes upward, this implies that the prices of relevant resources
Rise as the industry expands
Assume a purely. O petite firm is maximizing profit at some output at which long-run average total cost is at a minimum. Then
There is not tendency for the firms industry to expand or contract
Which of the following outcomes is consistent with a purely competitive market in the long-run equilibrium
Consumer and producer surplus will be maximized
A purely competitive firm is precluded from making economic profits in the long run because
Of unimpeded entry to the industry
The term allocative efficiency refers to
The production of the product mix most desired by customers
A purely competitive firm
Cannot earn economic profit in the long run
If production is occurring where marginal cost exceeds price, the purely competitive firm will
Fail to maximize profit and resources will be over allocated to the product
The MR=MC rule applies
In both short and long run
Which of the following is an example of creative destruction
Automobile production causes the wagon industry to shut down
A pure monopolist should ever produce in teh
Inelastic segment of its demand curve bc it can increase total revenue and reduce total cost by increasing price
A pure monopolists short run profit maximizing or loss- minimizing position is such that price
Will vertically intersect demand where MR=MC
For a pure monopolist the relationship between total revenue and marginal revenue is such that
Marginal revenue is positive when total revenue is increasing, but marginal revenue becomes negative when total revenue is decreasing
When a firm is on the inelastic segment of its demand curve it can
Increase profits by increasing price
A competitive firm is a ____ and a monopolist is a _____
Price taker, price maker
Because the monopolists demand curve is downsloping
Price must be lowered to sell more output
A pure monopolist
Will realize an economic profit if price exceeds ATC at the profit-maximizing/loss-minimizing level of output
Confronted with the same unit cost data, a monopolistic producer will charge
A higher price and produce a smaller output than a competitive firm
A purely monopolistic firm
Faces a downsloping demand curve
Barriers to entering an industry
Are the basis for monopoly
What do economies of scale, the ownership of essential raw materials, and patent have in common
They are all barriers to entry
In the short run a monopolists economic profits
May be positive or negative depending on market demand and cost conditions
Price discrimination refers to
The selling of a given product at different prices to different customers that do not reflect cost differences
In seeking the profit maximizing output
The pure monopolist underalloactes resources to its production
The profit maximizing output of a pure monopoly is not socially optimal bc in equilibrium
Price exceeds marginal cost
If a regulatory commisssion wants to establish a socially optimal price for a natural monopoly, it should select a price
At which the marginal cost curve intersects the demand curve
For a pure monopolist, marginal revenue is less that price bc
When a monopolist lowers price to sell more output, the lower price applies to all units sold
A single price monopoly is economically inefficient bc at the profit maximizing output
Society value units of monopolized product more highly than it does the alternative products those resources could otherwise produce
The vertical distance between the horizontal axis and any point on a nondiscrimination monopolists demand curve measures
Product price and average revenue
Oligopolistic firms engage in collusion to
Earn greater profits
Cartels are difficult to maintain in the long run bc
Individual members may find it profitable to cheat on agreements
The kinked demand curve of an oligopolist is based on the assumption that
Competitors will follow a price but ignore a price increase
Monopolistic competition is characterized by a
Large number of firms adn low entry barriers
In game theory, the credibility of a threat
Influences the degree of cooperation between two rivals
Monopolistically competitive firms
May realize either profits or losses in the short run but realize normal profits in the long run
Suppose an oligopolistic producer assumes its rivals will ignore a price increase but match a price cut. In this case the firm perceives its
Demand curve as kinked, being steeper below the going price than above
When a monopolistically competitive firm is in long-run equilibrium
MR=MC and P> minimum ATC
The Herfindahl index
Gives much greater weight to larger firms than to smaller firms in an industry
Aluminum competes with copper in the market for power transmission lines. This illustrates
Interindustry compettion
In the United States cartels are
In violation of the antitrust laws
Concentration ratios measure the
Percentage of total industry sales accounted for by the largest firms in the industry
In the short run, the price charged by a monopolistically competitive firm attempting to maximize profits
May be either equal to ATC, less than ATC, or more than ATC
If the four firm concentration ratio for industry x is 80
The four largest firms account for 80 percent of total sales
Which of the following is correct for a monopolistically competitive firm in the long run equilibrium
P exceeds minimum ATC
Excess capacity refers to the
Amount by which actual production falls short of the minimum ATC output
Under monopolistic competition, entry to the industry is
More difficult than under pure competition but not nearly as difficult as under pure monopoly
As a general rule, oligopoly exists when the four firm concentration ratio
Is 40 percent or more
Economic analysis of a monopolistically competitive industry is more complicated than that of pure competition bc
Of product differentiation and consequent product promotion activities
A significant benefit of monopolistic competition compared with pure competition is
Greater product variety
A monopolistically competitive industry combines elements of both competition and monopoly. It is correct to say that the competitive element results from
A relatively large number of firms and the monopolistic element from product differentiation
Game theory can be used to demonstrate that oligopolist s
Can increase their profits through collusion
A monopolistically competitive firm has a
Highly elastic demand curve
Prices are likely to be least flexible
In oligopoly
No price competition refers to
Advertising, product promotion, and changes in the real or perceived characteristics of a product
The herfindahl index for a pure monopolist is
10,000
Clear-cut interdependence with respect to the price output policies exists in
Oligopoly
If the firms in an oligopolistic industry can establish an effective cartel, the resulting output and price will approx. those of
A pure monopoly
Which of the following is an illustration of differentiated oligopoly
The soft drink industry
The general rule for hiring any input (say labor) in the profit maximizing amount in MRC=MRP. This rule takes the special form W=MRP where W is the wage rate, when the
Firm is hiring labor under purely competitive conditions
The substitution effect indicates that a profit seeking firm will use
More of an input whose rice has called and less of other inputs in producing a given output
Marginal resource cost is
The increase in total resource cost associated with the hire of one more unit of the resource
The labor demand curve of an imperfectly competitive seller is downsloping
Bc of both diminishing returns and the neccessity to lower price to sell more output
Assume that coefficient of elasticity of product demand is 0.5 in industry A and is 3.2 in industry B. Other things equal, labor demand will be
More elastic in industry B than in A
Assuming a competing resource market, a firm is hiring resources in the profit maximizing amounts when the
Marginal revenue product of each resource is equal to its price
Resource pricing is important bc
All
The demand for a resource depends primarily on
The demand for the product or service that it helps produce
The demand for airline pilots results from Teh demand for air travel. This fact is an example of
The derived demand for labor
Assume the price of capital doubles and as a result firms make no change int he relative quantities of capital and labor they employ. This implies
Labor is not readily substitutable for capital
The marginal revenue product schedule is
The firms resource demand schedule
Resource x has many close substitutes, whereas resource y has none. Other thing equal, we would expect
The demand for x to be more elastic than demand for y
Other things equal, the resource demand curve of an o perfectly competitive seller will
Be less elastic than that of a purely competitive seller
Which of the following occupations is projected to be the fastes growing in the us in terms of percentage increases
Personal care aides
Marginal revenue product measures the
Amount by which the extra production of one more worker increases a firm’s total revenue
Which of the following is true. Other things equal, the demand for labor will be less elastic the
Smaller the ratio of labor costs to total costs
ATMs and human bank tellers
Are substitute resources
For a firm selling its product in an imperfectly competitive market, the marginal revenue product of labor can be found by
Multiplying marginal product by marginal revenue
A decline in the price of resource a will
Increase the demand for complementary resource b
The relationship between the elasticity of product demand and the elasticity of demand for labor employed in its production is such that, other things being equal
The more elastic the demand for the product, the more elastic the demand for labor
The labor demand curve of a purely competitive seller
Slopes downward bc of diminishing marginal productivity
A profit-maximizing firm employs resources to the point where
MRP=MRC
The elasticity of resource demand measures the
Responsiveness of producers to changes in resource prices
The elasticity of resource demand will be greater th
Easier it is to substitute other resources in production
If resource a and b are complementary and employed in fixed proportions
An increase in the price of a will decrease the demand for b
