Chapter 11 & Chapter 12 - Assignment Essays

question

Each firm in a perfectly competitive industry is so _____ that it ______ effect the price of the product.

answer

small; cannot

question

The demand facing the perfectly competitive firm is perfectly elastic because the products sold by all firms are

answer

perfect substitutes.

question

True or false: A manager in a price-taking, competitive industry must make the decision about whether to produce any output using only the average fixed costs.

answer

False

Reason:

A manager in a price-taking, competitive industry does make the decision about whether to produce any output, but uses the average variable costs.

question

Managers will maximize profit by maximizing the difference between

answer

total revenue and total cost.

question

The profit maximizing output occurs where

answer

P = MC.

question

The characteristics of perfect competition include

answer

homogeneous product

unrestricted entry and exit

price-taking behavior

question

The demand curve facing the perfectly competitive firm is ______ while the demand facing the entire industry is ______.

answer

perfectly elastic; relatively elastic

question

When a firm faces a loss in the short run, the firm's loss is minimized by producing output where price equals:

answer

short-run marginal cost.

question

The two decisions that a manager in a price-taking firm in a competitive industry must make are

answer

whether to produce and if so, how much.

question

______ are used to determine the profit maximizing output.

answer

Marginal cost

question

The profit margin for a firm is

answer

price minus average total costs.

question

Marginal revenue will be equal to _______ when profit is maximized.

answer

marginal cost

question

All firms in a perfectly competitive industry sell ______ products.

answer

homogeneous

question

Because the _______ shows the quantity that the firm will be willing and able to sell at each price, it is the ______ for the firm.

answer

MC curve above AVC; short-run supply curve

question

A firm will continue to operate if total losses are ______ fixed costs, but shut down if total losses are ______ fixed costs.

answer

less than; more than

question

The industry supply curve is the ______ of the firms' demand curves.

answer

horizontal sum

question

Fixed costs are not considered in the profit-maximizing quantity decision because

answer

marginal costs are not affected by changes in fixed costs.

question

In the short-run, producer surplus can be calculated as

answer

TR - TVC.

question

A firm that has decided to enter a competitive industry in which profits are being earned will choose the profit maximizing output ______ .

answer

where P = LMC.

question

_____ encourage existing firms to leave a competitive industry.

answer

Losses

question

The short-run supply curve for the competitive firm is the

answer

marginal cost curve above average variable cost.

question

In the short-run, producer surplus is _____ profit.

answer

greater than

question

As existing firms leave a competitive industry in which they are incurring losses, prices will ______, causing losses to ______.

answer

rise; fall

question

_____ encourage new firms to enter into a competitive industry.

answer

Profits

question

An ______ industry is one in which input prices remain the same as all firms in the industry expand output.

answer

constant-cost

question

Long-run supply price for a constant-cost industry is

answer

horizontal

question

Existing firms will continue to leave a competitive industry in which existing firms are incurring losses until

answer

prices rise enough to eliminate losses.

question

The long-run supply curve in an increasing-cost industry will be a(n) ______ line that follows the minimum of the long-run average cost curve(s).

answer

up-sloping

question

Even firms in competitive industries with lower costs than other firms will earn zero economic profits in the long-run because

answer

they will pay economic rents to retain superior inputs.

question

An ______ industry is one in which input prices rise as all firms in the industry expand output.

answer

increasing-cost

question

______ is the additional revenue earned when the firm hires one more unit of the input.

answer

Marginal revenue product

question

Long-run supply price for a constant-cost industry is

answer

constant at minimum LAC.

question

A manager will maximize profit when he hires the variable input until

answer

MRP = wage.

question

New firms will continue to enter a competitive industry in which existing firms are earning profits until

answer

prices fall enough to eliminate profits.

question

The manager of a firm will choose to shut down when

answer

w > ARP.

Reason:

When w > ARP, TVC > TR, therefore the revenue from output sold does not cover the variable costs of producing.

question

_____ is(are) payment to a superior and more productive resource over and above what the resource could earn in its next best alternative employment.

answer

Economic rent

question

Click and drag on elements in order

Place these steps for implementing the profit-maximizing output decision in order beginning with the first step.

answer

1. Forecast the price of the product

2. Estimate average variable cost and marginal cost

3. Check the shutdown rule

4. If P>AVCmin, find the output level where P = SMC

5. Compute profit or loss

question

Marginal revenue product can be calculated as:

answer

P x MP.

ΔTRΔ/ΔTRΔI.

MR x MP.

question

When MRP is greater than the wage, the manager should hire:

answer

more labor.

question

As new firms enter a competitive industry in which existing firms are earning profits, prices will ______, causing profits to ______.

answer

fall; fall

question

When ARP < wage,

answer

TVC > TR.

question

Firms with market power have _____ firm demand curves.

answer

downward sloping

question

A _____ firm produces a product for which there are no close substitutes.

answer

monopoly

question

Under _____, the market consists of a large number of relatively small firms that produce similar but differentiated products and have some market power.

answer

monopolistic competition

question

A _____ identifies the producers and products or service types that compete in a particular geographic area that is large enough to include all competing sellers.

answer

market definition

question

Elasticity of demand can measure market power because the ____ elastic is demand, the _____ competitors a firm has.

answer

less; fewer

question

Firms with market power sell

answer

products that are different from other firms' products.

question

A low Lerner Index means that firms

answer

have little market power.

question

_____ ensure that a monopoly maintains its market power.

answer

Entry barriers

question

A monopolistic competitive firm is one that

answer

sells a produce with similar, but not perfect, substitutes, but low entry barriers.

question

Substitutes for a good can be identified by finding goods with ____ cross-price elasticities.

answer

large, positive

Reason:

Negative cross price elasticity indicates complement goods.

question

A strong barrier to entry

answer

exists when it is difficult for new firms to enter a market.

protect the profits of existing firms.

hinder the introduction of goods to compete with those that already exist.

question

An inelastic demand curve indicates that as prices increase, consumers will decrease their quantity ____ they would if the demand curve were elastic.

answer

less than

question

Examples of government-created barriers to entry include

answer

exclusive franchises.

patents.

licenses.

question

The Lerner Index is ____ when demand is inelastic.

answer

higher

question

A firm wishing to enter an industry in which the long-run average costs curve continues to decline over ranges of output that are high relative to the market demand for the good would find entry prohibitive because of

answer

economies of scale.

government created entry barriers.

question

When one firm or a few firms controls all the known supply of an input, this

answer

is a barrier to entry.

question

A large, positive cross-price elasticity measures that consumers view the two goods as

answer

readily substitutable.

question

True or false: Advertising does not contribute to brand loyalty.

answer

False

Reason:

Firms gain sales through advertising, but can also establish barriers to entry through advertising. But, advertising also allows competitors to inform customers of their product.

question

True or false: Economies of scale is a barrier to entry in an industry with very high demand for product.

answer

False

Reason:

Economies of scale would not present an entry barrier unless the demand for the output were relatively low compared to the scale of production needed to minimize costs.

question

Consumer lock-in occurs when switching costs

answer

are high.

question

Consumers may create a barrier to entry through always buying the same brand of a product. This is called

answer

brand loyalty.

question

When the value of a good is enhanced when many people use the good, that good is characterized by

answer

network effects.

question

Costs of setup that can be so high that a manager may reasonably conclude that entering business may not be profitable are a barrier to entry called

answer

sunk costs.

question

The monopoly firm's demand curve

answer

is the same as the market demand.

question

When the cost to learn about a new product is high, this can lead to the barrier to entry called

answer

consumer lock-in.

question

A monopoly firm maximizes profit where MR = MC because

answer

MR < P.

question

A network effect occurs when

answer

the value of a good increases as more people use the product.

question

For the firm with market power, the marginal revenue curve _____ the demand curve.

answer

lies below

question

Sunk costs:

answer

can be a barrier to entry.

should be ignored because they do not affect post-entry profit.

question

The monopoly firm will continue to operate even if earning losses in the short-run if

answer

P > AVC.

question

Industry and firm demand are the same for the _____ firm.

answer

monopoly

question

The monopoly firm will never operate on the inelastic portion of the demand curve because

answer

MR < 0.

question

Profit for the monopoly firm is maximized where

answer

MR = MC.

Reason:

MR < P for the monopoly firm, so profit is maximized where MR = MC.

question

The slope of the linear MR curve is _____ the slope of the linear demand curve.

answer

twice as steep as

question

In the long run, the monopoly firm will choose plant size so that

answer

LMC = MR.

question

Marginal revenue product is calculated as _____ for the firm with market power.

answer

MR x MP.

question

The monopoly firm will shut down in the short run when

answer

P < AVC.

question

The firm with market power will hire variable input until

answer

MRP = wage.

question

If the wage is greater than the average revenue product for the firm

answer

the firm should shut down in the short-run.

Reason:

The firm should shut down because it is not covering the costs of the variable input.

question

In the long-run the monopoly firm

answer

can continue to earn a profit as no new firms can enter.

will adjust plant size as demand conditions warrant.

may leave the industry if earning losses.

question

The firm with market power will employ all variable inputs at the level where

answer

MRP = input price.

question

Marginal revenue product cannot be calculated as MP x P for the firm with market power because

answer

MR ≠ P.

question

The characteristics of monopolistic competition include

answer

large number of relatively small firms

unrestricted entry and exit

similar product

question

______ cause(s) firms in monopolistic competition to have some market power.

answer

Product differentiation

question

In the short run, a firm in monopolistic competition behaves like

answer

a monopoly.

question

The relevant portion of the MRP curve for hiring is

answer

the portion below ARP.

question

A firm in monopolistic competition will have zero profits in the long run because

answer

new firms will enter when profits are earned in the short run.

question

An industry with a large number of firms who sell similar products and in which new firms can easily enter is

answer

monopolistic competition.

question

Click and drag on elements in order

Order the steps for the profit-maximizing output and pricing decision for the firm with market power.

answer

1. Estimate the demand equation

2. Find the inverse demand equation

3. Solve for marginal revenue

4. Estimate average variable cost and marginal cost

5. Find the output and price where MR = SMC

6. Check the shut-down rule

question

A firm in monopolistic competition faces a ______ demand curve.

answer

relatively elastic

question

If the MC of production from plant A is greater than the MC of production from plant B, the manager should

answer

decrease production at plant A and increase production at plant B.

question

A firm in monopolistic competition will maximize profit where

answer

MR = MC.

question

A firm in monopolistic competition will have ______ profits in the long run.

answer

zero

Reason:

New firms will enter and drive down prices and drive profits to zero.

question

When a firm produces output in two plants, the manager should allocate production between the two plants so that

answer

the MCs of the last unit produced in each plant are equal.

question

1. Refer to the graph below:

These are the cost curves for a perfectly competitive firm. If market price is $20, how much profit will the firm earn?

answer

-$3,000

When P=20,Q=100

AC=50

TR=20*100=2000

TC=50*100=5000

Loss=TC-TR=5000-2000=3000

Profit=-3000

question

2. Suppose that the manager of a firm operating in a perfectly competitive market has estimated the average variable cost function to be:

AVC = 4.0 - 0.0024Q + 0.000006Q^2

Fixed costs are $500. Average variable cost reaches its minimum value at ____ units of output, and the minimum value of average variable cost is $____.

answer

200; $3.76

AVC is minimum when , AVC and MC curves intersect each other.

Following the condition we get,

4- .0024Q+ .000006Q2 = 4 - .0048Q + .000018Q2

Or, .0024Q = .000012Q2

Or, Q = 200

Putting value of Q in the AVC equation we get,

AVC = 4- .0024*200 + .000006(200)2

= 4- .48 +.24 =$ 3.76

Average variable cost reaches its minimum value at 200 units of output, and the minimum value of average variable cost is $3.76.

question

3. Suppose that the manager of a firm operating in a perfectly competitive market has estimated the average variable cost function to be:

AVC = 4.0 - 0.0024Q + 0.000006Q^2

Fixed costs are $500. The marginal cost function is:

answer

MC = 4.0 -0.0048Q + 0.000018Q^2

AVC = average variable cost function = 4- .0024Q+ .000006Q2

FC= fixed cost = $500.

AVC*Q = TVC= 4Q-.0024Q2 + .000006Q3

TC = TVC+FC = 4Q-.0024Q2 + .000006Q3+ 500.

MC = dTC/dQ = 4 - .0048Q + .000018Q2

question

4. Economic rent...

answer

is the payment to a more productive resource above its opportunity cost

question

5. When a perfectly-competitive industry is in long-run equilibrium,

answer

each firm earns zero economic profit

question

6. Refer to the graph below:

These are the cost curves for a perfectly competitive firm. If market price is $50, how much profit will the firm earn?

answer

$3,000

In a competitive market equilibrium condition:P=MC

When P=50 ,quantity=300

AC=40

TR=P*Q=50*300=15,000

TC=AC*Q=40*300=12,000

Profit=TR-TC=15,000-12,000=3,000

Answer-$3,000

question

7. To minimize losses in the short run, a perfectly competitive firm should shut down if...

answer

total revenue is less than total variable cost (TR < TVC)

question

8. Suppose that the manager of a firm operating in a perfectly competitive market has estimated the average variable cost function to be:
AVC = 4.0 - 0.0024Q + 0.000006Q^2

Fixed costs are $500. If the forecasted price of the firm's output is $4.00, how much output will the firm produce in the short run (round to the nearest unit)?

answer

267

MC = 4
Or, 4 - .0048Q + .000018Q2 = 4
Or, Q* = 266.67 = 267
The firm should produce 267 output.

question

9. Refer to the graph below:

These are the cost curves for a perfectly competitive firm. If market price is $50, how much output will the firm produce?

answer

300 units

MC curve above the minimum of AVC is the supply curve. Hence at P = $50, output is 300 units

question

10. Suppose that the manager of a firm operating in a perfectly competitive market has estimated the average variable cost function to be:

AVC = 4.0 - 0.0024Q + 0.000006Q^2

Fixed costs are $500. If the firm shuts down, how much profit (loss) will the firm earn?

answer

-$500

It is a perfectly competitive market, if a firm shuts down if will suffer a loss equal to fixed costs.

question

11. Refer to the graph below:

These are the cost curves for a perfectly competitive firm. At what level of output will the firm break even?

answer

250

Break-even point is the point where total revenue and total cost are equal so it means no profit and no loss.

Now to find break-even from cost curves we need to look at the minimum of average total cost curve or the point or the point where marginal cost and average total cost both are equal.

The reason why we are taking a minimum of ATC is that above minimum of ATC a firm will achieve profit and below the minimum of ATC the firm will suffer loss hence break-even will be at a minimum of ATC or ATC = MC

So from the above graph, ATC is minimum at 250 units also ATC and MC are equal at this point.

question

12. Suppose that the manager of a firm operating in a perfectly competitive market has estimated the average variable cost function to be:

AVC = 4.0 - 0.0024Q + 0.000006Q^2

Fixed costs are $500. If the forecasted price of the firm's output is $4.00, how much profit (loss) will the firm earn (round to the nearest dollar)?

answer

-$444

Variable Cost = AVC * Q = ( 4 - 0.0024Q + 0.000006Q2 ) * Q

Fixed cost = 500

Total Cost = VC + FC = ( 4 - 0.0024Q + 0.000006Q2 ) * Q + 500

Marginal cost = d TC / d Q = 4 - 0.0048Q + 0.000018Q2

Price = $4

P = MC ( solving it we get Q)

so , Q = 266.67 units

Total revenue = P * Q = 1066.67

Total cost = 1509.79

Loss = TC - TR = 1509.79 - 1066.67 = 443.12

question

1. A manufacturer has r=two plants -- one in Ohio and one in Tennessee. At the current allocation of total output between the two plants, the last unit of output produced in the Ohio plant added $10 to total cost, while the last unit of output produced in the Tennessee plant added $8 to total cost. In order to decrease total costs, the firm should...

answer

switch some output from the Ohio to the Tennessee plant

question

2. Refer to the graph below:

The figure shows the demand and cost curves facing a monopoly in the short run. The firm earns profits of...

answer

$120

P = TR - TC

$300 - $180

question

3. The market demand for a monopoly firm is estimated to be:

Qd = 80,000 - 400P + 3M + 2000PR

where Q is output,

P is price,

M is income,

and PR is the price of a related good. The manager has forecasted the values of M and PR will her $60,000 and $15, respectively, in 2018. For 2018, the forecasted demand function is...

answer

Q= 80,000 -400P + 3(60,000) + 2000(15)

=80000 - 400P + 180000 + 30000

Q = 290,000 - 400P

question

4. A manufacturer has r=two plants -- one in Ohio and one in Tennessee. At the current allocation of total output between the two plants, the last unit of output produced in the Ohio plant added $10 to total cost, while the last unit of output produced in the Tennessee plant added $8 to total cost. If the firm switches one unit of output from the Tennessee plant to the Ohio plant, then...

answer

total cost will increase $2

question

5. Refer to the graph below:

The figure shows the demand and cost curves facing a monopoly in the short run. The profit-maximizing level of output is...

answer

60 units

The profit maximizing level of output is 60. At this quantity, MR = MC and for a monopolistic it would be beneficial to produce at a quantity where the Marginal Revenue equals the Marginal cost. At quantity = 60, the MR curve intersects the MC curve which indicates that both are same here and firm is operating at profit maximizing level of output.

question

6. Refer to the graph below:

The figure shoes the demand and cost curve facing a monopoly in the short run. The firm will sell its output at a price of...

answer

question

7. The market demand for a monopoly firm is estimated to be:

Qd = 80,000 - 400P + 3M + 2000PR

where Q is output,

P is price,

M is income,

and PR is the price of a related good. The manager has forecasted the values of M and PR will her $60,000 and $15, respectively, in 2018. For 2018, the marginal revenue function is...

answer

MR = 725 - 0.005Q

When M=60000 and PR=15, then Qd=80000-400P+3*60000+2000*15

=290000-400P

Thus the inverse demand function P=290000/400-Qd/400

=725-0.0025Qd

Total Revenue TR=P*Qd

=(725-0.0025Qd)*Qd

=725Qd-0.0025Qd^2

Thus the Marginal Revenue MR=d(TR)/dQd=725-0.005Qd

question

8. The market demand for a monopoly firm is estimated to be:

Qd = 80,000 - 400P + 3M + 2000PR

where Q is output,

P is price,

M is income,

and PR is the price of a related good. The manager has forecasted the values of M and PR will her $60,000 and $15, respectively, in 2018. The average variable cost function is estimated to be:

AVC = 725 - 0.01Q + 0.000001Q^2

Total fixed cost in 2018 is expected to be $50,000. The profit-maximizing level of output for 2011 is...

answer

5,000 units

question

9. A monopolistic competitor is similar to a monopolist in that:

answer

both have market power

1 of 116

question

Each firm in a perfectly competitive industry is so _____ that it ______ effect the price of the product.

answer

small; cannot

question

The demand facing the perfectly competitive firm is perfectly elastic because the products sold by all firms are

answer

perfect substitutes.

question

True or false: A manager in a price-taking, competitive industry must make the decision about whether to produce any output using only the average fixed costs.

answer

False

Reason:

A manager in a price-taking, competitive industry does make the decision about whether to produce any output, but uses the average variable costs.

question

Managers will maximize profit by maximizing the difference between

answer

total revenue and total cost.

question

The profit maximizing output occurs where

answer

P = MC.

question

The characteristics of perfect competition include

answer

homogeneous product

unrestricted entry and exit

price-taking behavior

question

The demand curve facing the perfectly competitive firm is ______ while the demand facing the entire industry is ______.

answer

perfectly elastic; relatively elastic

question

When a firm faces a loss in the short run, the firm's loss is minimized by producing output where price equals:

answer

short-run marginal cost.

question

The two decisions that a manager in a price-taking firm in a competitive industry must make are

answer

whether to produce and if so, how much.

question

______ are used to determine the profit maximizing output.

answer

Marginal cost

question

The profit margin for a firm is

answer

price minus average total costs.

question

Marginal revenue will be equal to _______ when profit is maximized.

answer

marginal cost

question

All firms in a perfectly competitive industry sell ______ products.

answer

homogeneous

question

Because the _______ shows the quantity that the firm will be willing and able to sell at each price, it is the ______ for the firm.

answer

MC curve above AVC; short-run supply curve

question

A firm will continue to operate if total losses are ______ fixed costs, but shut down if total losses are ______ fixed costs.

answer

less than; more than

question

The industry supply curve is the ______ of the firms' demand curves.

answer

horizontal sum

question

Fixed costs are not considered in the profit-maximizing quantity decision because

answer

marginal costs are not affected by changes in fixed costs.

question

In the short-run, producer surplus can be calculated as

answer

TR - TVC.

question

A firm that has decided to enter a competitive industry in which profits are being earned will choose the profit maximizing output ______ .

answer

where P = LMC.

question

_____ encourage existing firms to leave a competitive industry.

answer

Losses

question

The short-run supply curve for the competitive firm is the

answer

marginal cost curve above average variable cost.

question

In the short-run, producer surplus is _____ profit.

answer

greater than

question

As existing firms leave a competitive industry in which they are incurring losses, prices will ______, causing losses to ______.

answer

rise; fall

question

_____ encourage new firms to enter into a competitive industry.

answer

Profits

question

An ______ industry is one in which input prices remain the same as all firms in the industry expand output.

answer

constant-cost

question

Long-run supply price for a constant-cost industry is

answer

horizontal

question

Existing firms will continue to leave a competitive industry in which existing firms are incurring losses until

answer

prices rise enough to eliminate losses.

question

The long-run supply curve in an increasing-cost industry will be a(n) ______ line that follows the minimum of the long-run average cost curve(s).

answer

up-sloping

question

Even firms in competitive industries with lower costs than other firms will earn zero economic profits in the long-run because

answer

they will pay economic rents to retain superior inputs.

question

An ______ industry is one in which input prices rise as all firms in the industry expand output.

answer

increasing-cost

question

______ is the additional revenue earned when the firm hires one more unit of the input.

answer

Marginal revenue product

question

Long-run supply price for a constant-cost industry is

answer

constant at minimum LAC.

question

A manager will maximize profit when he hires the variable input until

answer

MRP = wage.

question

New firms will continue to enter a competitive industry in which existing firms are earning profits until

answer

prices fall enough to eliminate profits.

question

The manager of a firm will choose to shut down when

answer

w > ARP.

Reason:

When w > ARP, TVC > TR, therefore the revenue from output sold does not cover the variable costs of producing.

question

_____ is(are) payment to a superior and more productive resource over and above what the resource could earn in its next best alternative employment.

answer

Economic rent

question

Click and drag on elements in order

Place these steps for implementing the profit-maximizing output decision in order beginning with the first step.

answer

1. Forecast the price of the product

2. Estimate average variable cost and marginal cost

3. Check the shutdown rule

4. If P>AVCmin, find the output level where P = SMC

5. Compute profit or loss

question

Marginal revenue product can be calculated as:

answer

P x MP.

ΔTRΔ/ΔTRΔI.

MR x MP.

question

When MRP is greater than the wage, the manager should hire:

answer

more labor.

question

As new firms enter a competitive industry in which existing firms are earning profits, prices will ______, causing profits to ______.

answer

fall; fall

question

When ARP < wage,

answer

TVC > TR.

question

Firms with market power have _____ firm demand curves.

answer

downward sloping

question

A _____ firm produces a product for which there are no close substitutes.

answer

monopoly

question

Under _____, the market consists of a large number of relatively small firms that produce similar but differentiated products and have some market power.

answer

monopolistic competition

question

A _____ identifies the producers and products or service types that compete in a particular geographic area that is large enough to include all competing sellers.

answer

market definition

question

Elasticity of demand can measure market power because the ____ elastic is demand, the _____ competitors a firm has.

answer

less; fewer

question

Firms with market power sell

answer

products that are different from other firms' products.

question

A low Lerner Index means that firms

answer

have little market power.

question

_____ ensure that a monopoly maintains its market power.

answer

Entry barriers

question

A monopolistic competitive firm is one that

answer

sells a produce with similar, but not perfect, substitutes, but low entry barriers.

question

Substitutes for a good can be identified by finding goods with ____ cross-price elasticities.

answer

large, positive

Reason:

Negative cross price elasticity indicates complement goods.

question

A strong barrier to entry

answer

exists when it is difficult for new firms to enter a market.

protect the profits of existing firms.

hinder the introduction of goods to compete with those that already exist.

question

An inelastic demand curve indicates that as prices increase, consumers will decrease their quantity ____ they would if the demand curve were elastic.

answer

less than

question

Examples of government-created barriers to entry include

answer

exclusive franchises.

patents.

licenses.

question

The Lerner Index is ____ when demand is inelastic.

answer

higher

question

answer

economies of scale.

government created entry barriers.

question

When one firm or a few firms controls all the known supply of an input, this

answer

is a barrier to entry.

question

A large, positive cross-price elasticity measures that consumers view the two goods as

answer

readily substitutable.

question

True or false: Advertising does not contribute to brand loyalty.

answer

False

Reason:

Firms gain sales through advertising, but can also establish barriers to entry through advertising. But, advertising also allows competitors to inform customers of their product.

question

True or false: Economies of scale is a barrier to entry in an industry with very high demand for product.

answer

False

Reason:

Economies of scale would not present an entry barrier unless the demand for the output were relatively low compared to the scale of production needed to minimize costs.

question

Consumer lock-in occurs when switching costs

answer

are high.

question

Consumers may create a barrier to entry through always buying the same brand of a product. This is called

answer

brand loyalty.

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When the value of a good is enhanced when many people use the good, that good is characterized by

answer

network effects.

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Costs of setup that can be so high that a manager may reasonably conclude that entering business may not be profitable are a barrier to entry called

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sunk costs.

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The monopoly firm's demand curve

answer

is the same as the market demand.

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When the cost to learn about a new product is high, this can lead to the barrier to entry called

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consumer lock-in.

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A monopoly firm maximizes profit where MR = MC because

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MR < P.

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A network effect occurs when

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the value of a good increases as more people use the product.

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For the firm with market power, the marginal revenue curve _____ the demand curve.

answer

lies below

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Sunk costs:

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can be a barrier to entry.

should be ignored because they do not affect post-entry profit.

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The monopoly firm will continue to operate even if earning losses in the short-run if

answer

P > AVC.

question

Industry and firm demand are the same for the _____ firm.

answer

monopoly

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The monopoly firm will never operate on the inelastic portion of the demand curve because

answer

MR < 0.

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Profit for the monopoly firm is maximized where

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MR = MC.

Reason:

MR < P for the monopoly firm, so profit is maximized where MR = MC.

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The slope of the linear MR curve is _____ the slope of the linear demand curve.

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twice as steep as

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In the long run, the monopoly firm will choose plant size so that

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LMC = MR.

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Marginal revenue product is calculated as _____ for the firm with market power.

answer

MR x MP.

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The monopoly firm will shut down in the short run when

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P < AVC.

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The firm with market power will hire variable input until

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MRP = wage.

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If the wage is greater than the average revenue product for the firm

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the firm should shut down in the short-run.

Reason:

The firm should shut down because it is not covering the costs of the variable input.

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In the long-run the monopoly firm

answer

can continue to earn a profit as no new firms can enter.

will adjust plant size as demand conditions warrant.

may leave the industry if earning losses.

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The firm with market power will employ all variable inputs at the level where

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MRP = input price.

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Marginal revenue product cannot be calculated as MP x P for the firm with market power because

answer

MR ≠ P.

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The characteristics of monopolistic competition include

answer

large number of relatively small firms

unrestricted entry and exit

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