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Total Revenue
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The amount a firm receives for the sale of its output
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Total Cost
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The market value of the inputs a firm uses in production
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Profit
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Total revenue minus total cost
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Explicit Costs
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Input costs that require an outlay of money by the firm
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Implicit Costs
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Input costs that do not require an outlay of money by the firm
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Production Function
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The relationship between the quantity of inputs used to make a good and the quantity of output of that good
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Marginal Product
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The increase in output that arises from an additional unit of input
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Diminishing Marginal Product
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The property whereby the marginal product of an input declines as the quantity of the input increases
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Variable Costs
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Costs that vary with the quantity of output produced
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Average Total Cost
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Total cost divided by the quantity of output
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Average Variable Cost
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Variable cost divided by the quantity of output
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Average Fixed Cost
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Fixed cost divided by the quantity of output
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Marginal Cost
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The increase in total cost that arises from an extra unit of production
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Efficient Scale
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The quantity of output that minimizes average total cost
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Economies of Scale
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The property whereby long-run average total cost falls as the quantity of output increases
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Diseconomies of Scale
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The property whereby long-run average total cost rises as the quantity of output increases
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Constant Returns to Scale
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The property whereby long-run average total cost stays the same as the quantity of output changes
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Competitive Market
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A market with many buyers and sellers trading identical products so that each buyer and seller is a price taker
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Average Revenue
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Total revenue divided by the quantity sold
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Marginal Revenue
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The change in total revenue from an additional unit sold
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Monopoly
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A firm that is the sole seller of a product without close substitutes
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Natural Monopoly
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A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms
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Price Discrimination
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The business practice of selling the same good at different prices to different customers
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Oligopoly
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A market structure in which only a few sellers offer similar or identical products
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Monopolistic Competition
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A market structure in which many firms sell products that are similar but not identical
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Game Theory
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The study of how people behave in strategic situations
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Collusion
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An agreement among firms in a market about quantities to produce or prices to change
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Cartel
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A group of firms acting in unison
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Nash Equilibrium
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A situation in which economic actors interacting with one another choose their best strategy given the strategies that all the other actors have chosen
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Prisoner's Dilemma
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A particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial
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Dominant Strategy
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A strategy that is best for a player in a game regardless of the strategies chosen by the other players
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Why do firms continue if they make zero economic profit? Discuss economic profit and accounting profit. Explain why owners continue, explain why managers continue, and explain why workers continue.
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Implicit costs are input costs, like opportunity costs, that do not require an outlay of money by the firm, but explicit costs are inputs that do require an outlay of money by the firm, like the factors of production. Economic profit is total revenue minus total costs (both implicit and explicit costs); accounting profit is total revenue minus total explicit costs. A firm will continue if it makes zero economic profit because it is making enough to cover all of its opportunity costs. This also is why owners, managers, and workers will continue - they are not losing money by working at the firm instead of doing something else.
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Explain the difference between fixed costs and sunk costs. How do fixed costs affect average total cost?
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Sunk costs are costs that have already been committed and cannot be recovered, like rent during a firm's shutdown. Fixed costs are costs that do not vary with the quantity of output produced, like rent at any time. Fixed costs are incurred even if a firm produces nothing; they affect average total cost by ensuring that average total cost is always at least the amount of all fixed costs. If fixed costs are X dollars, then average total cost would be X dollars plus the marginal costs, if any.
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Explain the difference between a shut down and an exit. What mathematical conditions are required for each? Why would a firm continue to operate if it is "losing money"?
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A shutdown is a short-run decision not to produce anything during a specific period of time because of current market conditions. A firm would shut down if the revenue that it would earn from producing is less than its variable costs (TR < VC). An exit is a long-run decision to leave the market. A firm would exit if the revenue it would earn from producing is less than its total cost ( TR < TC).
A firm might continue to operate if it is losing money because its situation could be one where it would lose more money if it wasn't operating.
A firm might continue to operate if it is losing money because its situation could be one where it would lose more money if it wasn't operating.
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Identify and explain two reasons that advertising is productive for society. Provide a critique of advertising. If a firm is convinced that advertising is wasteful and stops, what do you think its competitors will do?
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Advertising is productive for society because advertising provides information to consumers and fosters competition. One critique of advertising is that firms advertise to manipulate people's tastes. I think that a firm's competitors will advertise/continue to advertise as long as they believe that their product is good enough to spend money on advertising. The firm that stops advertising could be saying that its product is not good enough to pay for advertising. Consumers will see ads for the other firms' products, and will be more likely to buy those products.
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Explain the relationship between profit maximization, marginal cost, and marginal revenue. How does the marginal revenue curve change if a firm is a monopolist or in a perfectly competitive economy and why?
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Profit maximization occurs when marginal revenue equals marginal cost. If a firm is a monopolist, price is greater than its marginal cost/revenue because the firm sets the price for its product. If a firm is a competitive firm, price is equal to marginal cost/revenue because the firm is a price taker.
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Explain the various regions of a marginal cost curve (curve will be depicted on the test). You should be able to identify economies of scale, diseconomies of scale, and constant returns to scale on the graph and explain why each section of the curve makes sense in the real world.
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