Econ 450 exam 2 - Assignment Essays

question

explicit costs

answer

are direct out-of-pocket payments for inputs

question

implicit costs

answer

reflect only a forgone opportunity rather than an explicit, current expenditure

question

opportunity costs

answer

the value of the best alternative use of that resource

question

Durable inputs

answer

are usable for a long period, perhaps for many years
examples include: land, buildings, equipment

question

sunk costs

answer

a past expenditure that cannot be recovered and are not considered in any managerial decisions

question

costs in the short run

answer

fixed costs, variable cost, and total costs

question

fixed costs

answer

do not vary with the quantity of output produced
ex: cost of land, office space, production facilities

question

variable costs

answer

changes as the quantity of output changes, it's the costs of variable inputs

question

total cost

answer

the sum of fixed and variable costs

question

average cost value in short run

answer

average fixed cost, average variable cost, and average total cost

question

average fixed cost

answer

=fixed cost/quantity
this cost falls as output rises because the fixed cost is spread over more units

question

average variable cost

answer

=variable cost/quantity
this cost many increase or decrease as output rises

question

Average total cost

answer

=total cost/quantity
this cost may increase or decrease as output rises

question

marginal cost

answer

is the amount by which a firm's cost changes when the frim produces one more unit of output
this also equals the change in variable cost from a one-unit increase in output
=change in total cost/change in qty
or alternatively
=change in variable cost/change in qty

question

How does a firm increase output in the short run?

answer

by using more labor

question

diminishing marginal returns

answer

a level of production in which the marginal product of labor decreases as the number of workers increases.
when output increases, variable cost increases more than proportionately because of this phenomenon

question

inverse relationship

answer

what kind of relationship does MC and MPL have?

question

Production function

answer

if input prices are constant, the shapes of the variable cost and the average cost curves are determined by this

question

diminishing marginal returns exist

answer

the average variable cost, average total cost, and marginal cost curves rise with output when what exists?

question

marginal cost

answer

the average total cost and average variable cost curves fall when ____ _____ is below them and rise when ___ _____ is above them

question

long run

answer

in what time period can a firm adjust all of its inputs?

question

technically efficient

answer

bundles of inputs use as few inputs as possible to produce a given quantity

question

economically efficient

answer

the bundle of inputs with the lowest costs of product. it is selected from the range of technically efficient input bundles

question

isocost line

answer

represents all combinations of inputs that have the same total cost

question

Properties of Isocosts

answer

-hits each axis at the value that represents the maximum of that output the firm can buy given the total cost
-isocosts further from the origin represent higher total costs
-the slope of each Isocost is the same

question

3 equivalent Rules for LR cost min

answer

1. the Lowest isocost rule
2.the tangency rule: MRTS= -w/r
3.the Last- Dollar rule: (MPl/w)=(MPk/r)

question

the lowest isocost rule

answer

the firm minimizes its cost by using the combination of inputs on the isoquant that is on the lowest isocost line that touches the isoquant

question

the tangency rule

answer

at the minimum-cost bundle the isoquant is tangent to the isocost line. the slope of the isoquant and the slope of the isocost are equal

question

the last-dollar rule

answer

cost is minimized if inputs are chosen so that the last dollar spent on labor adds as much extra output as the last dollar spent on capital

question

u-shape

answer

a what shape is typical for the average cost curve in a perfectly competitive firm in the LR?

question

Returns to scale

answer

1.increasing RTS
2.Decreasing RTS
3.Constant RTS

question

increasing returns to scale

answer

when output increases more than in proportion to an increase in all inputs

question

decreasing returns to scale

answer

when output increases less than in proportion to an increase in all inputs

question

constant returns to scale

answer

when output increases directly in proportion to an increase in all inputs

question

equal to or below

answer

the LR average cost is always _____ to or ______ the SR average cost
(type to or in answer)

question

learning by doing

answer

refers to the productive skills and knowledge that workers and managers gain from experience

question

learning curve

answer

is the relationship between average costs ........ cumulative output

question

cumulative output

answer

the total number of units of output produced since the product was introduced

question

economies of scale and learning by doing

answer

is a firm is operating at a pint on its average cost curve where economies of scale exist, expanding output lowers costs for what two reasons

question

market types

answer

1. Perfect Competition
2. Monopolistic Competition
3. Oligopoly
4. Monopoly

question

perfect competition

answer

-has very large number of small firms
-sell the same standardized product
-easy entry and exit
-impossible to have non-price competition
-has no market power
-can make no long run economic profits

question

monopolistic competition

answer

-large number of relatively small firms
-differentiated products
-easy entry and exit
-possible to have non-price competition
-have low to high market power
-make no long run economic profits

question

oligopoly

answer

-small number of relatively large firms
-sell standardized and differentiated products
-difficult to enter and exit the market
-possible or difficult to have non-price competition
-have low to high market power
-has the possibility of long run economic profits

question

monopoly

answer

-there is only one firm
-sell unique products
-very difficult/impossible to enter or exit
-there is no need for non-price competition
-have the highest amount of market power
-can make economic profit
-subject to a lot of regulation

question

the firm's ability to control the price

answer

what is the single more important indicator of how competitive a market structure is?

question

price takers

answer

firms are this in perfect competition because there are so many firms and products are so identical

question

price makers

answer

a firm in this under a pure monopoly they have the ultimate pricing power

question

whether new firms can enter when profits exist

answer

what most directly affects whether or not a firm can earn economic profits in the long run?

question

zero

answer

because entry and exit are completely free under perfect competition long run economic profit is what?

question

barriers to entry

answer

what can a monopoly utilize to keep long run economic profits positive?

question

when a firm enters a market it answers what three questions

answer

1. how much should we produce?
2. if we produce that amount how much will we earn?
3.if a loss rather than a profit is incurred, will it be worthwhile to continue in this market in the long run?

question

P=MR=AR=MC

answer

in a perfectly competitive firm price is equal to what?

question

horizontal demand curve

answer

firms in a perfectly competitive market face what kind of demand curve?

question

downward sloping

answer

the industry in a perfectly competitive market will face what kind of demand curve?

question

MR=MC

answer

In a perfectly competitive frim how do we know where to produce so as to maximize profits or minimize losses?

question

fixed costs

answer

in the short run we must still pay what?

question

shut down

answer

a short run decision not to produce anything because of market conditions

question

exit

answer

a long-run decision to leave the market

question

P < minimum AVC

answer

in the short run we shut down if what?

question

P > AVC

answer

in the short run we continue to produce if what?

question

revenue loss=TR

answer

cost of exiting the market is

question

P < ATC

answer

firm decided to exit under what condition?

question

P > ATC

answer

firm decides to enter market under what condition?

question

the firm's long run supply curve is what?

answer

the portion of the its MC curve above the LRATC curve

question

If economic profits are earned in a competitive market, then over time

answer

firms will enter the market
it will shift the supply curve to the right causing a surplus
-this will put a downward pressure on prices until it reduces profits back to normal aka zero

question

if economic losses are being made in a market, over time

answer

firms will exit the market
it will shift the supply curve to the left causing a shortage
-this will put an upward pressure on prices until it increases profits back to normal levels

question

P=ATC

answer

zero economic profit occurs under what condition

question

the long run market supply curve is horizontal if

answer

1. all firms have identical costs
2. costs do not change as other firms enter or exit the market

question

if either of the two assumptions for a LR horizontal supply curve is not true than

answer

the long run supply curve slopes upward

question

competitive market summary

answer

profit maximization happens where MC=MR
P=MR
so P=MC

question

a monopoly produces what kinds of products?

answer

differentiated

question

monopolies are the ultimate price what?

answer

price maker

question

in a monopoly the relationship between price and revenue is affected by what?

answer

elasticity of demand

question

when demand is more _______ increases in prices will be met with proportionately _______ decreases in quantity sold and total revenue will ______

answer

elastic, bigger, fall

question

when demand is more _________, increases in prices will be met with proportionately ______ decreases in quantity sold and total revenue will _______

answer

inelastic, small, rise

question

profit maximizing quantity for a monopoly is where?

answer

where MR=MC

question

because a monopolist is the only firm in the market it will charge what for price?

answer

the most that demand will bear

question

the demand curve for a FIRM in a monopoly is what?

answer

downward sloping

question

price is what to marginal revenue in a monopoly

answer

P>MR

question

what is a key feature for monopolies?

answer

barriers to entry

question

technical barrier to entry

answer

exist when there are high start-up costs

question

Legal barriers to entry

answer

this can take the form of a patent, governments granting a single firm the right to produce
-spending money and maintaining this kind of barrier and others can lead to a monopoly being less profitable

question

natural monopoly

answer

exists when one firm can service a market more cheaply than several firms can.

question

a monopoly does not have a what?

answer

supply curve

question

what is the closet that a monopoly has to a supply curve?

answer

the single point on the demand curve that corresponds to Q*

question

a monopoly can earn long run profit, what are they called?

answer

monopoly rents

question

how do yo calculate MR for a monopoly?

answer

MR= P-all the reductions in price necessary

question

why may monopolies experience lower or zero economic profit?

answer

1. resources spent to achieve monopoly profits such as ways to erect barriers to entry
2.lobbying expenses or legal fees to maintain barriers to entry or receive more favorable treatment

question

distributional effects

answer

the idea that economic profits go to the wealthy making the rich richer and the "poor" poorer
this is a common negative connotation towards monopolies

question

monopolies charge ______ price and produce ______ quantities than a perfectly competitive firm

answer

higher, lower

question

monopolistic competition

answer

has many firms and relatively easy entry and exit of new firms
source of their power is product differentiation
Q where MR=MC
P where Q corresponds to the demand curve

question

how are you successful under monopolistic competition market structure

answer

the firm must be constantly innovating to make the its product stand out

question

when the demand curve is steep

answer

demand is overall inelastic
if a monopoly raises price at profit maximizing qty few sales will be lost

question

when the demand curve is flat

answer

demand is overall elastic
is a monopoly raises price at profit maximizing qty many sales will be lost

question

learner index or price markup

answer

= (p-MC)/P
this measures the firm's market power
the larger the difference between price and marginal cost the larger the index

question

the learner index ranges between what?

answer

0 to 1

question

as elasticity of demand fall what happens to the learner index?

answer

it increases

question

things that reduce market power

answer

1. better substitutes
2.more firms
3.closer competition

question

cost advantage monopoly

answer

if a low cost firm sells at a price so low that other potential competitors with higher costs would lose money

question

natural monopolies

answer

one frim can produce the total output of the market at a lower cost than two or more firms could
happens because of economies of scale

question

how do governments create monopolies?

answer

1. making it difficult for new firms to obtain a license to operate
2. granting monopoly right to one firm
3. auctioning a monopoly to a private firm

question

patents

answer

is an exclusive right granted to the inventor of a new and useful product, process, substance, or design for a specified length of time

question

a good has a network externality if

answer

one person's demand depends on the consumption of a good by other

question

if a good has a positive network externality

answer

its value to a consumer grows as the number of units sol increases

question

critical mass of users

answer

this is required for a network to succeed

question

bandwagon effect

answer

a person places greater value on a good as more and more people possess it

question

snob effect

answer

a person places greater value on a good as fewer and fewer people possess it

question

price discrimination

answer

charging different prices to different customers or different groups of customers

question

price discrimination does what to profit

answer

it increases profits by using two channels
channel 1: higher prices for some
channel 2: attract new customers

question

conditions for price discrimination

answer

1.a firm must have market power
2.firm must identify groups with different price sensitivity
3. firm must prevent resale

question

price discrimination is based on what?

answer

charging different prices for units of a good that cost the same to produce
so charging different price for a hard copy of a magazine and digital copy of a magazine not price discrimination
but charging different prices for a WTJ subscription is price discrimination

question

perfect price discrimination

answer

the firm sells each unit at the maximum amount any customer is willing to pay

question

group price discrimination

answer

a firm charges each group of customers a different price, but it does not charge different prices within the group

question

Nonlinear price discrimination

answer

the firm charges a different price for larger purchases than for smaller purchases so that price paid varies according to the qty purchased

question

how do firms perfectly price discriminate?

answer

1.must have market power
2.must have full information about customers and their willingness to pay

question

when a firm is perfectly price discrimination price is equal to what?

answer

P=MR
this makes the firm's marginal revenue curve the same as the demand curve

question

realities of price discrimination

answer

1. perfect price discrimination is rarely fully achieved
2. firms can still increase profits with imperfect individual price discrimination

question

group price discrimination conditions

answer

1. must divide potential customers into two or more groups with different prices for each
2.all members in a single group must be charged the same price
3.firm must have market power
groups can differ by age, location, or other ways

question

separation by observable characteristics

answer

uses this when a firm believe that observable characteristics are associated with especially high or low reservation prices or demand elasticities

question

separation by action

answer

allows consumers to self-select the group they belong to depending on their opportunity cost of time

1 of 120

question

explicit costs

answer

are direct out-of-pocket payments for inputs

question

implicit costs

answer

reflect only a forgone opportunity rather than an explicit, current expenditure

question

opportunity costs

answer

the value of the best alternative use of that resource

question

Durable inputs

answer

are usable for a long period, perhaps for many years
examples include: land, buildings, equipment

question

sunk costs

answer

a past expenditure that cannot be recovered and are not considered in any managerial decisions

question

costs in the short run

answer

fixed costs, variable cost, and total costs

question

fixed costs

answer

do not vary with the quantity of output produced
ex: cost of land, office space, production facilities

question

variable costs

answer

changes as the quantity of output changes, it's the costs of variable inputs

question

total cost

answer

the sum of fixed and variable costs

question

average cost value in short run

answer

average fixed cost, average variable cost, and average total cost

question

average fixed cost

answer

=fixed cost/quantity
this cost falls as output rises because the fixed cost is spread over more units

question

average variable cost

answer

=variable cost/quantity
this cost many increase or decrease as output rises

question

Average total cost

answer

=total cost/quantity
this cost may increase or decrease as output rises

question

marginal cost

answer

question

How does a firm increase output in the short run?

answer

by using more labor

question

diminishing marginal returns

answer

question

inverse relationship

answer

what kind of relationship does MC and MPL have?

question

Production function

answer

if input prices are constant, the shapes of the variable cost and the average cost curves are determined by this

question

diminishing marginal returns exist

answer

the average variable cost, average total cost, and marginal cost curves rise with output when what exists?

question

marginal cost

answer

the average total cost and average variable cost curves fall when ____ _____ is below them and rise when ___ _____ is above them

question

long run

answer

in what time period can a firm adjust all of its inputs?

question

technically efficient

answer

bundles of inputs use as few inputs as possible to produce a given quantity

question

economically efficient

answer

the bundle of inputs with the lowest costs of product. it is selected from the range of technically efficient input bundles

question

isocost line

answer

represents all combinations of inputs that have the same total cost

question

Properties of Isocosts

answer

question

3 equivalent Rules for LR cost min

answer

1. the Lowest isocost rule
2.the tangency rule: MRTS= -w/r
3.the Last- Dollar rule: (MPl/w)=(MPk/r)

question

the lowest isocost rule

answer

the firm minimizes its cost by using the combination of inputs on the isoquant that is on the lowest isocost line that touches the isoquant

question

the tangency rule

answer

at the minimum-cost bundle the isoquant is tangent to the isocost line. the slope of the isoquant and the slope of the isocost are equal

question

the last-dollar rule

answer

cost is minimized if inputs are chosen so that the last dollar spent on labor adds as much extra output as the last dollar spent on capital

question

u-shape

answer

a what shape is typical for the average cost curve in a perfectly competitive firm in the LR?

question

Returns to scale

answer

1.increasing RTS
2.Decreasing RTS
3.Constant RTS

question

increasing returns to scale

answer

when output increases more than in proportion to an increase in all inputs

question

decreasing returns to scale

answer

when output increases less than in proportion to an increase in all inputs

question

constant returns to scale

answer

when output increases directly in proportion to an increase in all inputs

question

equal to or below

answer

the LR average cost is always _____ to or ______ the SR average cost
(type to or in answer)

question

learning by doing

answer

refers to the productive skills and knowledge that workers and managers gain from experience

question

learning curve

answer

is the relationship between average costs ........ cumulative output

question

cumulative output

answer

the total number of units of output produced since the product was introduced

question

economies of scale and learning by doing

answer

is a firm is operating at a pint on its average cost curve where economies of scale exist, expanding output lowers costs for what two reasons

question

market types

answer

1. Perfect Competition
2. Monopolistic Competition
3. Oligopoly
4. Monopoly

question

perfect competition

answer

-has very large number of small firms
-sell the same standardized product
-easy entry and exit
-impossible to have non-price competition
-has no market power
-can make no long run economic profits

question

monopolistic competition

answer

-large number of relatively small firms
-differentiated products
-easy entry and exit
-possible to have non-price competition
-have low to high market power
-make no long run economic profits

question

oligopoly

answer

question

monopoly

answer

question

the firm's ability to control the price

answer

what is the single more important indicator of how competitive a market structure is?

question

price takers

answer

firms are this in perfect competition because there are so many firms and products are so identical

question

price makers

answer

a firm in this under a pure monopoly they have the ultimate pricing power

question

whether new firms can enter when profits exist

answer

what most directly affects whether or not a firm can earn economic profits in the long run?

question

zero

answer

because entry and exit are completely free under perfect competition long run economic profit is what?

question

barriers to entry

answer

what can a monopoly utilize to keep long run economic profits positive?

question

when a firm enters a market it answers what three questions

answer

1. how much should we produce?
2. if we produce that amount how much will we earn?
3.if a loss rather than a profit is incurred, will it be worthwhile to continue in this market in the long run?

question

P=MR=AR=MC

answer

in a perfectly competitive firm price is equal to what?

question

horizontal demand curve

answer

firms in a perfectly competitive market face what kind of demand curve?

question

downward sloping

answer

the industry in a perfectly competitive market will face what kind of demand curve?

question

MR=MC

answer

In a perfectly competitive frim how do we know where to produce so as to maximize profits or minimize losses?

question

fixed costs

answer

in the short run we must still pay what?

question

shut down

answer

a short run decision not to produce anything because of market conditions

question

exit

answer

a long-run decision to leave the market

question

P < minimum AVC

answer

in the short run we shut down if what?

question

P > AVC

answer

in the short run we continue to produce if what?

question

revenue loss=TR

answer

cost of exiting the market is

question

P < ATC

answer

firm decided to exit under what condition?

question

P > ATC

answer

firm decides to enter market under what condition?

question

the firm's long run supply curve is what?

answer

the portion of the its MC curve above the LRATC curve

question

If economic profits are earned in a competitive market, then over time

answer

firms will enter the market
it will shift the supply curve to the right causing a surplus
-this will put a downward pressure on prices until it reduces profits back to normal aka zero

question

if economic losses are being made in a market, over time

answer

firms will exit the market
it will shift the supply curve to the left causing a shortage
-this will put an upward pressure on prices until it increases profits back to normal levels

question

P=ATC

answer

zero economic profit occurs under what condition

question

the long run market supply curve is horizontal if

answer

1. all firms have identical costs
2. costs do not change as other firms enter or exit the market

question

if either of the two assumptions for a LR horizontal supply curve is not true than

answer

the long run supply curve slopes upward

question

competitive market summary

answer

profit maximization happens where MC=MR
P=MR
so P=MC

question

a monopoly produces what kinds of products?

answer

differentiated

question

monopolies are the ultimate price what?

answer

price maker

question

in a monopoly the relationship between price and revenue is affected by what?

answer

elasticity of demand

question

when demand is more _______ increases in prices will be met with proportionately _______ decreases in quantity sold and total revenue will ______

answer

elastic, bigger, fall

question

when demand is more _________, increases in prices will be met with proportionately ______ decreases in quantity sold and total revenue will _______

answer

inelastic, small, rise

question

profit maximizing quantity for a monopoly is where?

answer

where MR=MC

question

because a monopolist is the only firm in the market it will charge what for price?

answer

the most that demand will bear

question

the demand curve for a FIRM in a monopoly is what?

answer

downward sloping

question

price is what to marginal revenue in a monopoly

answer

P>MR

question

what is a key feature for monopolies?

answer

barriers to entry

question

technical barrier to entry

answer

exist when there are high start-up costs

question

Legal barriers to entry

answer

question

natural monopoly

answer

exists when one firm can service a market more cheaply than several firms can.

question

a monopoly does not have a what?

answer

supply curve

question

what is the closet that a monopoly has to a supply curve?

answer

the single point on the demand curve that corresponds to Q*

question

a monopoly can earn long run profit, what are they called?

answer

monopoly rents

question

how do yo calculate MR for a monopoly?

answer

MR= P-all the reductions in price necessary

question

why may monopolies experience lower or zero economic profit?

answer

1. resources spent to achieve monopoly profits such as ways to erect barriers to entry
2.lobbying expenses or legal fees to maintain barriers to entry or receive more favorable treatment

question

distributional effects

answer

the idea that economic profits go to the wealthy making the rich richer and the "poor" poorer
this is a common negative connotation towards monopolies

question

monopolies charge ______ price and produce ______ quantities than a perfectly competitive firm

answer

higher, lower

question

monopolistic competition

answer

has many firms and relatively easy entry and exit of new firms
source of their power is product differentiation
Q where MR=MC
P where Q corresponds to the demand curve

question

how are you successful under monopolistic competition market structure

answer

the firm must be constantly innovating to make the its product stand out

question

when the demand curve is steep

answer

demand is overall inelastic
if a monopoly raises price at profit maximizing qty few sales will be lost

question

when the demand curve is flat

answer

demand is overall elastic
is a monopoly raises price at profit maximizing qty many sales will be lost

question

learner index or price markup

answer

= (p-MC)/P
this measures the firm's market power
the larger the difference between price and marginal cost the larger the index

question

the learner index ranges between what?

answer

0 to 1

question

as elasticity of demand fall what happens to the learner index?

answer

it increases

question

things that reduce market power

answer

1. better substitutes
2.more firms
3.closer competition

question

cost advantage monopoly

answer

if a low cost firm sells at a price so low that other potential competitors with higher costs would lose money

question

natural monopolies

answer

one frim can produce the total output of the market at a lower cost than two or more firms could
happens because of economies of scale

question

how do governments create monopolies?

answer

1. making it difficult for new firms to obtain a license to operate
2. granting monopoly right to one firm
3. auctioning a monopoly to a private firm

question

patents

answer

is an exclusive right granted to the inventor of a new and useful product, process, substance, or design for a specified length of time

question

a good has a network externality if

answer

one person's demand depends on the consumption of a good by other

question

if a good has a positive network externality

answer

its value to a consumer grows as the number of units sol increases

question

critical mass of users

answer

this is required for a network to succeed

question

bandwagon effect

answer

a person places greater value on a good as more and more people possess it

question

snob effect

answer

a person places greater value on a good as fewer and fewer people possess it

question

price discrimination

answer

charging different prices to different customers or different groups of customers

question

price discrimination does what to profit

answer

it increases profits by using two channels
channel 1: higher prices for some
channel 2: attract new customers

question

conditions for price discrimination

answer

1.a firm must have market power
2.firm must identify groups with different price sensitivity
3. firm must prevent resale

question

price discrimination is based on what?

answer

question

perfect price discrimination

answer

the firm sells each unit at the maximum amount any customer is willing to pay

question

group price discrimination

answer

a firm charges each group of customers a different price, but it does not charge different prices within the group

question

Nonlinear price discrimination

answer

the firm charges a different price for larger purchases than for smaller purchases so that price paid varies according to the qty purchased

question

how do firms perfectly price discriminate?

answer

1.must have market power
2.must have full information about customers and their willingness to pay

question

when a firm is perfectly price discrimination price is equal to what?

answer

P=MR
this makes the firm's marginal revenue curve the same as the demand curve

question

realities of price discrimination

answer

1. perfect price discrimination is rarely fully achieved
2. firms can still increase profits with imperfect individual price discrimination

question

group price discrimination conditions

answer

question

separation by observable characteristics

answer

uses this when a firm believe that observable characteristics are associated with especially high or low reservation prices or demand elasticities

question

separation by action

answer

allows consumers to self-select the group they belong to depending on their opportunity cost of time

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