Final Microeconomics - Assignment Essays

question

Total revenue

answer

the amount a firm receives for the sale of its output

question

Total cost

answer

the market value of the inputs a firm uses in production

question

Profit

answer

total revenue minus total cost

question

Profit =

answer

total revenue - total cost

question

Explicit costs

answer

input costs that require an outlay of money by the firm

question

Implicit costs

answer

input costs that do not require an outlay of money by the firm

question

You need $100,000 to start your business, the interest-rate is 5%. In case one, you borrow $100,000, what is the explicit & implicit cost?

answer

EC: 100,000 x 0.05 = $5000
IC: None

question

You need $100,000 to start your business, the interest-rate is 5%. In case two, you use $40,000 and borrow $60,000, what is the explicit & implicit cost?

answer

EC:60,000 x 0.05 = $3000
IC: 40,000 x 0.05 = $2000
Total = $5000

question

Economic profit

answer

total revenue minus total cost, including both explicit and implicit costs

question

Accounting profit

answer

total revenue minus total explicit cost

- accounting profit ignores implicit costs, so it's higher than economic profit.

question

Production function

answer

the relationship between quantity of inputs used to make a good and the quantity of output of that good

question

Marginal product

answer

the increase in input that arises from an additional unit of output

question

Marginal product of labor

answer

Change in output/ change in labor

question

Diminishing marginal product

answer

the property whereby the marginal product of an input declines as the quantity of the input increases

question

Marginal Cost (MC)

answer

Is the increase in total cost from producing one more unit

question

Fixed Costs (FC)

answer

does not vary with the quantity of output produced

- ex: Cost of equipment, loan payments, and rent

question

Variable costs

answer

vary with the quantity produced

- ex: cost of materials

question

Total costs =

answer

fixed costs + variable costs

question

Economies of scale

answer

A firm experiences this when long run average total costs fall as it increases production.

question

Constant returns to scale

answer

A firm experiences this when it can increase production without changing long run average total cost.

question

Diseconomies of scale

answer

A firm experiences this one long run average total cost increases as it increases production.

question

Characteristics of perfect competition

answer

1. Many buyers and many sellers.
2. The goods offered for sale are largely the same.
3. Firms can freely enter or exit the market.

- because of 1 and 2, each buyer and seller is a price taker - takes the price as given

question

Competitive market (firm)

answer

They try to maximize profit.

question

Competitive Market (profit)

answer

Profit equals total revenue - total cost.

question

Competitive market (total revenue)

answer

Total revenue equals price x quantity

- proportional to the amount of output.

question

Competitive market (average revenue)

answer

Average revenue equals total revenue / the quantity sold.

question

Competitive market (marginal revenue)

answer

Marginal revenue equals change in total revenue From an additional unit sold

question

For competitive firms

answer

AR=P
MR=P

question

MR = P for a Competitive Firm

answer

A competitive firm can keep increasing its output without affecting the market price.

So, each one-unit increase in Q causes revenue to rise by P, i.e., MR = P.

MR = P is only true for firms in competitive markets.

question

Profit Maximization

answer

Produce quality where total revenue minus total cost is greatest.

question

Compare marginal revenue with marginal cost

answer

•If MR > MC -increase production
•If MR < MC -decrease production
•Maximize profit where MR = MC

question

The marginal cost curve and the firm supply decision shows as

answer

- MC curve is upward sloping
- ATC curve is U-shaped
- MC curve crosses the ATC curve at the minimum of ATC curve
- The price line is horizontal: P = AR = MR

question

Rules for profit maximization

answer

- If MR > MC, firm should increase output
- If MC > MR, firm should decrease output
- If MR = MC, profit-maximizing level of output

question

Marginal cost curve

answer

- Determines the quantity of the good the firm is willing to supply at any price
- Is the supply curve

question

Shut down

answer

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

- Firm still has to pay fixed costs.

question

Exit

answer

-Long-run decision to leave the market
-Firm doesn't have to pay any costs

question

The firms short run decision to shut down is if

answer

TR<VC (or P<AVC)

question

Competitive firm short run supply curve is

answer

The portion of its marginal cost curve analyze above average variable cost.

question

Short run

answer

- Market supply with a fixed number of firms.
- Each firm supplies quantity where P= MC.
- For P > AVC: the supply curve is MC curve

question

If P > AVC, firm should

answer

produce Q where P = MC

question

If P < AVC, firm should

answer

shut down

question

Sunk Cost

answer

a cost that has already been committed and cannot be recovered.

- should be ignored when making decisions.
- don't cry over spilled milk/let bygones be bygones.
- in the short run, fixed costs are sunk costs.

question

Firms long run decision; exit the market if

answer

Total revenue < total cost (TR< TC or P<ATC)

question

Firms long run decision; enter the market if

answer

Total revenue > total cost (TR>TC or P>ATC)

question

If P>ATC

answer

Firms make positive profit and new firms enter the market.

question

If P<ATC

answer

Firms make a negative profit and exit the market.

question

Process of entry and exit ends when

answer

-Firms still in market make zero economic profit (P = ATC)

question

Long on supply curve is perfectly

answer

Elastic and horizontal at minimum ATC

question

The firms LR supply curve is

answer

the portion of its MC curve above LRATC

question

In the LR, the number of firms can change due to

answer

entry and exit

question

If existing firms earn positive economic profit

answer

-new firms enter, SR market supply shifts right
-P falls, reducing profits and slowing entry

question

If existing firms incur losses

answer

-some firms exit, SR market supply shifts left
-P rises, reducing remaining firms' losses

question

In the long run, the typical firm earns

answer

zero profit

question

The LR market supply curve is

answer

horizontal at P = minimum ATC

question

In Demand, a firm begins long run equilibrium but

answer

Then an increase in demand raises price, leading to a shift to the right and short run profits from the firm.

question

In supply, a firm begins long run equilibrium

answer

and overtime profits induce entry shifting supply to the right and reducing price, driving profits to zero and restoring long run equilibrium

question

Long run supply curve might

answer

Slope upward.

- some resources used in production may be available only in limited quantities.
- Increase in quantity supplied - increase in cost - increase in price.

question

Long run supply curve is

answer

More elastic than short run supply curve

question

Monopoly

answer

a firm that is the sole seller of a product without close substitutes

question

The key difference of a monopoly firm is

answer

It has market power, the ability to influence the market price of the product it's cells. A competitive firm has no market power.

question

The main cause of monopolies is

answer

barriers to entry- other firms cannot enter the market

question

Three sources of barriers to entry

answer

1. A single firm owns a key resource.
- example, Debeers owns most of the worlds diamond mines

2. The govt gives a single firm the exclusive right to produce the good.
- patents, copyright laws

3. Natural monopoly
- A single firm can produce the entire market Q at lower cost and could several firms

question

Natural monopoly

answer

a single firm can produce the entire market Q at lower cost than could several firms

question

In a competitive market, the market curve slopes

answer

Downward; But the demand curve for any individual firms product is horizontal at the market price. The firm can increase Q without lowering P, so MR= P for the competitive firm.

question

In contrast to competitive market, a monopolist is

answer

The only seller, so it faces the market demand curve. To sell a larger Q, the firm must reduce P. So MR ≠ P.

question

Which of the following is not a reason for the existence of a monopoly?
A). Sole ownership of a key resource
B). Patents
C). Copy rights
D). Diseconomies of scale

answer

D). Diseconomies of scale

question

Increasing Q has two effects on revenue:

answer

1. output effect: higher output raises revenue
2. price effect: lower price reduces revenue

question

Output affect

answer

Higher output raises revenue

question

Price affect

answer

Lower price reduces revenue

question

To sell a larger Q, the monopolist must

answer

reduce the price on all the units it sells, MR<P

question

MR could even be negative if

answer

The price effect exceeds the output effect

question

Like a competitive firm, a monopolist maximizes profit by producing the quantity where

answer

MR = MC

question

As with a competitive firm, the monopolist's profit equals

answer

(P-ATC) x Q

question

A competitive firm

answer

- takes P as given
- has a supply curve that shows how its Q depends on P

question

A monopoly firm

answer

- Is a price maker not a price taker. Q does not depend on P,
- Q and P are jointly determined by MC, MR and the demand curve.
- hence no supply curve for monopoly

question

In order to sell more of its product, a monopolist must
a. sell to the government.
b. sell in international markets.
c. lower its price.
d. use its market power to force up the price of complementary products.

answer

c. lower its price.

question

In a competitive market equilibrium

answer

P = MC and total surplus is maximized

question

In the monopoly equilibrium

answer

P>MR=MC

question

Price discrimination

answer

selling the same good at different prices to different buyers

question

The characteristic used in price discrimination is willingness to pay

answer

A firm can increase profit by charging a higher price to buyers with higher WTP

question

In the real world, pure monopoly is

answer

rare; Yet many firms have market power due to selling a unique variety of products and having a large market share with a few competitors.

question

In many cases, most of the results include

answer

Mock up of the price of a marginal cost and deadweight loss

question

Factors of production

answer

Land, labor, and capital: the equipment and structures used to produce goods and services

question

Capital

answer

The equipment and structures used to produce goods and services

question

Prices in quantities of these inputs are

answer

Determined by supply and demand in factor markets

question

Derived demand

answer

Demand for a factor of production derived from a firm decision to supply a good in another market

question

Two assumptions

answer

1. all markets are competitive
2. firms care only about maximizing profits

question

Production function

answer

the relationship between quantity of inputs used to make a good and the quantity of output of that good

question

Marginal product of labor

answer

the increase in the amount of output from an additional unit of labor

question

Value of the marginal product

answer

the marginal product of an input times the price of the output (P x MPL) = VMPL

question

Labor demand curve=

answer

VMPL Curve

question

Anything that increases P or MPL at each L will

answer

Increase VMPL and shift labor demand curve upward.

question

Things that shift the labor demand curve

answer

Changes in the output price, P
Technological change (affects MPL)
The supply of other factors (affects MPL)

question

The marginal product of labor is defined as the change in
A). Output per additional unit of revenue
B). Output per additional unit of labor
C). Revenue per additional unit of output
D). Revenue per additional unit of labor

answer

B). Output per additional unit of labor

question

Marginal cost

answer

the cost of producing an additional unit of output

question

MC =

answer

W/MPL

question

The competitive firm's rule for demanding labor

answer

P x MPL= W

question

Divide both sides by MPL

answer

P= W/MPL - P=MC

question

When deciding whether to hire an additional worker, firms need only consider how the additional worker would affect

A). Costs
B). Revenue
C). Output
D). Profit

answer

C). Output

question

Trade off between work and leisure

answer

The more time you spend working, the less time you have for leisure

question

Changes in taste or attitudes regarding the labor leader trade-off

answer

Opportunities for workers and other labor markets and immigration

question

Monopsony

answer

Market with only one buyer

question

A monopsony employer can use it to market power to increase its profit by

answer

Paying lower wages

question

Monopsony factors

answer

- Local labor markets are highly concentrated, workers have a hard time moving.
- noncompete clauses are prevalent

Solutions:
- Anti-trust policies/unions and other work or organizations

1 of 104

question

Total revenue

answer

the amount a firm receives for the sale of its output

question

Total cost

answer

the market value of the inputs a firm uses in production

question

Profit

answer

total revenue minus total cost

question

Profit =

answer

total revenue - total cost

question

Explicit costs

answer

input costs that require an outlay of money by the firm

question

Implicit costs

answer

input costs that do not require an outlay of money by the firm

question

You need $100,000 to start your business, the interest-rate is 5%. In case one, you borrow $100,000, what is the explicit & implicit cost?

answer

EC: 100,000 x 0.05 = $5000
IC: None

question

You need $100,000 to start your business, the interest-rate is 5%. In case two, you use $40,000 and borrow $60,000, what is the explicit & implicit cost?

answer

EC:60,000 x 0.05 = $3000
IC: 40,000 x 0.05 = $2000
Total = $5000

question

Economic profit

answer

total revenue minus total cost, including both explicit and implicit costs

question

Accounting profit

answer

total revenue minus total explicit cost

- accounting profit ignores implicit costs, so it's higher than economic profit.

question

Production function

answer

the relationship between quantity of inputs used to make a good and the quantity of output of that good

question

Marginal product

answer

the increase in input that arises from an additional unit of output

question

Marginal product of labor

answer

Change in output/ change in labor

question

Diminishing marginal product

answer

the property whereby the marginal product of an input declines as the quantity of the input increases

question

Marginal Cost (MC)

answer

Is the increase in total cost from producing one more unit

question

Fixed Costs (FC)

answer

does not vary with the quantity of output produced

- ex: Cost of equipment, loan payments, and rent

question

Variable costs

answer

vary with the quantity produced

- ex: cost of materials

question

Total costs =

answer

fixed costs + variable costs

question

Economies of scale

answer

A firm experiences this when long run average total costs fall as it increases production.

question

Constant returns to scale

answer

A firm experiences this when it can increase production without changing long run average total cost.

question

Diseconomies of scale

answer

A firm experiences this one long run average total cost increases as it increases production.

question

Characteristics of perfect competition

answer

question

Competitive market (firm)

answer

They try to maximize profit.

question

Competitive Market (profit)

answer

Profit equals total revenue - total cost.

question

Competitive market (total revenue)

answer

Total revenue equals price x quantity

- proportional to the amount of output.

question

Competitive market (average revenue)

answer

Average revenue equals total revenue / the quantity sold.

question

Competitive market (marginal revenue)

answer

Marginal revenue equals change in total revenue From an additional unit sold

question

For competitive firms

answer

AR=P
MR=P

question

MR = P for a Competitive Firm

answer

question

Profit Maximization

answer

Produce quality where total revenue minus total cost is greatest.

question

Compare marginal revenue with marginal cost

answer

•If MR > MC -increase production
•If MR < MC -decrease production
•Maximize profit where MR = MC

question

The marginal cost curve and the firm supply decision shows as

answer

- MC curve is upward sloping
- ATC curve is U-shaped
- MC curve crosses the ATC curve at the minimum of ATC curve
- The price line is horizontal: P = AR = MR

question

Rules for profit maximization

answer

- If MR > MC, firm should increase output
- If MC > MR, firm should decrease output
- If MR = MC, profit-maximizing level of output

question

Marginal cost curve

answer

- Determines the quantity of the good the firm is willing to supply at any price
- Is the supply curve

question

Shut down

answer

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

- Firm still has to pay fixed costs.

question

Exit

answer

-Long-run decision to leave the market
-Firm doesn't have to pay any costs

question

The firms short run decision to shut down is if

answer

TR<VC (or P<AVC)

question

Competitive firm short run supply curve is

answer

The portion of its marginal cost curve analyze above average variable cost.

question

Short run

answer

- Market supply with a fixed number of firms.
- Each firm supplies quantity where P= MC.
- For P > AVC: the supply curve is MC curve

question

If P > AVC, firm should

answer

produce Q where P = MC

question

If P < AVC, firm should

answer

shut down

question

Sunk Cost

answer

question

Firms long run decision; exit the market if

answer

Total revenue < total cost (TR< TC or P<ATC)

question

Firms long run decision; enter the market if

answer

Total revenue > total cost (TR>TC or P>ATC)

question

If P>ATC

answer

Firms make positive profit and new firms enter the market.

question

If P<ATC

answer

Firms make a negative profit and exit the market.

question

Process of entry and exit ends when

answer

-Firms still in market make zero economic profit (P = ATC)

question

Long on supply curve is perfectly

answer

Elastic and horizontal at minimum ATC

question

The firms LR supply curve is

answer

the portion of its MC curve above LRATC

question

In the LR, the number of firms can change due to

answer

entry and exit

question

If existing firms earn positive economic profit

answer

-new firms enter, SR market supply shifts right
-P falls, reducing profits and slowing entry

question

If existing firms incur losses

answer

-some firms exit, SR market supply shifts left
-P rises, reducing remaining firms' losses

question

In the long run, the typical firm earns

answer

zero profit

question

The LR market supply curve is

answer

horizontal at P = minimum ATC

question

In Demand, a firm begins long run equilibrium but

answer

Then an increase in demand raises price, leading to a shift to the right and short run profits from the firm.

question

In supply, a firm begins long run equilibrium

answer

and overtime profits induce entry shifting supply to the right and reducing price, driving profits to zero and restoring long run equilibrium

question

Long run supply curve might

answer

Slope upward.

- some resources used in production may be available only in limited quantities.
- Increase in quantity supplied - increase in cost - increase in price.

question

Long run supply curve is

answer

More elastic than short run supply curve

question

Monopoly

answer

a firm that is the sole seller of a product without close substitutes

question

The key difference of a monopoly firm is

answer

It has market power, the ability to influence the market price of the product it's cells. A competitive firm has no market power.

question

The main cause of monopolies is

answer

barriers to entry- other firms cannot enter the market

question

Three sources of barriers to entry

answer

question

Natural monopoly

answer

a single firm can produce the entire market Q at lower cost than could several firms

question

In a competitive market, the market curve slopes

answer

Downward; But the demand curve for any individual firms product is horizontal at the market price. The firm can increase Q without lowering P, so MR= P for the competitive firm.

question

In contrast to competitive market, a monopolist is

answer

The only seller, so it faces the market demand curve. To sell a larger Q, the firm must reduce P. So MR ≠ P.

question

Which of the following is not a reason for the existence of a monopoly?
A). Sole ownership of a key resource
B). Patents
C). Copy rights
D). Diseconomies of scale

answer

D). Diseconomies of scale

question

Increasing Q has two effects on revenue:

answer

1. output effect: higher output raises revenue
2. price effect: lower price reduces revenue

question

Output affect

answer

Higher output raises revenue

question

Price affect

answer

Lower price reduces revenue

question

To sell a larger Q, the monopolist must

answer

reduce the price on all the units it sells, MR<P

question

MR could even be negative if

answer

The price effect exceeds the output effect

question

Like a competitive firm, a monopolist maximizes profit by producing the quantity where

answer

MR = MC

question

As with a competitive firm, the monopolist's profit equals

answer

(P-ATC) x Q

question

A competitive firm

answer

- takes P as given
- has a supply curve that shows how its Q depends on P

question

A monopoly firm

answer

- Is a price maker not a price taker. Q does not depend on P,
- Q and P are jointly determined by MC, MR and the demand curve.
- hence no supply curve for monopoly

question

answer

c. lower its price.

question

In a competitive market equilibrium

answer

P = MC and total surplus is maximized

question

In the monopoly equilibrium

answer

P>MR=MC

question

Price discrimination

answer

selling the same good at different prices to different buyers

question

The characteristic used in price discrimination is willingness to pay

answer

A firm can increase profit by charging a higher price to buyers with higher WTP

question

In the real world, pure monopoly is

answer

rare; Yet many firms have market power due to selling a unique variety of products and having a large market share with a few competitors.

question

In many cases, most of the results include

answer

Mock up of the price of a marginal cost and deadweight loss

question

Factors of production

answer

Land, labor, and capital: the equipment and structures used to produce goods and services

question

Capital

answer

The equipment and structures used to produce goods and services

question

Prices in quantities of these inputs are

answer

Determined by supply and demand in factor markets

question

Derived demand

answer

Demand for a factor of production derived from a firm decision to supply a good in another market

question

Two assumptions

answer

1. all markets are competitive
2. firms care only about maximizing profits

question

Production function

answer

the relationship between quantity of inputs used to make a good and the quantity of output of that good

question

Marginal product of labor

answer

the increase in the amount of output from an additional unit of labor

question

Value of the marginal product

answer

the marginal product of an input times the price of the output (P x MPL) = VMPL

question

Labor demand curve=

answer

VMPL Curve

question

Anything that increases P or MPL at each L will

answer

Increase VMPL and shift labor demand curve upward.

question

Things that shift the labor demand curve

answer

Changes in the output price, P
Technological change (affects MPL)
The supply of other factors (affects MPL)

question

answer

B). Output per additional unit of labor

question

Marginal cost

answer

the cost of producing an additional unit of output

question

MC =

answer

W/MPL

question

The competitive firm's rule for demanding labor

answer

P x MPL= W

question

Divide both sides by MPL

answer

P= W/MPL - P=MC

question

When deciding whether to hire an additional worker, firms need only consider how the additional worker would affect

A). Costs
B). Revenue
C). Output
D). Profit

answer

C). Output

question

Trade off between work and leisure

answer

The more time you spend working, the less time you have for leisure

question

Changes in taste or attitudes regarding the labor leader trade-off

answer

Opportunities for workers and other labor markets and immigration

question

Monopsony

answer

Market with only one buyer

question

A monopsony employer can use it to market power to increase its profit by

answer

Paying lower wages

question

Monopsony factors

answer

- Local labor markets are highly concentrated, workers have a hard time moving.
- noncompete clauses are prevalent

Solutions:
- Anti-trust policies/unions and other work or organizations

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