question
In the absence of any government regulation on price, if a firm has no power to set price on its own, one can safely conclude
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the demand curve for the firm's product is horizontal.
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If all conditions for a perfectly competitive market are met
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the firms' demand curves are horizontal.
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If a profit-maximizing firm finds that, at its current level of production, MR > MC, it will
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increase output.
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If a competitive firm finds that it maximizes short-run profits by shutting down, which of the following must be true?
answer
p < AVC for all levels of output
question
If a firm is a price taker, then its marginal revenue will always equal
answer
price
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For a monopoly, marginal revenue is less than price because
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the demand for the firm's output is downward sloping.
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If the inverse demand function for a monopoly's product is p = a - bQ, then the firm's marginal revenue function is
answer
a - 2bQ
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If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then profit maximization
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is achieved only by shutting down in the short run.
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If the demand for a firm's output is perfectly elastic, then the firm's Lerner Index equals
answer
zero
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A perfect price discriminator
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charges each buyer her reservation price
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Suppose all individuals are identical, and their monthly demand for Internet access from a certain leading provider can be represented as p = 5 - (1/2)q where p is price in $ per hour and q is hours per month. The firm faces a constant marginal cost of $1. Potential consumer surplus equals
answer
$16
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Perfect Competition
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the degree of competition in which there are many sellers in a market and none is large enough to dictate the price of a product
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What are the 3 basic assumptions of price discrimination?
answer
1. Price Taking
2. Product Homogeneity
3. Free entry and exit
2. Product Homogeneity
3. Free entry and exit
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How is price determined
answer
by the intersection of market demand and market supply
question
True or false:
Individual firms have some influence on the market price in perfect competition.
Individual firms have some influence on the market price in perfect competition.
answer
False: They have no influence.
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Who are the price takers in a perfectly competitive market?
answer
Individual firms.
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What is a price taker?
answer
A firms that has no influence of the market and thus takes the prices as given.
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what happens if you do not offer a competitive price?
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your customers will take their business elsewhere.
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In a perfectly competitive market, what does a consumer do?
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each consumer buys such a small proportion of total industry output that he or she has no impact on the market price, and therefore takes the price as given.
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What is product homogeneity?
answer
the product has essentially the same physical characteristics and quality as similar products from other suppliers. One product can easily be substituted for the other.
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Why is price homogeneity important?
answer
·It ensures that there is a single market price, consistent with supply-demand analysis.
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What is Free Entry?
answer
the condition under which there are no special costs that make it difficult for a firm to enter or exit an industry.
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When is demand price elastic?
answer
when the percentage decline in quantity demanded is greater than the percentage increase in price.
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What is Average Revenue?
answer
The revenue received for selling a good per unit of output sold, found by dividing total revenue by the quantity of output.
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What is Marginal Revenue?
answer
The change in revenue resulting from a one-unit increase in output.
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How is marginal revenue calcualted?
answer
by dividing the change in total revenue by the change in output quantity.
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What is the monopolists average revenue?
answer
the price it receives per unit sold—is precisely the market demand curve.
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What is occurring when marginal revenue is positive?
answer
revenue is increasing with quantity
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What is occurring when marginal revenue is negative?
answer
Revenue is decreasing.
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How is the demand curve written so that price is a function of quantity?
answer
P=a-bQ
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If the demand curve is written as P=a-bQ, how is Total Revenue written?
answer
PQ=aQ-bQ2
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If the demand curve is written as P=a-bQ, how is Marginal revenue written?
answer
d(PQ)/dQ=a-2bQ
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What is the total revenue far a firm in a perfectly competitive market?
answer
TR=P*Q
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What is the shut down condition?
answer
A rule that states "in the short run a firm should continue to operate if price exceeds average variable costs."
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When determining whether to shut down or not, what does a firm have to do?
answer
They have to compare total revenues to total costs.
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What happens if the market price faced by a firm in a perfectly competitive environment is about AVC but below AC.
answer
The firm should continue producing in the short run but exit in the long run.
question
What is the point where the MC curve crosses the AVC curve called?
answer
The shutdown point.
question
What are the profit equations?
answer
Π(q)=R(q)-C(q) and
ΔΠ/Δq=ΔR/Δq-ΔC/Δq=0
ΔΠ/Δq=ΔR/Δq-ΔC/Δq=0
question
What profit occurs, what does Marginal Revenue equal?
answer
Marginal costs.
question
What is the output rule?
answer
If a firm is producing any output, it should produce at the level at which marginal revenue equals marginal cost.
question
What does the demand curve facing a competitive firm look like?
answer
It is horizontal so that MR=P.
question
What is the general rule for profit maximization?
answer
A perfectly competitive firm should choose its output so that MC=P.
question
How does a competitive firm maximize its profit?
answer
By chooing an output q* at which its MC is equal to the price P (or MR) of it s product.
question
What happens to profit in the short run if their is a change in output?
answer
whether quantity falls or rises, profit will fall.
question
What is the equation for long run profit maximization?
answer
SMC=P=MR
question
What shape of a demand curve does does a firm face in the long run?
answer
A horizontal curve.
question
What is long run competitive equilibrium?
answer
When all firms in an industry are maximizing profit, no firm has an incentive to enter or exit, and price is such that quantity supplied equals quantity demanded.
question
What does the price elasticity of market supply measure?
answer
The sensitivity of industry output to market price.
question
What is the elasticity of supply (Es)?
answer
It is the percentage change in Quantity Supplied (Q) in response to a 1% change in Price (P)
question
What is the equation for elasticity of supply?
answer
Es=(ΔQ/Q)/(ΔP/P)
question
True or False:
Because marginal cost curves are upward sloping, the short-run elasticity of supply is always positive.
Because marginal cost curves are upward sloping, the short-run elasticity of supply is always positive.
answer
True
question
True or False:
When the MC increases rapidly in response to an increase in output, the Es is high?
When the MC increases rapidly in response to an increase in output, the Es is high?
answer
False, the Es is low.
question
When is supply relatively elastic in the short run?
answer
When MC increases slowly in response to an increase in output.
question
What is Marginal Profit (MP)?
answer
the increase in profits resulting from the production of one additional unit.
question
How do you calculate MP?
answer
MP=MR-MC
question
What is the MR?
answer
The slope of the total revenue curve.
question
What is MC?
answer
The slope of the total cost curve.
question
What does the Lerner Index do?
answer
It measures the monoply power calculated as excess of price over MC as a fraction of price.
question
What is the equation for the Lerne index?
answer
L=(P-MC)/P=-1/Ed
question
What is the equation for elasticity of demand?
answer
Ed=(P-MC)/P
question
True or False:
The elasticity of demand limits the potential for monopoly power?
The elasticity of demand limits the potential for monopoly power?
answer
True, the firm's own demand will be at least as elastic as the market demand.
question
True or False:
If there are many firms in a market, it is possible that any one firms will significantly affect price?
If there are many firms in a market, it is possible that any one firms will significantly affect price?
answer
False
question
What is price discrimination?
answer
The act of selling the same good at different prices to different people.
question
What is a reservation price?
answer
The maximum price a consumer is willing to pay.
question
What is the first degree of price discrimination?
answer
The practice of charging each customer their reservation price.
question
What is the second degree of price discrimination?
answer
the practice of charging different prices per unit for different quantities of the same good or service.
question
What is the third degree of price discrimination?
answer
practice of dividing consumers into two or more groups with separate demand curves and charging different prices to each group
question
What is intertemporal price discrimination?
answer
Practice of separating consumers with different demand functions into different groups by charging different prices at different points in time.
question
What is a monopsony?
answer
When there is only one buyer in a market.
question
How do you calculate consumer surplus?
answer
=Max. Price willing to pay - Actual Price
question
How do you calculate Producer Surplus
answer
= TR - TC
question
What is consumer surplus?
answer
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
question
What is producer surplus?
answer
the amount a seller is paid for a good minus the seller's cost of providing it
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