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Total Revenue
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the amount that a firm receives from the sale of goods and services; calculated as the quantity sold multiplied by the price paid for each unit
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Total cost
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the amount that a firm pays for all of the inputs that go into producing goods and services
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Profit
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the difference between total revenue and total cost
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Revenue
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= Quantity x Price
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Fixed costs
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costs that do not depend on the quantity of output produced
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Variable costs
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costs that depend on the quantity of output produced
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Explicit costs
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costs that require a firm to spend money
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Implicit costs
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costs that represent forgone opportunities
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Accounting profit
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total revenue minus total explicit cost
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Economic profit
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total revenue minus all opportunity costs, explicit and implicit
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Production function
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the relationship between quantity of inputs and the resulting quantity of outputs
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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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a principle stating that the marginal product of an input decreases as the quantity of the input increases
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Average Fixed Cost (AFC)
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fixed cost divided by the quantity of output
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Average Variable Cost (AVC)
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variable cost divided by the quantity of output
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Average Total Cost (ATC)
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total costs divided by quantity of output
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Marginal Cost (MC)
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the additional cost incurred by a firm when it produces one additional unit of output
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Economies of scale
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returns that occur when an increase in the quantity of output decreases average total cost
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diseconomies of scale
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returns that occur when an increase in the quantity of output increases average total cost
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Constant returns to scale
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returns that occur when average total cost does not depend on the quantity of output
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Efficient scale
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the quantity of output at which average total cost is minimized
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Competitive market
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a market in which fully informed, price-taking buyers and sellers easily trade a standardized good or service
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Market power
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the ability to alter the market price of a good or service
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Characteristics of competitive market
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Buyers and sellers can't affect prices—the going price is the going price.
Goods are standardized.
Buyers and sellers have full information.
There are no transaction costs.
Goods are standardized.
Buyers and sellers have full information.
There are no transaction costs.
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Average revenue
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revenue generated per product, calculated as total revenue divided by the quantity sold
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Marginal revenue
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the revenue generated by selling an additional unit of a good
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Monopoly
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a firm that is the only producer of a good or service with no close substitutes
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Barriers to enter monopoly markets
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Scarce resources, economies of scale, government intervention, aggressive tactics
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Natural monopoly
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a market in which a single firm can produce, at a lower cost than multiple firms, the entire quantity of output demanded
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Monopoly demand curve
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In a perfectly competitive market, the demand curve for the market as a whole slopes downward, reflecting the inverse relationship between price and quantity (as price decreases, quantity
demanded increases)
demanded increases)
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Effects on monopolies total revenue
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Quantity effect and price effect
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Quantity effect
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The increase in total revenue due to the money brought in by the sale of additional units.
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Price effect
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The decrease in total revenue that occurs because the increase in quantity requires a lower price.
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Welfare costs of monopoly
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At any higher quantity, total surplus is reduced because the increase in consumer surplus
is less than the decrease in producer surplus.
At any lower quantity, total surplus is also reduced—the decrease in consumer surplus is
greater than the increase in producer surplus.
is less than the decrease in producer surplus.
At any lower quantity, total surplus is also reduced—the decrease in consumer surplus is
greater than the increase in producer surplus.
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Price discrimination
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the practice of charging customers different prices for the same good
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A firm has market power if it can
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influence the market price of the good it sells
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Which of the following is not a characteristic of a competitive market?
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Free entry is limited.
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Why does a firm in a competitive industry charge the market price?
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If a firm charges less than the market price, it loses potential revenue.
If a firm charges more than the market price, it loses all its customers to other firms.
The firm can sell as many units of output as it want to at the market price.
If a firm charges more than the market price, it loses all its customers to other firms.
The firm can sell as many units of output as it want to at the market price.
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Suppose the elasticity of demand for potatoes is 0.30 and that the potato market is perfectly competitive. The individual potato farmer's elasticity of demand
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Will be infinite
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If a firm in a perfectly-competitive market triples the number of units of output sold, then total revenue will
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exactly triple.
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Suppose that in a competitive market the equilibrium price is $2.50 per unit. What is marginal revenue for the last unit sold by a firm in this market?
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Exactly $2.50; Remember that marginal revenue is constant and equal to price (which is also constant) for a competitive firm.
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7. Which of the following statements is correct?
A. For all firms, marginal revenue equals the price of the good at all quantities of output.
B. Only for competitive firms does average revenue equal the price of the good.
C. Marginal revenue can be calculated as total revenue divided by the quantity sold.
D. Only for competitive firms does average revenue equal marginal revenue.
A. For all firms, marginal revenue equals the price of the good at all quantities of output.
B. Only for competitive firms does average revenue equal the price of the good.
C. Marginal revenue can be calculated as total revenue divided by the quantity sold.
D. Only for competitive firms does average revenue equal marginal revenue.
answer
D
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Firms operating in competitive markets produce output levels where marginal revenue equals
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price, average revenue, total revenue divided by output
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For any given price, a firm in a competitive market will maximize profit by selecting the level of output at which price intersects the
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marginal cost curve
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For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $10 per unit and a marginal cost of $7 per unit. It follows that the
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production of the 100th unit of output increases the firm's profit by $3. (10-7=3)
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Laura is a gourmet chef who runs a small catering business in the competitive industry of making wedding cakes. Laura sells 20 wedding cakes per month. Her monthly total revenue is $5,000. The marginal cost of her last wedding cake was $300 and her marginal cost curve is increasing throughout the entire range of output possibilities. In order to maximize profits, Laura should
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make fewer than 20 wedding cakes per month; the price at which Laura sells wedding cakes is 5,000 ÷ 20 = $250 per cake, which since the wedding industry is competitive (it is stated) means $250 per cake is also Laura's marginal revenue per cake. Unfortunately, since the marginal cost of Laura's last cake was $300, she lost money on it. If Laura reduces the number of wedding cakes she makes, her marginal revenues won't change (since marginal revenues are equal to price, which for a competitive firm remains constant) but her marginal costs will decrease since it is stated that her marginal cost curve is increasing. Hence, her profits will be greater/her losses smaller.
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A competitive firm sells its output for $20 per unit. The 50th unit of output that the firm produces has a marginal cost of $22. Which of following is not necessarily true?
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Production of the 50th unit of output increases the firm's average variable cost by $0.44.
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Which of the following expressions is correct for a competitive firm?
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Profit = quantity of output × (price - average total cost)
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A firm that shuts down has to pay
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its fixed costs but not its variable costs.
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Competitive firms that earn a loss in the short run should
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shut down if P < AVC
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When total revenue is less than total variable costs, a firm in a competitive market will
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Shut down
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Suppose you bought a ticket to a football game for $30 and that you place a $35 value on seeing the game. If you lose the ticket, then what is the maximum price you should pay for another ticket?
answer
$35
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Which of the following are necessary characteristics of a monopoly?
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The firm is the sole seller of its product
The firm's good is highly differentiated/ does not have close substitutes.
The firm's good is highly differentiated/ does not have close substitutes.
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The fundamental source of monopoly power is
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barriers to entry
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Which of the following is not considered a barrier to entry into a monopolized market?
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. selling a newly invented or introduced type of product (e.g., being the first firm to sell mobile phones)
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The laws governing patents and copyrights
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create and protect monopolies.
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Authors are allowed to be monopolists in the sale of their books in order to
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encourage authors to write more and better books.
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Natural monopolies are the result of
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the presence of economies of scale which exist over the entire relevant range of firm output.
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. If government officials were to break a natural monopoly up into several smaller firms, then
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the average costs of production across the industry will increase.
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When a monopolist increases the amount of output it produces and sells, the price of that output
answer
decreases.
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If a monopolist lowers its price, its
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marginal revenue must decrease.
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Suppose a firm has a monopoly on the sale of widgets and faces a downward-sloping demand curve. When selling the 100th widget, the firm will always receive
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less marginal revenue on the 100th widget than it received on the 99th widget.
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If a monopolist can sell seven units when the price is $4 per unit and eight units when the price is $3 per unit, then its marginal revenue from selling the eighth unit is equal to
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-$4; TR(7) = 4 × 7 = $28 and TR(8) = 3 × 8 = $24, so MR(8) = [TR(8) - TR(7)] / (8 - 7) = (24 - 28) / 1 = - 4 / 1 = -$4 per unit. Note also that a monopolist's marginal revenue can definitely be negative (though it would not want it to be)
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When a monopolist increases the number of units it sells, there are two effects on total revenue. That is, marginal revenue can be decomposed into two parts. These are the
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quantity effect and the price effect.
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For an ordinary, single-price monopolist, marginal revenue for all units beyond the first is
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less than price because of the price effect.
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As the monopolist increases its output quantity, the price effect on its total revenue is
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negative, but the quantity effect is positive
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As the monopolist increases output quantity, total revenue will
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increase if the quantity effect outweighs the price effect.
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For a monopoly, the level of output at which marginal revenue equals zero is also the level of output at which
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total revenue is maximized
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For a profit-maximizing monopolist
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P>MR=MC
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A reduction in a monopolist's fixed costs would
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not effect the profit-maximizing price or quantity.
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A profit-maximizing monopolist charges a price of $12 per unit. The intersection of the marginal revenue and marginal cost curves occurs where output is 10 units and marginal cost is $6 per unit. Average total cost for 10 units of output is $5 per unit. What is the monopolist's profit?
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$70; Unit profit is P(Q) - ATC(Q) = P(10) - ATC(10) = 12 - 5 = $7, and total profit is unit profit times quantity, i.e., 7 × 10 = $70.
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The efficient level of production in a market occurs where the marginal cost curve intersects
answer
Demand
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A monopolist produces
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less than the efficient quantity of output, but at a higher price than in a competitive market.
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Ordinary monopolist behavior prevents some mutually beneficial trades from taking place. These unrealized mutually beneficial trades are
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a deadweight loss to society
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The monopolist's cost curves differ from those of a perfectly-competitive firm in that the monopolist's
answer
Actually, market structure does not affect the shape of a firm's cost curves, unlike the way it does affect the shape of its revenue curves.
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For an ordinary-single price monopolist, marginal revenue is
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less than price, whereas marginal revenue is equal to price for a perfectly competitive firm.
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The demand and marginal revenue curves faced by a monopolist are different from those faced by a perfectly-competitive firm in that the monopolist's
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marginal revenue curve is downward-sloping instead of flat.
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When a perfectly-competitive firm increases its output, total revenue exclusively
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increases, because there is no price effect
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The presence of monopoly in a market causes
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some amount of total surplus to be lost as compared to the competitive outcome.
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The practice of selling goods with the same marginal cost to different customers at different prices is known as
answer
price discrimination
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Round-trip airline tickets are usually cheaper if you stay over a Saturday night before you fly back. What is the reason for this price discrepancy?
answer
Airlines are practicing (imperfect) price discrimination to raise their profits.
Airlines charge different rates based on the different natures of peoples' travel needs.
Airlines are attempting to charge people based on their willingness to pay.
Airlines charge different rates based on the different natures of peoples' travel needs.
Airlines are attempting to charge people based on their willingness to pay.
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Perfect price discrimination
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eliminates deadweight loss
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A monopolist's profits with price discrimination will be
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higher than if the firm charged just one price, because the firm will capture more consumer surplus.
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Which of the following statements comparing monopoly with perfect competition is correct?
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With perfect price discrimination, the total surplus under monopoly can be the equal in size as under perfect competition.
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In reality, perfect price discrimination is
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rarely possible
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Which of the following statements is not correct?
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Antitrust laws automatically prevent mergers between companies that produce similar products.
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The U.S. government has used antitrust law
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to break up monopolies and limit monopoly power.
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In confronting the issue of monopoly, the primary objective is to
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approximate the results of the competitive market
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Unregulated natural monopolies
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can capture profits by restricting output.
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Which of the following statements is not correct?
A. The government may use antitrust laws to break up an existing company to improve competition.
B. The government may break up a natural monopoly in order to lower the price charged to customers.
C. Private ownership of natural-monopoly firms is typically preferred to public ownership.
D. Sometimes the best strategy is for the government to do nothing about monopoly inefficiency because the "fix" may be worse than the problem.
A. The government may use antitrust laws to break up an existing company to improve competition.
B. The government may break up a natural monopoly in order to lower the price charged to customers.
C. Private ownership of natural-monopoly firms is typically preferred to public ownership.
D. Sometimes the best strategy is for the government to do nothing about monopoly inefficiency because the "fix" may be worse than the problem.
answer
B. The government may break up a natural monopoly in order to lower the price charged to customers.
question
At Rick's Cafe & Bakery, the cost to make a homemade chocolate cake is constant at $3 per cake. As a result of selling three cakes, Rick experiences a producer surplus in the amount of $19.50. Rick must be earning total revenue of _____ and charging a price of _____ per cake.
answer
If Rick sold three cakes with a constant marginal cost of $3 each, his total variable cost must be $9. If his producer surplus was $19.50, then his total revenue would be 9 + 19.50 = $28.50. (Remember the formula producer surplus = total revenue - total variable costs, i.e., PS = TR - TVC, then solve for total revenue). Finally, if total revenue was $28.50 and Q = 3 cakes, then P = 28.50 ÷ 3 = $9.50 each.
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Suppose that for a particular firm the only variable input into the production process is labor and that output is zero when no workers are hired. In addition, suppose that when the firm hires 4 workers, the firm produces 50 units of output. If the fixed cost of production is $4, the cost per unit of labor (e.g., per worker or per worker-hour) is constant at $20 each, and the marginal product of labor for the fifth unit of labor is 2 units, what is the average total cost of production when the firm hires 5 workers?
answer
Since total cost increased by $20 with the addition of the third worker, the marginal cost of the third worker is $20. Since the cost per unit of labor is constant, the second and first workers also have a marginal cost $20 each, and so the firm's cost of employing three units of labor is $60 altogether. In other words, the firm's total variable cost of producing three units of output (since it is stated that labor is the only variable input into the firm's production process) is $60. Since the firm's total cost is $110, this means that total fixed cost must be 110 - 60 = $50.
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For a firm, the relationship between the quantity of inputs and quantity of output is called the
answer
production function
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The marginal product of labor can be defined as
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change in output ÷ change in labor.
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When adding another unit of labor leads to an increase in output that is smaller than the increases in output that resulted from adding previous units of labor, the firm is experiencing
answer
diminishing marginal product.
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Suppose a certain firm is able to produce 165 units of output when 15 workers are hired. The firm is able to produce 176 units of output when 16 workers are hired (holding other inputs fixed). Then the marginal product of the 16th worker is
answer
MPL = (176 - 165) ÷ (16 - 15) = 11 units of output
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Which of the following expressions is correct?
A. marginal cost = change in quantity of output) ÷ change in total cost B. average total cost = total cost ÷ quantity of output
C. total cost = variable cost + marginal cost
D. average variable cost = quantity of output/total variable cost
A. marginal cost = change in quantity of output) ÷ change in total cost B. average total cost = total cost ÷ quantity of output
C. total cost = variable cost + marginal cost
D. average variable cost = quantity of output/total variable cost
answer
B. average total cost = total cost ÷ quantity of output
question
For a construction company that builds houses, which of the following would be a fixed cost?
A. the $20 per hour wage paid to a construction foreman
B. the $30,000 per year salary paid to the company's bookkeeper
C. the $2 per worker-hour paid to the state government for workers' compensation insurance
D. All of the above are correct.
A. the $20 per hour wage paid to a construction foreman
B. the $30,000 per year salary paid to the company's bookkeeper
C. the $2 per worker-hour paid to the state government for workers' compensation insurance
D. All of the above are correct.
answer
the $30,000 per year salary paid to the company's bookkeeper
question
Which of the following statements about a production function for a firm that uses labor to produce output is correct?
A. The production function depicts the relationship between the quantity of labor and the quantity of output.
B. The slope of the production function measures marginal product. C. The slopes of the production function and the total cost curve are inversely related; if one is increasing, the other is decreasing.
D. All of the above are correct.
A. The production function depicts the relationship between the quantity of labor and the quantity of output.
B. The slope of the production function measures marginal product. C. The slopes of the production function and the total cost curve are inversely related; if one is increasing, the other is decreasing.
D. All of the above are correct.
answer
D. All of the above are correct.
question
The cost of producing the typical unit of output is the firm's
answer
average total cost
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The Wacky Widget company has total fixed costs of $100,000 per year. The firm's average variable cost is $5 per widget for 10,000 widgets. At that level of output, the firm's average total costs equal
answer
TVC = 5 × 10,000 = $50,000, so TC = TFC + TVC = 100,000 + 50,000 = $150,000. Finally, ATC = TC ÷ Q = 150,000 ÷ 10,000 = $15 per widget.
question
Marginal cost is equal to
answer
ΔTC ÷ ΔQ.
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Which of the following statements about costs is correct? A. When marginal cost is less than average total cost, average total cost is rising. B. The total cost curve is U-shaped. C. As the quantity of output increases, marginal cost eventually rises. D. All of the above are correct
answer
As the quantity of output increases, marginal cost eventually rises
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The fundamental reason that marginal cost eventually rises as output increases is because of
answer
diminishing marginal product
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A firm has total fixed cost of $500 in its first year of operation. When the firm produces 100 units of output, its total costs are $4,500. The marginal cost of producing the 101st unit of output is $300. What is the total cost of producing 101 units?
answer
Use the formula MC(Q) = TC(Q) - TC(Q - 1), which can be solved for TC(Q) as TC(Q) = MC(Q) + TC(Q - 1). With MC(101) = 300 and TC(100) = 4,500, it follows that TC(100) will equal $4,800.
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If marginal cost is equal to average total cost, then
answer
average total cost is minimized
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Which of the following is not a property of a firm's cost curves?
answer
Average total cost will cross marginal cost at the minimum of marginal cost.
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Which of the following explains why long-run average total cost at first decreases as output increases? A. diseconomies of scale B. less-efficient use of inputs C. fixed costs becoming spread out over more units of output D. gains from specialization of inputs
answer
D. gains from specialization of inputs
question
When a firm experiences diseconomies of scale,
answer
long-run average total cost increases as output increases
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