question
Perfectly competitive market
answer
1. There are many buyers and sellers
2. The product is homogeneous
3. There are no barriers to market entry
4. Both buyers and sellers are price takers
2. The product is homogeneous
3. There are no barriers to market entry
4. Both buyers and sellers are price takers
question
Firm Specific Demand Curve
answer
a curve showing the relationship between the price charged by a specific firm and the quantity the firm can sell
question
Economic Competitions from most to least competitive?
answer
1. Perfect Comp
2. Monopolistic Comp
3. Oligopoly
4. Duopily
5. Monopoly
2. Monopolistic Comp
3. Oligopoly
4. Duopily
5. Monopoly
question
In a perfectly competitive market which way is the market demand cure sloping
answer
Downward Sloping
Price and quantity are inversely related.
Price and quantity are inversely related.
question
How to maximize profit (profit maximization rule)
answer
When marginal revenue = marginal cost
question
Economic Profit
answer
= (price - avg. cost) * quantity
question
Break even Price
answer
The price at which economic profit is zero; price equals average total cost
question
A perfectly competitive firm is a price...
answer
Price taker
question
A monopolist firm is a price...
answer
Maker
question
The shut down rule
answer
A firm should shut down if Average variable cost is greater than total revenue
a firm should operate if total revenue is higher than Average variable cost
a firm should operate if total revenue is higher than Average variable cost
question
If average total cost exceeds the price...
answer
The firm is operating at a loss and should plan to exit the market.
question
A company should operate if...
answer
total revenue is greater than variable costs
question
A company should shut down if...
answer
total revenue is less than variable costs
question
Sunk costs are
answer
A cost that a firm has committed to or already payed, so it cannot be recovered.
question
the marginal cost curve above the price
answer
is the supply curve
question
constant cost industry
answer
an industry that can expand or contract without affecting the long run per-unit cost of production; the long-run industry supply curve is horizontal
question
Profit Maximization rule
answer
A monopolists sets the output level at MR = MC and sets the price of the correct quantity on the demand curve
question
Marginal cost
answer
change in cost / change in quantity
question
Marginal Revenue
answer
change in total revenue / change in quantity
question
Monopolies
answer
Produce less and charge higher prices than perfectly competitive firms; much smaller consumer surplus than in a perfect market
question
Deadweight loss from monopoly
answer
a measure of the inefficiency from monopoly; equal to the decrease in the market surplus
question
Trade-Offs from Patents
answer
It is sensible for a gov to grant a patent for a product that would otherwise not be developed, but it is not sensible for other products.
The gov can't be selective when granting patents because they don't know if the product would be developed without a patent anyway
In some cases, patents lead to new products, while they just prolong monopoly power in other cases.
question
Price discrimination
answer
the practice of charging customers different prices for the same product.
A firm divides two potential customers into groups and applies the marginal principle twice - once for each group. For example, the profit-maximizing price for seniors can be $3 and $6 for others. (also student discounts could be an example)
A firm divides two potential customers into groups and applies the marginal principle twice - once for each group. For example, the profit-maximizing price for seniors can be $3 and $6 for others. (also student discounts could be an example)
question
3 conditions for price discrimination
answer
1. Market power
2. Different consumer groups
3. Resale is not possible
(Price Elasticity)
2. Different consumer groups
3. Resale is not possible
(Price Elasticity)
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