question
Accounting Profit
answer
total revenue - total explicit costs
question
Economic Profit
answer
total revenue - total cost (explicit costs & implicit costs)
question
Zero Economic Profit
answer
A firm is earning a normal return on its investment—i.e., it is doing as well as it could by investing its money elsewhere. GOOD THING!
question
Long Run
answer
A period of time in which no factors of production are fixed in quantity.
question
Short Run
answer
A period of time in which atleast one factor of production are fixed in quantity
question
Law of Diminishing Marginal Productivity
answer
As successive units of a variable input are added to a fixed input, beyond some point the marginal product declines
question
Total Cost (TC)
answer
TC=Total Variabe Cost + Total Fixed Cost
A cost that varies with different outputs
A cost that varies with different outputs
question
Average Total Cost (ATC)
answer
ATC= Average Variable Cost + Average Fixed Cost
total costs divided by quantity of output
total costs divided by quantity of output
question
M.E.S
answer
Minimum Efficient Scale
question
ATC
answer
average total cost
question
TC
answer
Total Cost
question
Perfect Competition Characteristics (4)
answer
1. Many Firms and Many Factors
2. Produce Identical Products
- perfect substitutes
3. Entry and Exit are easy
4. Price Taker
2. Produce Identical Products
- perfect substitutes
3. Entry and Exit are easy
4. Price Taker
question
Rule for Profit Maximization
answer
MR=MC
question
MR
answer
Marginal Revenue
question
MC
answer
Marginal Cost
question
MR=
answer
Change in Total Revenue/ change in Quantity
question
MC=
answer
Change in Total Cost / Change in Quantity
question
π
answer
Economic Profit
question
AFC=
answer
FC/output
question
Monopolistic Competition Characteristics
answer
1. Many Firms and Many Consumers
2. Entry and Exit are Easy
3. Market Power for Firms
- ability to affect the price they charge
4. Differentiated Products
2. Entry and Exit are Easy
3. Market Power for Firms
- ability to affect the price they charge
4. Differentiated Products
question
Excess Capacity Theorem
answer
prevents firms from joining a market
question
Monopolistic Market Entry
answer
1. Demand curve shifts INWARD and becomes FLATTER
question
Consumer Brand Loyalty
answer
A consumers decision to buy a product due to brand even if it isn't the cheapest option
question
Oligopoly Characteristics
answer
1. Few Firms (2-9)
2. Products are Homogenous and/or Differentiated
3. There are Barriers to Entry
4. Mutual Interdependance
2. Products are Homogenous and/or Differentiated
3. There are Barriers to Entry
4. Mutual Interdependance
question
Mutual Interdependance
answer
the situation that exists when two or more groups need to depend on one another to accomplish a goal that is important to each of them
question
Cartel
answer
explicit collusion (agreement) on cooperation
question
Tacit Collusion (Informal Collusion)
answer
Refers to cooperation that is implicit or understood between cooperating oligopolistic firms, without a formal agreement
question
Price Leadership
answer
a company/companies with the most control in the market set the market price
question
Antitrust Legislation
answer
Inspection further in markets with easy collusion
question
Conditions for Easy Collusion
answer
1. Few firms (ideally 2)
2. Similar costs
3. High Barriers to Entry
2. Similar costs
3. High Barriers to Entry
question
Oligopolistic Goals
answer
1. Protect your Market Shares
2. Steal your competitors Market Shares
2. Steal your competitors Market Shares
question
Game Theory
answer
the study of how people behave in strategic situations
question
Explicit Collusion
answer
firms directly negotiate output and pricing and divide markets. formally agree.
question
Implicit Collusion
answer
multiple firms make the same pricing decisions even though they have not explicitly consulted with one another.
question
Dominant Strategy
answer
a strategy that is best for a player in a game regardless of the strategies chosen by the other players
question
Nash Equilibrium
answer
a situation in which each firm chooses the best strategy, given the strategies chosen by other firms
question
When a firm has little ability to influence market prices it is said to be in...
a. a competitive market.
b. a strategic market.
c. a thin market.
d. a power market
a. a competitive market.
b. a strategic market.
c. a thin market.
d. a power market
answer
a
question
Which of the following is NOT a characteristic of a perfectly competitive market?
a. Firms are price takers
b. Firms have difficulty entering the market.
c. There are many sellers in the market.
d. Goods offered for sale are largely the same
a. Firms are price takers
b. Firms have difficulty entering the market.
c. There are many sellers in the market.
d. Goods offered for sale are largely the same
answer
b
question
When firms are said to be price takers, it implies that if a firm raises its price
a. buyers will go elsewhere
b. buyers will pay the higher price in the short run
c. competitors will also raise their prices
d. firms in the industry will exercise market power
a. buyers will go elsewhere
b. buyers will pay the higher price in the short run
c. competitors will also raise their prices
d. firms in the industry will exercise market power
answer
a
question
Suppose a firm in a competitive market reduces its output by 20 percent. As a result, the price of its output is likely to
a. increase.
b. remain unchanged.
c. decrease by less than 20 percent.
d. decrease by more than 20 percent.
a. increase.
b. remain unchanged.
c. decrease by less than 20 percent.
d. decrease by more than 20 percent.
answer
b
question
When a profit-maximizing firm in a competitive market has zero economic profit, accounting profit
a. is negative (accounting losses).
b. is positive.
c. is also zero.
d. could be positive, negative or zero.
a. is negative (accounting losses).
b. is positive.
c. is also zero.
d. could be positive, negative or zero.
answer
b
question
Which of the following statements regarding a competitive firm is true?
a. Since demand is downward sloping, if a firm increases its level of output, the firm willhave to charge a lower price to sell the additional output.
b. If a firm raises its price, the firm may be able to increase its total revenue even though itwill sell fewer units.
c. By lowering its price below the market price, the firm will benefit from being able to sellmore units at the lower price than it could have sold by charging the market price.
d. For all firms, average revenue equals the price of the good
a. Since demand is downward sloping, if a firm increases its level of output, the firm willhave to charge a lower price to sell the additional output.
b. If a firm raises its price, the firm may be able to increase its total revenue even though itwill sell fewer units.
c. By lowering its price below the market price, the firm will benefit from being able to sellmore units at the lower price than it could have sold by charging the market price.
d. For all firms, average revenue equals the price of the good
answer
d
question
The Wheeler Wheat Farm sells wheat to a grain broker in Seattle, Washington. Since the market for wheat is generally considered to be competitive, the Wheeler Wheat Farm maximizes its profit by choosing
a. to produce the quantity at which average variable cost is minimized.
b. to produce the quantity at which average fixed cost is minimized.
c. to sell its wheat at a price where marginal cost is equal to average total cost.
d. the quantity at which market price is equal to the farm's marginal cost of production
a. to produce the quantity at which average variable cost is minimized.
b. to produce the quantity at which average fixed cost is minimized.
c. to sell its wheat at a price where marginal cost is equal to average total cost.
d. the quantity at which market price is equal to the farm's marginal cost of production
answer
d
question
As a general rule, profit-maximizing producers in a competitive market produce output at a point where
a. marginal cost is increasing
b. marginal cost is decreasing
c. marginal revenue is increasing
d. price is less than marginal revenue
a. marginal cost is increasing
b. marginal cost is decreasing
c. marginal revenue is increasing
d. price is less than marginal revenue
answer
a
question
When price is greater than marginal cost for a firm in a competitive market
a. marginal cost must be falling.
b. the firm must be minimizing its losses.
c. there are opportunities to increase profit by increasing production.
d. the firm should decrease output to maximize profit
a. marginal cost must be falling.
b. the firm must be minimizing its losses.
c. there are opportunities to increase profit by increasing production.
d. the firm should decrease output to maximize profit
answer
c
question
The Toys-R-Danger-Us Toy Company can produce 500 water pistols for a total cost of $1,400. If the variable cost of producing 500 water pistols is $1,300, then
a. marginal cost must be $1300
b. average variable cost must be decreasing
c. fixed cost must be $100
d. marginal cost must be decreasing
a. marginal cost must be $1300
b. average variable cost must be decreasing
c. fixed cost must be $100
d. marginal cost must be decreasing
answer
c
question
The short-run supply curve for a firm in a perfectly competitive market is
a. horizontal.
b. likely to slope downward.
c. determined by forces external to the firm.
d. the portion of its marginal cost curve that lies above its average variable cost.
a. horizontal.
b. likely to slope downward.
c. determined by forces external to the firm.
d. the portion of its marginal cost curve that lies above its average variable cost.
answer
d
question
Susan used to work as a telemarketer, earning $25,000 per year. She gave up that job to start a catering business. In calculating the economic profit of her catering business, the $25,000 income that she gave up is counted as part of the catering firm's
a. total revenue
b. opportunity cost
c. marginal cost
d. explicit cost
a. total revenue
b. opportunity cost
c. marginal cost
d. explicit cost
answer
b
question
Suppose a firm in a perfectly competitive market reduces its output by 20 percent. As a result, the price of its output is likely to
a. increase
b. decrease by less then 20 percent
c. decrease by more than 20 percent
d. remain unchanged
a. increase
b. decrease by less then 20 percent
c. decrease by more than 20 percent
d. remain unchanged
answer
d
question
The golden rule of profit maximization states that any firm maximizes profit by producing where
a. price equal marginal revenue
b marginal revenue equals marginal cost
c. price equals marginal cost
d. marginal cost equals average revenue
a. price equal marginal revenue
b marginal revenue equals marginal cost
c. price equals marginal cost
d. marginal cost equals average revenue
answer
b
question
When price is below average variable cost, a firm in a competitive market will
a. shut down and incur fixed costs.
b. shut down and incur both variable and fixed costs.
c. continue to operate as long as average revenue exceeds marginal cost.
d. continue to operate as long as average revenue exceeds average fixed cost.
a. shut down and incur fixed costs.
b. shut down and incur both variable and fixed costs.
c. continue to operate as long as average revenue exceeds marginal cost.
d. continue to operate as long as average revenue exceeds average fixed cost.
answer
a
question
Mrs. Smith is operating a firm in a competitive market. The market price is $6.50. At her profit-maximizing level of output, her average total cost of production is $7.00 and her average variable cost of production is $6.00.
a. Mrs. Smith is earning a loss and should shutdown in the short run.
b. Mrs. Smith is earning a loss but should continue to operate in the short run.
c. Mrs. Smith is earning a profit since the price is above the average variable cost.
d. Without knowing Mrs. Smith's marginal cost we cannot determine whether she shouldstay in business or shut down
a. Mrs. Smith is earning a loss and should shutdown in the short run.
b. Mrs. Smith is earning a loss but should continue to operate in the short run.
c. Mrs. Smith is earning a profit since the price is above the average variable cost.
d. Without knowing Mrs. Smith's marginal cost we cannot determine whether she shouldstay in business or shut down
answer
b
question
Suppose a firm operates in the short run at a price above its average total cost of production. In the long run the firm should expect
a. new firms to enter the market.
b. the market price to fall.
c. its profits to fall.
d. All of the above
a. new firms to enter the market.
b. the market price to fall.
c. its profits to fall.
d. All of the above
answer
d
question
Carla's Candy Store is maximizing profits by producing 1,000 pounds of candy per day. If Carla's fixed costs unexpectedly increase and the market price remains constant, then the short run profit-maximizing level of output
a. is less than 1,000 pounds.
b. is still 1,000 pounds.
c. is more than 1,000 pounds.
d. becomes zero
a. is less than 1,000 pounds.
b. is still 1,000 pounds.
c. is more than 1,000 pounds.
d. becomes zero
answer
b
question
John has decided to start his own lawn-mowing business. To purchase the mowers and the trailer to transport the mowers, John withdrew $1,000 from his savings account, which was earning 3% interest, and borrowed an additional $2,000 from the bank at an interest rate of 7%. What is John's annual opportunity cost of the financial capital that has been invested in the business?
a.)$30.00
b.)$140.00
c.)$170.00
d.)$3,000.00
a.)$30.00
b.)$140.00
c.)$170.00
d.)$3,000.00
answer
c
question
a production function is a relationship between
a.) inputs and quantity of output.
b.) inputs and revenue.
c.) inputs and costs.
d.) inputs and profit.
a.) inputs and quantity of output.
b.) inputs and revenue.
c.) inputs and costs.
d.) inputs and profit.
answer
a
question
As Al's Radiator Company adds workers while keeping the same amount of machinery, some workers may be underutilized because they have little work to do while waiting in line to use the machinery. When this occurs, Al's Radiator Company encounters
a. economies of scale.
b. diseconomies of scale.
c. increasing marginal returns.
d. diminishing marginal returns.
a. economies of scale.
b. diseconomies of scale.
c. increasing marginal returns.
d. diminishing marginal returns.
answer
d
question
A certain firm produces and sells staplers. Last year, it produced 7,000 staplers and sold each stapler for $6. In producing the 7,000 staplers, it incurred variable costs of $28,000 and a total cost of $45,000.Refer to Scenario 13-5. In producing the 7,000 staplers, the firm's average fixed cost was
a. $1.00
b. $1.32
c. $2.21
d. $2.43
a. $1.00
b. $1.32
c. $2.21
d. $2.43
answer
d
question
For Firm A, when four units of output are produced, the total cost is $175 and the average variable cost is $33.75. What would the average fixed cost be if ten units were produced?
a. $4
b. $10
c. $40
d. $135
a. $4
b. $10
c. $40
d. $135
answer
a
question
In the long run for Firm A, total cost is $105 when output is 3 units and $120 when output is 4 units. Does Firm A exhibit economies or diseconomies of scale?
a. Diseconomies of scale, since total cost is rising as output rises.
b. Diseconomies of scale, since average total cost is falling as output rises.
c. Economies of scale, since total cost is rising as output rises.
d. Economies of scale, since average total cost is falling as output rises.
a. Diseconomies of scale, since total cost is rising as output rises.
b. Diseconomies of scale, since average total cost is falling as output rises.
c. Economies of scale, since total cost is rising as output rises.
d. Economies of scale, since average total cost is falling as output rises.
answer
d
question
A market structure with only a few sellers, offering similar or identical products, is known as
a. oligopoly.
b. monopoly.
c. monopolistic competition.
d. perfect competition.
a. oligopoly.
b. monopoly.
c. monopolistic competition.
d. perfect competition.
answer
a
question
Angelo is a wholesale meatball distributor. He sells his meatballs to all the finest Italian restaurants in town. Nobody can make meatballs like Angelo. As a result, his is the only business in town that sells meatballs to restaurants. Assuming that Angelo is maximizing his profit, which of the following statements is true?
a. Meatball prices will be less than marginal cost
b. Meatball prices will equal marginal cost.
c. Meatball prices will exceed marginal cost.
d. Meatball prices will be a function of supply and demand and will therefore oscillatearound marginal costs
a. Meatball prices will be less than marginal cost
b. Meatball prices will equal marginal cost.
c. Meatball prices will exceed marginal cost.
d. Meatball prices will be a function of supply and demand and will therefore oscillatearound marginal costs
answer
c
question
A fundamental source of monopoly market power arises from
a. perfectly elastic demand.
b. perfectly inelastic demand.
c. barriers to entry.
d. availability of "free" natural resources, such as water or air.
a. perfectly elastic demand.
b. perfectly inelastic demand.
c. barriers to entry.
d. availability of "free" natural resources, such as water or air.
answer
c
question
A natural monopoly occurs when
a. the product is sold in its natural state (such as water or diamonds).
b. there are economies of scale over the relevant range of output.
c. the firm is characterized by a rising marginal cost curve.
d. production requires the use of free natural resources, such as water or air.
a. the product is sold in its natural state (such as water or diamonds).
b. there are economies of scale over the relevant range of output.
c. the firm is characterized by a rising marginal cost curve.
d. production requires the use of free natural resources, such as water or air.
answer
b
question
When a natural monopoly exists, it is
a. always cost effective for government-owned firms to produce the product.
b. never cost effective for one firm to produce the product.
c. always cost effective for two or more private firms to produce the product.
d. never cost effective for two or more private firms to produce the product.
a. always cost effective for government-owned firms to produce the product.
b. never cost effective for one firm to produce the product.
c. always cost effective for two or more private firms to produce the product.
d. never cost effective for two or more private firms to produce the product.
answer
d
question
Which of the following statements is true about patents and copyrights?
(i) They both have benefits and costs.
(ii) They lead to higher prices.
(iii) They enhance the ability of monopolists to earn above-average profits.
a. (i) and (ii)
b. (ii) and (iii)
c. (ii) only
d. (i), (ii), and (iii)
(i) They both have benefits and costs.
(ii) They lead to higher prices.
(iii) They enhance the ability of monopolists to earn above-average profits.
a. (i) and (ii)
b. (ii) and (iii)
c. (ii) only
d. (i), (ii), and (iii)
answer
d
question
A firm that is a natural monopoly
a. is not likely to be concerned about new entrants eroding its monopoly power.
b. is taking advantage of economies of scale.
c. would experience a higher average total cost if more firms entered the market.
d. All of the above are correct.
a. is not likely to be concerned about new entrants eroding its monopoly power.
b. is taking advantage of economies of scale.
c. would experience a higher average total cost if more firms entered the market.
d. All of the above are correct.
answer
d
question
Most markets are not monopolies in the real world because
a. firms usually face downward-sloping demand curves.
b. supply curves slope upward.
c. price is usually set equal to marginal cost by firms.
d. there are reasonable substitutes for most goods.
a. firms usually face downward-sloping demand curves.
b. supply curves slope upward.
c. price is usually set equal to marginal cost by firms.
d. there are reasonable substitutes for most goods.
answer
d
question
When a firm operates under conditions of monopoly, its price is
a. not constrained.
b. constrained by marginal cost.
c. constrained by demand.
d. constrained only by its social agenda.
a. not constrained.
b. constrained by marginal cost.
c. constrained by demand.
d. constrained only by its social agenda.
answer
c
question
True or False. Firms in competitive markets are said to be price takers.
answer
t
question
True or False. A profit-maximizing firm in a competitive market will increase production when price exceeds marginal cost
answer
t
question
True or False. In making a short-run profit-maximizing production decision, the firm must consider both fixed and variable cost.
answer
f
question
In a perfectly competitive market, the process of entry and exit will end when
a. price is equal to average variable cost.
b. marginal revenue is equal to average variable cost.
c. economic profits are zero.
d. accounting profits are zero.
a. price is equal to average variable cost.
b. marginal revenue is equal to average variable cost.
c. economic profits are zero.
d. accounting profits are zero.
answer
c
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