question
Economists' models of the behavior of business firms assume that firms try to maximize ____________
answer
Profit. Adam Smith, the Father of Economics, divided income into three types: profits, wages, and rents. The essential feature of profit is risk: capital is ventured in the hope of a return, and there may be a very great return, or little, or none. There is no guarantee of a profit in any enterprise.
question
When an increase in income results in a decrease in demand for a product, that product is said to be a(n) ____________ good.
answer
Inferior. Normally, a change in demand for a product is associated with price. However, when a change in consumers' income affects demand, we need to decide whether the good is normal, or inferior. Consumption of an inferior good goes down when income increases. Consumption of a normal good goes up when income increases.
question
The curve that shows average revenue is the ______________ curve.
answer
Demand. Conventionally, the demand curve is usually drawn between axes with price plotted along the vertical axis and number of units of the good or service demanded plotted along the horizontal axis.
question
Business firms can acquire ___________ through debt and through equity.
answer
Capital. Capital consists of the buildings and machinery that are used to produce output. Be sure not to confuse this definition of capital with the concept of "financial capital," the funds that are used to purchase capital.
question
By differentiating their products from those of competitors, firms try to make demand ________ elastic.
answer
Less. The more and the closer substitutes there are for a product, the more elastic the demand for that product is. The more elastic the demand is, the greater the effect a change in price will have (i.e. raising the price a little results in big drop in demand). By differentiating its product, a firm is trying to portray it as having no substitute--thereby making demand less elastic.
question
When a firm creates output that is more valuable than the resources used to create the output, economists say that the firm is adding ___________.
answer
Value.
question
According to the supply rule, firms should produce and offer for sale the quantity at which marginal revenue equals ___________ _______.
answer
Marginal Cost. Marginal revenue is the additional revenue obtained by selling an additional unit of output. The rule for a profit maximizing firm is to produce up to the point where Marginal Revenue is equal to Marginal Cost. As you can see in the graph below, MR goes down, and MC goes up, so if you produce past the point where MR = MC, then your marginal cost will exceed your marginal revenue (i.e. that additional unit of production cost you more than it brought in).<br /><img src="pastez3l1kg.jpg" />
question
The difference between the accounting definition of costs and the economic definition of costs is--economists include the ____________ costs of the owner's capital used in the business and accountants don't.
answer
Opportunity
question
In ______________ competition, many firms produce differentiated products.
answer
Monopolistic. In monopolistic competition, a group of firms sell closely related, but not homogenous products. In other words, products are differentiated and none are seen as perfect substitutes by consumers. Almost all retail operations are in this form of market. Starting a business is relatively easily, but staying in business is not: that requires an ability to convince customers that the product is different and better than that of competitors. An example is the services of different hair dressers.
question
If a firm is producing at an output level for which marginal revenue is below marginal cost, then the firm could increase profits by _____________ output.
answer
Decreasing. As you increase quantity, marginal revenue decreases, and marginal cost increases. Therefore, decreasing quantity would increase MR, thereby increasing profit. Ideally, a firm should produce at the level where MR equals MC. If they go above or below that level, they are losing profits.
question
Assume that marginal revenue equals rising marginal cost at 200 units of output. At this output level, a profit-maximizing firm's total fixed cost is $600 and its total variable cost is $400. If the price of the product is $4 per unit, the firm should produce _______ units.
answer
200. Most of the information in this question is extra, unnecessary details. The rule is, a firm should produce at the level where marginal revenue equals marginal cost. The question clearly stated that this occurs at 200 units, so naturally the firm should produce 200 units.
question
A firm that is in perfect competition is called a ________ ________.
answer
Price taker. A price taker is a company that possesses so little market power that it has no control the price of the good, it must "take" or accept the going market price. Perfect competition results in price takers because there are so many substitutes and little product differentiation. The four types of market structure are perfect competition, monopoly, monopolistic competition, and oligopoly.
question
In a(n) _____________ market structure, a few firms produce either a standardized or differentiated product, and entry is possible but not easy.
answer
Oligopoly. Firms are interdependent in an oligopoly. In monopolistic competition and perfect competition, it is easy for a new firm to enter the market. In an oligopoly, entry is difficult, and in a monopoly, it is not possible for a new firm to enter the market--there is only one firm.
question
The difference between what firms would have been willing to accept for their products and the price they actually receive is called ___________ ________.
answer
Producer surplus. The producer surplus is the difference between the lowest price a firm is willing to sell a product for, and how much it actually sells it for. Along the same lines, a consumer surplus is the difference between what a consumer is willing to pay for a product, and what he actually pays.
question
The firm's short-run shutdown price is the ___________ point of the AVC curve.
answer
Minimum. Or, where the MC (Marginal Cost) curve intersects with the AVC curve, since the MC curve always intersects with the AVC curve at its minimum point. The shutdown point indicates the minimum selling price for the firm to stay in business--otherwise, staying in operation increases losses. The minimum point on the AVC curve indicates the minimum variable cost for producing each unit of product. If the price is below this minimum point, that means each unit sold would not cover the variable cost per unit. As seen in the graph below, the shutdown price is P2, selling at P1 would put the company out of business. Remember, this refers to the short-run, in the long-run, the business needs to make a profit, not just equal its variable costs.
question
If an effective price floor is introduced, this results in a ___________.
answer
Surplus. When a price floor is introduced, that means the price for a product cannot go any lower than a certain price--usually above the equilibrium price. An example of a price floor is a minimum wage law. When a price floor is imposed, the supply exceeds the demand, resulting in a surplus.
question
To achieve _____________ efficiency, firms must produce goods at the lowest possible cost.
answer
Productive. Economic efficiency requires both productive and allocative efficiency.
question
The firm's long-run ______________ price is the minimum point of the average-total-cost curve.
answer
Shutdown. The firm's long-run shutdown price is the minimum point of the ATC (Average Total Cost) curve. That's the point at which total costs equal the total revenue--the breakeven point. This is different from the short-run shutdown price, which is the minimum point of the AVC curve.
question
The demand curve of the individual firm in perfect competition is a horizontal line at the _________ ______.
answer
Market price. In perfect competition, the market sets the price. That means the firms in perfect competition must accept the market price, they do not set their own. That makes the demand curve a straight, horizontal line set at the market price.
question
In the ________-______, a perfectly competitive firm's supply curve is that portion of the marginal-cost curve above the minimum point on the average-variable-cost curve.
answer
Short-run. The short run under perfect competition is the period during which there is too little time for new firms to enter the industry. As shown in the graph below, the Supply curve is the bold portion of the MC curve above the minimum point on the AVC curve.
question
In a perfectly competitive industry, in the _______ _____, entry and exit stop only when individual firms earn a normal profit.
answer
Long run. Normal profit means zero economic profit. At zero economic profit, which means that firms are at the bottom of their ATC curve, there is no entry or exit. When companies are above the minimum point on the ATC curve, new firms enter the market--they are attracted by the economic profit being made by the current firms. When companies drop below the minimum point on the ATC curve, firms start exiting the market, because they are not making an economic profit.
question
If the price facing the firm is _____, the firm's total cost is less than its total revenue. (P1, P2, or P3)
answer
P3. We determined that where the MR and the MC intersect for a certain price is the quantity produced, so at P3 that means a quantity of Q5. The MR (marginal revenue)curve tells you your revenue, and the ATC curve tells you your total cost. Looking at the dotted line for Q5, we see that the total cost is way below the total revenue. At Q4, total cost is equal to total revenue, and at Q3, total cost is much higher than the revenue.
question
In a perfectly competitive market in the short run, if the price of a firm's product is less than the minimum average variable cost , the firm will ____________.
answer
Shutdown. In the short run in a perfectly competitive market, the price must at least be equal to the minimum AVC--that is considered the short run shutdown point. In the long run, the price must at least be equal to the minimum ATC--that is the long run shutdown point.
question
The long-run _____________ point occurs for a perfectly competitive firm when average total costs are at a minimum.
answer
Equilibrium. The point at which quantity demanded and quantity supplied are equal at a particular price.
question
A ___________ monopoly is a firm that has a monopoly within a limited geographic area.
answer
Local. It can decide the market price only in a limited area.
question
___________ to entry are anything that impedes the ability of firms to enter a market in which existing firms are earning economic profits.
answer
Barriers. These barriers may derive from several causes. Legal or regulatory or other clearly political barriers to entry are historically the most common source of long-lived monopolistic or cartelized conditions in the marketplace.
question
A ___________ monopoly is a firm that has a monopoly within a limited geographic area
answer
Local. It can decide the market price only in a limited area.
question
A monopolist maximizes profit by choosing the output level where marginal revenue equals __________ _______, and then charging the corresponding price on the demand curve at the quantity produced.
answer
Marginal cost. The goal of a monopoly, just like any other business, is to maximize profit, so it follows the rule of producing at MR = MC. This gives it the quantity to produce. To determine the price to sell at, it looks at the demand curve and figures out what consumers are willing to pay at this level of output
question
Compared with a perfectly competitive industry, a monopoly firm gets larger profits and generates a _____________ consumer surplus.
answer
Smaller. In a perfectly competitive industry, competition is so fierce that companies have to charge a very competitive price, and make little profit. On the other hand, a monopoly has no competition--it can charge whatever is the maximum a consumer is willing to pay. Consumer surplus is the difference between the maximum a consumer is willing to pay, and what he does end up paying--when dealing with a monopoly, consumer surplus is small or nonexistent.
question
In monopoly, price is ________ than marginal revenue; in perfect competition, price is equal to marginal revenue.
answer
Greater. In perfect competition, all firms must accept the market price for their product. They are price takers. In monopoly, the firm charges the highest price the consumer will pay. To determine the price to sell at, a firm looks at the price on the demand curve which corresponds to a given quantity. In perfect competition, the demand curve at a certain price is the same as the MR curve at that price
question
This natural monopoly is unregulated. It will choose to maximize profits at a price and output combination indicated by point ____.
answer
G. LRAC and LRMC simply stand for long run average cost and long run marginal cost. Remember, a firm will try to maximize profits by producing at a quantity indicated by MR = MC. LRMC intersects with MR at point J. This means that the firm will produce a quantity of K Since the monopoly is unregulated, there is no limit to the price it can charge. Moving up to the demand curve for quantity K, we see that it will charge a price of F. In the graph, the intersection of quantity K and price F is point G.
question
A monopolist can sell 20 units of output at a price of $50 per unit. To sell 21 units, the monopolist must cut the price of all units to $49. The monopolist's marginal revenue from the twenty-first unit sold is _____ dollars.
answer
29. Marginal revenue is the revenue gained by selling an additional unit, so the question is, how much additional revenue do you get from selling 21 units instead of 20? Initially, with 20 units, you make $20 x $50 = $1000. With 21 units, you make $21 x $49 = 1029 ( total revenue in the new case). Therefore the marginal revenue is $1029-$1000 = $29.
question
Price _____________ is charging different customers different prices for the same products.
answer
Discrimination. For instance, if a grocer were to charge you $15 and your neighbor $12 for the same amount of cabbage.
question
Compared with a perfectly competitive market structure, a ______________ market structure produces less output at a higher price.
answer
Monopoly. A monopolist has market power, the ability to set prices.
question
_______________ is the tendency of firms not faced with competition to become inefficient.
answer
X-inefficiency. This quantity describes the need to face competition to remain efficient.
question
______-________ behavior occurs when firms expend resources to acquire monopoly power by hiring lawyers, lobbyists, etc. in an attempt to receive governmentally granted monopoly power.
answer
Rent-seeking. Rent-seeking activities do not benefit society as a whole and divert resources away from productive activity. Examples of rent-seeking--when U.S. auto makers lobby to obtain quotas on Japanese auto imports; physicians in Florida obtain rules that make it difficult for physicians from other states to practice medicine there.
question
Increasing price above the market level results in a pure loss of both consumer and producer surplus known as _____________ loss.
answer
Deadweight. When a government artificially raises prices of foreign cars through a quota, or an unregulated monopoly raises prices and lowers quantity, these all result in pure loss known as deadweight loss.
question
Monopolistic competition is a market structure in which many firms are producing a _______________ product and entry is easy.
answer
Differentiated. These are products that consumers perceive to be different from one another, so they do not see them as perfect substitutes. This allows demand to remain less elastic than in perfect competition.
question
Firms in monopolistic competition compete primarily through product ______________.
answer
Differentiation . By selling products that consumers perceive to be different from one another, firms can make demand less elastic. Not only do firms need to differentiate their product, they must try to convince consumers that their product is better in some way.
question
An organization of independent firms whose purpose is to control and limit production and increase prices and profits is a _______________.
answer
Cartel. This they normally accomplish by agreeing on a relatively high common asking price for their product that none of the member firms will be permitted underbid, but sometimes the member firms may simply agree to divide the market geographically and grant each other local monopolies without necessarily enforcing a uniform price structure.
question
___________ __________ occurs when people alter their behavior from what was anticipated when a transaction was made.
answer
Moral hazard. A person who discovers that he or she has a serious illness and then purchases insurance is creating a moral hazard.
question
In both perfect competition and monopolistic competition, firms receive only a __________ profit in the long run
answer
Normal. Normal profit is the level of profit just sufficient to persuade firms to stay in the industry, but not high enough to attract new firms. This level of normal profit will vary from one industry to another. Normal profit is equal to zero economic profit. Please note that this is referring to the long run.
question
A _______________ game occurs when a firm can wait and see what its rival does before deciding on its own strategy.
answer
Sequential. A situation in which one firm moves first and then the other firm is able to choose a strategy based on the first firm's choices. An example is chess.
question
<img src="pastervwgn7.jpg" /><br />For this monopolistic competitor, the profit-maximizing price and output level are indicated by point ______.
answer
E. First, determine the profit maximizing quantity by checking where MR = MC. That is at point F, which indicates quantity G. Next, determine the price by looking at the demand curve at quantity G--that gives you a price of D. Point E indicates the price and quantity that maximizes the firm's profit.
question
E. First, determine the profit maximizing quantity by checking where MR = MC. That is at point F, which indicates quantity G. Next, determine the price by looking at the demand curve at quantity G--that gives you a price of D. Point E indicates the price and quantity that maximizes the firm's profit.
answer
Interdependent. An oligopoly is a market dominated by a few producers all of who have some control over the market. Firms here have to consider each other's reaction in deciding their pricing strategy (interdependence).
question
Incentives for individual firms to break the agreement account for the instability of ___________.
answer
Cartels. For e.g. a cocaine drug cartel. The intended purpose of a cartel is to reap monopoly profits by artificially restricting output and thus driving the price above the level that would prevail if they remained in competition with one another.
question
A ___________ demand curve occurs when other firms follow price cuts but not price increases.
answer
Kinked. Paul M Sweezy suggested "It is pretty well agreed among economists that the ordinary concept of a demand curve is inapplicable to oligopoly". In particular , Sweezy said the assumption that everything else would remain unchanged if the oligopolist changed his price was unrealistic. Below is an example of a kinked demand curve. What is unusual is the gap in the MR curve, shown by the dashed line. Simply put, if the firm lowers price below P* a strong reaction from competitors occurs in the form of industry wide price drops. This causes MR to drop dramatically, causing a gap in the curve.
question
The type of decision-making behavior that occurs when firm X's best choice depends on firm Y's actions, and firm Y's best choice depends on firm X's actions, is called ____________ behavior.
answer
Strategic. In other words, behavior that occurs when what is best for B depends on what A chooses and what A chooses depends on what B is most likely to do.
question
In the long run, a monopolistic competitor _________ ______.
answer
Breaks even. In the long run, the typical monopolistically competitive firm makes zero economic profits. This is because just like in a perfectly competitive market, as long as economic profits remain, new firms will enter the market until there is zero economic profit.
question
The term ___________ __________ refers to the point where no additional units of output can be produced without decreasing the output of another good.
answer
Economic efficiency. A situation where no one in society can be made better off without making someone else worse off.
question
In the United States, ________________ has been seriously advocated since the early 1980s.
answer
Deregulation. Deregulation is the removal of government controls from an industry or sector, to allow for a free and efficient marketplace.
question
Since the mid-1980s in the United States, ______________ policy has followed the rule of reason
answer
Antitrust. Government policies and programs designed to control the growth of monopoly and enhance competition.
question
When the Supreme Court rules that it is the intent to abuse monopoly control, not monopoly control alone, that is illegal, it is following the rule of _________________.
answer
Reason. This rule states that a business having a monopoly over its field is not in itself a violation of antitrust laws. Under this rule, a company is only in violation of the law if it is actively engaging in anticompetitive behavior. In other words, all monopolies are not illegal. The Rule of Reason replaced the per se rule. Profit, and, maximization:, output, pricing, revenue
question
When judging the anticompetitive effects of a merger between businesses, the government relies primarily on the _____________ index.
answer
Herfindahl. The Herfindahl index measures concentration in a market.
question
In terms of limiting certain types of business activities through ____________ laws, the United States is more restrictive than other countries.
answer
Antitrust.
question
_____________ __________ refers to the prescription of price and output for a particular industry.
answer
Economic Regulation. Economic regulation of transportation began because large fixed costs limited industry, however, since the 1970s, the transportation industry has been largely deregulated.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
