question
Quiz 7
answer
...
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In a competitive market, the actions of any single buyer or seller will:
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Have a negligible impact on the market price.
why: (buyers and sellers are price takers).
why: (buyers and sellers are price takers).
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Farmer McDonald sells wheat to a broker in Kansas City, Missouri. Because the market for wheat is generally considered to be competitive, Mr. McDonald maximizes his profit by choosing
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The quantity at which market price is equal to Mr. McDonald's marginal cost of production
Why: (How much to produce is determined by the quantity where MC = MR, P = MR.
Why: (How much to produce is determined by the quantity where MC = MR, P = MR.
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The following table presents cost and revenue information for Bob's bakery production and sales.
At what quantity will Bob maximize his profit?
At what quantity will Bob maximize his profit?
answer
6 units
Why: Remember that if MR and MC are not equal, it is the closest to equal with MR being greater.
At 6 units MR=$3.25 and MC=$3.00
At 7 Units 3.50 > Price of 3.25 (can't happen).
Why: Remember that if MR and MC are not equal, it is the closest to equal with MR being greater.
At 6 units MR=$3.25 and MC=$3.00
At 7 Units 3.50 > Price of 3.25 (can't happen).
question
When Bob produces and sells the profit-maximizing quantity, how much profit does he earn?
answer
Profit = $4.00
Why:
TR - TC = Profit
TR = P (3.25) X Q (6) = $19.50
TC @ 6 units = $15.50
Why:
TR - TC = Profit
TR = P (3.25) X Q (6) = $19.50
TC @ 6 units = $15.50
question
Suppose that due to a decrease in the market demand for bread the market price of bread drops to $2.75 per loaf. At this new price, what is Bob's profit-maximizing quantity?
answer
5 units
Why: P = $2.75, and MC = $2.50.
Choose where P ≥ MC.
Why: P = $2.75, and MC = $2.50.
Choose where P ≥ MC.
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In the Long Run, all of a firm's costs are variable. In this case the exit criterion for a profit-maximizing firm is to shut down if
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price is less than average total cost
Why: (In the short run, that shut down point is if the price is less than Average Variable Cost.
But in the long run firms will exit if the Price is lower than average total cost)
Why: (In the short run, that shut down point is if the price is less than Average Variable Cost.
But in the long run firms will exit if the Price is lower than average total cost)
question
When market conditions in a competitive industry are such that firms cannot cover their total production costs, then
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some firms will exit the market, causing prices to rise until the remaining firms can cover their total production costs
why: (Some firms will leave the industry causing the Supply curve to shift to the left. The new Equilibrium, price will be higher and Quantity will be lower. This will allow those remaining firms to cover their Total costs.)
why: (Some firms will leave the industry causing the Supply curve to shift to the left. The new Equilibrium, price will be higher and Quantity will be lower. This will allow those remaining firms to cover their Total costs.)
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Quiz 8
answer
...
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Microsoft faces very little competition from other firms for its Windows software. Why isn't the price of the software $1,000 per copy?
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because the company would sell so few copies that they would earn higher profits by selling at a lower price
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Which of the following is a characteristic of a natural monopoly?
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Average total cost declines over large regions of output.
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The economic inefficiency of a monopolist can be measured by the
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deadweight loss.
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Black Box Cable TV is able to purchase an exclusive right to sell a premium movie channel (PMC) in its market area. Let's assume that Black Box Cable pays $150,000 a year for the exclusive marketing rights to PMC. Since Black Box has already installed cable to all of the homes in its market area, the marginal cost of delivering PMC to subscribers is zero. The manager of Black Box needs to know what price to charge for the PMC service to maximize her profit. Before setting price, she hires an economist to estimate demand for the PMC service. The economist discovers that there are two types of subscribers who value premium movie channels. First are the 4,000 die-hard TV viewers who will pay as much as $150 a year for the new PMC premium channel. Second, the PMC channel will appeal to 20,000 occasional TV viewers who will pay as much as $20 a year for a subscription to PMC.
If Black Box Cable TV is unable to price discriminate, what price will it choose to maximize its profit, and what is the amount of the profit?
answer
price = $150; profit = $450,000
Choose the die hard fans bc they will pay more: $150*4000 = $600,000
subtract the executive marketing rights cost
$600,000-$150,000 = $450,000
Choose the die hard fans bc they will pay more: $150*4000 = $600,000
subtract the executive marketing rights cost
$600,000-$150,000 = $450,000
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The fundamental cause of monopoly is
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barriers to entry
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In order to sell more of its product, a monopolist must
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lower its price
Why: (Monopolies have price making power but the are still subject to demand. Demand--more will be demanded at lower prices.)
Why: (Monopolies have price making power but the are still subject to demand. Demand--more will be demanded at lower prices.)
question
The following table shows the quantity, price and marginal cost of a monopoly
What level of output should the firm produce to maximize profit?
What level of output should the firm produce to maximize profit?
answer
3 units:
TR = Q(output) x Price
2 x $8 = $16
3 x $7 = $21
MR = $21 - $16 = $5
Look where MR = MC. (3 units)
TR = Q(output) x Price
2 x $8 = $16
3 x $7 = $21
MR = $21 - $16 = $5
Look where MR = MC. (3 units)
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When a market is monopolistically competitive, the typical firm in the market is likely to experience a
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positive or negative profit in the short run and a zero profit in the long run.
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In monopolistically competitive markets, positive economic profits
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suggest that new firms will enter the market.
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seperate customers according to their willingness to pay
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Price discrimination requires the firm to
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Monopolistic competition is considered inefficient because
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price exceeds marginal cost.
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The higher the concentration ratio, the
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more control an individual firm has to set prices
less competitive the industry
less competitive the industry
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Peter operates a shop in the center of Fairfield. He sells several unusual flavors of organic, homemade ice cream so he has a monopoly over his own ice cream, though he competes with many other firms selling ice cream in Fairfield to the same customers. Peter's demand and cost values for sales per day are given in the table below. (Everyone who, purchases Peter's ice cream purchases a double scoop cone because it's so good.)
How many double scoop ice cream cones should Peter sell per day to maximize his profit?
How many double scoop ice cream cones should Peter sell per day to maximize his profit?
answer
80
why?
Where does MC = MR?
@2.80 (80 units)
why?
Where does MC = MR?
@2.80 (80 units)
question
What price should Peter charge per double scoop ice cream cone to maximize his profit?
$5.60
$5.60
answer
producing 80, so charge $4.40
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How much profit will Peter earn each day if he chooses the price and quantity that maximize his profit?
answer
$176
Why:
Quantity (80)
Price ($4.40)
ATC ($2.20)
Quantity x ATC = maximizing profit
80 x $2.20 = $176
Why:
Quantity (80)
Price ($4.40)
ATC ($2.20)
Quantity x ATC = maximizing profit
80 x $2.20 = $176
question
Which of the following statements best describes the long run adjustment to the ice cream market in which Peter is competing.
answer
One or more new ice cream shops in Fairfield opens and competes with Peter for customers, reducing the demand for Peter's ice cream. Peter's profits decline until he earns zero profit.
question
Firms that spend the greatest percentage of their revenue on advertising tend to be firms that sell
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highly-differentiated consumer goods
Why:
(Products with the characteristic of being highly differentiated face more competition and need to advertise why their product is better. McDonald's vs. Burger King,)
Why:
(Products with the characteristic of being highly differentiated face more competition and need to advertise why their product is better. McDonald's vs. Burger King,)
question
Two bottles of over-the-counter pain reliever sit side-by-side in a grocery store: Advil (a brand name) sells for $5.00, while Fell Better (not a brand name) sells for $2.50. In a typical day the store sells some of each type of pain reliever, which suggests that
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some consumers must perceive that Advil is a higher quality product.
Why: (In some products brand name recognition imply quality that consumers are willing to pay more for.)
Why: (In some products brand name recognition imply quality that consumers are willing to pay more for.)
question
some consumers must perceive that Advil is a higher quality product. (In some products brand name recognition imply quality that consumers are willing to pay more for.)
Answer the following based on the above information.
What is the Marginal Product of Labor of the fifth (5th) worker?
Answer the following based on the above information.
What is the Marginal Product of Labor of the fifth (5th) worker?
answer
12
question
Refer to the table in Question 1:
After which worker does diminishing Marginal Product occur?
After which worker does diminishing Marginal Product occur?
answer
3rd worker
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Refer to the table in Question 1
Calculate the marginal revenue product (VMPL) of the third worker.
answer
$400
question
Refer to the table in Question 1
How many workers should the firm hire to maximize profit
How many workers should the firm hire to maximize profit
answer
6 workers
question
Refer to the table in Question 1
If the price of shirts decreased to $15 and the wage per day of workers increased to $150, how many workers hired because of these changes?
If the price of shirts decreased to $15 and the wage per day of workers increased to $150, how many workers hired because of these changes?
answer
5 workers
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