VT Econ 2005 Trost Exam 2 - Assignment Essays

question

Minimize Costs

answer

Reason why firms choose specific technology and inputs.

question

marginal product

answer

change in total product when a particular resource increases by one unit

question

total product

answer

a firm's total output

question

law of diminishing marginal returns

answer

as more of a variable resource is added to a given amount of other resources, marginal product eventually declines and could become negative

question

fixed resource

answer

any resource that cannot be varied in the short run

question

variable resource

answer

any resource that can be varied in the short run to increase or decrease production

question

short run

answer

period in which at least one of a firm's resources is fixed

question

long run

answer

period during which all resources under the firm's control are variable

question

marginal cost

answer

change in total cost resulting from a one-unit change in output; MC=ΔTC/q

question

Marginal product

answer

change in total product when a particular resource increases by one unit

question

accounting profit

answer

firm's total revenue minus its explicit costs

question

economic profit

answer

firm's total revenue minus its explicit and implicit costs

question

total cost

answer

sum of fixed cost and variable cost; TC=FC+VC

question

Slope of total cost curve

answer

The slope at each rate of output equal the marginal cost at that rate of output

question

average variable cost

answer

variable cost divided by output; AVC=VC/q

question

average total cost

answer

total cost divided by output; ATC=TC/q OR ATC=AFC+AVC

question

MC relationship with AVC and ATC

answer

When MC is above AVC or ATC, they are rising. If MC is below, they are falling. If they are equal to MC they are at a minimum

question

Long-run average cost curve

answer

curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies

question

ATC curves relationship with LRAC

answer

Many ATC curves are tangent with the LRAC. Those points are the least-cost way of producing that rate of output.

question

Economies of Scale

answer

forces that reduce a firm's average cost as the scale of operation expands in the long run

question

diseconomies of scale

answer

forces that may eventually increase a firm's average cost as the scale of operation expands in the long run

question

minimum efficient scale

answer

Lowest rate of output at which a firm takes full advantage of economies of scale

question

What does a short run cost curve look like?

answer

ATC and AVC make a U shape, MC makes a check shape, and AFC is nearly flat

question

Types of Market structures

answer

perfect competition, monopoly, monopolistic competition, oligopoly

question

5 characteristics of perfect competition

answer

-price takers
-homogeneous products
-everyone has access to full information
-unrestricted entry & exit into the market
-prices not fixed or regulated by the state

question

What does perfect competition look like graphed?

answer

Price must be what the market sets. Quantity is chosen to maximize profit

question

Flat

answer

What does the demand curve for an individual, perfectly competitive firm?

question

Importance of P=MC=MR

answer

Gives profit-maximizing quantity and gives firm's supply curve. Is efficient to society

question

Long-run competitive equilibrium

answer

when P=SRMC=SRAC=LRAC & profits are zero

question

productive efficiency

answer

each firm employs the least-cost combination of inputs; minimum average cost in the long run

question

allocative efficiency

answer

each firm produces the output most preferred by consumers; marginal benefit equals marginal cost

question

Perfectly competitive rules for staying open in the short run

answer

If P<AVC a firm should shut down
If P>=AVC a firm should stay open

question

Rule for entering/exiting perfectly competitive markets

answer

if profits are > 0 firms will enter so prices fall until profits = 0.
If profits are < 0 firms will exit until prices rise to = 0.

question

Long-run industry supply curve

answer

Industry makes the prices that firms sell at

question

Monopoly characteristics

answer

-no close substitutes
-significant barriers to entry

question

Market demand curve

answer

what does a monopolist's demand curve look like?

question

Lower price to sell more

answer

what monopolists must do to make profit because MR is not the same as price or demand curve.

question

How do monopolists choose profit?

answer

choose q where MR=MC, then choose price from demand curve

question

Losses in monopoly

answer

when price is less than ATC

question

Profits in monopoly

answer

when price is more than ATC

question

Why aren't monopolies efficient?

answer

Because P>MC (q too low and P is too high), & not at minimum of ATC

question

natural monopoly

answer

industry that realizes such large economies of scale in producing its product that single firm production of the good or service is most efficient

question

perfect price discrimination (first degree)

answer

occurs when a firm changes the minimum amount that buyers are willing to pay for each unit

question

Second degree price discrimination

answer

occurs when firms charge different prices based on unobservable attributes

question

Third degree price discrimination

answer

occurs when firms charge people different prices based on observable consumer attributes

question

How does price discrimination work?

answer

consumers are divided into segments and are charged more or less based on their elasticity of demand

question

Difference between monopolistic competition and perfect competition

answer

monopolistic competition has differentiated products, so firms act like monopolists of their own product. D shifts down

question

Qualities of monopolistic competition

answer

-free entry, so average profits = 0
-costly advertising, but promotes variety
-inefficient, because P>MC (q too low, p is too high) and not at minimum average cost

question

Charactaristics of oligopolies

answer

-few big firms with market power can control price
-interaction and interdependence between firms
-inefficient because P>MC (q too low, p too high) and strategies are wasteful

question

Technological advancements

answer

a good thing to come out of oligopolies

question

cartel/collusion model

answer

bunch of firms getting together to act as a monopolist (unstable)

question

price leadership model

answer

big firms choose prices knowing others will follow

question

contestable markets

answer

when a monopoly lowers prices to perfectly competitive levels due to the threat of competition (P=ATC)

1 of 53

question

Minimize Costs

answer

Reason why firms choose specific technology and inputs.

question

marginal product

answer

change in total product when a particular resource increases by one unit

question

total product

answer

a firm's total output

question

law of diminishing marginal returns

answer

as more of a variable resource is added to a given amount of other resources, marginal product eventually declines and could become negative

question

fixed resource

answer

any resource that cannot be varied in the short run

question

variable resource

answer

any resource that can be varied in the short run to increase or decrease production

question

short run

answer

period in which at least one of a firm's resources is fixed

question

long run

answer

period during which all resources under the firm's control are variable

question

marginal cost

answer

change in total cost resulting from a one-unit change in output; MC=ΔTC/q

question

Marginal product

answer

change in total product when a particular resource increases by one unit

question

accounting profit

answer

firm's total revenue minus its explicit costs

question

economic profit

answer

firm's total revenue minus its explicit and implicit costs

question

total cost

answer

sum of fixed cost and variable cost; TC=FC+VC

question

Slope of total cost curve

answer

The slope at each rate of output equal the marginal cost at that rate of output

question

average variable cost

answer

variable cost divided by output; AVC=VC/q

question

average total cost

answer

total cost divided by output; ATC=TC/q OR ATC=AFC+AVC

question

MC relationship with AVC and ATC

answer

When MC is above AVC or ATC, they are rising. If MC is below, they are falling. If they are equal to MC they are at a minimum

question

Long-run average cost curve

answer

curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies

question

ATC curves relationship with LRAC

answer

Many ATC curves are tangent with the LRAC. Those points are the least-cost way of producing that rate of output.

question

Economies of Scale

answer

forces that reduce a firm's average cost as the scale of operation expands in the long run

question

diseconomies of scale

answer

forces that may eventually increase a firm's average cost as the scale of operation expands in the long run

question

minimum efficient scale

answer

Lowest rate of output at which a firm takes full advantage of economies of scale

question

What does a short run cost curve look like?

answer

ATC and AVC make a U shape, MC makes a check shape, and AFC is nearly flat

question

Types of Market structures

answer

perfect competition, monopoly, monopolistic competition, oligopoly

question

5 characteristics of perfect competition

answer

-price takers
-homogeneous products
-everyone has access to full information
-unrestricted entry & exit into the market
-prices not fixed or regulated by the state

question

What does perfect competition look like graphed?

answer

Price must be what the market sets. Quantity is chosen to maximize profit

question

Flat

answer

What does the demand curve for an individual, perfectly competitive firm?

question

Importance of P=MC=MR

answer

Gives profit-maximizing quantity and gives firm's supply curve. Is efficient to society

question

Long-run competitive equilibrium

answer

when P=SRMC=SRAC=LRAC & profits are zero

question

productive efficiency

answer

each firm employs the least-cost combination of inputs; minimum average cost in the long run

question

allocative efficiency

answer

each firm produces the output most preferred by consumers; marginal benefit equals marginal cost

question

Perfectly competitive rules for staying open in the short run

answer

If P<AVC a firm should shut down
If P>=AVC a firm should stay open

question

Rule for entering/exiting perfectly competitive markets

answer

if profits are > 0 firms will enter so prices fall until profits = 0.
If profits are < 0 firms will exit until prices rise to = 0.

question

Long-run industry supply curve

answer

Industry makes the prices that firms sell at

question

Monopoly characteristics

answer

-no close substitutes
-significant barriers to entry

question

Market demand curve

answer

what does a monopolist's demand curve look like?

question

Lower price to sell more

answer

what monopolists must do to make profit because MR is not the same as price or demand curve.

question

How do monopolists choose profit?

answer

choose q where MR=MC, then choose price from demand curve

question

Losses in monopoly

answer

when price is less than ATC

question

Profits in monopoly

answer

when price is more than ATC

question

Why aren't monopolies efficient?

answer

Because P>MC (q too low and P is too high), & not at minimum of ATC

question

natural monopoly

answer

industry that realizes such large economies of scale in producing its product that single firm production of the good or service is most efficient

question

perfect price discrimination (first degree)

answer

occurs when a firm changes the minimum amount that buyers are willing to pay for each unit

question

Second degree price discrimination

answer

occurs when firms charge different prices based on unobservable attributes

question

Third degree price discrimination

answer

occurs when firms charge people different prices based on observable consumer attributes

question

How does price discrimination work?

answer

consumers are divided into segments and are charged more or less based on their elasticity of demand

question

Difference between monopolistic competition and perfect competition

answer

monopolistic competition has differentiated products, so firms act like monopolists of their own product. D shifts down

question

Qualities of monopolistic competition

answer

-free entry, so average profits = 0
-costly advertising, but promotes variety
-inefficient, because P>MC (q too low, p is too high) and not at minimum average cost

question

Charactaristics of oligopolies

answer

-few big firms with market power can control price
-interaction and interdependence between firms
-inefficient because P>MC (q too low, p too high) and strategies are wasteful

question

Technological advancements

answer

a good thing to come out of oligopolies

question

cartel/collusion model

answer

bunch of firms getting together to act as a monopolist (unstable)

question

price leadership model

answer

big firms choose prices knowing others will follow

question

contestable markets

answer

when a monopoly lowers prices to perfectly competitive levels due to the threat of competition (P=ATC)

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