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| Question | Answer |
| What is a firm's fundamental goal? | To maximize profit |
| What do economists mean by the phrase ‘normal profit’? | The return to entrepreneurship. The profit that is used to keep the firm in business and competitive. |
| How is the time period referred to as the short run defined? | Some resources are fixed |
| What do economists mean by the phrase ‘increasing marginal returns’? | When the marginal product of an additional worker exceeds the marginal product of the previous worker. |
| How are average product and marginal product related mathematically? | Marginal product= Change in total product/ change in quantity of labor; Average Product= Total Product/quantity of labor |
| How is the cost of capital treated in the short run? | The quantity of capital does not change in the short run, so the cost does not change either. The cost of capital is a fixed cost. |
| What are the reasons for the U-shape of the average total cost curve? | Because total fixed cost is spread over a larger output and because of decreasing marginal returns. Cost is high for small values and gradually decreases until it hits a minimum where it then rises again with a very large quantity of goods being produced. |
| What is the relationship between the MC, AVC, and ATC curves? | MC is change in total cost resulting from a one-unit increase in output; AVC is total variable cost per unit of output; ATC is average fixed cost plus average variable cost. |
| What do economists call the situation where a firm's long-run average total cost falls as its output increases | Economies of scale |
| What effects cause the long-run average cost curve to be U-shaped? | When economies of scale are present, the curve is shaped downward and when diseconomies of scale are present the curve slopes upward |
| What are the characteristics of a perfectly competitive industry | Many firms that sell an identical product to many buyers -There are no barriers to entry or exit from the market -Established firms have no advantage over new firms -Sellers and buyers are well informed about prices |
| What makes up a perfectly competitive firm's supply curve (above the shut-down point)? | It is determined by the price of goods. |
| What decision does a perfectly competitive firm have to make to maximize its profit, in the short run? | They would produce at the profit maximizing quantity. Where Marginal cost equals price. |
| What happens if a perfectly competitive firm raises the price of its product above the equilibrium price? - | Supply would increase and price would fall |
| In the short run, what level of profit can a perfectly competitive firm earn? - | Normal profits |
| What level of profit does a perfectly competitive firm earn if price is less than its ATC? | It incurs an economic loss |
| (graph) How is the profitability of a perfectly competitive firm shown graphically? | Profit is when marginal benefit is above ATC. Loss is when ATC is above marginal benefit. |
| What happens in the long run when firms in a perfectly competitive market are earning an economic profit? - | More firms will enter the market which increases market supply and lowers price and profit |
| In the long run, how profitable will a firm in a perfectly competitive market be? | Zero economic profit |
| How will a permanent decrease in demand affect a perfectly competitive market? | It decreases the number of firms and decreases the equilibrium quantity. |
| What are the characteristics of a monopolistic market? | One firm sells a good or service that has no close substitutes and a barrier to entry prevents competition from new firms. |
| What are some examples of legal barriers in markets? | Public franchise, government license, patent, or copyright |
| How does a natural monopoly arise? | -When the technology for producing a good or service enables one firm to meet the entire market demand at a lower average total cost than two or more firms. |
| What is a single-price monopoly and why doesn’t it price discriminate? | A single price monopoly produces a smaller output and charges a higher price. |
| What does a single-price monopoly do to maximize its profit? | It produces the quantity at which marginal revenue equals marginal cost and charges the maximum price that consumers are willing to pay for that quantity. |
| graph) How is the profit-maximizing output determined graphically for a single-price monopoly? | It is where the difference between total revenue minus total cost is the greatest. |
| How does a monopoly differ from a perfectly competitive market with the same costs? - | A single price monopoly charges a higher price and produces a smaller quantity than a perfectly competitive market and creates a deadweight loss. |
| (graph) How would consumer surplus in a monopolistic market be shown graphically? | g |
| What fact about the willingness to pay of buyers makes price discrimination possible? | Different groups have different willingness to pay. |
| What happens to consumer surplus if a monopoly is able to perfectly price discriminate? | Monopolies can capture the entire consumer surplus, meaning that there is no consumer surplus. Prices are the highest that consumers are willing to pay for each unit. |
| What are the characteristics of monopolistic competition? | -Large number of firms competing -Each firm produces a differentiated product -Firms compete on price, product quality, and marketing -Firms are free to enter and exit |
| What happens to firms in monopolistic competition, in the long run? | It causes new firms to enter the market and therfore existing firms will not incur an economic profit for long |
| How is the ability to collude related to the number of firms in an industry? | Impossible when the market has a large number of firms. |
| Why can firms in monopolistic competition set the price for their products? | Because it faces a downward sloping demand curve as a result of product differentiation. |
| How is the marginal revenue curve facing a monopolistically competitive firm related to its demand curve? - | The curve is negatively sloped |
| How do economists define a firm's efficient scale of production? | The quantity at which average total cost is a minimum. |
| What rule does a firm in monopolistic competition follow to maximize profit? | Marginal revenue equals marginal cost |
| graph) How is the profit-maximizing price for a monopolistically competitive firm determined graphically | Price and output are respectively were the vertical line that extends from where mc equals MR. The efficient point. |
| Why do firms in monopolistic competition engage in innovation and product development? | In order to maintain economic profit |
| How do economists evaluate the overall efficiency of monopolistically competitive firms? | Complete product uniformity is efficient |
| What is the unique characteristic of oligopoly markets? | A small number of interdependent firms compete behind a barrier to entry. |
| What do economists call a market with only two firms? | A duopoly |
| What tools do economists use to identify oligopoly markets? | Looking at the HHL ratio (greater than 1,800 is an oligopoly), four-firm concentration ratio |
| What level of profit can firms in an oligopoly earn if they successfully collude and do not cheat on a cartel agreement? - | They can make the same level of profit as a monopoly |
| (graph) How can the range of outputs of an oligopoly be determined graphically? | The outputs may be at the monopoly equilibrium, perfect competition equilibrium, or somewhere in between. The in between is shown as a double sided arrow on the demand curve. |
| What tool do economists use to analyze the mutual interdependence of oligopolies? | HHL and four-firm concentration ratio? |
| Why are collusive agreements to form a cartel difficult to maintain? | Because of the prisoners dilemma where one firm may gain while the other suffers or both firms gain and suffer equally |
| Why is the prisoners' dilemma similar to the problem faced by firms in an oligopoly in the United States? | Because firms must decide whether or not to cheat on their partner in order to gain larger profit by producing more or less goods. They may gain more money but could also lose money and harm their partner in the process. |
| What is the focus of U.S. antitrust legislation? | It regulates oligopolies and prohibits them from becoming monopolies or behaving like monopolies |
| What do economists call setting a price so low that competitors are driven out of a market and then boosting the price? – | Predatory pricing |
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