Chapters 7-12

question

short run

answer

period of time during which some of the firm's cost commitments will NOT have ended.

question

long run

answer

period of time long enought for all of the firm's comments to end.

question

fixed cost

answer

cost of an input whose quantity does not rise when output goes up

question

variable cost

answer

varies with output.

question

total physical product (TPP)

answer

amount of output obtained from a given quantity of input

question

average physical product (APP)

answer

output per unit of product

question

APP (formula)

answer

TPP/X (where X is the quantity of input)

question

marginal physical product (MPP)

answer

increase in total output from a one-unit increase in the input quantity, holding the amounts of all other inputs constant

question

law of diminishing marginal returns

answer

an increase in the amount of any one input, ultimately leads to lower marginal returns to the expanding input.

question

marginal revenue product (MRP)

answer

the additional revenue that the producer earns from the increased sales when it uses and additional unit of input.

question

MRP (formula)

answer

MPP x Price of Output

question

optimal quantity of an input

answer

when MPP = Price. Only holds true when we see diminishing marginal returns. When the MPP exceeds price it pays to use more of an input.

question

Total Cost (TC)

answer

fixed cost + variable costs (+ opportunity costs)

question

Average Variable cost (AVC)

answer

total variable cost / quantity produced

question

Marginal variable cost (MVC)

answer

increase in total variable cost from one additional unit of output

question

MVC (formula)

answer

Chg Total Cost/ Chng Total Quantity

question

total fixed cost curve

answer

straight line

question

average cost curve

answer

U-Shaped due to the downward sloping segment of increasing marginal physcial products and distribution of fixed costs over ever-larger quantities of outputs.

question

average cost curve and more production

answer

as you produce more fixed costs go down

question

average cost (formula)

answer

AFC + AVC

question

Marginal cost (formula)

answer

MFC + MVC = 0 + MVC = MVC

question

economies of scale and production relationship

answer

long run average cost curves decline as output expands

question

production indifference curve

answer

sometimes called an isoquant. A curve showing all the difference quantities of two inputs that are just sufficient to produce a given quantity of output

question

production indifference curve characteristic for higher curves

answer

represent larger outputs and larger quantities of both inputs that corresponding points on the lower curve

question

production indifference curve and slope

answer

negative slope

question

production indifference curve shape

answer

curves inward towards the origin to reflect diminishing returns

question

production indifference curve and budget line

answer

the least costly way to produce any given level of output is indicated by the point of tangency between a budget line and production indifference curve

question

expansion path

answer

for each possible output levels, the combination of input quantities that minimize the cost of producing that output.

question

Price quantity pair

answer

point on the demand curve

question

Total Profit (TP) (economic total profit)

answer

total revenue - total cost (counts opportunity cost)

question

economic profit

answer

accounting profit (net earnings) minus opportunity cost

question

Total Revenue (TR)

answer

P X Q

question

Average Revenue (AR) (formula)

answer

TR/Q = PxQ/Q = P

question

Marginal Revenue (definition)

answer

the additional total revenue resulting from the addition of one unit to total output.

question

Marginal Revenue (formula)

answer

MR = TR1 - TR0

question

Total Cost Curve

answer

increasing with output

question

average cost curve

answer

U-shaped

question

Marginal cost curve

answer

U-shaped

question

Total profit graphically

answer

vertical distance between TR curve and TC curve

question

marginal profit

answer

addition to total profit from one more unit of output. The slope of the total profit curve

question

If MP > 0

answer

increase output

question

If MP = 0

answer

optimal

question

Rule of profit maximization

answer

profit can only be maximized at an output level at which marginal revenue is equal to marginal costs (MR = MC).

question

How to problem solve profit maximization

answer

If MR > MC --> produce one more unit
If MR < MC ---> do not produce more because MR = MC is optimal between the two

question

Finding optimal price

answer

1) find the profit maximizing quantity
2) find the price that corresponds to that quantity on the demand curve

question

profit maximize price and quantity and fixed costs

answer

when fixed cost increases profit maximizing price and output remain unchanged so long as it pays the firm to stay in business

question

perfect competition

answer

1) Numerous small firms and customers
2) Homogeneity of product
3) Freedom of entry and exit
4) Perfect information

question

numerous small firms and customers

answer

competitive markets contain so many buyers and sellers that each one constitutes a negligible portion of the whole

question

homogeneity of product

answer

identical product buyers do not care which firm they buy from

question

freedom of entry and exit

answer

no impediments to entry. If good is not profitable there is no barrier to leaving the market

question

perfect information

answer

each seller knows the other's price and products

question

perfectly competitive firm

answer

firm has no choice but to accept the market price. Flat horizontal demand curve, sells as much as it wants at the market price

question

equilibrium for a profit maximizing firm in a perfectly competitive market

answer

occurs at an output level at which marginal cost equals price = AR = MR. This is because the horizontal demand curve makes price and marginal revenue equal and therefore bost must equal marginal costs. MC = MR = P

question

P > AC

answer

firm will earn a profit

question

P < AC

answer

firm will suffer a loss

question

If TR < TC

answer

firm will suffer a loss

question

If TR > total short run variable cost (TVC)

answer

the firm should continue to operate in the short run

question

P > AVC

answer

firms should continue to operate in the short run

question

total revenue

answer

P x Q

question

If P > ATC [TR >TC]

answer

profit

question

If P < ATC

answer

operates at a loss

question

TR < TC

answer

operates at a loss

question

If P < AVC

answer

firm shuts down

question

TR < TVC

answer

firm shuts down

question

If P < AVC (reasoning)

answer

loss of shutting down (TC - TVC) is less than loss of operating (TC-TR

question

relationship between MC and supply curve in perfectly competitive firm

answer

the short run supply curve is thE MC CURVE that lies above the low point of the AVC curve. anything below AVC means we have to shut down.

question

industry short run

answer

period of time too brief for new firms to enter or old firms to leave.

question

industry long run

answer

period of time long enough for any firm to enter or exit as it desires.

question

supply curve of perfectly competitive industry

answer

at any price add up the quantity supplied by each of the firms

question

short term industry supply curve shift

answer

shifts out to the right as new firms enter the market

question

long run maximized profits perfectly competitive industry

answer

P = MC = AC

question

Monopoly barriers to entry and cost advantages

answer

legal restrictions, patents, control of a scarce resource or input, deliberately erected entry barriers, large sunk costs (boeing competitor), tech superiority, economies of scale (as you produce more average costs get lower and lower).

question

Monopoly and demand curve

answer

monopolies select price or quantity and have a down-ward sloping demand curve where P = AR = D

question

Monopoly marginal revenue curve

answer

below demand curve. MR < AR

question

Monopoly: how to analyze when a profit

answer

1) find MR = MC and get the quantity
2) find price at that quantity
3) If P > AC, you have a profit

question

Find optimal output for a monopoly

answer

find where MR = MC and total profit is the highest

question

monopoly v. perfect competition

answer

-monopolist output persists
- monopoly restricts output to raise shortrun prices
- monopoly restricts output to raise long run prices
-monopoly leads to inefficient resource allocation

question

monopoly shift in demand curve

answer

results in an outward shift of marginal revenue curve

question

monopolistic competition

answer

demand curve has a negative slope, a price increase may lead to losing some customers

question

Short run equilibrium of firm under monopolistic competition

answer

MR curve falls below AC and demand curve

question

Long run equilibrium under monopolistic competition

answer

demand curve is tangent to the AC curve, zero economic profit

question

oligopoly

answer

- market dominated by a few sellers
- big business
- identical or differentiated products
- seeks to create new products

question

Oligopolistic behavior

answer

must take into account rivals' responses because there is a lot of direct competition

question

excess capacity theorem and resource allocation

answer

monopolistic competition tends to lead firms to have unused or wasted capacity

question

Oligopolistic behavior models

answer

-ignoring interdependence
- strategic intereaction (moves counter moves)
- cartel (opec)
-tacit collusion
- price leader

question

average fixed costs

answer

as you produce more average fixed costs go down. curve is convex to the origin

question

total cost and total revenue curves

answer

total cost increases over time. total revenue decreases over time.

question

marginal physical product can tell a producer

answer

how much the last input added to the total amount of production

question

the long run average cost curve

answer

is a composite if short run AC curves

question

the long run average cost curve

answer

shows the lowest possible AC corresponding to each level

question

the long run average cost curve

answer

depends on the firms planning horizon

question

total profit

answer

TR-TC

question

total profit

answer

net profit times total output

question

total profit

answer

total sales revenue minus total cost

question

total revenue can be calculated

answer

directly from the demand curve

question

total revenue can be calculated

answer

from the average revenue curve

question

total revenue can be calculated

answer

P*Q

question

not a characteristic of perfect competition

answer

all consumers have identical demand curves

question

Example of real life perfect competition

answer

fishing industry

question

Average cost (formula)

answer

TOTAL COST / QUANTITY

question

Shutdown immediately if

answer

TR < SRVC

question

The difference between zero profit and zero economic profit is that

answer

economists include opportunity cost in zero economic profit while accountants do not include opportunity cost in zero profit

question

Pure monopoly

answer

- one supplier
- has no close substitutes for product
- exists when entry and survival of potential competitors is extremely unlikely

question

Why is the monopolist supply decision more complicated than that of competitive supply

answer

because the monopolist can choose its price and the perfect competitor cannot

question

A monopolist can sell 10 sans if he changes $10 per wang and $11 if he charges $9. The MR from selling the 11th is

answer

-$1

question

finding profit maximinzing output

answer

point before marginal revenue starts to decline

question

Monopoly characteristics

answer

- inefficient and therefore the least desireable form of market
- they may cause a shift in the demand curve to benefit society
- may aid in innovation

question

firms that engage in price discrimination

answer

will earn more profit that those that do not

question

Monopolistic competitors and perfect competitors are alike because

answer

they both have zero economic profit in the long run

question

The demand curve for a monopolistic competitor slopes downward because

answer

there are close but not perfect substitutes for the product

question

The monopolistically competitive firm in short run equilibrium

answer

- faces a downward sloping demand curve

question

The monopolistically competitive firm in short run equilibrium

answer

has a MR which lies below its demand curve

question

The monopolistically competitive firm in short run equilibrium

answer

maximizes profit where MR = MC

question

Oligopolists must

answer

take rivals' reactions into account

question

The difficulty in analyzing oligopolistic behavior arises from

answer

interdependant nature of oligopolistic decisions

question

When oligarcs join together in a cartel they

answer

have admitted that their behavior is interdependant

question

A sales-maximizing firm produces the output level at which

answer

MR = 0

question

The maximin criterion can be defined by which of the following

answer

one seeks the maximum of minimum payoffs to the various available strategies

question

if a market is contestable

answer

long run economic profits are zero

question

Placement of AVC and ATC curves on graph

answer

ATC must always be above AVC

question

perfectly competitive firm maximizes profits when

answer

price = marginal cost OR marginal revenue = MC OR
profits are the highest (greatest distance between total revenue and total cost)

question

The short run supply curve of a perfectly competitive firm

answer

goes through the lowest point on both its short run average variable cost and its short run average total cost curves

question

Monopolistic competitors and perfect competitors are alike in

answer

zero economic profit in the long run.

question

The demand curve for a monopolistic competitor slopes downward because

answer

there are close but not perfect substitutes for the product.

question

According to the kinked demand curve model, an oligopolist may face

answer

more elastic demand if she raises her price than if she lowers her price.

1 of 125

question

short run

answer

period of time during which some of the firm's cost commitments will NOT have ended.

question

long run

answer

period of time long enought for all of the firm's comments to end.

question

fixed cost

answer

cost of an input whose quantity does not rise when output goes up

question

variable cost

answer

varies with output.

question

total physical product (TPP)

answer

amount of output obtained from a given quantity of input

question

average physical product (APP)

answer

output per unit of product

question

APP (formula)

answer

TPP/X (where X is the quantity of input)

question

marginal physical product (MPP)

answer

increase in total output from a one-unit increase in the input quantity, holding the amounts of all other inputs constant

question

law of diminishing marginal returns

answer

an increase in the amount of any one input, ultimately leads to lower marginal returns to the expanding input.

question

marginal revenue product (MRP)

answer

the additional revenue that the producer earns from the increased sales when it uses and additional unit of input.

question

MRP (formula)

answer

MPP x Price of Output

question

optimal quantity of an input

answer

when MPP = Price. Only holds true when we see diminishing marginal returns. When the MPP exceeds price it pays to use more of an input.

question

Total Cost (TC)

answer

fixed cost + variable costs (+ opportunity costs)

question

Average Variable cost (AVC)

answer

total variable cost / quantity produced

question

Marginal variable cost (MVC)

answer

increase in total variable cost from one additional unit of output

question

MVC (formula)

answer

Chg Total Cost/ Chng Total Quantity

question

total fixed cost curve

answer

straight line

question

average cost curve

answer

U-Shaped due to the downward sloping segment of increasing marginal physcial products and distribution of fixed costs over ever-larger quantities of outputs.

question

average cost curve and more production

answer

as you produce more fixed costs go down

question

average cost (formula)

answer

AFC + AVC

question

Marginal cost (formula)

answer

MFC + MVC = 0 + MVC = MVC

question

economies of scale and production relationship

answer

long run average cost curves decline as output expands

question

production indifference curve

answer

sometimes called an isoquant. A curve showing all the difference quantities of two inputs that are just sufficient to produce a given quantity of output

question

production indifference curve characteristic for higher curves

answer

represent larger outputs and larger quantities of both inputs that corresponding points on the lower curve

question

production indifference curve and slope

answer

negative slope

question

production indifference curve shape

answer

curves inward towards the origin to reflect diminishing returns

question

production indifference curve and budget line

answer

the least costly way to produce any given level of output is indicated by the point of tangency between a budget line and production indifference curve

question

expansion path

answer

for each possible output levels, the combination of input quantities that minimize the cost of producing that output.

question

Price quantity pair

answer

point on the demand curve

question

Total Profit (TP) (economic total profit)

answer

total revenue - total cost (counts opportunity cost)

question

economic profit

answer

accounting profit (net earnings) minus opportunity cost

question

Total Revenue (TR)

answer

P X Q

question

Average Revenue (AR) (formula)

answer

TR/Q = PxQ/Q = P

question

Marginal Revenue (definition)

answer

the additional total revenue resulting from the addition of one unit to total output.

question

Marginal Revenue (formula)

answer

MR = TR1 - TR0

question

Total Cost Curve

answer

increasing with output

question

average cost curve

answer

U-shaped

question

Marginal cost curve

answer

U-shaped

question

Total profit graphically

answer

vertical distance between TR curve and TC curve

question

marginal profit

answer

addition to total profit from one more unit of output. The slope of the total profit curve

question

If MP > 0

answer

increase output

question

If MP = 0

answer

optimal

question

Rule of profit maximization

answer

profit can only be maximized at an output level at which marginal revenue is equal to marginal costs (MR = MC).

question

How to problem solve profit maximization

answer

If MR > MC --> produce one more unit
If MR < MC ---> do not produce more because MR = MC is optimal between the two

question

Finding optimal price

answer

1) find the profit maximizing quantity
2) find the price that corresponds to that quantity on the demand curve

question

profit maximize price and quantity and fixed costs

answer

when fixed cost increases profit maximizing price and output remain unchanged so long as it pays the firm to stay in business

question

perfect competition

answer

1) Numerous small firms and customers
2) Homogeneity of product
3) Freedom of entry and exit
4) Perfect information

question

numerous small firms and customers

answer

competitive markets contain so many buyers and sellers that each one constitutes a negligible portion of the whole

question

homogeneity of product

answer

identical product buyers do not care which firm they buy from

question

freedom of entry and exit

answer

no impediments to entry. If good is not profitable there is no barrier to leaving the market

question

perfect information

answer

each seller knows the other's price and products

question

perfectly competitive firm

answer

firm has no choice but to accept the market price. Flat horizontal demand curve, sells as much as it wants at the market price

question

equilibrium for a profit maximizing firm in a perfectly competitive market

answer

question

P > AC

answer

firm will earn a profit

question

P < AC

answer

firm will suffer a loss

question

If TR < TC

answer

firm will suffer a loss

question

If TR > total short run variable cost (TVC)

answer

the firm should continue to operate in the short run

question

P > AVC

answer

firms should continue to operate in the short run

question

total revenue

answer

P x Q

question

If P > ATC [TR >TC]

answer

profit

question

If P < ATC

answer

operates at a loss

question

TR < TC

answer

operates at a loss

question

If P < AVC

answer

firm shuts down

question

TR < TVC

answer

firm shuts down

question

If P < AVC (reasoning)

answer

loss of shutting down (TC - TVC) is less than loss of operating (TC-TR

question

relationship between MC and supply curve in perfectly competitive firm

answer

the short run supply curve is thE MC CURVE that lies above the low point of the AVC curve. anything below AVC means we have to shut down.

question

industry short run

answer

period of time too brief for new firms to enter or old firms to leave.

question

industry long run

answer

period of time long enough for any firm to enter or exit as it desires.

question

supply curve of perfectly competitive industry

answer

at any price add up the quantity supplied by each of the firms

question

short term industry supply curve shift

answer

shifts out to the right as new firms enter the market

question

long run maximized profits perfectly competitive industry

answer

P = MC = AC

question

Monopoly barriers to entry and cost advantages

answer

question

Monopoly and demand curve

answer

monopolies select price or quantity and have a down-ward sloping demand curve where P = AR = D

question

Monopoly marginal revenue curve

answer

below demand curve. MR < AR

question

Monopoly: how to analyze when a profit

answer

1) find MR = MC and get the quantity
2) find price at that quantity
3) If P > AC, you have a profit

question

Find optimal output for a monopoly

answer

find where MR = MC and total profit is the highest

question

monopoly v. perfect competition

answer

-monopolist output persists
- monopoly restricts output to raise shortrun prices
- monopoly restricts output to raise long run prices
-monopoly leads to inefficient resource allocation

question

monopoly shift in demand curve

answer

results in an outward shift of marginal revenue curve

question

monopolistic competition

answer

demand curve has a negative slope, a price increase may lead to losing some customers

question

Short run equilibrium of firm under monopolistic competition

answer

MR curve falls below AC and demand curve

question

Long run equilibrium under monopolistic competition

answer

demand curve is tangent to the AC curve, zero economic profit

question

oligopoly

answer

- market dominated by a few sellers
- big business
- identical or differentiated products
- seeks to create new products

question

Oligopolistic behavior

answer

must take into account rivals' responses because there is a lot of direct competition

question

excess capacity theorem and resource allocation

answer

monopolistic competition tends to lead firms to have unused or wasted capacity

question

Oligopolistic behavior models

answer

-ignoring interdependence
- strategic intereaction (moves counter moves)
- cartel (opec)
-tacit collusion
- price leader

question

average fixed costs

answer

as you produce more average fixed costs go down. curve is convex to the origin

question

total cost and total revenue curves

answer

total cost increases over time. total revenue decreases over time.

question

marginal physical product can tell a producer

answer

how much the last input added to the total amount of production

question

the long run average cost curve

answer

is a composite if short run AC curves

question

the long run average cost curve

answer

shows the lowest possible AC corresponding to each level

question

the long run average cost curve

answer

depends on the firms planning horizon

question

total profit

answer

TR-TC

question

total profit

answer

net profit times total output

question

total profit

answer

total sales revenue minus total cost

question

total revenue can be calculated

answer

directly from the demand curve

question

total revenue can be calculated

answer

from the average revenue curve

question

total revenue can be calculated

answer

P*Q

question

not a characteristic of perfect competition

answer

all consumers have identical demand curves

question

Example of real life perfect competition

answer

fishing industry

question

Average cost (formula)

answer

TOTAL COST / QUANTITY

question

Shutdown immediately if

answer

TR < SRVC

question

The difference between zero profit and zero economic profit is that

answer

economists include opportunity cost in zero economic profit while accountants do not include opportunity cost in zero profit

question

Pure monopoly

answer

- one supplier
- has no close substitutes for product
- exists when entry and survival of potential competitors is extremely unlikely

question

Why is the monopolist supply decision more complicated than that of competitive supply

answer

because the monopolist can choose its price and the perfect competitor cannot

question

A monopolist can sell 10 sans if he changes $10 per wang and $11 if he charges $9. The MR from selling the 11th is

answer

-$1

question

finding profit maximinzing output

answer

point before marginal revenue starts to decline

question

Monopoly characteristics

answer

- inefficient and therefore the least desireable form of market
- they may cause a shift in the demand curve to benefit society
- may aid in innovation

question

firms that engage in price discrimination

answer

will earn more profit that those that do not

question

Monopolistic competitors and perfect competitors are alike because

answer

they both have zero economic profit in the long run

question

The demand curve for a monopolistic competitor slopes downward because

answer

there are close but not perfect substitutes for the product

question

The monopolistically competitive firm in short run equilibrium

answer

- faces a downward sloping demand curve

question

The monopolistically competitive firm in short run equilibrium

answer

has a MR which lies below its demand curve

question

The monopolistically competitive firm in short run equilibrium

answer

maximizes profit where MR = MC

question

Oligopolists must

answer

take rivals' reactions into account

question

The difficulty in analyzing oligopolistic behavior arises from

answer

interdependant nature of oligopolistic decisions

question

When oligarcs join together in a cartel they

answer

have admitted that their behavior is interdependant

question

A sales-maximizing firm produces the output level at which

answer

MR = 0

question

The maximin criterion can be defined by which of the following

answer

one seeks the maximum of minimum payoffs to the various available strategies

question

if a market is contestable

answer

long run economic profits are zero

question

Placement of AVC and ATC curves on graph

answer

ATC must always be above AVC

question

perfectly competitive firm maximizes profits when

answer

price = marginal cost OR marginal revenue = MC OR
profits are the highest (greatest distance between total revenue and total cost)

question

The short run supply curve of a perfectly competitive firm

answer

goes through the lowest point on both its short run average variable cost and its short run average total cost curves

question

Monopolistic competitors and perfect competitors are alike in

answer

zero economic profit in the long run.

question

The demand curve for a monopolistic competitor slopes downward because

answer

there are close but not perfect substitutes for the product.

question

According to the kinked demand curve model, an oligopolist may face

answer

more elastic demand if she raises her price than if she lowers her price.

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Chapters 7-12

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