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ECON 2113

question
What is the objective of a firm?
answer
To maximize profits.
question
What is the difference between economic profit and accounting profit?
answer
Economists measure a firm's economic profit as total revenue minus all the opportunity costs (explicit and implicit). Accountants measure the accounting profit as
the firm's total revenue minus only the firm's explicit costs. In other words, they ignore the implicit costs.
question
Define the production function.
answer
The relationship between quantity of an input used to make a good and the quantity of output of that good.
question
What is diminishing marginal product?
answer
The property whereby the marginal product of an input declines as the quantity of the input increases.
question
What items are included in a firm's cost of production?
answer
Includes all the opportunity costs of making its output of goods and services. Explicit costs involve a direct money outlay for factors of production. Implicit costs do not involve a direct money outlay.
question
What are the fixed and variable costs?
answer
Costs that do not vary with the quantity of output produced; Costs that do change as the firm alters the quantity of output produced.
question
Various measures of costs: average total, average fixed, average variable, and marginal costs.
answer
AFC = FC/Q
AVC = VC/Q
ATC = TC/Q
MC = ▲TC/▲Q
question
What are the meaning of average cost and marginal cost and how they are related?
answer
Whenever marginal cost is less than average total cost, average total cost is falling. Whenever marginal cost is greater than average total cost, average total cost is rising. The marginal-cost curve crosses the average total-cost curve at the efficient scale.
question
What are the economies and diseconomies of scale?
answer
When long-run average total cost declines as output increases; When long-run average total cost rises as output increases.
question
What characteristics make a market competitive?
answer
There are many buyers and sellers in the market. The goods offered by the various sellers are largely the same.
Firms can freely enter or exit the market.
question
Measures of revenue: average revenue and marginal revenue.
answer
Tells us how much revenue a firm receives for the typical unit sold. In perfect competition, average revenue equals the price of the good; the change in total revenue from an additional unit sold.
question
How competitive firms decide how much output to produce?
answer
Tthe firm will want to produce the quantity that maximizes the difference between total revenue and total cost.
question
How does a firm make the short-run decision to shut down?
answer
If the revenue it gets from producing is less than the variable cost of production. Shut down if TR<TC Shut down if TR/Q<VC/Q Shut down if P<AVC.
question
What are sunk costs?
answer
Costs that have already been committed and cannot be recovered.
question
How does a firm make the long-run decision to exit?
answer
The firm exits if the revenue it would get from producing is less than its total cost. Exit if TR<TC Exit if TR/Q<TC/Q Exit if P<ATC
question
What is the definition on monopoly?
answer
Being the only seller of its product. Its product does not have close substitutes.
question
Why do some markets have only one seller?
answer
Costs of production make a single producer more efficient than a large number of producers.
question
What is the definition of natural monopoly?
answer
When a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms; arises when there are economies of a scale over the relevant range of output.
question
What is the key difference between a competitive firm and a monopoly?
answer
Having a sole producer, downward supply demand curve. being a price maker, and reduces sales to increase sales VS. being one of many producers, horizontal demand curve, price taker, and sells as much or as little at market price
question
How does a monopoly determine the quality to produce and the price to charge?
answer
• The profit-maximizing level of output is where MR=MC
- Same as for a perfectly competitive firm
• For a monopoly, MR is not equal to price.
- Different from a perfectly competitive firm
question
How do the monopoly's decisions affect economic well-being?
answer
In contrast to a competitive firm, the monopoly charges a price above the marginal cost. From the standpoint of consumers, this high price makes monopoly undesirable. However, from the standpoint of the owners of the firm, the high price makes monopoly very desirable.
question
What is the deadweight loss related to monopoly?
answer
The deadweight loss caused by a monopoly is similar
to the deadweight loss caused by a tax. The difference between the two cases is that the government gets the revenue from a tax, whereas a private firm gets the monopoly profit.
1 of 22
question
What is the objective of a firm?
answer
To maximize profits.
question
What is the difference between economic profit and accounting profit?
answer
Economists measure a firm's economic profit as total revenue minus all the opportunity costs (explicit and implicit). Accountants measure the accounting profit as
the firm's total revenue minus only the firm's explicit costs. In other words, they ignore the implicit costs.
question
Define the production function.
answer
The relationship between quantity of an input used to make a good and the quantity of output of that good.
question
What is diminishing marginal product?
answer
The property whereby the marginal product of an input declines as the quantity of the input increases.
question
What items are included in a firm's cost of production?
answer
Includes all the opportunity costs of making its output of goods and services. Explicit costs involve a direct money outlay for factors of production. Implicit costs do not involve a direct money outlay.
question
What are the fixed and variable costs?
answer
Costs that do not vary with the quantity of output produced; Costs that do change as the firm alters the quantity of output produced.
question
Various measures of costs: average total, average fixed, average variable, and marginal costs.
answer
AFC = FC/Q
AVC = VC/Q
ATC = TC/Q
MC = ▲TC/▲Q
question
What are the meaning of average cost and marginal cost and how they are related?
answer
Whenever marginal cost is less than average total cost, average total cost is falling. Whenever marginal cost is greater than average total cost, average total cost is rising. The marginal-cost curve crosses the average total-cost curve at the efficient scale.
question
What are the economies and diseconomies of scale?
answer
When long-run average total cost declines as output increases; When long-run average total cost rises as output increases.
question
What characteristics make a market competitive?
answer
There are many buyers and sellers in the market. The goods offered by the various sellers are largely the same.
Firms can freely enter or exit the market.
question
Measures of revenue: average revenue and marginal revenue.
answer
Tells us how much revenue a firm receives for the typical unit sold. In perfect competition, average revenue equals the price of the good; the change in total revenue from an additional unit sold.
question
How competitive firms decide how much output to produce?
answer
Tthe firm will want to produce the quantity that maximizes the difference between total revenue and total cost.
question
How does a firm make the short-run decision to shut down?
answer
If the revenue it gets from producing is less than the variable cost of production. Shut down if TR<TC Shut down if TR/Q<VC/Q Shut down if P<AVC.
question
What are sunk costs?
answer
Costs that have already been committed and cannot be recovered.
question
How does a firm make the long-run decision to exit?
answer
The firm exits if the revenue it would get from producing is less than its total cost. Exit if TR<TC Exit if TR/Q<TC/Q Exit if P<ATC
question
What is the definition on monopoly?
answer
Being the only seller of its product. Its product does not have close substitutes.
question
Why do some markets have only one seller?
answer
Costs of production make a single producer more efficient than a large number of producers.
question
What is the definition of natural monopoly?
answer
When a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms; arises when there are economies of a scale over the relevant range of output.
question
What is the key difference between a competitive firm and a monopoly?
answer
Having a sole producer, downward supply demand curve. being a price maker, and reduces sales to increase sales VS. being one of many producers, horizontal demand curve, price taker, and sells as much or as little at market price
question
How does a monopoly determine the quality to produce and the price to charge?
answer
• The profit-maximizing level of output is where MR=MC
- Same as for a perfectly competitive firm
• For a monopoly, MR is not equal to price.
- Different from a perfectly competitive firm
question
How do the monopoly's decisions affect economic well-being?
answer
In contrast to a competitive firm, the monopoly charges a price above the marginal cost. From the standpoint of consumers, this high price makes monopoly undesirable. However, from the standpoint of the owners of the firm, the high price makes monopoly very desirable.
question
What is the deadweight loss related to monopoly?
answer
The deadweight loss caused by a monopoly is similar
to the deadweight loss caused by a tax. The difference between the two cases is that the government gets the revenue from a tax, whereas a private firm gets the monopoly profit.
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