ECON 212 Exam 2

question

Plant

answer

an establishment that performs one or more functions in fabricating and distributing goods and services

question

Firm

answer

An organization that employs resources to produce a good or service for profit and owns and operates one or more plants.

question

Industry

answer

a group of firms producing products the same or similar

question

Common Stock

answer

represents a share in the ownership of a corporation

question

Principle-Agent Problem

answer

a problem caused by agents pursuing their own interests rather than the interests of the principals who hired them

question

Economic cost

answer

the payment that must be made to obtain and retain the services of a resource

question

A firm's explicit costs are:

answer

monetary payments it makes to those from who it must purchase resources that it does not own

question

Accounting Profit

answer

Total revenue - Explicit costs

question

Economic Profit

answer

Total revenue - Explicit costs - Implicit costs

question

Total Product

answer

total quantity or output of a particular good or service produced

question

Law of Diminishing Marginal Returns

answer

assumes technology is fixed thus techniques of production don't change

question

Total Product Max

answer

Marginal product is 0

question

Fixed costs

answer

costs that remain constant as output changes

question

Average Fixed Cost (AFC)

answer

total fixed costs divided by quantity of output

question

Marginal Cost (MC)

answer

The additional cost incurred from the consumption of the next unit of a good or service

question

Marginal Cost (MC)

answer

total cost divided by output

question

in the long run

answer

industry and individual firms can undertake all desired resource adjustments

question

Long run curve (ATC)

answer

shows lowest average total cost at any output level can be produced after time for adjustments

question

Economics of scale

answer

the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time

question

Downslope of long-run ATC curve

answer

explained by the economies of scale

question

Time expansion

answer

time of expansion of firm may lead to diseconomies

question

Diseconomies of scale

answer

the difficulty of efficiently controlling and coordinating a firm's operations as it becomes a large-scale producer

question

Economies and Diseconomies of Scale

answer

Economies of Scale - achieved when the business increases its scale of productions and in the process becomes more efficient

Diseconomies of Scale - when a business experiences inefficiency due to increasing scale of production

question

Minimum efficient scale (MES)

answer

the lowest level of output at which a firm can minimize long-run average total cost

question

Industry of Operation

answer

a firms decisions concerning price and production depend greatly on the character of industry of operation

question

the 4 distinct market structures are:

answer

pure competition
pure monopoly
monopolistic competition
oligopoly

question

Pure Competition Characteristics

answer

-Very large numbers of sellers
-Standardized product
-"Price takers"
-Easy entry and exit

question

Pure Monopoly Characteristics

answer

-single seller
-product has no close substitutes
-price makers
-barriers to entry

question

Monopolistic Competition Characteristics

answer

1. many, small buyers and sellers
2. no barriers to entry
3. differentiated products

question

Oligopoly Characteristics

answer

1. few, mutually interdependent firms
2. high barriers to entry
3. imperfect information

question

A basic feature of the purely competitive market is the presence of ______.

answer

a large number of independently acting sellers; offered in large national or international markets

question

Pure competitions must

answer

accept price predetermined by the market

question

pure competitors are

answer

price takers not price makers

question

Purely competitive demand schedule

answer

the demand schedule faced by an individual firm in a purely competitive industry is perfectly ELASTIC at market price

question

Price and Average revenue

answer

price and average revenue are the same in pure competition

question

In the short-run

answer

the firm will maximize profit or minimize loss by producing the output at marginal revenue = marginal cost (pure competition)

question

Profit-mazimizaition rule

answer

produce the quantity of output where marginal revenue equals marginal cost

question

Early stages of production

answer

in the early stages of production marginal product is low which makes costs unusually high

question

Price - Marginal Cost relationship

answer

improves with increased production

question

Quantity supplied increases

answer

According to the law of supply, when prices increases; economic profit is higher at higher profit

question

Entry and Exit in the Long Run

answer

can only take place in the long run

question

Short Run

answer

has a specific number of firms and fixed plant size

question

Assumptions of Entry and Exit

answer

all graphical adjustments are caused by entry and exits

question

If market price initially exceeds minimum ATC

answer

the resulting economic profits will attract new firms to the industry

question

Price increase

answer

industry will increase supply until price is brought down

question

Constant-cost industry

answer

an industry in which expansion by the entry of new firms has no effect on the prices firms in the industry must pay for resources and thus no effect on production costs

question

Increasing cost industries

answer

firms' ATC curves shift upward as the industry expands and downward as the industry contracts

question

Decreasing cost industries

answer

firms experience lower costs as their industry expands

question

Constant or Increasing cost industry

answer

the final long-run equilibrium positions of all firms have the same basic efficiency characteristics

question

In the long run pure competition forces

answer

firms to produce at the minimum average total cost (ATC) of production and charge a price that is just consistent with that cost

question

P = minimum ATC

answer

The firm will make zero economic profit (normal profit), and this is the break-even price for the firm

question

long run equilibrium in pure competition

answer

guarantees allocative efficiency we can be certain tithe society's scare resources are directed toward producing the goods and services that people most want to consume

question

P = MC

answer

allocative efficiency

question

Consumer surplus:

answer

The difference between the maximum amount a person is willing to pay for a good and its current market price.

question

Producer surplus:

answer

the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives

question

A pure monopoly exists when:

answer

a single firm is the sole producer of a product for which there are no close substitutes

question

Pure Monopoly Main Characteristics

answer

-One, sole producer
-Unique product, no close substitutes
-Price Maker, controls production
-blocked entry, strong barriers to entry ignored to block potential competition

question

Barriers to entry

answer

business practices or conditions that make it difficult for new firms to enter the market

question

Strong Barrier
Weaker Barrier
Weakest Barrier

answer

Pure Monopoly
Oligopoly
Monopolistic Competition

question

Modern technology in some industries is economies of scale

answer

declining average total cost with added firm size are extensive

question

Government Barriers to Entry

answer

the government may limit the number of firms in the market by awarding patents and license

question

A monopolist

answer

can use private property as an obstacle to potential rivals

question

Monopolist use of private property

answer

a firm that owns or controls a resource essential to the production process can prohibit the entry of rival firms

question

Confronted with a new entrant

answer

the monopolist may "create an entry barrier" by slashing its price, stepping up advertising or strategic actions to make entrance difficult

question

Monopoly Demand Assumptions

answer

1. Patents, economies of scare, or resource ownership secure our firms monopoly
2. No unit of government regulates the firm
3. The firm is a single-price monopolist; it charges the same price for all units of output

question

Marginal Revunue

answer

is less than the price for every unit of output except the first

question

All imperfect competitors

answer

face down-sloping demand curves

question

Change in quantity produced

answer

causes a movement along their respective demand curves and a change in the price they can charge for their respective products

question

Economists summarize this by saying

answer

firms with down-sloping demand curves are price makers

question

A monopolist seeking to maximize total profit

answer

they will employ the same rationale as a profit-seeking firm in a competitive industry

question

MR = MC

answer

profit maximization

question

In the long run the pure competitor

answer

is destined to have only a normal profit whereas barriers to entry mean that any economic profit realized by the monopolist can persist

question

In pure monopoly

answer

there are no new entrants to increase supply, drive down price, and eliminate economic profit

question

Monopoly yields

answer

neither productive nor allocative efficiency

question

Monopolist

answer

output less than output average total cost Is lowest

question

A purely monopolistic industry:

answer

will charge a higher price, produce a smaller output and allocate economic resources less efficiently than a purely competitive industry

question

Price discrimination

answer

the business practice of selling the same good at different prices to different customers

question

Price discrimination conditions

answer

1. must have monopoly power
2. must be able to segregate the market
3. consumers must NOT be able to resell the product
MR = Demand (one curve)
- no consumer surplus, it becomes profit

question

Price discrimination is

answer

widely practiced in the United States economy

question

Rule of Reason

answer

under the Sherman Act, contracts or conspiracies are illegal only if they constitute an unreasonable restraint of trade or attempt to monopolize. If an agreement promotes competition, it may be legal. If it suppresses or destroys competition, it is unreasonable and illegal.

question

Monopolistic competition

answer

mixes a small amount of monopoly power tight a large amount of competition

question

Oligopoly

answer

blends a large amount of monopoly power with both considerate rivalry among existing firms

question

Monopolistic Competition Characteristics

answer

many sellers, product differentiation, free entry and exit

question

Monopolistic competition involves

answer

small market shares, no collusion, independent action

question

Product differentiation

answer

a positioning strategy that some firms use to distinguish their products from those of competitors

question

Entry in Monopolistic competition

answer

relatively easy

question

Are few and requirements are low

answer

Economies of scale and capital requirements

question

The goal of product differentiation and advertising in monopolistic competition is to make

answer

price less of a factor in consumer purchases and make product differences a greater factor

question

Demand curve for monopolistic competition

answer

is highly elastic but NOT perfectly elastic

question

Maximize profits or minimize loss

answer

pure competitors and monopolists

question

Long run firms enter

answer

a profitable monopolistically competitive industry and leave unprofitable one

question

Only earn normal profit in the long run

answer

will only break even

question

Economic efficiency

answer

a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum

question

P = MC = minimum ATC

answer

economic efficiency

question

Monopolistic competition neither

answer

productive nor allocative efficiency occurs in long-run equilibrium

question

Excess capacity

answer

the difference between a firm's profit-maximizing quantity and the quantity that minimizes average cost

question

"Few Large Producers"

answer

Large producers control market

question

Homogenous vs. Differentiated

answer

Standardized v. Unique

question

Oligopoly characterized by

answer

strategic behavior and mutual independence

question

Oligopoly has similar

answer

barriers of entry to those of a pure monopoly

question

Mergers

answer

are utilized to help lessen competition

question

Mergers are typically

answer

unchallenged by the government if they are in the same industry

question

Game theory

answer

the study of how people or firms behave in strategic situations

question

Oligopolistic firms can

answer

increase their profits and influence rival profits by changing pricing strategies

question

Oligopolists can often benefit from __ , which means cooperation with rivals.

answer

collusion

question

Collusion

answer

occurs when competing firms in an industry work together to control prices and increase profits

question

Incentive to cheat

answer

even if you agree to cooperate through collusion or a commitment strategy, you still have a strong incentive to cheat on the agreement

question

Price leadership

answer

a form of implicit collusion in which one firm in an oligopoly announces a price change and the other firms in the industry match the change

question

Collusion/Cartel

answer

when companies cooperate to raise their joint profits
a cartel is an agreement between several producers to obey output restrictions in order to increase their joint profits.

question

The kinked demand curve

answer

a perceived demand curve that arises when competing oligopoly firms commit to match price cuts, but not price increases

question

Collusion agreement

answer

are difficult to establish and maintain

question

Share of total market

answer

determined through product development and advertising

question

product development

answer

a marketing strategy that entails the creation of new products for present markets

question

Advertising

answer

is an efficiency enhancing activity ----> greater economic profit

question

Advertising is designed

answer

inform
persuade
provoke
motivate

question

P = minimum ATC or P = MC

answer

is likely to occur under oligopoly

1 of 116

question

Plant

answer

an establishment that performs one or more functions in fabricating and distributing goods and services

question

Firm

answer

An organization that employs resources to produce a good or service for profit and owns and operates one or more plants.

question

Industry

answer

a group of firms producing products the same or similar

question

Common Stock

answer

represents a share in the ownership of a corporation

question

Principle-Agent Problem

answer

a problem caused by agents pursuing their own interests rather than the interests of the principals who hired them

question

Economic cost

answer

the payment that must be made to obtain and retain the services of a resource

question

A firm's explicit costs are:

answer

monetary payments it makes to those from who it must purchase resources that it does not own

question

Accounting Profit

answer

Total revenue - Explicit costs

question

Economic Profit

answer

Total revenue - Explicit costs - Implicit costs

question

Total Product

answer

total quantity or output of a particular good or service produced

question

Law of Diminishing Marginal Returns

answer

assumes technology is fixed thus techniques of production don't change

question

Total Product Max

answer

Marginal product is 0

question

Fixed costs

answer

costs that remain constant as output changes

question

Average Fixed Cost (AFC)

answer

total fixed costs divided by quantity of output

question

Marginal Cost (MC)

answer

The additional cost incurred from the consumption of the next unit of a good or service

question

Marginal Cost (MC)

answer

total cost divided by output

question

in the long run

answer

industry and individual firms can undertake all desired resource adjustments

question

Long run curve (ATC)

answer

shows lowest average total cost at any output level can be produced after time for adjustments

question

Economics of scale

answer

the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time

question

Downslope of long-run ATC curve

answer

explained by the economies of scale

question

Time expansion

answer

time of expansion of firm may lead to diseconomies

question

Diseconomies of scale

answer

the difficulty of efficiently controlling and coordinating a firm's operations as it becomes a large-scale producer

question

Economies and Diseconomies of Scale

answer

question

Minimum efficient scale (MES)

answer

the lowest level of output at which a firm can minimize long-run average total cost

question

Industry of Operation

answer

a firms decisions concerning price and production depend greatly on the character of industry of operation

question

the 4 distinct market structures are:

answer

pure competition
pure monopoly
monopolistic competition
oligopoly

question

Pure Competition Characteristics

answer

-Very large numbers of sellers
-Standardized product
-"Price takers"
-Easy entry and exit

question

Pure Monopoly Characteristics

answer

-single seller
-product has no close substitutes
-price makers
-barriers to entry

question

Monopolistic Competition Characteristics

answer

1. many, small buyers and sellers
2. no barriers to entry
3. differentiated products

question

Oligopoly Characteristics

answer

1. few, mutually interdependent firms
2. high barriers to entry
3. imperfect information

question

A basic feature of the purely competitive market is the presence of ______.

answer

a large number of independently acting sellers; offered in large national or international markets

question

Pure competitions must

answer

accept price predetermined by the market

question

pure competitors are

answer

price takers not price makers

question

Purely competitive demand schedule

answer

the demand schedule faced by an individual firm in a purely competitive industry is perfectly ELASTIC at market price

question

Price and Average revenue

answer

price and average revenue are the same in pure competition

question

In the short-run

answer

the firm will maximize profit or minimize loss by producing the output at marginal revenue = marginal cost (pure competition)

question

Profit-mazimizaition rule

answer

produce the quantity of output where marginal revenue equals marginal cost

question

Early stages of production

answer

in the early stages of production marginal product is low which makes costs unusually high

question

Price - Marginal Cost relationship

answer

improves with increased production

question

Quantity supplied increases

answer

According to the law of supply, when prices increases; economic profit is higher at higher profit

question

Entry and Exit in the Long Run

answer

can only take place in the long run

question

Short Run

answer

has a specific number of firms and fixed plant size

question

Assumptions of Entry and Exit

answer

all graphical adjustments are caused by entry and exits

question

If market price initially exceeds minimum ATC

answer

the resulting economic profits will attract new firms to the industry

question

Price increase

answer

industry will increase supply until price is brought down

question

Constant-cost industry

answer

an industry in which expansion by the entry of new firms has no effect on the prices firms in the industry must pay for resources and thus no effect on production costs

question

Increasing cost industries

answer

firms' ATC curves shift upward as the industry expands and downward as the industry contracts

question

Decreasing cost industries

answer

firms experience lower costs as their industry expands

question

Constant or Increasing cost industry

answer

the final long-run equilibrium positions of all firms have the same basic efficiency characteristics

question

In the long run pure competition forces

answer

firms to produce at the minimum average total cost (ATC) of production and charge a price that is just consistent with that cost

question

P = minimum ATC

answer

The firm will make zero economic profit (normal profit), and this is the break-even price for the firm

question

long run equilibrium in pure competition

answer

guarantees allocative efficiency we can be certain tithe society's scare resources are directed toward producing the goods and services that people most want to consume

question

P = MC

answer

allocative efficiency

question

Consumer surplus:

answer

The difference between the maximum amount a person is willing to pay for a good and its current market price.

question

Producer surplus:

answer

the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives

question

A pure monopoly exists when:

answer

a single firm is the sole producer of a product for which there are no close substitutes

question

Pure Monopoly Main Characteristics

answer

-One, sole producer
-Unique product, no close substitutes
-Price Maker, controls production
-blocked entry, strong barriers to entry ignored to block potential competition

question

Barriers to entry

answer

business practices or conditions that make it difficult for new firms to enter the market

question

Strong Barrier
Weaker Barrier
Weakest Barrier

answer

Pure Monopoly
Oligopoly
Monopolistic Competition

question

Modern technology in some industries is economies of scale

answer

declining average total cost with added firm size are extensive

question

Government Barriers to Entry

answer

the government may limit the number of firms in the market by awarding patents and license

question

A monopolist

answer

can use private property as an obstacle to potential rivals

question

Monopolist use of private property

answer

a firm that owns or controls a resource essential to the production process can prohibit the entry of rival firms

question

Confronted with a new entrant

answer

the monopolist may "create an entry barrier" by slashing its price, stepping up advertising or strategic actions to make entrance difficult

question

Monopoly Demand Assumptions

answer

question

Marginal Revunue

answer

is less than the price for every unit of output except the first

question

All imperfect competitors

answer

face down-sloping demand curves

question

Change in quantity produced

answer

causes a movement along their respective demand curves and a change in the price they can charge for their respective products

question

Economists summarize this by saying

answer

firms with down-sloping demand curves are price makers

question

A monopolist seeking to maximize total profit

answer

they will employ the same rationale as a profit-seeking firm in a competitive industry

question

MR = MC

answer

profit maximization

question

In the long run the pure competitor

answer

is destined to have only a normal profit whereas barriers to entry mean that any economic profit realized by the monopolist can persist

question

In pure monopoly

answer

there are no new entrants to increase supply, drive down price, and eliminate economic profit

question

Monopoly yields

answer

neither productive nor allocative efficiency

question

Monopolist

answer

output less than output average total cost Is lowest

question

A purely monopolistic industry:

answer

will charge a higher price, produce a smaller output and allocate economic resources less efficiently than a purely competitive industry

question

Price discrimination

answer

the business practice of selling the same good at different prices to different customers

question

Price discrimination conditions

answer

1. must have monopoly power
2. must be able to segregate the market
3. consumers must NOT be able to resell the product
MR = Demand (one curve)
- no consumer surplus, it becomes profit

question

Price discrimination is

answer

widely practiced in the United States economy

question

Rule of Reason

answer

question

Monopolistic competition

answer

mixes a small amount of monopoly power tight a large amount of competition

question

Oligopoly

answer

blends a large amount of monopoly power with both considerate rivalry among existing firms

question

Monopolistic Competition Characteristics

answer

many sellers, product differentiation, free entry and exit

question

Monopolistic competition involves

answer

small market shares, no collusion, independent action

question

Product differentiation

answer

a positioning strategy that some firms use to distinguish their products from those of competitors

question

Entry in Monopolistic competition

answer

relatively easy

question

Are few and requirements are low

answer

Economies of scale and capital requirements

question

The goal of product differentiation and advertising in monopolistic competition is to make

answer

price less of a factor in consumer purchases and make product differences a greater factor

question

Demand curve for monopolistic competition

answer

is highly elastic but NOT perfectly elastic

question

Maximize profits or minimize loss

answer

pure competitors and monopolists

question

Long run firms enter

answer

a profitable monopolistically competitive industry and leave unprofitable one

question

Only earn normal profit in the long run

answer

will only break even

question

Economic efficiency

answer

question

P = MC = minimum ATC

answer

economic efficiency

question

Monopolistic competition neither

answer

productive nor allocative efficiency occurs in long-run equilibrium

question

Excess capacity

answer

the difference between a firm's profit-maximizing quantity and the quantity that minimizes average cost

question

"Few Large Producers"

answer

Large producers control market

question

Homogenous vs. Differentiated

answer

Standardized v. Unique

question

Oligopoly characterized by

answer

strategic behavior and mutual independence

question

Oligopoly has similar

answer

barriers of entry to those of a pure monopoly

question

Mergers

answer

are utilized to help lessen competition

question

Mergers are typically

answer

unchallenged by the government if they are in the same industry

question

Game theory

answer

the study of how people or firms behave in strategic situations

question

Oligopolistic firms can

answer

increase their profits and influence rival profits by changing pricing strategies

question

Oligopolists can often benefit from __ , which means cooperation with rivals.

answer

collusion

question

Collusion

answer

occurs when competing firms in an industry work together to control prices and increase profits

question

Incentive to cheat

answer

even if you agree to cooperate through collusion or a commitment strategy, you still have a strong incentive to cheat on the agreement

question

Price leadership

answer

a form of implicit collusion in which one firm in an oligopoly announces a price change and the other firms in the industry match the change

question

Collusion/Cartel

answer

when companies cooperate to raise their joint profits
a cartel is an agreement between several producers to obey output restrictions in order to increase their joint profits.

question

The kinked demand curve

answer

a perceived demand curve that arises when competing oligopoly firms commit to match price cuts, but not price increases

question

Collusion agreement

answer

are difficult to establish and maintain

question

Share of total market

answer

determined through product development and advertising

question

product development

answer

a marketing strategy that entails the creation of new products for present markets

question

Advertising

answer

is an efficiency enhancing activity ----> greater economic profit

question

Advertising is designed

answer

inform
persuade
provoke
motivate

question

P = minimum ATC or P = MC

answer

is likely to occur under oligopoly

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ECON 212 Exam 2

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