Managerial Economics - Chapter 8 - Custom Scholars
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Managerial Economics – Chapter 8

question
Short Run Supply Curve
answer
The supply curve for a firm in a competitive market is the positively sloped part of its marginal cost curve above minimum AVC. For prices below this level, the firm minimizes losses by shutting down in the short run.
question
Shutdown Point
answer
The point at which the firm must consider ceasing its production activity because the short run losses suffered by operating would be equal to the short run loss suffered by not operating (i.e., the operating cost = total fixed cost). In a perfectly competitive situation, this point is found at the lowest point of a firm's average variable cost curve. If the market price falls to this point, the firm should consider shutting down its operations. Any price lower than this would dictate that the firm should cease its operations in the short run.
question
Contribution Margin
answer
The amount of revenue that a firm earns above its total variable cost. According to economic analysis, a firm experiencing a loss may continue operating in the short run if it has a positive contribution margin. A firm experiencing a negative contribution margin must shut down its operations because its revenue cannot even cover its variable cost of operations.
question
Economic Loss
answer
A situation that exists when a firm's revenues cannot cover its accounting cost and its opportunity cost of production.
question
Long Run (Market Analysis)
answer
Firms are expected to enter a market in which sellers are earning economic profit. They are expected to leave a market in which sellers are incurring economic losses.
question
Market Power
answer
The power to set the market price.
question
Market Structure
answer
The number and relative sizes of the buyers and sellers in a particular market. A "competitive" market structure implies that the number of buyers and sellers in a market is large enough that it is difficult, if not impossible, for any one buyer or seller to determine the market price.
question
Monopoly
answer
A market in which there is only one seller for a particular good or service. There may be legal barriers to entry into this type of market (e.g. regulated utilities, patent protection).
question
Normal Profit
answer
An mount of profit earned in a particular endeavor that is just equal to the profit that could be earned in a firm's next-best alternative activity.
When a firm earns normal profit, its revenue is just enough to cover both its accounting cost and opportunity cost.
It can also be considered as the return to capital and management necessary to keep resources engaged in a particular activity.
question
MR = MC Rule
answer
A rule stating that if a firm desires to maximize its economic profit, it must produce an amount of output whereby the marginal revenue received at this particular level is equal to its marginal cost. This implies that those firms with market power must set a price that prompts buyers to to purchase this particular level of output.
question
P = MC Rule
answer
A variation of the MR = MC rule for those firms operating in perfectly competitive markets. In such markets, firms are price takers. Thus, the price they must deal with (which has been determined by the forces of supply and demand) is in fact the same as a firm's marginal revenue. When P = MC at multiple outputs, the firm should choose the one on the positively sloped part of the marginal cost curve (the output on the negatively sloped part is a profit minimum). Firms using this rule must also be careful that the price is greater than average variable cost as well as equal to marginal cost (i.e. AVC < P = MC). If a firm cannot operate at the production level where this condition holds, it should shut down its operations.
question
Perfect Competition
answer
A market with four main characteristics: (1) a large number of relatively small buyers and sellers, (2) a standardized product, (3) easy entry and exit, and (4) complete information by all market participants about the market price. Firms in this type of market have absolutely no control over the price and must compete on the basis of the market price established by the forces of supply and demand.
question
Price Makers
answer
Firms that exercise market power through product differentiation or by being dominant players in their markets.
question
Price Takers
answer
Firms that operate in perfectly competitive markets.
question
Pricing for Profit
answer
The method of pricing that follows the MR = MC rule.
question
Pricing for Revenue
answer
The pricing of a product to maximize a firm's revenue. I this case, the firm would try to price its product to sell an amount of output whereby the revenue earned from the last unit sold would be equal to zero (i.e., MR = 0). Assuming the firm faces a linear demand curve, the price it establishes to maximize revenue would be lower than the price that would maximize its profit.
question
Short Run Supply Curve
answer
The supply curve for a firm in a competitive market is the positively sloped part of its marginal cost curve above minimum AVC. For prices below this level, the firm minimizes losses by shutting down in the short run.
question
Shutdown Point
answer
The point at which the firm must consider ceasing its production activity because the short run losses suffered by operating would be equal to the short run loss suffered by not operating (i.e., the operating cost = total fixed cost). In a perfectly competitive situation, this point is found at the lowest point of a firm's average variable cost curve. If the market price falls to this point, the firm should consider shutting down its operations. Any price lower than this would dictate that the firm should cease its operations in the short run.
question
Four Firm Concentration Ratio
answer
The sum of the market shares of the top four firms in the defined industry. Letting Si denote sales for firm i and ST denote total industry sales
C4 = W1 + W2 + W3 + W4, where W1 = Si/ST
Really it's super easy. It's just market share of top four firms on top of each other
question
Herfindahl-Hirschman Index (HHI)
The sum of the squared market shares of firms in a given industry, multiplied by 10,000
So if there are 5 firms each who have 20% market share , then it would be 10,000*((.2)
answer
2 + (.2)^2 + (.2)^2+(.2)^2)+(.2)^2)
question
Natural Monopoly
answer
An industry that realizes such large economies of scale in producing its product that single-firm production of that good or service is most efficient.
question
When would a merger be challenged via the HHI?
answer
If it exceed 1800 (or would after the merger)
OR
Merger increases HHI by more than 100
question
What are some barriers to entry?
answer
Capital requirements
Patents and copyrights
Economies of scale
Economies of scope
question
What are the following of a PERFECT COMPETITION: Number and size of firms, type of product, market entry and exit, non-price competition, market power, long-run economic profit
answer
# and Size: Very large number of small firms
Type of Product: Standardized
Market Entry and Exit: Very easy
Non-Price Competition: Impossible
Market Power: None
Long-Run Economic Profit: None
Example: Commodities
question
What are the following of a MONOPOLY: Number and size of firms, type of product, market entry and exit, non-price competition, market power, long-run economic profit
answer
# and Size: One
Type of Product: Unique
Market Entry and Exit: Very difficult or impossible
Non-Price Competition: Not necessary
Market Power: High
Long-Run Economic Profit: High, subject to regulation
Example: Oil back in the day
question
In a perfect competition, where will the price settle?
answer
At the point where a firm earns a "normal" profit (MR = MC)
This is because if there's profit, firms enter, which pushes prices down
If there's losses, firms leave, pushes prices up
question
Is it easy or difficult for a firm to make money in a perfectly competitive market?
answer
Difficult. must be EXTREMELY cost efficient.
question
Can a monopoly set ANY price it wants?
answer
Yes, but it's still subject to a demand curve, so there will still be an "optimal" price
question
What are the "remedies" to a monopoly?
answer
Antitrust laws
question
What are the three main questions a firm must ask ask itself when considering entry into a market?
answer
How much should we produce?
If we produce such an amount, how much profit will we earn?
If a loss rather than a profit is incurred, will it be worthwhile to continue in this market in the long run (in hopes that we will eventually earn a profit) or should we exit?
question
What are three key things to keep in mind for firms looking to enter a perfectly competitive market?
answer
The earlier the firm enters a market, the better its chance of earning above-normal profit (assuming a strong demand in this market).
As new firms enter the market, firms that want to survive and perhaps thrive must find ways to produce at the lowest possible cost, or at least at cost levels below those of their competitors.
Firms that find themselves unable to compete on the basis of cost might want to try competing on the basis of product differentiation instead, although this is extremely difficult in this type of market.
question
Which of the following characteristics is most important in differentiating between perfect competition and all other types of markets?
answer
Whether or not firms are price takers
question
Demand facing an individual, perfectly competitive firm is...
answer
Perfectly elastic at the price determined by market forces.
question
In perfect competition the firm's demand curve is...
answer
perfectly elastic.
question
If a perfectly competitive firm incurs an economic loss, it should...
answer
...shut down if this loss exceeds fixed cost.
question
The principle marginal revenue equal-marginal-cost rule for maximizing profit applies to which industries?
answer
All industries
question
Are monopolies price takers or price makers?
answer
Price makers, they always decide their price because they're the only one selling the product
question
What is profit when MR = MC?
answer
Maximized
question
Are monopoly's demand curves usually more or less elastic than in more competitive markets? Explain why.
answer
Its demand curve is generally less elastic than in more competitive market, because there's no one else for consumers to go to.
question
Will a monopoly usually sell where its demand curve is elastic or inelastic?
answer
where its demand curve is elastic.
question
What does it mean for a perfectly competitive firm to have a perfectly elastic demand curve?
answer
There is no limit to the firm's revenues.
question
What does it mean to say that a perfectly competitive firm is a price taker? Can't a firm set any price it chooses?
answer
It means that they HAVE to follow the market on price, as if they sell at a higher price others won't buy it, and if you buy lower you'll lose revenue.
question
Why would a firm choose to remain in an industry in which it makes an economic profit of zero?
answer
It doesn't mean it's not making money, it means it's actually covering accounting + opportunity cost.
1 of 43
question
Short Run Supply Curve
answer
The supply curve for a firm in a competitive market is the positively sloped part of its marginal cost curve above minimum AVC. For prices below this level, the firm minimizes losses by shutting down in the short run.
question
Shutdown Point
answer
The point at which the firm must consider ceasing its production activity because the short run losses suffered by operating would be equal to the short run loss suffered by not operating (i.e., the operating cost = total fixed cost). In a perfectly competitive situation, this point is found at the lowest point of a firm's average variable cost curve. If the market price falls to this point, the firm should consider shutting down its operations. Any price lower than this would dictate that the firm should cease its operations in the short run.
question
Contribution Margin
answer
The amount of revenue that a firm earns above its total variable cost. According to economic analysis, a firm experiencing a loss may continue operating in the short run if it has a positive contribution margin. A firm experiencing a negative contribution margin must shut down its operations because its revenue cannot even cover its variable cost of operations.
question
Economic Loss
answer
A situation that exists when a firm's revenues cannot cover its accounting cost and its opportunity cost of production.
question
Long Run (Market Analysis)
answer
Firms are expected to enter a market in which sellers are earning economic profit. They are expected to leave a market in which sellers are incurring economic losses.
question
Market Power
answer
The power to set the market price.
question
Market Structure
answer
The number and relative sizes of the buyers and sellers in a particular market. A "competitive" market structure implies that the number of buyers and sellers in a market is large enough that it is difficult, if not impossible, for any one buyer or seller to determine the market price.
question
Monopoly
answer
A market in which there is only one seller for a particular good or service. There may be legal barriers to entry into this type of market (e.g. regulated utilities, patent protection).
question
Normal Profit
answer
An mount of profit earned in a particular endeavor that is just equal to the profit that could be earned in a firm's next-best alternative activity.
When a firm earns normal profit, its revenue is just enough to cover both its accounting cost and opportunity cost.
It can also be considered as the return to capital and management necessary to keep resources engaged in a particular activity.
question
MR = MC Rule
answer
A rule stating that if a firm desires to maximize its economic profit, it must produce an amount of output whereby the marginal revenue received at this particular level is equal to its marginal cost. This implies that those firms with market power must set a price that prompts buyers to to purchase this particular level of output.
question
P = MC Rule
answer
A variation of the MR = MC rule for those firms operating in perfectly competitive markets. In such markets, firms are price takers. Thus, the price they must deal with (which has been determined by the forces of supply and demand) is in fact the same as a firm's marginal revenue. When P = MC at multiple outputs, the firm should choose the one on the positively sloped part of the marginal cost curve (the output on the negatively sloped part is a profit minimum). Firms using this rule must also be careful that the price is greater than average variable cost as well as equal to marginal cost (i.e. AVC < P = MC). If a firm cannot operate at the production level where this condition holds, it should shut down its operations.
question
Perfect Competition
answer
A market with four main characteristics: (1) a large number of relatively small buyers and sellers, (2) a standardized product, (3) easy entry and exit, and (4) complete information by all market participants about the market price. Firms in this type of market have absolutely no control over the price and must compete on the basis of the market price established by the forces of supply and demand.
question
Price Makers
answer
Firms that exercise market power through product differentiation or by being dominant players in their markets.
question
Price Takers
answer
Firms that operate in perfectly competitive markets.
question
Pricing for Profit
answer
The method of pricing that follows the MR = MC rule.
question
Pricing for Revenue
answer
The pricing of a product to maximize a firm's revenue. I this case, the firm would try to price its product to sell an amount of output whereby the revenue earned from the last unit sold would be equal to zero (i.e., MR = 0). Assuming the firm faces a linear demand curve, the price it establishes to maximize revenue would be lower than the price that would maximize its profit.
question
Short Run Supply Curve
answer
The supply curve for a firm in a competitive market is the positively sloped part of its marginal cost curve above minimum AVC. For prices below this level, the firm minimizes losses by shutting down in the short run.
question
Shutdown Point
answer
The point at which the firm must consider ceasing its production activity because the short run losses suffered by operating would be equal to the short run loss suffered by not operating (i.e., the operating cost = total fixed cost). In a perfectly competitive situation, this point is found at the lowest point of a firm's average variable cost curve. If the market price falls to this point, the firm should consider shutting down its operations. Any price lower than this would dictate that the firm should cease its operations in the short run.
question
Four Firm Concentration Ratio
answer
The sum of the market shares of the top four firms in the defined industry. Letting Si denote sales for firm i and ST denote total industry sales
C4 = W1 + W2 + W3 + W4, where W1 = Si/ST
Really it's super easy. It's just market share of top four firms on top of each other
question
Herfindahl-Hirschman Index (HHI)
The sum of the squared market shares of firms in a given industry, multiplied by 10,000
So if there are 5 firms each who have 20% market share , then it would be 10,000*((.2)
answer
2 + (.2)^2 + (.2)^2+(.2)^2)+(.2)^2)
question
Natural Monopoly
answer
An industry that realizes such large economies of scale in producing its product that single-firm production of that good or service is most efficient.
question
When would a merger be challenged via the HHI?
answer
If it exceed 1800 (or would after the merger)
OR
Merger increases HHI by more than 100
question
What are some barriers to entry?
answer
Capital requirements
Patents and copyrights
Economies of scale
Economies of scope
question
What are the following of a PERFECT COMPETITION: Number and size of firms, type of product, market entry and exit, non-price competition, market power, long-run economic profit
answer
# and Size: Very large number of small firms
Type of Product: Standardized
Market Entry and Exit: Very easy
Non-Price Competition: Impossible
Market Power: None
Long-Run Economic Profit: None
Example: Commodities
question
What are the following of a MONOPOLY: Number and size of firms, type of product, market entry and exit, non-price competition, market power, long-run economic profit
answer
# and Size: One
Type of Product: Unique
Market Entry and Exit: Very difficult or impossible
Non-Price Competition: Not necessary
Market Power: High
Long-Run Economic Profit: High, subject to regulation
Example: Oil back in the day
question
In a perfect competition, where will the price settle?
answer
At the point where a firm earns a "normal" profit (MR = MC)
This is because if there's profit, firms enter, which pushes prices down
If there's losses, firms leave, pushes prices up
question
Is it easy or difficult for a firm to make money in a perfectly competitive market?
answer
Difficult. must be EXTREMELY cost efficient.
question
Can a monopoly set ANY price it wants?
answer
Yes, but it's still subject to a demand curve, so there will still be an "optimal" price
question
What are the "remedies" to a monopoly?
answer
Antitrust laws
question
What are the three main questions a firm must ask ask itself when considering entry into a market?
answer
How much should we produce?
If we produce such an amount, how much profit will we earn?
If a loss rather than a profit is incurred, will it be worthwhile to continue in this market in the long run (in hopes that we will eventually earn a profit) or should we exit?
question
What are three key things to keep in mind for firms looking to enter a perfectly competitive market?
answer
The earlier the firm enters a market, the better its chance of earning above-normal profit (assuming a strong demand in this market).
As new firms enter the market, firms that want to survive and perhaps thrive must find ways to produce at the lowest possible cost, or at least at cost levels below those of their competitors.
Firms that find themselves unable to compete on the basis of cost might want to try competing on the basis of product differentiation instead, although this is extremely difficult in this type of market.
question
Which of the following characteristics is most important in differentiating between perfect competition and all other types of markets?
answer
Whether or not firms are price takers
question
Demand facing an individual, perfectly competitive firm is...
answer
Perfectly elastic at the price determined by market forces.
question
In perfect competition the firm's demand curve is...
answer
perfectly elastic.
question
If a perfectly competitive firm incurs an economic loss, it should...
answer
...shut down if this loss exceeds fixed cost.
question
The principle marginal revenue equal-marginal-cost rule for maximizing profit applies to which industries?
answer
All industries
question
Are monopolies price takers or price makers?
answer
Price makers, they always decide their price because they're the only one selling the product
question
What is profit when MR = MC?
answer
Maximized
question
Are monopoly's demand curves usually more or less elastic than in more competitive markets? Explain why.
answer
Its demand curve is generally less elastic than in more competitive market, because there's no one else for consumers to go to.
question
Will a monopoly usually sell where its demand curve is elastic or inelastic?
answer
where its demand curve is elastic.
question
What does it mean for a perfectly competitive firm to have a perfectly elastic demand curve?
answer
There is no limit to the firm's revenues.
question
What does it mean to say that a perfectly competitive firm is a price taker? Can't a firm set any price it chooses?
answer
It means that they HAVE to follow the market on price, as if they sell at a higher price others won't buy it, and if you buy lower you'll lose revenue.
question
Why would a firm choose to remain in an industry in which it makes an economic profit of zero?
answer
It doesn't mean it's not making money, it means it's actually covering accounting + opportunity cost.

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