Microeconomics Final Test Questions – Flashcards
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Perfect competition leads to allocative and productive efficiency because prices reflect consumers preferences and firms are motivated by profit.
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How does perfect competition lead to allocative and productive efficiency?
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when a good or service is produced at lowest possible cost.
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Productive efficiency is...
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produced up to the point where prices equals marginal cost.
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Allocative efficiency is...
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Productive efficiency pertains to production within an industry while allocative efficiency pertains to production across all industries.
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What is the difference betweem Allocative and Productive efficiency?
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will supply additional oranges because produces seek the highest return on their investment.
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Assume the marjet for oranges is perfectly competitive. If the demand for oranges increases, will the market supply additional oranges? If the demand for oranges increases, the market...
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results in productive efficiency because firms enter and exit until they break even where prices equal minimum average costs.
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Does the market system result in productive efficiency? In the long run, perfect competition...
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decrease; decrease
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A decrease in demand for organic products will ______ a firm's economic profict, and the increase in cost to produce organic produce will _____ a firm's economic profit.
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productive efficiency.
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Which of the following descibes a situation in which a good or service is produced at the lowest cost?
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the difference between the highest price a comsumer is willing to pay and the price the consumers actually pays.
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Consumer Surplus is...
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decreases;increases.
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As the price of a good rises, consumer surplus ______, and as the price of a good falls, consumer surplus ______.
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the difference between the lowest price a firm is willing to accept and the price it actually receives.
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Producer surplus is...
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increases; decreases.
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As the price of a good rises, producer surplus ______, and as the price of a good falls, producer surplus _______.
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$75 dollars.
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Paul goes to sportsmart to byuy a new tennis racquet. He is willing to pay $200 for a new racquet, but buys one on sale for $125. Paul's consumer surplus from the purchase is....
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the marginal benefit of consuming the product is equal to the marginal cost of consuming it.
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Consumers are willing to purchase a product up to the point where
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supply
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A ______ curve shows the marginal cost of producing one more unit of a good or service.
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The price received is at least equal to the additional cost of producing the product.
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Suppliers will be willing to supply a product only if
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a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production AND the sum of the consumer surplus and producer surplus is at a maximum.
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Economic efficiency is
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-to illustrate the benefits of a competitive market equilibrium. -to help policymakers the negative consequences of price floors, price ceilings and taxes.
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Economists define economic efficiency in this way...
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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.
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Economic efficiency is...
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the reduction in economic surplus resulting from not being in competitve equilibrium.
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Deadweight loss refers to...
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the quantity supplied is less than the economically efficient quantity.
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The figure to the right represents the market for pecans. Assume that this is a competitive market. If the price of pecans is $3,
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economic efficiency is achieved.
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If there is a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and consumer surplus producer surplus is maximized, then...
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actually, average revenue is always equal to price, whether is downaward sloping or not.
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With a downward-sloping demand curve, average revenue is equal to price...
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because the firm must lower its price to sell addictional units.
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With a downward-sloping demand curve, marginal revenue is below price...
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Wheat is a homogeneous good, while Starbucks is able to differentiate its coffee from other coffeehouses.
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There are many wheat farms in the united states, and there are also more than 7,000 starbucks coffeehouses. Why, then, does a Starbucks coffeehouse face a downward-sloping demand curve when a wheat farmer faces a horizonal demand curve?
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No
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Is it possible for marginal revenue for a firm operating in a perfectly competitive industry to be negative?
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No because marginal cost cannot be negative.
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Would a firm selling in a monopolistically competitive market ever produce where marginal revenue is negative?
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some of McDonald's customers, but not all of them, will still demand McDonald's cheeseburgers because they may prefer McDonald's cheeseburgers to cheeseburgers at other fast- food resturants.
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If McDonald's raises the price of it's cheeseburgers, then...
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many small (relative to the total market) sellers actying independently.
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The key characteristic of a monopolistically competitive market structure include...
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entery barriers into the industry are low.
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A characteristic that is common to monopolistic competition and perfect competition is that...
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it must reduce price to sell more units.
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If a firm faces a downward- sloping demand curve,
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less than the price.
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For a monopolistically competitive firm, marginal revenue is ...
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False.
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When a monopolistically competitive firm cuts its price to increase sales, it experiences a loss in revenue due to the income effect and a gain due to the substitution effect. (T/F)
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Profit= $100 Profit= (P - ATC) x Q
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If Daniel sells 200 Big Macs at the price of $3.75, and his average cost of producing 200 is 3.25, what is his profit?
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No. A monopolistically competitive firm should produce up to the point where marginal revenue equals marginal cost.
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Should a monopolistically competitive firm take into account its fixed costs when decideing how much to produce? Explain.
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To produce a quanity such that the marginal revenue equals marginal cost.
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What is the profit- maximizing rule for a monopolistically competitive firm?
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price unequal to marginal revenue for all output levels.
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Unlike a perfectly competitive firm, for a monopolistically competitive firm...
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each will have a smaller share of the existing market; consumers will have additional choices.
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The entry of new firms cause the demand curve of an existing firm in a monopolistically competitve market to shift to the left because _______ and become more elastic since ______.
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Zero economic profit includes a firm's implicit cost but zero accounting profit does not.
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What is the difference between zero accounting profit and zero economic profit?
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may continue to earn profit by reducing costs.
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Is zero economic profit inevitable in the long run for monopolistically competitive firms? In the long run, monopolistically competitive firms...
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The dmand curve facing each restaurant owner becomes more elastic.
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You are planning to open a new Italian resturant in your hometown where there are threee other Italian resturants. You plan to distinguish your resturant from your competitors by offering northern Italian cuisine and using locally grown organic produce. What is likely to happen in the restuarant market in your hometown after you open?
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dominant businesses; compete with one another not only in price but also in developing new products, marketing and advertising those products, and developing complements to use with the products.
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Oligopolists
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A situation in which both firms would be better off if they both chose a high price but each chooses a low price.
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Duopolists
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A market structure in which barriers to entry are low and many firms compete by selling similar, but not identical, products.
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Monopolistic competitors
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is more closely suited to their tastes.
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Do consumers benefit in any way from monopolistic competition relative to perfect competition? Compare to perfect competion, when aconsumer purchases a product from a monopoistically competitive firm, the consumer benefits from purchasing a product that...
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firms earn normal profits.
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Long run equilibrium under monopolistic competition is similar ro that under perfect competition in that...
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average toal cost is minimized in production.
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For the productive efficiency to hold...
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price must equal the marginal cost of the last unit priduced.
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For allocative efficiency to hold...
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True.
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Consumers in monopolistically competitive markets face a tradeoff between paying prices greater than marginal costs and purchasing products that are more closely suited to their tastes.
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Without barriers to entry, new firms will enter industries where firms are earning economic profits.
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What do barriers to entry have to do with the extent of competition, or lack thereof, in an industry?
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The most important barriers to entry are economies of scale, ownership of a key input, and government imposed barriers.
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What are the most important barriers to entry?
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minimum average cost occurs when a firm output is a large fraction of industry output.
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It is more likely for an industry to be an oligopoly than a competitiev in the presence of economies scales because...
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Factors that cause a producer's average cost per unit to fall as output rises.
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Economies of scale are...
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greater; 40
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Most economist believe that a fourpfirm concentration ratio of ____ than ___ percent indicates that an industry is an oligopoly.
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it does not include sales in the U.S. by foreigh firms.
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The four-firm concentration ratio is flawed in that...
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impose barriers to entry with a patent, which grants exclusive rights to product a good.
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In oligopolies, the government might...
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Ocean Spray has had almost exclusieb ownership of cranberries, which is key input.
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Ocean Spray has faced limited competition in the market for fresh and frozen cranberries. What has kept new firms from entering the market for fresh and frozen cranberries?
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firms pursuing aggressive business strategies, independent of rivals' strategies.
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An oligopolistic industry is characterized by all of the following except...
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both firms have market power.
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An oligopoly firm is similar to a monopolistically competitve firm in that...
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Oligopoly and perfect competition.
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Producing a homogeneous product occurs in which of the following industries?
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Concentration ratios assign weights to only the four largest firms in an industry.
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Which of the following is not a shortcoming of the concentration ratio as a measure of the extent of competition in an industry?
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one firm's pricing decision affects all the other firms.
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In an oligopoly market...
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difficult to determine because the firms's demand curve is typically unknown.
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Marginal revenue for an oligopolist is
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unlike department stores, do not have significant econmies of scales.
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A reason wht there is more competition among restaurants than among large discount department stores is that restaurants...
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Firms pursue their own self interest instead of cooperating to earn higher profits.
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Why do economist refer to the pricing strategies of oligopoly firms as a prisoner's dilemma game?
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Unlike explicit collusion, implicit collusion is where firms signal to each other without actually meeting and agreeing to not compete.
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What is the difference between explicit collusion and implicit collusion?
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where firms meet and agree to not compete.
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An example of explicit collusion is...
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price leadership.
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An example of implicit collusion is...
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In a repeated game plays can employ retaliation strategies.
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How is the prisoner's dilemma result changed in a repeated game?
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A situation in which each firm chooses the best strategy, given the strategies chosen by other firms. It is reached when each player chooses the best strategy for himself, given the strategies chosen by the other players in the group.
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Nash equilibrium
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A game in which pursuing dominant strategies results in noncooperation that leaves everyone worse off.
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Prisoner's dilemma
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An equilibrium in a game in which players do not cooperate but pursue their own self-interest.
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Noncooperative equilibrium
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In game theory, rules determine what actions are allowable, players employ strategies to attain their objectives,and payoffs are the results of the interation among the player's strategies.
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How are games in game theory played?
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An approach to evaluating alternative strategies in situations where the outcome of a particular strategy depends on the strategies used by other individuals.
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Game theory
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In economics, the rules of game include matters beyond a firms's control, a strategy is a firm's action to achieve a goal, and the payoffs are the profits.
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How is game theory used in economics?
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the profit that each producer can expect to earn fromevery combination of strategies by the firms in the market.
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Suppose we want to use game theory to analyze how an oligopolist selects its optimal price. The cells of the payoff matrix shows...
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could result in a Nash equilibrium.
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A game in which each player adopts its dominant strategy...
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a grouo of firms that enter into a formal agreement to fix prices to maximize joint profits.
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A cartel is...
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Yes.
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Are there any products for which there are no substitutes?
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No. It is possible to have a monopoly produce a good or service with substitutes as long as they are not close substitutes.
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Are products with substitutes, products which it would be possible to have a monopoly?
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it earns profit in the long run.
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Economists could find that a firms is a monopoly if
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a government- imposed barrier.
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To enter a local cable television market, a firms needs a license from the city government. This is an example of...
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withour a close substitute.
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A monopoly is a seller of a product...
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No, although Peet's coffee is a unique product, there are many different brands of coffee that are very close substitutes.
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Peet's coffee and Teas produce some flavorful varieties of Peet's brand coffee. Is Peet's a monopoly?
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a more inelastic demand curve
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Compared to a monopolistic competitor,a monopolist faces...
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more horizontal; when price goes up, total revenue decreases; when price goes down, total revenue increases
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Elastic demand curve
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Not responsive to price. so Price goes up by a lot, and quantity goes down by a little so Revenue goes up. & Revenues will go down when the price goes down
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Inelastic demand curve
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Only Koenig andBauer has access to the technology necessary to produce presses for currency.
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The German compay Koenig and Bauer has 90 percent of the world market for presses that print currency. Discuss the factors that would make it difficult for new companies to enter this market.
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encourage firms to spend money on the research and development necessary to create new products.
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The government issues patents to...
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A patenet is the exclusive right to a product for a period of 20 years from the date the product is invented.
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How long do patents last?
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government designation that a private firm is the only legal producer of a good or service.
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A public franchise is a...
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has a monopoly in the provision of first- class mail service.
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The United States Post Office...
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True.
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For a natural monopoly, the marginal cost of producing an additional unit of its product is relatively small. (T/F)
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A monopolist does not have a supply curve because it is a price maker with one profit-maximizing price-quantity combination.
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Does a monopolist have a supply curve?
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A monopoly's demand curve is the same as the demand curve for the product.
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Describe a monopoly's demand curve.
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marginal revenue equals marginal cost and charging the prce on the maeket demand curve for that output.
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A monopolist's profit mazimizing price and output corresponds to the point on a graph where..
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Market power results in economic profits that can be spent on research to develop new products.
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What effect might market power gave on technological change?
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the sum of consumer surplus an producer surplus is maximized.
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Economic effieciency in a free market occurs when...
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is lower because price is higher and output is lower.
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Compared to perfect competition, the consumer surplus in a monopoly...
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market price being close to marginal cost.
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The size of a deadweight loss in a market is reduced by...
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The Clayton Act prohibited firms from buying stock in competitors.
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The federal government has passed various lawes addressing mergers. What did the Clayton Act do?
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squares the market shares of each firm in the industry and adds up the values of the squares. For example, if a market has two firms, each with 50 percent market share, then HHI=2x (50)2 HHI=2x 2,500 HHI=5,000
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The Herfindahl-Hirschman Index (HHI) of concentration...
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In the United States the governments makes collusion illegal with antitrust laws because monopolies reduce economic efficiency.
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What is the government's policy on the collusion in the United States?
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whether or not there are close substitutes for the products of the two firms.
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When a proposed merger between two companies is reviewed by the government, the relevant market is defined by...
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Herfindahl-Hirschman Index.
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The standards used by the department of Justice and the FTC to evalute a potential merger are based on market concentration as determined by the...
