Study for test 3 – microeconomics

What describes monopolistic competition?
A relatively large number of sellers producing differentiated products and in which entry or exit from the industry is quite easy.

Marginal revenue is the _____ in total revenue that results from selling _____ more unit (extra unit) of output.
Change/1

What best describes oligopoly?
Involves only a few sellers of a standardized or differentiated product, so each firm is affected by the decisions of its rivals.

In a purely competitive industry, marginal _____ is equal to ______.
Cost/price; revenue/marginal cost; revenue;price

What best describes a pure monopoly?
One firm selling a single unique product, where entry of additional firms is blocked and product differentiation is not an issue.

In a purely competitive market, price per unit to the purchaser is the same as _____ per unit or _____ revenue to a seller.
Revenue/Average

From an economic standpoint, the break-even point is the level of output at which a firm makes ______ profit.
zero/normal

Which of the following best describes marginal revenue
the additional or extra revenue that an additional or extra unit of output contributes to total revenue

Which of the following factors will alter costs and shift the marginal cost or short-run supply curve to a new location
Technology
Price of variable inputs

The marginal cost curve is the firm’s short-run ____ curve
supply

A wage increase would increase marginal costs and shift the supply curve
upward; to the left

Which of the following describes the purely competitive industry’s supply curve
it is the sum of the supply curves of all the firms in the industry and has an important bearing on price

A purely competitive firm is a price _____
taker

Confronted with the market price of its product, a purely competitive producer will ask which three questions
What economic profit or loss will we realize if we produce this product
If we produce this product, in what amount
Should we produce this product

in the short run, the firm has a _____ plant and therefore, can adjust its output only through changes in the amount of ______ resources it uses.
fixed; variable

At a profit-maximizing level of output of 25 units, a perfectly competitive firm’s marginal revenue is $4, average variable cost is $.30, average total cost is $1.22 and marginal cost is $3.75 this firm’s economic profit equal
$69.50

True or false: A firm within pure competition will maximize its profits when total cost is maximized over total revenue
false
(A firm with pure competition will maximize its profit when total revenue is maximized over total cost)

When price is above ______ total cost, the firm incurs and economic profit
average

A purely competitive firm can maximize its economic profit (or minimize its loss) only by adjusting its
supply

Economists group industries into _______ distinct market structures
four

In pure competition, a firm’s economic profits is equal to:
-marginal revenue minus average total cost multiplied by quantity
-price minus average total cost multiplied by quantity

_______ is relatively rare in the real world, although this market model is highly __________ to several industries
Pure competition; relevant

A purely competitive firm’s demand schedule is also known as its:
average-revenue schedule & marginal-revenue schedule

The MR = MC rule is known as the:
profit-maximizing rule
loss-minimizing rule

Match each market structure with the description that best describes the conditions for exit and entry into the industry:
Purely competitive – very easy, no obstacles
Monopoly – blocked
Monopolistically competitive – relatively easy
Oligopoly – significant obstacles

A purely competitive firm’s total revenue (TR) curve will slope _____ and to the ________/
Upward; right

A firm within pure competition will produce up to the point where marginal revenue equals marginal cost because
-it will experience the lowest losses at this point
-it will experience the highest possible profits at this point

Match each structure with its correct description in terms of non-price competition
Monopoly – mostly public relations, advertising
Monopolistically competitive – considerable emphasis on advertising, brand names, trademarks
Oligopoly – a great deal, particularly with product differentiation
Purely competitive – none

A purely competitive firm’s total revenue curve will
have a constant slope because each extra unit of sales increases total revenue by a constant amount

Which of the following are true about the profit-maximizing rule of MR = MC?
-The rule applies only if producing is preferable to shutting down
-The rule is an accurate guide to product maximization for all firms regardless of their market structure
-The rule can be re-stated as P=MC when applied to a purely competitive firm because product price and MR are equal
-When MR is equal to MC at a fractional level of output, the last complete unit of output should be produced where MR > MC

In regards to its slope, a purely competitive firms demand curve is perfectly ________
elastic

Match each market structure with the correct description of how price control is exerted
Oligopoly – limited by mutual interdependence
Monopoly – considerable control
Monopolistically competitive – some, but within narrow limits
Purely competitive – none

In pure competition, a firm’s product price and marginal revenue are _______
equal

Which of the following best describes a firm continuing to operate even though it incurs an economic loss?
Whenever price exceeds average variable costs but is less than average total cost, the firm can pay part but not all, its fixed costs by producing

What is the behavior of marginal revenue for the monopolist compared to that of a pure competitor?
Declining and lower than product price

Which of the following describes why marginal revenue is less than price in an imperfect market?
Because the lower price of the extra unit of output also applies to all prior units of output

Two solutions to the economic losses caused by socially optimal pricing are public ______ and price discrimination
subsidies

What are potential solutions to the economic losses incurred by a regulated monopoly caused by socially optimal pricing?
Price discrimination & public subsidies

For a pure monopolist, total revenue _______ at a diminishing rate
increases

A monopolist does not have a supply curve because:
-it does not equate price with marginal cost
-there is no single, unique price associated with each level of output

Patents provide the in venture with a __________ position for the life of the patent
monopoly

The _______ price is where a monopoly’s price is equal to marginal cost
socially optimal

A natural monopoly occurs when the market demand curve crosses the long-run average total cost curve where average total costs are:
still declining

Which of the following can be a cause of extensive economies of scale?
Modern technology

Economics of scale refer to ______ average total costs with added firm size.
declining

What are two legal barriers to entry created by the government?
Patents and licenses

___________ competitors include pure monopolists, oligopolists, and monopolistic competitors.
Imperfect

The profit-maximizing monopolist will always want to avoid the ________ segment of its demand curve
inelastic

The change in total revenue is called __________ revenue
marginal

When are society’s resources allocated efficiently?
When purely competitive firms produce where price is equal to marginal cost

When disrupted by changes in the economy, a purely competitive market can restore the efficiency associated with marginal revenue or ________ = _________ cost = lowest ATC.
price; marginal

A specific number of firms, all with fixed unalterable plants, mainly describes:
an industry’s short run

Competitive market economies strive to generate:
allocative efficiency & productive efficiency

Whether a purely competitive industry is a constant-cost industry or an increasing-cost industry, the final long-run equilibrium position of all competitive firms share which of the following characteristics?
-Price or marginal revenue will settle where it is equal to minimum average total cost
-In the long run, a multiple equality occurs where price equals marginal revenue which equals the minimum average total cost
-In the long run, a multiple equality occurs where price equals marginal cost which equals the minimum average total cost

An unfavorable shift or _______ in demand will upset the original industry equilibrium and produce __________.
decrease; losses

In pure competition, society’s resources are allocated efficiently when:
profit-motivated firms produce output to the point where price or marginal revenue (MR) and marginal cost (MC) are equal

Competition, reflected in the entry and exit of firms eliminates economic profits and losses by adjusting the product ______ to equal the minimum long-run average ______ cost
price; total

________ efficiency means that resources are distributed among firms and industries to yield a mix of products and services that is most wanted by society
allocative

A constant-cost industry is one where ______ or ________ will not affect resource prices and production costs
expansion; contraction

_______ efficiency means that goods are produced in the least costly way.
productive

Which of the following does an increasing-cost industry experience?
-The downward shifting average total cost (ATC) curve as the industry contracts
-An upward shifting average total cost (ATC) curve as the industry expands

What describes consumer surplus?
It is the difference between the maximum price that consumers are willing to pay for a product and the market price for the product

A type of implicit understanding used by oligopolists to coordinate prices without engaging in outright collusion is known as:
price leadership

The benefits to oligopolists from collusion are:
-it increases profits
-it reduces price uncertainty
-it possible prohibits the entry of new rivals

Price leaders make price adjustments:
-by communicating impending price adjustments to the industry
-infrequently due to the uncertainty in rivals’ response to those price changes
-by establishing a price that discourages new entrants into the industry

Which of the following best exemplifies a firm with excess capacity
A fast-good restaurant where consumers never have to wait to place an order

A good way to describe ______ competition is that it mixes a small amount of monopoly power with a large amount of competition, which ______ blends a large amount of monopoly power, a small amount of competition through entry, and considerable rivalry among firms
monopolistic; oligopoly

Three models used to study pricing and output by oligopolies are:
-price leadership model
-collusive pricing model
-the kinked-demand curve model

Monopolistic competition normally consists of 25 to 75 firms rather than hundreds or thousands and involves”
-no collusion
-small market shares
-independent action

The rudy of how people behave in strategic situations is called:
game theory

In the long run, if a monopolistic competitive firm is earning normal profits (breaking even), then it should exit or stagy in the industry, and why?
Not exit the industry because both explicit and implicit costs are covered

Which of the following are typical characteristics of monopolistic competition?
-Small market share
-No collusion
-Independent

What describes the difference between products under pure competition versus products under monopolistic competition?
Standardized products are sold in pure competition but differentiated products are sold in monopolistic competition

When firms in an oligopoly _______, their payoffs will be greater than if they did not.
collude

What means illegal cooperation with rivals?
Collusion

Multiple models are used to study oligopolies because oligopolies
-encompass a greater range and diversity of market situations
-cannot estimate both their demand and marginal revenue curves due to rivals’ reactions

Firms in monopolistic competition produce goods with:
-varying degrees of customer service
-slightly varying physical characteristics

___ ___ competition is illustrated through product differentiation and advertising.
non-price

Which of the following are shortcomings of the kinked-demand analysis of oligopoly
-The kinked-demand curve explains price inflexibility but not price itself
-During macroeconomic instability, oligopoly prices are not as rigid as the kinked-demand theory implies

advertising increases efficiency by..
facilitating introduction of new products
lowering search costs for consumers

an oligopolistic firm’s marginal revenue curve is made up of two segments if
its rivals match a price cut but ignore a price increase

The equality of price and minimum average total cost yields technical ____ efficiency; the equality of price and marginal cost yields ____ efficiency.
Productive, Allocative

A monopolistic competitor’s demand curve
more elastic than that of a pure monopoly but less elastic than hat of a firm in pure competition

Oligopolistic behavior implies that oligopolists prefer competition
-though product development
-through advertising

Monopolistically competitive firms are not productively efficient because:
Output is less than society’s optimal level because a producer’s average total cost per unit is not at its lowest possible cost

The Herfindahl index equals
the sum of the squared percentage market shares of all firms in an industry

The kinked-demand curve of an oligopolist is based on the assumption that:
competitors will follow a price cut but ignore a price increase.

Explicit costs:
Monetary payments

Implicit costs:
Value of next best use
Self-owned resources
Includes normal profit

Accounting profit =
revenue – explicit costs

Economic profit =
Accounting profit – implicit costs

Short run:
-some variable inputs
-fixed plant

Long run:
-all inputs are variable
-Variable plant
-Firms enter and exit