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ECONOMICS TEST 2
| Question | Answer |
|---|---|
| A type of firm that would not normally maximize profit is | an organization pursuing the public interests such as non for profits |
| What types of firm organizations allow owners of a firm to obtain the advantages of limited liability? (the organization structure that offers the most limited liability is....) | corporations |
| To avoid sales taxes of valuable inputs, companies often | vertically integrate to avoid paying the taxes |
| Airline manufacturing is what market structure? | an oligopoly because there are only a few airline manufacturers |
| the market for electrical work in a small town is what market structure? | perfectly competitive because electrical work is a homogeneous product |
| the market for tomatoes is what market structure? | a perfectly competitive because tomato farmers can easily enter and exit the market |
| the market for cable television in a city is what market structure? | a monopoly because there is only one cable supplier |
| if a monopoly chooses the optimal price instead of the optimal quantity, then its profits will be | unchanged because the optimal price and quantity yield the same profit |
| a monopoly can't choose both price and quantity because | a monopoly has the power to set price, not the demand curve |
| a firm is a natural monopoly if | one firm can produce the total output of the market at lower cost than two or more firms could |
| a drug company may charge more after it goes off patent if | the demand curve is less elastic at the new optimum |
| If entry produces a parallel shift left, then the brand-name firm | will not charge a higher price because its demand curve does not become steeper |
| explicit costs to a corporation of an executive's personal flight include | maintenance and reparircosts |
| methods that correctly determine the marginal explicit cost of the flight is | the incremental cost of the flight |
| the marginal opportunity cost of an executive's personal flight to the corporation is | the price the corporation could have earned from leasing the jet to someone else |
| in what types of industries would you expect to see substantial learning by doing | producing new products |
| average cost | decreases with cumulative output when there is learning by doing |
| a market is unlikely to be nearly competitive | with differentiated products such as food |
| high transaction costs and imperfect information would prevent price taking behavior because they | discourage customers from buying from rival firms |
| a firm should shut down if | Average Variable Cost is greater than the market price |
| a binding minium wage______ the market wage and _______ the market employment level | raises; decreases |
| The difference between the total cost and the total varialbe cost is (for short run production) | a constant |
| the marginal cost is the (for short run production) | slope of the total cost curve or the total variable cost curve |
| the average cost curve is (for short run production) | everywhere above the average variable cost curve |
| if a firm buys a building so as to have office space for its workers, the monthly opporutnity cost of the building is best measured as | the rent the firm could earn if it rented the building to another firm |
| if both the price of labor and capital rise in the same proportion, | the isocost line makes a parallel shift inward |
| if the price of labor increases but the capital stays the same, | the isocost line becomes steeper |
| for a given level of output, a subsidy will prompt a firm to use | more labor and less capital becuase the marginal product of the last dollar spent on labor is greater than the marginal product of the last dollar spent on capital |
| a production possibilities frontier that is a downward sloping straight line implies | no economies of scope |
| selling shares in an initial public offering results in | ownership becoming broadly distributed |
| should a competitive firm ever produce when it is losing money? | yes, as long as revenue can cover total variable costs plus any portion of fixed costs |
| teachers are more likely to specialize and teach only one subject becuase | a larger student base justifies specialized teachers that are more effective at teaching one subject |
| To avoid a hostile takeover, the management of the target company should | institute policies that make the company a less attractive tackover target |
| a competitive firm observing a rival firm raising its price will | ignore its rival's action |
| suppose there is a relatively large number of firms, a high degree of product differentiation, and free entry. What market structure is likely to form | a monopolistically competitive market |
| Profit is maximized when the MC... | intersects demand from below because at any quantity greater than this MC is greater than MR |
| In a perfectly competitive marekt | firms can freely enter and exit |
| high transaction costs and imperfect information would prevent price taking behavior because they.... | discourage customers from buying from rival firms |
| in the short run, a lump sum tax _______ the monopoly's profit maximizing quantity if it produces and _____ the monopoly's likelihood of shutting down | does not affect; does not affect |
| in the long run, a lump sum tax _______ the monopoly's profit maximizing quantity if it produces and _____ the monopoly's likelihood of shutting down | does not affect; increases |
| which of the following must be true for a natural monopoly to occur | the marginal cost must be below the average cost |
| Unlike a competitive firm, a monopoly may operate on any part of its long run average cost curve because a monopoly | is the only firm in the industry |
| Explanations for positive network externalities | bandwagon effect, direct size effect, and behavioral effect |
| opportunity cost | the value of the input's best alternative use |
| Sunk costs | costs that cannot be recovered |
| Short-Run costs | has FC and VC; |
| Average costs | TC/#of inputs |
| AVC | VC/Output |
| marginal costs | the amount by which a firm's cost changes if the firm produces one more unit of the output |
| at quantities where the marginal cost curve is below the average cost curve | the average cost curve is downward sloping |
| when the marginal cost curve is above the average cost curve | the average cost curve is upward sloping |
| the marginal cost curve cuts the average cost curve | at it's minimum point |
| if labor is the only variable factor in the short run, the shape of SR cost curves... | reflects the marginal product of labor |
| Long Run Costs | all inputs can be adjusted; no FC |
| If there are no fixed costs | the average total cost and average variable cost are identical |
| a firm chooses to use a combination of inputs that... | minimizes the costs |
| to produce a given output level | it chooses the lowest point on the isocost line that touches the relevant isoquant |
| another way to minimizze costs | a firm adjusts inputs until the last dollar spent on any input increases output by as much as the last dollar spent on any other input |
| Costs | is a function of the input prices and the output level |
| If a firm's average cost falls as output expands | it has economies of scale |
| if a firm's average cost rises as output expands | there are diseconomies of scale |
| economies of scope | if it is less expensive for a firm to produce two goods jointly rather than seperately |
| diseconomies of scope | it is less expensive to produce good seperately |
| the presence or absence of economies of scope is important in determining... | the portfolio of products that a firm produces |
| For-profit firms | are normally organized as sole proprietorships, partnerships, or corporations |
| types of firms that have objectives other than profit maximization | non for profit and government owned firms |
| economic profit | revenue minus opportunity costs |
| zero economic profit | means that the firm is making as much as it could if its resources were devoted to their best alternative uses |
| 2 maximization of profit decisions | 1) the point at which Q is at its highest (where Marginal Profit = 0 or when MR=MC)and 2) whether to rpoduce at all |
| principal-agent problem or agency problem | where the owner (principal) hires an agent (manager) to perform an action, and the agent acts in his or her own best interest |
| how to fix the agency problem | monitoring, contingent rewards, and corporation rewards |
| vertically integrate | participate in more than onee successive stage of the production and distribution of goods or services |
| key incentives to vertical integration | lowering transaction costs, ensuring a steady supply, and avoiding government restrictions |
| quasi-vertical integration | uses of contracts or other means to control firms with which it has vertical relations |
| Market structure | ease at which a firm can enter or leave the market, the ability to differentiate products |
| major market structures | perfect competition, monopoly, oligopoly, and monopolistic competition |
| competitive firms are | price takers |
| non competitive firms are | price setters |
| oligopolies and monopolistically competitive firms | must take account of rivals' strategies and may differentiate their products |
| competitive and monopolistically competitive firms | are in markets where entry by potential rivals is easy, so economic profit is driven to zero |
| perfect competition | a market structure in whihc buyers and sellers are price takers; has a horizontal demand curve |
| why is the perfectly competitive market structure demand curve horizontal? | because of the 5 characteristics of perfect competition |
| 5 characteristics of perfect competition | large number of small buyers and sellers, firms produce identical products, buyers have full info about products, transaction costs are negligible, and there is free entry and exit in the long run |
| because competitive firms are price takers | MR=Market price, so it sets its output so that price=marginal cost |
| a profit-maximizing firm shuts down and produces no output | if the market price is less than its minimum average variable costs |
| a competitive firm's short run supply curve | is its marginal cost curve above its minimum average variable costs |
| short run market supply curve | the sum of the supply cuves of the fixed number of firms producing in the short run |
| in the long run, a competitive firms sets its output | where the market price equals its long run marginal costs |
| competitive firms shut down in the long run if | the market price is less than the minimum of its long run average costs |
| competitive firms long run supply curve | the long run marginal cost above its its miniimum long run average costs; the horizontal sum of the supply cuves of all the firms in the market |
| if firms differ | entry is difficult or costly, input prices increase with output, the long run market supply curve has an upward slope. the LR Equilibrium price and quantity may b different from the SR price and quantity |
| perfect competitivion | maximizes total surplus |
| total surplus | the monetary value of the gain from trade. the sum of consumer surplus and producer surplus |
| consumer surplus | the economic benefit obtained by a consumer in excess of price paid. the area under the demand curve above the price up to the quantity that the consumer buys |
| producer surplus | is the amount producers are paid over and above the minimum amount needed to induce them to produce; is revenue minus VC. which with no fixed costs, equals profit. is the area below price and above the supply curve up to the Q sold |
| in the short run, a firm's producer surplus is greater than profit by... | an amount equal to unavoidable fixed costs |
| monopoly | maximizes its profit by setting its output so that its marginal revenue equals its marginal costs; makes positive profit if its average cost is less than the price at the profit maximizing output |
| market power | the ability of a firm to significantly affect the market price; a firm has this based on the shape of its demand curve |
| a more elastic demand curve at the point where the firm is producing, | the lower the markup price over the marginal cots |
| when a monopoly produces too little output because its price is above the costs | it produces deadweight loss. |
| for monopolies, consumers are worse off becuase | tthey are buying less output at a higher price |
| creation of monopolies | a firm may be a monopoly because it has lower operating costs than its rivals, due to superior knowleadge of control of an output |
| natural monopoly | it is cheaper to produce from just one comapany, often created by governments. or it may have apatent |
| why monopolies advertise | to shift its demand curve to the right or make it less elastic so to raise its net profit |
Created by:
hopekn