UO Econ 201 Final Ben Hansen

total revenue (TR)

The amount a firm receives for the sale of its output (TR = P x Q)

total cost (TC)

The market value of the inputs a firm uses in production TC= FC+VC

Profit Equation

total revenue - total cost (TR-TC)

explicit costs

input costs that require an outlay of money by the firm (paying wages to workers) raw materials + rent + interest paid

implicit costs

Input costs that do not require an outlay of money by the firm (opportunity cost of the owners time) alternative job + forgone interest

Total Cost Formula

Explicit + Implicit costs

accounting profit

total revenue - total explicit cost

economic profit

total revenue - total costs (explicit and implicit)

accounting profit is greater than economic profit because...

accounting profit ignores implicit costs.

marginal product

the amount by which total cost rises if output increases by 1 unit

marginal product of labor

the change in output from hiring one additional unit of labor

Fixed Cost (FC)

do not vary with the quantity of output produced; incur even if production is zero;

Variable Cost (VC)

vary with the quantity of output produced;

diminishing marginal product

the property whereby the marginal product of an input declines as the quantity of the input increases

production function

the relationship between quantity of inputs used to make a good and the quantity of output of that good. (X) capital + (Y) labor = (Z) output

diminishing marginal product explains why, as a firms output increases ___

the production function gets flatter, while the total-cost curve gets steeper

Average Total Cost (ATC)

total costs divided by quantity of output

Average Fixed Cost (AFC)

fixed cost divided by the quantity of output

Average Variable Cost (AVC)

total variable costs divided by quantity of output

Marginal Cost (MC)

the change in total costs associated with a one-unit change in output

efficient scale

the quantity of output that minimizes average total cost

A firm is producing 20 units with an average total cost of $25 and a marginal cost of $15. If it increases production to 21 units, which of the following must occur?

Average total cost will decrease.

The government imposes a $1,000 per year license fee on all pizza restaurants. As a result, which cost curves shift?

Average total cost and average fixed cost

economies of scale

the property whereby long-run average total cost falls as the quantity of output increases

diseconomies of scale

the property whereby long-run average total cost rises as the quantity of output increases

constant returns to scale

the property whereby long-run average total cost stays the same as the quantity of output changes

If a higher level of production allows workers to specialize in particular tasks, a firm will likely exhibit ________ of scale and ________ average total cost.

economies; falling

Average Revenue (AR)

total revenue divided by the quantity of the product sold

Marginal Revenue (MR)

the change in total revenue from selling one more unit of a product

sunk cost

a cost that has already been committed and cannot be recovered. should be ignored when making decisions. You must pay them regardless. in the short run FC are sunk costs, so FC should not matter in the decision to shut down.

A competitive firm maximizes profit by choosing the quantity at which

marginal cost equals the price

A competitive firm's short-run supply curve is its ________ cost curve above its ________ cost curve.

marginal; average-variable

If a profit-maximizing, competitive firm is producing a quantity at which marginal cost is between average variable cost and average total cost, it will ________.

keep producing in the short run but exit the market in the long run

In the long-run equilibrium of a competitive market with identical firms, what are the relationships among price P, marginal cost MC, and average total cost ATC?

P = MC and P = ATC

In the short-run equilibrium of a competitive market with identical firms, if new firms are getting ready to enter, what are the relationships among price P, marginal cost MC, and average total cost ATC?

P = MC and P > ATC

Monopoly

a firm that is the sole seller of a product without close substitutes

natural monopoly

a type of monopoly that arises because a single firm can supply a good or service to an entire market at a lower cost than could two or more firms

price discrimination

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

Some government grants of monopoly power are desirable if they

provide incentives for invention/ artistic creation

A firm is a natural monopoly if it exhibits ________ as its output increases:

decreasing ATC

what is the monopolists profit maximizing quantity of output determined by

the intersection of the MC curve and the MR curve.

For a competitive firm,

P = MR = MC

For a monopoly firm,

P > MR = MC

if a monopoly fixed costs increase, its price will ___ and its profit will ___

stay the same; decrease

Compared to the social optimum, a monopoly firm chooses

a quantity that is too low and a price that is too high

Price discrimination by a monopolist refers to charging different prices based on _______.

the consumers WTP

When a monopolist switches from charging a single price to practicing perfect price discrimination, it reduces _______.

consumer surplus

antitrust laws

laws that encourage competition in the marketplace

antitrust regulators are likely to prohibit two firms from merging if

the combined firm will have a large share of the market

If regulators impose marginal-cost pricing on a natural monopoly, a possible problem is that _______.

the firm will lose money and exit the market

Oligopoly

a market structure in which only a few sellers offer similar or identical products

game theory

the study of how people behave in strategic situations

collusion

secret agreement or cooperation

Cartel

a group of firms acting in unison

Nash Equilibrium

a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen

Prisoner's Dilemma

a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial

dominant strategy

a strategy that is best for a player in a game regardless of the strategies chosen by the other players

The key feature of an oligopolistic market is that _________.

a small number of firms are acting strategically

As the number of firms in an oligopoly grows, the industry approaches a level of output ________ the competitive level and ________ the monopoly level.

equal to; more than

If an oligopoly does not cooperate and each firm chooses its own quantity, the industry will produce a quantity of output ________ the competitive level and ________ the monopoly level.

less than; more than

If an oligopolistic industry organizes itself as a cooperative cartel, it will produce a quantity of output ________ the competitive level and ________ the monopoly level.

less than; equal to

Two people facing the prisoners' dilemma may cooperate if they _______.

play the game repeatedly and expect noncooperation to be met with future retaliation

The prisoners' dilemma is a two-person game illustrating that _______.

even if cooperation is better than the Nash equilibrium, each person might have an incentive not to cooperate

predatory pricing

selling a product below cost to drive competitors out of the market

resale price maintenance

an agreement between a manufacturer and a distributor on the price at which a product will be resold

Bundling

grouping two or more products together and pricing them as a unit

Antitrust enforcement is controversial mainly because _______.

some business practices that seem anticompetitive may in fact have legitimate purposes

The Coase theorem suggests that __________ solve the problem of externalities in the absence of transaction costs.

private markets may

Fixed costs are incurred only if the firm produces a positive quantity of output true or false

false, fixed costs are incurred even if the firm produces nothing at all. variable costs are incurred only if the firm produces a positive quantity of output

Profit Maximizing Rule

MR=MC

shutdown

a short-run decision not to produce anything because of market conditions; Q=0 in the short run. if shut down in SR, must still pay FC

exit

a long-run decision to leave the market. If exit in LR, zero costs.

a firm should shut down if

TR

a firm should enter the market if

TR>TC; P>AtC

in competitive markets, choose Q where

Price = MC (because MR=P)

in monopoly choose Q where

MR=MC, and here P> MR=MC

deadweight loss is reduced with

price discrimination (consumer surplus taken by monopoly)

options for monopoly

regulate (utilities), break them up or do nothing

in an oligopoly profits are highest if they..

collude and act as a monopoly, but they have incentives to cheat.

when MC < ATC, ATC is ___

falling

when MC > ATC, ATC is ___

rising

For which pairs of goods is the cross-price elasticity most likely to be positive?

a. sheets and towels

b. bed frames and mattresses

c. pillows and blankets

d. quilts and comforters

D. quilts and comforters. the cross- price elasticity is positive for substitutes.

when a binding price floor is imposed, the quantity supplied exceeds the quantity demanded resulting in a surplus. (ex spaghetti sauce)

the demand curve for spaghetti sauce shifts to the left.

The size of the deadweight loss that results from a tax on cola is smaller, the _______.

less time cola sellers have to adjust to the tax.

The market demand curve faced by a competitive firm is ______, and it is ______ for a typical monopolist.

horizontal; downward sloping

Relative to a situation in which hotel rooms are not taxed, the imposition of a tax on hotel rooms causes the equilibrium quantity of hotel rooms to _______.

decrease, and the price buyers pay for hotel rooms increases.

Which of the following would likely have the least elastic supply?

a. Computers

b. Candles

c. Furniture

d. Beachfront land

d. beachfront land. the price elasticity of supply depends on the flexibility of the sellers to change the amount of the good they produce. it is almost impossible to produce more beachfront land, so it has the least elastic supply of the goods listed.

When a firm produces 875 units of output, the firm's average fixed cost is $0.28, the firm's average variable cost is $0.20, and the firm's marginal cost is $0.22. The firm's total cost of producing 875 units is _______.

420. The sum of the firm's average variable cost and average fixed cost gives the average total cost: $0.28 + $0.20 = $0.48. Total cost is average total cost multiplied by the quantity being produced: $0.48 × 875 = $420. Without additional information, marginal cost is not helpful in determining total cost.

absolute advantage

the ability to produce a good using fewer inputs than another producer

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

a negative externality occurs on a table when

social cost > private cost

positive externalities occur of a table when

private value < social value

shifts in the supply curve are caused by

input prices, technology, expectations, number of sellers

shifts in the demand curve

income, prices of related goods, tastes, expectations, number of buyers

elastic

refers to a market for a product or service that is price sensitive; that is, relatively small changes in price will generate fairly large changes in the quantity demanded, horizontal line (>1)

Inelastic

describes demand that is not very sensitive to price changes, vertical line (