Econ Exam 3

What determines the different short-run average total cost curves for a firm?

Different factory sizes based on the expected level of output in the long run.

When should a firm increase its factory size?

Only if it expects an increase in output in the long run.

What happens to output as the size of a firm increases in the long run?

The output that a given quantity of labor can produce increases, but returns diminish as the number of workers increases.

What is the long-run average cost curve composed of?

The lowest average total cost for each output level.

What is economies of scale?

A situation in which long-run average cost decreases as output increases.

What causes the Long Run Average Total Cost Curve to initially slope down?

Economies of scale.

What is diseconomies of scale?

A situation in which long-run average cost increases as output increases.

What are constant returns to scale?

A situation in which long-run average cost does not change as output changes.

What are the components of short-run costs?

Average Fixed Cost (AFC), Average Variable Cost (AVC), Average Total Cost (ATC), and Marginal Cost (MC).

What characterizes a perfectly competitive market?

Many small firms, similar products, easy entry and exit, and equal access to information.

What is an example of a perfectly competitive market?

Agricultural products.

What defines monopolistic competition?

Many firms with different but substitutable products, easy entry and exit, and some restrictions on information availability.

What is an example of monopolistic competition?

Branded goods, Starbucks, computer games, and restaurants.

What characterizes an oligopoly?

Few firms, some large, with similar or differentiated products, and some barriers to entry.

What is an example of an oligopoly?

Operating systems like Mac and Windows, and OPEC.

What defines a monopoly?

One firm with a unique product, common barriers to entry, and some restrictions on information availability.

What is an example of a monopoly?

Hawaiian Electric Company (HECO) and patented drugs.

In a perfectly competitive market, what is the relationship between price and marginal revenue?

Price equals marginal revenue because firms face a horizontal demand curve.

How is profit maximization achieved?

At the point where the slope of the total revenue function equals the slope of the total cost function, or where marginal revenue equals marginal cost.

What is the formula for profit?

Profit is total revenue minus total cost (TR - TC).

What happens to total fixed cost as output changes?

Total fixed cost remains the same at each output level.

What happens to total variable cost as output increases?

Total variable cost increases as output increases.

What should a firm do if marginal revenue equals marginal cost?

Stop producing more units, as producing additional units would result in a loss.

What is marginal revenue?

The amount by which total revenue changes as a result of a one-unit increase in quantity sold.

What is marginal cost?

The cost incurred by producing one additional unit.

How is profit calculated using Average Total Cost (ATC)?

Profit = (Total Revenue) - (Total Cost) or TR - TC, where TR = Price * Quantity and TC = Average Total Cost * Quantity.

What condition indicates that a firm is making an economic profit?

A firm is making a profit if, at the point where marginal revenue = marginal cost, marginal revenue (MR) is above average total cost (ATC).

Under what conditions should a firm operate at a loss?

A firm should operate at a loss if, at the point where marginal revenue = marginal cost, marginal revenue (MR) is below average total cost (ATC) but above average variable cost (AVC).

When should a firm shut down operations?

A firm should shut down if, at the point where marginal revenue = marginal cost, marginal revenue (MR) is below average variable cost (AVC).

What does the short-run supply curve of a perfectly competitive firm correspond to?

The short-run supply curve of a profit-maximizing firm in perfect competition coincides with the upward sloping part of the marginal cost curve lying above the average variable cost curve.

What happens to economic profits in the long-run equilibrium of perfect competition?

If there are economic profits, other firms will enter the market, increasing supply and lowering prices until economic profits fall to zero.

What occurs if firms are making a loss in a perfectly competitive market?

Firms will eventually exit the industry, reducing supply and increasing prices until economic profits rise to zero.

Why do economists favor long-run equilibrium in perfect competition?

1. Long-run ATC is minimized, meaning goods are produced at the lowest possible cost. 2. Price equals the minimum of ATC, ensuring consumers pay the lowest possible price. 3. Price equals marginal cost, resulting in no deadweight loss.

What are barriers to entry in a monopoly?

Barriers to entry can include patents, exclusive franchises, and exclusive charters.

What is a closed monopoly?

A closed monopoly is protected by legal restrictions on competition, such as patents or copyrights.

What defines a natural monopoly?

A natural monopoly occurs when long-run average cost (LRAC) is minimized when only one firm serves the market.

What is an open monopoly?

An open monopoly is when one firm is the sole supplier of a product but has no special protection from competition.

How does pricing differ between perfect competition and monopoly?

In perfect competition, firms are price takers, while in monopoly, the firm is a price maker.

What is the relationship between the Marginal Revenue Curve and the Demand Curve in a monopoly?

The Marginal Revenue Curve lies below the Demand Curve.

What happens to Average Revenue in a monopoly?

Average Revenue equals total revenue divided by quantity, and as quantity increases, price (P) decreases.

What is the significance of the downward slope of the Marginal Revenue Curve in a monopoly?

Marginal Revenue is always below the average revenue because when prices fall along a demand curve, marginal revenue decreases.

How does a monopolist determine price and quantity?

A monopolist sets price and quantity at the point where Marginal Revenue (MR) equals Marginal Cost (MC).

What is a key difference in long-run equilibrium between perfect competition and monopoly?

In monopoly, long-run equilibrium remains the same as short-run because there is no new entry.

What are the disadvantages of monopoly?

1. ATC is usually not minimized, leading to higher production costs. 2. Monopolies can restrict output and raise prices.

How can a monopoly lead to wealth accumulation?

Monopolies can lead to significant profits, allowing owners to become wealthy, unlike competitive markets.

What is the relationship between price and average total cost (ATC) in a competitive market?

Price is usually equal to the minimum of ATC.

What does it indicate if price is greater than marginal cost (MC) in a monopoly?

There is a deadweight loss (excess burden) associated with a monopoly.

How does consumer surplus change under monopoly compared to competition?

Consumer surplus is smaller under monopoly.

How does producer surplus change under monopoly compared to competition?

Producer surplus is larger under monopoly.

What happens to the sum of consumer and producer surplus under monopoly?

The sum is smaller under monopoly.

What is the profit condition in a perfectly competitive market?

Profit equals zero.

What is the relationship between price, average total cost (ATC), and marginal cost (MC) in a monopoly?

Price is greater than MC and ATC may not equal minimum ATC.

What does the Merchant Marine Act of 1920 regulate?

It regulates marine commerce in US waters and between US ports.

What is Section 27 of the Merchant Marine Act of 1920 known as?

The Jones Act.

What is a significant consequence of the Jones Act on shipping?

All goods transported by water between US ports must be carried on ships constructed in the US.

What percentage of the West Coast to Hawai'i shipping market is controlled by Matson and Horizon?

Matson controls 67% and Horizon controls 29%.

What is the estimated deadweight loss associated with the Jones Act?

Around $4 billion a year.

What is the claimed cost of the Jones Act to each resident of Hawai'i?

$3000 per year.

What are the two main arguments regarding the Jones Act?

It protects American jobs and industry, but is also seen as protectionist and limiting competition.

What is price discrimination?

The practice of charging different prices for various units of a single product when the price differences are not justified by differences in costs.

Why do firms engage in price discrimination?

Different market segments have different price elasticities of demand, allowing monopolists to maximize profit by charging varying prices.

What are the necessary conditions for producers to price discriminate?

1. Different elasticities that can be identified. 2. The good cannot be resold.

What is a natural monopoly?

An industry where long-run average cost is minimized when only one firm serves the market.

Give an example of a natural monopoly.

Electricity, telephone service, or cable TV.

What are the properties of a natural monopoly?

1. Fixed costs are very large relative to variable costs. 2. Average costs are large at small output and fall as output increases. 3. Average costs are never less than marginal costs over the relevant range of production.

Why might monopolies be granted to certain firms?

Monopoly profits encourage innovation and reward inventors, artists, and entrepreneurs.

What is a potential downside of monopolies in terms of market competition?

They can limit competition and increase prices for consumers.

What is the significance of copyright laws in relation to monopolies?

They help maintain quality and encourage innovation in creative industries.

What happens to average costs as output increases in a natural monopoly?

Average costs continue to fall over the relevant range of output.

What is a key characteristic of a natural monopoly?

In a natural monopoly, economies of scale are so powerful that they are still being achieved even when the entire market demand is met.

What does the Long Run Average Cost curve look like in a natural monopoly?

The Long Run Average Cost curve is still sloping downward when it meets the demand curve.

What is the relationship between marginal costs and average costs in a natural monopoly?

Average costs are never less than marginal costs over the relevant range of output.

How does an unregulated natural monopoly maximize profit?

By producing the quantity at which marginal revenue equals marginal costs and charging the highest price at which that quantity can be sold.

What is deadweight loss in the context of natural monopolies?

It occurs when the monopolist charges a price higher than the socially optimal quantity, leading to a loss of economic efficiency.

What is the socially optimal quantity from society's point of view in a natural monopoly?

The best quantity from society's point of view is Q1.

What is one method the government can use to regulate a natural monopoly?

Regulate the price with a price ceiling set slightly higher than marginal cost.

What is rate of return regulation?

A method where the government sets the price equal to average total cost to ensure the firm does not make excessive profits.

What is a potential problem with regulating a natural monopoly?

If the government sets the price to cover costs, there is no incentive for the company to keep costs down.

What is the difference between monopolistic competition and perfect competition?

In monopolistic competition, products are not identical but are substitutes, whereas in perfect competition, products are identical.

What happens to profits in the long run in monopolistic competition?

There are profits in the short run but not in the long run.

What effect does new competition have on demand and average total cost in monopolistic competition?

Demand will shift downward and average total cost will shift upward due to increased spending on advertising.

What is a cartel?

A group of firms that tries to * they were a monopoly.

What is the stability problem in cartels?

Cartels frequently break down due to entry of new firms and cheating among members.

What is the significance of the concentration ratio?

It measures the percentage of all sales accounted for by the largest firms in a market.

What does an HHI value above 1800 indicate?

An industry is considered concentrated.

What does an HHI value below 1000 indicate?

An industry is considered unconcentrated.

What was one consequence of OPEC raising prices in the 1970s?

It encouraged oil exploration in other regions, leading to a loss of market share for OPEC.

Why might firms in a cartel have an incentive to cheat?

Each member can increase profits by producing more than the agreed amount, leading to zero profits for all if everyone cheats.

What is the relationship between the number of firms in a market and the likelihood of a cartel?

Cartels are more likely to form in markets with a small number of sellers.

What is the difference between oligopoly and oligarchy?

Oligopoly refers to a market with a small number of sellers, while oligarchy refers to a small number of people controlling a country.