Econ Final Exam

What’s Profit?

TR-TC

What’s TR

P x Q

Explicit Costs?

Costs that require an outlay of money by the firm

Implicit Costs?

Costs that don’t require an outlay of money by the firm, not recorded by accountant

Total Costs?

Explicit Costs + Implicit Costs

Economic Profit

Total revenue - (Explicit costs + Implicit costs)

Accounting Profit

Total revenue - explicit costs

Production

Quantity of INPUTS used to produce the quantity of OUTPUTS

Marginal Product

Change in Quantity output over change in labor | slope of productivity function

What happens to productivity in the short run?

It increases, mariginal product increases

What happens to productivity over the long run?

It flattens, as the marginal product decreases, as there’s diminishing marginal products and fixed capital

Average Productivity at one point

Quantity/Labor

Graph of Productivity

What happens to the Total Cost curve over time?

Gets steeper as the amount produced rises, as Marginal cost increases due to diminishing marginal product

Graph of Total Cost Curve

Total Cost (alt equation)

Fixed Costs + Variable Costs

Average Fixed Costs

Fixed Costs / Quantity of output

Average Variable Costs

Variable Cost / Quantity of Output

Average Total Cost

Total Cost / Quantity of Output

Marginal Cost

Change in Total Cost/ Change in Quantity output | Increase in Total Cost from producing an additional unit of output

ATC =

AVC + AFC

What happens to the AFC curve as output rises

It declines

What happens to the AVC curve as output rises

It increases due to diminishing marginal product

Efficient Scale?

Quantity of Output that minimizes ATC

Where does the Marginal cost curve cross the Average Total-cost curve?

At its minimum

Why is the Average Total Cost-curve “u-shaped”?

Bc its afc + avc

Where do Short-run cost curves lie?

On or above the long-run cost curves

When MC > ATC

ATC curve is increasing

When MC < ATC

ATC curve is decreasing

What determines the Cost function?

Quantity of outputs

What determines Production function?

Capital and Labor

What happens in a Perfectly Competitive Market?

Trading of identical products, firms can enter or exit the market.

What are firms in perfectly competitve markets

Price-takers

What’s the goal of a firm

To maximize profit

Average Revenue

Total Revenue / Quantity sold

Marginal Revenue

Change in total revenue pver chane in quantity

In a perfectly competitive market, what is price equal to?

Average revenue and Marginal revenue

When MR > MC,

Increase Production

When MR < MC

decrease production

To maximize Profit, what should marginal revenue’s quantity be raised to?

Marginal Cost

What’s the supply curve of a perfectly competitive firm

Marginal Cost

Why is the marginal cost curve equal to a perfectly competitive firm’s supply curve?

Firms are price takers and decide what quantity to produce based on the marginal cost (i.e the quantity produced is where P = MC)

When do firms shutdown?

When Price is less than AVC | TR < VC

When do firms exit the market?

When Price is less than ATC | TR < TC

What is profit on a graph?

(P - ATC) * Q

When does the entry and exit of firms end in the long run in a competitive market?

When P = MC = Minimum ATC

why is mc curve upward sloping

Bc of law diminishing returns

When drawing all the cost function curves, what do you need to do with the MC curve

Have it intersect the minimum of the AVC and the ATC curve

In a perfectly competitive market, what’s the minimum of the AVC curve?

The shutdown price

When does Nash Equilibrium occur?

When each firm chooses the best stable response given others (i.e dominant strategy)

What’s the relationship between monopoly price and marginal cost

P > MC

Why are Monopoly’s price-makers?

Barriers to entry

What does Price Discrimination require?

Ability to separate customers according to their WTP, No arbitrage/resell

In the long run for monopolistic competitive market what does price equal on a graph?

ATC

In a monopolistically competitive market, what is price’s relationship with MC

P > MC, because each firm has a monopoly on its product (i.e. Markup)

What happens when firms in an oligopoly individually choose production to maximize profit?

Price is less than the monopoly price, but greater than MC

What graph of cost should we draw on the test?

How do we find MR using equations on the test?

Find P function in terms of Q than multiply function by Q, and than take derivative to find MR

How do we draw price discrimination on the test?

How do we draw monopolistic competitive market on a graph?

Note that marginal cost is typically U-shaped to be more realistic

When MR = 0, what is TR

Maximized, bc MR is the derivative of TR

As a group, oligopolists always earn the highest profit if they?

Charge the same price that a monopolist would charge if the market were a monopoly

If TC = A +BQ, what’s fixed cost?

BQ