ECON 2030 Lecture Notes - Takers, Monopolistic Competition, Marginal Revenue

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2 Jul 2014

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Today"s menu: friday 20 june 2014: business, practice problems, chapter 13: 1, 2, 5, 7, 8, 11, 15-17, 21, second exam: next thursday. Substance: theory of the firm: the basics, profit, maximizing rule: mr = mc, normal = normal economic profit = zero economic profit (equilibrium) Economic profit 0 = total revenue explicit implicit. Positive: examples, costs, total (tc) = fixed cost (fc) + variable cost (vc, fixed (fc) = costs that are fixed that don"t change, variable (vc) = costs that vary that change. Independent of your level of production. level of production. Production increases variable costs go up output. Total cost = fixed cost + variable cost: marginal (mc) = change in total cost divided by the change in. Mc = fixed cost/quantity + variable cost/quantity 0 + variable cost/quantity = mc. Profit = p x q atc x q. Per unit per unit: q* where mr = mc, profit = (p-atc) x q.

Related Questions

5. Economic profit is equal to

a. total revenue minus the explicit cost of producing goods and services.

b. total revenue minus the opportunity cost of producing goods and services.

c. total revenue minus the accounting cost of producing goods and services.

d. average revenue minus the average cost of producing the last unit of a good or service.

6. Accounting profit is equal to

a. marginal revenue minus marginal cost.

b. total revenue minus the explicit cost of producing goods and services.

c. total revenue minus the opportunity cost of producing goods and services.

d. average revenue minus the average cost of producing the last unit of a good or service.

7. Economic profit

a. will never exceed the accounting profit.

b. is most often equal to accounting profit

c. is always at least as large as accounting profit.

d. is a less complete measure of profitability than accounting profit

8. Which of the following expressions is correct?

a. accounting profit = total revenue - explicit costs

b. economic profit = total revenue - implicit costs

c. economic profit = total revenue - explicit costs

d. Both a and b are correct

Scenario 13-2:

Zach took $400,000 out of the bank and used it to start his new cookie business. The bank account pays 3% interest per year. During the first year of his business, Zach sold 6,000 boxes of cookies for $2.50. Also during the first year, the cookie business incurred costs that required outlays of money amounting to $9,000.

9. Zach's accounting profit for the year was

10. Zach's economic profit for the year was

Scenario 14-1:

As part of an estate settlement, Mary received $1 million. She decided to use the money to purchase a small business in Anywhere, USA. If Mary would have invested the $1 million in a risk-free bond fund she could have made $100,000 each year. She also quit her job with Lucky.Com Inc. to devote all of her time to her new business; her salary at Lucky.Com Inc. was $75,000 per

11. At the end of the first year of operating her new business, Mary's accountant reported an accounting profit of $150,000. What was Mary's economic profit?

1-7 True or False

1) In the short run, a perfectly competitive firm can earn positive, zero, or negative profit depending on the market price of the firm's output.

2)In the model of the perfectly competitive firm, the firm's fixed costs are equal to its implicit costs of production.

3)Assume the market price is greater than average total cost at the perfectly competitive firm's profit-maximizing level of output. In this case, the firm is earning positive economic profits, which act as an incentive for new firms to enter the market.

4)Assume that at the current level of output, price equals marginal revenue, but is less than average total cost. So long as price is greater than average variable cost, the firm should continue to operate in the short run to minimize its losses.

5)The fact that a firm is a price-setter does not ensure it will make a positive economic profit in the short run and over time.

6)Barriers to entry serve to limit the number of firms that operate in a particular market and, as 11) such, reduce the amount of total profit earned in the market.

7)In the prisoner's dilemma game, each player's dominant strategy is also the Nash equilibrium.

14-17 Multiple Choice

14) Marginal revenue is equal to:
A) the change in P x Q due to a one unit change in output. B) the change in quantity divided by the change in price.

C) the change in price divided by the change in output. D) price, but only if the firm is a price searcher.

15) In order to maximize its profits, a price-taking firm should produce the level of output at which:

A) marginal revenue = marginal cost. B) total revenue = total cost.

C) variable revenue = variable cost. D) average revenue = average cost.

16) Assume that there is an improvement in the technology used by firms in a perfectly competitive industry that is initially in long-run equilibrium. In the short run this would cause:

A) cannot be determined with the information given. B) no change in the firm's economic profit.
C) a decrease in the firm's economic profit. D) an increase in the firm's economic profit.

17) Assume at the firm's profit-maximizing level of output P = AVC. In this case, the firm will be:

A) incurring an economic loss. B) earning a positive economic profit.

C) earning economic profit = 0. D) breaking even.

Question 1

If economic profits are zero

		accounting profits is less than the cost of capital.
		accounting profit is just covering the cost of capital.
		the cost of capital is negative.
		the entrepreneur should go to his/her next best alternative.

3 points

Question 2

Markets provide

information.

prices.

incentives.

all of these choices.

3 points

Question 3

The entrepreneur is always searching for

positive profit.

normal profit.

accounting profit.

economic profit.

3 points

Question 4

Social regulations can create

a more competitive market place.

network externalities.

a lower HHI.

barriers to entry.

3 points

Question 5

According to economic theory, profits are maximized where

total revenue equals total cost.

marginal revenue equals marginal cost.

price and average cost are equal.

where marginal product and average cost are equal.

3 points

Question 6

Brand names help

create commodities.

maintain market power.

create competition.

keep economic profits at zero.

3 points

Question 7

Entry of new firms causes

accounting profits to go to zero.

market share to grown.

economic profits to go to zero.

total revenue to be maximized.

3 points

Question 8

Fixed costs

do not vary with output

vary with output

do not vary with price

vary with price

3 points

Question 9

Variable costs

do not vary with price.

do not vary with output.

vary with price.

vary with output.

3 points

Question 10

Value maximization means

		that managers make decision so as to increase the long-run market value of the financial claims on the firm.
		that a firm should make products that have the highest price.
		that managers make decision so as to increase the short-run market value of the financial claims on the firm.
		all of these choices.

3 points

Question 11

A manager can determine if her product is viewed as a normal good or an inferior good by considering

price elasticity.

cross elasticity.

income elasticity.

advertising elasticity.

3 points

Question 12

If demand is perfectly elastic,

		the smallest increase in price will cause quantity demanded to fall to zero.
		the smallest increase in price will cause demand to fall to zero.
		the smallest increase in price will cause quantity demanded to fall.
		the smallest increase in price will cause demand to fall.

3 points

Question 13

If demand is perfectly elastic, then

demand and price are inversely related.

quantity demanded and price are inversely related.

the demand curve is a vertical line.

the demand curve is a horizontal line.

3 points

Question 14

If price elasticity is 3.25 then

		for every one percent change in price, there will be a 3.25 percent change in quantity demanded.
		for every one percent change in price, there will be a 3.25 percent change in demand.
		for every one percent change in price, there will be a 32.5 percent change in quantity demanded.
		for every one percent change in price, there will be a .0325 percent change in quantity demanded.

3 points

Question 15

If price elasticity is 3.25, then demand is

inelastic.

elastic.

unitary.

negative.

ECON 2030 Lecture Notes - Takers, Monopolistic Competition, Marginal Revenue

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Related Questions

		positive profit.
		normal profit.
		accounting profit.
		economic profit.

		a more competitive market place.
		network externalities.
		a lower HHI.
		barriers to entry.

		total revenue equals total cost.
		marginal revenue equals marginal cost.
		price and average cost are equal.
		where marginal product and average cost are equal.

		create commodities.
		maintain market power.
		create competition.
		keep economic profits at zero.

		accounting profits to go to zero.
		market share to grown.
		economic profits to go to zero.
		total revenue to be maximized.

		do not vary with output
		vary with output
		do not vary with price
		vary with price

		do not vary with price.
		do not vary with output.
		vary with price.
		vary with output.

		price elasticity.
		cross elasticity.
		income elasticity.
		advertising elasticity.

		demand and price are inversely related.
		quantity demanded and price are inversely related.
		the demand curve is a vertical line.
		the demand curve is a horizontal line.

		information.
		prices.
		incentives.
		all of these choices.

		inelastic.
		elastic.
		unitary.
		negative.