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ECON 208 Chapter Notes - Chapter 9: Takers, Economic Equilibrium, Profit Maximization

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cerisecattle883
12 Dec 2012
School
McGill University
Department
Economics (Arts)
Course
ECON 208
Professor
Mayssun El- Attar Vilalta

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ECON 208 Full Course Notes
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ECON 208 Full Course Notes
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Document Summary

Significance of market structure: understand behavior of an individual firm, evaluate overall efficiency of market outcomes. Firms maximize profits = tr tc. Individual firm demand curve is not = to the industry demand curve. From the industry demand curve we can infer firm"s demand curve. Competitiveness of the market = influence that individual firms have on market prices. The less power an individual firm has to influence the market price, the more competitive is that market"s structure. Zero market power: extreme form of competitive market, perfectively competitive market, firms are able to sell as much as they want at the market price. Competitive behavior = degree to which individual firms actively vie with one another. Customers know the product and each firm"s price. Each firm reaches its minimum lrac at a level of output that is small relative to the industry"s total output. Firms are free to exit and enter the industry. Each firm faces a horizontal demand curve.

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Related Questions

A. A competitive firm

  1. can consider only its location in setting the price.
  2. must base its competitive price on product differentiation.
  3. has the ability to set its own price.
  4. must accept the price determined by the intersection of the market supply and demand curves.
  5. has no supply curve.

B. If a firm is making an economic profit, then

  1. the factors of production are being paid their opportunity costs.
  2. there will be no change in the number of firms if the industry is perfectly competitive.
  3. the factors of production are being paid less than their opportunity costs.
  4. the factors of production are being paid more than their opportunity costs.
  5. the firm will exit the industry

C. Along a downward-sloping monopoly demand curve,

  1. marginal revenue is greater than price.
  2. the elasticity of demand is constant.
  3. marginal revenue decreases when the price decreases.
  4. marginal revenue is equal to zero when the price is equal to zero

D. If, in the short run, a perfectly competitive firm is producing at a point where the total cost is greater than total revenue, then the firm should

  1. shut down because economic profits are negative.
  2. continue to produce as long as P > AVC.
  3. continue to produce because accounting profits are positive.
  4. set a higher price for its output.
  5. set a lower price for its output

E. For a perfectly competitive firm, the demand curve is

  1. the marginal revenue curve.
  2. perfectly inelastic.
  3. always equal to marginal cost.
  4. the same as the market demand curve

F. A firm in a(n) industry will have the most elastic demand curve

  1. monopolistic
  2. oligopolistic
  3. monopolistically competitive
  4. perfectly competitive

G. If the demand curve of a monopolist is in the inelastic range, then

  1. total revenue will fall if the price increases.
  2. total revenue will be unchanged if the price increases.
  3. total revenue will rise if the price increases.
  4. the total supply will increase by an equal amount if demand increases.
  5. the price will be unchanged if total revenue increases

H. Monopolistic competition and oligopoly are examples of

  1. monopoly.
  2. perfect competition.
  3. theories of consumer behavior.
  4. imperfect competition.
  5. the extreme cases on the market structure continuum

I. Under which market structure do firms face the flattest (most elastic) demand curve?

  1. perfect competition
  2. monopolistic competition
  3. oligopoly
  4. monopoly

J. At the point of long-run equilibrium for a perfectly competitive firm,

  1. economic profits are zero.
  2. TR > TC.
  3. TR < TC.
  4. P = AVC.
  5. normal profits are zero.

Q8. To arrive at a logical determination of a firm's optimum output, economists assume that the firm seeks to
a. maximize output
b. minimize cost
c. maximize profit or minimize loss
d. maximize price

Q9. So long as marginal cost is rising, average variable cost must rise.
a. true
b. false

Q10. As output increases, marginal cost increases, reaches a maximum, and then falls.
a. true
b. false

Q11. Which of the following is the best example of variable cost?
a. depreciation on a building
b. property taxes
c. wages
d. rent paid for one's building

Q12. If the AVC is $12, the AFC is $4, the AR is $20, and output is 6,000 units, the total profit is
a. $72,000
b. $48,000
c. $24,000
d. negative $96,000

Q13. Under perfect competition, if a firm is suffering a loss,
a. MR exceeds ATC
b. AR equals AVC
c. AR equals ATC
d. AR is less than ATC

Q14. Elaine's firm is in a perfectly competitive industry. Why doesn't Elaine try to sell more of her product by lowering its price below the market price?
a. her demand curve is not elastic
b. doing so would be considered unethical price chiseling
c. her competitors would not allow it
d. she can sell all she wants at the market price

Q15. In the long run, perfect competition results in firms producing
a. at the minimum point of their long-run average cost curves, which indicates allocative efficiency
b. where price equals marginal cost, which indicates economic efficiency
c. where price equals marginal cost, which indicates the optimal scale of operation
d. at the minimum point of their long-run average cost curves, which indicates economic efficiency

Q16. On a graph of average cost curves, the space between ATC and AVC represents AFC.
a. true
b. false

Q18. If MC equals MR at a point greater than ATC, the perfectly competitive firm will
a. sustain a loss
b. shut down
c. make an economic profit
d. expand output

Q19. Since all producers have the same average revenue under conditions of perfect competition, they all have the same profits in the short run.
a. true
b. false

Q20. If the entry of new firms in a perfectly competitive industry substantially increases the market demand for resources,
a. this reduces the market price of resources
b. this raises the market price of resources
c. the market price of resources does not change
d. this lowers the ATC curves of individual firms

Q22. Under conditions of perfect competition, profits exist whenever AR is above AVC at equilibrium output.
a. true
b. false

Q23. Under perfect competition, market price is determined by market demand and supply.
a. true
b. false

Q24. If one firm in a perfectly competitive industry is somehow able to produce at a lower cost than competing firms in the short run,
a. the competing firms will adopt similar production techniques in the long run
b. the more efficient firm will earn higher profits than the competing firms in the long run
c. the competing firms will earn higher profits than the more efficient firm in the short run
d. the competing firms will go out of business in the long run

1. In the market structure called monopolistic competition (Points : 1.25)
a) Very little advertising will occur
b) There are only a few companies in the industry
c) These industries offer only few products
d) None of the above
Question 2.2. In a purely competitive industry (Points : 1.25)
a) Products are differentiated
b) A large amount of advertising occurs
c) Price will be higher than in other market structure
d) None of the above
Question 3.3. A used lawn mower is an example of (Points : 1.25)
a) a search good
b) an experience good
c) a homogenous good
d) None of the above
Question 4.4. The problem of asymmetric can be overcome by (Points : 1.25)
a) Reputation
b) Brand name
c) Warranties
d) All of the above
e) None of the above
Question 5.5. A monopolist will always charge a higher price than a purely competitive industry (Points : 1.25)
True
False
Question 6.6. Given TC = 10 + 5Q, Ed = -2, what price will be a monopolist charge? (Points : 1.25)
a) 5
b) 12
c) 8
d) 10
e) None of the above
Question 7.7. The monopolist determines optimal output the same way as does a purely competitive industry (Points : 1.25)
True
False
Question 8.8. Given a company with some monopoly power and Ed=3, the optimal markup is (Points : 1.25)
a) 33%
b) 50%
c) 72%
d) None of the above
Question 9.9. Given the information given in 8 above and MC=6, gross margin is (Points : 1.25)
a) 50%
b) 42%
c) 33%
d) 38%
e) None of the above
Question 10.10. You would expect gross margin in a store brand to be higher than gross margin in a brand name product (Points : 1.25)
True
False
Question 11.11. You expect products that are less price elastic to have lower gross margins than products with greater price elasticity (Points : 1.25)
True
False
Question 12.12. A company with large gross margins will have large profits (Points : 1.25)
True
False
Question 13.13. If a company is incurring losses, it should stop operating (Points : 1.25)
a) Yes
b) No
c) Not enough information
Question 14.14. A monopolist may not charge the highest price they could get (at MR=MC) in the short run (Points : 1.25)
True
False
Question 15.15. All price discrimination is illegal (Points : 1.25)
True
False
Question 16.16. A company that faces different levels of demand (different price elasticities) (Points : 1.25)
a) Must charge the same price to all customers
b) is violating the law
c) Can charge different price to customers
Question 17.17. Patents allow a company the exclusive right to act as a monopolist (Points : 1.25)
a) This is not justified economically
b) It is justified economically
Question 18.18. The kinked demand curve model was developed to help explain: (Points : 1.25)
a) fluctuations of prices in pure competition
b) rigidities observed in prices in oligopolistic industries
c) fluctuations observed in prices in oligopolistic industries
d) all of the above
e) none of the above
Question 19.19. If a cartel seeks to maximize profits, the market share (or quota) for each firm should be set at a level such that the _____ of all firms is identical. (Points : 1.25)
a) average total cost
b) average profit
c) marginal profit
d) marginal cost
e)marginal revenue
Question 20.20. Factors that affect the ability of oligopolistic firms to successfully engage in cooperation include_________________. (Points : 1.25)
a) number and size distribution of sellers
b) size and frequency of orders
c) product heterogeneity
d) a and b only
e) a, b, and c