ECON 1050 Chapter Notes - Chapter 10: Opportunity Cost, Market Price, W. M. Keck Observatory

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14 Apr 2017

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Firm- is an institution that hires factors of production and organizes those factors to produce and sell goods and services. The firm"s goal: a firms goal is manly to maximize profit. A firm that does not seek to maximize profit either fails or is taken over by a firm that does seek that goal. Accounting profit: campus sweaters received ,000 for sweaters they sold and paid. So the firms surplus was ,000: cindy"s accountant also subtracted (cid:884)(cid:882)(cid:882),(cid:882)(cid:882) for depreciation from the (cid:883)7(cid:882),(cid:882)(cid:882)(cid:882) surplus. Economic accounting measured as the opportunity cost of production. When a firm uses its own capital, it implicitly rents it from itself. Implicit rent rate-the firms opportunity cost of using its own capital and has two components economic depreciation and. Normal profit- the profit that an entrepreneur earns on average. Three constraints that limit the maximum economic profit it can make: technology constraints- technology is ay method of producing a good or service.

Related Questions

True/False

Indicate whether the sentence or statement is true or false.

____ 1. The average fixed cost curve increases as output increases over a relevant range of production.

____ 2. Average revenue is slightly higher than price.

____ 3. Marginal cost curves and average cost curves are both purely upward sloping.

____ 4. A firm that sells at a price below average cost is not making a normal profit.

____ 5. In the short run, it is possible for a perfectly competitive firm to make economic profits or economic losses.

____ 6. If a firm sells its output at a price greater than AC, it will earn economic profit.

____ 7. Zero profit in the economic sense means that firms are earning a normal rate of return.

____ 8. In a free market (laissez-faire) system, the price mechanism dictates the production planning (how to produce) decisions.

____ 9. Free markets produce relatively high levels of efficiency but low rates of growth.

____ 10. A natural monopoly occurs when a single firm can produce the entire output of the market at a lower average cost than could many firms.

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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.

32. Which of the following is not a difference between monopolies and perfectly competitive markets?

A. Monopolies face downward sloping demand curves while perfectly competitive firms face horizontal demand curves.

B. Monopolies charge a price higher than marginal cost while perfectly competitive firms charge a price equal to marginal cost.

C. Monopolies can earn profits in the long run while perfectly competitive firms break even.

D. Monopolies choose to produce the quantity at which marginal revenue equals marginal cost while perfectly competitive firms do not.

40. Which of the following statements is not correct?

A. Both monopolies and monopolistically competitive firms can earn economic profits in the long run.

B. Both monopolistically competitive and perfectly competitive firms can earn economic profits in the short run.

C. Only competitive firms produce the welfare-maximizing level of output.

D. Firms in perfect competition, monopolistic competition, and monopoly maximize profits by producing where marginal revenue equals marginal cost.

43. A monopolistically competitive firm is currently producing 20 units of output. At this level of output the firm is charging a price equal to $20, has marginal revenue equal to $12, has marginal cost equal to $12, and has average total cost equal to $18. From this information we can infer that

A. the profits of the firm are negative.

B. firms are likely to leave this market in the long run.

C. the firm is currently maximizing its profit.

D. All of the above are correct.

ECON 1050 Chapter Notes - Chapter 10: Opportunity Cost, Market Price, W. M. Keck Observatory

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