Microeconomics Terms Flashcards

CHAPTER 1
When the Fed Gov crafts environmental policies that make it less expensive for firms to follow green initiatives,
the policies are consistent with economic incentives.
_____ is the study of the choices people make to attain their goals, given their scarce resources.
Economics.
Quiz 1. 1. Trade-Offs force society to make choices, particularly when answering the following three fundamental questions:
One, what goods and services will be produced? Two, how will the goods and services be produced? Three, who will receive the goods and services produced?
Economics is a social science because
All of the above

Julia Paul, an analyst at a research institute, lives very close to her office and walks to work every day. Meanwhile, her colleague, Amanda Jones, dislikes the fact that it takes her almost an hour to commute to work every day. As a result, when Julia decides to move to a suburb farther away, Amanda is very surprised.

Which of the following, if true, would explain Julia’s behavior?

_____ is concerned with what is, and _____ is concerned with what ought to be. Economics is about _____, which measures the costs and benefits of different courses of action.
Positive Analysis; Normative analysis; Positive
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One of the basic facts of life is that people must make choices as they try to attain their goals. This unavoidable fact come from a reality an economist calls
scarcity.
Economists use the work marginal to mean an extra or additional benefit or cost of a decision. An optimal decision occurs when
marginal benefit equals marginal cost.

Suppose, in an effort to prevent the population from declining, Italy begins offering new mothers extended periods of paid family leave from work and, consequently, the birthrate per woman increases.

If so, then this could best be characterized as an example of people responding to

economic incentive
Opportunity cost is
the highest valued alternative that must be give up to engage in an activity.
Economic models are
simplified versions of reality designed to analyze “what is” to explain human decision making in any context.
To develop a model that will answer economic questions, economists typically:
first make simplifying assumptions, then formulate a hypothesis, test the hypothesis, and finally revise the model if necessary.
_____ occurs when a good or service is produced at the lowest possible cost. _____ occurs when production is in accordance with consumer preferences.
Productive; Allocative
Suppose Dell is currently selling 2,000,000 computers per year. However, managers at Dell are considering whether to increase production by 200,000. One manager explains that after increasing production by this amount, total profit would be $100 million. Given this information, should Dell increase production by 200,000 computers?
Information about the additional revenue earned and the additional cost incurred from producing 200,000 additional computers is required to answer this question.
How do market economics ultimately determine what goods and services are produced, how to produce them, and who will receive them?
Consumers determine what goods and services are produced, firms determine how to produce them, and markets determine who will receive them.
​Trade-offs force society to make​ choices, particularly when answering the following three fundamental​ questions:
​One, what goods and services will be​ produced? Two, how will the goods and services be​ produced? Three, who will receive the goods and services​ produced?
_____ is the study of the choices people make to attain their​ goals, given their scarce resources.
Economics
CHAPTER 2
A production possibilities frontier​ (PPF) is
a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology.
Suppose the economy whose PPF is shown on the right experiences economic growth. ​1.) Use the​ 3-point curved line drawing tool to show how growth affects the​ trade-offs the country faces between producing ships and food. ​2.) Use the point drawing tool to draw and label a point on the new PPF that shows the economy producing more of both goods. Label this point​ 'B'. Which of the following may have caused the shift you have​ drawn? ​(Check all that​ apply.)
Suppose the economy whose PPF is shown on the right experiences economic growth.
​1.) Use the​ 3-point curved line drawing tool to show how growth affects the​ trade-offs the country faces between producing ships and food.
​2.) Use the point drawing tool to draw and label a point on the new PPF that shows the economy producing more of both goods. Label this point​ ‘B’.Which of the following may have caused the shift you have​ drawn? ​(Check all that​ apply.)

An increase in capital stock
Advances in technology
A larger labor force.

Suppose an increasing number of school districts across the country find themselves with too few teachers at a time of rising enrollments and calls for improved outcomes in terms of student performance.

A​ market-based remedy for this emerging mismatch between the availability of teachers and school​ districts’ needs would likely emphasize

higher compensation to elicit both a larger quantity of teacher services and a greater reliance by districts on​ non-traditional instruction methods.
The primary difference between product markets and factor markets is that
product markets are markets for​ goods, while factor markets are markets for factors of production–​labor, ​capital, natural​ resources, and entrepreneurial ability.
​labor, ​capital, natural​ resources, and entrepreneurial ability.
absolute advantage refers to the ability to produce more of a good or service using the same amount of resources and comparative advantage refers to the ability to produce a good or service at a lower opportunity cost.

A number of political leaders have expressed concern about the​ nation’s decline as a major steel producer. Many have advocated policies to restrict imports and promote domestic production.

These individuals would see their position weakened most by the knowledge that

the substitution of domestic steel for foreign steel absorbs resources that would otherwise produce goods of greater value.
A(n) _____ is someone who operates a​ business, bringing together the factors of production — Labor, capital, and natural resources– to produce goods and services.
Entrepreneur.
Suppose the United States and Mexico both produce hamburgers and tacos. The combinations of the two goods that each country can produce in one day are presented in the table below.
United States
HB – 0 70 140 210
T – 126 84 42 0
Mexico
HB – 0 7 14 21
T – 105 70 35 0Which country has an absolute advantage in producing​ tacos?
Which country has a comparative advantage in producing​ tacos?

Suppose the United States is currently producing 140 tons of hamburgers and 42 tons of tacos and Mexico is currently producing 14 tons of hamburgers and 35 tons of tacos. If the United States and Mexico each specialize in producing only one good​ (the good for which each has a comparative​ advantage), then a total of ___ additional​ ton(s) of hamburgers can be produced for the two countries combined ​(enter a numeric response using an​ integer) and a total of
___ additional​ ton(s) of tacos can be produced.

US
Mexico56+hb
28+t

Country A’s PPF 200 corn 200 oil
Country B’s PPF 270 Corn 180 oilFrom the PPFs shown above it can be determined that the opportunity cost of oil is lower in country ___.

Given the comparative opportunity costs as revealed by the PPFs shown​ above, the comparative advantage for country B lies in _____.

After these two countries specialize and trade with each​ other, country A will import _____.

A

Corn

Corn

Prepping for a​ next-day exam over the course of an evening​ (and possibly into the wee hours of test​ day) poses increasing costs since
the longer you choose to study will result in an increase in the number and value of foregone activities.
The production possibilities frontiers depicted in the diagram to the right illustrate
The production possibilities frontiers depicted in the diagram to the right illustrate
both the labor force and capital stock increasing.
both the labor force and capital stock increasing.
that it makes it possible for society to become better off by increasing both its production and its consumption.
As part of their budget tightening​ process, many states are cutting aid to colleges and​ universities, with students being asked to pick up a bigger part of the escalating tab of higher education.
Which of the following would do the most to enable you to cope with those higher expenses without impairing your progress toward a​ degree?
Reducing your consumption of goods and services not essential to your education.
In economic​ terminology, the inputs used to make goods and services are referred to as
factors of production
The basis for trade is
comparative advantage.
On the diagram to the​ right, movement along the curve from points A to B to C illustrates
On the diagram to the​ right, movement along the curve from points A to B to C illustrates
increasing marginal opportunity costs.
CHAPTER 3
Consider the figure to the right and assume that it is the market for​ health-care services. When the​ “baby boomer” generation​ retires, the number of people who require health care increases by​ 30%, and, as a​ result, the number of​ health-care providers also​ increases, but by only​ 25%.
What is the effect on the price of​ health-care services over​ time?
It increases because demand increased by more than supply.
The distinction between substitutes and complements is
substitute goods are used for the same purposes while complementary goods are used together.
Consider the supply of crude oil on the world market. In August​ 2011, the price of oil was roughly​ $80 per barrel. Which of the following changes would increase the supply of​ oil?
The oil supply curve would shift to the right if
future oil prices were expected to be lower.
The recent recession that began in December 2007 resulted in declining incomes as some people lost their jobs and others were forced to work fewer hours or have their wages reduced. How did this affect the market for fast food restaurantsfast food restaurants​?
In the figure to the​ right, show how the recent recession likely affected the market for fast food restaurantsfast food restaurants.
Using the line drawing tool​, draw either a new supply curve ​(Upper S2​) or a new demand curve ​(Upper D2​). Properly label your line.
Shift demand right.
According to the law of​ supply,
there is a positive relationship between price and quantity supplied.
as the price of a product​ increases, firms will supply more of it to the market.
According to the law of​ demand,
there is an inverse relationship between price and quantity demanded.
Consider the demand for condominiums illustrated in the figure to the right. What demographic change would likely result in the demand curve for condominiums shifting to the left?
The demand curve for condominiums would likely shift to the left if the
portion of the population that is elderly decreases.
Suppose the equilibrium price and equilibrium quantity of gold both increase. Which of the following would produce such a​ change?
The market demand curve for gold could have increased.
After World War II in​ 1945, the United States experienced a​ “baby boom” as birthrates rose and remained high through the early 1960s. In​ 2011, the first members of the baby boom generation became older than 65. What effect will this have on the market for nurses?
As the first baby boomers become older than​ 65, the
demand curve for nurses will shift to the right.
Consider the market for​ Hewlett-Packard (HP)​ printers, depicted in the figure to the​ right, where the supply of HP printers has increased from S1 to S2.
What would cause the supply curve for HP printers to shift to the​ right?
A positive technological change.
A decrease in the price of a substitute in production.
CHAPTER 4
Tax incidence is
the actual division of the burden of a tax between buyers and sellers in a market.
Consider the market for sugar illustrated in the figure to the right. Suppose the market is perfectly competitive and initially in equilibrium at a price of p2 and a quantity of Upper Q2.
Now suppose the government applies a price floor of p3. Compared with the​ market-clearing equilibrium, consumer surplus wouldIn​ turn, producer surplus would

Consequently, with the price floor​, deadweight loss would equal

Decrease by areas B and E.

Increase by area B and decrease by area F.

Areas E and F.

Consider the market for gasoline illustrated in the figure to the right. Suppose the market is perfectly competitive and initially in equilibrium.
Now suppose the government imposes a gasoline tax of
​0.75 to be paid for by producers. The effect of this tax is illustrated in the figure to the right.
Who bears the burden of the​ tax?
Consumers pay ​___ of the ​$0.75 tax ​(enter a numeric response using a real number rounded to two decimal​ places) and producers pay ​___ of the tax.
S1 @ 50gas $2.50
S2 @ 45ga $3.00.$0.50
$0.25

In the diagram to the​ right, illustrating a​ per-unit tax equal to P2 minus P3​, tax revenue is represented by the areas _____ and the excess burden of the tax is rep by areas _____.
D and F
E and G.
Assume the figure to the right illustrates the market for orange juice. Suppose the government begins providing orange juice producers a ​$0.30 per pound subsidy.
What will be the effects of this subsidy on the market for orange​ juice?
​1.) Using the point drawing​ tool, indicate the​ pre-subsidy competitive market equilibrium. Label this point ​’e1​’.
​2.) Using the line drawing tool​, draw a new supply curve reflecting the subsidy. Label this line ​’SupplyS​’.
​3.) Using the point drawing​ tool, indicate the market price and quantity with the subsidy. Label this point ​’e2​’.
Supply shifts up 30 cents.
In the diagram to the​ right, illustrating a binding price ceiling at P3​, the amount of producer surplus transferred to consumers is represented by area ___.
and the deadweight loss is equal to areas _____.
C
B and D.
A black market is
a market in which buying and selling take place at prices that violate government price regulations.
Economic Efficiency is
a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum.
When the government imposes price floors or price​ ceilings,
some people​ win, some people​ lose, and there is a loss of economic efficiency.

A country that imports a substantial amount of gasoline every year imposed a​ $1.2 per gallon excise tax on​ gasoline, to be paid by sellers. The equilibrium price of gasoline prior to the tax was​ $4 per gallon. Gasoline being a necessary​ good, its demand curve is steep and the consumers had to bear the bulk of the tax burden. The​ post-tax price of gasoline went up to​ $5 per​ gallon, causing the​ country’s media to claim that it was unfair that people should have to pay so high a price for such an important consumption item. They further believed that such a high tax was inefficient and could not be justified.

Which of the​ following, if​ true, would support the​ media’s claim about the tax being​ inefficient?

The demand for gasoline​ declined, causing the revenue generation to be much lower than expected.
In the diagram to the​ right, marginal benefit ______ marginal cost at output level Q1 (the lowest)
The output level is considered economically _____.
is greater than.
Inefficient.
Consider the market for eggs illustrated in the figure to the right. Suppose the market is perfectly competitive and initially in equilibrium at a price of 5 cents and a quantity of 50​ (thousand).
If the price were 7 cents instead of 5​ cents, then consumer surplus wouldIn​ turn, producer surplus would

Consequently, at a price of 7 ​cents, deadweight loss would equal

Decrease by areas B and E.

Increase by area B and decrease by area F.

Areas E and F.

CHAPTER 5
Consider the market illustrated in the figure to the right. Supply curve Upper S1 represents the private cost of production and demand curve Upper D1 represents the private benefit from consumption. Suppose the consumption of this good creates a negative externality. In​ turn, the social benefit from consumption is represented by demand curve Upper D2. Show how the externality affects market efficiency.
Use the triangle drawing tool to shade in the new economic surplus​ (New surplus) or the deadweight loss​ (Deadweight loss) created by the negative externality. Properly label this shaded area.
Draw triangle at intersection of D1 and S1, intersection of D2 and S1, and down along D2.
How do externalities affect​ markets?
If a positive externality in consumption is present in a​ market, then
The private benefit from consumption will be different than the social benefit from consumption.
How do externalities in the production of electricity result in market failure?
Because of​ externalities, the market for electricity will
Provide too much electricity.
Consider the market illustrated in the figure to the right. Supply curve Upper S1 represents the private cost of production and demand curve Upper D1 represents the private benefit from consumption. Suppose consumption of this good creates a positive externality. Show how the externality affects the market.
Demand shifts right. Market equilibrium is initial intersection. Efficient equilibrium is on D2.
How do property rights affect externalities and market​ failure?
Externalities and market failure will result from the difficulty of enforcing property rights.
Suppose the figure to the right illustrates the marginal cost and marginal benefit from reducing sulfur dioxide pollution. Suppose also that the United States is currently planning to eliminate 5.5 million tons of pollution per year.
What would be the net benefit to the United States of instead eliminating 8.5 million tons of sulfur​ dioxide?
Use the triangle drawing tool to shade in the net benefit to society from eliminating 8.5 million tons of pollution per year compared to eliminating 5.5 million tons of pollution. Label this shaded area​ ‘Net benefit’.
Shade above MC line, from 5.5-8.5mil tons.
What must be true for the Coase Theorem to hold?
All parties to an agreement must be willing to accept a reasonable agreement.
Suppose the production of electricity by a utility generates pollution that harms others. Suppose also that Coase bargaining can occur between the utility and the victims of pollution but that the utility has not been legally liable for the damages from its pollution. How would making the utility legally liable for the damages from its pollution affect pollution​ reduction?
If the electric utility and the people suffering the effects of the​ utility’s pollution can​ bargain, then making the utility legally liable for the damages from its pollution will
not change the amount of pollution reduction because the marginal benefit and marginal cost of pollution reduction will not change.
Suppose the figure to the right illustrates the marginal cost and marginal benefit from reducing sulfur dioxide pollution. Suppose also that the United States is currently generating 11.5 million tons of pollution per year.
What is the optimal level of pollution​ reduction?
The optimal level of pollution reduction is
7. Intersection.
How might society solve problems associated with externalities and market failure?
If an externality is​ present, resulting in market​ failure, then
Private solutions may reduce or correct market failure.
Which of the following is an example of a transaction cost associated with negotiating the reduction of a negative​ externality?
An example of a transaction cost isHow might transaction costs affect private solutions to externality​ problems?
Transaction costs

The cost associated with monitoring an agreement to reduce a negative externality.

May make private solutions to reduce negative externalities no longer feasible.

Suppose the figure to the right illustrates the marginal cost and marginal benefit from reducing sulfur dioxide pollution. How could the government use a command-and-control approach to reduce pollution to the optimal level for​ society?
The government couldSuppose the government requires each firm to reduce sulfur dioxide emissions by an equal amount such that total emissions are reduced by 8.5 million tons per year. Is this approach necessarily economically​ efficient?
This​ command-and-control approach

Limit sulfur dioxide pollution to a particular quantity per year.

Is not efficient because firms can have different costs of reducing pollution.

Suppose the figure to the right illustrates the market for toilet​ paper, where S1 (intersects D @ $175,550tons) represents the marginal private cost of production and D1 represents the marginal private benefit from consumption. Companies that produce toilet paper bleach the paper to make it white. Some paper plants discharge the bleach into rivers and​ lakes, causing substantial environmental damage. Assume that S2 (inter D @ $325,250tons) represents the marginal social cost of producing toilet paper​ (incorporating the​ externality). What could the government do to internalize the​ externality?

In the presence of a negative​ externality, the government could _____ toilet paper production.

In particular, the gov should set a Pigovian tax of __ per ton of toilet paper produced.

tax

$225

Suppose the United States has two​ utilities, Commonweath Utilities and Consolidated Electric. Both produce 20 million tons of sulfur dioxide pollution per year.​ However, the marginal cost of reducing a ton of pollution for Consolidated Electric is ​$275 per ton and the marginal cost of reducing a ton of pollution for Commonwealth Utilities is ​$375 per ton. The​ government’s goal is to cut sulfur dioxide pollution in half​ (by 20 million tons per​ year).
If the government issues 10 million tradable pollution permits to each​ utility, what will be the cost of eliminating half of the pollution to​ society?Using a cap-and-trade system of tradable emission allowances will eliminate half of the sulfer dioxide pollution at a cost of ___ million per year.

If the permits are not​ tradable, what will be the cost of eliminating half of the​ pollution?
If permits cannot be​ traded, then the cost of the pollution reduction will be ___ mil per year.

$5500

$6500

Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. The diagram to the right illustrates the situation in the toilet paper market. The private profit — maximizing output level is
Q3. Intersecting Marginal private cost and Marginal Benefit.
Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. The diagram to the right illustrates the situation in the toilet paper market. Suppose the government wants to use a Pigovian tax to bring about the efficient level of production. What should the value of the tax​ be?
$(P2-P0) per ton of output.
Highest cost of benefit per unit – lowest cost of benefit.
In England during the Middle​ Ages, each village had an area of​ pasture, known as a​ commons, on which any family in the village was allowed to graze its cows or sheep without charge. Was the common land used​ optimally?
Grazing created a negative​ externality, resulting in the commons being overused.
Consider the market illustrated in the figure to the right for wood from a forest. Suppose the trees are a common resource. Supply curve S1 represents the private cost of production and demand curve D1 represents the private benefit from consumption. Show how the private market overuses common resources.
S shifts up/left. Actual equilibrium is intersection of D1, S1. Efficient equilibrium is inter of D1, S2.
A small town provides a fireworks​ display, which is a public​ good, every fourth of July. For​ simplicity, assume the town only has two​ residents: Hayden and Madison. Their demands for the fireworks display are illustrated in the figure to the right. Construct the market demand curve for this public good.
Add price together for starting D. Add price together for ending D.
Consider the consumption of electricity.What type of good is electricity?
Electricity is
a quasi-public good.

Consider the market for fish in public water, illustrated in the figure to the right, where S1 is marginal private cost and D1 is marginal private benefit.

Fish are an example of a _____.

Suppose that the use of fish in public water generates a negative externality of $150 per unit.
If so, then according to the figure, the optimal quantity of fish in public water for society is __ nits.

common resource.

3

Consider the market for a common resource such as fish in public water​, illustrated in the figure to the right where S1 represents marginal private costs and D1 represents marginal private benefits. The dashed green line represents the corresponding marginal social cost.

The private market tends to _____ common resources.

Use the triangle drawing tool to shade in the amount of deadweight loss created by the private market. Properly label this shaded area.

overuse

Shade above D1 line. Along dash and D1.

Suppose a new recreational neighborhood park would cost​ $20,000, including opportunity​ costs, to construct and maintain. If​ built, the park would be a public good. For simplicity, assume the neighborhood park would be used by three families, each of whom would derive a marginal benefit equivalent to $8,000 from the park.

Should the neighborhood park be built?

It would _____ for the park to be built.

If left to the private​ market, without private bargaining or government​ intervention, would the park be​ built?
Without private bargaining or government​ intervention, the park _____ be built.

be optimal.

would not.

Suppose a common resource–wood in a public forest–is being overused because residents consider the benefits of gaining firewood or wood for building but do not account for the cost of deforestation when chopping down trees. What could be done to prevent wood in the forest from being​ overused?
To prevent overuse of the common​ resource,
the community could estab norms where social pressure limits deforestation.

Consider a pair of Nike shoes. Is the consmption of Nike shoes rival and excludable?

The consumption of Nike shoes is

rival and excludable.
How do property rights affect externalities and market failure?
Externalities and market failure will result from incomplete property rights.

What is an​ externality?

Which of the following is an example of a good or service having the effects of a positive​ externality?

Which of the folowing is an example of a good or service having the effects of a negative​ externality?

A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.

Medical research
Education

Cigarette smoking

The private cost of producing a good will differ from the social cost
When there is an externality, such as acid rain generated by the production of electricity.
When will the private benefit from consuming a good differ from the social​ benefit?
when there is an​ externality, such as​ second-hand smoke generated by the consumption of cigarettes.
when there is an​ externality, such as fewer diseases generated by the consumption of vaccines.

What is economic​ efficiency?

Externalities affect the economic efficiency of a market equilibrium by causing a difference between

Economic efficiency is where consumer surplus and producer surplus are maximized.

the private cost of production and the social cost of production.
the private benefit of consumption and the social benefit of production.

What is a market failure?
A market failure is when the market fails to produce the efficient level of output.
When is market failure likely to​ arise?
when property rights are incomplete
when it is difficult to enforce property rights.
Briefly discuss the relationship between property rights and the existence of externalities.
Without property rights​ (or if property rights are difficult to​ enforce), externalities areFor​ example, if you buy a house and the government protects your right to exclusive use of that​ house, then your private benefit from the house will likely _____ the social benefit of the house.

In another​ example, if you buy a college education and you have no property right that will enable you to prevent others from benefiting from your​ education, then your private benefit will likel

likely to result

equal

be less than.

The chapter states that your consuming a Big Mac does not create an externality. But suppose you arrive at your favorite​ McDonald’s at lunchtime and get in a long line to be served. By the time you reach the​ counter, there are 10 people in line behind you. Because you decided to have a Big Mac for lunchlong dash—instead ​of, say, a pizzalong dash—each of those 10 people must wait in line an additional 2 minutes. Or suppose that after a lifetime of consuming Big​ Macs, you develop heart disease. Because you are now over age​ 65, the government must pay most of your medical bills through the Medicare system.

Under these​ circumstances, when you consume a Big Mac you create a _____ externality in _____.

Might there be a justification here for the government to intervene in the market for Big​ Macs? Explain.

negative; consumption.

Because the private benefit of your consuming a Big Mac is greater than the social​ benefit, the government should intervene to internalize the externality.

Your neighbor John has a barking dog.
Which of the following statements is​ true?
It can create negative externalities by disrupting your sleep and can also create positive externalities by discouraging intruders.
Yellowstone National Park is in bear country. The National Park​ Service, at its Yellowstone Web​ site, states the following about camping and hiking in bear​ country:
Do not leave packs containing food​ unattended, even for a few minutes. Allowing a bear to obtain human food even once often results in the bear becoming aggressive about obtaining such food in the future. Aggressive bears present a threat to human safety and eventually must be destroyed or removed from the park. Please obey the law and do not allow bears or other wildlife to obtain human food.
​Source: National Park​ Service, Yellowstone National​ Park, “Backcountry Camping​ & Hiking,”​ www.nps.gov/yell/planyourvisit/backcountryhiking.htm.
What externality does obtaining human food pose for the​ bear?
When campers and hikers leave human food for bears to​ consume, that posesWhat externality does the​ bear’s obtaining human food pose for future campers and​ hikers?
When campers and hikers leave human food for bears to​ consume, that poses

a negative externality for the bears because the taste of human food often causes the bears to be aggressive and since they pose a threat to human​ safety, they are eventually removed from the park or even destroyed.

a negative externality for the future campers and hikers since they may be attacked by aggressive bears who are searching for more human food.

Examples of transaction costs include

When are we likely to see private solutions to the problem of​ externalities?

the cost of monitoring an agreement.
the cost of drafting a contract or agreement.
the time required to negotiate an agreement.When transaction costs are low.
When the parties involved have information about the externality.
When the number of parties involved is small.

Is it ever possible for an increase in pollution to make society better​ off? Referring to the graph to the​ right,
society would be better off increasing pollution if pollution reduction is at Q3.
The following information regarding cable television is from the Federal Communications Commission​ (FCC) Web​ site:
In​ general, a cable television operator has the right to select the channels and services that are available on its cable system. With the exception of certain channels like local broadcast television channels which are required to be carried by federal​ law, the cable operator has broad discretion in choosing which channels will be available and how those channels will be packaged and marketed to subscribers. With the exception of programming that is required to be carried on the basic​ tier, the cable operator and the entity that owns the channel or programming service negotiate the terms and conditions for carriage on the cable system. Terms may include whether the channel or service will be offered in a package with other programming or whether the channel or service will be offered on a​ per-channel or​ pay-per-view basis.
​Source: Consumer and Government Affairs​ Bureau, “Choosing Cable​ Channels,” ​www.fcc.gov/cgb/consumerfacts/cablechannels.html​, November​ 6, 2008.
Suppose you are a fan of The Daily Show with Jon Stewart and The Colbert Report​, both on the Comedy Central cable​ channel, but the only way you can get Comedy Central from your local cable provider is to subscribe to a package that includes 30 other channels.
Is there an externality involved​ here? If​ so, is it an externality in production or​ consumption, and is it positive or​ negative? If there is an​ externality, discuss possible solutions.
This is potentially an example of aWhat would be a possible solution to this​ externality? ​(Mark all that​ apply.)

Positive externality in production.

Have other components of the package pay Comedy Central a portion of their revenue.

Allow Comedy Central to operate independently from the platinum package.

Have other components of the package pay for a portion of Comedy​ Central’s costs of producing The Daily Show and The Colbert Report.

Merge the companies in the package into one company.

Have other components of the package pay Comedy Central a subsidy.

CHAPTER 6
In fall​ 2006, Pace University in New York raised its annual tuition from ​$24,750 to ​$29,000. Freshman enrollment declined from 1,425 in fall 2005 to 1,120 in fall 2006. Assuming that the demand curve for places in the freshmen class at Pace did not shift between 2005 and​ 2006, use this information to calculate the price elasticity of demand. Use the midpoint formula in your calculation.
​Source: Karen W.​ Arenson, “At​ Universities, Plum Post at Top Is Now​ Shaky,” New York Times​, January​ 9, 2007.
The price elasticity of demand for Pace University for the fall of 2006 is ___.The demand for places in​ Pace’s freshman class is price

Calculate the total revenue generated from​ Pace’s freshman class in 2005 ​$

Calculate the total revenue generated from​ Pace’s freshman class in 2006 ​$

The total amount of tuition Pace received from its freshman class _____ in 2006 compared with 2005.

-1.50 (midpoint formula)

elastic

35268750 (tuition X enrollment)

32480000

fell

What is the formula for the price elasticity of​ demand?
The formula for the price elasticity of demand is
the percentage change in quantity demanded divided by the percentage change in price.
Why​ isn’t elasticity just measured by the slope of the demand​ curve?
The measurement of slope is sensitive to the units chosen for quantity and price.
How is the price elasticity of demand​ measured?
In the 2010 holiday​ season, Steve Richardson decided to cut the prices of his​ hand-crafted wooden puzzles to increase sales. According to a newspaper​ account, “the number of orders at Stave Puzzles​ Inc., his​ Norwich, Vt.​ business, hasn’t been enough to offset the price​ cuts.”
​Source: Emily​ Maltby, “In Season of Big​ Discounts, Small Shops​ Suffer,” Wall Street Journal​, November​ 24, 2010.
The demand for these puzzles
must be inelastic because the percentage increase in the quantity demanded for orders is less than the percentage decrease in price of the puzzles.
When demand curves​ intersect, the curve with the larger slope in absolute value​ (the steeper demand​ curve) is more elastic.
False.
CHAPTER 7
Match the countries below on the left with the health care system descriptions to their right. Do this by inserting into each​ country’s response box the number associated with the description of its health care system.Canada

Japan

UK

US

Has a ​single-payer health care system where the government provides national health insurance to all residents.

Has a system of universal health insurance under which every resident is required to either enroll in a​ non-profit health insurance society or in a government health insurance program.

The government owns most hospitals and employs most​ doctors, so the health care system is referred to as socialized medicine.

Most people have private health insurance through​ employers, with the government also providing insurance to the​ poor, aged, and military veterans.

The main sources of health insurance in the United States include all of the following except
household​ co-operatives, or​ co-ops.

Which of the following countries operates under a​ single-payer health insurance​ system?

Which of the following best describes the system of socialized​ medicine?

Canada

a health care system under which the government owns most of the hospitals and employs most of the physicians

Comparisons of health care outcomes across countries often concentrate on measures such as life expectancy and infant mortality since
they are among the easiest outcomes to measure because a specific event​ (death) has occurred.

Match the terms below on the left with the definitions to their right. Do this by inserting into each​ term’s response box the number associated with its correct definition.

Health insurance

Free-for-Service

Single-payer health care system

Socialized medicine

A contract under which a buyer makes payments in exchange for the​ provider’s agreeing to pay some or all of the​ buyer’s medical bills.

A type of health insurance plan under which doctors and hospitals receive a payment for each service they provide.

A health care system where one​ entity, usually the​ government, provides national health insurance to all residents.

A health care system in which the government owns most hospitals and employs most doctors.

The phrase​ “health care​ outcome” refers to _____ .
Compared with those of other​ high-income countries, health care outcomes in the United States areIn attempting to compare health care outcomes across​ countries, a problem encountered is

any indicator of societal health.
better on some​ indicators, inferior on others.A lack of data consistency
getting an accurate Measurement of health care delivery
Distinguishing health care effectiveness from lifestyle choices.
Properly assessing consumer preferences.

Two health care analysts argue that in the United​ States,
​”we have arrived at a moment where we are making little headway in defeating various kinds of diseases.​ Instead, our main achievements today consist of devising ways to marginally extend the lives of the very​ sick.”
​Source: David​ Brooks, “Death and​ Budgets,” New York Times​, July​ 14, 2011.
Should​ “marginally extend[ing] the lives of the very​ sick” be an important goal of a health care system​ and, if​ not, what other goals should have a higher​ priority?
While this normative question has no definite correct or incorrect​ answer, it seems reasonable to expect that any health care system​ would, at a minimum and through multiple​ avenues,The success of health care systems of different countries in extending the lives of the very sick

reduce human suffering

may be measured by examining​ illness/disease mortality ratios.

According to an article in the Economist about the health care system in the United​ Kingdom, “A defining principle of the National Health Service is that it is​ ‘free at the point of​ delivery’.”
​Source: “Free-for-All,” Economist​, June​ 1, 2013.
The reference to​ “free at the point of​ delivery” meansIs health care actually free to residents of the United​ Kingdom?

there is no charge to the health care system user.

​No, because they pay for these services through their taxes.

​Source: Organization for Economic Cooperation and Development​, OECD Health Data 2013​, June 2013.
According to the figure​ above, health care is a normal good for
all countries
CHAPTER 10 HW
The table below shows the relationship between the number of movies seen per month and the total utility.
Movies
0
1
2
3
4
5
Total Utility
0
48
80
96
104
108
In this​ example, consuming additional movies _____ the law of diminishing marginal utility.
Marginal Utility

48
32
16
8
4Illustrates

If a 14 percent increase in the price of Cheerios causes a 26 percent reduction in the number of boxes of cereal​ demanded, the price elasticity of demand for Cheerios is ___.

The demand for Cheerios is _____.

-1.86

Elastic

Refer to the graph to the​ right, which shows two potential demand curves in the market for photocopies at a printing company.
If you start at point A on D1​, what is the percentage change in quantity demanded when price falls from​ $30 to​ $20? Use the midpoint formula to calculate this percentage change.
Quantity from 16 to 28. Price from 30 to 20
Quantity demanded rises by 55%
​[Related to​ Don’t Let This Happen to​ You] The publisher of a magazine gives his staff the information in the table below. He tells​ them,
​”Our costs are currently​ $150,000 more than our revenues each month. I propose to eliminate this problem by raising the price of the magazine to​ $3.00 per issue. This will result in our revenue LOADING… being exactly equal to our​ cost.”
Demand is perfectly inelastic.
If a 20 percent increase in the price of Red Bull energy drinks results in a decrease in the quantity demanded of 25​ percent, demand for Red Bull is​ _______ in this range.
elastic
Which of the following is a primary determinant of the price elasticity of supply?
The price elasticity of supply is affected byIn​ particular, the supply curve for a particular product will be increasingly more elastic over a _____ period of time.

The passage of time.

longer

Consider the market for North Face coats. Suppose average household income increases from ​$36 thousand to ​$59 thousand per year. As a​ result, the demand for North Face coats increases from 331 to 536.
Using the midpoint​ formula, what is the income elasticity of demand for North Face coats​? __For this instance, North Face coast are _____ good.

Furthermore, North Face coats are a _____.

.99

a normal

necessity

Consider the demand curve illustrated in the figure to the right.
Is demand elastic or​ inelastic?At what price is total revenue​ maximized?
Total revenue is maximized when price equals

Demand is elastic at all prices above ​$8.00 and inelastic at all prices below $8.00.

8

MIT economist Jerry Hausman has estimated the price elasticity of demand for Post Raisin Bran cereal to be minus−2.5 and the price elasticity of demand for all types of breakfast cereals to be minus−0.9.
The price elasticity of demand for Post Raisin Bran cereal is _____, and the price elasticity of demand for all types of cereals are _____.Why might the price elasticity of demand for Post Raisin Bran cereal be more elastic than the price elasticity of demand for all types of breakfast​ cereals?
Post Raisin Bran cereal

elastic; inelastic

is defined more narrowly.

Suppose that you own an electronics store that sells LCD TVs. The demand for LCD TVsis illustrated in the figure to the right.
If the price elasticity of demand for LCD TVs is elastic​, then you can increase your total revenue by _____ the price of LCD TVs.That being the​ case, if you continue lowering the price of LCD TVs, will total revenue continue to​ increase?

lowering

no

Economist X. M. Gao and two colleagues have estimated that the​ cross-price elasticity of demand between beer and spirits is 0.15.
If​ so, then beer and spirits are _____.Gao and colleagues have estimated that the​ cross-price elasticity of demand between beer and wine is 0.31.
If the price of wine increases by 10​ percent, then the quantity of beer demanded will

In​ addition, Gao and colleagues have estimated the income elasticity of demand for beer to be minus−0.09.
If​ so, then beer

substitues.

increase; 3.1

an inferior good

Suppose the demand for J. Crew sweaters is illustrated in the figure to the right.
Suppose the price of J. Crew sweaters is ​$70. What is total ​revenue?Price increases to $80. Total revenue is

$7000 (P X Q)

$4000

elastic

Compare the price elasticity of demand for pencils with the price elasticity of demand for gasoline.
The price elasticity of demand for pencils is likely
more inelastic because pencils tend to represent a smaller fraction of a​ consumer’s budget.
Suppose the price of pepper increases by 20% and the quantity of salt demanded decreased by 4%.
The cross-priced elasticity of demand between pepper and salt is ___.Pepper and salt are _____

If substitutes

-.2 (4/20)

complements.

positive.

What is the impact of an increase in worker productivity when demand is relatively more​ elastic?
Consider the polar case where the price elasticity of demand is perfectly inelastic.
D is vertical.
Compare the price elasticity of demand for water with the price elasticity of demand for wine.
The price elasticity of demand for wine is likely
relatively more elastic because wine is a luxury.
Suppose the demand for wheat increased only slightly between 1950 and 2000 but the equilibrium quantity increased dramatically. Absent any other​ changes, what could explain the large increase in the equilibrium​ quantity?
The equilibrium quantity of wheat could have increased dramatically given a slight increase in demand because
the price elasticity of supply is relatively elastic
The price elasticity of demand for milk is likely to be more inelastic than the price elasticity of demand for concert tickets because
milk is more of a necessity.
Suppose a consumer is trying to decide how much to spend on housing and how much to spend on all other ​(non-housing​) consumption.
The economic model of consumer behavior predicts that the consumer will
Choose the combination of housing and ​non-housing consumption that makes her as well off as possible from among the combinations of housing and ​non-housing items she can afford.
The following table shows​ Madison’s utility from consuming popcorn and Coke. Suppose that Madison has income of ​$21.00​, the price of popcorn is ​$3.00​, and the price of Coke is ​$2.25. If Madison wants to maximize her​ utility, how much popcorn and Coke should she​ buy?
Popcorn MU
192
144
96
48
24
12
Coke MU
144
108
72
36
18
9
Madison should buy __ boxes of popcorn and __ cans of Coke.
4; 4.
Suppose you have a monthly entertainment budget that you use to rent movies and purchase CDs. You currently use your income to rent 5 movies per month at a cost of​ $5.00 per movie and to purchase 5 CDs per month at a cost of​ $10.00 per CD. Your marginal utility from the fifth movie is 10 and your marginal utility from the fifth CD is 28.
Are you maximizing utility?
You are not maximizing utility because the marginal utility per dollar spent on movies is not equal to the marginal utility per dollar spent on CDs.
Suppose ham is an inferior good. How will consumers adjust their buying decisions if the price of ham​ changes?
If the price of ham​ increases, then consumers will demandSuppose ham is a normal good.
If the price of ham increases, consumers demand ______ ham due to income effect and _____ ham due to the substitution effect.

More ham due to the income effect because their purchasing power decreases and less ham due to the substitution effect because the opportunity cost of consuming ham is higher.

Less; less.

What role does utility play in the economic model of consumer​ behavior?
When modeling consumer​ behavior, utility
Reflects the satisfaction a consumer receives from consuming a particular set of goods and services.
The table below shows the demand for tickets to professional basketball games for​ you, Gina, and Chad.
Graph starting point at highest price and all demands together; ending point at lowest price and demands together.
Giffen goods
were not shown to exist til 2006.
The figure to the right represents the demand for ice cream cones.
Which of the following statements is true​?
Points a and b are the utility−maximizing quantities of ice−cream cones at two different prices of ice−cream.
The figure to the right represents the demand for ice cream cones.
When the price of ice cream cones increases from​ $2 to​ $3, quantity demanded decreases from 4 ice cream cones to 3 ice cream cones. This change in quantity demanded is due to
the income and substitution effects.
For a demand curve to be upward​ sloping, the good would have to be an inferior​ good, and
the income effect would have to be larger than the substitution.
What explanations have economists offered for why firms​ don’t raise prices when doing so would seem to increase​ profits?
Firms might not raise prices when doing so might increase profits because
consumers find it unfair for firms to increase prices after an increase in demand.
What affects the desirability of a​ product?
Products become more desirable when

Professional athletes use a product because consumers who use the same product may feel closer to famous people.

celebrities use a product because consumers who use the same product may feel more fashionable.

movie stars use a product because consumers perceive them to be particularly knowledgeable about it.

Are consumers only interested in making themselves as well off as possible in a material​ sense?
Consumers are
also concerned with fairness as exemplified by tipping restaurants that will never be visited again
What effect does a network externality have on the market for a​ product?
If a network externality is present for a​ product, then
consumers may be more likely to buy the product because it is more useful.
Consider a form of public consumption such as attending sporting events.
An​ individual’s demand for sporting events depends on

the cost of the sporting event.

the​ individual’s tastes and preferences.

the popularity of the sporting event.

Identify the one statement that does not demonstrate how social effects influence consumer choice.
Students in an Economics class are required to purchase a textbook assigned by the professor.
Consider the ultimatum game ​, where an​ “allocator” is​ given, say, ​$100.00 to decide how to divide with a​ “recipient,” who then decides whether to accept or reject the​ allocation, ultimately determining whether the pair receives the allocation or nothing.
What is the optimal play in the ultimatum​ game?The optimal play in the ultimatum game is for the allocator to propose a division of the money such that the recipient receives ​__ and the recipient then _____ the division.

When the ultimatum game experiment is carried​ out, both allocators and recipients act as if fairness _____ important.

$.01; accepts

is

Research by Daniel​ Kahneman, Jack​ Knetch, and Richard Thaler has shown that companies like airlines were explicitly able to include a fuel surcharge in their prices because
consumers see it as fair for firms to raise prices after an increase in costs.
In recent​ years, some economists have begun studying situations in which people do not appear to be making choices that are economically rational.
This new area of economics is calledWhy might consumers not act​ rationally?
Consumers might

behavioral economics.

Take into account monetary costs.
Ignore nonmonetary opportunity costs.
Fail to ignore skunk costs.
Unrealistic about future goals.

Behavioral economist Richard Thaler has studied several examples of how businesses make use of inconsistencies in consumer​ decision-making.
Which of the following is an example of​ this?
An example of businesses taking advantage of inconsistencies in consumer​ decision-making is
credit card companies not allowing stores to charge a fee to consumers if they pay with a credit card but allowing stores to provide a discount to consumers if they pay in cash.
Behavioral economists attribute some consumer behavior to the endowment effect.
Which of the following is an example of the endowment​ effect?
An example of the endowment effect is
Being unwilling to sell a vase for a price that is greater than the price you would be willing to pay to buy the vase if you didn’t already own it.
What explanation might an economist provide why some people smoke cigarettes when such behavior can lead to health​ consequences?
Some people likely smoke cigarettes because
They overvalue the utility from current choices.
Which of the following is most likely to be a fixed cost for a farmer?
insurance premiums on property.
Which of the following is most likely to be a variable cost for a business firm?
cost of shipping products.
CHAPTER 11 HW
Technology isAn example of technological change is

the processes a firm uses to turn inputs into outputs of goods and services.

Being able to produce more output using the same inputs.
Being able to produce the same output using fewer inputs.
A decline in the quantity of output that can be produced from a given quantity of inputs.

Suppose a pizza parlor has the following production​ costs: ​$4.00 in labor per​ pizza, ​$2.00 in ingredients per​ pizza, ​$0.50 in electricity per​ pizza, ​$4,000 in restaurant rent per​ month, and ​$450 in insurance per month.
Assume the pizza parlor produces 4,000 pizzas per month.The variable cost of production is _____. (Add labor, ingred, electricity)
The fixed cost of production is _____. (Add rent and insurance)

$26,000; $4450

Charles has decided to open a​ lawn-mowing company. To do​ so, he purchases mowing equipment for ​$3,000​, buys gasoline ​($1.60 in gas is required to mow each​ yard), and pays a helper ​$15.00 per yard. Prior to opening the lawn​ company, Charles earned ​$7,000 as a lifeguard at the neighborhood swimming pool. Assume the money he used to purchase the mowing equipment could otherwise have earned 2 percent per year in the bank and that the mowing equipment depreciates at 10 percent per year. Charles plans to mow 250 yards per year.

Charles’s implicit cost of production is _____ per year.

$7360
Consider a production process where flowers are grown​ (the output) using gardeners​ (labor) and greenhouses​ (capital). The quantity of flowers grown per day with various combinations of labor and capital are shown in the table below.

Total cost is cost of labor and capital.

Average total cost is Total cost/ Output.

The production function is the relationship between
the inputs employed by a firm and the maximum output it can produce with those inputs.
What is the difference in the short run and the long​ run?
In the short​ run,
at least one of the​ firm’s inputs is​ fixed, while in the long​ run, the firm is able to vary all its​ inputs, adopt new​ technology, and change the size of its physical plant.
Suppose that last semester your semester GPA was 3.70 and your resulting cumulative GPA was 2.83.
​Next, suppose that this semester your semester GPA will be 3.10.
If​ so, then your cumulative GPA
Will increase because your​ “marginal” GPA will be above your cumulative GPA.
The marginal product of labor potentially increases​ (from one to three​ workers) due to
specialization.
Which of the following is true of the relationship between the average product of labor and the marginal product of labor?
Whenever the marginal product of labor is less than the average product of labor, the average product of labor must be decreasing.
The marginal cost of production shows the change in a​ firm’s total cost from producing one more unit of a good or service. What is the shape of the marginal cost​ curve?
Graphically, the marginal cost curve is
a U​ shape, initially falling when the marginal product of labor is rising and then eventually rising when the marginal product of labor is falling.

Marginal cost = change in Total cost/Output

For​ example, if the total cost of producing three units of output is ​$2,331 and the total cost of producing four units of output is ​$3,391​, then the marginal cost of the fourth unit is ​_____.

3391-2331=1060.
When a firm produces​ 50,000 units of​ output, its total cost equals​ $6.5 million. When it increases its production to​ 70,000 units of​ output, its total cost increased to​ $9.4 million.
Within this​ range, the marginal cost of an additional unit of output is
9.4-6.5=2.9/20000
.000145*1000
$145.
In the world oil​ market, oil is supplied up to the point where
the marginal cost of the last barrel is just equal to the price buyers are willing to pay for that last barrel.
The figure to the right illustrates the​ short-run cost curves for a company that produces cell phones.
Identify the average total cost curve​ (ATC), the average variable cost curve​ (AVC), the average fixed cost curve​ (AFC), and the marginal cost curve​ (MC) in the figure.
ATC is C3
AVC is C2
AFC is C1
MC is C4
Refer to the diagram to the right. What happens to the average fixed cost of production when the firm increases output from 150 to​ 200?
It falls.
Refer to the table to the right which shows cost data for Lotus​ Lanterns, a producer of whimsical night lights.
What is the marginal cost per unit of production when the firm produces 100​ lanterns?
$32
If the average variable cost curve is above the marginal cost​ curve, then
marginal costs can be either increasing or decreasing.
Which of the following equations is incorrect​?
ATC = AVC – AFC

Average Fixed Cost

Average Variable Cost

Average Total Cost

Marginal Cost

Profit

Maximizing Profit.
Optimal Profit

Total Revenue

AFC = TC when Q is 0/Q

AVC = Variable Cost/Output
AVC = TC – (TC when Q is 0)/Q
VC = AVC x Q

ATC = Total Costs/Output = TC/Q
TC = ATC X Q

MC = Change in TC/Change in Q

Total Revenue – Total Cost (TR – TC)

MR = MC
Competitive firm P = MR. TR – TC (TR = P x Q)
OP = the next TC – this TC

TR = P x Q

​[Related to Solved Problem ​#4​] Suppose you decide to open a copy store. You rent store space​ (signing a​ one-year lease), and you take out a loan at a local bank and use the money to purchase 10 copiers. Six months​ later, a large chain opens a copy store two blocks away from yours. As a​ result, the revenue you receive from your copy​ store, while sufficient to cover the wages of your employees and the costs of paper and​ utilities, doesn’t cover all of your rent and the interest and repayment costs on the loan you took out to purchase the copiers.
Should you continue operating your​ business?
Yes, because you are covering your variable costs.
According to an article in the New York Times​, interest payments on bank loans make up more than half the costs of the typical solar panel manufacturer. The owner of a firm that imports solar panels made this observation about solar panel​ manufacturers:
​”So as long as companies can cover their variable costs and earn at least some revenue to put toward interest​ payments, they will continue to operate even at a​ loss.”​Source: Diane​ Cardwell, “Solar Tariffs​ Upheld, but May Not Help in​ U.S.,” New York Times​, November​ 7, 2012.
The interest payments these firms make are a

The quote describes logical behavior of solar panel firms in the

fixed cost since they do not vary with output.

short run

The figure to the right illustrates the​ long-run average cost curve for a company that makes motors.
Suppose the company produces 12 thousand motors per month. Is it experiencing economies of​ scale, diseconomies of​ scale, or constant returns to​ scale?
If the company produces 12 thousand​ motors, then it experiences _____.At what level of output does the firm experience the minimum efficient​ scale?
The minimum efficient scale occurs when the firm produces __ thousand motors.

diseconomies of scale. (line starts going up.

5. (lowest point)

Firms experience economies of scale LOADING… for several reasons. What is one such​ reason?
A firm might experience economies of scale because
as a firm expands, it may borrow money more inexpensively.
Your company incurs a cost for factory rent​, ​which, in the short​ run, is fixed. What happens to this cost in the long​ run?
In the long​ run, the cost of factory rent
becomes a variable cost.
Economies of scale exist as a firm increases its size in the long run because of all of the following except
as a firm expands its production, its profit margin per unit of output increases.
All of the following statements are true of the minimum efficient scale except one. Which​ one?
An increase in the output level will reduce profit.

Any cost that remains unchanged as output changes represents a​ firm’s

Any cost that changes as output changes represents a​ firm’s

Which of the following is most likely to be a fixed cost for a​ farmer?

Which of the following is most likely to a variable cost for a business​ firm?

Fixed cost.

Variable cost.

Insurance premiums on property

Cost of shipping products

What are implicit costs?
An implicit cost isHow are implicit costs different from explicit costs?

a nonmonetary opportunity cost.

An explicit cost is a cost that involves spending​ money, while an implicit cost is a nonmonetary cost.

Economies of scale occur

For which of the following​ reason(s) may firms experience economies of​ scale?

when a​ firm’s long-run average costs decrease with output.

Firm’s production may increase with a smaller proportional increase in at least one input.
Large firms may be able to purchase inputs at lower costs than smaller​ competitors; they can also borrow money at a lower interest rate.
Both managers and workers may become more specialized and hence more productive as output expands.

Consider the production of hotdogs. Given the average total cost of producing hotdogs illustrated in the graph to the​ right, which of the following is true of the marginal cost of producing​ hotdogs?

ATC at $0.18. Swoops down 400hotdogs up to $0.22.

The marginal cost of producing up to 400 hotdogs is less than the average total​ cost, but the marginal cost of producing more than 400 hotdogs is greater than the average total cost.
The marginal cost of production is exactly equal to the average total cost at 400hotdogs.
Suppose a​ firm’s average total cost curve is decreasing with output. What can be said of its marginal cost​ curve?
The​ firm’s marginal cost curve must be
below the average total cost curve.
What is the difference between technology and technological​ change?
Technology is the process of using inputs to make​ output, while technological change is when a firm is able to produce more output using the same inputs.
Suppose a pizza parlor has the following production​ costs: ​$2.00 in labor per pizza, $1.00 in ingredients per pizza, and $0.20 in electricity per pizza, $2,500 in restaurant rent per month and $450 in insurance per month.
Assume the pizza parlor produces 5,000 pizzas per month.
The variable cost of production is ​$
The fixed cost of production is ​$
$16000
$2950
The marginal cost of production shows the change in a​ firm’s total cost from producing one more unit of a good or service. What is the shape of the marginal cost​ curve?
​Graphically, the marginal cost curve is
a U​ shape, initially falling when the marginal product of labor is rising and then eventually rising when the marginal product of labor is falling.
Mr. Jernigan owns a piece of land on which he grows corn. Corn production annually requires ​$4,000 in seed, $3,000 in fertilizer, and $10,000 in pesticides. Mr. Jernigan uses his own labor to grow the corn and therefore hires no workers. If Mr. Jernigan did not use his time to grow corn, he would instead be able to sell insurance, earning $30,000 per year.
Suppose another farmer has just offered to pay Mr. Jernigan rent of ​$20,000 per year for use of the land.
If Mr. Jernigan refuses to rent the land to another​ farmer, then what will be his accounting costs from farming corn himself on his​ land? What will be his economic​ costs?
Mr.​ Jernigan’s accounting costs will be ​_____ per year, and his economic costs will be _____ per year.
$17000
$67000
An example of technological change is
a firm rearranging the factory floor to increase production.
a firm’s workers going through a training program.
What is the law of diminishing​ returns?
The law of diminishing returns states that
adding more of a variable input to the same amount of a fixed input will eventually cause the marginal product of the variable input to decline.
Consider the production of slices of pizza. The average total cost (ATC) and average fixed cost (AFC) of producing slices of pizza are illustrated in the graph to the right.
Use the​ four-point curve drawing tool to graph the average variable cost of producing​ one, two,​ three, and four thousand slices of pizza.
ATC-AFC = AVC
CHAPTER 12
Suppose Farmer Smith grows apples. The entire market for apples is shown in the figure below. Assume the market for apples is perfectly competitive.
Demand curve is horizontal
What is the difference between a​ firm’s shutdown point in the short run and its exit point in the long​ run?
In the short​ run, a​ firm’s shutdown point is the minimum point on the
average variable cost​ curve, while in the long​ run, a​ firm’s exit point is the minimum point on the average total cost curve.
What is the relationship between a perfectly competitive​ firm’s marginal cost curve and its supply​ curve?
A​ firm’s marginal cost curve is equal to its supply curve for prices above average variable cost.
Why are firms willing to accept losses in the short run but not in the long​ run?
There are fixed costs in the short run but not in the long run.
OR
There are sunk costs in the short run but not in the long run.
What conditions make a market perfectly​ competitive?
A market is perfectly competitive if
it has many buyers and many​ sellers, all of whom are selling identical​ products, with no barriers to new firms entering the market.
Assume the market for organic produce sold at​ farmers’ markets is perfectly competitive. All else​ equal, as more farmers choose to produce and sell organic produce at​ farmers’ markets, what is likely to happen to the equilibrium price of the produce and profits of the organic farmers in the long​ run?
The equilibrium price is likely to decrease and profits are likely to decrease.
In perfect competition
the market demand curve is downward sloping while demand for an individual​ seller’s product is perfectly elastic.
Farmer Jones grows oranges in Florida. Suppose the market for oranges is perfectly competitive and that the market price for a crate of oranges is ​$18 per crate.
Fill in total​ revenue, average​ revenue, and marginal revenue in the table below.
TR=MP*Q
Refer to the diagram to the right. If the firm is producing 700​ units, what is the amount of its profit or​ loss?
Graph Market Price is through MC line. Right side of MC to MP are is filled in.
There is insufficient information to answer the question.
If the firm is charging a price of​ $12 per unit
Graph Market price at 8, through MC line.
it is not selling any output.
How should firms in perfectly competitive markets decide how much to​ produce?
Perfectly competitive firms should produce the quantity where
the difference between total revenue and total cost is as large as possible.
Why do single firms in perfectly competitive markets face horizontal demand​ curves?
With many firms selling an identical product, single firms have no effect on market price.
Which of the following is an expression of profit for a perfectly competitive​ firm?
Profit for a perfectly competitive firm can be expressed as
Profit = (P X Q) – (ATC X Q)​, where P is​ price, Q is​ output, and ATC is average total cost.
The figure to the right illustrates the average total cost​ (ATC) and marginal cost​ (MC) curves for an apple farmer. Assume the market for apples is perfectly competitive.
If the market price for apples is ​$42.00 per​ crate, then what will be this apple​ farmer’s profit?
Click at $42, drag to ATC point vertical to MC.
Refer to the diagram to the right which shows the cost and demand curves for a profitminus−maximizing firm in a perfectly competitive market.
If the market price is​ $30, the​ firm’s profit maximizing output level isIf the market price is​ $30, should the firm represented in the diagram continue to stay in​ business?

180 (Lower pt of ATC)

Yes, because it is covering part of its fixed cost.

The figure to the right represents the cost structure for a perfectly competitive firm with its average total cost​ (ATC) curve, average variable​ (AVC) curve, and marginal cost​ (MC) curve. Fixed costs are​ $50.00.
Suppose the market price is ​$15.00 per unit.
Characterize the​ firm’s profit.
If the firm produces​ output, then it willShould the firm instead shut down in the short​ run?
In the short​ run, the firm should

experience losses.

continue to produce because price is greater than average variable cost.

What is the supply curve for a perfectly competitive firm in the short​ run?
The supply curve for a firm in a perfectly competitive market in the short run is
that​ firm’s marginal cost curve for prices at or above average variable cost.
Assume the market price is ​$26.
The graph to the right shows a firm in a perfectly competitive market operating at a loss. The graph includes the​ firm’s marginal cost​ curve, average total cost​ curve, and average variable cost curve.
​1.) Use the line drawing tool to graph the​ firm’s demand curve. Label this line​ ‘Demand’.
​2.) Use the point drawing tool to plot the​ firm’s profit-maximizing price and quantity. Label this point​ ‘Point A’.
​3.) Use the rectangle drawing tool to shade in the​ firm’s profit​ (Profit/Loss). Properly label this shaded area.
Demand curve is horizontal at $26.
Point A is at intersection of Demand and MC.
Rectangle from Point A to price that’s at the bottom of ATC.
How does perfect competition lead to allocative and productive​ efficiency?
Perfect competition leads to allocative and productive efficiency
Because prices reflect consumer preferences.
firms are motivated by profit.
Suppose the figure to the right illustrates the cost curves for a firm in a perfectly competitive market. Let MC be the marginal cost curve and ATC be the​ long-run average total cost curve.
At what point does the firm achieve productive​ efficiency?
Using the point drawing​ tool, identify the quantity and the average cost at which the firm achieves productive efficiency. Label the point​ “Productive efficiency.”
Bottom of ATC.
Farmer Brown grows cotton. The average total cost and marginal cost of growing cotton for an individual farmer are illustrated in the graph to the right.
Assume the market for cotton is perfectly competitive and that the market price is ​$22 per bushel. Also assume that farmer Brown is producing the amount of cotton that maximizes profits.
Use the rectangle drawing tool to shade in farmer​ Brown’s profit. Properly label this shaded area.
From Price line @ $22, to bottom of ATC line, right of MC.
What is the difference between a​ firm’s shutdown point in the short run and its exit point in the long​ run?
In the short​ run, a​ firm’s shutdown point is the minimum point on theWhy are firms willing to accept losses in the short run but not in the long​ run?

Average variable cost​ curve, while in the long​ run, a​ firm’s exit point is the minimum point on the average total cost curve.

There are sunk costs in the short run but not in the long run.

The figure on the left represents the cost structure for a perfectly competitive wheat farmer with her average total cost​ (ATC) ($5, 11bshl) curve and marginal cost​ (MC) (Inters. ATC @ $5, 11bshl) curve-this ​firm’s cost curves are representative of most firms in the market. The figure on the right represents the market for wheat. S starts at $5, 3bshl, goes to $9, 7bshl. D starts at $9.5, goes to $1, inters S at $7, 3.5bshl.

Characterize profits for the firms in this industry.
Firms in this market are currently

What will be the market price at the​ long-run competitive​ equilibrium?
The​ long-run equilibrium price will be

In​ long-run, firms will _____ the market until the marginal firm is earning _____.

making a profit (Above ATC)

$500.

enter; zero economic profit.

Which of the following best explains why firms​ don’t maximize revenue rather than profit?

If a firm decided to maximize​ revenue, would it be likely to produce a smaller or a larger quantity than if it were maximizing​ profit? The firm would produce a _____ quantity of output.

At the point where revenue is maximized, the difference between total revenue and total cost may not be maximized

larger

The increase in total revenue that results from selling one more unit of output is

What is the relationship between​ price, average​ revenue, and marginal revenue for a firm in a perfectly competitive​ market?

marginal revenue.

Price is equal to both average revenue and marginal revenue.

How are prices determined in perfectly competitive markets​?
In perfectly competitive​ markets, prices are determined by
the interaction of market demand and market supply because firms and consumers are price takers.
Which of the following is a characteristic of perfectly competitive​ markets?
The products sold by all firms in the market will be identical.
How is the market supply curve derived from the supply curves of individual​ firms?
The market supply curve is derived
by horizontally adding the individual​ firms’ supply curves.

Total revenue is

Marginal revenue is

Maximizing profit when

If next week the equilibrium price of desk lamps drops to​ $30, should it be shut down?

the total amount of funds received by a seller of a good or​ service, calculated by multiplying price per unit by the number of units sold. TR = initial TR + first TC

the change in total revenue from selling one more unit. TR2 – TR1. All the same.
marginal revenue equals marginal cost. Output should be expanded up to this point.

No because price is greater than minimum AVC

Edward Scahill produces table lamps in the perfectly competitive desk lamp market. The equilibrium price of lamps is ​$55.
a. Fill in the blanks in the table for total revenue and marginal​ revenue, as represented by ​(i and ii​). ​(Enter your responses as​ integers.)How many table lamps will Edward produce to maximize profit?

If next week the equilibrium price of desk lamps drops to​ $30, should Edward shut down

TR = initial revenue + 55.

MR = change from selling 1 more unit. 55.

Where MR = MC

No because price is greater than minimum AVC.

Explain why it is true that for a firm in a perfectly competitive​ market, the​ profit-maximizing condition MR​ = MC is equivalent to the condition P​ = MC.
When maximizing​ profits, MR​ = MC is equivalent to P​ = MC because
When are firms likely to enter an industry & when are they likely to exit?
Economic profits will attract firms and economic losses will drive firms out
In the graph on the​ right, the demand for syrup has changed because the price of frozen waffles has risen from ​$2.30 to ​$2.55 per package.
The cross-price elasticity of demand between frozen waffles and syrup is ___.Graph: D1 @ 1.89, 9,000
D2 @ 1.75, 7,000

-3.89
When quantity demanded is completely unresponsive to​ price, what is the value of price elasticity of​ demand?
If demand is perfectly​ elastic, then what is the effect of an increase in​ price?
a decrease in quantity demanded to zero

Which one of the following factors helps determine the marginal cost of reducing​ crime?

Which one of the following factors helps determine the marginal benefit of reducing​ crime?

Would it be economically efficient to reduce the amount of crime to​ zero? Briefly explain.

resources devoted to courts.

personal injury from crime.

No. It would not be efficient to completely reduce crime because the marginal cost of doing so likely exceeds the marginal benefit.

Suppose that you own an electronics store that sells Apple iPods. The demand for Apple iPods is illustrated in the figure to the right.
If the price elasticity of demand for Apple iPods is elastic​, then you can increase your total revenue byThat being the​ case, if you continue lowering the price of Apple iPods, will total revenue continue to increase?

lowering the price of Apple iPods.

No.

Health care costs in a country have traditionally been moderate.​ However, some economists in this country predict that healthcare costs are likely to rise in the future.
Which of the following​ trends, if​ true, would strengthen the argument of these​ economists?
The average population of the country is becoming older.
Refer to the table below. What is the marginal cost of producing the 200th​ pizza?

TC of Pizzas at quantity of 200 minus the initial cost, divided by 200

TC2 – TC1 = $$/Marg Prod of Labor

Refer to the table below. Which of the following costs are implicit​ costs?

Which of the following are sometimes called accounting​ costs?

the forgone salary and interest

explicit costs

Use the graph to the right of the market for basketball tickets at State University to answer these​ questions:
The supply curve isSuppose the basketball team at State University goes undefeated in the first half of the​ season, and the demand for basketball tickets increases.

The equilibrium

If State University basketball team continues to do very well in future​ years, and a new bigger stadium is​ built, then the price elasticity of supply would

perfectly inelastic (Straight up)

price of tickets increases but the equilibrium quantity stays the same.

increase

Given this​ information, compute the range of price elasticity of demand for cigarettes.
​Source: Shaila​ Dewan, “States Look at Tobacco to Balance the​ Budget,” New York Times​, March​ 20, 2009.
According to the​ article, the price elasticity of demand for cigarettes ranges from __ to __.Explain whether the demand for cigarettes is elastic, inelastic, or unit elastic.
The price elasticities in this range

.3; .5

are inelastic because they are less than one.

increase because the percentage increase in price will be larger than the percentage decrease in quantity.

Why do most economists favor tradable emissions allowances to the​ command-and-control approach to​ pollution?
Tradable emissions allowances eliminate pollution at lower cost than the​ command-and-control approach.
How is the price elasticity of demand​ measured?
The price elasticity of demand is measured as
the percentage change in the quantity demanded divided by the percentage change in price.

What is the difference between the short run and the long​ run?

Is the amount of time that separates the short run from the long run the same for every​ firm?

In the short​ run, at least one of a​ firm’s inputs is​ fixed, while in the long​ run, a firm is able to vary all its inputs and adopt new technology.

No

A firm sells​ 3,000 headphones at a price of​ $3 per unit. Even though this price is slightly higher than competing​ brands, the management is considering a further increase in price by 25 cents. The firm plans to focus advertising efforts on superior sound clarity.​ Rachel, the​ firm’s marketing​ head, feels confident that a price increase by 25 cents will increase revenue. Industry analysts are of the opinion that even though the revenue is likely to​ increase, the firm must be careful of rivals who are actively competing for higher market share.
The firm increased the price of headphones to​ $3.25 and anticipated a decline in quantity demanded by only 100 units.​ However, the firm was able to sell only​ 2,769 headphones at this new price. Which of the following is most strongly implied by this​ information?
There will be almost no change in the total revenue after the price increase.

A Pigovian tax is

At what level must a Pigovian tax be set to achieve​ efficiency? A Pigovian tax must be set equal to

a tax to bring about an efficient level of output in the presence of externalities.

the cost of the externality.

An externality

Which of the following are examples of activities that generate externalities in the market for health​ care? ​(Check all that​ apply.)

interferes with the economic efficiency of a market equilibrium.
refers to a benefit or cost of an economic activity that affects someone who is not directly associated with it.
may require government intervention.Individuals engaging in injurious or reckless lifestyle choices.
People receiving vaccinations against infectious diseases.

According to the Coase​ theorem, a steel plant that creates air pollution would agree to curtail production​ (and therefore​ pollution) even if it were not legally liable for the damage the pollution was causing because

According to the Coase​ theorem, a pollutor such as the steel plant that creates air pollution will agree to reduce pollution and production

the steel plant may receive payments from the victims of pollution that overcompensate it for the reduction of output.

even if the victims of pollution do not have the property right to clean air.

Consider the demand for cigarettes. Suppose the government decreases the cost of cigarettes by lowering cigarette taxes.
How will this affect the demand for cigarettes over​ time?
If the cost of cigarettes decreases​, then the quantity of cigarettes demanded will
increase​, and this effect will likely become larger​ (in absolute​ value) over time.
What is free​ riding?

Free riding is benefiting from a good without paying for it.

the market producing a quantity of public goods that is inefficiently low because they are nonexcludable.

A hospital provides​ emergency-room medical care for local residents. Suppose the hospital currently provides this care for​ 15,000 patients per year at a total cost of ​$45,000,000. If the hospital​ expands, it can provide​ emergency-room medical care for​ 20,000 patients per year at a total cost of ​$60,000,000.

If the hospital​ expands, will it be experiencing economies of​ scale, diseconomies of​ scale, or constant returns to​ scale?
If the hospital​ expands, it will be experiencing

constant returns to scale
Compare the price elasticity of demand for water with the price elasticity of demand for wine.
The price elasticity of demand for water is likely
relatively more inelastic because water is a necessity.
As you move up a linear demand​ curve, the price elasticity of demand in absolute value

increases

inelastic; increase

Match the terms below on the left with the definitions to their right. Do this by inserting into each​ term’s response box the number associated with its correct definition.

Principal-agent problem

Adverse selection

Asymmetric information

Moral hazard

Results from agents pursuing their own interests rather than the interests of the principals who hired them.

Is the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction.

Occurs when one party to an economic transaction has less information than the other party.

Refers to actions people take after they have entered into a transaction that make the other party to the transaction worse off.

What is the tragedy of the​ commons?

How can it be​ avoided? The tragedy of the commons can be avoided by

The tendency for a common resource to be overused.

setting a tax equal to the external cost of overusing common resources.
clearly defining and enforcing property rights.

Spending on health care has been growing faster than the economy as a whole for at least the past several decades. What has caused this​ trend?
Health care as a proportion of GDP has been increasing because
expensive medical equipment has been invented.
Which costs are affected by the level of output​ produced?
variable costs.
What are the sources of externalities and market​ failure?
incomplete property rights.
the difficulty of enforcing property rights in certain countries

Behavioral economics is the study of

Three mistakes consumers often make are

situations in which people make choices that do not appear to be economically rational.

ignoring nonmonetary opportunity​ costs, failing to ignore sunk​ costs, and being overly optimistic about the future.

The​ cross-price elasticity of demand is

If the​ cross-price elasticity of demand is​ negative, then the products​ are:

the percentage change in quantity demanded of one good divided by the percentage change in the price of another good.

​complements, but if it is​ positive, then
the products are substitutes.

What is the difference between technology and technological​ change?
Technology is the process of using inputs to make​ output, while technological change is when a firm is able to produce the same amount of output using fewer inputs.

The private benefit is​ ________, while the social benefit is​ ________.

A positive externality causes

the benefit received by the consumer of a good or​ service; the total benefits from consuming the good or service

the social benefit from consuming the good to be greater than the private benefit.

When XYZ firm entered the market for good A two years​ back, it kept the price of its product low to attract customers away from its leading competitor. The firm has now established itself and has a market share of 20 percent. The management of XYZ is planning to increase price of A from the current​ $6 per unit to​ $7 per unit. Timothy​ Walters, the marketing​ head, however, feels this is not a good idea because it will reduce quantity demanded drastically from the current​ 1,200 units to 900 units. His colleague and the head of the sales​ department, Jake​ Mayers, feels that the quantity demanded would only decline by 250 units. According to​ Jake, the firm can afford to increase the price because even after the price increase they would still have significant market share.
The quantity demanded declines by 10 percent in response to the​ $1 price increase.
Sarah owns a bakery that sells cakes. The long run average cost of selling cakes is illustrated in the graph to the right.
Suppose Sarah is currently selling 700 cakes. In the long run, Sarah should _____ output to reduce the long run average cost of production.Specifically, to sell on the minimum efficient scale in the long run, Sarah should expand output to _____ cakes.

(Before minimum efficiency) expand.

900 cakes (Minimum efficiency)

Income elasticity of demand is

Use income elasticity to distinguish a normal good from an inferior good.
For a normal​ good, the income elasticity of demand will be

Is it possible to tell from the income elasticity of demand whether a product is a luxury good or a​ necessity?

the percentage change in quantity demanded divided by the percentage change in income.

​positive, but for an inferior​ good, the income elasticity of demand will be negative.

Yes. If the income elasticity of demand is greater than​ 1, then the good is a luxury. If the income elasticity of demand is positive but less than​ 1, then the good is a necessity.

The Commerce Ministry of a country conducts regular surveys on goods and services sold within the country. Researchers at the Ministry study consumer behavior through the choices the consumers make while deciding what to buy. Their report on the industry for beverages last year indicated that the price elasticity of demand for fruit juices in the country was​ -0.8, while the price elasticity of demand for a particular brand called Fruit Drops was​ -1.2. According to the​ report, an average consumer spends about 1 percent of his monthly income on fruit juices. A student of​ economics, Julio, however feels that the current price elasticity of demand for Fruit Drops is actually higher than​ -1.2, based on his own experience in purchasing fruit juices.
Three new brands have been introduced in the market for fruit juices in the last month.
How is the price elasticity of demand​ measured?
by dividing the percentage change in the quantity demanded of a product by the percentage change in the​ product’s price
The figure to the right illustrates the demand for taxi rides in a large city. Suppose the price per ride is initially ​$10 but then falls to $5 due to a recession.What is the price elasticity of demand for taxi​ rides?
Using the midpoint​ formula, the price elasticity of demand is ___.Demand is _____.

-.16

inelastic

MIT economist Jerry Hausman has estimated the price elasticity of demand for Post Raisin Bran cereal to be −2.5 and the price elasticity of demand for all types of breakfast cereals to be −0.9.
The price elasticity of demand for Post Raisin Bran cereal is _____, and the price elasticity of demand for all types of breakfast cereals is _____.Why might the price elasticity of demand for Post Raisin Bran cereal be more elastic than the price elasticity of demand for all types of breakfast​ cereals?
Post Raisin Bran cereal

elastic; inelastic

has more substitutes available.

What is the distinction between the economic short run and the economic long​ run?
In the short​ run, at least one input is​ fixed, but in the long​ run, the firm can vary all inputs.

What is the definition of marginal​ utility?

The law of diminishing marginal utility suggests that

Marginal utility is more useful than total utility in consumer decision making because

The change in utility from consuming an additional unit of a good or service.

consumers experience diminishing additional satisfaction as they consume more of a good or service.

optimal decisions are made at the margin.

In the market for health​ insurance, asymmetric information problems arise because
buyers of health insurance policies always know more about the state of their health than do the insurance companies.
What is the focus of a​ command-and-control approach to reducing​ pollution?
The government imposing quantitative limits on the amount of pollution firms are allowed to generate.
When lettuce prices​ doubled, from about ​$1.40 per head to about ​$2.80​, the reaction of one consumer was quoted in a newspaper​ article:
​”I will not buy​ [lettuce] when​ it’s ​$2.80 a​ head,” she​ said, adding that other green vegetables can fill in for lettuce.​ “If bread were​ $5 a loaf​ we’d still have to buy it. But lettuce is not that important in our​ family.”
​Source: Justin​ Bachman, “Sorry, Romaine​ Only,” Associated​ Press, March​ 29, 2002.
For this​ consumer’s household, which product has the higher price elasticity of demand: bread or​ lettuce?For this​ consumer’s household, is the cross-price elasticity of demand between lettuce and other green vegetables positive or​ negative:

lettuce

positive

Refer to the table to the right. What portion of the marginal revenue of the 4th unit is due to the output effect and what portion is due to the price​ effect?
Q/P/R
1
​$7.50
​$7.50
2
7.00
14.00
3
6.50
19.50
4
6.00
24.00
5
5.50
27.50
6
5.00
30.00
Output effect​ = $6.00; Price effect​ = −​$1.50
Refer to the diagram to the right. The marginal revenue from selling the additional unit Qb instead of Qa equals
Area between Qa and Qb not along D line + area between Pa and Pb not along D line.
Suppose the figure to the right represents the market for a particular brand of​ shampoo, such as​ L’Oreal, Lancome, or Maybelline.
Assume the market is monopolistically competitive.
What is the​ firm’s profit-maximizing price and​ quantity?
pg. 429
Eco Energy is a monopolistically competitive producer of a sports beverage called Power On. The table to the right shows the​ firm’s demand and cost schedules.
What is the marginal profit from producing and selling the 5th​ case?
1
​$75
​$75
​$60
2
70
140
85
3
65
195
105
4
60
240
115
5
55
275
130
$20
Eco Energy is a monopolistically competitive producer of a sports beverage called Power On. The table to the right shows the​ firm’s demand and cost schedules.
What is likely to happen to the​ product’s price in the long​ run?
1
​$75
​$75
​$60
2
70
140
85
3
65
195
105
4
60
240
115
5
55
275
130
6
50
300
155
7
45
315
190
8
40
320
230
9
35
315
280
It will fall.
Suppose the market for​ fast-food value meals is monopolistically​ competitive, with many restaurants selling their own brand of food.
Assume the restaurants in the industry behave optimally by maximizing profit.
The figure to the right represents the market for one monopolistically competitive​ firm’s value meals.
How will this figure change as the market moves toward​ long-run equilibrium?
In the long​ run,ATC swoops above everything. MC swops below D1 and MR then comes up above ATC. Short-run at $4.80, 8meals. MC and MR cross @ $1.60, 8meals.

the demand curve will shift to the right and become more inelastic because the firms are currently experiencing losses.
Suppose the figure to the right represents the market for a particular brand of soap such as​ Zest, Dove, or Ivory.
Suppose also that the market is monopolistically competitive and the firm behaves optimally to maximize profit.MC intersects MR @ $0.80, 8packs. MC, D1, and ATC intersect at $1.60, 12packs.

Above ATC = profit.
Profit = (P – ATC) X Q.

In the long​ run, will new firms enter the market or will existing firms​ exit?
In the long​ run,

Shade D1 point (that intersects MC/MR) to ATC directly up or down from it.

New firms will enter because the firm is currently making profit.

Is zero economic profit inevitable in the long run for monopolistically competitive​ firms?
In the long​ run, monopolistically competitive firms

May continue to earn profit by convincing consumers their product is different.

May continue to earn profit by improving their product.

Suppose the figure to the right represents the market for a particular brand of​ shampoo, such as​ L’Oreal, Lancome, or Maybelline.
Assume the market is monopolistically competitive and is in​ long-run equilibrium.
How much excess capacity does the firm​ have?Monopolastically competitive firm’s excess capacity is

​Instead, suppose the market is perfectly competitive and is in​ long-run equilibrium​ (with the same cost structure as that illustrated in the​ figure.)
How much excess capacity does the firm​ have?
The perfectly competitive​ firm’s excess capacity is

Difference of Qpc and Qmc =

4 thousand

0 thousand

Do consumers benefit in any way from monopolistic competition relative to perfect​ competition?
Compared to perfect​ competition, when a consumer purchases a product from a monopolistically competitive​ firm, the consumer benefits from purchasing a product
That is appealing because it is differentiated.
That is more closely suited to their tastes.
Are monopolistically competitive firms efficient in​ long-run equilibrium?
Monopolistically competitive firms
are not productively efficient because they do not produce at minimum average total cost and they are not allocatively efficient because they produce where price is greater than marginal cost.
How does the​ long-run equilibrium for a monopolistically competitive market differ from the​ long-run equilibrium for a perfectly competitive​ market?
One way in which monopolistically competitive markets and perfectly competitive markets differ is that in​ long-run equilibrium, monopolistically competitive firms
Charge a price greater than marginal cost.
OR
Do not produce at minimum average total cost.
Many firms advertise. What effect does advertising have on firm​ profits?
One possible effect of advertising is to
Increase profits by shifting the demand curve for the product to the right.
Suppose a firm introduces a significantly different version of an old product. How might that firm use brand management
Such a firm might use brand management to
to postpone the time when they will no longer be able to earn economic profits.
Which of the following is a threat to a trademarked company​ name?
Trademarked brands are threatened by
their names becoming so widely used for a type of product that they no longer are associated with a specific company.
Which of the following is an example of a trademarked name that has become so widely used for a type of product that it is no longer associated with the product of a specific​ company?
Asprin
OR
esclalator
thermos.
How do firms use​ marketing?
A firm might use marketing to
Decide how to distribute the product
OR
determining which products to produce
Designing the product.
Advertising the product
Monitoring how changes in consumer tastes are affecting the market for the product.
What factors under the control of owners and managers make a firm successful and allow it to earn economic​ profits?
Owners and managers control some of the factors that make a firm successful such as
the firm’s ability to produce its product at a lower average cost than competitors.
If buyers of a monopolistically competitive product feel the products of different sellers are strongly​ differentiated, then
the demand for each seller’s product is relatively inelastic.
A firm that is first to the market with a new product frequently discovers that there are design flaws or problems with the product that were not anticipated. How do these problems affect the innovating​ firm?
They reduce profits for the new innovations and open the door to competitors who can enter the new market with a better product.
Some factors that allow firms to make economic profits are beyond its control. All but one of the following is an uncontrollable factor. Which factor is​ controllable?
product differentiation.
Which of the following statements is true​?
Sheer chance can play a significant role in the success or failure of a business.
CHAPTER 13
What is the difference between zero accounting profit and zero economic​ profit?
Zero economic profit includes a​ firm’s opportunity/implicit costs but zero accounting profit does not.
Brad owns a restaurant that sells soup in a monopolistically competitive market. The graph to the right depicts the demand and marginal revenue for his soup.
Suppose that Brad​’s restaurant is maximizing profits at 30 bowls of soup ​(per day).
Assume that restaurants in this market are earning positive economic profits in the short run.
Use the​ three-point curve drawing tool to add Brad​’s average total cost​ (ATC) curve to the graph. Properly label this curve.
First point at 1/2 Q and 1/2. Second point on maximized profit (35).
Third point on D line, half the cost of when at 35.
Does the fact that monopolistically competitive markets are not allocatively or productively efficient mean that there is a significant loss in economic​ well-being to society in these​ markets?
Though monopolistically competitive markets are not allocatively or productively​ efficient, consumers benefit in that
they are able to purchase a differentiated product that more closely suits their tastes.
With a​ downward-sloping demand​ curve, average revenue is equal to price
​actually, average revenue is always equal to​ price, whether demand is downward sloping or not.
With a​ downward-sloping demand​ curve, marginal revenue is below price
because the firm must lower its price to sell additional units.
There are many wheat farms in the United​ States, and there are also more than​ 7,000 Starbucks coffeehouses.
​Why, then, does a Starbucks coffeehouse face a​ downward-sloping demand curve when a wheat farmer faces a horizontal demand​ curve?
Wheat is a homogeneous​ good, while Starbucks is able to differentiate its coffee from other coffeehouses.
What is a key factor that determines a​ firm’s profitability?

Differentiation of a​ firm’s product from other products

Chance events.

A​ firm’s average cost of production relative to that of competing firms.

Factors affecting a​ firm’s entire market.

(#9)Consider the graph to the right. Is it possible to say whether this firm is a perfectly competitive firm or a monopolistically competitive firm?

The graph shows a _____ equilibrium because the firm is making _____ economic profits.

What quantity on the graph represents long-run equlibrium if the firm were perfectly competitive? ___ lattes per week.

Yes. This is a monopolistically competitive firm because its demand curve is downward sloping.

Short-run; positive

Where ATC intersects D. 6

What effect does the entry of new firms have on the economic profits of existing​ firms?
When new firms enter a monopolistically competitive​ market, the economic profits of existing firms
will decrease because their demand curves will shift to the left.
A monopolistically competitive​ firm’s demand curve ​(D​), marginal revenue curve ​(MR​), and marginal cost curve ​(MC​) are illustrated in the figure to the right.
Is this firm maximizing profits if it chooses to produce 8 (pass MC intersection of MR) units of​ output? Explain.
If the firm chooses to produce 8 units of​ output, then it is
not maximizing profit because marginal cost is greater than marginal revenue, so the firm should produce less.
A monopolistically competitive firm​ doesn’t produce where P​ = MC like a perfectly competitive firm because
P exceeds MR for a monopolistically competitive​ firm, and​ it’s MR that must equal MC for profit maximization.
Give two examples of products sold in perfectly competitive markets and two examples of products sold in monopolistically competitive markets.
Wheat and corn are sold in perfectly competitive markets and Maybelline cosmetics and Ralph Lauren cologne are sold in monopolistically competitive markets.
OR
Apples and oranges are sold in perfectly competitive markets and Maybelline cosmetics and Ralph Lauren cologne are sold in monopolistically competitive markets.
What are the most important differences between perfectly competitive markets and monopolistically competitive​ markets?
Unlike in perfectly competitive​ markets, in monopolistically competitive​ markets,
firms face​ downward-sloping demand​ curves, and the products competitors sell are differentiated.
Why would a monopolistically competitive firm​ advertise?
A monopolistically competitive firm would advertise to
shift its demand curve to the right. More inelastic
What is marketing to an​ economist?
Marketing is monitoring how changes in consumer tastes affect demand for product.
Marketing is maintaining product differentiation through brand management
Marketing is advertising the product.
Marketing is deciding how to distribute product.
A monopolistically competitive firm is not allocatively efficient because
price exceeds marginal cost.
Many factors under a​ firm’s control affect profitability. Do factors that are not under a​ firm’s control also affect​ profitability?
Factors not under a​ firm’s control
such as rising rising fuel prices affect profitability.
OR
terrorist events
CHAPTER 13
Suppose a monopolistically competitive firm sells a particular brand of jeans. The quantities of jeans sold per day at various prices are shown in the table below.
Fill in total revenue and marginal revenue in the table below. ​
TR = P X O
MR = TR2 – TR1
Suppose a local​ McDonald’s hamburger restaurant raises the price of its cheeseburgers from​ $2.00 to​ $2.50. What will happen to the quantity of​ McDonald’s cheeseburgers​ demanded?
If​ McDonald’s raises the price of​ it’s cheeseburgers, then
some of​ McDonald’s customers, but not all of​ them, will still demand​ McDonald’s cheeseburgers because they may prefer McDonald’s cheeseburgers to cheeseburgers at other fast-food restaurants.
Suppose Abercrombie​ & Fitch sells clothing in a monopolistically competitive market and that a farmer sells oranges in a perfectly competitive market.
​1.) Use the line drawing tool to draw the type of demand curve likely faced by Abercrombie​ & Fitch. Label this line DAF.
​2.) Use the line drawing tool to draw the type of demand curve faced by an individual orange farmer. Label this line DOranges.
Doranges is horizontal
Daf slopes down
Refer to the table to the right. What portion of the marginal revenue of the 4th unit is due to the output effect and what portion is due to the price​ effect?
Output effect = That quantity’s price.
Price effect = First price minus the price of this unit
Refer to the diagram to the right. The marginal revenue from selling the additional unit Qb instead of Qa equals
Change in quantity from Qb to Qa (Not including triangle) – Change in price from Pa to Pb (not including triangle)
Suppose the figure to the right shows the demand curve for a monopolistically competitive firm. Show the​ firm’s marginal revenue curve.
Using the line drawing​ tool, graph the​ firm’s marginal revenue curve. Label this curve ​”MR​.”
Start up where it did, down to halfway between 0 and D.
Suppose the figure to the right represents the market for a particular brand of​ shampoo, such as​ L’Oreal, Lancome, or Maybelline.
Assume the market is monopolistically competitive.
What is the​ firm’s profit-maximizing price and​ quantity?
The monopolistically competitive​ firm’s profit-maximizing quantity is ___ thousand bottles of shampoo, and it’s profit-maximizing price is $2.00 per bottle.What are the firm’s profits?
Profit equals $___ thousand.

Above intersec of MR and MC on D line. 10; $2.00

Dif between point on D and bottom of ATC. $2

The graph to the right depicts the demand​ (and marginal​ revenue) for a monopolistically competitive​ firm’s perfume along with the average total cost and marginal cost of producing perfume in the short run.
As the market for perfume moves toward a​ long-run equilibrium, firms will _____ the industry.This will shift demand curves for existing firms to _____ and demand curves of existing firms will become _____ elastic.

ATC is above everything. Exit.

right;less

CHAPTER 14
Why do oligopolies​ exist?
Oligopolies exist due to
barriers to entry.
Oligopolies exist because of barriers to entry. One of the most important barriers to entry is due to economies of scale. Why is this​ true?
It is more likely for an industry to be an oligopoly than competitive in the presence of economies of scale because
minimum average cost occurs when firm output is a large fraction of industry output.
The figure to the right shows the market demand for goods and services provided by discount department stores.
Show how economies of scale in this industry can lead to an oligopolistic market by comparing the​ long-run average cost curves for a typical firm assuming a competitive market with a typical firm assuming an oligopolistic market.
LRAC for competitive is on far left side of graph,.
LRAC for oligopolistic intersects LRAC and Demand curve.
One measure of the extent of competition in an industry is the concentration ratio. What level of concentration indicates that an industry is an​ oligopoly?
Most economists believe that a​ four-firm concentration ratio of ______ than ___ percent indicates that an industry is an oligopoly.Is the concentration ratio an accurate measure of the extent of​ competition?
The​ four-firm concentration ratio

greater; 40

is flawed in that it does not measure competition between industries.

What effect might the government have on​ oligopolies?
In​ oligopolies, the government might
impose barriers to entry with a quota to limit foreign competition.
Ocean Spray
has had almost exclusive ownership of cranberries, which is a key input.
Which of the following is not a reason why government officials are willing to impose entry​ barriers?
to promote an equitable distribution of income
Consider the market for oil. Suppose for simplicity that there are only two oil producing countries—Saudi Arabia and Kuwait. Both countries must choose whether to produce a low output or a high output.
These output strategies with corresponding profits are depicted in the payoff matrix to the right.​ Kuwait’s profits are in red and Saudi​ Arabia’s are in blue.
Suppose the two countries form a cartel. What is the cooperative equilibrium​?What is the Nash equilibrium for this​ game?

The cooperative equilibrium is for Saudi Arabia to produce a low output and Kuwait to produce a low output.

The Nash equilibrium is for Saudi Arabia to produce a low output and Kuwait to produce a high output. (highest outputs)

​Then, HP and Dell advertise that they will match any lower price of their competitors. For​ example, if HP charges ​$350​, then Dell will match that price and also charge ​$350.
What effect will matching prices have on profits​ (relative to the Nash equilibrium without price​ matching)?
When both at higher price minus when both at lower price.
Consider a market with two​ firms, Kellogg and​ Post, that sell breakfast cereals. Both companies must choose whether to charge a high price ​($5.00​) or a low price ​($2.50​) for their cereals.
These price​ strategies, with corresponding​ profits, are depicted in the payoff matrix to the right.​ Kellogg’s profits are in red and​ Post’s are in blue.
What is the cooperative equilibrium for this​ game?Is the cooperative equilibrium likely to​ occur?
The cooperative equilibrium

Both price $5.00

unlikely because $5 is not dominant strategy.

Suppose Securitex is a small firm that has developed a new​ anti-theft device for automobiles. Securitex currently sells its device online and earns profit of ​$17 million per year. GM is considering installing​ Securitex’s system on its automobiles. The two firms​ first, however, must bargain over what price GM will pay Securitex for its software.
GM chooses how much to offer Securitex for its system and then Securitex chooses whether to accept the offer and install its system on​ GM’s automobiles. The strategies and corresponding profits for GM​ (GM) and Securitex​ (SX) are depicted in the decision tree to the right. Profits are in​ millions, and​ GM’s payoffs represent the additional profit it can earn on its automobiles with​ Securitex’s anti-theft system.
What is the​ subgame-perfect equilibrium?
The​ subgame-perfect equilibrium is for GM to offer a low price and for Securitez to accept the offer. (GM’s most profitable/SX most profitable after low price.)
How are games in game theory​ played?
In game​ theory,How is game theory used in​ economics?
In​ economics,

rules determine what actions are​ allowable, players employ strategies to attain their​ objectives, and payoffs are the results of the interaction among the​ players’ strategies.

the rules of the game include laws that a firm must obey, a strategy is a firm maximizing profits, and the payoffs are profits.
OR the rules of the game include matters beyond a firm’s control, a strategy is a firm maximizing profits​, and the payoffs are profits.

Suppose Best Buy is the only electronics store in a particular​ market, but RadioShack is thinking about entering the market.
Best Buy chooses how much to produce first and then RadioShack chooses whether to enter the industry. The strategies and corresponding profits for Best Buy​ (BB) and RadioShack​ (RS) are depicted in the decision tree to the right.
What will the firms​ do?
Best Buy will choose the large quantity and RadioShack will not enter.
BB second best profit, but RS won’t make anything.
Rainbow Writer​ (RW) is a small online company selling a highly rated software package for printing color labels directly onto CDs. The firm currently earns a profit of​ $2 million per year selling its package exclusively on its website.​ Odeon, the producer of the most popular software package for editing and burning CDs and DVDs has expressed interest in bundling Rainbow​ Writer’s product into its own package. Odeon expects that bundling would further boost its sales and allow it to sell the new bundled product at a higher​ price, thus raising its profits beyond its current profit of​ $12 million. The diagram above shows the decision tree for the Rainbow Writerminus−Odeon bargaining game.
Refer to the decision tree above. What is the equilibrium outcome in this game and is this a subgameminus−perfect ​equilibrium?
In the​ equilibrium, Odeon offers​ $40 per copy of the software package and is accepted but this is not a subgame-perfect equilibrium.
In a decision​ tree, the difference between a decision node and a terminal node is that
at a decision​ node, a decision must be made while a terminal node shows the payoff.
In many business situations one firm will act​ first, and then other firms will respond. To help analyze these types of situations economists use
sequential games.
When Wal-Mart decides to build a new retail store in a​ town, it will decide to build a large store rather than a small store if the large store is expected to earn a greater economic profit. What other motive would Wal-Mart have for chooseing to build a large store?
A larger store may deter entry into the town by a rival firm.
A few years ago Netflix​ (N) pioneered an online DVD rental service. Blockbuster​ (B), a brick and mortar​ DVD/video rental​ company, waited until Netflix had been in business for over a year before deciding whether to establish its own online rental service. At this​ point, Netflix had to decide whether or not to lower its subscription price in order to deter​ Blockbuster’s entry into the market. The figure above shows the decision tree for the Netflixminus−Blockbuster entry game.
Refer to the figure above. Does it make sense for Netflix to lower its price in order to deter​ Blockbuster’s entry into the online DVD rental​ market?
​No, because Netflix will make a higher profit by keeping its subscription price​ unchanged, whether Blockbuster enters the market or not.
Firms must typically purchase inputs from suppliers to produce output.
What effect might suppliers have on an​ industry?
If many firms can supply an input, then suppliers are unlikely to have the bargaining power to limit a​ firm’s profits.
The five competitive forces model suggests the bargaining power of buyers may affect industry competition.
Which of the following is an example of a way buyers might affect an​ industry?
GM has significant bargaining power in the tire market, which reduces the profitability of tire manufactures.
OR
Wal-Mart has significant bargaining power over it’s supplier, which decreases the profitability of the suppliers.
Encyclopedia Britannica is an encyclopedia publisher who sells printed encyclopedias. In the​ 1990s, encyclopedias began to be sold electronically. What effect did electronic encyclopedias have on Encyclopedia​ Britannica?
Electronic encyclopedias
served as a superior product to heavy-bulky, and expensive printed encyclopedias.
What​ “forces” does the five competitive forces model​ address?
The competitive forces in the five competitive forces model does not include
technological change.
The five competitive forces model suggests the threat from potential entrants affects industry competition.
How might an existing firm deter entry of new​ firms?
An existing firm might
advertise to create loyalty.
Assume that the four-firm concentration ratio in an industry is 85 percent. Which of the following statements uses one of the five competitive forces to argue that this industry may be more competitive than its concentration ratio​ suggests?
The threat of entry into this industry can cause firms in the industry to lower their prices and profits in order to deter entry.
In​ 2013, the Educational Testing Service​ (ETS) charged​ $51 to take the Scholastic Aptitude Test​ (SAT) but​ $150 to take the Graduate Record Exam​ (GRE). One reason for this difference in price is
the ETS faces competition in the market for the SAT but no competition for the GRE.
For many​ years, the Aluminum Company of America (Alcoa) essentially operated as a monopoly. What made this company a monopoly. The Aluminum Company of America (Alcoa) was essentially a monopoly because
it had almost exclusive control of the​ world’s supply of bauxite, used to make aluminum
CHAPTER 15
A form of market structure studied by economists is monopoly.
When is a firm a​ monopoly, or are monopolies only theoretical concepts that do not​ exist?
A firm is a monopoly if its economic profits are not competed away in the long run.
The reason that the​ Fisherman’s Friend restaurant in​ Stonington, Maine had a monopoly on selling seafood dinners in that town is most likely due to
no competitors apparently found the profit level attractive enough to enter the market.
A firm that has the ability to control to some degree the price of the product it sells
is a price maker
Which of the characteristics in the list above is shared by an oligopolist and a​ monopolist?
a market structure with barriers to entry.
firm can reap long run profits.
A narrow definition of monopoly is that a firm is a monopoly if it can ignore
the actions of all other firms.
A firm that is the only seller of a good or service that does not have a close substitute is called
a monopoly
The figure to the right illustrates market demand for a monopoly along with its average total cost​ (ATC) curve.
Is the monopoly a natural monopoly?
The firmSuppose 18 units of output are supplied in the market. How much lower is the average total cost of production for one firm compared to two​ firms?
One firm can supply 18 units of output for ___ less per unit in ave total cost than two firms.

is a natural monopoly because it can supply the entire market at lower average total cost than can two or more firms.
Q at intersection of ATC and D divided by two.$1. Price if two firms minus price if one firm.

Governments often have the potential to influence whether firms are monopolies.
How might the government affect whether a firm is a​ monopoly?
The government could
grant a copyright to a firm, giving it the exclusive right to produce a product.
To have a​ monopoly, barriers to entering the market must be so high that no other firms can enter. Do network externalites create or remove barriers to​ entry? Explain.
Network externalities
create barriers to entry because if a firm can attract enough customers​ initially, it can attract additional customers as its​ product’s value increases by more people using​ it, which attracts even more customers.
Why does the government issue​ patents?
The government issues patentsHow long do patents​ last?

to encourage firms to spend money on the research and development necessary to create new products.

20yrs.

Give an example of a public franchise and an example of a public enterprise.
An example of a public franchise is
a firm that is the​ sole, government-designated provider of electricity, and an example of a public enterprise is the gov directly providing water.
Many firms might like to be monopolies because such firms earn economic profits in the long run. What might cause a​ monopoly?
A firm is likely to be a monopoly if
economies of scale are so large that the firm has a natural monopoly.
Suppose a small town has only one artist who sells​ paintings, making that artist a monopoly. One of the​ artist’s paintings is demanded at a price of ​$600​, two paintings are demanded at a price of ​$450​, three at ​$300​, four at ​$150​, and five if the paintings are given away​ (with a price of​ zero).
Demand curve starts at 600,1 and goes to 0,5.
Marginal Revenue goes from 600,1 to 0,3
MR = change in TR/change in Q. So pretty much just change in TR unless Q increases more than 1 each time.
Describe a​ monopoly’s demand curve.
A​ monopoly’s demand curve
is the same as the demand curve for the product.
What happens if a perfectly competitive industry becomes a​ monopoly?
Suppose the demand curve in the figure to the right is market demand and the corresponding market supply curve represents the marginal cost of production.
Compared to perfect​ competition, a​ profit-maximizing monopoly would _____ output by __ units.In addition, a monopoly would _____ price by ___.

decrease; 3. Quantity where D intersects S,MC – Quantitywhere MR intersects S, MC.

raise; 3. Price where D intersects – Price where MR intersects.

Suppose the figure to the right represents the market for diamond​ necklaces, where the company that supplies necklaces is a monopoly because it is the only firm with access to diamond mines.
What is the​ firm’s profit-maximizing price and​ quantity? What are​ profits?
Profit-maximizing is on D curve, above intersection of MC and MR.
Economic profits are point on D down to ATC
Which are more economically​ efficient, perfectly competitive markets or​ monopolies?
Compared to​ monopolies, perfectly competitive markets are
more economically efficient because they result in more economic surplus.
Is the loss in efficiency due to market power large or​ small? Explain.
The loss in efficiency due to market power is
small because firms with substantial market power are rare.
What effect might market power have on technological​ change?
Market power results in
economic profits that can be spent on research to develop new products.
What is the​ government’s policy on collusion in the United​ States? Explain the rationale for this policy.
In the United States
the government makes collusion illegal with antitrust laws because monopolies reduce economic efficiency.
Are monopolies economically​ efficient?
Consider the market to the right. Compared to the perfectly competitive​ outcome, what would be the change in surplus if instead the market had one supplier that was a ​ monopoly?
Deadweight loss is the triangle to the left along D and MC.
The Department of Justice and the Federal Trade Commission must define the relevant market when determining whether to allow a merger.
How do economists identify the relevant​ market?
The relevant market has been identified if
a price increase results in higher​ profits; otherwise, the market is too narrow.
What happens if firms in an industry​ merge?
Suppose the figure to the right represents a perfectly competitive market.​ Then, the firms in the industry​ merge, forming a monopoly.
S1, MC1 decrease (shift right) half.
When a proposed merger between two companies is reviewed by the​ government, the relevant market is defined by
whether or not there are close substitutes for the products of the two firms.
A form of market structure studied by economists is monopoly.
When is a firm a​ monopoly, or are monopolies only theoretical concepts that do not​ exist?
A firm is a monopoly if its economic profits are not competed away in the long run.
Economists have developed broad and narrow definitions to identify monopolies. What is a characteristic that supports a firm being classified as a​ monopoly?
Economists could find that a firm is a monopoly if
it earns profits in the long run.
Substitutes exist for just about every​ product, so can a firm ever really be a​ monopoly?
A firm can
be a monopoly if it can ignore the actions of other firms.
Why might a monopoly​ arise? One firm will be present when
it can supply the entire market at lower average fixed average fixed cost than can two or more firms.
Monopolies are recognized to create deadweight loss. How large are the efficiency losses due to​ monopoly?
Economists generally agree that efficiency losses due to monopolies in the economy are
What is the definition of​ monopoly?

A monopoly is a firm that is created and regulated by the government.

A monopoly is a firm that is the only seller of a product in a given industry.

A monopoly is a firm that is the only seller of a product that can ignore the fixed cost of production.

A monopoly is a firm that earns large economic profits.

Give an example of an antitrust law and give a brief description of how that law affects the​ government’s antitrust policy.
The Clayton Act prohibited market entry of new firms if the result would reduce competition.
OR
The Robinson-Patman Act prohibited charging buyers different prices of the result would reduce competition.

Suppose a market has 25 ​firms, each with 44 percent market share. What is the​ Herfindahl-Hirschman Index​ (HHI) of concentration for this​ market?

The HHI is ___.

Higher HHI values correspond to _____ market concentration.

4^2 X 25 = 400

greater

How is the market supply curve derived from the supply curves of individual​ firms?
The market supply curve is derived
by horizontally adding the individual​ firms’ supply curves.

What term describes laws aimed at promoting competition among​ firms?

Which of the following laws was the first to make monopolization​ illegal?

antitrust aws

Sherman Act

What is the value of the​ Herfindahl-Hirschman Index​ (HHI) when there are four firms in an industry and each firm has an equal market​ share?

The Department of Justice and the FTC consider markets as highly concentrated if the postmerger HHI for a proposed horizontal merger is

2500

above 2500

​[Related to Making the​ Connection] After a federal court judge had found Apple guilty of conspiring with book publishers to raise​ e-book prices, the Department of Justice recommended that the judge order Apple not to sign agency model contracts with publishers for five years. The publishers objected to the​ recommendation, arguing that the recommendation would​ “effectively punish the publishers by prohibiting agreements with Apple using an agency​ model.”

​Source: Chad​ Bray, “Publishers Object to​ E-Book Plan for​ Apple,” Wall Street Journal​, August​ 7, 2013.
Under the agency​ model, the publishers would set the

The Department of Justice would want to keep Apple from signing agency model contracts with publishers because it wants to

The publishers would want to continue signing such contracts because this would allow them to

retail price of​ e-books and Apple would keep 30 percent of the price of every​ e-book it sold.

keep firms from artificially restricting competition to raise prices.

keep prices higher.

What is the difference between a horizontal merger and a vertical​ merger?
A horizontal merger is a mergerWhich type of merger is more likely to increase the market power of a newly merged​ firm?
_____ mergers are more likely to increase market power.

between firms in the same​ industry, while a vertical merger is a merger between firms at different stages of the production of a good.

Horizontal

​[Related to Solved Problem ​#4​] According to an article in the Wall Street Journal​, in 2007 the insurance company AXA Equitable signed a​ long-term lease on 2 million square feet of office space in a skyscraper on Sixth Avenue in Manhattan in New York City. In​ 2013, AXA decided that it only needed 1.7 million square feet of office​ space, so it subleased​ 300,000 square feet of space to several other firms. Although AXA is paying a rent of​ $88 per square foot on all 2 million square feet it is​ leasing, it is only receiving​ $40 per square foot from the firms subleasing the​ 300,000 square feet.

​AXA’s actions might make economic sense in the short run if​ AXA’s

​AXA’s actions could make economic sense in the long run if​ AXA’s

variable cost per square foot was equal to or less than​ $40.

total cost per square foot is equal to​ $40 or less.

Refer to the graphs above. Suppose the graph on the left represents a typical​ firm’s supply curve in a perfectly competitive​ industry, and there are 100 identical firms in the industry.
Graph on right is graph left’s Q x 100.
What does the graph on the right​ represent?
the market supply curve.
Consider the market for oil. Suppose for simplicity that there are only two oil producing countries—Saudi Arabia and Kuwait. Both countries must choose whether to produce a low output or a high output.
These output strategies with corresponding profits are depicted in the payoff matrix to the right.​ Kuwait’s profits are in red and Saudi​ Arabia’s are in blue.
Suppose the two countries form a cartel. What is the cooperative equilibrium ?Kuwait
Low – $12 high – $17
Low – $9 high – $12
Saudi Arabia
Low – $125 Low – $70
High – $100 High – $75

What is the Nash equilibrium for this​ game?

The cooperative equilibrium is for Saudi Arabia to produce a low output and Kuwait to produce a low output.

The Nash equilibrium is for Saudi Arabia to produce a high output and Kuwait to produce high output.

What is a sequential​ game?
A sequential game is a game
where one firm acts first and then the other firms respond.

A game theory analysis of deterring entry concludes that

WM 10% T 10% – enter
WM 22% T 0%

WM 24% T 24% – enter
WM 30% T 0%

Given the decision tree above for an entry​ game, Wal-Mart will

deterring entry may be a good or a bad​ idea, depending on the circumstances.

build a small store

How are games in game theory​ played?
In game​ theory,
rules determine what actions are​ allowable, players employ strategies to attain their​ objectives, and payoffs are the results of the interaction among the​ players’ strategies.
How is game theory used in​ economics?
In​ economics,
the rules of the game include matters beyond a firm’s control, a strategy is a firm’s actions to achieve a goal, and the payoffs are profits.
Is the concentration ratio an accurate measure of the extent of​ competition?
The​ four-firm concentration ratio
is flawed in that it does not include sales in the U.S. by foreign firms.
The government indirectly influences the level of industry competition with its own barriers to entry. ​ How?
The government can restrict entry by
requiring licenses for a firm to produce.
The market for electronic readers consists of relatively few​ firms, including​ Amazon, Sony, and Plastic Logic. In an​ interview, Walter Mossberg of the Wall Street Journal asked Rich​ Archuleta, CEO of Plastic​ Logic, what price the company would be charging for a new electronic reader that it was​ developing, aimed at business users. Archuleta declined to give a specific​ price, saying​ instead, “The market sets pricing. We​ don’t set​ pricing.” But Plastic Logic is competing in an oligopolistic​ industry, so​ shouldn’t the​ firm, not the​ market, be setting the​ price?
​Source: “Plastic Logic Shows New​ E-Book Reader,” Wall Street Journal​, May​ 27, 2009.
Explain why Archuleta made the statement he made.
Archuleta likely meant that

although firms in an oligopoly select their​ price, competitive​ forces, such as competition from substitute goods, determine which price maximizes profit.

NOT:
although firms in an oligopoly are typically free to select their​ price, his firm is unable to pick its price because it is colluding with other firms in the oligopoly.

although firms in an oligopoly select their​ price, competitive​ forces, such as fixed costsfixed costs​, determine which price maximizes profit.

although firms in an oligopoly select their​ price, competitive​ forces, such as government​ regulations, determine which prices are legal.

although some firms in an oligopoly select their​ price, his firm is in an oligopoly where firms do not set their own price.

How can the government impose barriers to​ entry?
The government can require occupational licensing to provide goods and services.
Which of the following will influence the level of competition in an​ industry?
Competition from other firms in the form of longer warranties.
The bargaining power of buyers.
The threat of new entrants.
The bargaining power of suppliers.
Suppose Pfizer has been the only pharmaceutical company to produce a certain kind of​ medicine, but a new firm​ (Mimi’s Drugs) is thinking about entering the market to produce a generic version of​ Pfizer’s drug. Absent​ entry, Pfizer can maximize profits by producing a small quantity. ​ However, by producing a large​ quantity, Pfizer can attempt to deter entry by reducing prices​ and, consequently, profits.
Pfizer must choose how much to produce first and then​ Mimi’s Drugs will choose whether to enter the industry. The strategies and corresponding profits for Pfizer​ (P) and​ Mimi’s Drugs​ (MD) are depicted in the decision tree to the right. What is the Nash equilibrium of the​ game?small quantity
P: $47
MD: $47
P: $88
MD: $0

large quantity
P: $0
MD: -$13
P: $60
MD: $0

Pfizer will choose the large quantity and​ Mimi’s Drugs will not enter.
How are decision trees used to analyze sequential​ games?
A decision tree
contains decision nodes where firms must make​ decisions, arrows illustrating the​ decisions, and terminal nodes showing the resulting rates of return.
Consider a market with two​ firms, Coke and​ Pepsi, that produce soft drinks. Both firms must choose whether to charge a high price ​($1.25​) or a low price ​($0.85​) for their soft drinks.
These price strategies with corresponding profits are depicted in the payoff matrix to the right. ​ Coke’s profits are in red and​ Pepsi’s are in blue.
​Coke’s dominant strategy is to pick a price of ___ and Pepsi’s dominant strategy is to pick a price of ___.Nash equilibrium

$0.85;$0.85

Both choose $0.85

Michael Porter has argued that in many industries
​” strategies LOADING… converge and competition becomes a series of races down identical paths that no one can​ win.”
​Source: Michael E.​ Porter, “What Is​ Strategy?” Harvard Business Review​, ​November-December 1996, p. 64.
Are firms in these industries likely to earn economic​ profits?
No
Nutco is a​ cashew-processing firm that operates in the developing country of Ecotopia. After procuring raw cashews from farms around the​ country, Nutco processes them using a​ labor-intensive method. The workers at Nutco recently demanded a 20 percent increase in their overtime wage rate. All members of​ Nutco’s labor​ union, which was a substantial proportion of the​ company’s labor​ force, went on an unannounced strike when the management only agreed to a 5 percent hike. During negotiations that​ followed, the management informed the union leader that this was a​ take-it-or-leave-it offer. The union leader was not convinced and declared that the workers would not come back to work unless their demands were fully met. Kurt​ Whitman, Nutco’s human resources​ manager, however thinks that the strike will end soon because of the​ company’s strong stand.
Which of the​ following, if​ true, would suggest that the​ management’s threat of not accepting the​ workers’ demands is not​ credible?
Due to the impact on production and the consequent delay in delivering export​ orders, several of​ Nutco’s customers have indicated that they may cancel existing contracts.
Suppose that Symantec is a small firm that has developed​ anti-virus computer software. Symantec currently earns ​$1 million per year in profits from selling its software. Dell informs Symantec that it is considering installing the software on every new computer it sells. Dell currently earns profits of​ $30 million but expects to sell more computers at a higher price if it can install​ Symantec’s software.
Dell first chooses whether to offer Symantec​ $30 or​ $20 for each copy of its​ software, and then Symantec responds by either accepting or rejecting the offer. The strategies and corresponding profits​ (in millions) for Dell​ (D) and Symantec​ (S) are depicted in the decision tree to the right. What is the Nash equilibrium of the​ game?Offer $30
D: $35 S: $12
D: $30 S: $1 – reject

Offer $20
D: $46 S: $9
D: $30 S: $1

Dell will offer​ $20 per copy of the software and Symantec will accept the offer.
For many​ years, the Aluminum Company of America (Alcoa) essentially operated as a monopoly. What made this company a monopoly​?
The Aluminum Company of America (Alcoa) was essentially a monopoly because
it had almost exclusive control of the​ world’s supply of bauzite, used to make aluminum.
The graph to the right depicts the average total cost of producing meals for Ryan’s Restaurant.
Suppose this​ industry’s total sales equals 10,000 meals. According to the average total cost of producing meals​, this industry has room for ____ firms.
10,000 is to the right of the ATC’s lowest point. Many.
The reason that the​ Fisherman’s Friend restaurant in​ Stonington, Maine had a monopoly on selling seafood dinners in that town is most likely due to
no competitors apparently found the profit level attractive enough to enter the market.
A firm that has the ability to control to some degree the price of the product it sells
is a price maker
Which of the characteristics in the list above is shared by an oligopolist and a​ monopolist?
a market structure with barriers to entry
firm can reap long run profits.
A narrow definition of monopoly is that a firm is a monopoly if it can ignore
the actions of all other firms
A firm that is the only seller of a good or service that does not have a close substitute is called
monopoly
Governments often have the potential to influence whether firms are monopolies LOADING… .
How might the government affect whether a firm is a​ monopoly?
The government could
grant a copyright to a firm, giving it the exclusive right to produce a product.
To have a​ monopoly, barriers to entering the market must be so high that no other firms can enter. Do network externalites create or remove barriers to​ entry? Explain.
Network externalities
create barriers to entry because if a firm can attract enough customers​ initially, it can attract additional customers as its​ product’s value increases by more people using​ it, which attracts even more customers.
The figure to the right illustrates market demand for a monopoly along with its average total cost​ (ATC) curve.
Is the monopoly a natural monopoly?
The firmSuppose 18 units of output are supplied in the market. How much lower is the average total cost of production for one firm compared to two​ firms?
One firm can supply 18 units of output for ___ less per unit in average total cost than two firms.

slopes down with Demand
is a natural monopoly because it can supply the entire market at lower average total cost than can two or more firms.1; point half of 18

Why does the government issue​ patents?
The government issues patentsHow long do patents​ last?
A patent is the exclusive right to a product for a period of ___ year from the date the patent is filed with the gov.

to encourage firms to spend money on the research and development necessary to create new products.

20

Substitutes exist for just about every​ product, so can a firm ever really be a​ monopoly?
A firm can
be a monopoly if it can ignore the actions of other firms.
Economist Harvey Leibenstein argued that the loss of economic efficiency in industries that are not perfectly competitive has been understated. He argues that when competition is​ weak, firms are under less pressure to adopt the best techniques or to hold down their costs. He refers to this effect as​ “x-inefficiency.” If​ x-inefficiency causes a​ firm’s marginal costs to​ rise, how is the deadweight loss caused by a monopoly​ understated?
Suppose MC1 is the marginal cost of production with perfect competition and MC2 is the marginal cost of production with​ x-inefficiency.
shade out to intersection of MR and MC2. Down to MC line up to Demand line.
Economists have developed broad and narrow definitions to identify monopolies. What is a characteristic that supports a firm being classified as a​ monopoly?
Economists could find that a firm is a monopoly if
it earns profits in the long run.
What is the definition of​ monopoly?
A monopoly is a firm that is the only seller of a product in a given industry.
Monopolies are recognized to create deadweight loss. How large are the efficiency losses due to​ monopoly?
Economists generally agree that efficiency losses due to monopolies in the economy are
small because true monopolies are very rare.
What happens if a perfectly competitive industry becomes a​ monopoly?
Suppose the demand curve in the figure to the right is market demand and the corresponding market supply curve represents the marginal cost of production.
Compared to perfect​ competition, a​ profit-maximizing monopoly would _____ output by ___ units.In addition, a monopoly would _____ price by ___.

decrease; 3

raise; 3

Suppose a market has twenty−five ​firms, each with 4 percent market share. What is the​ Herfindahl-Hirschman Index​ (HHI) of concentration for this​ market?
The HHI isHigher HHI values correspond to _____ market concentration.

400

greater

The Department of Justice and the Federal Trade Commission must define the relevant market when determining whether to allow a merger.
How do economists identify the relevant​ market?
The relevant market has been identified if
a price increase results in higher​ profits; otherwise, the market is too narrow.
Governments often have the potential to influence whether firms are monopolies .
How might the government affect whether a firm is a​ monopoly?
The government could
grant a firm a public franchise, making it the exclusive legal provider of a good or service.
The figure to the right shows the average cost of production ​(AC​) for a cable company that is a monopoly as well as the corresponding demand ​(D​) for cable subscriptions in the city to which the company provides service. AC decreases with D then slopes up after intersect.
Is this company a natural​ monopoly?
This firm
is a natural monopoly because average cost is decreasing when it crosses demand.
How do network externalities affect barriers to​ entry?
Network externalities
serve as barriers to entry because new products are less useful.
Recent medical reports have brought forth some negative health implications from the use of this​ product, especially for the young people. As a​ result, Susanna​ Campbell, the marketing head of this​ firm, is anticipating a decline in demand. While the​ firm’s costs have increased on the one​ hand, she is expecting the market price to decline to​ $5.
If​ Susanna’s prediction does hold​ true, which of the following will most likely​ occur?
The firm will have to shut down.
EXAM 3
A​ fast-food restaurant decides to raise the price of its hamburgers. Assume the firm is in a monopolistically competitive industry. What will happen to the demand for its​ hamburgers?
When the​ fast-food restaurant raises the price of​ hamburgers,
some of its customers will be willing to pay a higher price because they prefer this brand of hamburgers.
The stocks of Walker Industries have gained considerably following the announcement of a merger with Vicenza Inc. Walker Industries is a​ family-owned firm that has been in the diamond jewelry business for decades. Vicenza is a luxury jewelry company that also has several fashion labels. In response to queries from the​ media, John​ Antonio, a spokesperson for​ Vicenza, says that the merger will not violate any antitrust laws and will lead to efficiency gains for both firms. Maria​ Crusoe, a business​ reporter, claims that the merger will result in even higher diamond prices for consumers.
Which of the following questions would be most important to answer in order to determine whether​ Maria’s claim is​ accurate?
What is the combined market share of the merged entity in the diamond jewelry​ market?
Farmer Brown grows peaches. The average total cost and marginal cost of growing peaches for an individual farmer are illustrated in the graph to the right.
Assume the market for peaches is perfectly competitive and that the market price is ​$20 per box. Also assume that farmer Brown is producing the amount of peaches that maximizes profits.
From price line intersection to MC to bottom of ATC
Why are consumers so powerful in a market​ system?
Because it is​ consumers’ demand that influences the market price and dictates what producers will supply in the market.
Are monopolies economically​ efficient?
Consider the market to the right. Compared to the perfectly competitive​ outcome, what would be the change in surplus if instead the market had one supplier that was a ​ monopoly?
Use the triangle drawing tool to shade in the change in surplus. Properly label this shaded area.
shade along left side of MC and along D. Deadweight loss.
Why might a monopoly​ arise? One firm will be present when
the government blocks entry of more than one firm by granting a copyright.
Farmer Brown grows blueberries. The average total​ cost, average variable​ cost, and marginal cost of growing blueberries for an individual farmer are illustrated in the graph to the right.
Farmer Brown will incur losses if the market price falls below ___ per crate​Furthermore, farmer Brown should shut down in the short run if the market price falls below ​___ per crate.

Where ATC slopes lowest. $18

Where AVC slopes lowest. $14.

What is a key factor that determines a​ firm’s profitability?

Factors affecting a​ firm’s entire market.

Chance events.

A​ firm’s average cost of production relative to that of competing firms.

Differentiation of a​ firm’s product from other products.

Farmer Smith grows apples. The average total cost and marginal cost of growing apples for an individual farmer are illustrated in the graph to the right.
Suppose the market for apples is perfectly competitive. If the market price is ​$24 per box​, then to maximize​ profits, farmer Smith should produce
Where MC intersects Price line. 60
Suppose the market for Christmas trees is perfectly competitive and that the market price for Christmas trees is ​$76 per tree.
How many Christmas trees should Sophia​ grow?

market price for product X amount of trees sold minus Total cost.

MP X Q = ? – TC

How does the​ long-run equilibrium for a monopolistically competitive market differ from the​ long-run equilibrium for a perfectly competitive​ market?
One way in which monopolistically competitive markets and perfectly competitive markets differ is that in​ long-run equilibrium, monopolistically competitive firms
charge a price greater than marginal cost.
One of the reasons why monopolies exist is because the government blocks the entry of more than one firm into a market. How might the government do​ this?
The government could block entry by
issuing patents to firms that develop new products or new ways of making existing products.
The figure to the right represents the market for peaches. Assume the market for peaches is perfectly competitive and a​ constant-cost industry. Also assume the industry is initially in​ long-run equilibrium.
​Then, the demand for peaches increases​, as​ shown, from D1 to D2.
Supply shifts to right, intersecting D and Slr.
What is a​ monopoly?
A monopoly is
a firm that is the only seller of a good or service that does not have a close substitute.

The market for corn is perfectly competitive with​ 1,000 farmers. Suppose the farmers have identical​ short-run cost​ curves, which are illustrated in the figure below.

Describe the​ market’s supply curve.
Use the line drawing tool to draw the​ short-run market supply curve for corn. Label this line​ ‘Supply’.

Suppy is same as MC
Suppose Farmer Smith grows apples. The enitre market for apples is shown in the figure below. Assume the market for apples is perfectly competitive
Demand is horizontal, through D and S intersection.
The figure to the right shows the average cost of production ​(AC​) for a cable company that is a monopoly as well as the corresponding demand ​(D​) for cable subscriptions in the city to which the company provides service.
Is this company a natural​ monopoly?
This firm
is a natural monopoly because average cost is decreasing when it crosses demand.
Lauren grows grapes. Her average variable cost ​(AVC​), average total cost ​(ATC​), and marginal cost ​(MC​) of production are illustrated in the figure to the right.
Assume the market for grapes is perfectly competitive and that the market price is ​$4.00 per crate.
Characterize​ Lauren’s economic profits. Assume she produces such that she maximizes profits in the short run.
ACT is above MC at this price. Price loss where MC intersects market price to where ACT intersects market price.
A representative monopolistically competitive​ firm’s demand ​(D​), marginal revenue ​(MR​), marginal cost ​(MC), and​ long-run average cost ​(AC​) curves are illustrated in the figure to the right. AC is above everything.
Is this industry in​ long-run equilibrium?
This industry is
not in​ long-run equilibrium because firms are incurring losses, which will result in firms exiting.
Suppose the figure to the right illustrates the cost curves for a firm in a perfectly competitive market. Let MC be the marginal cost curve and ATC be the​ long-run average total cost curve.
At what point does the firm achieve productive​ efficiency?
Productive efficiency is intersection of MC and ATC.
Farmer Jones grows oranges in Florida. Suppose the market for oranges is perfectly competitive and that the market price for a crate of oranges is ​$14 per crate.
Fill in total​ revenue, average​ revenue, and marginal revenue in the table below.
AR = TR/Q
MR = change in TR/change in Q(same as price)

Suppose the top figure to the right illustrates the​ long-run average cost curve ​(AC​) and the marginal cost curve ​(MC​) for a representative firm in a perfectly competitive market. Assume all firms in the industry have the same cost structure. The bottom figure illustrates the​ market, with a market supply curve ​(S​) and a market demand curve ​(D​). MC intersects AC at bottom of AC slope at $40,5. S and D intersect at $60,300
How many firms are there​ initially?
The industry has ___ firms.Will new firms enter or will existing firms exit in the long​ run?
In the long​ run, firms will _____.

How many firms will there be at the​ long-run equilibrium?
In the​ long-run equilibrium, there will be ___ firms.

50

enter

160

Farmer Jones grows applesapples. The average total cost and marginal cost of growing applesapples for an individual farmer are illustrated in the graph to the right. Assume the market for applesapples is perfectly competitive.
According to the​ graph, farmer Jones will earn profit​ (positive economic profit as opposed to​ losses) at any market price above ___ per box.Assume that the market price specifically is $32 per box. If farmer Jones produces the profit maximizing quantity, what will be her profit? ___

At ATC slope. $18.

subtract point where new Q intersects ATC by 32, market price, Xs new Q. $900