Intro to Microeconomics Exam 3 Study Guide
Intro to Microeconomics Exam 3 Study Guide ECON 1010
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This 28 page Study Guide was uploaded by Nicole Kaplan on Saturday April 2, 2016. The Study Guide belongs to ECON 1010 at Tulane University taught by Jonathan Pritchett in Spring 2016. Since its upload, it has received 104 views. For similar materials see Into to Microeconomics in Economcs at Tulane University.
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If Nicole isn't already a tutor, they should be. Haven't had any of this stuff explained to me as clearly as this was. I appreciate the help!
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Date Created: 04/02/16
firm an institution that hires productive resources and that organizes those factors to produce and sell goods and services What is the primary goal of the firm? to maximize profit How do economists measure profit? based on an opportunity cost measure of cost What is a firms opportunity cost when the highest valued alternative use of its producing a good? factors of production that must be foregone explicit costs costs paid directly in money (cash flow) costs incurred when a firm: implicit costs 1. uses its own capital 2. uses its owners' time or financial resources The firm can rent _____ and pay an capital, rental cost explicit ____ ____ implicit rental rate of capital when the firm buys capital and incurs an implicit opportunity cost of using its own capital What two factors is the implicit rate of 1. economic depreciation capital made up of? 2. interest forgone economic depreciation the change in the market value of capital over a given period of time interest forgone return on the funds used to acquire capital economic profit a firm's total revenue minus its opportunity costs A firm's total cost of production is the 1. explicit costs sum of what two things? 2. implicit costs economic profits tend to be ____ than less accounting profits technological efficiency when it is not possible to increase output without increasing inputs economic efficiency when the cost of producing a given output is as low as possible a firm that does not use the maximize profit economically efficient method of production does not: Is an economically efficient production yes process also technologically efficient? Is a technologically efficient process not always economically efficient? A firm organizes production by combining 1. command system and coordinating production resources using 2. incentive system a mixture of which two systems? command system uses managerial hierarchy where commands pass downward through the hierarchy and information (feedback) passes upward which type of systems are relatively rigid command systems and can have many layers of specialized management? incentive system uses market-like mechanisms to induce workers to perform in ways that maximize the firm's profit problem of devising compensation rules that induce an agent to act in the principle-agent problem best interests of a principal are their agents of a firm are the principals and the managers of the firm 1. ownership What are the three ways to cope with the principle-agent problem? 2. incentive pay 3. long-term contracts often offered to managers, gives the managers ownership an incentive to maximize the firm's profits, which is the goal of the owners (the principals) links managers or workers pay to the firm's incentive pay performance and helps align the managers and workers interests with those of the owners (the principal) can tie managers or workers long term rewards to the long-term contracts long-term performance of the firm - encourages the agents work in the best long-term interests of the firm owners (the principals) proprietorship a firm with a single owner partnership a firm with two or more owners who have unlimited liability corporation a firm owned by one or more limited liability stockholders What are the pros to proprietorship? 1. easy to set up 2. simple decision making 3. profits taxed only once as owner's income What are the cons to proprietorship? 1. owners entire wealth at risk 2. firm dies with owner What are the pros to a partnership? 1. easy to set up 2. can survive withdrawal of partner 3. profits taxed only on as owners' incomes What are the cons to a partnership? 1. owners entire wealth at risk 2. withdrawal of partner may create capital shortage What are the pros to a corporation? 1.owners have limited liability 2.large-scale, low-cost capital available 3.professional management not restricted by ability of owners 4.perpetual life 1. complex management structure can make decision What are the cons to a corporation? slow and expensive 2. profits taxed twice as company profit and as stockholders' income Why do proprietorships and 1. corporations dominate where a large amount of capital is necessary corporations dominate in certain 2. proprietorships dominate where flexibility in decision sectors? making is critical 1. perfect competition What are the four types of market 2. monopolistic competition structures? 3. oligopoly 4. monopoly 1. large number of firms perfect competition 2. large number of buyers 3. identical products 4. ease of entry and exit 5. good information on product prices monopolistic competition 1. large number of firms 2. compete by making similar but slightly different products (product differentiation) 3. ease of entry and exit product differentiation when competing companies make similar but slightly different products (usually in monopolistic competition) 1. small numbers of firms oligopoly 2. barriers to entry and exit 3. similar products 4. interdependent decision making monopoly 1. only one firm 2. no close substitutes 3. barriers to entry and exit 4. faces entire market demand for product the percentage of the value of sales What does the Four Firm Concentration Ratio measure? accounted for by the four largest firms (between 0% and 100%) Herfindahl-Hirschman Index the sum of the the squares of the percentage market shares of each firm What are the 3 limitations of 1. geographical scope of market (regional vs. global markets) concentration measures? 2. product definition (aluminum foil vs. plastic wraps) 3. barriers to entry and turnover (contestable markets) In the U.S. economy, what percentage of 75% goods came from either perfectly competitive or monopolistically competitive markets? What determines whether markets or whichever is the economically efficient firms coordinate production? method 1. lower transaction costs What are the 4 reasons firms sometimes 2. economics of scale more efficient coordinators of economic 3. economics of scope activity? 4. economics of team production transaction costs 1. finding someone with whom to do business 2. reaching an agreement about the price and other aspects of the exchange 3. ensuring that the terms of the agreement are full economics of scale when the cost of producing a unit of a good falls as output increases economics of scope when a firm uses specialized resources to produce a range of goods and services a production process in which the team production individuals in a group specialize in mutually supportive tasks What are the fixed factors of the firms "plant" production for a firm called? ex: factory, machines, etc. In the short run, a firms plant is _____ fixed To increase output in the short run, labor what factor of production must a firm increase the quantity of? The long run is a period in which the plant firm can change its ____ sunk cost a cost that has already been committed and cannot be recovered If you hire a second worker how will they will increase - the two brokers can specialize in different parts of production and can produce that effect your marginal returns? more than twice as much as one worker Do all production processes eventually yes reach a doubt if diminishing marginal returns? When is average product largest? when average product and marginal product are equal When marginal product exceeds increasing average product, is average product increasing or decreasing? When marginal product is less than decreasing average product, average product is increasing or decreasing? What is a firm's objective? profit maximization period of time in which the quantity of at least short run one input is fixed and the quantities of the other inputs can be varied long run period of time in which the quantities of all inputs can be varied How can firms increase output in the by increasing the quantity of labor short run? total product total output produced marginal product increase in total product that results from one-unit increase in an input average product total product divided by the quantity of inputs How is marginal product measured? by the slope of the total product curve increasing marginal returns when the marginal product of an additional worker exceeds the marginal product of the previous worker diminishing marginal returns when the marginal product of an additional worker is less than the marginal product of the previous worker as a firm uses more of a variable input, with a given law of diminishing returns quantity of fixed inputs, the marginal product of the variable input eventually diminishes total cost (TC) the cost of all productive resources used by a firm total fixed cost (TFC) cost of all the firm's fixed inputs total variable cost (TVC) cost of all firms variable inputs equation for total cost TC = TFC +TVC marginal cost increase in total cost that results from one-unit increase in output equation for marginal cost MC = TC/increase in output Why do marginal costs decrease at low specialization, but eventually, marginal costs increase due tothe law of diminishing returns (as firm uses more variable input or outputs but then eventually increase? labor, the marginal product of the variable input eventually diminishes) average fixed cost (AFC) total fixed cost per unit of output average variable cost (AVC) total variable cost per unit of output average total cost (ATC) total cost per unit of output average cost equation TC/Q = TFC/Q + TVC/Q or ATC = AFC + AVC rising MP and falling MC lead to: rising AP and falling AVC falling MP and rising MC lead to: rising AP and falling AVC long run cost cost of production when a firm uses the economically efficient quantities of labor and capital long-run costs are affected by: the production function (relationship between maximum output attainable and quantities of both labor and capital) production function the relationship between the maximum Where is the long run average total cost the short-run average total cost curves curve derived from? average total cost is the lowest, make up the long-run average total cost curve returns to scale increases in output that result from increasing all inputs by the same percentage technological conditions under which a given constant returns to scale percentage increase in all the firm's inputs results in the firm's output increasing by the SAME percentage technological conditions under which a given increasing returns to scale percentage increase in al the firm's inputs results in the firm's output increasing by a LARGER percentage technological conditions under which a given decreasing returns to scale percentage increase in all the firm's inputs results in the firm's output increasing by a SMALLER percentage When do economies of scale occur? when AC decreases as output increases When do diseconomies of scale occur? when AC increases as output increases minimum efficient scale output at which AC is lowest Points on the total production curve are technologically efficient _______ _________ points underneath the total production inefficient curve are ______ As employment increases, total less production curve becomes ____ steep On the marginal product curve, midpoint marginal product from increasing labor is plotted at the ______ When MP > AP, AP is _____ increasing When MP < AP, AP is _____ decreasing AP is largest when: MP = AP Why do both the TC and TVC curves Because to increase output, more labor must be employed, which increases TC slope upward? and TVC What happens to TFC when output nothing, TFC doesn't change changes? TFC is the vertical distance between TC and TVC curves which two curves? Where does MC intersect the AVC and at their MINIMUM points ATC curves? When MC < AC, AC is ____ decreasing When MC > AC, AC is ____ increasing When output increases, the firm downward spreads TFC over larger output, so AFC slopes ____ decreases, increases As output increases, AVC _____ initially, but eventually it ______. Why? -As output increases, more labor is needed, but law of diminishing returns applies causes an eventual increase in AVC As output increases, both AFC and AVC decrease decrease, casing ATC to _____ If AVC increases more quickly than AFC increase decreases, ATC starts to ____ If marginal product increases, marginal decreases cost ______ If marginal product is at its minimum, maximum marginal cost is at its _____ If as a firm hires more labor firm hires rises more labor, MP decreases, then its MC _____ If a firm hires more labor, AP ____ and increases, decreases AVC _____ If AP is at its maximum, then AVC is at minimum its _____ If as a firm hires more labor, its AP rises diminishes, its AVC _____ Marginal cost equation: MC = change in TC / change in Q Average fixed cost equation: TFC / Q Average variable cost equation: TVC / Q The economically efficient plant for lowest producing a given output is the one with the ______ ATC Once af firm choses a plant, it operates short with ____ run cost curves that apply to that plant marginal product of capital change in total product divided by change in capital when quantity of labor is constant -the change in output resulting from a one-unit increase in the quantity of capital What is the main source of economies greater specialization of labor and of scale? capital What is the main source of the challenge of managing a large diseconomies of scale? enterprise What are the 6 characteristics of perfect 2) many buyers each selling an identical product 3) no restrictions on entry into the industry competition? 5) firms in industry have no advantage over potential new entrants 6) firms and buyers are well informed about prices of the products of each firm in the industry As a result of the characteristics of price takers perfect competition, perfect competitors are _____ ______ price takers firms that cannot influence the price of a good or service (sell for market price, "take" it) What is the firms goal? to maximize economic profit In a firm, what is total cost? opportunity cost total revenue (definition and equation) value of a firm's sales TR = P x Q marginal revenue (definition) change in total revenue resulting from a one-unit increase in quantity sold average revenue total revenue divided by the quantity sold (revenue per unit sold) In perfect competition, what does price P = MR = AR equal? short run (firms) a time frame in which each firm has a given plant and the number of firms in the industry is fixed long run (firm) a time frame in which each firm can change the size of its plant and decide to enter the industry in the short run, the firm must decide: 1) whether to produce or to shut down 2) if the decision is to produce, what quantity to produce in the long run, the firm must decide: 1) whether to increase or decrease its plant size 2) whether to stay in the industry or leave it If MR > MC that means the extra is greater than revenue from selling one more unit ____ the extra cost If MR > MC, how can the firm increase increase output profit? If MR < MC, that means the extra is less than revenue from selling one more unit _____ the extra cost If MR < MC, how can the firm increase decrease output profit? If MR = MC, what happens to the the economic profit is maximized economic profit? When must fixed costs be paid? in the short run 1) laying off workers How can variable costs be avoided? 2) shutting down Why would a firm shut down? if price falls below minimum of AVC (average variable cost) - shows quantity supplied by the industry at each price when plant size of short-run industry supply curve (what each firm and the number of firms remains constant does it show, how is it constructed? - is constructed by summing the quantities supplied by the individual firms What determines the market price and industry demand and industry supply industry output? changes in demand brings changes to short run industry what industry equilibrium? In the short run industry, what happens - prices rise when you increase the demand? (to - firms increase production (quantity increases) prices and quantity?) In the short run industry, what happens - price falls when you decrease demand? - firms decrease production (quantity decreases) When does a firm break even? when: P = ATC When does a firm make economic when: profit? P > ATC when: When does a firm incur an economic loss? P < ATC In which two ways do competitive 1) entry and exit industries adjust? 2) changes in plant size What causes firms to enter an industry? prospect of persistent profit What causes firms to exit an industry? prospect of persistent loss If firms are making economic profits, they enter the industry how do other firms react? If firms are making economic losses, some existing firms exit the industry how do the existing firms react? As new firms enter an industry, what the price falls happens to price? As new firms enter an industry, what decreases happens to the economic profit of each firm? As firms leave an industry, what rises happens to price? As firms leave an industry, what happens to decreases the economic loss of each firm? When a firm changes its plant size, how by lowering its costs can it increase its economic profit? When does long-run equilibrium occur -when firms are earning profit in a competitive industry? - when economic profit is zero Economic profits draw ___ firms and in, expant cause existing firms to _____ Economic losses cause firm to _____ leave, scale back and cause existing firms to ____ ___ long-run equilibrium in a competitive - firms neither enter nor exit industry industry - firms neither expand their scale of operation nor downsize Name a few products whose demand - trains has fallen tremendously due to - TV and radio repair advances in technology: - sewing machines Name a few products whose demand - paper plates has increased dramatically: - cell phones if: When is long-run supply perfectly elastic? 1) firms can be replicated 2) workers can be hired at same costs - if firms can be replicated and workers hired at same constant cost industry costs, then the long-run supply will be perfectly elastic - adjustments in output through enter and exit of firms external diseconomies factors outside the control of a firm that raise the firm's costs as industry output increases what are some examples of external 1) congestion at airports increase with expansion of airline industry diseconomies? 2) wages rise as firms try to hire more workers external economies factors beyond the control of an individual firm that lower its costs as the industry what are some examples of external 1) specialized support services for an industry economies? 2) software developers in the silicon valley Perfect competition enables resources external costs and external benefits to be used efficiently if there are no: goods providing external benefits underproduced would be _______ goods providing external costs would overproduced be ______ to: Why does a monopoly restrict output 1) raise price below its competitive level? 2) increase profit what determines the market price? market demand and market supply why is the total revenue curve for because each additional sweater brings perfect competition an upward sloping in a constant amount straight line? in perfect competition, what does the the market price firms marginal revenue equal? In perfect competition, what kind of perfectly elastic elasticity does demand have at the market price? Where is the shutdown point on a at the minimum AVC graph? At price below the shutdown point, shuts down what does the firm do? At a price = to the shutdown point, indifferent between shutting down or what does the firm do? incurring more loss At a price above the shutdown point, firm incurs loss less than TFC if still what does the firm do? below ATC If the price is either above or at the cost = to TFC (total fixed cost) shutdown point, the firm minimizes its economic loss and incurs what cost? When the price rises, does firm increase decrease or increase their output? When there is an increase in demand, P increases what happens to price and Q that the Q increases firm sells and produces at? When there is a decrease in demand, P decreases what happens to the P and Q that the Q decreases firm produces at? Does profit maximizing point always No end up making profit? If P = ATC what happens to profit? break even If P > ATC what happens to profit? economic profit arises If P < ATC what happens to profit? economic profit decreases Entry of new firms ____ supply and ____ increases, decreases prices decreases, increases, increases, increases Exit of firms' ___ supply but each remaining firms' output ___ and price ____ so each firm's production _____ When there is an increases in demand, quantity ____ and increases, increases. price ____. Then new firms enter the market and supply increases, decreases. ____ and price _____. So now the equilibrium shifts ____ and firms ____ make a profit. right, do With new technology, what happens to - production costs decrease production costs and price? - prices decrease How does technological change effect only brings temporary gains in profit the profits of producers? When you produce at the lowest EP = zero possible long run average cost (LRAC) what happen to you economic profit? When is there an efficient allocation of - zero economic profit resource? - lowest possible ATC What are the two reasons as to why 1) no close substitutes monopolies exist? 2) there are barriers to entry If a firm has no close substitutes, why is b/c if there are no close substitutes, it faces no competition (from producers of the substitute) it a monopoly? If a firm has barriers to entry, why is it barriers to entry are legal or natural constraints that protect a firm from potential a monopoly? competitors? legal barriers to entry create: a legal monopoly legal monopoly a market in which competition and entry are restricted by the granting of a public franchise, government license, patent, or copyright exclusive right granted toa firm tosupply a good or service (ex: public franchise (government franchise) US postal service) - any other firm that enters the market will be prosecuted government license controls entry into particular occupations, professions, and industries (Exs: medicine, law...) patents exclusive right granted to the inventor of a product or service for 20 years copyright exclusive rights granted to author or composer of a literary, musical, dramatic, or artistic work for 70+ years what do patents encourage? what do - encourage the invention of new products they simulate? - simulate innovation network externalities additional benefits enjoyed by all users of a good or service because others use it as well Is joining a large network more yes beneficial than joining a small network? natural monopoly when one firm can supply the entire market at a lower price than two or more firms can Why does a natural monopoly occur? - it's a consequence of economics of scale (when a firm's technology makes ATC decrease and output increase) What is an example of a natural electric utility monopoly? What is the goal of a monopoly? to earn the highest profit possible What is the main trade off in a the more it charges for its product, the monopoly? fewer units it will be able to sell single price monopoly a monopoly firm that is limited to charging the same price for each unit of output sold price discrimination: what is it and definition:charging different prices todifferent consumers what is it based on? - based on differences in the prices consumers are willing topay Once a single price monopoly firm its price determines its output level, what has it also determined? What kind of demand curve does a downward sloping: the lower the price, single price monopoly have? Why? the higher the quantity What are examples of single priced 1) DeBeers diamonds monopolies? 2) Microsoft In a single price monopoly what does the the market demand curve firm's demand curve also represent? no In a single price monopoly, is marginal revenue the same as market price? What - related to the elasticity of demand for its good is the marginal revenue related to? Would a profit maximizing monopoly no, it would produce it in the elastic range ever produce an output in the inelastic where it could charge a higher price, produce range of its demand curve? a smaller quantity, and earn a larger profit A ____ firm is a price taker, whereas the competitive, monopoly ______ influences its price What is greater in a monopoly: price or - price is greater than marginal revenue, marginal revenue? price or marginal so price is also greater than marginal cost? cost In a monopoly, when is profit when: marginal cost = marginal revenue maximized? MC = MR price discrimination charging different prices to different customers for reasons other than differences in cost price-discriminating monopoly divides its customers into different categories based on their willingness to pay for the good 1)market power - price setterping demand curve What are the three requirements before introducing price discrimination? - difficultthe willingnessto pay 3)prevent resale - more common with services What are examples of price - coupons - college tuition discrimination in everyday life? - paperback vs. hardcover books 1) firm has higher profits What are the 3 main effects of price 2) some customers pay higher price, which is greater than the price they would pay for a single discrimination? (profits, prices) price policy 3) low price from some consumers, which is below the price they would pay under a single- price policy When does a price discriminating firm when marginal revenue of each market is EQUAL to marginal cost of production maximize their profits? discriminating between groups charging different prices to different groups based upon their price elasticity ex: air fares (business class, first class, discounts, etc.) What would a monopolist do if one of higher the price their markets has inelastic demand of their good? What would a monopolist do if one of lower the price their markets had elastic demand of their good? perfect price discrimination charging each customer the most he or she would be willing to pay for each unit purchased price of the additional unit sold (firms In perfect price discrimination, what does marginal revenue equal? marginal revenue curve = same as demand curve) higher profits (they extract the entire consumer surplus) What happens to the profits under perfect price discrimination? Under perfect price discrimination, the the last unit sold, so MR = Ddemand curve b/c total revenue increases by the price of monopolist charges a price equal to - each price is represented by a rectangle under the demand curve what? Why? - the sum of the prices equals total revenue Where does a monopoly maximize where MC = MR profit? In perfect price discrimination, profit is above, below the area ____ the demand curve but ____ the ATC When can limits to price discrimination - if the good cannot be resold - if the monopoly can identify groups be used? with different elasticities of demand How does a single price monopoly - restricts output effect output and price? - raises price Why do people devote a lot of effort to because monopoly creates economic obtain monopoly rights? profit in the long run rent seeking the pursuit of wealth by capturing economic rent How does a firm try to capture some of 1) buying a monopoly (ex: taxi cabs) the consumer surplus for itself? 2) creating legal barriers (ex: lobbying) How can the government regulate natural monopoly so marginal cost pricing rule that it produces the efficient quantity? (with natural monopolies, quantity produced is less than the efficient quantity) regulation that sets the price equal to the marginal cost pricing rule monopoly's marginal cost (quantity demanded at a price equal to marginal cost is the EFFICIENT quantity) Unregulated, where does a natural - where MR = MC and charging the monopoly maximize economic profit? highest price at which that quantity will be bought Why does the firm incur an economic the average cost is greater than the price loss with the marginal cost pricing rule? What is a solution to the economic loss average cost pricing rule (second best incurred from the marginal cost pricing regulation of a natural monopoly) rule? average cost pricing rule set the price equal to average cost When total revenue is maximized, what type unit elastic of elasticity of demand is there> 1) produce less Monopolies damage consumer interest 2) increase cost of production in what 3 ways? 3) increase price by more than cost of production Why does a deadweight loss arise with - when only one firm is producing the goods, quantity produced decreases shifting the ideal a monopoly? quantity to the left, and rising the price Why does consumer surplus shrink consumers have to pay more for the with a monopoly? good, but less of the good is available Why does the ATC increase (curve shifts - because costs go up, the monopoly up) because of rent seeking? uses all econ profit to maintain its monopoly At the profit maximizing point in rent - breaks even seeking equilibrium, what is the firms profit? Is consumer surplus effected by rent no, but deadweight loss is larger seeking? Producer surplus equation TR - TVC Producer surplus - TFC Economic Profit equation: or TR - TC regulation rules administered by a government agency to influence prices, quantities, entry, and other aspects of economic activity the process of removing regulation of firms or industries deregulation rate of return regulation: what is it and a firm must justify its price by showing that its return on capital doesn't exceed a specified target rate what incentive does it give the firm? - gives them incentives to inflate costs by spending on things like private jets, free baseball tickets, etc price cap regulation: what is it and what a price ceiling, a rule that specifies the highest price the firm is permitted toset incentive does it give the firm? - gives firm incentive tooperate efficiently and keep costs under control
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