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AP Micro Unit IV Review. 2014. What will a perfectly competitive profit maximizing firm do if the market price rises?. Increase production to where MC again equals MR (or P). How much economic profit will a perfectly competitive firm earn in the long run?. None – zero – zip…. - PowerPoint PPT Presentation
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AP Micro Unit IV Review
2014
What will a perfectly competitive profit maximizing
firm do if the market price rises?
Increase production to where MC again equals MR
(or P)
How much economic profit will a perfectly competitive firm earn in the long run?
None – zero – zip…
Identify two common reasons why gov’ts will regulate monopolies.
Charge a higher price than the competitive market price,
output doesn’t reach greatest social benefit, output doesn’t
account for externalities
Identify two characteristics of a perfectly competitive
industry.
Easy entry/exit, perfectly elastic demand for the firm,
downward sloping demand for the industry, no product
differentiation (homogeneous)
What is the relationship between price and MR for a
perfect monopoly? How does this relate to socially
optimal output?
P > MR for perfect monopoly, so MC=MR will stop short of
socially optimal output (which is where MC=MB)
If price drops in a perfectly competitive market, a firm should only keep producing
if…
Price remains higher than AVC (should shut down if you’re not covering AVC)
In perfect competition in the long run, ATC will equal…
MR and MC
Why are monopolistically competitive firms
allocatively inefficient in the long run?
They charge a price greater than their MC
What is the simplest definition of productive
efficiency?
MC=ATC (or minimum ATC – where marginal revenue product
is same for all inputs)Means the firm is producing in the
most efficient manner
What is the simplest definition of allocative
efficiency?
Marginal Cost = Marginal Benefit (often assume MB=P)
This means society is making best use of it’s resources – should also be where consumer & producer
surplus are maximized
What impact would a per unit subsidy have on a
monopolist?
Encourage them to increase output
What do gov’ts usually need to do if they want a
monopoly to produce at a socially beneficial point where P is below ATC?
Subsidize them for the difference
What is the relationship between MC and minimum
ATC for both purely competitive firms and
monopolies?
MC will cross (=) ATC at minimum point
Firms in a monopolistically competitive industry create
DWL because they…
Restrict their output level to maximize profits
What will happen to short run price and output if
consumer income decreases?
Both will decrease, and in thelong run firms will exit
the industry
What is the relationship between P and MR for the
monopolist?
P > MR
What would happen to price and output in a perfectly competitive industry if it
were taken over by a monopoly?
Price would go up, output quantity would decrease
Interedependence among firms is most strongly
present in which market model?
Oligopoly
A perfectly competitive profit-maximizing firm will always produce where…
MC = MR (which will also equal P)
Advertising, product promotion, and changes in the real or
perceived characteristics of a product refers to what type of
competition?
Nonprice competition
Large number of firms and low entry barriers are characteristics
of what?
Monopolistic competition
What is the process by which new firms and new products replace
existing dominant firms and products?
Creative destruction
What distinguishes the short run from the long run in pure
competition?
Firms can enter and exit the market in the long run, but
not in the short run.
A firm can sell as much output as it chooses at the existing price if
the demand curve is…
Perfectly elastic
When does a firm reach the break-even point?
Where the total revenue and total cost are equal
A purely competitive firm is a "price ______.”
taker
A monopolist is a "price _____.
maker
What happens to marginal cost when a monopolist is at the profit-
maximizing output level?
Marginal cost exceeds price
What do economies of scale, the ownership of essential raw
materials, and patents have in common?
They are all barriers to entry.
In the long run a pure monopolist will maximize profits by producing that output at which marginal cost
is equal to what?
Marginal revenue
What happens to marginal cost when a monopolist is at the profit-
maximizing output level?
Marginal cost exceeds price
What is the profit-maximizing output level produced by an
unregulated monopoly?
Less than the socially optimal level, since the price paid by
consumers exceeds the firm’s marginal cost
A firm will earn zero economic profits in long-run equilibrium if it
sells its output in what kind of market?
Perfectly competitive
What will cause an unregulated monopolist to produce a more allocatively efficient level of
output?
A subsidy that increases as output increases
Entry of new firms is most difficult in which kind of industry
structure?
Pure monopoly
What market structure has many firms selling a differentiated
product, easy entry & exit, and some control over price?
Monopolistic competition
What are the characteristics of an oligopoly?
• A few large producers. • Homogeneous or differentiated
products.• Control over price, yet mutually
interdependent.
Why are firms in a monopolistically competitive
industry inefficient compared with firms in a perfectly competitive
industry?
They restrict their output level to maximize profits
True or false: It is always true that in both monopolies and perfectly
competitive firms average total cost equals marginal cost when average
total cost is a minimum.
True
What should a producer do in a perfectly competitive market, if the
price falls, in the short run?
Continue to produce only if the new price covers average variable
costs.
What are characteristics of a perfectly competitive industry?
New firms can enter the industry easily, there is no product
differentiation.
In the short run, a competitive firm can determine the profit-maximizing
(or loss-minimizing) output by equating:
Marginal revenue and marginal cost
Economic profits encourage firms to enter the market and losses cause
them to exit. True or false?
True
In long-run equilibrium, in a purely competitive market , what happens to
consumer and producer surplus?
Surplus will be maximized.
In which market models do demand and marginal revenue diverge?
Pure monopoly, oligopoly, and monopolistic competition
In the long run the price charged by the monopolistically
competitive firm attempting to maximize profits will be equal to
what?
ATCAverage Total Costs
What do concentration ratios measure?
The percentage of total industry sales accounted for by the largest firms in
the industry.
If the price of a firm’s product is less than
minimum AVC, what should they do? Why?
Close down. If they continue producing, their losses will exceed total fixed costs.