Eco 312 Final Exam

Front 1

Total Revenues - Total Costs

Back 1

Economic Profits

Front 2

Opp. Costs of all inputs used in production

Back 2

Total Costs

Front 3

Both implicit costs and explicit costs are part of ______________.

Back 3

economic costs

Front 4

Profits are maximized by producing an output so that __________

Back 4

MR = MC

Front 5

the increase in revenues from selling one more unit of output

Back 5

marginal revenue

Front 6

For a competitive firm (a "price-taker"), ____________

Back 6

MR = P

Front 7

The short-run supply curve for a competitive firm coincides with its __ curve above ___.

Back 7

MC; AVC

Front 8

Why does the short-run supply curve for a competitive firm coincide with its MC curve above AVC?

Back 8

The minimum level of AVC is the firm's shutdown price. For prices below the shutdown price, the firm supplies zero output, and its supply curve is a vertical line coinciding with the vertical axis.

Front 9

How does a firm respond to changes in fixed costs in the short-run?

Back 9

Changes in fixed costs don't change behavior (No effect on price or quantity in the market)

Front 10

How does a firm respond to changes in variable costs in the short-run?

Back 10

Changes in variable costs will change behavior. Changes in variable costs change marginal costs.

Front 11

How does a competitive industry reach long-run equilibrium?

Back 11

When firms in the market are earning short-run economic profits, it is not sustainable in the long-run because new firms see that they could earn more money in this industry than where they currently have resources invested. Entry into the market will shift the market supply out, lowering price. The falling price means falling profits for the firms in the industry. Entry continues until all economic profits have been eliminated.

Front 12

an industry in which the increase or decrease of industry output does not affect the prices of inputs

Back 12

constant-cost industry

Front 13

an industry in which increases in industry output increase the prices of inputs

Back 13

increasing-cost industry

Front 14

an industry in which increases in industry output decrease the prices of some or all inputs

Back 14

decreasing-cost industry

Front 15

Horizontal Long-Run industry Supply Curve

Back 15

Constant Cost Industry

Front 16

Input prices (which determine costs of production) are not affected by entry/exit.

What this means is that the graph of the firm’s costs does not change (cost curves don’t shift as entry or exit takes place).

Back 16

Constant Cost Industry

Front 17

Explain constant cost industry

Back 17

Suppose we have a constant cost competitive industry in L-R equilibrium.

Then Market Demand increases.

The increase in price results in short-run economic profits. In the long-run, these profits attract new firms (“entry”) since there are no entry barriers.

This causes market price to fall, lowering profits. We reach an equilibrium when profits are zero.

Front 18

Upward-sloping Long-Run industry Supply Curve

Entry increases costs for existing firms

Back 18

Increasing Cost Industry

Front 19

Entry bids up price of inputs, causing cost curves for all firms in the industry to shift up.

Back 19

Factor Price Effect

Front 20

Downward-sloping Long-Run industry Supply Curve

“The degree of specialization is limited by the extent of the market.”

We know there are gains to specialization—inputs are more productive when they specialize. More productive means lower costs. 

When the market is small then there won’t be enough demand for very specialized services.

Back 20

Decreasing Cost Industry

Front 21

Payments to a factor of production (input) in excess of the minimum payment to have that factor supplied.

Back 21

economic rent

Front 22

The difference between the amount of money received (Total Revenue) from selling a given amount of a good and the minimum amount necessary to be willing to sell (variable costs).

Back 22

producer surplus

Front 23

The extra value individuals receive from consuming a good over what they paid for it.

Back 23

consumer surplus

Front 24

can be found graphically as the area under Demand and above price out to the quantity consumed

Back 24

consumer surplus

Front 25

Price - Marginal Cost

Back 25

Producer Surplus

Front 26

is found graphically as the area under price and above Supply out to quantity sold

Back 26

producer surplus

Front 27

the reduction in net economic benefits resulting from an inefficient allocation of resources

Back 27

deadweight loss

Front 28

Why are competitive markets "efficient"?

Back 28

Net Benefit is maximized because production is allocated to the lowest cost to producers and consumption is allocated to the highest value to consumers.

Front 29

What happens when there is a tax on sellers?

Back 29

Supply curve shifts up (a decrease in supply), equilibrium quantity falls and equilibrium price rises.

Price increase is less than the tax, burden of tax ends up being shared.

Front 30

What happens when there is a tax on buyers?

Back 30

Demand curve shifts down (a decrease in demand), equilibrium quantity falls; equilibrium price falls.

Price decrease is less than the tax, burden of tax ends up being shared.

Front 31

Describe the effects of a subsidy.

Back 31

Demand curve shifts up, equilibrium quantity increases.

Seller keeps market price, buyer pays a lower price.

This causes a DWL due to overproduction.

Front 32

What happens when an economy opens to trade in a good for which it has a comparative disadvantage?

Back 32

Price falls to world price, consumers benefit more by consuming more at the lower price, producers are harmed because they sell less at a lower price, this causes a Net Gain for Society

Front 33

What happens when an economy opens to trade in a good for which it has a comparative advantage?

Back 33

Price rises to world price, consumers are harmed because they consume less at the higher price, producers benefit because they sell more at the higher price, this causes a Net Gain for Society

Front 34

Describe the effect of a tariff.

Back 34

Domestic producers benefit

Domestic consumers are worse off

Gov't revenues increase

Net Loss for Economy (DWL due to Tariff)

Front 35

One firm

No close substitutes

Complete Barriers to Entry

Back 35

monopoly

Front 36

What is the relationship between price and marginal revenue for a single-price firm (monopoly)?

Back 36

Marginal Revenue is less than Price

Front 37

is the percentage markup of price over MC the firm charges

Back 37

Lerner Index of Market Power

Front 38

What is the relationship between marginal revenue and price elasticity of demand?

Back 38

(Change in Quantity/Change in Price) x (Price/Quantity)

Front 39

Describe the effects of price ceilings on monopolies.

Back 39

Price floor set equal to the competitive price will result in an economically efficient outcome.