Microeconomics: Exam 2

Front 1

Economic profits are calculated by:

Back 1

taking the difference between total revenue and the sum of explicit and implicit cost TR = Explicit + Implicit

Front 2

A monopolistic competitor will engage in advertising in order to:

Back 2

increase demand for its product

Front 3

When a firm produces at an output level at which MR=MC, it is operating at the:

Back 3

optimal output level

Front 4

When a firm finds that its ATC of production decreases as it increases production, this firm is said to be experiencing:

Back 4

economies of scale

Front 5

If a firm's economic profits are equal to zero, its accounting profits are most likely:

Back 5

greater than economic profits

Front 6

Temporary monopolies via the provision of sole ownership rights to profit from the production, use, or sale of a good provided by:

Back 6

patents and copyrights

Front 7

Goods that are subjected to network externalities tend to be ones:

Back 7

for which the value of the good to an individual is higher when more people use it.

-Goods have more value when more people use it

Front 8

A monopolistically competitive industry is made up of:

Back 8

many good firms producing a differentiated product.

Front 9

Industries that are made up of many competing producers, each selling a differentiated product, and whose firms eventually earn zero economic profits in the long run are:

Back 9

monopolistically competitive

Front 10

Monopolistic competitors:

Back 10

have some ability to set price

Front 11

Diminishing returns are a reason:

Back 11

the marginal cost curve is upward sloping

Front 12

Control of scarce resource or input, economies of scale, technological superiority, and government-created barriers are forms of:

Back 12

barriers to entry

Front 13

For a monopolist with a downward-sloping demand curve, the quantity effect dominates the price effect at:

Back 13

lower levels of production

Front 14

Economies and diseconomies of scale are associated with the:

Back 14

long-run average total cost curve and the long run

Front 15

If marginal cost of production are greater than marginal benefits of production (MC>MB):

Back 15

too much of the good is being produced

Front 16

A demand curve that is perfectly inelastic is:

Back 16

vertical

Front 17

A firm finds that its long-run average total costs increase as it produced more output. This firm is experiencing:

Back 17

diseconomies of scale

Front 18

If ATC is equal to MC, then the firm is operating at:

Back 18

the minimum point of ATC

Front 19

At the profit-maximizing level of production, a perfectly competitive industry will produce an __________ level of production, and a monopolist produces an _________ level of production.

Back 19

efficient, inefficient

Front 20

Perfectly competitive industries are characterized by:

Back 20

goods that are standardized

Front 21

If monopolist knows its price elasticity of demand is greater than one, then a(n):

Back 21

decrease in price will increase total revenue

Front 22

The addition to the total revenue from selling one more unit of the good is:

Back 22

marginal revenue

Front 23

A perfectly competitive industry with constant costs initially operates in long-run equilibrium. When demand increases, one will observe that in the long and short runs:

Back 23

output will increase

Front 24

When firms price-discriminate, people with ________ price elasticity of demand will pay ________ prices relative to those purchasing the same product who have a ________ price elasticity of demand.

Back 24

lower, higher, higher

Front 25

In the short run, a firm will continue to sell its product as long as:

Back 25

the price is greater than average variable costs

Front 26

In the long run, perfect competitors and monopolistic competitors are similar in that they:

Back 26

produce an output level at which P = ATC

Front 27

If the long-run market supply curve for a perfectly competitive market is horizontal, then this industry is one that exhibits:

Back 27

constant cost

Front 28

In a perfectly competitive marrket:

Back 28

both producers and consumers are price-takers

Front 29

If the Herfindahl-Hirschman index (HHI) for an industry is 900, this market is considered:

Back 29

a strongly competitive market

Front 30

Both monopolists and monopolistic competitors:

Back 30

charge a price that is greater than the marginal cost (MC) of production

Front 31

Firms will make a profit in the long run or short run if the price is:

Back 31

greater than ATC

Front 32

An oligopoly is characterized as an industry in which:

Back 32

there are few firms, each producing a differentiated or similar product.

Front 33

A horizontal sum of individual firms MC' curves at and above the shut-down price is the:

Back 33

short-run industry supply curve

Front 34

A firm's total fixed cost:

Back 34

stays constant in the short run

Front 35

In the long run, monopolistic competitors will:

Back 35

earn zero economic profits

Front 36

In a perfectly competitive market, tastes and preferences lead to an increase in the demand for the good. Holding everything else constant, this will lead to an increase in price that will result in:

Back 36

positive economic profits for firms, which will attract new firms, which in turn will result in a reduction in the price.

Front 37

If a monopoly market structure was transformed into a perfectly competitive one, one would find that price would _______ and output would ______.

Back 37

fall, increase

Front 38

Cartels made up of a large number of firms are unstable because each firm in the cartel:

Back 38

has an incentive to cheat

Front 39

Monopolistic competitors sell products that are ________ as a result, each firm has a ________ demand curve.

Back 39

imperfect substitutes, downward-sloping

Front 40

Hank operates a perfectly competitive firm in the long run. For several periods the market price has been $20, and he knows his break-even price is $22. Hank should:

Back 40

exit the industry, since he is making losses

Front 41

Neoclassical economics

Back 41

-stable preferences that are not affected by context-people are accurate counting machines-people are good planners with plenty of willpower-people are selfish and self-interested-ex: people do not care about fairness and only treat others well if doing so will get them something they want

Front 42

Behavioral economics

Back 42

-Focusing on mental process behind decisions-improving outcomes by improving decision-making-ex: many people care deeply about fairness and will often give to others even when doing so will yield no personal benefits

Front 43

Heuristics

Back 43

Heuristics are energy savers-involving or serving as an aid to learning, discovery, or problem-solving by experimental and especially trial-and-error methods OR exploratory problem solving techniques that utilize self-educating techniques.

Front 44

Cognitive Biases

Back 44

Cognitive Biases are errors in thinking that influence how we make decisions.-In our attempt to simplify information processes, we may take mental shortcuts that lead us down the wrong path. These thinking errors that we make our called cognitive biases.

Front 45

Framing Effect

Back 45

Framing effect is one of cognitive biases--which describes that presenting the same option in different formats can alter people's decisions--depending on whether it is presented as a gain or a loss.-They are changes in a decision-making process based on how the decision is framed.

Front 46

Loss Aversion

Back 46

Loss aversion refers to people's tendency to strongly prefer avoiding losses to acquiring gains.-Most studies suggest that losses are twice as powerful, psychologically, than gains.

Front 47

Anchoring

Back 47

Using irrelevant information as a reference for evaluating or estimating some unknown value or information.-ex: friend asks you how much is a 1,100 sq-ft apartment when you live in a 800 sq-ft apartment

Front 48

Endowment Effect

Back 48

Hypothesis that people place a higher value on objects they own; relative to objects they do not own.

Front 49

Status Quo Bias

Back 49

Is a cognitive bias that leads people to prefer than things remain the same, or that they change as little as possible.

Front 50

Myopia

Back 50

nearsightedness; lack of imagination, lack of intellectual insight

Front 51

explicit cost

Back 51

Explicit Cost is a direct payment made to others in the course of running a business such as wage, rent and materials, lease cost, etc.-Obvious cash outflows from a business.

Front 52

Implicit cost

Back 52

Implicit Cost is where no actual payment is made.-It is represented by the lost of opportunity in the use of a company's own resources, excluding cash.-An implicit cost for a firm can be thought of as the opportunity cost related to undertaking a certain project or decision.-ex: time and effort an owner puts into maintenance of the company, or coming to a decision on how to allocate/distribute resources.-Does not record implicit costs for accounting purposes because no money is changing hands.-Implicit cost represents the loss of potential income and not the actual loss of profits.

Front 53

normal Profit vs. Accounting Profit

Back 53

Normal profit takes into consideration the opportunity costs.-Accounting profit does not.

Front 54

Breakeven point

Back 54

The point at which gains equal losses

Front 55

Short run

Back 55

-Some inputs are variable (i.e. labor)-Fixed capital (building, machines, etc.)-Within a certain period of time, in the future, at least one input is fixed while others are variable.-Not a definite period of time, but rather varies based on the length of the firm's contracts-In certain situations, it may be preferable to keep operating an unprofitable firm over the short run if this helps to partially offset costs that are fixed.-Barriers to entry prevent competitors from quickly entering market. (So, no barriers to entry)-Can influence prices through adjustments made to production levels.

Front 56

Long Run

Back 56

-All inputs are variable-firms can adjust plant size, as well as enter and exit industry-A period of time in which all factors of production and costs are variable.-In the long run, firms are able to adjust all costs, whereas in short run firms are only able to influence prices through adjustments made to production levels.-In the long run, an unprofitable firm will be able to terminate its leases and wage agreements and shut down operations.-May enter or exit an industry

Front 57

Law of Diminishing Returns

Back 57

As the number of new employees increases, the marginal product an additional employee will at some point be less than the marginal product of the previous employee-At some point additional workers will provide less output than the previous worker.-If new employees are constantly added, the plant will eventually become overcrowded with workers, decreasing the production of the factory.

Front 58

Fixed costs

Back 58

Are costs that are constant, or do not change with the increase or decrease in the amount of goods/services produced.-ex: a company's lease on a building

Front 59

Variable costs

Back 59

A cost that varies with the level of output-Variable costs rise as production increases, and fall as production decreases.-ex: direct material cost or direct labor cost, such as packaging.

Front 60

Economies of Scale

Back 60

When more units of a good or service can be produced on a larger scale, yet with less input costs.-So, when a company grows and production units increase, a company will have a better chance to decrease its costs.-Economic growth may be achieved when economies of scale is reached.-a proportionate savings in costs gained by an increased level of production-Economies of scale could be reached by: labor specialization, managerial specialization, efficient capital, etc.

Front 61

Constant returns to scale

Back 61

A constant ratio between inputs and outputs.-Constant returns to scale occurs when increasing the number of inputs leads to an equivalent increase in the output.

Front 62

Diseconomies of Scale

Back 62

Rather than experiencing continued decreasing costs per increase in output (as in economies of scale), in diseconomies of scale--firms see an increase in marginal cost when output is increased.-Economies of scale no longer function for a firm.-Causes: control and coordination problems, communication problems, worker alienation, shirking

Front 63

Natural Monopoly

Back 63

Long run costs are minimized when one firm produces the product

Front 64

In perfect competition, what is always true?

Back 64

MR = P