A monopoly
can set the price it charges for its output but faces a downward-sloping demand curve so it cannot earn unlimited profits.
When firms in a competitive market have different costs, it is likely that
some firms will earn positive economic profits in the long run.
Mrs. Smith operates a business in a competitive market. The current market price is $8.10. At her profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should
continue to operate in the short run but shut down in the long run.
Average total cost is increasing whenever
marginal cost is greater than average total cost
In a competitive market with identical firms,
free entry and exit into the market requires that firms earn zero economic profit in the long run even though they may be able to earn positive economic profit in the short run.
Economic models
incorporate simplifying assumptions that often contradict reality, but also help economists better understand reality.
Laws that restrict the smoking of cigarettes in public places are examples of government intervention that is intended to reduce
externalities.
From society's standpoint, cooperation among oligopolists is
undesirable, because it leads to output levels that are too low and prices that are too high.
As the number of firms in an oligopoly increases, the
price approaches marginal cost, and the quantity approaches the socially efficient level.
The prisoners' dilemma game
has a Nash equilibrium, but the Nash equilibrium outcome is not the outcome the players would agree to if they could cooperate with each other.
In markets characterized by oligopoly,
the oligopolists earn the highest profit when they cooperate and behave like a monopolist.
When an oligopoly market reaches a Nash equilibrium,
a firm will not take into account the strategies of competing firms.
The equilibrium quantity in markets characterized by oligopoly is
higher than in monopoly markets and lower than in perfectly competitive markets.
To improve living standards, policymakers should
formulate policies designed to increase productivity.
The term market failure refers to
a situation in which the market on its own fails to allocate resources efficiently.
If the price of gasoline rises, when is the price elasticity of demand likely to be the highest?
one year after the price increase
The cross-price elasticity of demand can tell us whether goods are
complements or substitutes.
Production is efficient if the economy is producing at a point
on the production possibilities frontier.
The intersection of a firm's marginal revenue and marginal cost curves determines the level of output at which
profit is maximized
Consider a monopolistically competitive firm in a market in long-run equilibrium. This firm is likely earning
no economic profit since it is charging a price equal to its average total cost.
In a competitive market,
no single buyer or seller can influence the price of the product.
Which of the following conditions distinguishes monopolistic competition from perfect competition?
product differentiation
Which of these types of costs can be ignored when an individual or a firm is making decisions?
sunk costs
monopolist can sell 200 units of output for $36 per unit. Alternatively, it can sell 201 units of output for $35.80 per unit. The marginal revenue of the 201st unit of output is
$-4.20.
Which of the following is an example of a barrier to entry?
Dick obtains a copyright for the new computer game that he invented.
Financial aid to college students, quantity discounts, and senior citizen discounts are all examples of
price discrimination.
Which of the following represents the firm's long-run condition for exiting a market
exit if P < ATC
Some prescription drugs sell for more in the United States than they do in other countries. Which of the following statements about this issue is most likely to be true?
Drug companies are engaging in price discrimination, but this might improve global social welfare if it gives more people access to the drugs
A natural monopolist's ability to price its product is
constrained by the market demand curve.
In the long run,
both monopolistically competitive and perfectly competitive firms produce where P = ATC.
A competitive market is in long-run equilibrium. If demand increases, we can be certain that price will
rise in the short run. Some firms will enter the industry. Price will then fall to reach the new long-run equilibrium.
For a profit-maximizing monopolist
P > MR = MC
In a long-run equilibrium
only a perfectly competitive firm operates at its efficient scale
When a production possibilities frontier is bowed outward, the opportunity cost of producing an additional unit of a good
increases as more of the good is produced
When a tax is imposed on a good, the
equilibrium quantity of the good always decreases
A legal minimum on the price at which a good can be sold is called a price
floor.
When considering her budget, the highest indifference curve that a consumer can reach is the
one that is tangent to the budget constraint.
The slope of an indifference curve is
the marginal rate of substitution.
Production is efficient if the economy is producing at a point
on the production possibilities frontier
The price of diamonds is high, in part because the majority of the world's diamonds are controlled by a single firm. This is an example of
a market failure caused by market power
If the government removes a binding price ceiling from a market, then the price received by sellers will
increase, and the quantity sold in the market will increase.
Steak and pasta are normal goods. When the price of pasta falls, the income effect by itself causes
the consumer to feel richer, so the consumer buys more steak.
When a tax is imposed on a good for which the supply is relatively elastic and the demand is relatively inelastic,
buyers of the good will bear most of the burden of the tax.
The substitution effect of a wage decrease in the work-leisure model results in the worker choosing to
work less than before.