Transcript PPT

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 profitmaximizing 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 lossminimizing) 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?
ATC
Average 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.