Business
Write formula for Accounting Profit, Economic Profit
Accounting profit = revenues – explicit costs
Economic profit = revenues – (explicit + implicit costs)
or Economic profit = accounting profit – implicit costs
Give the formula of the following:
Profit =
Profit =
Total Cost =
Total Revenue =
ATC =
AVC =
AFC =
Profit = TR - TC
Profit = (Price - ATC)*Q
Total Cost = FC + VC
Total Revenue = Price * Quantity
ATC = TC / Q
AVC = VC / Q
AFC = FC / Q
I give condition you give outcome
Price > ATC -->
Price < ATC -->
Price = ATC -->
Price > AVC -->
Price < AVC -->
Price > ATC --> profitable
Price < ATC --> make a loss
Price = ATC --> normal profit (covers everything)
Price > AVC --> continue producing
Price < AVC --> shut down temporarily
Give Characteristics of Monopoly Market
Hint: Number of firms, Product Type, Market Power, Barriers to entry
1. One firm
2. No close substitute
3. Price Maker
4. Significant of barriers
what is deadweight loss (DWL) and What is the reason for monopoly deadweight loss (relative
to perfect competition)?
A. The monopolist faces a downward-sloping demand
curve.
B. People boycott monopolies more often.
C. The monopolist sells less output at a higher price.
D. The monopolist has no competitors.
Def: loss of sales
C. The monopolist sells less output at a higher price.
Recall: Deadweight loss
• Monopoly DWL > 0
• Competition DWL = 0
Which of the following is an example of an implicit cost?
A. Wages paid to employees.
B. Cost of food delivery.
C. The opportunity cost of the owner’s time.
D. Monthly insurance premiums.
C. The opportunity cost of the owner’s time.
Describe 3 types of scales
1. Economies of scale: ATC falls when production expands
E.g Mass production, low-cost technology
2. Diseconomies of scale: ATC rises when production expands
E.g resource/raw material/input cost increase, scarcity
3. Constant returns to scale: ATC doesn’t change when production expands.
E.g Think of bakery (double input double output)
Steve runs a competitive sandwich shop. Right now, he is producing output at a level where MR > MC.
To increase his profits, Steve should
A. try to use more capital in his production.
B. try to use more labor in his production.
C. produce less output.
D. produce more output.
D. produce more output
Profit-Maximizing Rule produce the output level at
MR = MC
What is price discrimination?
when a firm charges different prices to different group of consumers for the same product.
What are the 3 primary factors of production?
1. Land
2. Labor
3. Capital
Give characteristics of Perfect Competitive Market
Hint: Number of firms, Product type, Market power, and Barriers to entry
1. Many firms/suppliers
2. Homogenous/Standardize/Perfect Substitute
3. Price Taker
4. Easy to enter (anyone can start one)
What do you suppose is one of the main reasons that competitive firms all earn zero economic profits in the long run?
A. Each firm has a lot of market power.
B. Firms all want to earn zero profits.
C. Free entry and exit in the industry.
D. The cost curves are U-shaped.
C. Free entry and exit in the industry.
Which of the following most accurately describes a patent?
A. an incentive to innovate
B. a profit-sharing mechanism
C. a redistribution of wealth
D. an original invention
A. an incentive to innovate
Two Conditions for Price Discrimination must be met
1. Distinguishing groups of consumers
2. Preventing resale
Total output with seven workers is Q = 70. Total output with eight workers is Q = 82. What is the marginal product of the eighth worker?
A. 12
B. 10
C. 82
D. 8
A. 12
Profit-maximizing rule by choosing the level of output at
MR = MC
If a competitive industry is making positive economic
profits, what will eventually happen in this industry?
A. The market supply will shift to the left.
B. The market supply will shift to the right.
C. The market demand will shift to the left.
D. The market demand will shift to the right.
B. The market supply will shift to the right
Under perfect competition: P = MR
With a monopoly: P is
A. P > MR
B. P < MR
C. P = MR
A. P > MR
General pricing rule:
1. Charge higher price to relatively inelastic consumers (insensitive to price)
2. Charge lower price to relatively elastic consumers (sensitive to price)
In short run, inputs are......
In long run, inputs are.......
Fixed
variable/can change
Short run shut-down rule
Price < AVC
because continue the firm will incur a bigger loss.
Give characteristic of monopolistic
Hint: # of firms, product type, market power, barrier to entry
1. Many firms
2. Differentiated
3. Price maker
4. No barrier
Describe The 3 steps to find Monopoly level of output and price to charge
1. Find MR = MC
2. Look up demand curve
3. Choose the maximum price the firm can charge at that output level (Maximum WTP)
A general rule for price discriminating with two consumers
groups is to charge a ______ price to the inelastic group and a
______ price to the elastic group.
A. high; low
B. low; high
C. positive; negative
D. negative; positive
A. high; low