Marginal utility
Define diminishing Marginal Utility and give an example
beyond some point, additional units of a product will yield less and less extra satisfaction to a consumer
Eat 4 slices of pizza and don't eat the fifth slice
What is an implicit cost?
What is an example?
What is an explicit cost?
What is an example?
Explicit- monetary payments made by individuals, firms, and governments for the use of resources owned by others
EX: Rent
Implicit- opportunity costs of owning resources
EX: gave up accounting salary of $80,000 to start own business
What are the characteristics of perfect competition?
Bonus: what is the closest industry we have to perfect competition?
large number of sellers and buyers
standardized product
price taker
easy entry and exit
Beef market
What are the characteristics of monopolistic competition?
large number of sellers
differentiated product (close substitutes)
come control over price
relatively easy entry and exit
What are the two formulas to find total revenue?
P*Q
Σ MR
Suppose MUx/Px exceeds MUy/Py. To maximize utility, the consumer who is spending all her money income should buy
A) less of X only if its price rises
B) more of Y and/or less of X
C) more of X and/ or less of Y
D) more of Y only if its price rises
C) more of X and/or less of Y
What is the accounting profit equation?
What is the economic profit equation?
What is the difference between the two?
AP= TR- Explicit costs
EP= TR- Economic costs(explicit+implicit)
Accounting only uses explicit
Economic uses explicit and implicit costs
What are the characteristics of a pure monopoly?
What is an example
single seller
product has no close substitutes
price maker
barriers to entry
EX: only gas station in a town
What are the characteristics of oligopolistic competition?
few large producers
standard or differentiated product
significant entry barriers
price setters/makers
mutually interdependent
Which competitions does the MR=MC rule apply to?
Perfect competition
Pure monopoly
Monopolistic competition
Oligopolistic competition
The first Pepsi yields Craig 18 units of utility and the second yields him an additional 12 units of utility. His total utility from three Pepsis is 38 units of utility. The marginal utility of the third Pepsi is
8 units of utility
What is a fixed cost?
What is an example?
What is a variable cost?
What is an example?
Fixed cost- cost not dependent on the level of output produced
EX: Rent
Variable cost- costs change with the amount of output produced (increases as production increases)
EX: leather needed to make shoes
List examples of barriers to entry
(at least 2)
Resource control
economy of scale
patton
A monopolistically competitive firm will
a) always charge the same price as competitors
b) always produce at the minimum efficient scale of production
c) have some control over its price because its product is differentiated
d) produce an output level that is productively and allocatively efficient
c) have some control over its price because its product is differentiated
What are the definitions and examples of first, second, and third level price discrimination?
First- sells each unit of output at buyers maximum willingness
Second- bulk price, lowers price per good so willing to buy more
EX: Sams
Third- break up market based on elasticity
EX: Senior discount, Ladies night
If the consumer has money income of $52 and the prices of J and K are $8 and $4 respectively, the consumer will maximize her utility by purchasing
4 units of J and 5 units of K
Matt quits his job at which he was earning $50,000 per year, and opens a small business. In the first year, the business has sales of $75,000 and explicit costs of $45,000. What is Matt's economic profit?
-$20,000
A monopolist faces a downward sloping demand curve because
a) the demand for its product is inelastic
b) the industry demand curve is horizontal
c) resource prices increase as the monopolist expands output
d) the entire market demand curve is the monopolist's demand curve
d) the entire market demand curve is the monopolist's demand curve
When should a firm shut down?
if P<AVC at Q*
the four firm concentration ratio for this industry is
Firm Market share
A- 40
B 30
C 20
D 5
E 5
95%
Assume the prices of L and M are $3 and $4 respectively and that the consumer's income is $14. What level of total utility does the rational consumer realize with the optimal bundle?
43 utils
Price= $70
Total Output= 4 units
ATC= $49.50
What is the profit per unit?
$20.50
If a monopolist's marginal revenue is $3 and its marginal cost is $4.50 it will increase its profits by
a) reducing output and raising price
b) reducing both output and price
c) increasing both price and output
d) raising price while keeping output unchanged
a) reducing output and raising price
if the firm is currently producing and selling Qa units what is the price charged?
P2
In the payoff matrix shown describe each companies strategy
both firms have a dominant strategy to price low