Chapter 14
True or False
Assuming that implicit costs are positive, economic profit is greater than accounting profit.
False
Accounting profit equals total revenues minus explicit costs. Economic profit equals total revenues minus both explicit and implicit costs. Assuming that implicit costs are positive, accounting profit is greater than economic profit.
A market with many buyers and sellers trading a nearly identical product describes a(n) _______.
Competitive Market
What is a natural monopoly?
a type of monopoly that arises because a single firm can supply a good or service to an entire market at a lower cost than could two or more firms
True or False
Indifference curves are downward sloping.
True
We assume that consumers like both goods. If the quantity of one good is reduced, the quantity of the other good must increase for the consumer to be equally happy. Thus, indifference curves are downward sloping.
In the ______, all costs are ________.
long run; variable
***In the long run, all costs are variable. In the short run, at least one cost is fixed, but not all costs are fixed.
True or False
For all firm types price equals marginal revenue, and for competitive firms price equals average revenue.
False
Average revenue for a firm is total revenue (P × Q) divided by the quantity (Q). Therefore, average revenue simplifies to the price of the good (P) for all firm types. Marginal revenue is the change in total revenue from an additional unit sold. Because price is fixed for a competitive firm, the change in total revenue from selling an additional unit will be the price. Therefore, price and marginal revenue are equal for competitive firms.
When a monopoly decreases its output and sales, the output effect works to ______ total revenue, and the price effect works to ______ total revenue.
decrease; increase
Marginal revenue is the amount of revenue that the firm receives for each additional unit of output. It is very different for monopolies versus competitive firms. When a monopoly decreases the amount it sells, this action has a price effect-the price rises which tends to increase total revenue-and an output effect-less output is sold which tends to decrease total revenue-on total revenue.
What is the substitution effect?
the change in consumption that results when a price change moves the consumer along a given indifference curve to a point with a new marginal rate of substitution
Farmer Greene faces diminishing marginal product. If she plants no seeds on her farm, she gets no harvest. If she plants 1 bag of seeds, she gets 3 bushels of wheat. If she plants 2 bags, she gets 5 bushels. If she plants 3 bags, she gets _______.
6 bushels
When price is greater than average total cost, profits for the firm are _______.
When price is greater than average total cost, the profit per unit is positive. This corresponds to positive total economic profits.
True or False
When a monopoly increases production by 1 unit, it causes the price of its good to fall, which reduces the amount of revenue earned on all units produced. As a result, a monopoly’s marginal revenue is always less than the price of its good.
True
What is an indifference curve?
a curve that shows consumption bundles that give the consumer the same level of satisfaction
Xavier opens up a lemonade stand for two hours. He spends $10 for ingredients and sells $60 worth of lemonade. In the same two hours, he could have mowed his neighbor's lawn for $40. Xavier earns an accounting profit of _____ and an economic profit of ____.
50. 10
One explanation for why the market long-run supply curve slopes upward is because _______.
the inputs in production are only available in limited quantities
Market long-run supply curves can be upward sloping if firms have different cost structures. If firms with higher costs enter the market, the price in the market must raise to make entry profitable. This can result in an upward sloping market long-run supply curve.
Which of the following statements best describes the business practice of price discrimination?
a. Pricing a good below marginal cost
b. Selling the same good at different prices to different customers
c. Selling two similar goods at different prices
d. Hiring an advertising firm to enhance a good's brand
B
Price discrimination is the business practice of selling the same good at different prices to different customers.
True or False
The income effect is the change in consumption that results from the movement to a new indifference curve. The substitution effect is the change in consumption that results from moving to a new point on the same indifference curve with a different marginal rate of substitution.
True
The relationship between the quantity of an input and the quantity of output is called the _______.
production function
How do they firms determine if they need to exit the market?
The firm exits the market if the revenue it would get from producing is less than its total cost of production.
Exit if the price is less than average total cost.
Why do Monopolies Exist?
Monopoly resources: A single firm owns a key resource required for production.
Government regulation: The government gives a single firm the exclusive right to produce a good or service.
The production process: A single firm can produce output at a lower cost than a larger number of firms can.
What are the 4 properties of Indifference curves?
Higher indifference curves are preferred to lower ones.
Indifference curves slope downward.
Indifference curves do not cross.
Indifference curves are bowed inward.