Micro Test 3
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Change in total revenue from producing one more unit
Calculate Marginal Revenue
The difference in Total Revenue from one unit to the next
MR = Price only in perfect competition
Calculate Marginal cost
The difference in Total Cost from one unit to the next
Calculate Average Total Cost
Total Cost / Quantity
Calculate Economic Profit
Total Revenue - Total Cost
Graph the demand schedule, marginal cost curve, and marginal revenue curve
- Demand = marginal revenue = price
- this is shown by a perfectly elastic demand curve (horizontal line)
- marginal cost curve is shown by a decreasing line that starts to curve and increase (looks like a checkmark)
Determine the profit maximizing level of output
- This can be found where MC = MR
- Whatever the Quantiy and Price is at that point.
What is the short-run decision rule for finding the profit maximizing level of ouput?
Firms produce where MR = MC
- if MR < MC firms will not produce
- If MR > MC firms will produce
Rate of Return on Investment
Net Revenue / Investment
- Below Average = negative E.P.
- National Average = zero E.P.
- Above Average = positive E.P.
If given a market price what should the firm produce, why, what is the Economic Profit
- Price (given)
- Quantity (MC = P)
- P vs ATC
- negative E.P. , Price < ATC
- zero E.P. , Price = ATC
- positive E.P. , Price > ATC
EP = Price = ATC
Assume that in a competitive industry, P > ATC. How much Economic Profit is being earned by a typical firm in this industry
MC - ATC = Eononomic Porfit
Explain why entry will occur in this industry. (p > atc)
entry of new firms attracted to positive E.P, and above average rate of return on investment
In the long-run, what will happen to the industry supply curve, price, and economic profit earned?
- supply increase
- price decrease
- E.P. decrease
What is the long-run competitive equilibrium condition?
Zero Economic Profit ( MC = ATC)
- Industry consist of a single firm selling a product for which there are few substitutes
- firm = industry
Give an example of how "Industry Boundaries" (geographic area and definition of the product) make it difficult to define monopoly.
- Area = town (only one available in area) monoply
- Product = cable tv (narrow)
- Area = usa (plenty available) not a monoply
- Product = tv or entertainment (broader)
Define "Barriers to Entry".
Obstacles that prevent a new firm from entering a profitable industry.
What are five major barriers to entry into an industry?
- Economies of scale (lower ATC)
- High start-up cost
- Government Licenses
- Network effect-the value (usefulness) i get from a product if more people have the same product
Why is MR less than the demand curve for the monopolist?
monopolist must lower price to all buyers in order to sell more units.
Determine the profit maximizing level of output and price.(monopoly)
Q= where MC=MR
P= go up on the demand curve
What is the principal limit to the ability of the monopoist to increase price?
The demand curve or what people are willing to pay.
Occurs whan a seller charges different prices to different (groups of) buyers for the exact same product
What conditions are necessary for a firm to practice price discrimination?
- Seller must have market power
- Seller can distinguish between groups of buyers who have different demands
- Resale of product is difficult
Explain some examples of ways sellers practice price discrimination.
- Time of day, day of week, season of year
- Age of buyer
How does price discrimination benefit the seller?
- Existing buyers pay P(market pridce) or more increase total revenue
- Increase sales volume by creating a lowest demand group charge price below p(market price) to only that group.
What is "peak load" pricing? Give an example of peak load pricing.
- Seller divides market into strong (peak-high price) demand time period and weak low price (off peak-low price) demand time period; creates incentive for customers to shift use of product from peak to off peak (smoothes demand)
- Example- volume of people who fly at different times of the day. You have peak & off peak time
- Industry consist of a large number of small firms selling products that are similar but not identical (each firm has a small market share).
- ex. restaurant or retail shop
The percentage of industry sales volume produced by a single firm
What is product differentiation?
ways to make your product distinguishable from or more appealing to customers than other similar products.
What are some ways to perform product differentiation?
- physical differences
- subjective differences-image, ads
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