MICRO TEST 2

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MICRO TEST 2
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  1. What are explicit costs?
    What are implicit costs?
    Explicit Costs = Money payments for resources outside firm

    Implicit costs = Opportunity costs of resources firm owns
  2. What is a normal profit?

    What is Economic profit?
    What is a normal profit?

    Implicit cost of entrepreneurship. (compared to what was being made before)


    What is Economic profit?

    Total revenue - Implicit & Explicit Costs (including normal profit)
  3. What is Economic profit?
    Total revenue - Implicit & Explicit Costs (including normal profit)
  4. Short run vs long run
    Short run = fixed plant capacity but a short period long enough to vary its output  by applying smaller or larger amounts of labor or resources.

    • Long run = a period of time long enough to adjust the quantities of all the resources it employs.
    • Ex: add a new production facility and installs more equipment.
  5. Law of diminishing return
    At some point output will decrease as more labor keeps being added.
  6. In the short run the TC of any level of output is the sum of total fixed and variable costs.
    What is the equation?
    TC = TFC + TVC
  7. AFC, AVC, and ATC are.....

    MC............
    are fixed variable and total costs per unit of output.

    MC is the extra cost of producing 1 mre unit of output.
  8. Most firms have U shaped long run average total cost curves, reflecting economies, and then dis-economies of scale.
    What are the consequences of greater specialization of labor and management, more efficient capital equipment, and the spreading of start-up costs over m
  9. MES stands for?
    Minimum efficient scale is the lowest level of output at which a firms long-term average total cost is at a minimum.
  10. Income statement for a business will show 3 things....
    Will show revenues less expenses

    • whether or not the firm had a net profit
    • or net loss.
  11. Mortgage contract & Installment payment contract for a piece of equipment are examples of fixed costs.
    True
  12. Implicit Costs
    can also be considered ______ ________/
    Opportunity costs.
  13. TR - Explicit - Implicit = __________________
    Economic Profit or Loss
  14. Marginal Product
    is the extra output that comes from producing 1 more unit
  15. Is MC = MR the same thing as Net Profit?
    No
  16. Is economic profit the same as Accounting profit?
    No
  17. TFC + TVC = ?
    TFC + TVC = TC
  18. How do I figure out my Average Fixed Cost? (AFC)?
    TFC/Quantity produced
  19. How is marginal cost calculated?
    Change in Total cost/ Change in Quantity
  20. If critical resource dropped in price...........then the ATC curve would also shift ________.
    Downward
  21. Economies of scale:
    Constant Return to Scale:
    Diseconomies of Scale:
    • Economies of scale: Efficient low costs (^5% labor = ^10% output)
    • Constant Return to Scale: ^production v costs(^5% labor = ^5% output)

    • Diseconomies of Scale: Uncontrolable reasons / Unefficient
    • (^5% labor = ^-20% output)
  22. All of the major market structures –
    competition, monopoly, oligopoly (including cartels) and monopolistic
    competition all follow the profit maximization rule of ......
    MR = MC
  23. Marginal revenue is the change in..........
    change in total revenue / Change in quantity
  24. In economic theory, the breakeven point can also be determined by finding where ______________________________-
    Total Revenue = Total Cost.
  25. AVC line is higher than the
    market price, then the firm should shut down.
    Yup
  26. additional tax on each unit of production will raise the marginal cost curve and it will shift upward
    yes
  27. If the market price is at the point where MC intersects with ATC, this is also known as the Break-Even point.
    Yes
  28. Monopolies usually offer society the highest prices at a lower output versus the free market.
    true
  29. If the government set the monopoly price where Price =
    Marginal Cost, then most likely the monopoly would need a public subsidy
    to survive.
    True
  30. . Cartels are part of the
    Oligopolyeconomic model
  31. It is possible for a firm to enjoy an accounting
    profit yet at the same time not enjoy an economic profit.
    true
  32. . The ______  ______ is used to
    measure the market share of the four top firms within an Oligopoly.
    concentration ratio
  33. ______ ________ is used to anticipate the various decisions that firms within an Oligopoly could make and it also tells us about the various potential market outcomes.
    Game Theory
  34. Collusion
    • This occurs when firms agree with each other to fix prices and the quantity
    • produced. Collusion is illegal in the U.S. because this activity restricts and
    • hampers free market competition
  35. Price Discrimination:
    • Usually
    • this term is associated with a monopoly. If a monopoly (i.e. PG&E) charges
    • “significantly” different prices to each customer within the same market based
    • upon their knowledge of elastic and inelastic demand, then the U.S. Anti-Trust
    • Department could charge the monopoly with price discrimination.
  36. Barriers to entry
    • Firms
    • may do certain things to prevent new competitors from entering the marketplace.
    • If they can successfully set up barriers to entry, then they can stop new
    • competition. For example, they could bribe officials at City Hall to make the
    • registration process for a new firm so expensive and bureaucratic that the new
    • firm would just give up trying to enter the market.
  37. Increasing cost industry is AKA
    • This means the same as “diseconomies of scale.” As production expands, the long run
    • average total costs go up.
  38. 5. Explicit Cost:

    These
    are generally costs that can be verified with receipts. CPAs and accountants
    track these costs. 

     

     

     

    6. Variable Costs:

    These
    costs change as production changes. For example, if a firms switched from an 8
    hour day to 24/7, then you would expect their electric bill to rise.
  39. What should be used to try and anticipate a competitors next move in an oligopoly?
    Game theory software
  40. If a business cannot cover AFC & AVC then it should shut down.
    yes
  41. If we draw a Marginal Cost curve, then we
    can also draw the ______ _____. These two curves will match each other
    after the point where the ______ and _____ curve intersect.
    • Supply curve
    • AVC & MC curve intersect
  42. AFC = TFC / Quantity

    ‘and’
    AVC = TVC / Quantity.
    These calculations are correct.
  43. The Marginal Cost curve at first _____ then _____ as production picks up speed
    • falls
    • Rises
  44. If you can’t calculate MC=MR for whatever
    reason, then the next best thing to do would be to calculate ......?
    Total Revenue – Total Cost.
  45. Where MC intersects with ATC......
    it is known as minimum point or breakeven point.
  46. If you are looking at a firm in a very competitive market
    and if you notice that no matter how much they sell, their Marginal Revenue stays
    at a flat amount (e.g. $4), then this must mean that they have a totally
    elastic demand curve.
    true
  47. monopolistic competition and cartel market structures are the same as the monopoly
    curves.

    Only the ______ market structure is different graph, with its kinked demand curve
    is different
    oligopoly
  48. Technically speaking, the supply curve starts at
    the point where the marginal cost curve is just above the.............
    AVC cost curve
  49. If a monopoly is practicing price
    discrimination, then they are probably taking advantage of inelastic versus
    elastic demand curves for different customers.
    true
  50. Welfare loss to society means that it is missing out
    on higher output and lower prices because a monopoly exists rather than a free and
    competitive market.
    true
  51. set the monopoly price where Price
    = Marginal Cost, then most likely the monopoly .................
    would need a public subsidy to survive.
  52. we have studied __ market structures.
    Market Structure:

    We have studied five main market structures – competition, oligopoly, cartel,monopolistic competition and monopoly.
  53. Monopoly
    • One
    • firm controls anywhere from 90 to 100 percent of the industry. The competition
    • that does exist must be small and not be a serious threat to the monopoly firm.
    • On the horizon, the monopoly must be careful because they may face a challenge
    • from the U.S. Anti-Trust Department that will seek to either regulate them or
    • break them up.
  54. Monopolistic Competition
    • This market
    • structure represents that vast majority of U.S. business. Essentially, the firm
    • that has the most inelastic demand curve will be the winner in terms of total
    • revenues, gross sales, profits and market share. But because there may be
    • robust competition their market advantage may disappear. The beneficiary of
    • this type of competition is the consumer who will enjoy more choice, better
    • quality, lower prices and perhaps an investment opportunity in the successful
    • firm’s stock.
  55. Oligopoly:
    • This industry structure has a few firms (3 to 15) that dominate the industry while
    • the other competitors often compete for the leftover sales, profits, market
    • share and consumers. The graph that represents this industry is a kinked demand
    • curve.
  56. Cartel
    • This market
    • structure occurs when the suppliers come together and work with each other to
    • restrict supply in order to keep prices high. This activity is illegal in the
    • U.S. A good example in today’s world of an international cartel would be OPEC –
    • the Organization of Petroleum Exporting Countries.
  57. Perfect competition
    • All
    • firms in the industry have perfectly elastic demand curves. There are many
    • firms in the industry and they are free to enter or exit at will. Finally, the
    • “economic profit” margin is zero and even the accounting profits must be razor
    • thin.
  58. If AVC are not met then business should shut down.
    true
  59. Is the Fixed Cost curve is always higher than the Variable Cost curve in most business.
    NO
  60. What characteristics does the “perfectly competitive
    market” have?
    Many competitors, similar products and no one firm has market price control.

    Many competitors, similar products and free market entry and exit for firms
  61. Which industry closely represents the
    perfectly competitive market?
    The online travel industry – Yahoo Travel, Expedia, Priceline.com.
  62. If the demand curve for an individual firm is perfectly elastic, then we can say:   

     

    • The firm has no market pricing power.
    • It is in a state of perfect competition. 

    It can produce as little or as much as it wants and it sells products at the same price.
  63. Is Pure Competition is commonplace in the real world?
    it is mainly a theoretical concept but there are some firms on the internet that come close to it.
  64. How is Marginal Revenue calculated?
    Change in TR/Change in Quantity
  65. What is this saying?

    Marginal Revenue = Average
    Revenue = Price
    Then you have Perfect Competition  

    The demand curve must be totally elastic
  66. How do you calculate average revenue
    TR/Quantity
  67. Economic Profit is calculated how?
    • Total revenue minus
    • explicit and implicit costs.
  68. If we drew a graph that plotted both the Total Revenue and
    Total Cost curves, then we

    could say:
    • You reach a breakeven point that includes a ‘normal profit’ when they intersect
    • with each other
  69. MC=MR
    Point where firm maximizes its profits.
  70. Let’s assume that a firm is going through hard economic
    times. The market price

    generates enough revenues to cover the average variable
    costs, but not all of the total costs.

    Therefore, what should the firm do next?
    Continue to produce as long as we can still cover average variable costs.  

    •  but also think of ways to
    • minimize costs and increase revenues.
  71. Let’s assume that a firm is going through very hard
    economic times. Unfortunately, the

    market price doesn’t even generate enough revenue to cover
    the average variable costs.

    Therefore, what should this firm do?
    Stop all production and shut down immediately  

    • Consider selling the business and get out of
    • the industry
  72. At the point where Marginal Cost just intersects the
    Average Total Cost, and assuming the

    price of the product or service is also at this level, then
    you are:
  73. Your are breaking even with no economic
    profit whatsoever.
  74. When Economic Profit = 0,
    then this means what
  75. The firms in the industry are earning normal profits.  
    • There is no motivation to leave the industry
    • or for new firms to enter the industry.
  76. The federal government has just given everyone a temporary
    income tax cut and quickly

    mailed out the rebate checks. If the demand curve for an a
    product temporarily increases and

    sales spike upward in an industry that had zero economic profits
    for several years, then we

    can conclude:
    • That the temporary spike in sales won't do much good in the
    • long-run because as more firms enter the industry to seize the new profits,
    • then this will eventually bring the economic profits for the industry back to
    • zero.

    • In the short-run times will be good, but in
    • the long-run everyone will return to zero economic profits.
  77. Most firms belong to increasing
    cost industries. This means that:
    The long-run supply curve is upward sloping.  

    • As the industry expands, more firms will enter
    • the industry and will compete for the inputs that are necessary for production.  

    • New firms entering the industry will bid up
    • input resource prices (e.g. labor) and will therefore increase the per-unit
    • costs.
  78. At the lowest point of the
    Long-Run Total Cost Curve, what we can say?
    Management has made the best choices and has minimized long-run ATC. 

    • That Productive Efficiency has been
    • reached when the firm can produce in the least costly way and that they are
    • using the least amount of inputs.  

    • That Allocative Efficiency is reached
    • when the firms use the best combination of inputs so that they can produce the
    • best mix of products and services desired most by society.
  79. When a generic drug becomes available, then price of the drug will fall. Therefore, consumer surplus will rise and what will society experience?
    • An
    • Efficiency Gain
  80. Fixed Costs are expenses that:
    Do not change as production changes.

    • Are contractual obligations such as a fixed
    • rate commercial mortgage loan.
  81. Total Fixed Costs + Total
    Variable Costs = What?
    Total Cost.
  82. What does the term “short-run
    cost” mean
    You only have time to alter one variable of input regarding land, labor or capital.
  83. If you started your own business and had $100,000 in
    revenues and $50,000 in expenses

    (that were verified with receipts), then how would you
    classify these costs?
    • Explicit
    • costs
  84. As you were working in your new business trying to make a
    profit, you passed up an offer

    for a job that would have paid you $75,000 per year in
    salary. This is a good example of:
    Implicit cost & Opportunity cost
  85. The law of diminishing returns
    would agree with what statement:
    • You
    • will get more output as you hire more workers but if you hire too many workers,
    • then each new hire will contribute proportionally less versus the workers that
    • were first hired by you
  86. The Marginal Cost is calculated
    by:
    • Dividing the change in total cost by the change in the quantity
    • produced.

    It is the added cost of producing one more unit of the product or service.
  87. Both the Average Fixed Cost and Average Variable Cost can
    be determined by dividing

    Total Fixed Cost and Total Variable Cost by the units of
    output:
    TRUE
  88. Perfect competition: 1000 of providers of same good, firms are price takers, horizontal demand curves, and earn zero economic profits due to
    Pure Monopoly: Single seller selling unique product, can earn economic profits due its price making power, 100% entry barrier.
    Oligopoly: Only a few firms offer similar or identical product. Have price setting power & enter barriers are high thus forming cartels (acting in unison)
    Monopolistic Competition: Large # of sellers but sell products that are not exactly the same. Entry barriers exist but are low and can determine pricing up to certain extent. Economic profits cannot be earned in the long run due to competitors & low barrier costs. ( Mex Rest) ATC = MC

  89. If Price = ATC then is there a economic profit?
    NO!
  90. Accounting Profits Vs Economic Profits vs Normal Profit
    A firm is making an economic profit if EP is greater than..... TR - O.C - Explicit Costs

    Accounting Profit does not put into account Opportunity costs and is TR - Explicit Costs.

    • Normal profits is where TR = TC
    • not making a profit according to accountants BUT economist include salary into normal profit of what he/she would of earned working for someone else.
  91. What are forms of imperfect competition?
    • Monopoly
    • Oligopoly
    • Monopolistic Competition
  92. In Perfect Competition...
    AR > ATC = Econ Profit
    AR < ATC = Econ Loss
    MC = MR ----- to max profits in short run

    Average revenue aka price

    ENTRY ELIMINATES PROFITS
    EXIT ELIMINATES LOSSES

    Output will always return to MR = MC in the long run due to people being attracted to economic profits and low entry barriers and competition.
  93. Increasing cost industry
    Constant Cost Industry
    Decreasing cost industry


    are AKA....
    • Economies of scale
    • Constant return to scale
    • diseconomies of scale
  94. What does no close substitutes mean?
    That means there are no close subtitutes for that product.
  95. What are two legal barriers to entry?
    Patents & Licenses
  96. Patent length lasts ____ years in all of worlds nations.
    20 years
  97. Why does a monopoly survive?
    Due to entry barriers such as economies of scale, patents & Licenses, the ownership of essential resources, and strategic actions to exclude rivals.
  98. A monopoly has a _________ shifting demand curve
    Downward which means it is a price maker.
  99. Does a monopoly have a supply curve?
    no
  100. What is the socially optimal price? that achieves ______ _____ and still may result in losses?

    What is the fair-return price which yields a normal profit but fails to achieve allocation efficiency?
    • Socially optimal Price = P = MC
    • Fair-return Price = P = ATC
  101. What are the 3 conditions necessary for price discrimination?
    • 1. Monopoly power
    • 2. Able to separate buyers based on demand elasticities
    • 3. Inabilitie of buyers to resell the product
  102. WHAT IS EXCESS CAPACITY?
    plant equipment that are underused because firms are producing less than the minimal ATC output.
  103. Mutual Interpendence
    Firms profits depend on not only their own price but that of other competitors.
  104. Interindustry competition
    competition of two produts used with two different industries
  105. Price leadership
    Where one firm may adjust their price ( the leader in the industry) and then the others follow. This way it isnt blatantly collusion.

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