Cost Concepts and Perfect Competition
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Questions and Answers

What is the formula for Average Total Cost?

Fixed Cost + Variable Cost

Define Marginal Cost.

Change total cost / change quantity produced

What is the formula for Average Product of Labor?

Quantity produced / labor output

What does marginal cost equal?

<p>the change in total cost given a one-unit change in output.</p> Signup and view all the answers

If a firm is experiencing diminishing returns to labor, marginal cost must be increasing.

<p>True</p> Signup and view all the answers

What causes the short-run average total cost curve to have a U-shape?

<p>diminishing marginal returns</p> Signup and view all the answers

Which curve passes through the minimum point of the average total cost curve?

<p>the marginal cost curve</p> Signup and view all the answers

When marginal cost is greater than average cost, average cost is rising.

<p>True</p> Signup and view all the answers

What happens when there are economies of scale?

<p>a more-than-proportionate increase in output.</p> Signup and view all the answers

When do diminishing returns occur?

<p>the marginal product of an input is falling.</p> Signup and view all the answers

Describe the control an individual seller in a perfectly competitive market has.

<p>has control over the quantity it sells but no control over the price.</p> Signup and view all the answers

What are firms assumed to maximize in economics?

<p>profits</p> Signup and view all the answers

How are profits calculated?

<p>total revenue minus total costs.</p> Signup and view all the answers

For a firm in a perfectly competitive market, what is marginal revenue always equal to?

<p>market price</p> Signup and view all the answers

To maximize profits, how long does a firm increase its output?

<p>as long as marginal revenue is greater than marginal cost.</p> Signup and view all the answers

When does a firm maximize its profits?

<p>marginal revenue equals marginal cost.</p> Signup and view all the answers

What happens to economic profits in the long run in a competitive market, if firms earn economic profits in the short run?

<p>disappear because the market supply curve will shift to the right.</p> Signup and view all the answers

In a perfectly competitive industry where firms are making economic losses, some firms in the industry may exit the industry.

<p>True</p> Signup and view all the answers

All other things equal, when firms enter a perfectly competitive market, market supply increases, and market price decreases.

<p>True</p> Signup and view all the answers

What is at its minimum point when a perfectly competitive market is at the long-run equilibrium?

<p>average total cost</p> Signup and view all the answers

Match long-run outcomes with their effect on the market supply curve.

<p>All firms earn zero economic profits. = does not shift Some firms earn positive economic profits. = shift right Some firms incur economic losses. = shift left</p> Signup and view all the answers

What is the formula for economic profit?

<p>accounting profit − implicit cost.</p> Signup and view all the answers

Choose the most complete and accurate response: At the long-run perfectly competitive equilibrium, what is the relationship between price, marginal revenue, average cost, and minimum average cost?

<p>P = MR = AC = minimum (AC).</p> Signup and view all the answers

How do competitive firms maximize profits?

<p>producing the output level at which marginal revenue equals marginal cost</p> Signup and view all the answers

Which of the following is true of a monopoly? (Select all that apply.)

<p>There are no close substitutes for its product.</p> Signup and view all the answers

A firm has market power when it can what?

<p>change its price without losing all its market share.</p> Signup and view all the answers

Why does marginal revenue lie below the demand curve for a monopoly?

<p>price declines as the firm lowers price to raise output</p> Signup and view all the answers

How does a monopoly maximize profits?

<p>producing the output level at which marginal revenue equals marginal cost</p> Signup and view all the answers

To maximize profits, a monopoly produces less output than a competitive firm.

<p>True</p> Signup and view all the answers

What kind of market is it when a single producer can produce large quantities efficiently because of extensive economies of scale?

<p>natural monopoly</p> Signup and view all the answers

At the monopoly equilibrium, a portion of the consumer surplus has been transferred to the monopolist.

<p>True</p> Signup and view all the answers

What is an industry called when there are a few firms and each of them reacts to the other firms' moves?

<p>oligopoly</p> Signup and view all the answers

In a monopolistically competitive market, firms produce what?

<p>differentiated products.</p> Signup and view all the answers

What is the difference between short-run demand and long-run demand for a firm in monopolistic competition?

<p>Short-run demand might result in profits or losses whereas long-run demand results in no economic profit or loss.</p> Signup and view all the answers

Compared with a monopoly, a monopolistically competitive industry in long-run equilibrium results in what?

<p>a lower price and greater output.</p> Signup and view all the answers

Compared with perfect competition, a monopolistically competitive industry in long-run equilibrium results in what?

<p>a higher price and lower output.</p> Signup and view all the answers

What characterizes an oligopoly?

<p>a few sellers</p> Signup and view all the answers

What is often used to explain firm behavior in an oligopoly?

<p>Game theory</p> Signup and view all the answers

When is collusion most likely to occur?

<p>firms interact over a long period of time.</p> Signup and view all the answers

How do airlines practice price discrimination?

<p>Airlines offer different fares at different times. They also charge different fares for first class, business class, and coach.</p> Signup and view all the answers

Study Notes

Cost Concepts

  • Average Total Cost (ATC) = Fixed Cost + Variable Cost
  • Average Fixed Cost (AFC) = Fixed Cost / Quantity Produced
  • Marginal Cost (MC) = Change in Total Cost / Change in Quantity Produced
  • Average Product of Labor (APL) = Quantity Produced / Labor Output
  • Marginal Cost equals the change in total cost given a one-unit change in output.
  • Diminishing returns to labor cause marginal cost to increase.
  • Short-run ATC curves are U-shaped due to diminishing marginal returns.
  • The MC curve intersects the ATC curve at the ATC curve's minimum point.
  • When MC > ATC, ATC is rising.
  • Economies of scale mean a more-than-proportionate increase in output.
  • Diminishing returns occur when marginal product of an input falls.

Perfect Competition

  • In perfect competition, individual sellers have no control over price but can control quantity.
  • Firms aim to maximize profits.
  • Profit = Total Revenue - Total Costs
  • In perfect competition, marginal revenue = market price
  • Firms increase output as long as marginal revenue > marginal cost.
  • Profit maximization occurs when marginal revenue equals marginal cost.
  • Short-run economic profits drive new firms into the market, shifting supply right and lowering price, eliminating profits in the long run.
  • If firms lose money in the short run, some might exit the industry, shifting supply left and raising price, eliminating losses.
  • Long-run equilibrium in perfect competition has all firms earning zero economic profit when price equals minimum average total cost.

Monopoly

  • Monopolies have no close substitutes, high barriers to entry, and market power.
  • Firms can change price without losing all market share.
  • Marginal revenue is below the demand curve because price declines as output increases.
  • Monopolies maximize profits where marginal revenue equals marginal cost.
  • Monopolies produce less output than competitive firms.
  • A natural monopoly results from extensive economies of scale.
  • In monopoly equilibrium, some consumer surplus is transferred to the monopolist.

Imperfect Competition

  • Oligopoly has a few sellers who react to each other's moves.
  • Game theory is used to explain oligopoly behavior.
  • Collusion is more likely when firms interact frequently.
  • Monopolistic competition involves differentiated products.
  • Long-run demand results in zero economic profit.
  • Monopolistic competition has lower price and greater output than monopoly, but higher price and lower output than perfect competition.

Cost and Profit

  • Economic profit is equal to accounting profit minus implicit cost.
  • Long-run competitive equilibrium: P = MR = AC = minimum (AC).
  • To maximize profits, a competitive firm produces at the output level where marginal revenue equals marginal cost.

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Description

This quiz covers essential economic concepts related to cost structures and market dynamics under perfect competition. You'll explore average total cost, marginal cost, and the firm's role in a competitive market. Test your understanding of these fundamental principles in economics.

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