Economics Chapter 14: Firms in Competitive Markets

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Questions and Answers

Refer to Figure 14-1. Let Q represent the quantity of output and suppose the price of the good is $125. Then

marginal revenue is $125 at Q = 270.

marginal revenue is $125 at Q = 322.

marginal revenue is $125 at Q = 515.

All of the above are correct. (correct)

Refer to Figure 14-1. Suppose the price of the good is $175. If the firm produces and sells 515 units of output, its total revenue is

$100,525.

$90,125. (correct)

$75,250.

$84,500.

Refer to Figure 14-1. When the price of the good is $175, the firm's maximum profit is

$16,500.

$20,375.

$90,125.

$25,750. (correct)

Refer to Figure 14-1. Suppose AVC = $113 when the firm produces 515 units of output. Then the firm's fixed cost amounts to

$6,180 and its profit amounts to $25,750. Signup and view all the answers

Refer to Figure 14-1. Suppose the price of the good is $175. If the firm produces and sells 514 units of output, its profit is approximately

$25,750. Signup and view all the answers

Refer to Figure 14-1. The firm will shut down in the short run if the price of the good is

$75. Signup and view all the answers

Refer to Figure 14-1. In the long run, the firm will exit the market if the price of the good is

All of the above are correct. Signup and view all the answers

Refer to Figure 14-1. In the short run, the firm's maximum profit (or minimum loss) is the same at which of the following pairs of prices?

$65 and $75 Signup and view all the answers

Refer to Figure 14-1. At what price is the firm's maximum profit zero?

$100 Signup and view all the answers

For a firm, marginal revenue minus marginal cost is equal to

change in profit. Signup and view all the answers

A competitive firm is currently producing a quantity of output at which marginal revenue exceeds marginal cost. In order to increase its profit, the firm should

increase its quantity of output. Signup and view all the answers

In a market with a fixed number of firms, as long as price is

above average variable cost, each firm's marginal-cost curve is its supply curve. Signup and view all the answers

Suppose the long-run supply curve for a good is upward-sloping. The upward slope could be explained by

increases in production costs resulting from more firms coming into the market. Signup and view all the answers

Suppose ABC Aluminum Inc. owns 80% of the world's bauxite, a mineral used in the production of aluminum. Which of the following reasons describes the fundamental barrier to entry for the aluminum industry?

monopoly resources Signup and view all the answers

Exclusive ownership of a key resource

is a potential but rare cause of a monopoly. Signup and view all the answers

Which of the following is NOT a difference between monopolies and perfectly competitive markets?

Monopolies choose to produce the quantity at which marginal revenue equals marginal cost while perfectly competitive firms do not. Signup and view all the answers

Refer to Figure 15-1. Which of the following reasons describes the fundamental barrier to entry for the monopoly in the figure?

the production process Signup and view all the answers

When a monopolist reduces the quantity of output it produces and sells,

the price of its output increases. Signup and view all the answers

Refer to Table 15-1. The monopolist's total revenue from selling 4 units of output is

$48. Signup and view all the answers

Refer to Table 15-1. The monopolist's marginal revenue from selling the second unit of output is

$14. Signup and view all the answers

Refer to Table 15-1. The monopolist's marginal revenue is

always less than the price of its good. Signup and view all the answers

Refer to Table 15-1. When the price effect on revenue is greater than the output effect, marginal revenue is

negative. This occurs with the 6th unit of output. Signup and view all the answers

Refer to Table 15-1. The monopolist's profit-maximizing level of output is

3 units. Signup and view all the answers

Refer to Table 15-1. Suppose the firm depicted in the table is selling a prescription drug for which it had a patent, but the patent has expired. As new firms enter the market and sell the generic version of this drug competitively, what quantity will be sold?

6 units Signup and view all the answers

Refer to Scenario 15-1. How much profit will the museum earn if it charges all customers $8 for admission?

$400. Signup and view all the answers

Refer to Scenario 15-1. How much profit will the museum earn if it engages in price discrimination?

$800. Signup and view all the answers

Refer to Scenario 15-1. How much additional profit will the museum earn if it engages in price discrimination compared to charging each customer $8 for admission?

$400. Signup and view all the answers

The breakfast cereal industry, with its concentration ratio of 78%, would best be described as a(n)

oligopoly. Signup and view all the answers

Which of the following is most likely sold in a monopolistically competitive market?

sunglasses Signup and view all the answers

Refer to Scenario 16-1. What are the concentration ratios for these industries?

Industry A: 68%, Industry B: 79% Signup and view all the answers

Refer to Scenario 16-1. Which of the following statements is correct regarding the competitiveness of these two industries?

Industry A is more competitive than Industry B. Signup and view all the answers

Refer to Figure 16-1. Which of the graphs illustrates the demand curve most likely faced by a firm in a monopolistically competitive market?

Panel B Signup and view all the answers

Refer to Figure 16-1. Which of the graphs illustrates a relatively elastic, though not perfectly elastic, demand curve consistent with a market that has many substitute products?

Panel B Signup and view all the answers

Refer to Figure 16-1. Which of the following sets of explanations best describes the differences between the graphs above?

Panel A: perfectly competitive firm's demand curve Panel B: monopolistically competitive firm's demand curve Panel C: monopoly firm's demand curve Panel D: supply curve Signup and view all the answers

Refer to Figure 16-2. The profit for this firm is

$500. Signup and view all the answers

Refer to Figure 16-2. How much consumer surplus will be derived from the purchase of this product at the monopolistically competitive price?

$250. Signup and view all the answers

Refer to Figure 16-2. The graph depicts a monopolistically competitive firm in the short run. Which of the following explanations best describes the long run adjustment?

More firms will enter this market and each firm will have a smaller share of the total market demand, shifting this firm's demand curve to the left. Signup and view all the answers

Refer to Scenario 16-2. As a result of the new Ike's Ice Cream parlor, consumers living in and visiting Mayville are likely to experience a

product-variety externality, which benefits consumers. Signup and view all the answers

Refer to Scenario 16-2. As a result of the new Ike's Ice Cream parlor, existing ice cream shops located in Mayville are likely to experience a

business-stealing externality, which harms producers. Signup and view all the answers

Refer to Figure 16-3. What is the efficient scale of production?

28 units Signup and view all the answers

Refer to Figure 16-3. How much cost per unit could this firm save by producing the efficient level of output rather than the profit-maximizing level of output?

$2 Signup and view all the answers

AllClean knows that it produces and sells very effective laundry detergent. NotQuiteWhite knows that it produces and sells ineffective laundry detergent. According to the signaling theory of advertising,

AllClean has an incentive to spend a large amount of money on advertising its detergent, but NotQuiteWhite does not. Signup and view all the answers

Because oligopoly markets have only a few sellers, the actions of any one seller

Both b) and c) are correct. Signup and view all the answers

Game theory is necessary to understand which kinds of markets?

oligopoly Signup and view all the answers

If two firms comprise the entire soft drink market, the market would be a(n)

duopoly. Signup and view all the answers

Suppose that George and Laura are duopolists. George is producing 300 units of output, and Laura is producing 400 units of output. When Laura produces 400 units, George maximizes profit by producing 300 units. When George produces 300 units of output, Laura maximizes profit by producing 400 units. George and Laura are

at a Nash equilibrium. Signup and view all the answers

Study Notes

Chapter 14 Firms in Competitive Markets

Marginal Revenue: The change in total revenue from selling one more unit of output.
Perfect Competition: A market structure with many buyers and sellers, identical products, free entry and exit, and price takers.
Price Takers: Firms that must accept the market price for their goods, as they cannot influence the price.
Total Revenue: Price multiplied by quantity sold.
Profit Maximization: In perfect competition, firms maximize profit by producing at the level where marginal cost equals marginal revenue.
Shut-down: A firm's decision to cease production in the short-run if the price is below average variable cost.
Long-run: The period of time when all factors of production are variable.

Multiple Other Chapters

Monopoly: A market structure with a single seller, a unique product with no close substitutes, and significant barriers to entry.
Natural Monopoly: A monopoly that arises because a single firm can supply the entire market at a lower cost than multiple firms.
Barriers to Entry: Factors that make it difficult for new firms to enter a market.
Total Revenue (TR): Price multiplied by quantity.
Marginal Revenue (MR): Change in total revenue from selling one more unit of output.
Profit Maximizing: Occurs when marginal revenue equals marginal cost.
Average Variable Cost (AVC): Total variable cost divided by quantity.
Average Total Cost (ATC): Total cost divided by quantity.
Variable Cost (VC): Costs that vary with the level of output.
Fixed Costs (FC): Costs that do not vary with the level of output.

Measurement of a Nation's Income

GDP (Gross Domestic Product): The total market value of all final goods and services produced within a country in a given period of time.
Circular-Flow Diagram: Illustrates the flow of goods, services, income, and payments between businesses, households, government, and the rest of the world.
Intermediate Goods: Goods used in the production of other goods. Excluded from GDP calculation
Final Goods: Goods used by consumers or businesses (not production of other goods)
U.S. GNP: Includes output produced by U.S. citizens domestically AND abroad, excludes production of foreigners working in the U.S.

Measuring the Cost of Living

CPI (Consumer Price Index): A measure of the average change in prices over time for a basket of goods and services.
Base Year: The year used as a reference point for comparing prices in other years. The CPI is set to 100 in the base year.

Production and Growth

Real GDP per capita: Measure of economic output adjusted for population growth and inflation
Technological progress: Improvements in the ability to produce goods and services
Human Capital: The skills, knowledge, and experience of a worker.
Physical Capital: The stock of tools, machinery, and equipment used in production.

Unemployment

Labor Force: All individuals aged 16 or older who are either employed or unemployed but actively seeking work.
Labor-Force Participation Rate: The percentage of the adult population that is in the labor force.
Unemployment Rate: The percentage of the labor force that is unemployed.
Discouraged Workers: Individuals who are not actively seeking employment, but would like to be employed

The Monetary System

M1 Money Supply: The most narrow measure of money, consisting of currency, checking deposits, and traveler's checks (most liquid assets).
M2 Money Supply: Broader measure including M1 and less liquid assets ( savings deposits, time deposits, and money market deposit accounts)
Money Multiplier: The amount by which the money supply expands as a result of an increase in reserves.
Required Reserve Ratio: The fraction of deposits that a bank is legally obligated to keep in reserve.
Open-Market Operations: The buying or selling of U.S. government bonds by the Federal Reserve to influence the money supply.
Discount Rate: The interest rate at which commercial banks can borrow money directly from the Federal Reserve.
Federal Reserve: The central bank of the United States.

Money Growth and Inflation

Inflation: The persistent rise in the general level of prices over time.
Consumer Price Index (CPI): A basket of goods and services to measure prices over a period of time. The average change in prices. A measure of inflation.
Velocity of Money: The rate at which money changes hands.

Short-Run Trade-Off between inflation and Unemployment

Aggregate Demand: Total demand for goods and services in the economy.
Aggregate Supply: Total supply of goods and services in the economy.
Short-run Phillips Curve: A curve showing the short-run trade-off between inflation and unemployment, steeper the curve, the less the trade-off.

Six Debates over Macroeconomic Policy

Fiscal policy: Government spending and taxation to influence the economy.
Monetary policy: Manipulation of the money supply and interest rates to influence the economy.
Stabilization policy: Policies designed to reduce the severity of recessions and booms.
Budget deficits: Government spending exceeding government revenues.
Debt to GDP ratio: The size of the debt relative to GDP

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This quiz explores key concepts from Chapter 14 on Firms in Competitive Markets. Dive into the principles of marginal revenue, perfect competition, and profit maximization. Test your understanding of how firms operate in such market structures and their decision-making processes.