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Questions and Answers
What does the law of diminishing marginal returns state?
What does the law of diminishing marginal returns state?
- Holding all inputs constant while using only one will maximize outputs.
- Increasing one input while holding others constant will eventually decrease outputs.
- Adding more of one input will increase outputs initially, but may decrease them after a point. (correct)
- Using multiple inputs will always result in increasing outputs consistently.
Which of the following best describes accounting costs?
Which of the following best describes accounting costs?
- Accounting costs are equivalent to economic costs in all scenarios.
- Accounting costs are calculated by subtracting opportunity costs from total expenditures.
- Accounting costs include only direct expenses incurred.
- Accounting costs consist of actual expenditures along with depreciation and expenses. (correct)
How do economic costs differ from accounting costs?
How do economic costs differ from accounting costs?
- Economic costs are always lower than accounting costs.
- Economic costs include accounting costs plus opportunity costs. (correct)
- Economic costs include only direct monetary costs.
- Economic costs exclude direct expenditures.
What is an essential condition for the law of diminishing marginal returns to apply?
What is an essential condition for the law of diminishing marginal returns to apply?
Which statement regarding the relationship between inputs and outputs is accurate?
Which statement regarding the relationship between inputs and outputs is accurate?
What does the marginal cost (Mc) represent in terms of total cost and output?
What does the marginal cost (Mc) represent in terms of total cost and output?
What happens when marginal cost (Mc) is greater than average cost (Ac)?
What happens when marginal cost (Mc) is greater than average cost (Ac)?
Which condition applies when marginal cost (Mc) equals average cost (Ac)?
Which condition applies when marginal cost (Mc) equals average cost (Ac)?
In the context of diminishing marginal returns, what occurs if marginal cost (Mc) is less than average cost (Ac)?
In the context of diminishing marginal returns, what occurs if marginal cost (Mc) is less than average cost (Ac)?
Using the marginal cost formula, how would you express $Mc$ mathematically?
Using the marginal cost formula, how would you express $Mc$ mathematically?
At which level of production does marginal cost begin to increase according to the provided data?
At which level of production does marginal cost begin to increase according to the provided data?
What is the marginal cost at an output level of 4?
What is the marginal cost at an output level of 4?
If the total cost rises from $26$ to $35$ as output increases from $4$ to $5$, what is the marginal cost associated with this change?
If the total cost rises from $26$ to $35$ as output increases from $4$ to $5$, what is the marginal cost associated with this change?
In which market context is the tendency to cooperate greater?
In which market context is the tendency to cooperate greater?
What is one likely factor that affects the cooperation tendency among firms?
What is one likely factor that affects the cooperation tendency among firms?
What does the term 'Nash outcome' refer to in the context of game theory?
What does the term 'Nash outcome' refer to in the context of game theory?
In a sequential game, which condition typically affects the actions of the players involved?
In a sequential game, which condition typically affects the actions of the players involved?
Which scenario exemplifies a contracting market?
Which scenario exemplifies a contracting market?
In a monopolistic competition, how do firms compete in the market?
In a monopolistic competition, how do firms compete in the market?
What happens to the market demand when new firms enter a monopolistic competition?
What happens to the market demand when new firms enter a monopolistic competition?
In the short run, how do individual firms maximize profits?
In the short run, how do individual firms maximize profits?
What occurs to the demand curve of existing firms when new firms enter the market?
What occurs to the demand curve of existing firms when new firms enter the market?
In monopolistic competition, why do consumers benefit?
In monopolistic competition, why do consumers benefit?
What is the shape of the demand curve faced by an individual firm in monopolistic competition?
What is the shape of the demand curve faced by an individual firm in monopolistic competition?
At which point does equilibrium in the long run occur for a firm in monopolistic competition?
At which point does equilibrium in the long run occur for a firm in monopolistic competition?
Why do firms prefer monopolistic competition over perfect competition?
Why do firms prefer monopolistic competition over perfect competition?
Under Hotelling's Boardwalk model, how do ice cream sellers attract consumers?
Under Hotelling's Boardwalk model, how do ice cream sellers attract consumers?
In monopolistic competition, how does the entry of new firms affect existing firms' prices?
In monopolistic competition, how does the entry of new firms affect existing firms' prices?
At what point does a perfectly competitive firm maximize its profit?
At what point does a perfectly competitive firm maximize its profit?
Which condition indicates that a firm should continue producing in the short run?
Which condition indicates that a firm should continue producing in the short run?
What happens when price is equal to average total cost at the break-even point?
What happens when price is equal to average total cost at the break-even point?
If a firm is producing where P < MC, what should the firm do?
If a firm is producing where P < MC, what should the firm do?
During the short run, a perfectly competitive firm will produce a quantity where P equals
During the short run, a perfectly competitive firm will produce a quantity where P equals
What indicates a firm's production decision if P is greater than average variable cost but less than average total cost?
What indicates a firm's production decision if P is greater than average variable cost but less than average total cost?
What is the economic implication if a firm experiences P < ATC over a sustained period?
What is the economic implication if a firm experiences P < ATC over a sustained period?
In the long run, what is expected of a perfectly competitive firm making economic profits?
In the long run, what is expected of a perfectly competitive firm making economic profits?
If a firm is operating at P = MC and realizes a loss, what does this imply about its variable costs?
If a firm is operating at P = MC and realizes a loss, what does this imply about its variable costs?
At the point of maximizing profits, total revenue equals total cost when the firm is
At the point of maximizing profits, total revenue equals total cost when the firm is
Which statement is true about a firm's short-run supply curve in perfect competition?
Which statement is true about a firm's short-run supply curve in perfect competition?
If all firms in a perfectly competitive market face the same cost structure and enter at the same time, what will likely happen in the long run?
If all firms in a perfectly competitive market face the same cost structure and enter at the same time, what will likely happen in the long run?
Which of the following best describes the condition for a firm to produce in the long run in a perfectly competitive market?
Which of the following best describes the condition for a firm to produce in the long run in a perfectly competitive market?
What is the primary factor that determines a firm's supply in a perfectly competitive market?
What is the primary factor that determines a firm's supply in a perfectly competitive market?
When should a firm shut down its operations in the short run?
When should a firm shut down its operations in the short run?
Study Notes
Law of Diminishing Marginal Returns
- If more than one input is used in production, holding all other inputs constant, outputs will increase but eventually at a diminishing rate.
Costs
- Accounting costs: Actual expenditures plus depreciation expenses
- Economic costs: Accounting cost plus opportunity cost.
Marginal Cost
- The change in total cost resulting from an incremental change in output: MC = (ΔC / ΔQ)
Shapes of Cost Curves
- When the incremental change in total cost is greater than the average cost, the average cost is increasing.
- When the marginal cost is less than the average cost, the average cost is decreasing.
- When the marginal cost is equal to the average cost, the average cost is at its minimum.
Marginal Average Rule
- If MC > AC, AC is increasing
- If MC < AC, AC is decreasing
- If MC = AC, AC is at minimum
Short-Run Cost Curves
- For a perfectly competitive firm, P = MR for all output (Q).
- A perfectly competitive firm maximizes profit at the quantity where MR = MC.
- The profit-maximizing rule is to produce where MR = MC.
- Profit = TR - TC = (P - AC)Q
- If P > AVC, the firm should produce the quantity where P = MC.
- If P = AVC, the firm breaks even.
- If P < AVC, the firm should shut down.
Long-Run Cost Curves
- In the long run, all inputs can be changed.
- A firm will adjust its production to the level where P = MC in the long run.
- New firms will enter the market if profits are positive, causing the demand for existing firms to decrease.
- Firms will exit the market if profits are negative, causing the demand for existing firms to increase.
- Equilibrium in the long run is where P = MC = AC.
- Social welfare is maximized at the point where P = MC.
- Deadweight loss is the loss in social welfare due to a market not being in equilibrium.
Monopolistic Competition and Perfect Competition
- Firms in monopolistically competitive markets differentiate their products to create brand loyalty, but still face competition from similar products.
- Firms in monopolistic competition produce at a higher price than firms in perfect competition, but offer more variety.
Hotelling's Boardwalk
- Hotelling's Boardwalk example demonstrates that in a market with two competing firms, each firm locates itself in a way that maximizes its share of the market.
- The tendency to cooperate is greater in a growing market than in a contracting market.
Sequential Game
- A sequential game is a game where players take turns making decisions.
- The first player's decision may affect subsequent decisions.
Dominant Firm
- A dominant firm is a firm that has a large market share and can therefore influence market prices.
- The tendency to cooperate is greater when the market contains a dominant firm.
- Uncertainty can lead to a decrease in cooperation in a sequential game.
- Nash Outcome: Players can benefit from cooperation, but the best strategy for each individual player is to not cooperate.
Backward Induction
- Analyzing from the end of a game to its beginning.
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Description
This quiz explores key concepts in economics including the law of diminishing marginal returns, accounting and economic costs, and the behavior of cost curves. Understand how marginal cost interacts with average cost and the implications for competitive firms in the short run.
