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Seminar 4: Firm behavior and market structure

Chapter 13: The Costs of Production

Chapter 14: Firms in Competitive Markets

Chapter 15: Monopoly

Chapter 16: Monopolistic Competition

Chapter 17: Oligopoly

Part 1: True/False Questions

1. Profit equals marginal revenue minus marginal cost.
2. The difference between economic profit and accounting profit is that economic profit is calculated based on both implicit and explicit costs whereas accounting profit is calculated based on explicit costs only.
3. Implicit costs are costs that do not require an outlay of money by the firm.
4. Diminishing marginal product exists when the total cost curve becomes flatter as outputs increases.
5. The average fixed cost curve is constant.
6. In the short run, if a firm produces nothing, total costs are zero.
7. If the marginal cost of producing the tenth unit of output is $2.50, and if the average total cost of producing the tenth unit of output is $3, then at ten units of output, average total cost is rising.
8. The average total cost curve is unaffected by diminishing marginal product.
9. The marginal cost curve intersects the average total cost curve at the minimum point of the average total cost curve.
10. Average total cost reveals how much total cost will change as the firm alters its level of production.
11. For a firm operating in a perfectly competitive industry, marginal revenue and average revenue are equal.
12. Because there are many buyers and sellers in a perfectly competitive market, no one seller can influence the market price.
13. In competitive markets, firms that raise their prices are typically rewarded with larger profits.
14. Firms in a competitive market are said to be price takers because there are many sellers in the market and the goods offered by the firms are very similar if not identical.
15. Firms operating in perfectly competitive markets produce an output level where marginal revenue equals marginal cost.
16. A firm is currently producing 100 units of output per day. The manager reports to the owner that producing the 100th unit costs the firm $5. The firm can sell the 100th unit for $4.75. The firm should continue to produce 100 units in order to maximize its profits (or minimize its losses).
17. A firm operating in a perfectly competitive industry will continue to operate in the short run but earn losses if the market price is less than that firm’s average total cost but greater than the firm’s average variable cost.
18. A firm will shut down in the short run if revenue is not sufficient to cover its variable costs of production.
19. A popular resort restaurant will maximize profits if it chooses to stay open during the less-crowded “off season” when its total revenues exceed its variable costs.
20. The marginal firm in a competitive market will earn zero economic profit in the long run.
21. Even with market power, monopolists cannot achieve any level of profit they desire because they will sell lower quantities at higher prices.
22. The fundamental cause of monopolies is barriers to entry.
23. The amount of power that a monopoly has depends on whether there are close substitutes for its product.
24. A natural monopoly has economies of scale for most if not all of its range of output.
25. Copyrights and patents are examples of barriers to entry that afford firms monopoly pricing powers.
26. A monopolist maximizes profit by producing an output level where marginal cost equals price.
27. Like competitive firms, monopolies choose to produce a quantity in which marginal revenue equals marginal cost.
28. A monopolist does not have a supply curve because the firm’s decision about how much to supply is impossible to separate from the demand curve it faces.
29. The socially efficient quantity is found where the demand curve intersects the marginal cost curve.
30. A monopoly creates a deadweight loss to society because it produces less output than the socially efficient level.
31. Suppose a profit-maximizing monopolist faces a constant marginal cost of $10, produces an output level of 100 units, and charges a price of $50. The socially efficient level of output is 200 units. Assume that the demand curve and marginal revenue curve are the typical downward-sloping straight lines. The monopoly deadweight loss equals $4,000.
32. Product differentiation always leads to some measure of market power.
33. Monopolistically competitive firms, like monopoly firms, maximize their profits by charging a price that exceeds marginal cost.
34. A firm in a monopolistically competitive market can earn short-run profits but not long-run profits.
35. In the long run, monopolistically competitive firms produce where demand equals marginal cost.
36. Free entry eliminates long-run profits for firms in competitive and monopolistic industries.
37. The essence of an oligopolistic market is that there are only a few sellers.
38. For a firm, strategic interactions with other firms in the market become more important as the number of firms in the market becomes larger.
39. If all of the firms in an oligopoly successfully collude and form a cartel, then total profit for the cartel is equal to what it would be if the market were a monopoly.
40. If two players engaged in a prisoner’s dilemma game are likely to repeat the game, they are more likely to cooperate than if they play the game only once.

Part 2: Short Answer Question

1.

If the average total cost curve is falling, what is necessarily true of the marginal cost curve? If the average total cost curve is rising, what is necessarily true of the marginal cost curve?

2.

Describe the difference between average revenue and marginal revenue. Why are both of these revenue measures important to a profit-maximizing firm?

3.

Use a graph to demonstrate the circumstances that would prevail in a competitive market where firms are earning economic profits. Can this scenario be maintained in the long run? Explain your answer.

4.

Use a graph to demonstrate the circumstances that would prevail in a perfectly competitive market where firms are experiencing economic losses. Identify costs, revenue, and the economic losses on your graph. Using your graph, determine whether an individual firm will shut down in the short run, or choose to remain in the market. Explain your answer.

5.

At its current level of production a profit-maximizing firm in a competitive market receives $12.50 for each unit it produces and faces an average total cost of $10. At the market price of $12.50 per unit, the firm's marginal cost curve crosses the marginal revenue curve at an output level of 1,000 units. What is the firm's current profit? What is likely to occur in this market and why?

6.

If identical firms that remain in a competitive market over the long run make zero economic profit, why do these firms choose to remain in the market?

7.

What is the deadweight loss due to profit-maximizing monopoly pricing under the following conditions: The price charged for goods produced is $10. The intersection of the marginal revenue and marginal cost curves occurs where output is 100 units and marginal revenue is $5. The socially efficient level of production is 110 units. The demand curve is linear and downward sloping, and the marginal cost curve is constant.

8.

Use a graph to demonstrate why a profit-maximizing monopolistically competitive firm must operate at excess capacity. Explain why a perfectly competitive firm is not subject to the same constraint.

9.

List five goods that are likely sold in a monopolistically competitive market.

10.

A firm in the perfectly competitive market has a total cost function The market price is 1200.

1. What is the quantity that this firm maximize its profits? Compute this profit.
2. What are the quantity and price where the firm is break-even (earn zero profit).
3. What are the quantity and price where the firm shut-downs?
4. Draw a figure showing the supply curve of this firm.

11.

A monopolist has a total cost function and the demand curve P=70-Q

1. What is the fixed cost?
2. What is the marginal revenue function?
3. What are the quantity and price that the monopolist maximze its profit?
4. Compute the deadweight loss in this case.
5. What are the quantity and price that the monopolist maximze its revenue?