AP Micro Unit IV Review

2014

What will a perfectly competitive profit maximizing

firm do if the market price rises?

Increase production to where MC again equals MR

(or P)

How much economic profit will a perfectly competitive firm earn in the long run?

None – zero – zip…

Identify two common reasons why gov’ts will regulate monopolies.

Charge a higher price than the competitive market price,

output doesn’t reach greatest social benefit, output doesn’t

account for externalities

Identify two characteristics of a perfectly competitive

industry.

Easy entry/exit, perfectly elastic demand for the firm,

downward sloping demand for the industry, no product

differentiation (homogeneous)

What is the relationship between price and MR for a

perfect monopoly? How does this relate to socially

optimal output?

P > MR for perfect monopoly, so MC=MR will stop short of

socially optimal output (which is where MC=MB)

If price drops in a perfectly competitive market, a firm should only keep producing

if…

Price remains higher than AVC (should shut down if you’re not covering AVC)

In perfect competition in the long run, ATC will equal…

MR and MC

Why are monopolistically competitive firms

allocatively inefficient in the long run?

They charge a price greater than their MC

What is the simplest definition of productive

efficiency?

MC=ATC (or minimum ATC – where marginal revenue product

is same for all inputs)Means the firm is producing in the

most efficient manner

What is the simplest definition of allocative

efficiency?

Marginal Cost = Marginal Benefit (often assume MB=P)

This means society is making best use of it’s resources – should also be where consumer & producer

surplus are maximized

What impact would a per unit subsidy have on a

monopolist?

Encourage them to increase output

What do gov’ts usually need to do if they want a

monopoly to produce at a socially beneficial point where P is below ATC?

Subsidize them for the difference

What is the relationship between MC and minimum

ATC for both purely competitive firms and

monopolies?

MC will cross (=) ATC at minimum point

Firms in a monopolistically competitive industry create

DWL because they…

Restrict their output level to maximize profits

What will happen to short run price and output if

consumer income decreases?

Both will decrease, and in thelong run firms will exit

the industry

What is the relationship between P and MR for the

monopolist?

P > MR

What would happen to price and output in a perfectly competitive industry if it

were taken over by a monopoly?

Price would go up, output quantity would decrease

Interedependence among firms is most strongly

present in which market model?

Oligopoly

A perfectly competitive profit-maximizing firm will always produce where…

MC = MR (which will also equal P)

Advertising, product promotion, and changes in the real or

perceived characteristics of a product refers to what type of

competition?

Nonprice competition

Large number of firms and low entry barriers are characteristics

of what?

Monopolistic competition

What is the process by which new firms and new products replace

existing dominant firms and products?

Creative destruction

What distinguishes the short run from the long run in pure

competition?

Firms can enter and exit the market in the long run, but

not in the short run.

A firm can sell as much output as it chooses at the existing price if

the demand curve is…

Perfectly elastic

When does a firm reach the break-even point?

Where the total revenue and total cost are equal

A purely competitive firm is a "price ______.”

taker

A monopolist is a "price _____.

maker

What happens to marginal cost when a monopolist is at the profit-

maximizing output level?

Marginal cost exceeds price

What do economies of scale, the ownership of essential raw

materials, and patents have in common?

They are all barriers to entry.

In the long run a pure monopolist will maximize profits by producing that output at which marginal cost

is equal to what?

Marginal revenue

What happens to marginal cost when a monopolist is at the profit-

maximizing output level?

Marginal cost exceeds price

What is the profit-maximizing output level produced by an

unregulated monopoly?

Less than the socially optimal level, since the price paid by

consumers exceeds the firm’s marginal cost

A firm will earn zero economic profits in long-run equilibrium if it

sells its output in what kind of market?

Perfectly competitive

What will cause an unregulated monopolist to produce a more allocatively efficient level of

output?

A subsidy that increases as output increases

Entry of new firms is most difficult in which kind of industry

structure?

Pure monopoly

What market structure has many firms selling a differentiated

product, easy entry & exit, and some control over price?

Monopolistic competition

What are the characteristics of an oligopoly?

• A few large producers. • Homogeneous or differentiated

products.• Control over price, yet mutually

interdependent.

Why are firms in a monopolistically competitive

industry inefficient compared with firms in a perfectly competitive

industry?

They restrict their output level to maximize profits

True or false: It is always true that in both monopolies and perfectly

competitive firms average total cost equals marginal cost when average

total cost is a minimum.

True

What should a producer do in a perfectly competitive market, if the

price falls, in the short run?

Continue to produce only if the new price covers average variable

costs.

What are characteristics of a perfectly competitive industry?

New firms can enter the industry easily, there is no product

differentiation.

In the short run, a competitive firm can determine the profit-maximizing

(or loss-minimizing) output by equating:

Marginal revenue and marginal cost

Economic profits encourage firms to enter the market and losses cause

them to exit. True or false?

True

In long-run equilibrium, in a purely competitive market , what happens to

consumer and producer surplus?

Surplus will be maximized.

In which market models do demand and marginal revenue diverge?

Pure monopoly, oligopoly, and monopolistic competition

In the long run the price charged by the monopolistically

competitive firm attempting to maximize profits will be equal to

what?

ATCAverage Total Costs

What do concentration ratios measure?

The percentage of total industry sales accounted for by the largest firms in

the industry.

If the price of a firm’s product is less than

minimum AVC, what should they do? Why?

Close down. If they continue producing, their losses will exceed total fixed costs.