Download - AP Micro Unit IV Review
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AP Micro Unit IV Review
2014
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What will a perfectly competitive profit maximizing
firm do if the market price rises?
Increase production to where MC again equals MR
(or P)
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How much economic profit will a perfectly competitive firm earn in the long run?
None – zero – zip…
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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
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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)
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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)
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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)
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In perfect competition in the long run, ATC will equal…
MR and MC
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Why are monopolistically competitive firms
allocatively inefficient in the long run?
They charge a price greater than their MC
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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
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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
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What impact would a per unit subsidy have on a
monopolist?
Encourage them to increase output
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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
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What is the relationship between MC and minimum
ATC for both purely competitive firms and
monopolies?
MC will cross (=) ATC at minimum point
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Firms in a monopolistically competitive industry create
DWL because they…
Restrict their output level to maximize profits
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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
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What is the relationship between P and MR for the
monopolist?
P > MR
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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
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Interedependence among firms is most strongly
present in which market model?
Oligopoly
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A perfectly competitive profit-maximizing firm will always produce where…
MC = MR (which will also equal P)
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Advertising, product promotion, and changes in the real or
perceived characteristics of a product refers to what type of
competition?
Nonprice competition
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Large number of firms and low entry barriers are characteristics
of what?
Monopolistic competition
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What is the process by which new firms and new products replace
existing dominant firms and products?
Creative destruction
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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.
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A firm can sell as much output as it chooses at the existing price if
the demand curve is…
Perfectly elastic
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When does a firm reach the break-even point?
Where the total revenue and total cost are equal
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A purely competitive firm is a "price ______.”
taker
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A monopolist is a "price _____.
maker
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What happens to marginal cost when a monopolist is at the profit-
maximizing output level?
Marginal cost exceeds price
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What do economies of scale, the ownership of essential raw
materials, and patents have in common?
They are all barriers to entry.
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In the long run a pure monopolist will maximize profits by producing that output at which marginal cost
is equal to what?
Marginal revenue
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What happens to marginal cost when a monopolist is at the profit-
maximizing output level?
Marginal cost exceeds price
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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
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A firm will earn zero economic profits in long-run equilibrium if it
sells its output in what kind of market?
Perfectly competitive
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What will cause an unregulated monopolist to produce a more allocatively efficient level of
output?
A subsidy that increases as output increases
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Entry of new firms is most difficult in which kind of industry
structure?
Pure monopoly
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What market structure has many firms selling a differentiated
product, easy entry & exit, and some control over price?
Monopolistic competition
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What are the characteristics of an oligopoly?
• A few large producers. • Homogeneous or differentiated
products.• Control over price, yet mutually
interdependent.
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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
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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
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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.
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What are characteristics of a perfectly competitive industry?
New firms can enter the industry easily, there is no product
differentiation.
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In the short run, a competitive firm can determine the profit-maximizing
(or loss-minimizing) output by equating:
Marginal revenue and marginal cost
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Economic profits encourage firms to enter the market and losses cause
them to exit. True or false?
True
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In long-run equilibrium, in a purely competitive market , what happens to
consumer and producer surplus?
Surplus will be maximized.
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In which market models do demand and marginal revenue diverge?
Pure monopoly, oligopoly, and monopolistic competition
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In the long run the price charged by the monopolistically
competitive firm attempting to maximize profits will be equal to
what?
ATCAverage Total Costs
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What do concentration ratios measure?
The percentage of total industry sales accounted for by the largest firms in
the industry.
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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.