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AP Micro Unit IV Review

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….

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AP Micro Unit IV Review

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  1. AP Micro Unit IV Review 2014

  2. What will a perfectly competitive profit maximizing firm do if the market price rises? • Increase production to where MC again equals MR (or P)

  3. How much economic profit will a perfectly competitive firm earn in the long run? • None – zero – zip…

  4. 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

  5. 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)

  6. 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)

  7. 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)

  8. In perfect competition in the long run, ATC will equal… • MR and MC

  9. Why are monopolistically competitive firms allocatively inefficient in the long run? • They charge a price greater than their MC

  10. 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

  11. 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

  12. What impact would a per unit subsidy have on a monopolist? • Encourage them to increase output

  13. 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

  14. What is the relationship between MC and minimum ATC for both purely competitive firms and monopolies? • MC will cross (=) ATC at minimum point

  15. Firms in a monopolistically competitive industry create DWL because they… • Restrict their output level to maximize profits

  16. 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

  17. What is the relationship between P and MR for the monopolist? • P > MR

  18. 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

  19. Interedependence among firms is most strongly present in which market model? • Oligopoly

  20. A perfectly competitive profit-maximizing firm will always produce where… • MC = MR (which will also equal P)

  21. Advertising, product promotion, and changes in the real or perceived characteristics of a product refers to what type of competition? • Nonprice competition

  22. Large number of firms and low entry barriers are characteristics of what? • Monopolistic competition

  23. What is the process by which new firms and new products replace existing dominant firms and products? • Creative destruction

  24. 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.

  25. A firm can sell as much output as it chooses at the existing price if the demand curve is… • Perfectly elastic

  26. When does a firm reach the break-even point? • Where the total revenue and total cost are equal

  27. A purely competitive firm is a "price ______.” • taker

  28. A monopolist is a "price _____. • maker

  29. What happens to marginal cost when a monopolist is at the profit-maximizing output level? • Marginal cost exceeds price

  30. What do economies of scale, the ownership of essential raw materials, and patents have in common? • They are all barriers to entry.

  31. In the long run a pure monopolist will maximize profits by producing that output at which marginal cost is equal to what? • Marginal revenue

  32. What happens to marginal cost when a monopolist is at the profit-maximizing output level? • Marginal cost exceeds price

  33. 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

  34. A firm will earn zero economic profits in long-run equilibrium if it sells its output in what kind of market? • Perfectly competitive

  35. What will cause an unregulated monopolist to produce a more allocatively efficient level of output? • A subsidy that increases as output increases

  36. Entry of new firms is most difficult in which kind of industry structure? • Pure monopoly

  37. What market structure has many firms selling a differentiated product, easy entry & exit, and some control over price? • Monopolistic competition

  38. What are the characteristics of an oligopoly? • A few large producers. • Homogeneous or differentiated products. • Control over price, yet mutually interdependent.

  39. 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

  40. 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

  41. 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.

  42. What are characteristics of a perfectly competitive industry? • New firms can enter the industry easily, there is no product differentiation.

  43. In the short run, a competitive firm can determine the profit-maximizing (or loss-minimizing) output by equating: • Marginal revenue and marginal cost

  44. Economic profits encourage firms to enter the market and losses cause them to exit. True or false? • True

  45. In long-run equilibrium, in a purely competitive market , what happens to consumer and producer surplus? • Surplus will be maximized.

  46. In which market models do demand and marginal revenue diverge? • Pure monopoly, oligopoly, and monopolistic competition

  47. In the long run the price charged by the monopolistically competitive firm attempting to maximize profits will be equal to what? • ATC • Average Total Costs

  48. What do concentration ratios measure? • The percentage of total industry sales accounted for by the largest firms in the industry.

  49. 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.

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