Econ Exam 3 April

Question 1

What is one assumption we make about companies?

Answer 1

the primary goal of the firm is to maximize profits

Question 2

What is the profit equation?

Answer 2

Total Revenue-Total Costs = Profit

Question 3

Total Cost Equation

Answer 3

Total Variable Costs (TVC) + Total Fixed Costs (TFC)

Question 4

What was the color of the sky on march 11th?

Answer 4

BLACK

Question 5

Variable Costs

Answer 5

costs of production that change w/changes in the level of output

Question 6

What is the best example of variable costs?

Answer 6

Labor

Question 7

Fixed Costs

Answer 7

Fixed costs are sunk costs. Once they are incurred, there is nothing the firm can do to avoid them, even if the firm shuts down.

Question 8

What is the best example of fixed costs?

Answer 8

Building Cost

Question 9

Movie theater example of fixed costs

Answer 9

Movie theater “buys” movie for week, if they are closed, there is no variable cost (labor) but cost for building & movie are fixed.

Question 10

What do we assume about variable and fixed costs in this class?

Answer 10

Always assume that everything is either all variable or all fixed, even though in real life partially fixed/variable things do occur.

Question 11

Average Cost

Answer 11

a per unit cost for a given level of output

Question 12

Average Cost Chant

Answer 12

Average ________ is total ______ divided by quantity.

Question 13

Average Total Cost equation

Answer 13

ATC = TC/Q

Question 14

Average Fixed Cost Equation

Answer 14

AFC = TFC/Q

Question 15

Average Variable Cost Equation

Answer 15

AVC = TVC/Q

Question 16

Marginal Cost

Answer 16

The extra cost of adding one more unit of output

Question 17

Marginal Cost Equation

Answer 17

MC = Delta TC/Delta Q

Question 18

Why does marginal cost shoot through the roof?

Answer 18

MPPl is shrinking due to the law of diminishing returns. Must be short run because capital is fixed.

Question 19

Why does MC go down before it goes up?

Answer 19

MPPl is increasing bc more workers means they will be more productive due to division/specialization of labor.

Question 20

Why does the TVC go up by the same each time?

Answer 20

Add workers at the same cost per worker, and each worker costs the company the same amount (Paid same, use same materials)

Question 21

Where do the AVC and ATC cross the MC?

Answer 21

at their lowest points

Question 22

What does the AFC look like?

Answer 22

It keeps decreasing

Question 23

Demand Curve Facing the Firm (DFF)

Answer 23

the amount of its own product it can sell at all alternative prices, c.p.

Question 24

What is an example of a DFF?

Answer 24

The demand curve for one book by one author on Amazon at different prices

Question 25

What is the shape of the DFF determined by?

Answer 25

The shape of the DFF will be determined by the industry structure

Question 26

What are the 4 types of industry structures?

Answer 26

Perfect competition, monopoly, monopolistic competition, oligopoly

Question 27

What 2 industry structures are complete opposites?

Answer 27

Perfect competition and monopoly

Question 28

Does perfect competition exist in the real world?

Answer 28

No, it would require an infinite number of firms

Question 29

What is a monopoly?

Answer 29

Only one firm, zero competitors, existence is illegal

Question 30

What Assumptions do we make about perfect competition?

Answer 30

1) Many firms ( none have mrkt pwr, so all are price takers) 2) Homogeneous Product 3) Economic Agents are Rational 4) Economic Agents have perfect mobility (no barriers to entry) 5) No artificial constraints on price ( no price ceilings, gov interference etc.)

Question 31

What is a price taker?

Answer 31

No market power, no control over price

Question 32

What is the closest thing to perfect competition?

Answer 32

Farming

Question 33

What are barriers to entry?

Answer 33

Things that prevent firms from entering the market. They do no exist in perfect competition. Everyone can get in or out.

Question 34

What are artificial constraints on price?

Answer 34

Price ceilings, gov interference, outside influences,

Question 35

What are prices determined by in perfectly competitive markets?

Answer 35

They are determined 100% by supply and demand. The equilibrium price is the price

Question 36

Why is the DFF curve perfectly straight?

Answer 36

Due to 1st assumption, because there are an infinite number of firms

Question 37

What does TR look like in a perfectly competitive market?

Answer 37

Straight line out of the origin

Question 38

What does the MR look like in a perfectly competitive market?

Answer 38

MR=AR=DFF=P

Question 39

New Golden Rule

Answer 39

profits will be maximized at the quantity where marginal revenue equals marginal cost. ( MR=MC)