EREC Final Exam

Question 1

Economies of Scale

Answer 1

simulation in which long-run average cost declines as the firm increases its level of output

Question 2

Possible Causes of Economies of Scale

Answer 2

• Specialization of resources
• More efficient use of equipment
• Reduced unit costs of inputs
• Opportunities for the use of by-products
• Growth of auxiliary facilities

Question 3

Pure Competition

Answer 3

Many buyers/sellers; no “market power”; MR = P = MC = AC

Question 4

Negatives of Pure Competition

Answer 4

• EOS cost curves for larger firms are lower
• Consumers desire a variety
• Due to patents, size, etc, entry into industries is often limited
• Advertising can cause perceived conduct differences

Question 5

Imperfect competition

Answer 5

Prevails in an industry when individual sellers face their own non-horizontal demand curves, and thereby have some control over price

Question 6

Monopoly

Answer 6

• One firm industry
• Single seller
• No good substitutes
• High barriers to entry
  - legal /regulatory
  - economic/financial
  - Absolute cost advantage
  - Spatial

Question 7

Social costs of monopoly

Answer 7

1. Limited options for consumers – reduced competition
2. Allocative inefficiency – “under production”
3. Barriers to entry may foster inefficiency
4. Encourages unproductive “rent-seeking” activities

Question 8

Oligopoly

Answer 8

a market in which most sales are made by few firms, each large enough to effect the market price by its own actions
- Differentiated products: cars, etc.
- Homogeneous products: steel, etc.

Question 9

Oligopoly Pricing

Answer 9

• Price decreases by one firm tend to be followed by other firms
• Price increases by one firm are NOT matched by other firms
• Tendency is for STABLE, INFLEXIBLE prices to exist over time

Question 10

Imperfect Competitions are

Answer 10

monopoly
oligopoly
monopolistic competition

Question 11

Pure/Perfect Competition are

Answer 11

Just pure competition

Question 12

Pure and Monopolistic Competition Similarities

Answer 12

1. Zero long-run economic profit
2. Low barriers to entry
3. Responsive to consumer desires

Question 13

Pure and Monopolistic Compeittion Differences

Answer 13

1. The equilibrium is not at min. LRAC
2. Price > MR
3. Effects of advertising

Question 14

Four types of market structure

Answer 14

• Pure competition
• Imperfect competition
  - Monopolistic competition
  - Oligopoly
  - Monopoly

Question 15

Consequences of Imperfect Competition

Answer 15

1. Misallocation of resources
2. Suboptimal production levels
3. Deadweight loss – Welfare losses to society that needn’t occur

Question 16

How do we measure concentration?

Answer 16

Four-firm concentration ratio: % of sales by the four largest firms
= (X1+ X2 + X3 + X4) / total sales by industry

Question 17

Merger types

Answer 17

Horizontal – similar firms
Vertical – “linked” firms
Conglomerate – unrelated firms

Question 18

Sherman Antitrust Act (1890)

Answer 18

• “Every person who shall monopolize or attempt to monopolize… any part of the trade or commerce among the several states… shall be deemed guilty of a felony
• Led to the 1911 breakup of American Tobacco Co. and Standard Oil

Question 19

Clayton Act (1914)

Answer 19

Outlaws typing contracts: bans interlocking directorates;
bans mergers via acquiring common stock, primarily only if these practices lessen competition

Question 20

FTC (1914)

Answer 20

Prohibits “unfair methods of competition”

Question 21

Size offense

Answer 21

Related to structure…illegal if they provide “unreasonable” restraints to trade

Question 22

Conduct Offenses

Answer 22

1. Retail price “maintenance”
2. Predatory pricing – selling goods for less than the production cost
3. Tying contracts
4. Price discrimination

Question 23

Predatory pricing

Answer 23

cutting prices in order to drive competitors from the industry (illegal)

Question 24

Factor markets

Answer 24

markets in which businesses demand factors of production – as opposed to consumer goods - from household suppliers in order to produce goods and services for final demand
- The factor is the intermediate goods
- Ex. ink for a pen

Question 25

Derived demand

Answer 25

The demand for a factor of production

Question 26

Increase in a derived demand leads to:

Answer 26

1. Substitution away from the input by producers 2. Substitutions away from the (now) more expensive final product by consumers

Question 27

Marginal revenue product

Answer 27

the additional revenue a producer earns from increased sales when using an additional unit of input

Question 28

Maximum profits

Answer 28

occur where the marginal revenue product of each input used is equal to the cost of that unit of input

Question 29

MPP

Answer 29

change in TPP from adding one more unit of input (factor)

Question 30

MRP equation

Answer 30

MPP*MR

Question 31

VMP equation

Answer 31

MPP*(output) price

Question 32

If pure competition (what is the =)

Answer 32

MRP = VMP

Question 33

Shifts in factors demand are caused by

Answer 33

1. Change in demand for the final product - (what would change MRP=MP*P) 2. Change in productivity of the resource 3. Change in the price of a substitute resource

Question 34

Least Cost Rule and Equation

Answer 34

Producing a certain level of output at the least cost MRPk/Pk = MRPL/PL

Question 35

In general for equations

Answer 35

MRP1/P1 = MRP2/P2 = MRP3/P3 ……

Question 36

In general

Answer 36

1. An increase in resource prices leads to - substitution in production - Substitution in Consumption 2. The price elasticity of a resource usually increases with time 3. Shifts in derived demand caused by - Change in demand for a product - Change in productivity of resource - Change in price of substitute 4. Production costs are minimized when: - MRP1/P1 = MRP2/P2 = MRP3/P3….. = MRPn/Pn 5. Long-run equilibrium in a factor market - S = D - Resource owners must be earning a market rate of return

Question 37

The Interest Rate factors

Answer 37

- Risk premium - Inflationary premium - Pure(/or real) interest

Question 38

Inflation

Answer 38

a sustained rate of increase in the general price level

Question 39

Inflation Rate

Answer 39

% rate of increase of the general price level over a specified period of time

Question 40

Present value

Answer 40

current worth of future income after it is discounted back to the present by an appropriate cost of capital-the “opportunity cost” of capital

Question 41

Nominal r

Answer 41

real interest rate + inflation

Question 42

Four-firm concentration ratio:

Answer 42

% of sales by the four largest firms = (X1+ X2 + X3 + X4) / total sales by industry

Question 43

Morrill Land Grant Act of 1862 (and 1890)

Answer 43

Created - U.S. department of agriculture - Land grant universities Created schools

Question 44

Hatch Act (1887)

Answer 44

Agricultural Experiment Stations - Experiments

Question 45

Smither Lever Act 1914

Answer 45

Cooperative extension Outreach

Question 46

How do land grants different from other universities?

Answer 46

1. Clientele - being farmers, rural communities 2. Outreach - extension element 3. Funding - federal v. state, private

Question 47

Why is Justin Morrill important?

Answer 47

Created a program that set aside federal lands in order to establish public institutions of higher education in every state (more colleges with more equal opportunities)