Exam 2

Question 1

Characteristics of Perfect Competition

Answer 1

Large number of firms in the market.
Undifferentiated product
Ease of entry into market or non barriers to entry.
Complete information to all market participants.
No control over price.

Question 2

Characteristics of Monopolistic Competition

Answer 2

Large number of firms in the market.
Differentiated product
Few barriers to entry into market.
Relatively good information available to market participants.
Some control over price.

Question 3

Characteristics of Oligopoly

Answer 3

Small number of firms in the market.
Undifferentiated or differentiated product
Many barriers to entry into the market.
Information likely to be protected by patents, copyrights, and trade secrets.
Some control over price, but limited by interdependent behavior.

Question 4

Characteristics of Monoply

Answer 4

Single firm in the market.
Unique differentiated products with no close substitutes.
Many barriers to entry, often including legal restrictions.
Information likely to be protected by patents, copyrights, and trade secrets.
Substantial control over price.

Question 5

A characteristic of a perfectly competitive market in which the firm cannot influence the price of its product, but can sell any amount of its output at the price established by the market.

Answer 5

Price-Taker

Question 6

The assumed goal of firms, which is to develop strategies to earn the largest amount of profit possible.

Answer 6

Profit Maximization

Question 7

How to accomplish profit maximization.

Answer 7

Focus on Revenues
Focus on Costs
Focus on Both

Question 8

Profit =

Answer 8

TR - TC
OR
(P - AC) x Q

Question 9

Profit-Maximizing Rule

Answer 9

Produce at the level of output where MR = MC

Question 10

MR =

Answer 10

Change in TR / Change in Q

Question 11

MC =

Answer 11

Change in TC / Change in Q

Question 12

TR =

Answer 12

P x Q

Question 13

TC =

Answer 13

AC x Q

Question 14

If P > AC.

Answer 14

Positive Profit

Question 15

If P < AC.

Answer 15

Negative Profit

Question 16

If P = AC.

Answer 16

0 Profit

Question 17

When P is between AVC and AC for a perfectly competitive firm.

Answer 17

Negative Economic Profit (Minimizing Losses)
Covering All Variable Cost
Continue Producing

Question 18

When P equals minimum AVC in a perfectly competitive firm.

Answer 18

Shutdown Point

Covering all Variable Cost, No Fixed Cost

Question 19

The P, which equals a firm’s minimum AVC, below which it is more profitable for the perfectly competitive firm to stop than to continue to produce.

Answer 19

Shutdown Point for the Perfectly Competitive Firm

Question 20

A period of time in which the existing firms in the industry cannot change their scale of operation because at least one input is fixed for each firm.
Firms also cannot enter or exit the industry during this time.

Answer 20

Short Run

Question 21

Achieving lower unit costs of production by adopting a larger scale of production, represented by the downward sloping portion of a long-run average cost curve.

Answer 21

Economies of Scale

Question 22

Incurring higher unit costs of production by adopting a larger scale of production, represented by the upward sloping portion of a long-run average cost curve.

Answer 22

Diseconomies of Scale

Question 23

A measure of how many firms produce the total output of an industry.
The more the industry is, the fewer the firms operating in that industry.

Answer 23

Industry Concentration

Question 24

Occurs when TR = TC.
Known as normal profit position.
A firm’s TR covers all production costs, both explicit and implicit.
P = AC.

Answer 24

Breakeven

Question 25

Occurs when TC > TR.

Answer 25

Loss

Question 26

Occurs in the short-run when TR > TC.

Answer 26

Economic Profit

Question 27

Where P < AVC.

Answer 27

Shutdown Point

Question 28

When P > AVC but P < AC.

Answer 28

Minimizing Losses

Question 29

The portion of a firm's MC curve that lies above the minimum AVC.

Answer 29

Supply Curve of Firm in Short-Run

Question 30

The ability of a firm to influence the prices of its products and develop other competitive strategies that enable it to earn large profits over longer periods of time.

Answer 30

Market Power

Question 31

A market structure characterized by a single firm producing a product with no close substitutes.

Answer 31

Monopoly

Question 32

A firm in imperfect competition that faces a downward sloping demand curve and must set the profit-maximizing price to charge for its product.

Answer 32

Price-Setter

Question 33

The structural, legal, or regulatory characteristics of a firm and its market that keep other firms from producing the same or similar products at the same cost.

Answer 33

Barriers to Entry

Question 34

Barriers to entry that help firms maintain market power and earn positive economic profits.

Answer 34

``` Economies of Scale Barriers Created by Government Input Barriers Brand Loyalties Consumer Lock-In and Switching Costs Network Externalities ```

Question 35

A form of market power for a firm in which consumers become locked into purchasing certain types or brands of products because they would incur substantial costs if they switched to other products.

Answer 35

Lock-In and Switching Costs

Question 36

A barrier to entry that exists because the value of a product to consumers depends on the number of consumers using the product.

Answer 36

Network Externalities

Question 37

A measure of market power that focuses on the difference between a firm's product price and its marginal cost of production. 0 for perfect competition and increases as market power increases.

Answer 37

Lerner Index

Question 38

Lerner Index =

Answer 38

(P - MC) / P

Question 39

A measure of market power that focuses on the share of the market held by the X number of largest firms, where X typically equals four, six, or eight.

Answer 39

Concentration Index

Question 40

A measure of market power that is defined as the same of the squares of the market share of each firm in an industry.

Answer 40

Herfindahl-Hirschman Index (HHI)

Question 41

A market structure characterized by a large number of small firms that have some market power from producing differentiated products. This market power can be competed away over time.

Answer 41

Monopolistic Competition

Question 42

Legislation, beginning with the Sherman Act of 1890, that attempts to limit the market power of firms and to regulate how firms use their market power to compete with each other.

Answer 42

Antitrust Laws

Question 43

A market structure characterized by competition among a small number of large firms that have market power, but that must take their rivals' actions into account when developing their own competitive strategies.

Answer 43

Oligopoly

Question 44

Models of interdependent oligopoly behavior that assume that firms pursue profit-maximizing strategies based on the assumptions about rivals' behavior and the impact of this behavior on the given firm's strategies.

Answer 44

Noncooperative Oligopoly Models

Question 45

Models of interdependent oligopoly behavior that assume that firms explicitly or implicitly cooperate with each other to achieve outcomes that benefit all the firms.

Answer 45

Cooperative Oligopoly Models

Question 46

An oligopoly model based on two demand curves that assumes that other firms will not mach a firm's price increases, but will match its price decreases.

Answer 46

Kinked Demand Curve Model

Question 47

Short-run goal of firms with market power to gain market share and increase profits over future periods. Occurs where MR = 0. Price will be lower than profit-maximizing price.

Answer 47

Revenue Maximization

Question 48

Goals of business managers.

Answer 48

Maximum Profit Maximum Sales Maximum Sales Growth Maximum Market Share