Final Exam

Question 1

Long run total cost function

Answer 1

Relates minimized total cost to output, Q, and to the factor prices (w and r)

Question 2

Long run total cost curve

Answer 2

Shows minimized total cost as output varies, holding input prices constant

Question 3

Long run average cost function

Answer 3

Is the LRTC function divided by Q

Question 4

Economies of scale

Answer 4

If average cost decreases as output rises

Increasing returns to scale

AC > MC

Question 5

Diseconomies of scale

Answer 5

If average cost increases as output rises

Decreasing returns to scale

AC < MC

Question 6

Output elasticity of total cost

Answer 6

The % change in total cost per one % change in output

Question 7

Short run total cost function

Answer 7

Tells us the minimized total cost of producing Q units of output, when at least one input is fixed

Question 8

Total variable cost function

Answer 8

The minimized sum of expenditures on variable inputs at the short run cost minimizing input combinations

Question 9

Short run average cost function

Answer 9

The SRTC function divided by Q

Question 10

Short run marginal cost function

Answer 10

Measures the rate of change of SRTC as output varies, holding constant input prices and fixed inputs

Question 11

Perfectly competitive market

Answer 11

Consists of firms that produce identical products that sell at the same price

Each buyer/seller buys/sells in small quantities

All firms have access to the same resources

Question 12

Short run supply curve

Answer 12

Tells us how the profit maximizing output changes as the market price changes

Question 13

Shut down price

Answer 13

The price below which the firm would opt to produce zero

Question 14

Market supply

Answer 14

At any price is the sum of the quantities each firm supplies at that price

Question 15

Long run

Answer 15

The period of time in which all the firms inputs can be adjusted . The number of firms in the industry may change as well

Question 16

The long run market supply curve

Answer 16

Tells us the total quantity of output that will be supplied at various market prices, assuming that all long run adjustments (plant, entry) take place

Question 17

Producer surplus

Answer 17

The area above the market supply curve and below the market price . It is a monetary measure of the benefit that producers derive from producing a good at a particular price

Question 18

Monopoly market

Answer 18

Market with a single seller facing many buyers

Question 19

When does an agent have monopoly power

Answer 19

If they can affect, through their own actions, the price that prevails in the market . Sometimes this is thought of as the degree to which a firm can raise price above MC

Question 20

The lerner index of market power

Answer 20

The price-cost margin (p-MC)/p. This index ranges between 0 for the competitive firm and 1 for a monopolist

Question 21

Barriers to entry

Answer 21

Factors that allow an incumbent firm to earn positive economic profits while making it unprofitable for newcomers to enter the industry

Question 22

Structural barriers to entry

Answer 22

Occur when incumbent firms have cost or demand advantages that would make it unattractive for a new firm to enter the industry

Question 23

Legal barriers to entry

Answer 23

Exist when an incumbent firm is legally protected against competition

Question 24

Strategic barriers to entry

Answer 24

Result when an incumbent firm takes explicit steps to deter entry

Question 25

Product differentiation

Answer 25

Occurs when two or more products possess attributes that set products apart from one another and make them less than perfect substitutes

Question 26

Residual demand

Answer 26

The market demand minus the amount of demand fulfilled by other firms in the market (Q1 = Q - Q2)

Question 27

Best response function

Answer 27

For every possible output of the rival(s), we can determine the firm's best response . The sum of all theses points makes up the best response function of the firm