Week 3

Question 1

How does a company set its prices?

Answer 1

The company does not set its own prices, but simply accepts the price determined by the market.

Question 2

What must a company do to maximize profits?

Answer 2

In order to maximize profits, the company sells at the market price.

Why?:

A company cannot sell its product above the market price, and all produced can be sold at the market price.

Question 3

What effect do substitutes have on the elasticity of demand?

Answer 3

The more substitutes there are and the better they are, the higher the elasticity of demand.

Question 4

Which conditions do companies need to satisfy for an industry to be competitive?

Answer 4

• The product to be sold is almost identical among different sellers.
• There are many sellers and many buyers, all relatively small compared to the total market.
• There are many potential sellers

Question 5

Define the ‘long run’

Answer 5

We define the long run as the time after an entry or exit has taken place.

Question 6

Define the ‘Short run’

Answer 6

We define the short run as the period before an entry or exit.

Question 7

How is profit calculated?

Answer 7

Profit = Total revenue - Total cost.

Question 8

Define explicit costs

Answer 8

Literal monetary expensidutre

Question 9

Define implicit costs

Answer 9

Costs which do not require any monetary expenditure, such as opportunity costs.

Question 10

Define Opportunity costs

Answer 10

Opportunity costs refer to the possibility that you could have made more profit from another project.

Question 11

Describe ‘Economic profit’

Answer 11

Economic profit is total revenue minus total costs including implicit costs.

Question 12

Describe Accounting profit

Answer 12

Accounting profit is total revenue minus explicit costs

Question 13

Define Fixed costs

Answer 13

Fixed costs are those costs that do not change when output changes.

Question 14

Define variable costs

Answer 14

Variable costs are costs that do change when output changes.

Question 15

Define total costs

Answer 15

Total costs are fixed and variable costs together.

Question 16

What’s a method to find the quantity to maximize profit?

Answer 16

Look for the amount that TR - TC maximizes.

Question 17

Define marginal revenue

Answer 17

Increase in revenue when selling an additional unit

Question 18

Define marginal costs

Answer 18

Increase in costs when selling an additional unit.

Question 19

Explain the average cost curve

Answer 19

Average cost: Total cost/ quantity.

Question 20

Whats the best thing a company can do when a price of a product drops significantly?

Answer 20

The best thing a company can do is to produce so that the price of it equals marginal costs.

Question 21

What happens to a company when the price < average cost?

Answer 21

The company suffers a loss

Question 22

Whats the lowest price a company can offer without incurring losses?

Answer 22

The minimum point of the average cost curve.

Question 23

Draw the figure that summarises all decisions regarding entry, exit, and shutdown.

Answer 23

student wiki week 3

Question 24

Explain price discrimination

Answer 24

Selling the same product at different prices to different customers.

Question 25

What's the first principle of price discrimination?

Answer 25

If demand curves differ, it is more profitable to apply different prices in different markets than a single price covering all markets. In order to maximize profits, a monopolist must set a higher price on markets with more inelastic demand.

Question 26

Describe 'arbitrage'.

Answer 26

The difference in prices on markets can cause (illegal) trade between markets outside the company.

Question 27

What's the second principle of price discrimination?

Answer 27

Arbitrage makes it difficult for a company to set different prices in different markets, thereby reducing the benefits of price discrimination.

Question 28

Describe how perfect price discrimination works

Answer 28

In perfect price discrimination, consumers pay exactly what they are willing to pay, and no consumers have no consumer surplus. All profits go to the PPD monopolist, which in turn encourages the PPD monopolist to maximize profits and thus there is no deadweight loss.

Question 29

Up to what amount does a PPD monopolist produce?

Answer 29

P = MC (Price equals marginal cost)

Question 30

What's 'Tying'

Answer 30

To use one good, consumers must use a second good which is only sold by the same firm these companies sell the products as a package, also known as tying.

Question 31

Define bundling

Answer 31

Goods are bundled if they have to be purchased in a package, like left and right shoes, which is natural.

Question 32

Describe an increasing-cost industry

Answer 32

In an increasing-cost industry, costs are rising at higher output levels and this leads to an upward rising supply curve, which is the most common curve.

Question 33

Describe a constant cost industry

Answer 33

In a constant cost industry, costs remain the same when changes in industrial output occur and this ensures a flat supply curve.

Question 34

Describe a decreasing cost industry

Answer 34

In an increasing cost industry, the costs decrease with higher output, which is very rare. This results in a downward slope curve.