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Transcript
AP Micro Unit IV Review 2014 What will a perfectly competitive profit maximizing firm do if the market price rises? Increase production to where MC again equals MR (or P) How much economic profit will a perfectly competitive firm earn in the long run? None – zero – zip… Identify two common reasons why gov’ts will regulate monopolies. Charge a higher price than the competitive market price, output doesn’t reach greatest social benefit, output doesn’t account for externalities Identify two characteristics of a perfectly competitive industry. Easy entry/exit, perfectly elastic demand for the firm, downward sloping demand for the industry, no product differentiation (homogeneous) What is the relationship between price and MR for a perfect monopoly? How does this relate to socially optimal output? P > MR for perfect monopoly, so MC=MR will stop short of socially optimal output (which is where MC=MB) If price drops in a perfectly competitive market, a firm should only keep producing if… Price remains higher than AVC (should shut down if you’re not covering AVC) In perfect competition in the long run, ATC will equal… MR and MC Why are monopolistically competitive firms allocatively inefficient in the long run? They charge a price greater than their MC What is the simplest definition of productive efficiency? MC=ATC (or minimum ATC – where marginal revenue product is same for all inputs) Means the firm is producing in the most efficient manner What is the simplest definition of allocative efficiency? Marginal Cost = Marginal Benefit (often assume MB=P) This means society is making best use of it’s resources – should also be where consumer & producer surplus are maximized What impact would a per unit subsidy have on a monopolist? Encourage them to increase output What do gov’ts usually need to do if they want a monopoly to produce at a socially beneficial point where P is below ATC? Subsidize them for the difference What is the relationship between MC and minimum ATC for both purely competitive firms and monopolies? MC will cross (=) ATC at minimum point Firms in a monopolistically competitive industry create DWL because they… Restrict their output level to maximize profits What will happen to short run price and output if consumer income decreases? Both will decrease, and in thelong run firms will exit the industry What is the relationship between P and MR for the monopolist? P > MR What would happen to price and output in a perfectly competitive industry if it were taken over by a monopoly? Price would go up, output quantity would decrease Interedependence among firms is most strongly present in which market model? Oligopoly A perfectly competitive profitmaximizing firm will always produce where… MC = MR (which will also equal P) Advertising, product promotion, and changes in the real or perceived characteristics of a product refers to what type of competition? Nonprice competition Large number of firms and low entry barriers are characteristics of what? Monopolistic competition What is the process by which new firms and new products replace existing dominant firms and products? Creative destruction What distinguishes the short run from the long run in pure competition? Firms can enter and exit the market in the long run, but not in the short run. A firm can sell as much output as it chooses at the existing price if the demand curve is… Perfectly elastic When does a firm reach the break-even point? Where the total revenue and total cost are equal A purely competitive firm is a "price ______.” taker A monopolist is a "price _____. maker What happens to marginal cost when a monopolist is at the profit-maximizing output level? Marginal cost exceeds price What do economies of scale, the ownership of essential raw materials, and patents have in common? They are all barriers to entry. In the long run a pure monopolist will maximize profits by producing that output at which marginal cost is equal to what? Marginal revenue What happens to marginal cost when a monopolist is at the profit-maximizing output level? Marginal cost exceeds price What is the profit-maximizing output level produced by an unregulated monopoly? Less than the socially optimal level, since the price paid by consumers exceeds the firm’s marginal cost A firm will earn zero economic profits in long-run equilibrium if it sells its output in what kind of market? Perfectly competitive What will cause an unregulated monopolist to produce a more allocatively efficient level of output? A subsidy that increases as output increases Entry of new firms is most difficult in which kind of industry structure? Pure monopoly What market structure has many firms selling a differentiated product, easy entry & exit, and some control over price? Monopolistic competition What are the characteristics of an oligopoly? • • • A few large producers. Homogeneous or differentiated products. Control over price, yet mutually interdependent. Why are firms in a monopolistically competitive industry inefficient compared with firms in a perfectly competitive industry? They restrict their output level to maximize profits True or false: It is always true that in both monopolies and perfectly competitive firms average total cost equals marginal cost when average total cost is a minimum. True What should a producer do in a perfectly competitive market, if the price falls, in the short run? Continue to produce only if the new price covers average variable costs. What are characteristics of a perfectly competitive industry? New firms can enter the industry easily, there is no product differentiation. In the short run, a competitive firm can determine the profit-maximizing (or lossminimizing) output by equating: Marginal revenue and marginal cost Economic profits encourage firms to enter the market and losses cause them to exit. True or false? True In long-run equilibrium, in a purely competitive market , what happens to consumer and producer surplus? Surplus will be maximized. In which market models do demand and marginal revenue diverge? Pure monopoly, oligopoly, and monopolistic competition In the long run the price charged by the monopolistically competitive firm attempting to maximize profits will be equal to what? ATC Average Total Costs What do concentration ratios measure? The percentage of total industry sales accounted for by the largest firms in the industry. If the price of a firm’s product is less than minimum AVC, what should they do? Why? Close down. If they continue producing, their losses will exceed total fixed costs.