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150 Cards in this Set
- Front
- Back
____ firms can take part in Perfect Competition
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Many
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____ firms can take part in Monopolistic Competition
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Many
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____ firms can take part in an Oligopoly
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Few
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____ firms can take part in a monopoly
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One
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In Perfect Competition, what types of products are bring sold?
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Identical
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In Monopolistic Competition, what types of products are being sold?
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Differentiated
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In Oligopoly, what types of products are being sold
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Identical or Differentiated
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In Monopoly, what types of products are being sold
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Unique
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What is the ease of entry level for perfect competition?
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High
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What is the ease of entry level for monopolistic competition?
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High
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What is the ease of entry level for Oligopoly?
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Low
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What is the ease of entry level for Monopoly?
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None
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Explain what a perfectly competitive market is
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A Market that meets the conditions of:
- Many buyers and sellers - all firms selling identical products Also sets no barriers to new firms entering the market |
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What determines the price in a perfectly competitive market?
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Prices in perfectly competitive markets are determined by the interaction of demand and supply for the good or service
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What is a Price Taker?
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A buyer or seller that is unable to affect the market price
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Firms in a perfectly competitive market have what kind of demand curve?
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Firms in a perfectly competitive market have a horizontal demand curve
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Explain Profit
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The difference between total revenue (TR) and total cost (TC)
Profit = TR-TC |
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What is Average Revenue
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Total Revenue divided by the quantity of the product sold
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What is Marginal Revenue?
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Change in total revenue from selling one more unit of a good
MR = (∆TR/∆Q) |
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What is price equal to for a firm in a perfectly competitive market?
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For a firm in a perfectly competitive market, price is equal to both average revenue and marginal revenue
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How is the Marginal Revenue Curve for a perfectly competitive firm?
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The marginal revenue curve for a perfectly competitive firm is the same as its demand curve
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Where is the largest profit margin for a firm in a perfectly competitive market?
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Largest profit is between the total cost curve and the total revenue curve
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How long should a firm produce in a perfectly competitive market?
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Firms should Produce until MR = MC
This is the profit-maximizing level of output |
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How does profit look on a graph?
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Profit on the graph is a box with a height equal to price minus ATC (for profit) or ATC minus Price (for loss)
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How is it illustrated when a firm is breaking even or operating at a loss?
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P>ATC means profit
P=ATC means breaking even P<ATC means the firm is experiencing a loss |
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What is a sunk cost?
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a cost that has already been paid and cannot be recovered
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Explain a firm's supply curve in the short run of a perfectly competitive market
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A Perfectly Competitive Firm’s marginal cost curve also is its supply curve
A firm will shut down if the price of a good drops below the average variable cost curve |
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What is the shutdown point?
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The minimum point on the average variable cost curve
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Explain the market supply curve in a perfectly competitive industry
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Determined by adding up the quantity supplied by each firm in the market at each price
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What is economic profit
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A firm’s revenues minus all its costs, implicit and explicit
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When new firms enter a perfectly competitive market, the supply curve shifts to the ____
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Right
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Explain Economic Loss
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The Situation in which a firm’s total revenue is less than its total cost, including all implicit costs
In the long run, firms will exit an industry if they are unable to cover all their costs |
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What is Long Run Competitive Equilibrium
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The situation in which the entry and exit of firms has resulted in the typical firm breaking even
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What is the long run supply curve and explain how a perfectly competitive market influences the supply curve
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A Curve that shows the relationship in the long run between market price and the quantity supplied
In the long run, a perfectly competitive market will supply whatever amount of a good consumers demand at a price determined by the minimum point on the typical firm’s average total cost curve |
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Any industry in which the typical firm’s average costs do not change as the industry expands production will have what kind of supply curve?
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Any industry in which the typical firm’s average costs do not change as the industry expands production will have a horizontal long-run supply curve
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Industries with upward-sloping long-run supply curves are called what?
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Industries with upward-sloping long-run supply curves are called increasing-cost industries
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Industries with downward-sloping long-run supply curves are called what?
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Industries with downward-sloping long-run supply curves are called decreasing-cost industries
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What is productive efficiency?
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the situation in which a good or service is produced at the lowest possible cost
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In the long run, who benefits from cost reductions in a perfectly competitive market?
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In the long run, only the consumer benefits from cost reductions
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Explain Allocative Efficiency
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A state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it
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How long will firms continue producing in a perfectly competitive market?
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Firms will produce a good up to the point where the marginal cost of producing another unit is equal to the marginal benefit consumers receive from consuming that unit
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Explain Monopolistic Competition
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A Market structure in which barriers to entry are low and many firms compete by selling similar, but not identical products.
faces a downward sloping demand curve sells more units but must accept lower price As a result, Marginal revenue is downward sloping |
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Where does a monopolistically competitive firm maximize profit?
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A monopolistically competitive firm maximizes profits at the level of output where marginal revenue equals marginal cost
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Price _ MR for a perfectly competitive firm and price _ MR for a monopolistically competitive firm
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=, >
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Monopolistically Competitive firms only produce when P_MC
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>
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How does the entry of new firms affect the profits of existing firms
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demand shifts to the left and becomes more elastic
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What happens when the demand curve is tangent to the average total cost curve for a monopolistically competitive firm?
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P=ATC
The firm is breaking even |
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How does a monopolistically competitive firm make money?
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Profit is made by selling differentiated products or producing an existing product at a low cost
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Monopolistically Competitive Firms charge a price _______ than marginal cost
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greater
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Monopolistically Competitive Firms _____ produce at minimum average total cost
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do not
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Where is profit maximized in Monopolistic Competition?
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The profit maximizing level of output for a monopolistically competitive firm comes at a level of output where price is greater than marginal cost, and the firm is not at the minimum point of its average total cost curve
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How Consumers Benefit from Monopolistic Competition
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Firms differentiate their products to appeal to customers
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What is Brand Management?
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The actions of a firm intended to maintain the differentiation of a product over time
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What do firms use Brand Management for?
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Firms use this to postpone the time when they will no longer be able to earn economic profits
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What is a firm trying to accomplish by advertising their product?
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When a firm advertises a product, it is trying to shift the demand curve for the product to the right and make it more inelastic
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What is Oligopoly
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A market structure in which a small number of interdependent firms compete
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Explain the Concentration Ratio
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state the fraction of each industry’s sales accounted for by its four largest firms
Ex: A four-firm concentration ration greater than 40% indicates that an industry is an oligopoly |
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What is a barrier to entry
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Anything that keeps new firms from entering an industry in which firms are earning economic profits
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What are Economies of Scale?
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The situation when a firm’s long-run average costs fall as the firm increases output
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The greater the economies of scale of an oligopoly, the _______ the number of firms that will be in the industry
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smaller
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What are the 3 main barriers to entry in an oligopoly
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Economies of scale, ownership of a key input, and government imposed barriers
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How long do patents last?
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20 Years
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What is the game theory
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The study of how people make decisions in which attaining their goals depends on their interactions with others
In economics, the study of the decisions of firms in industries where the profit of a firm depend on its interactions with other firms |
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What are the three characteristics of the game theory
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Rules
Strategies Payoffs |
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What is a business strategy
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Actions that a firm takes to achieve a goal such as maximizing profits
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What are payoffs?
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The profits a firm takes to achieve a goal such as maximizing profits
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What is a payoff matrix?
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A table that shows the payoffs that each firm earns from every combination of strategies by the firms
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What is collusion?
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An agreement among firms to charge the same price or otherwise not to compete
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What is a dominant strategy?
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A strategy that is the best for a firm, no matter what strategies other firms use
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What is a Nash Equilibrium?
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A situation in which each firm chooses the best strategy, given the strategies chosen by other firms
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What is Cooperative equilibrium?
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An equilibrium in a game in which players cooperate to increase their mutual payoff
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What is a Noncooperative equilibrium?
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An equilibrium in a game in which players do not cooperate but pursue their own self-interest
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What is a Prisoner's dilemma?
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A game in which pursuing dominant strategies results in noncooperation that leaves everyone worst off
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What is price leadership?
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A form of implicit collusion in which one firm in an oligopoly announces a price change and the other firms in the industry match the change
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What is a cartel?
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A group of firms that collude by agreeing to restrict output to increase prices and profits
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What does the Five Competitive Forces Model determine?
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This model determines the level of competition in an industry
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What is the five competitive forces model?
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The degree of competition among existing firms
The threat from new entrants Competition from substitute goods Bargaining power of buyers Bargaining power of suppliers |
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What is a Monopoly?
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A Firm that is the only seller of a good or service that does not have a close substitute
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How is a monopoly determined?
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A monopoly is determined by how many close substitutes the industry has
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Monopolies have ____ barriers to entry
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high
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What are the four main reasons for monopoly?
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Government prevention
Key control of a resource Network Externalities Large Economies of Scale |
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Heirs can hold a copyright for up to __ years after the creator’s death
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70
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What is a public franchise?
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A government designation that a firm is the only legal provider of a good or service
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A Government may sometimes to provide certain services directly to consumers through a ______ __________
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Public Enterprise
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What is a Network Externality
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A situation in which the usefulness of a product increases with the number of consumers who use it
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What is a Natural Monopoly?
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A situation in which economies of scale are so large that one firm can supply the entire market at a lower average total cost than can two or more firms
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Where is a natural monopoly most likely to occur?
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most likely to occur in markets where fixed costs are very large relative to variable costs
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A monopoly’s demand curve is _______ the demand curve for the product
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the same as
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In a Monopoly, firms are price ______ not price ______
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Firms are price makers not price takers
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In a monopoly, As long as the MC is _ than MR, the firm should keep selling
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<
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A monopoly will produce ____ and charge a ______ price than a perfectly competitive industry producing the same good
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less, higher
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Monopoly causes a _________ in consumer surplus
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Reduction
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Monopoly causes a ________ in producer surplus
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Increase
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Monopoly causes a ____________, which represents a reduction in economic efficiency
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Deadweight loss
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What is an anti-trust law
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Laws aimed at eliminating collusion and promoting competition among firms
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What is a horizontal merger?
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A Merger between firms in the same industry
Governments’ biggest concern |
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What is a Vertical Merger?
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A merger between firms at different stages of production of a good
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What are two factors complicating horizontal mergers?
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unclear markets
newly merged firms might be more efficient than the merging firms individually |
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What are three factors the government considers when approving a merger?
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Market Definition
Measure of Concentration in the Market Merger Standards |
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What is the Herfindahl-Hirschman Index?
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A Measurement of Concentration in the market.
squares the market shares of each firm in the industry and adds up the values of the squares |
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What Merger Standards does the US Government use?
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Postmerger HHI Below 1500 - always allowed
Postmerger HHI between 1500 and 2500 - moderately challenged Postmerger HHI Above 2500 - always challeged |
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When Regulated, Monopolies must charge a price _____ to its marginal cost
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equal
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Explain Total Revenue
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Total revenue for a firm is the selling price times the quantity sold
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What is total revenue proportional to?
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Total revenue is proportional to the amount of output.
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What does Average Revenue represent?
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Average revenue tells us how much revenue a firm receives for the typical unit sold.
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In perfect competition, average revenue equals what?
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In perfect competition, average revenue equals the price of the good.
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For competitive firms, marginal revenue equals what?
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For competitive firms, marginal revenue equals the price of the good.
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What is the goal of a competitive firm?
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The goal of a competitive firm is to maximize profit
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How do competitive firms reach their goal of maximizing profit?
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This means that the firm will want to produce the quantity that maximizes the difference between total revenue and total cost.
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Explain Profit Maximization for the Competitive Firm
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Profit maximization occurs at the quantity where marginal revenue equals marginal cost.
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What is the difference between a shutdown and an exit
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A shutdown refers to a short-run decision not to produce anything during a specific period of time because of current market conditions.
Exit refers to a long-run decision to leave the market. |
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What are the three conditions for a shutdown point?
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Shut down if TR < VC
Shut down if TR/Q < VC/Q Shut down if P < AVC |
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The portion of the marginal-cost curve that lies above average variable cost is the competitive firm’s _____ ___ ______ _____
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short-run supply curve.
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When should a firm exit the competitive market?
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Exit if TR < TC
Exit if TR/Q < TC/Q Exit if P < ATC |
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When should a firm enter a competitive market?
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Enter if TR > TC
Enter if TR/Q > TC/Q Enter if P > ATC |
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Explain the Competitive Firm’s Long-Run Supply Curve
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The competitive firm’s long-run supply curve is the portion of its marginal-cost curve that lies above average total cost.
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Firms will enter or exit the competitive market until when?
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Firms will enter or exit the market until profit is driven to zero
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In the long run, price equals the _______ of average total cost.
The long-run market supply curve is __________ at this price |
Minimum, Horizontal
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At the end of the process of entry and exit, firms that remain must be making ____ economic profit.
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zero
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The process of entry & exit ends only when price and average total cost are driven to________
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equality
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Explain how zero-profit equilibrium work?
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In the zero-profit equilibrium, the firm’s revenue compensates the owners for the time and money they expend to keep the business going.
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An increase in demand raises what in the short run?
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An increase in demand raises price and quantity in the short run.
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What is a marginal firm?
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The marginal firm is the firm that would exit the market if the price were any lower.
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While a competitive firm is a price _____, a monopoly firm is a price _____
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Taker, Maker
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A monopolist’s marginal revenue is always ____ ____ the price of its good.
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less than
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When a monopoly increases the amount it sells, it has two effects on total revenue. What are they?
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The output effect—more output is sold, so Q is higher.
The price effect—price falls, so P is lower. |
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A monopoly maximizes profit by producing the quantity at which what?
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A monopoly maximizes profit by producing the quantity at which marginal revenue equals marginal cost.
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How long will a monopolist receive economic profit?
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The monopolist will receive economic profits as long as price is greater than average total cost.
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In contrast to a competitive firm, the monopoly charges a price _____ the marginal cost.
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above
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The monopolist produces ____ ____ the socially efficient quantity of output
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Less than
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What is imperfect competition?
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Imperfect competition refers to those market structures that fall between perfect competition and pure monopoly.
Imperfect competition includes industries in which firms have competitors but do not face so much competition that they are price takers. |
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What is a duopoly?
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A duopoly is an oligopoly with only two members. It is the simplest type of oligopoly.
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What is a Nash equilibrium?
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A Nash equilibrium is a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the others have chosen.
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The oligopoly price is ____ than the monopoly price but ____than the competitive price (which equals marginal cost).
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The oligopoly price is less than the monopoly price but greater than the competitive price (which equals marginal cost).
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How does an oligopoly affect the market?
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The output effect: Because price is above marginal cost, selling more at the going price raises profits.
The price effect: Raising production lowers the price and the profit per unit on all units sold. |
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What is Resale Price Maintenance?
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Resale price maintenance (or fair trade) occurs when suppliers (like wholesalers) require the retailers that they sell to, to charge customers a specific amount.
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What is Predatory Pricing?
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Predatory pricing occurs when a large firm begins to cut the price of its product(s) with the intent of driving its competitor(s) out of the market.
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What is Tying?
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Tying refers to when a firm offers two (or more) of its products together at a single price, rather than separately.
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Short-run economic profits encourage new firms to enter the market. How does this effect the market?
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Increases the number of products offered.
Reduces demand faced by firms already in the market. Incumbent firms’ demand curves shift to the left. Demand for the incumbent firms’ products fall, and their profits decline. |
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Short-run economic losses encourage firms to exit the market. How does this effect the market?
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Decreases the number of products offered.
Increases demand faced by the remaining firms. Shifts the remaining firms’ demand curves to the right. Increases the remaining firms’ profits. |
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What are the two characteristics of Long Run Equilibrium?
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As in a monopoly, price exceeds marginal cost.
As in a competitive market, price equals average total cost. |
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There are two noteworthy differences between monopolistic and perfect competition. What are they?
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There are two noteworthy differences between monopolistic and perfect competition—excess capacity and markup.
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There __ excess capacity in perfect competition in the long run.
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There is no excess capacity in perfect competition in the long run.
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Free entry results in competitive firms producing at the point where average total cost is minimized, which is the _________ _____ of the firm
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Free entry results in competitive firms producing at the point where average total cost is minimized, which is the efficient scale of the firm
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There ___ excess capacity in monopolistic competition in the long run
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is
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In monopolistic competition, output is ____ than the efficient scale of perfect competition
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less
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For a competitive firm, price equals marginal cost.
For a monopolistically competitive firm, price is ___ than marginal cost. |
greater
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Externalities of entry in a monopolistically competitive market include
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product-variety externalities.
business-stealing externalities. |
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The product-variety externality: Because consumers get some consumer surplus from the introduction of a new product, entry of a new firm conveys a ________ externality on consumers.
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positive
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The business-stealing externality: Because other firms lose customers and profits from the entry of a new competitor, entry of a new firm imposes a ________ externality on existing firms.
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negative
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