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Business Costs and Production

8. Business Costs and Production. Practice What You Know. Bob runs a small family restaurant. How would you describe the monthly rent he pays on the building? Explicit cost, variable cost Explicit cost, fixed cost Implicit cost, variable cost Implicit cost, fixed cost.

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Business Costs and Production

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  1. 8 Business Costs and Production

  2. Practice What You Know Bob runs a small family restaurant. How would you describe the monthly rent he pays on the building? Explicit cost, variable cost Explicit cost, fixed cost Implicit cost, variable cost Implicit cost, fixed cost

  3. Practice What You Know Which of the following is an example of an implicit cost? Wages paid to employees Cost of food delivery The opportunity cost of the owner’s time Monthly insurance premiums

  4. Practice What You Know Suppose the wage rate that a company pays its workers increases. In terms of the cost equations, which of the following is true? TC will increase, but ATC will decrease TVC will increase, but AVC will decrease The MC curve will become hill-shaped The TFC and AFC will not change

  5. Practice What You Know Total output with seven workers is Q = 70.Total output with eight workers is Q = 82.What is the marginal product of the eighth worker? 12 10 82 8

  6. 9 Firms in a Competitive Market

  7. Practice What You Know Steve runs a competitive sandwich shop. Right now, he is producing output at a level where MR > MC. To increase his profits, Steve should Try to use more capital in his production Try to use more labor in his production Produce less output Produce more output

  8. Practice What You Know If a competitive industry is making positive economic profits, what will eventually happen in this industry? The market supply will shift to the left The market supply will shift to the right The market demand will shift to the left The market demand will shift to the right

  9. Practice What You Know Suppose a competitive firm is faced with a price in the short run that is below ATC but above AVC. In the short run, this firm should Shut down Exit the industry Raise the price of the good Produce at the output level where MR = MC

  10. Practice What You Know What do you suppose is one of the main reasons that competitive firms all earn zero economic profits in the long run? Each firm has a lot of market power Firms all want to earn zero profits Free entry and exit in the industry The cost curves are U-shaped

  11. Practice What You Know A competitive firm will shut down and produce output level Q = 0 if Price < min (ATC) min (AVC) < Price < min (ATC) Price < min (AVC) P = MR

  12. 10 Understanding Monopoly

  13. Practice What You Know Which of the following firms will most likely be a natural monopoly? A grocery store A cable TV company A gas station A barbershop

  14. Practice What You Know Which of the following most accurately describes a patent? An incentive to innovate A profit-sharing mechanism A redistribution of wealth An original invention

  15. Practice What You Know What is true for a profit-maximizing monopoly? P = MR = MC P = MR > MC P > MR = MC P > MR > MC

  16. Practice What You Know What is the reason for monopoly deadweight loss (relative to perfect competition)? The monopolist faces a downward sloping demand curve People boycott monopolies more often The monopolist sells less output at a higher price The monopolist has no competitors

  17. Practice What You Know A monopolist will have negative profits and exit the industry in the long run if: A new competitor enters the industry Demand becomes more elastic Price < ATC A monopolist never has negative profits

  18. 11 Price Discrimination

  19. Practice What You Know Which of the following goods or services is most likely to be sold successfully by a firm at different prices? Economics textbooks Haircuts Candy bars University apparel

  20. Practice What You Know A general rule for price discriminating with two consumers groups is to charge a ______ price to the inelastic group and to charge a ______ price to the elastic group. high; low low; high positive; negative negative; positive

  21. Practice What You Know What market and pricing structure has the least amount of consumer surplus? Perfect competition Pure monopoly (single price) A price discriminating monopoly that charges two different prices A monopolist that engages in perfect price discrimination

  22. Practice What You Know Why might one consumer group (A) have a more elastic demand (and be more price sensitive) than another group (B) of consumers? Group (A) may have less income Group (A) may have lower tastes and preferences for the good Both of the above could be true None of the above

  23. 12 Monopolistic Competition and Advertising

  24. Practice What You Know Which of the following is true about monopolistic competition? It results in higher prices than monopoly It results in higher prices than perfect competition It results in lower quantity than monopoly It is more economically efficient than perfect competition

  25. Practice What You Know Which of the following industries fits most closely with the model of monopolistic competition? Automobile production Farming Diamond mining Fast-food restaurants

  26. Practice What You Know What is true about the long run equilibrium for firms in a monopolistically competitive industry? MR < MC, P < min(ATC) P = MR = MC = min(ATC) P = ATC, P > MC, P > min(ATC) P > ATC, P = MC

  27. Practice What You Know Which of the following is true about product differentiation? More differentiation means products are more substitutable for each other More differentiation leads to greater differences in price More differentiation leads to converging prices Differentiation lowers firm profits

  28. 13 Oligopoly and Strategic Behavior

  29. Practice What You Know Which of the following is most likely to become an oligopoly industry? An industry without entry barriers An industry where economies of scale are very small An industry with sizeable network effects An industry with hundreds of competitors

  30. Practice What You Know Which of the following is true about oligopoly? Oligopolies are illegal in the United States All oligopoly industries will try to collude Oligopoly industries generally have a high concentration ratio Firms in an oligopoly act independently from other firms in the oligopoly

  31. Practice What You Know Why do cartel deals tend not to last? Each firm in the cartel has a dominant strategy to be uncooperative and defect from the cartel agreement Cartel profits are lower than competitive profits Cartels create more competition Firms know that cartels are often illegal so they break the deal to escape

  32. Practice What You Know What is an example of a good with a positive network effect? An online multiplayer game A fast-food burger A dry-cleaning service A cable TV subscription

  33. Practice What You Know How can a pure strategy Nash equilibrium be accurately described? • It is always the overall best outcome • It’s an outcome in which neither player wants to change strategies • It can only be reached by collusion • One exists in all games

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