Econ 2610, Principles 1    Review Sheet #2      Dr. Usip

Coverage: Chapters 6, 8, 9, 10
Class #1

  1. What is a firm? What is an industry? What is a market structure?.
  2. What is a production function?
  3. Be able to define the terms short run and long run.  Will the short run be the same length of time for a firm in the dry cleaning industry as for a firm in the steel industry?  Explain your answer.
  4. Be able to define and calculate explicit costs.
  5. Be able to define and calculate implicit costs.
  6. Be able to define and calculate total fixed costs, total variable costs, total costs, and marginal costs.

Class #2

  1. Be able to define and calculate AFC, AVC, and ATC.
  2. Why might the costs of production be lower in the long run?
  3. Be able to define the following terms:  economies of scale, constant returns to scale, diseconomies of scale, and minimum efficient scale.
  4. How would the minimum efficient scale in an industry affect the level of concentration in the industry?.

Class #3

  1. Be able to explain the difference between explicit and implicit costs?  Give an example of each.
  2. Be able to explain the difference between accounting profit and economic profit.   If a firm states that it is earning a 5 percent profit in its annual shareholders report, is it earning an economic profit?
  3. What is a normal profit?
  4. How does the demand curve faced by the firm differ from the market demand curve?   Will it be more elastic or inelastic?  Explain why.
  5. What is the difference between firms who are price takers and firms who are price setters? 

Class #4

  1. Be able to define the term marginal revenue.  Why is MR equal to the price of a unit of output if the firm is a price taker, but less than the price of a unit of output if the firm is a price setter?
  2. What is the rule for choosing the profit-maximizing level of output?  Be able to explain why a firm should produce more output if MC<MR, or produce less output if MC>MR.
  3. What is the shutdown rule?  Be able to explain it both in terms of TVC and AVC.

Class #5

  1. What are the three characteristics of pure competition?  Why are the firms in a perfectly competitive market price takers?
  2. Be able to show the following graphically:  supply and demand for the market, and the demand, MR, MC, and ATC curves for an individual firm.  Be able to identify the profit-maximizing level of output and the area representing the firms profits or losses.
  3. Given the market price and values for TC, be able to calculate MC, TR, and profit.
  4. What is the shutdown price?
  5. How do we find the short run market supply curve from the supply curves of the individual firms?

Class #6

  1. If firms in a competitive market are making economic profits, what will happen to the number of firms in the industry in the long run?  What will happen to the location of the market supply curve?  What will happen to the equilibrium price?  What will happen to the profits of firms in the industry in the long run?
  2. Answer the same questions assuming that the firms in the industry were earning losses.
  3. Why do we believe that the plants in a competitive industry will be of such a size that the firm will be producing at the minimum of the LRATC curve?
  4. What determines whether the long-run supply curve is horizontal or upward sloping?   What is the long-run supply curve?

Class #7

  1. What are the key characteristics of a monopoly firm?
  2. Be able to define the terms natural monopoly, patent, copyright, and government franchise.
  3. Be able to show graphically the profit-maximizing level of output of a monopolist and the area representing the monopolist's profits (you will need to draw demand, MR, MC, and ATC).
  4. What is the shutdown rule for a monopolist in the short run (hint: it's the same as the shutdown rule for a competitive firm)?  Would you expect a monopolist to earn losses in the long run?  Explain.
  5. Why might government regulation and rent-seeking activities result in the monopolist earning normal profits?

Class #8

  1. In what way does a monopolist impose a welfare loss on society?  Do the economic profits of the monopolist impose a welfare loss?  Be able to defend your responses.
  2. What is a rent-seeking activity?  How could it reduce monopoly profits?
  3. What is price discrimination?  What requirements must be met for price discrimination to occur?  Be able to give some examples of price discrimination.
  4. What is perfect price discrimination?

Class #9

  1. What are the three characteristics of a market with monopolistic competition?
  2. Be able to show graphically the profit-maximizing price and level of output for a monopolistically competitive firm.
  3. Will firms in a monopolistically competitive market earn profits in the long run?   Be able to justify your answer.
  4. Be able to give some examples of nonprice competition.  How will advertising change the firm's demand curve and ATC curve?
  5. What are the characteristics of an oligopoly?
  6. What are some of the reasons there would be a small number of firms in a market?   How does the minimum efficient scale in the market influence the structure of a market?

Class #10

  1. What is game theory?  What is a payoff matrix?  What is a dominant strategy?   Be able to determine if there is a dominant strategy in a game.
  2. How does repeated play change the possible strategies that the players might undertake?
  3. Be able to define the following terms:  explicit collusion, cartel, tacit collusion, tit for tat, and price leadership.
  4. Under what conditions will a member of a cartel be more likely to cheat?

 

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