week 7

Question 1

what is the total economic cost?

Answer 1

sum of opportunity costs of all inputs including implicit costs

Question 2

implicit cost of capital is the

Answer 2

opportunity cost of financial capital invested in firm

Question 3

what are the possibilities of financing K investment?

Answer 3

Question 4

what is the long run break even point?

Answer 4

P= minimum of ATC_LR

firms earns zero economic profits or “Normal economic profits” i.e. revenues cover all economic costs and provides “normal” rate of return on financial/physical capital investments

Question 5

what does firm look like in the long run?

Answer 5

Question 6

entry and exit of firms

what happens in the long run?

Answer 6

1. at the firm level, firms can alter K input
2. at the market level, firms may exit or enter the industry

Question 7

when will new firms enter an industry?

Answer 7

Question 8

when wil EXISTING firms exist an industry?

Answer 8

Question 9

what does a firm making profits in the short run look like?

Answer 9

Question 10

what does a firm in the short run making loss look like?

Answer 10

Question 11

when is an industry in long run equilibrium?

Answer 11

when firms have no incentive to enter or exist i.e. P=min of ATC_LR

Question 12

two desirable features of LR equilibrium

Answer 12

1. ATC_LR is minimised –> goods are produced at lowest costs which is also the price customers pay
2. capital is allocated efficiently

Question 13

show how market influences typical firm in the long run

Answer 13

Question 14

Short run impact of demand increase

Answer 14

Question 15

show short run impact of demand increase

Answer 15

Question 16

demand increase in the long run

Answer 16

1. more firms in the industry
2. LR output > SR output
3. Price back to min ATC_LR and zero economic profits

Question 17

demand increase in the long run SHOW

Answer 17

Question 18

what is the short run impact of demand decrease?

Answer 18

Question 19

what is the LR impact of demand decrease?

Answer 19

Question 20

entry and exit of firms will

Answer 20

end until price back to minimum of long run ATC

Question 21

what is a constant-cost industry?

Answer 21

LR average costs remain unchanged as industry output rises

Question 22

what is external diseconomies of scale

Answer 22

factors outside control of a firm that raises its costs as industry output increases

Question 23

what is external economies of scale?

Answer 23

Question 24

showwhat S_LR looks like in the long run

Answer 24

Question 25

what does S_LR look like for diseconomies of scale

Answer 25

D increases more than S as industry Q rises, cost of inputs rise

Question 26

show what S_LR looks like for economies of scale

Answer 26

Question 27

what is a monopoly

Answer 27

a market with a single seller with no close substitutes high barriers of entry

Question 28

why one seller in certain markets?

Answer 28

economies of scale

Question 29

describe relationship between MR and D for monopoly

Answer 29

MR is twice as steep as D MR AR= P

Question 30

show profits for a monopolist

Answer 30

Question 31

show Deadweight loss for a monopolist

Answer 31

Question 32

monopolist produces too little. Why?

Answer 32