AP Microeconomics - Weebly



AP Microeconomics

Unit 4 Study Guide (Ch 13-17)

Firm Behavior, Organization of Industry, Monopolies and Oligopolies

Chapter 13 (pgs. 259-274)

1. What is the relationship between a firm’s total revenue, profit and total cost?

2. What is marginal product, and what does it mean when it is “diminishing”?

3. Draw a production function graph that exhibits diminishing marginal product of labor. Draw the associated cost curve (be sure to label the axes). Explain the shapes of the 2 curves you have drawn.

4. Explain the relationship between total cost, average total cost, and marginal cost.

5. Draw the marginal cost and average total cost curves for a typical firm. Explain the shapes and intersection of the two curves.

6. How and why does a firm’s average total cost curve differ in the short run and long run?

7. Explain the development of both economic and diseconomies of scale.

Terms to Know

Explicit and implicit costs production function economic profit

Fixed costs accounting profit variable costs

Efficient state constant return to scale

Chapter 14 (pgs. 279-295)

1. What is a “competitive firm”?

2. Explain the difference between a firm’s revenue and its profit. Which do firms maximize?

3. Draw the cost curves for a typical firm. For a given price, explain how the firm chooses the level of output that maximizes profit. At that level of output, show on your graph the firm’s total revenue and total costs.

4. Under what conditions will a firm temporarily shut down? Explain. Under what conditions will it exit the market? Explain.

5. Does a firm’s price equal marginal cost in the short run, in the long run, or both? Explain.

6. Does a firm’s price equal the minimum average total cost in the short run, long run, or both? Explain.

7. Are market supply curves typically more elastic in the short run or the long run? Explain.

Terms to Know

Average revenue marginal revenue sunk costs

Chapter 15 (pgs. 299-328)

1. Give an example of a government-created monopoly. Is creating this monopoly necessarily bad public policy? Explain.

2. What does the size of a market have to do with whether an industry is a “natural monopoly”?

3. Why is a monopolist’s marginal revenue less than the price of its good? Can marginal revenue ever be negative? Explain.

4. Draw the demand, marginal revenue, average total cost, and marginal cost curves for a monopolist. Show the profit-maximizing level of output, the profit-maximizing price, and the amount of profit.

5. Give two examples of price discrimination. In each case, explain why the monopolist chooses to follow this business strategy.

6. What gives the government the power to regulate mergers between firms? From the standpoint of the welfare of society, give a good reason and a bad reason that two firms might want to merge.

Terms to Know

monopoly natural monopoly price discrimination

Chapter 16 (pgs. 329-348)

1. Describe the 3 attributes of monopolistic competition. How is monopolistic competition like monopoly? How is it like perfect competition?

2. Draw a diagram depicting a firm that is making a profit in a monopolistically competitive market. Show what happens to this firm as new firms enter the industry.

3. Draw a diagram of the long-run equilibrium in a monopolistically competitive market. How is price related to average total cost? How is price related to marginal cost?

4. Does a monopolistic competitor produce too much or too little output compared to the most efficient level? What practical considerations make it difficult for policymakers to solve this problem?

5. How might advertising reduce economic well-being? How might advertising increase economic well-being?

6. Explain 2 benefits that might arise from the existence of brand names.

Terms to Know

oligopoly monopolistic competition

Chapter 17 (pgs. 349-371)

1. If a group of sellers could form a cartel, what quantity and price would they try to set?

2. Compare the quantity and price of an oligopoly to those of a monopoly, then compare them to those of a competitive market.

3. How does the number of firms in an oligopoly affect the outcome in its market?

4. What is the prisoners’ dilemma, and what does it have to do with oligopoly?

5. Give 2 examples other than oligopoly that show how the prisoners’ dilemma helps to explain behavior.

6. What kinds of behavior do anti-trust laws prohibit?

Terms to Know

Game theory collusion cartel Nash equilibrium

Prisoners’ dilemma dominant strategy

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