Econ 4001.01 1st EditionExam # 2 Study Guide Lectures: 9-18Lecture 9 (February 10th)What are the three different types of returns to scale?1.Constant returns to scale- output increases proportionally with increasing input2.Decreasing returns to scale- output increases less than proportionally with increasing input3. Increasing returns to scale- output increases more than proportionally with increasing inputLecture 10 (February 17th) What is the difference between explicit and implicit costs?Explicit costs are all out-of-pocket costs that involve an input of money, while implicit costs are opportunity costs. Total cost is all out-of-pocket costs that involve an input of money and opportunity costs or explicit + implicit costs.What is the difference between economic and accounting profit?Economic profit is total revenue minus total cost while accounting profit is total revenue minus explicit costs. The only difference is the economic profit takes implicit costs into account while accounting profit ignores it.What is the difference between sunk cost and fixed cost?Sunk costs are cost that have been made and cannot be reversed. Fixed costs are expenditures that are not affected by output. Some fixed costs are also sunk costs, but not always.Software programs: sunk or fixed cost?Sunk costInsurance: sunk or fixed cost?Fixed costLecture 11 (February 19th) How are marginal cost and marginal product related?MC= (W/MPL) when the variable is labor which shows that MC and MP are inversely relatedIf marginal cost is above average cost average cost must be _______?RisingIf marginal cost is below average cost, average cost must be _______?FallingWhat is the formula for cost of capital?Cost of capital (r)= depreciation rate + interest rateWhat is the formula for total cost?Total cost= capital costs + labor costsTC= (r) + (W*L)What is an isocost curve?An isocost curve shows all the different possible combinations for labor and capital at a certain total cost. Each isocost curve has a different total cost.Lecture 12 (February 24th) What are economies of scope?This situation occurs when a firm that makes two products may be able to operate at lower costs due to efficienciesDefine a learning curve:A learning curve occurs over time as workers become better and more efficient as they make more and more of their output.List the requirements for a perfectly competitive market:1.Many sellers2.Homogeneous products3.Free entry and exitIf MR>MC, then __________ production will raise profitsIncreasingIf MR<MC, _________ production will raise profitsDecreasingIf MR=MC, then any change in production will _______ profitsLowerLecture 13 (February 26th) At what point on the graph are firm’s maximizing profits? What if the firm has a horizontal demand curve?At the point where MR(q)=MC(q) is where the typical firm maximizes profit. A firm faced with ahorizontal demand curve will operate at P=MCAt what point should a firm shut down?A firm should shutdown if P<ATC. Firms will make a profit at P>ATC and will continue to run making losses at point AVC<P<ATC for a short time. Lecture 14 (March 3rd) What is the difference between producer surplus and profit?Profit takes into account fixed while producer surplus does not.True or False: A long-run supply curve can be horizontal if there are constant returns to scale.TrueLecture 15 (March 5th) Is minimum wage an example of a price floor or a price ceiling?Price floorWhat can be used to determine how the burden of a tax falls?Burden depends on elasticity or supply and demand. The most inelastic line (of supply or demand) bears most of the burden of the tax.Lecture 16 (March 10th) What are the characteristics of a monopoly?One sellerMany buyersHomogeneous ProductBarriers of entry What are the different types of barriers to entry and what defines them?1.Statutory- the government regulates/restricts entry into the market2.Natural- high fixed costs naturally lead to barriers of entry for firms3.Patent or trademark- lawfully gives the right to sell a specific design of a product to one single firm4.Cost advantage- one firm has lower costs5.Marketing advantage- buyers prefer one firm over the otherHow do monopolists maximize their profits?Monopolists choose to operate at a quantity where MC=MR and use the price on the demand curve.Lecture 17 (March 12th) Example: Price per daily dose is $3.50 and marginal cost is $0.30-0.40, what is the range of demand elasticity?Plug it in to the learner index to get the range of demand elasticity (3.50-0.30)/3.50= 0.914  -1/0.914= -1.09 (3.50-0.40)/3.50=0.886  -1/0.886= -1.13 The range is from -1.09 to -1.13What are some welfare implications of a monopoly?Consumer surplus is transferred to the monopolist, dead weight loss is present, and rent-seeking behavior may occur, which is when firms wastefully compete for market power such as paying off companies not to enter the market and etc. However, government often controls these behaviors with restrictions such as price ceilings.What is a monopsony?A monopsony is a market where the buyer has the power to impact the market price, and the monopsony buyer chooses a quantity where ME=MV. Compared to monopoly, in a monopsony equilibrium quantity is too low for both buyer and seller and therefore there is a dead weight loss. Although there is dead weight loss, the surplus is transferred to consumers rather than producers in a monopsony.Lecture 18 (March 24th) True or false: Firms with market power can set the price above MC.TrueWhat percentage is considered a high concentration of market power?High is considered over 50% and very high is over 80%What are the three degrees of price discrimination and what defines them?1st degree (Perfect price discrimination): Each customer pays his/her maximum willingness to pay2nd degree: Seller offers discounts to purchasers of large quantities of the good or service3rd degree: Seller splits market into two or more groups, based on their WTP and demand elasticityTrue or false: restaurants offering lower prices during the week is an example of price-skimming strategy?False. This is an example of peak-loading pricing, where the product is in higher demand at certain times so the firm caters it’s prices to those times. Price skimming strategy is setting a high price for newly released items such as books or movies, then over time the price goes down because people only want it at the high price while its