ECO 100

Exam #2 Review Sheet

Note: If you have any questions about the review sheet, please talk to me,
Lisa or Nigina.
COST OF PRODUCTION
Total variable cost: TVC cost that vary with out put
Total fixed cost: TFC costs that dont vary with output
Total cost: TC = TFC..+TVC..
Average cost = cost per unit (hint: divide cost by quantity)
Average fixed cost: AFC = TFC../ Q
Average variable cost: AVC =TVC../ Q
Average total cost: ATC =TC../ Q =AFC +AVC
Marginal cost: MC =TC../ Q = ../

TFC

TVC

TC

0
1
2
3
4
5

2
2
2
2
2
2

0
4
7
13
22
35

2
6
9
15
24
37

1. Which of the following is true? When Q equals

a) 1, ATC = 4
b) 2, AFC = 3.5
c) 0, ATC = 0
d) 4, ATC = 6
e) 3, AVC = 5
ECO 100 - Exam # 2 Review Sheet

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2. MC of the second unit is 9.

3. MC of the third unit is 6.

TRUE / FALSE
TRUE / FALSE

Short run (SR)

- draw total costs
(TFC, TVC, TC)

- draw average and marginal costs

(AFC, AVC, ATC, MC)

Cost curves shift when there is a change in:

- ..
- ..
- ..
Long run (LR) draw LRATC (long-run average total cost)
$

Diseconomics
Of scale
Economy
Of

constant returns
To scale

Scale

Q
Show where on the curve are
- economies of scale- constant returns to scale -%change in put = % change in output
ECO 100 - Exam # 2 Review Sheet

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diseconomies of scale- ?

Explain why they occur.

4. Implicit costs are costs for resources used in production where no monetary payment is
made.
TRUE / FALSE
Accounting profit = revenues - explicit costs
Economic profit = revenue - (explicit cost + implicit cost)
..
5. Accounting profits overestimate economic costs.
TRUE / FALSE

MARKET STRUCTURES
Fill in the blanks:

ECO 100 - Exam # 2 Review Sheet

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Solution:

PROFIT MAXIMIZATION
MR=MC
Indicate optimal quantity and price:
Monopolistic Competition
$

Monopoly
$

MC

MC
MR = P = d

ATC
MR
MR

ECO 100 - Exam # 2 Review Sheet

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Perfect Competition

Firms maximize their profit when MR=MC

Firms will:
- increase production when
- decrease production when
- keep their production unchanged when

MR>..MC
MR<..MC
MR=..MC

go to demand line for price @ q where mr =mc

8. In the long run, firms produce at the lowest point of their LRATC in
a) Perfect competition
b) Monopolistic competition
c) Oligopoly
d) Monopoly
9. Which of the following would be legal barriers to entry?
a) patent
b) copyright
c) control over essential output
d) licenses
g) economies of scale
f) public franchises
10. Which one of the above listed barriers would cause natural monopoly? What would be
examples of natural monopoly?
Economies of scale, utilities
GAME THEORY MATRIX
(numbers represent profits)
Ferrari
A
100
100

C
130
50

B
50
130

D
80
80

Maseratti

In which cells are the firms:

- competing D both low
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cooperating A both high

cheating? B C one lowered one higher

In cell B Masserati is cheating. Would the price of Masserati be lower or higher compared to
the price of Ferrari? lower

MERGERS
Task: connect merging companies with appropriate merger types:
CAR company + CAR company

Vertical

BEER company + HOPS company

Conglomerate

CAR company + BEER company

Horizontal

GOVERNMENT
11. Indicate whether the following terms are characteristics of public or private good.
a) exclusion Private
b) non-rival consumption Public
c) it is indivisible Public
Compare equilibrium quantities and price with and without the spillover cost (higher / lower):
SB
P
SA

Spillover Cost lowers supply (A

to B)
Q decreased but P increased

Pa Qa are efficient prices/output

D

(Pb-Pa) is spillover costs

Q
Pollution:
12. Command and control regulation and incentive-based regulation are government
approaches to spillover cost.
TRUE / FALSE
ECO 100 - Exam # 2 Review Sheet

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IMPORTANT TERMS
What is:
-

Cartel (what are the obstacles to forming cartels)

Formal organization of firms attempting to act as 1 firm
Obstacles: cheating, # of sellers, cost and demand difference, potential
competition econ downturn government policy illegal
Price discrimination
Charging different prices to different customers despite no difference in cost
(senior discounts, last minute ticket prices) (business to consumer and legal)
Tying contract
Prevents buyers from using products of a competing supplier
Interlocking directorate
Same person serves on boards of competing firms
(Illegal)
Sherman Act section 1, section 2 (what they regulate)
1: prohibits particular type of market conduct
(conspiracy to limit competition)
2: outlaws particular market structure
(outlaws monopoly)
Clayton Act (what it regulates)
Price discrimination, mergers, tying contracts, interlocking directorates
Public good
Indivisible, nonexclusive, non rival
Private good
Divisible, exclusion, rival consumption
Spillover cost (give specific examples)
Cost imposed on people other than producers or consumers
(pollution)
Transfer (give specific examples)
Taking money from one person to give to another
(unemployment insurance, food stamps, social security)
Public utility regulation
Government controls price and output of natural monopolies
(utilities)
Fair-return price
Price that public utilities can charge when PRICE = ATC (normal profit)
Economic inequality
When distribution of goods distributed is unequal
Market failure
When the market fails to allocate resources efficiently
Price leadership

ECO 100 - Exam # 2 Review Sheet

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Informal type of collusion where the price leader is the dominant firm and the
other firms follow the price changes made by that leader which results in reduced
output, higher prices, and shared monopoly profits. (collusion but legal)

ECO 100 - Exam # 2 Review Sheet

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