What distinguishes sunk costs from opportunity costs?
Sunk costs are already incurred and unrecoverable, opportunity costs are forgone returns from the next-best alternative.
How is economic cost calculated?
Economic cost equals accounting cost plus opportunity cost.
When should a project be undertaken based on economic cost?
When its revenue exceeds its full economic cost.
What does the opportunity cost of attending school include?
Earnings forgone from the individual’s previous job and other relevant alternatives.
When do economies of scale occur?
When average cost decreases as output increases.
When do diseconomies of scale occur?
When average cost increases as output increases.
What are sources of economies of scale?
Fixed costs, specialization, and indivisible inputs.
What is marginal cost?
The cost of producing an additional unit.
What is average cost?
Total cost divided by the number of units produced.
Where does marginal cost cross average variable cost?
At the minimum point of average variable cost.
Where does marginal cost cross average cost?
At the minimum point of average cost.
What is the formula for profit in terms of revenue and cost?
Profit equals total revenue minus total cost.
When should a firm increase its output based on marginal revenue and cost?
When marginal revenue exceeds marginal cost.
When should a firm decrease its output based on marginal revenue and cost?
When marginal revenue is below marginal cost.
At what output is profit maximized regarding marginal revenue and cost?
Where marginal revenue equals marginal cost.
What condition must marginal cost satisfy for profit maximization?
It must identify the top of the profit curve.
Why do fixed costs not affect the profit-maximizing output?
Because they do not change marginal revenue or marginal cost.
What characterizes perfect competition regarding products?
Products are homogeneous in perfect competition.
What is the relationship between price and marginal revenue for a competitive firm?
Price equals marginal revenue for a competitive firm.
What condition triggers a competitive firm to shut down in the short run?
Price below minimum average cost causes shutdown in short run.
What determines the market price in perfect competition?
Aggregate demand and aggregate supply determine market price.
How do firms in perfect competition influence the market price?
Firms are price takers and cannot influence market price.
What is the supply decision condition for a competitive firm?
The supply decision satisfies .
What determines each competitive firm's output?
Each firm chooses output at the given market price.
What triggers entry in long-run competitive adjustment?
Firms earning positive profit trigger entry.
What triggers exit in long-run competitive adjustment?
Firms earning negative profit trigger exit.
What must active firms do in long-run competitive equilibrium?
Active firms must maximize profit.
What profit condition holds for firms in long-run competitive equilibrium?
Firms earn zero economic profit.
In long-run competitive equilibrium, what equals price?
Price equals both marginal cost and average cost.
What costs do firms cover in long-run competitive equilibrium?
Firms cover all costs including the entrepreneur’s opportunity cost.
What is the formula for total revenue in monopoly pricing?
Total revenue equals price times quantity: .
How is marginal revenue calculated for a monopolist with inverse demand ?
Marginal revenue is .
Where does a monopolist choose quantity to maximize profit?
Where marginal revenue equals marginal cost.
How does a monopolist determine the price after choosing quantity?
By using the inverse demand curve.
What role do fixed costs play in monopoly pricing decisions?
Fixed costs do not determine the monopoly pricing decision.
What do fixed costs determine for a monopoly business?
Whether the business is profitable.
What does price elasticity of demand measure?
Responsiveness of quantity demanded to a price change.
When does a price increase raise total expenditure?
When demand is inelastic.
When does a price increase lower total expenditure?
When demand is elastic.
What is the monopoly markup rule formula?
$\frac{P-MC}{P}=\frac{1}{E}$
Why does a monopolist operate on the elastic portion of demand?
Because marginal revenue must be positive when marginal cost is positive.
What does game theory study?
Rational behavior in interactive or interdependent situations.
What defines a dominant strategy?
It gives a higher payoff regardless of the other player's actions.
What is a Nash equilibrium?
A strategy combination where no player wants to change unilaterally.
Is a Nash equilibrium always efficient?
No, it is not necessarily efficient.
What does backward induction solve in sequential games?
Optimal actions at final decision nodes and earlier decisions by reasoning backward.
When does a threat in a sequential game matter?
Only when it is credible and optimal to carry out at the decision node.
What is the first step to solve a sequential game?
Start with the last move and determine the player's best action.
What should be done after determining the best action in a sequential game?
Eliminate inferior branches and repeat backward.
When is the monopolist’s threat to fight entry noncredible in the market-entry game?
When accommodation gives the monopolist a better response after entry.
What defines an oligopoly market structure?
A market with a finite number of firms whose decisions affect one another strategically.
What distinguishes Cournot from Bertrand competition?
Cournot involves simultaneous quantity choices, Bertrand involves simultaneous price choices.
What happens in price competition with homogeneous products?
Firms undercut each other until price equals marginal cost.
What is a Stackelberg game in competition models?
A sequential competition where the leader moves first anticipating the follower’s reaction.
What factors does demand depend on?
Demand depends on own price, prices of other goods, income, and tastes.
How does an increase in a substitute's price affect demand for the good?
It increases demand for the good.
How does an increase in a complement's price affect demand for the good?
It decreases demand for the good.
How does an increase in income affect demand for a normal good?
It increases demand for a normal good.
How does an increase in income affect demand for an inferior good?
It decreases demand for an inferior good.
What are the steps involved in demand estimation?
Specifying a demand equation, collecting data, and fitting the equation using regression techniques.
Where does market equilibrium occur in terms of quantity?
Where quantity demanded equals quantity supplied.
What does consumer surplus represent in a market?
Buyers’ gains from trade.
How is producer surplus defined in relation to the supply curve and market price?
Area above the supply curve and below the market price.
What effect does a per-unit tax on sellers have on the supply curve?
It shifts the supply curve upward by the tax amount.
What effect does a per-unit tax on buyers have on the demand curve?
It shifts the demand curve downward by the tax amount.
How does a sales tax affect total welfare?
It reduces total welfare by creating deadweight loss.
Test your knowledge with 36 questions on Managerial Economics: Markets and Strategy.
1. Which cost should be included when evaluating a forward-looking business decision?
2. When should a project be undertaken under the economic-cost decision rule?
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