eco10.31 - When prices increase, the quantity supplied for...

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7. True/False: a. Sunk costs are irrelevant to decisions about business strategy. TRUE? B. A competitive market will experience entry and exit until all accounting profits are zero. FALSE 6. Suppose there are 1,000 hot pretzel stands operating in NYC and the market for pretzels in the long-run equlibrium. a. Illustrate the current equilibrium. b. The city decides to restrict the number of pretzel-stand licenses, reducing the # of stands to only 800. What effect will this action have on the market and on an individual stand that is still operating? c. Suppose the city decides to charge a fee for the 800 licences, all of which are quickly sold. How will the size of the fee affect the equilibrium? If the city wants to raise as much revenue as possible how high should the city set the license fee? Characteristics of Competitive Markets 1. Objectives: Maximize profit 2. MR=MC Marginal Revenue = Marginal Cost 3. MR=P 4. Profits><O in the short-run 5. Profits=0 in the long-run Firms will still try to maximize profits even when it yields negative profit
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Unformatted text preview: When prices increase, the quantity supplied for each individual firm goes up. When a firm is maximizing costs, it is minimizing its costs. Different firms have different costs of production. Monopoly While a competitive firm is a price take , a monompoly firm is a price maker . A firm is considered a monopoly if-It is the sole seller of its product-Its product does not have close substitutes Why monopolies arise The fundamental cause of monopoly is barriers to entry . Barriers to entry have three sources: Ownership of a key resource The government gives a single firm the exclusive right to produce some good. Costs of production make a single producer more efficient than a large number or producers. An industry is a natural monopoly when a single firm can supply an entire market at a smaller cost than could two or more firms A natural monopoly arises when there are economies of scale over the relevant range of output....
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This note was uploaded on 04/20/2008 for the course ECON 304K taught by Professor Ledyard during the Spring '08 term at University of Texas at Austin.

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