Quiz Three

1. Price taker: under perfect competition, the firm is a price taker. It has no choice but to accept the
price that has been determined in the market.

2. Economic profit: equals net earnings, in the accountant’s sense, minus the opportunity costs of
capital and of any other inputs supplied by the firm’s owners.

3. Supply curve of the firm: shows the different quantities of output that the firm would be willing
to supply at different possible prices during some given period of time.

4. Supply curve of the industry: show the different quantities of output that the industry would
supply at different possible prices during some given period of time.

5. Variable cost: is a cost whose total amount changes when the quantity of output of the supplier
changes.

6. Price discrimination: is the sale of a given product at different prices to different costumers of
the firm, when there are no differences in the cost of supplying these costumers. Prices are also
discriminatory if it cost more to supply one costumer than another, but there are charged the
same price.

7. Patents: is a privilege granted to an inventor, where an individual or a firm, that for a specified
period of time prohibits anyone else from producing or using that invention without the
permission of the holder of the patent.

8. Monopoly profits: are any excess of the profits earned persistently by a monopoly firm over and
above those that would be earned if the industry were perfectly competitive.

9. Natural monopoly: is industry in which advantages of large-scale production make it possible for
a single firm to produce the entire output of the market at lower average cost that a number of
firms, each producing smaller quantity.

10. Oligopoly: is a market dominated by a few sellers, at least several of which are large enough
relative to the total market to be able to influence the market price.

11. Perfect competition: occurs in a industry when that industry is made up of many small firms
producing homogenous products, when there is no impediment to the entry or exit of firms, and
when full information is available.

12. Imperfect competition: is the competitive situation in any market where the conditions
necessary for perfect competition are not satisfied. It is a market structure that does not meet
the conditions of perfect competition .
Problems: complete two of the following three problems. Five points each.

1. Explain why it is not sensible to close a business firm if it earns zero economic profits.

2. If the firm’s lowest average cost is $50 and the corresponding average variable cost is $10, what
does it pay a perfectly competitive firm to do if the market price is $8? $12? $49?
3. Which of the following are pure monopolies?
a. The only gasoline station in a small town

b. The only bookstore on a college campus

c. The only supplier of a patented medication

Discussion: Ten points.

Compare and contrast the profit maximizing process of a perfectly competitive firm with that of a
monopolist.