ECO 182 UNIT 2 TEST EXAM QUESTIONS AND ANSWERS WITH
COMPLETE SOLUTIONS VERIFIED
Equilibrium
The price at which quantity supplied is equal to quantity
demanded is the equilibrium price
Deadweight Loss (DWL)
represents the value of mutually beneficial transactions foregone
Characteristics of Perfect Competition
1. Many buyers and many sellers.
2. The goods offered for sale are largely the same.
3. Firms can freely enter or exit the market.
4. Complete Information
Perfect comp in the SR
If MR > ATC, firms make a profit and operate in the short run
If AVC < MR < ATC, firms make a loss but operate in the short run
If MR < AVC, firms shut down in the short run
Perfect comp in the LR
If the firm is making a profit, operate
If the firm is making a loss, exit
(The long-run price is the minimum of the ATC; the long-run profit is 0)
When do market failures occur?
, when the individual pursuit of their own self-interest results in a deadweight loss (does
not result in an efficient outcome)
Why do market failures occur?
Market failures are often the result of the assumptions of perfect competition failing to
hold
What are the four types of market failures?
Market power(Monopoly, Oligopoly, Monopolistic competition)
Externalities
Limited property rights(Public goods, Common resources)
Asymmetric information
Sources of barriers to entry for monopolies
Control of scarce resources or inputs
High fixed costs of entry and low marginal costs (natural monopolies)
Technological superiority
Network externalities
Patents and copyrights
Characteristics of Monopolistic competition
Many sellers (and many buyers)•
No barriers to entry•
Therefore, long-run economic profits are zero
Differentiated goods
Therefore, demand is downward-sloping
•Therefore, can mark price up over MC
COMPLETE SOLUTIONS VERIFIED
Equilibrium
The price at which quantity supplied is equal to quantity
demanded is the equilibrium price
Deadweight Loss (DWL)
represents the value of mutually beneficial transactions foregone
Characteristics of Perfect Competition
1. Many buyers and many sellers.
2. The goods offered for sale are largely the same.
3. Firms can freely enter or exit the market.
4. Complete Information
Perfect comp in the SR
If MR > ATC, firms make a profit and operate in the short run
If AVC < MR < ATC, firms make a loss but operate in the short run
If MR < AVC, firms shut down in the short run
Perfect comp in the LR
If the firm is making a profit, operate
If the firm is making a loss, exit
(The long-run price is the minimum of the ATC; the long-run profit is 0)
When do market failures occur?
, when the individual pursuit of their own self-interest results in a deadweight loss (does
not result in an efficient outcome)
Why do market failures occur?
Market failures are often the result of the assumptions of perfect competition failing to
hold
What are the four types of market failures?
Market power(Monopoly, Oligopoly, Monopolistic competition)
Externalities
Limited property rights(Public goods, Common resources)
Asymmetric information
Sources of barriers to entry for monopolies
Control of scarce resources or inputs
High fixed costs of entry and low marginal costs (natural monopolies)
Technological superiority
Network externalities
Patents and copyrights
Characteristics of Monopolistic competition
Many sellers (and many buyers)•
No barriers to entry•
Therefore, long-run economic profits are zero
Differentiated goods
Therefore, demand is downward-sloping
•Therefore, can mark price up over MC
