econ 202 exam 3 - Assignment Essays

question

long run

answer

the time it takes for substantial new investment and entry to occur

question

short run

answer

the period before exit or entry can occur

question

sunk cost

answer

a cost that has already been committed and cannot be recovered

question

fixed cost

answer

a cost that does not change, no matter how much of a good is produced

question

explicit cost

answer

a cost that requires an outlay of money

question

implicit cost

answer

a cost that does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are forgone

question

accounting profits

answer

total revenue minus total explicit cost

question

economic profit

answer

total revenue minus total cost, including implicit opportunity costs and explicit costs

question

total revenue

answer

Price x Quantity

question

total cost

answer

the sum of fixed and variable costs

question

variable costs

answer

costs that vary directly with the level of production

question

marginal revenue

answer

the revenue from the sale of one additional unit of output

question

marginal cost

answer

the cost of producing one more unit of a good

question

average total cost

answer

total cost divided by the quantity of output

question

zero (normal) profits

answer

the condition when P = AC; at this price the firm is covering all of its costs including enough to pay labor and capital their ordinary opportunity costs

question

increasing cost industry

answer

an industry that faces higher per-unit production costs as industry output expands in the long run; the long run industry supply curve slopes upward

question

constant cost industry

answer

an industry that can expand or contract without affecting the long run per-unit cost of production; the long-run industry supply curve is horizontal

question

decreasing cost industry

answer

An industry in which expansion through the entry of firms lowers the prices that firms in the industry must pay for resources and therefore decreases their production costs.

question

variable costs change with the level of production and fixed costs does not change no matter how much you are producing

answer

what is the difference between variable costs and fixed costs

question

conditions for a firm to be maximizing profits

answer

1. is the firm doing the best it can, MR = MC?
2. should the firm shut down, p>= AVC?
3. what happens in the long run? p>= ATC?

question

postive profits

answer

If the price that a firm charges is higher than its average cost of production for that quantity produced, then the firm's profit margin is positive and it is earning economic profits.
MR>ATC

question

no stay in business

answer

if p > ATC in the short run should the firm shut down?

question

yes

answer

if p < ATC in the short run should the firm shut down?

question

no but its the breakeven point so zero economic profits

answer

if the p = ATC in the short run should the firm shut down?

question

entry

answer

economic profits lead to firm ____

question

exit

answer

economic losses lead to firm _____

question

market power

answer

the extent to which a seller can charge a higher price without losing many sales to competing businesses

question

perfect competition

answer

many competitors with the same product and least amount of market power with a basically flat demand curve (elastic)

question

monopolistic competition

answer

Many competitors selling differentiated products with some market power and imperfect competition and has a downward-sloping firm demand curve

question

oligopoly

answer

few competitors with the same or different products that have some market power and a downward-sloping demand curve

question

monopoly

answer

no competitors with a unique product and has the most market power where a firm demand curve is the market demand curve

question

marginal revenue equation

answer

output effect - discount effect

question

output effect

answer

the price of the extra item you sell

question

discount effect

answer

the price cut you'll have to offer times the quantity that gets that price cut

question

true

answer

market power leads busninesses to
1. charge a higher price
2. sell a smaller quantiy
3. earn larger profits
4. service with inefficiently high costs
T or F

question

abuses

answer

public policy can't eliminate market power but it can limit

question

firms demand curve

answer

is the average revenue curve because your average revenue per unit is the price

question

profit margin per unit

answer

average revenue minus average cost

question

rational rule for entry

answer

you should enter a market if you expect to earn a positive economic profit, which occurs when the price exceeds your average cost

question

zero

answer

short run profits -> lead to new firms to enter -
> they keep entering -. until profits are ____

question

average cost

answer

in the long run: price =

question

the rational rule for exit

answer

Exit the market if you expect to earn a negative economic profit, which occurs if the price is less than your average costs.

question

zero

answer

short-run losses lead incumbent firms to exit and they'll keep leaving until profits are ______

question

barriers to entry

answer

Obstacles that make it difficult for new firms to enter a market

question

Demand side barriers to entry

answer

create customer lock in
1. switching costs
2. earn goodwill and build your reputation
3. generate network effects

question

supply side barriers to entry

answer

develop unique cost advantages
1. learn by doing
2. exploit benefits of mass production
3. invest in research and development
4. create relationships with suppliers
5. limit access to key inputs

question

government policy barriers to entry

answer

shape the rules for entry
1. win patents
2. shape regulations
3. impose compulsory licenses
4. lobby politicians

question

deterrence barriers to entry

answer

convince your rivals you'll crush them
1. build excess capacity
2. keep cash on hand
3. build your brand
4. earn a reputation as a fierce competitor

question

competitive forces

answer

1. Competition from existing competitors
2. Threat of potential entrants
3. Threat of substitute products
4. Bargaining power of suppliers
5. Bargaining power of customers

question

price discrimination

answer

selling the same good at different prices

question

price discrimination strategy

answer

1. Charges higher prices to those who'll pay them
2. Offers selective discounts to induce new customers to buy

question

conditions for price discrimination

answer

1. Your business has market power
2. You can prevent resale
3. You can target the right prices to the right customers

question

adverse selection of sellers

answer

The tendency for the mix of goods to be skewed toward more low-quality goods when buyers can't observe quality.

question

adverse selection of buyers

answer

The tendency for the mix of buyers to be skewed toward more high-cost customers when sellers don't know buyers type.

question

moral hazard

answer

The actions you take because they are not fully observable and you are partially insulated from their consequences

question

private information

answer

when you know something others don't and it distorts what's bought and sold

question

assymetric information

answer

when one party in an exchange has more or better information then the other party

question

principle-agent problem

answer

how can a principal incentivize an agent to work in the principal's interest even when the agent has information that the principal does not?

question

free rider

answer

someone who consumes the benefits of a public good without paying a share of the costs

question

adverse selection

answer

when an offer conveys negative information about the product being offered

question

signaling

answer

an expensive action that is taken to reveal information

question

steps for making strategic decisions

answer

1. consider all of the possible outcomes
2. think about the "what ifs" separately
3. play your best response
4. put yourself in someone else's shoes

question

nash equilibrium

answer

An equilibrium in which the choice that each player makes is a best response to the choices other players are making

question

prisoners dilemma

answer

a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial.
-yields a failure to cooperate
-The temptation to take advantage undermines cooperation
-The best outcome would be to cooperate, but this is not the equilibrium outcome

question

coordination games

answer

everybody benefits if the problem is solved, so the trick is to get everyone common knowledge about the situation and its solution.
-you typically want to make the choice that complements the choice of the other players
-there's more than one equilibrium
-Communication, focal points, culture and norms, and laws and regulations can help solve the problem

question

finitely repeated game

answer

games that play out over time using game trees and reasoning backwards to solve

question

game tree

answer

shows how all possible outcomes can play out over time

question

look forward and reason backward

answer

your "what if" thinking with a repeated game
- To anticipate the likely consequences of your choices ..
- ... Start by analyzing the last period of the game. Use this
to figure out what will happen in the second-to-last period,
and Keep reasoning backward until you can see all the
consequences that follow from today's decision.

question

first-mover advantage

answer

The strategic gain from an anticipatory action which can force a rival to respond less aggressively.

question

second-mover advantage

answer

The strategic advantage that can follow from taking an action that adapts to your rival's choice.

question

indefinitely repeated games

answer

when you face the same strategic interaction an unknown number of times -> The Grim Trigger strategy punishes your rivals for not cooperating -> Punishment drives cooperation
Indefinitely repeated play helps solve the Prisoner's Dilemma.

question

diminishing marginal utility

answer

less additional utility from each additional dollar

question

risk spreading

answer

breaking a big risk into many smaller risks so that it can be spread out

a way to reduce risk

question

diversification

answer

instead of one big risk, take many unrelated risks

a way to reduce risk

question

insurance

answer

buy compensation if something bad happens

a way to reduce risk

question

hedging

answer

find a risk to offset an existing risk

a way to reduce risk

question

gathering information

answer

will reduce uncertainty

a way to reduce risk

question

overconfidence

answer

your forecasts are less accurate than you think

when evaluating probabilities avoid this

question

availability

answer

don't be swayed by easily recalled event

when evaluating probabilities avoid this

question

anchoring

answer

don't get hung up on an initial estimate or starting point

when evaluating probabilities avoid this

question

representativeness

answer

look beyond how similar things are

when evaluating probabilities avoid this

question

focusing illusion

answer

think about what you're not thinking about

when assessing payoffs avoid this

question

loss aversion

answer

don't be more sensitive to payoffs appearing as losses

when assessing payoffs avoid this

1 of 83

question

long run

answer

the time it takes for substantial new investment and entry to occur

question

short run

answer

the period before exit or entry can occur

question

sunk cost

answer

a cost that has already been committed and cannot be recovered

question

fixed cost

answer

a cost that does not change, no matter how much of a good is produced

question

explicit cost

answer

a cost that requires an outlay of money

question

implicit cost

answer

a cost that does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are forgone

question

accounting profits

answer

total revenue minus total explicit cost

question

economic profit

answer

total revenue minus total cost, including implicit opportunity costs and explicit costs

question

total revenue

answer

Price x Quantity

question

total cost

answer

the sum of fixed and variable costs

question

variable costs

answer

costs that vary directly with the level of production

question

marginal revenue

answer

the revenue from the sale of one additional unit of output

question

marginal cost

answer

the cost of producing one more unit of a good

question

average total cost

answer

total cost divided by the quantity of output

question

zero (normal) profits

answer

the condition when P = AC; at this price the firm is covering all of its costs including enough to pay labor and capital their ordinary opportunity costs

question

increasing cost industry

answer

an industry that faces higher per-unit production costs as industry output expands in the long run; the long run industry supply curve slopes upward

question

constant cost industry

answer

an industry that can expand or contract without affecting the long run per-unit cost of production; the long-run industry supply curve is horizontal

question

decreasing cost industry

answer

An industry in which expansion through the entry of firms lowers the prices that firms in the industry must pay for resources and therefore decreases their production costs.

question

variable costs change with the level of production and fixed costs does not change no matter how much you are producing

answer

what is the difference between variable costs and fixed costs

question

conditions for a firm to be maximizing profits

answer

1. is the firm doing the best it can, MR = MC?
2. should the firm shut down, p>= AVC?
3. what happens in the long run? p>= ATC?

question

postive profits

answer

If the price that a firm charges is higher than its average cost of production for that quantity produced, then the firm's profit margin is positive and it is earning economic profits.
MR>ATC

question

no stay in business

answer

if p > ATC in the short run should the firm shut down?

question

yes

answer

if p < ATC in the short run should the firm shut down?

question

no but its the breakeven point so zero economic profits

answer

if the p = ATC in the short run should the firm shut down?

question

entry

answer

economic profits lead to firm ____

question

exit

answer

economic losses lead to firm _____

question

market power

answer

the extent to which a seller can charge a higher price without losing many sales to competing businesses

question

perfect competition

answer

many competitors with the same product and least amount of market power with a basically flat demand curve (elastic)

question

monopolistic competition

answer

Many competitors selling differentiated products with some market power and imperfect competition and has a downward-sloping firm demand curve

question

oligopoly

answer

few competitors with the same or different products that have some market power and a downward-sloping demand curve

question

monopoly

answer

no competitors with a unique product and has the most market power where a firm demand curve is the market demand curve

question

marginal revenue equation

answer

output effect - discount effect

question

output effect

answer

the price of the extra item you sell

question

discount effect

answer

the price cut you'll have to offer times the quantity that gets that price cut

question

true

answer

market power leads busninesses to
1. charge a higher price
2. sell a smaller quantiy
3. earn larger profits
4. service with inefficiently high costs
T or F

question

abuses

answer

public policy can't eliminate market power but it can limit

question

firms demand curve

answer

is the average revenue curve because your average revenue per unit is the price

question

profit margin per unit

answer

average revenue minus average cost

question

rational rule for entry

answer

you should enter a market if you expect to earn a positive economic profit, which occurs when the price exceeds your average cost

question

zero

answer

short run profits -> lead to new firms to enter -
> they keep entering -. until profits are ____

question

average cost

answer

in the long run: price =

question

the rational rule for exit

answer

Exit the market if you expect to earn a negative economic profit, which occurs if the price is less than your average costs.

question

zero

answer

short-run losses lead incumbent firms to exit and they'll keep leaving until profits are ______

question

barriers to entry

answer

Obstacles that make it difficult for new firms to enter a market

question

Demand side barriers to entry

answer

create customer lock in
1. switching costs
2. earn goodwill and build your reputation
3. generate network effects

question

supply side barriers to entry

answer

develop unique cost advantages
1. learn by doing
2. exploit benefits of mass production
3. invest in research and development
4. create relationships with suppliers
5. limit access to key inputs

question

government policy barriers to entry

answer

shape the rules for entry
1. win patents
2. shape regulations
3. impose compulsory licenses
4. lobby politicians

question

deterrence barriers to entry

answer

convince your rivals you'll crush them
1. build excess capacity
2. keep cash on hand
3. build your brand
4. earn a reputation as a fierce competitor

question

competitive forces

answer

1. Competition from existing competitors
2. Threat of potential entrants
3. Threat of substitute products
4. Bargaining power of suppliers
5. Bargaining power of customers

question

price discrimination

answer

selling the same good at different prices

question

price discrimination strategy

answer

1. Charges higher prices to those who'll pay them
2. Offers selective discounts to induce new customers to buy

question

conditions for price discrimination

answer

1. Your business has market power
2. You can prevent resale
3. You can target the right prices to the right customers

question

adverse selection of sellers

answer

The tendency for the mix of goods to be skewed toward more low-quality goods when buyers can't observe quality.

question

adverse selection of buyers

answer

The tendency for the mix of buyers to be skewed toward more high-cost customers when sellers don't know buyers type.

question

moral hazard

answer

The actions you take because they are not fully observable and you are partially insulated from their consequences

question

private information

answer

when you know something others don't and it distorts what's bought and sold

question

assymetric information

answer

when one party in an exchange has more or better information then the other party

question

principle-agent problem

answer

how can a principal incentivize an agent to work in the principal's interest even when the agent has information that the principal does not?

question

free rider

answer

someone who consumes the benefits of a public good without paying a share of the costs

question

adverse selection

answer

when an offer conveys negative information about the product being offered

question

signaling

answer

an expensive action that is taken to reveal information

question

steps for making strategic decisions

answer

1. consider all of the possible outcomes
2. think about the "what ifs" separately
3. play your best response
4. put yourself in someone else's shoes

question

nash equilibrium

answer

An equilibrium in which the choice that each player makes is a best response to the choices other players are making

question

prisoners dilemma

answer

question

coordination games

answer

question

finitely repeated game

answer

games that play out over time using game trees and reasoning backwards to solve

question

game tree

answer

shows how all possible outcomes can play out over time

question

look forward and reason backward

answer

question

first-mover advantage

answer

The strategic gain from an anticipatory action which can force a rival to respond less aggressively.

question

second-mover advantage

answer

The strategic advantage that can follow from taking an action that adapts to your rival's choice.

question

indefinitely repeated games

answer

question

diminishing marginal utility

answer

less additional utility from each additional dollar

question

risk spreading

answer

breaking a big risk into many smaller risks so that it can be spread out

a way to reduce risk

question

diversification

answer

instead of one big risk, take many unrelated risks

a way to reduce risk

question

insurance

answer

buy compensation if something bad happens

a way to reduce risk

question

hedging

answer

find a risk to offset an existing risk

a way to reduce risk

question

gathering information

answer

will reduce uncertainty

a way to reduce risk

question

overconfidence

answer

your forecasts are less accurate than you think

when evaluating probabilities avoid this

question

availability

answer

don't be swayed by easily recalled event

when evaluating probabilities avoid this

question

anchoring

answer

don't get hung up on an initial estimate or starting point

when evaluating probabilities avoid this

question

representativeness

answer

look beyond how similar things are

when evaluating probabilities avoid this

question

focusing illusion

answer

think about what you're not thinking about

when assessing payoffs avoid this

question

loss aversion

answer

don't be more sensitive to payoffs appearing as losses

when assessing payoffs avoid this

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