question
Jill has two choices: (1) $9 for sure and (2) a lottery with an expected value of $7. If Jill chooses the lottery, she is:
answer
Risk Seeking
question
If two goods are complements, the cross-price elasticity of demand must be
answer
Negative
question
The market supply function is: P= 10 + Q. The market demand function is: P = 70 -2Q. What is the change in consumer surplus associated with a price floor (minimum price) of $30?
answer
0
question
Suppose a small regional airport is served by one of the major airlines, and a new low-cost airline enters the market. If the major airlines cuts air fares in this market to levels that are below its marginal cost in response to the other firm's entry, then the m ajor airline may be engaging in:
answer
Predatory pricing
question
Suppose that dean and supply for a product are given by the following equations. Further suppose the government imposes a tax of $2 per unit. What is ther percentage of the tax borne by SELLERS?
answer
Q(d) = 60- P(b)
Q(s) = -40 + 4P(s)
Answer: 20
Q(s) = -40 + 4P(s)
Answer: 20
question
Suppose that dean and supply for a product are given by the following equations. Further suppose the government imposes a tax of $2 per unit. What is the deadweight loss asssociated with the tax?
answer
Q(d) = 60- P(b)
Q(s) = -40 + 4P(s)
Answer: 1.6
Q(s) = -40 + 4P(s)
Answer: 1.6
question
Which of the following production functions exhibits constant returns to scale?
answer
q = K + 2L
question
The change in the quantity of a good resulting from a change in relative price with the level of satisfaction held constant is called the:
answer
Substitution Effect
question
Marginal Revenue graphically is
answer
The slope of the total revenue at a given point
question
At the profit-maximizing level of output, what is the relationship between the total revenue (TR) and total cost(TC)?
answer
They must have the same slope
question
Because of the relationship between a perfectly competitve firms demand surve and its marginal revenue curve, the profit maximization condition for the firm can be written as
answer
P = MC
question
In a constant-cost industry, an increase in demand will be followed by:
answer
An increase in supply that will bring price down to the level it was before the demand shift
question
In an unregulated competitive market, producer surplus exists because some
answer
Producers are willing to sell at less than the equilibrium price
question
Consider a good whose own price elasticity of deman is -0.5 and price elasticity of supply is 1.5. The fraction of a specific tax will be passed through to consumer is
answer
0.75
question
The firms in a market have decided not to complete with one another and have aggreed to limit output and raise price.
answer
This practice is known as collusion and is illegal inthe United States
question
A firm has two main products: WindSong is a program that can be used to edit audio files and SunBurst is a program that can be used to edit digital photos. The two major types of customers are small businesses and home users. The small business customershave a reservation price of $300 for WindSong and $450 for SunBurst. The home users have a reservation price of $100 for WindSong and $125 for SunBurst. Which of the following statements is true?
answer
Bundling the two software products is not likely to be profitable because the demands are positively correlated.
question
Ed, acar salesman,is an extremely talented negotiator. He spends a lot of time getting to know his customers and he believes that he can determine each customer's true value for a car. He sells each customer a car at a price equal to that customer's willingness-to-pay. This is an example of:
answer
First- Degree Price Discrimination
question
The supply curve for a competitive firm is
answer
its MC Curve above the minimum of the AVC curve
question
In yourown words, explain why firms maximize profits at the point where marginal revenue equals marginal cost.
answer
If MR > MC, increasing Q increases profit because the increased revenue from selling one more unit is larger than the increased cost of producing one more unit.
If MR < MC, decreasing Q increases profit because the decreased cost of producing one less unit outweighs the decreased revenue from selling one less unit.
Therefore, the only situation where the firm cannot change its output to increase its profit is when MR = MC. Profit must be maximized when MR = MC.
If MR < MC, decreasing Q increases profit because the decreased cost of producing one less unit outweighs the decreased revenue from selling one less unit.
Therefore, the only situation where the firm cannot change its output to increase its profit is when MR = MC. Profit must be maximized when MR = MC.
question
why the burden of a tax is not always shared evenly between buyers and sellers
answer
When demand is inelastic relative to supply (demand is steeper), the buyers pay a higher proportion of the tax (left-hand side figure below).
When supply is inelastic relative to demand (supply is steeper), the sellers pay a higher proportion of the tax (right-hand side figure below).
When supply is inelastic relative to demand (supply is steeper), the sellers pay a higher proportion of the tax (right-hand side figure below).
question
Which of the following statements demonstrates acorrectunderstanding of the importance of sunk costs for decision making?
I. "Even though I hate my MBA classes, I can't quit because I've spent so much money on tuition."
II. "To break into the market for soap our firm needs to spend $10M on creating an image that is unique to our new product. When deciding whether to develop the new soap, we need to take this marketing cost into account."
I. "Even though I hate my MBA classes, I can't quit because I've spent so much money on tuition."
II. "To break into the market for soap our firm needs to spend $10M on creating an image that is unique to our new product. When deciding whether to develop the new soap, we need to take this marketing cost into account."
answer
II only
question
For any given level of output:
answer
a. marginal cost must be greater than average cost.
b.average variable cost must be greater than average fixed cost.
c.average fixed cost must be greater than average variable cost.
d.fixed cost must be greater than variable cost.
Answer: e.None of the above is necessarily correct.
b.average variable cost must be greater than average fixed cost.
c.average fixed cost must be greater than average variable cost.
d.fixed cost must be greater than variable cost.
Answer: e.None of the above is necessarily correct.
question
Suppose that the price of labor (w) is $10 and the price of capital (r) is $20. What is the equation of the isocost line corresponding to a total cost of $100?
answer
K= 5 - 0.5L
question
The average total cost to produce 100 cookies is $0.25 per cookie. The marginal cost is constant at $0.10 for all cookies produced.The total cost to produce 50 cookies is:
answer
20
question
Anna has two choices: (1) $100 for sure and (2) a lottery where she has a 50% chance of winning $200 and a 50% chance of winning $40. If Anna chooses the $100 for sure, she is
answer
risk averse
question
Donna has two choices: (1) $100 for sure and (2) a lottery where she has a 50% chance of winning $200 and a 50% chance of winning $40. If Donna chooses the lottery, she is
answer
It is impossible to tell anything about Donna's risk preferences.
Explination: If Donna chooses the lottery, which has an expected value of $120, over $100 for sure, she could be risk neutral, riskloving, or risk averse.
If she was risk neutral, she would choose the option with the highest expected value. In this case, the option with the highest expected value is the lottery. Donna chose the lotteryso she could be risk neutral.
If she was risk seeking, she would care about both expected value and having a high standard deviation (or variance). In this case, the lottery has a higher expected value and a higher variance than the for sure payment. Therefore, by choosing the lottery, she could be risk seeking.
Explination: If Donna chooses the lottery, which has an expected value of $120, over $100 for sure, she could be risk neutral, riskloving, or risk averse.
If she was risk neutral, she would choose the option with the highest expected value. In this case, the option with the highest expected value is the lottery. Donna chose the lotteryso she could be risk neutral.
If she was risk seeking, she would care about both expected value and having a high standard deviation (or variance). In this case, the lottery has a higher expected value and a higher variance than the for sure payment. Therefore, by choosing the lottery, she could be risk seeking.
question
An investment opportunity is a sure thing; it will pay off $100 regardless of which of the three possible outcomes comes to pass. The variance of this investment opportunity:
answer
is 0
question
Other things equal, expected income can be used as a direct measure of well-being
answer
if and only if individuals are risk neutral.
question
We may not be able to fully remove risk by diversification if:
answer
the asset returns in our portfolio are positively correlated.
question
If you were risk neutral, you would be indifferent between the two lotteries because the expected values are the same.
answer
If you were risk averse, you would prefer the first lottery (the one in Part A) because it has a lower standard deviation and, therefore, lower risk.
question
EV = -3:
Will Danny accept the lottery if he is risk neutral? (Possible answers: Yes, No, Indifferent, Ambiguous)
Will Danny accept the lottery if he is risk neutral? (Possible answers: Yes, No, Indifferent, Ambiguous)
answer
No; the status quo of $0 is better (i.e. if he doesn't accept the lottery, he doesn't gain or lose). The risk neutral person only cares about expected value.
question
EV = -3:
Will Danny accept the lottery if he is risk averse? (Possible answers: Yes, No, Indifferent, Ambiguous)
Will Danny accept the lottery if he is risk averse? (Possible answers: Yes, No, Indifferent, Ambiguous)
answer
No; compared to not playing (EV = 0), the lottery has a lower expected value and more risk. Therisk averse person would not like either of these things.
question
Will Danny accept the lottery if he is risk seeking? (Possible answers: Yes, No, Indifferent, Ambiguous)
answer
Ambiguous; if Danny is risk seeking, he is willing to give up expected value to gain risk, but we don't know how risk seeking he is. Perhaps he is only willing to give up $2 in EV to play this lottery, in which case he would not play. On the other hand, he could be willing to give up $4 in EV to play this lottery, in which case he would accept the lottery. Since we don't know Danny's utility function, we can't say for sure whether he would accept this lottery.
question
The assumption that preferences are complete:
answer
means that the consumer can compare any two market baskets of goods and determine that either one is preferred to the other or that she is indifferent between them
question
An upward-sloping indifference curve defined over two goods violates which of the following assumptions from the theory of consumer behavior?
answer
more is preferred to less.
question
Envision a graph with meat on the horizontal axis and vegetables on the vertical axis. A strict vegetarian would have indifference curves that are:
answer
horizontal lines.
question
Chris says that he can watch 2 movies a week but couldn't be paid to watch another movie after that.
answer
Assumption: Consumers prefer more of a good to less.
question
Erica says that she prefers going to a movie over hiking. She also indicates that she prefers hiking to swimming. Erica states that she would rather go swimming than go to a movie.
answer
Assumption: Consumer preferences are transitive.
question
Laura says she prefers hiking to watching a movie but can't determine her preference for swimming.
answer
Assumption: Consumer preferences are complete.
question
Bubbles
answer
An increase in the
price of a good based not on the fundamentals of demand or value, but instead on a belief that the price will keep going up.
price of a good based not on the fundamentals of demand or value, but instead on a belief that the price will keep going up.
question
Information Cascades
answer
An assessment (e.g., of an investment opportunity) based in part on the actions of others, which in turn were based on the actions of others.
question
Reference Point Behavior
answer
The point
from which an individual makes a consumption decision.
from which an individual makes a consumption decision.
question
Endowment Effect
answer
Tendency of individuals to value an item more when they own it than when they do not.
question
Anchoring
answer
Tendency to rely
heavily on one prior (suggested) piece of information when making a decision.
heavily on one prior (suggested) piece of information when making a decision.
question
Loss Aversion
answer
Tendency for individuals to prefer avoiding losses over acquiring gains.
question
Framing
answer
Tendency to rely on the context in which a choice is described when making a decision.
question
Law of small
numbers
numbers
answer
Tendency to overstate the probability that a certain event will occur when faced with relatively little information.
question
Rules of Thumb
answer
A common way to economize on the effort involved in making decisions is to ignore seemingly unimportant pieces of information.
question
Risk averse
answer
prefers a certain given income to a risky income with the same expected value
Function increasing at a decreasing rate.
Function increasing at a decreasing rate.
question
Risk Neutral
answer
Condition of
being indifferent between a certain income and an uncertain income with the same expected value.
being indifferent between a certain income and an uncertain income with the same expected value.
question
Risk Loving
answer
Condition of preferring a risky income to a certain income with the same expected value.
question
Engle Curve
answer
Curve relating the quantity of a good consumed to income
the upward-sloping income-consumption curve applies to all normal goods.
the upward-sloping income-consumption curve applies to all normal goods.
question
Snob Effect
answer
network externality in which a consumer wishes to own an exclusive or unique good.
question
Bandwagon Effect
answer
Positive network externality in which a consumer wishes to possess a good in part because others do
question
Diversification
answer
Practice
of reducing risk by allocating resources to a variety of activities whose outcomes are not closely related.
of reducing risk by allocating resources to a variety of activities whose outcomes are not closely related.
question
first-degree price discrimination
answer
Practice of charging each customer her reservation price.
Ex. Coupons/age discounts
Ex. Coupons/age discounts
question
reservation price
answer
Maximum
price that a customer is willing to pay for a good.
price that a customer is willing to pay for a good.
question
Second- Degree Price discrimination
answer
Practice of charging different prices per unit for different quantities of the same good or service.
question
Block pricing
answer
Practice of
charging different prices for different quantities or "blocks" of a good.
Ex. If scale economies cause average and marginal costs to decline, the government agency that controls rates may encourage block pricing.
charging different prices for different quantities or "blocks" of a good.
Ex. If scale economies cause average and marginal costs to decline, the government agency that controls rates may encourage block pricing.
question
Who uses block pricing?
answer
Electric power companies, natural gas utilities, and municipal water compa- nies.
question
Third- Degree Price Discrimination
answer
Practice of dividing consumers into two or more groups with separate demand curves and charging different prices to each group.
Ex. regular versus "special" airline fares; premium versus nonpremium brands of liquor, canned food or frozen vegetables; discounts to students and senior citizens; and so on.
Ex. regular versus "special" airline fares; premium versus nonpremium brands of liquor, canned food or frozen vegetables; discounts to students and senior citizens; and so on.
question
intertemporal price discrimination
answer
Practice of separating consumers with different demand functions into different groups by charging different prices at different points in time.
question
Two- Part Tariff
answer
pricing in which consumers are charged both an entry and a usage fee.
One consumer: Set the price = MC per unit consumed
Two Consumers: Usage Fee should be above MC. Set the entry fee the remaining consumer surplus of the consumer with the smaller demand.
One consumer: Set the price = MC per unit consumed
Two Consumers: Usage Fee should be above MC. Set the entry fee the remaining consumer surplus of the consumer with the smaller demand.
question
Many consumers: Two- Part Tariff
answer
A lower entry fee means more entrants and thus more profit from sales of the item.
as the entry fee becomes smaller and the number of entrants larger, the profit derived from the entry fee will fall.
as the entry fee becomes smaller and the number of entrants larger, the profit derived from the entry fee will fall.
question
Bundling
answer
The practice of selling
two or more products as a package.
Bundling makes sense when customers have heterogeneous demands and when the firm cannot price discriminate.
two or more products as a package.
Bundling makes sense when customers have heterogeneous demands and when the firm cannot price discriminate.
question
When does bundling work?
answer
the demands are negatively correlated—the customer willing to pay the most for Wind is willing to pay the least for Gertie.
question
A monopolistically competitive market has two key characteristics:
answer
1. Firms compete by selling differentiated products that are highly substitut- able for one another but not perfect substitutes. In other words, the cross- price elasticities of demand are large but not infinite.
2. There is free entry and exit: It is relatively easy for new firms to enter the market with their own brands and for existing firms to leave if their prod- ucts become unprofitable.
2. There is free entry and exit: It is relatively easy for new firms to enter the market with their own brands and for existing firms to leave if their prod- ucts become unprofitable.
question
Oligopoly
answer
a market in which only a few firms compete with one another, and entry by new firms is impeded.
Ex. automobiles, steel, aluminum, petrochemicals, electrical equipment, and computers.
Ex. automobiles, steel, aluminum, petrochemicals, electrical equipment, and computers.
question
Cartel
answer
Market in which some or all firms explicitly collude, coordinating prices and output levels to maximize joint profits.
question
Why does oligopoly have barriers?
answer
Scale economies may make it unprofitable for more than a few firms to coexist in the market; patents or access to a technology may exclude potential competitors; and the need to spend money for name recognition and market reputation may discourage entry by new firms.
question
Nash Equilibrium
answer
Set of strategies or actions in which
each firm does the best it can given its competitors' actions.
Each firm is doing the best it can given what its competitors are doing.
each firm does the best it can given its competitors' actions.
Each firm is doing the best it can given what its competitors are doing.
question
Duopoly
answer
Market in which two
firms compete with each other.
firms compete with each other.
question
Cournot Model
answer
each firm treats the output level of its competitor as fixed when deciding how much to produce
question
reaction curve
answer
Relationship
between a firm's profit- maximizing output and the amount it thinks its competitor will produce.
between a firm's profit- maximizing output and the amount it thinks its competitor will produce.
question
Cournot equilibrium
answer
Equilibrium in the Cournot model in which each firm correctly assumes how much its competitor will produce and sets its own production level accordingly.
question
Bertrand model
answer
Oligopoly
model in which firms produce a homogeneous good, each firm treats the price of its competitors as fixed, and all firms decide simultaneously what price to charge.
model in which firms produce a homogeneous good, each firm treats the price of its competitors as fixed, and all firms decide simultaneously what price to charge.
question
residual demand
answer
curve is the individual firm's demand curve which is that portion of market demand that is not supplied by other firms in the market.
*the market demand function minus the quantity supplied by other firms at each price.
*the market demand function minus the quantity supplied by other firms at each price.
question
Cournot solution is Nash Eq. B/c
answer
Both firms do not want to move
question
Both firms in a Cournot duopoly would enjoy higher profits if:
answer
the firms simultaneously reduced output below the Nash equilibrium level.
question
Which of the following are price-setting oligopoly models?
answer
Bertrand.
question
The Bertrand model of oligopoly reveals that:
answer
perfectly competitive prices can arise in markets with only a few firms.
question
The Cournot theory of oligopoly assumes rivals will:
answer
keep their output constant.
question
Which of the following is a profit-maximizing condition for a Cournot oligopolist?
answer
MR = MC.
question
Tom and Jack are the only two local gas stations. Although they have different constant marginal costs, they both survive continued competition. Tom and Jack do NOT constitute a:
answer
Bertrand oligopoly.
question
An oligopolist faces a demand curve that is steeper at higher prices than at lower prices. Which
of the following is most likely?
of the following is most likely?
answer
Other firms match price increases but do not match price reductions.
question
If firms are in Cournot equilibrium:
answer
firms could increase profits by jointly reducing output.
question
A duopoly in which both firms have a Lerner index of monopoly power equal to 0 is probably a:
answer
Bertrand oligopoly.
question
The producer's surplus of all firms in an oligopoly is usually the least in the case of a:
answer
Bertrand oligopoly.
question
The Bertrand theory of oligopoly assumes:
answer
firms set prices.
question
In a Cournot oligopoly, a decrease in a firm's marginal cost leads to:
answer
higher output and a lower price.
question
In the presence of large sunk costs, which of the following market structures generally leads to the highest price
answer
d) Monopoly.
question
Both firms in a Cournot duopoly would experience lower profits if
answer
there was an increase in marginal production costs
question
what does a NEGATIVE cross price elasticity of demand tell you
answer
the two goods are complements
question
what does a positive cross price elasticity of demand tell you
answer
the two goods are substitutes
question
Tax Burdens
answer
a tax falls mostly on the buyer if Ed/Es is small, and mostly on the seller if Ed/Es is large.
question
Substitutes:
answer
If the price of good A goes up, demand for good B goes down
question
Complemets
answer
If the price of good A goes up, demand for good B goes down.
question
Binding Price Floor
answer
one that is above Eq
Cause surplus.
Cause surplus.
question
Binding Price Ceiling
answer
one that is below Eq.
Causes shortage
Causes shortage
question
Price Elastic
answer
The percentage decline in quantity demanded is greater than the percentage increase (luxury goods, goods with substitutes)
question
Price inelastic
answer
Necessity goods, goods with few subs
question
Elasticity
answer
Changes along the demand curve. Infinite elastic horizontal line. Completely inelastic vertical line.
question
Long- Run
answer
most goods are more price elastic in the long-run than the short run
question
Short Run
answer
For durables, the shore run can more more elastic than the long run
question
Completeness
answer
Consumers can rank all possible baskets
question
Completeness Violation
answer
I don't know whether I want A or B
question
Transitivity
answer
Consumers preferences are consistent
question
Transitivity Violation
answer
I like pink better than blue.
I like blue better than yellow
I like yellow better than pink
I like blue better than yellow
I like yellow better than pink
question
More is Better
answer
Consumers are never satisfied
question
More is Better Violation
answer
You'd have to pay me to eat another hamburger
question
Indifference Curves
answer
All combinations of goods that provide a consumer with the same level of satisfaction.
Must slope downwards, if slope upwards it would violate more is better
Cannot intersect or it violates Transitivity
Must slope downwards, if slope upwards it would violate more is better
Cannot intersect or it violates Transitivity
question
Diminishing marginal Rate of Substitution
answer
indifference curves are convex (slope increases as we move along the curve)
I.e becomes less negative
I.e becomes less negative
question
Revealed Preference
answer
If a consumer chooses one market basket over another, and if the chosen market basket is more expensive than the alternative, then the consumer must prefer the chosen market basket
question
Explain why firms maximize profits at the point where marginal revenue equals marginal cost?
answer
MR< MC : Decreases Q ; Increases profit
MR > MC: Decrease Q; increases profit
MR > MC: Decrease Q; increases profit
question
Engel Curve: Necessary Goods
answer
upward sloping and concave downwards, if expenditure on the good is measured vertically and income horizontally.
question
Engel Curve: Luxury
answer
upward sloping and convex downwards.
question
Engel: Money increase
answer
upward sloping straight line from the origin
question
Rules of thumb:
answer
Studies show that people usually ignore shipping and handling costs when making online purchases.
question
Law of small numbers
answer
tendency to overstate the probability that a certain event will occur when faced with relatively little information
question
Factors of Production
answer
Labor, Materials and Capital
question
Production Short Run
answer
One variable is fixed
question
Production Long Run
answer
amount of time needed to make all production inputs variable.
question
Tech improvement
answer
Allow entire product curve to shift upward so that more output can be produced with the same inputs
question
Stock of Capital
answer
The total amount of capital available for use in production
question
Isoquants
answer
A curve showing all possible combination of inputs that yield the same output
When returns to scale are constant, isoquants are equally spaced (left-hand figure below).
When returns to scale are increasing, isoquants get closer together (right-hand figure below) because less inputs are needed to create the same jump in output.
When returns to scale are constant, isoquants are equally spaced (left-hand figure below).
When returns to scale are increasing, isoquants get closer together (right-hand figure below) because less inputs are needed to create the same jump in output.
question
Returns to scale
answer
the rate at which output increases as inputs are increased proportionally
question
Increasing returns to scale
answer
output more than doubles when all inputs are doubled
question
Constant returns to scale:
answer
output exactly doubles when all inputs are doubled
question
Decreasing returns to scale
answer
output less than doubles when all inputs are doubled
question
Economies of scale
answer
a doubling of output requires less than a doubling of cost
question
Diseconomies of scale
answer
situation in which a doubling of output requires more than a doubling of cost
question
The long-run average cost curve
answer
the crosshatched portions of the short-run AC curves because these show the minimum cost of production for any output level. (
question
Betrand Model Facts
answer
Nash Eq of this model is for both firms to set P = MC. Based on price
question
Game
answer
Situation in which players (participants) make strategic decisions that take into account each other's actions and responses.
question
Payoff:
answer
Value associated with a possible outcome.
question
Strategy
answer
Rule or plan of action for playing a game.
question
Optimal strategy:
answer
Strategy that maximizes a player's expected payoff.
question
Dominant Strategies
answer
A player has a dominant strategy when he should always play the same strategy (i.e. his best response is always the same, regardless of which choice his opponent makes).
question
"Equilibrium in dominant strategies"
answer
refers to the equilibrium of a game where both firms have a dominant strategy.
Also nash equilibrium
Also nash equilibrium
question
Maximin Strategies
answer
If they both invest, they are both better off. If only one of them invests, consumerWTP decreases
question
Mixed Strategies
answer
a players makes a random choice based on probabilities.
When we allow for mixed strategies, every game has at least oneNash equilibrium.
When we allow for mixed strategies, every game has at least oneNash equilibrium.
question
Repeated Game
answer
increase the likelihood that players are able to collude.
question
Tit-for-tat strategy
answer
Repeated-game strategy in which a player responds in kind to an opponent's previous play, cooperating with cooperative opponents and retaliating against uncooperative ones
question
infinite game
answer
cooperation is easier to achieve because the long-run gain of cooperation outweighs the short-run defection profit. However, the temptation to defect may be stronger for some players than others.
Mathematically, economists use a variable ("discount factor") to describe firms' patience; more patient firms are less likely to defect.
Mathematically, economists use a variable ("discount factor") to describe firms' patience; more patient firms are less likely to defect.
question
finitelyrepeated game
answer
cooperation is, in theory, impossible to achieve.
question
Sequential Games
answer
, players do not make their decisions at the same time; one player can observe the other's action before committing to his own action.
In sequential games, timing matters. Sometimes, the first player to make a decision has an advantage (called a "first-mover advantage").
In sequential games, timing matters. Sometimes, the first player to make a decision has an advantage (called a "first-mover advantage").
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
