question
output
answer
whatever a firm produces
-cars, sandwiches, clothing, toys, haircuts
-cars, sandwiches, clothing, toys, haircuts
question
inputs
answer
resources, such as raw materials, people, energy, finance, etc, that are put into a system (such as a manufacturing plant) to obtain a desired output
question
labor
answer
human work needed for production
-workers
-workers
question
capital
answer
material objects needed for production
-machinery, factory space, tools
-machinery, factory space, tools
question
spot market
answer
informal relationship between a buyer and seller, neither party is obligated to exchange
(if i go to a food wholesalers and make purchases as needed)
(if i go to a food wholesalers and make purchases as needed)
question
contract
answer
formal relationship between a buyer and seller
(if i strike a 1-year deal with breyer's to use only their products, and in return they promise me a good deal)
(if i strike a 1-year deal with breyer's to use only their products, and in return they promise me a good deal)
question
vertical integration
answer
firm itself produces the inputs it needs
(if i decide to make the ice cream myself)
(if i decide to make the ice cream myself)
question
transaction costs
answer
costs associated with acquiring an input in excess of the amount paid to the input seller
question
types of obvious transaction costs
answer
-cost of searching for a supplier
-cost of negotiating a price
-other investments and expenditures required to facilitate exchange
-cost of negotiating a price
-other investments and expenditures required to facilitate exchange
question
specialized investment
answer
expenditure that must be made to allow two parties to exchange but has little or not value in any alternative use
question
relationship-specific exchange
answer
a type of exchange that occurs when the parties have made specialized investments
question
types of specialized investments
answer
-site specificity
(costly bargaining)
-physical-asset specificity
(underinvestment)
-dedicated assets
(the holdup problem, [fisher body vs GM])
-human capital
(costly bargaining)
-physical-asset specificity
(underinvestment)
-dedicated assets
(the holdup problem, [fisher body vs GM])
-human capital
question
spot exchange works well when
answer
-no relationship-specific investment
-few transaction costs
-many buyers and sellers, so you know you can get a good deal
-few transaction costs
-many buyers and sellers, so you know you can get a good deal
question
cons of spot exchange
answer
-opportunism can be an issue
-underinvestment in specialized investments
-underinvestment in specialized investments
question
contracts work well when
answer
-inputs require a substantial specialized investment
-specifies prices of inputs prior to making specialized investments
(reduces likelihood of opportunism
reduces likelihood to skimp on specialized investment)
-specifies prices of inputs prior to making specialized investments
(reduces likelihood of opportunism
reduces likelihood to skimp on specialized investment)
question
cons of contracts
answer
-typically requires substantial up-front expenditures
-requires decision on optimal contract length
-requires decision on optimal contract length
question
vertical integration works well when
answer
-a substantial specialized investment
-generate significant transaction cost
-complex contracting or uncertain economic environments
-generate significant transaction cost
-complex contracting or uncertain economic environments
question
pros of vertical integration
answer
-"skips the middleman"
-reduces opportunism
-mitigates transaction costs
-reduces opportunism
-mitigates transaction costs
question
cons of vertical integration
answer
-managers must create an internal regulatory mechanism
-bear the cost of setting up production facilities
-no longer specialized in producing its output
-bear the cost of setting up production facilities
-no longer specialized in producing its output
question
are substantial investments required? no...
answer
spot exchange
question
are substantial investments required? yes
are contracting costs very high? or are you worried about a potential hold-up problem?
are contracting costs very high? or are you worried about a potential hold-up problem?
answer
no - contract
yes - vertical integration
yes - vertical integration
question
agent
answer
the person who is actually doing some work or action
-the lazy worker
-the lazy worker
question
principal
answer
the person whose payoff depends on the agent's actions
-the manager or owner of a firm
-the manager or owner of a firm
question
the primary obstacle of a principal-agent problem is...
answer
...the misalignment of incentives, which leads to a conflict of interest
question
examples of principal-agent problem - workplace
answer
An hourly factory worker has an incentive to laze off, whereas the factory owner wants the worker to be efficient and produce more
question
examples of principal-agent problem - real estate
answer
Why doesn't a realtor exert some extra effort in getting a higher sale price for the house you're selling? Because they only get a fraction of the sale price in commission
question
examples of principal-agent problem - health insurance
answer
If you have health insurance, you have an incentive to get expensive medical treatment because you know you don't have to pay for it. Your insurance company wants you to stay healthy and get as little treatment as possible
question
solutions to principal-agent problem
answer
need a way to align incentives of principal and agent
question
examples in the workplace of solutions to principal-agent problem
answer
-profit sharing with workers (incentive contract)
-piece rates
-time clocks and spot checks
-external incentives (reputation of company, takeover threat)
-piece rates
-time clocks and spot checks
-external incentives (reputation of company, takeover threat)
question
production function tells you...
answer
...the maximum amount of output that can be produced with K units of capital and L units of labor
question
average product of labor
answer
measures the output produced by an average worker
question
average product of labor function
answer
APl = Q/ L
question
average product of capital
answer
measures the output produced by an average unit of capital
question
average product of capital function
answer
APk = Q / K
question
managerial product of labor
answer
measures the additional output produced by the last worker
question
marginal product of capital
answer
measures the additional output produced by the last unit of capital
question
increasing marginal returns
answer
range over which marginal product is increasing
question
decreasing marginal returns
answer
range over which marginal product is decreasing
question
negative marginal returns
answer
range over which marginal product is negative
question
short run
answer
-period of time where some input (usually capital) is fixed and constrains a manager's decisions
-manager's job is to find optimal level of the other variable input (usually labor)
-manager's job is to find optimal level of the other variable input (usually labor)
question
long run
answer
-period of time over which all inputs (both capital and labor) are variable, and can be adjusted by a manager
-manager's job is to find optimal level of both capital and labor
-manager's job is to find optimal level of both capital and labor
question
short run decision rule
answer
-value of marginal product - marginal product x price you can sell the product for
-continue hiring as long as the value of marginal product of labor is greater than or equal to the wage
-continue hiring as long as the value of marginal product of labor is greater than or equal to the wage
question
short run decision rule for labor equation
answer
VMPl = w
-where VMPl = P x MPl
-where VMPl = P x MPl
question
choosing inputs in the long run
answer
-need to choose the optimal amount of both capital AND labor
-use a tool called isoquants
-use a tool called isoquants
question
isoquants
answer
tell you all the different combinations of inputs that yield the same output
-the further out the isoquant, the larger the output
-the further out the isoquant, the larger the output
question
marginal rate of technical substitution (MRTS)
answer
-the rate at which a producer can substitute between two inputs and maintain the same level of output
-the absolute value of the slope of the isoquant
-the absolute value of the slope of the isoquant
question
marginal rate of technical substitution formula
answer
MRTSkl = MPl / MPk
question
diminishing MRTS
answer
as a producer uses less of an input, increasingly more of the other input must be employed to produce the same level of output
question
isocost line
answer
tells you all the different combinations of inputs that yield the same cost
question
changes in isocosts
answer
-for a given input price, isocosts further away from the origin are associated with higher costs
-changes in input prices changes the slopes of isocost lines
-changes in input prices changes the slopes of isocost lines
question
fixed costs
answer
costs that must be incurred before any output can be produced
question
fixed costs examples
answer
-rent
-utilities
-"overhead" (billing department)
-licenses, taxes, fees for production
-utilities
-"overhead" (billing department)
-licenses, taxes, fees for production
question
variable costs
answer
cost that scales with the amount of output produced
question
variable cost examples
answer
-raw materials
-labor (assembly)
-patents (per unit)
-shipping (per unit)
-labor (assembly)
-patents (per unit)
-shipping (per unit)
question
total cost equation
answer
TC(q) = F + VC(q)
question
average costs
answer
the total cost divided by the output produced
question
average fixed cost equation
answer
FC / Q
question
average variable cost equation
answer
VC(Q) / Q
question
average total cost equation
answer
C(Q) / Q
question
marginal cost
answer
the incremental cost of producing an additional unit of output
question
sunk cost
answer
cost that is forever lost after it has been paid
question
principle of irrelevance of sunk costs
answer
a decision maker should ignore sunk costs to maximize profits or minimize losses
question
what is a market structure
answer
provides information about how firms operating in the market will behave
-number of firms
-ease of entry/exit
-degree of product differentitaiton
-number of firms
-ease of entry/exit
-degree of product differentitaiton
question
types of market structures
answer
-perfect competition
-monopoly
-monopolistic competition
-oligopoly (duopoly)
-monopoly
-monopolistic competition
-oligopoly (duopoly)
question
perfect competition
answer
-identical products with little/no market power
-individual firms can't influence the market
-firms behave as if market characteristics are given
-individual firms can't influence the market
-firms behave as if market characteristics are given
question
identical products
answer
consumers perceive each firm's product to be the same
question
perfect information
answer
consumers know the prices of being charged by all sellers
question
law of one price
answer
there is a single price at which transactions will occur
question
many buyers and sellers
answer
a buyer or seller cannot affect the market price
question
no transaction costs
answer
there are no transaction costs
question
price takers
answer
buyers and sellers take prices as given when making purchase and production decisions
question
free entry and exit
answer
new firms will enter if it would be profitable
question
long-run zero economic profit
answer
if there are positive profits, other firms will enter and compete them away
question
in perfect competition - if price goes up
answer
consumers will purchase from other firms
-due to perfect information and undifferentiated goods
-due to perfect information and undifferentiated goods
question
in perfect competition- if price lowers
answer
consumers will purchase only from one person
-due to perfect information and undifferentiated goods
-due to perfect information and undifferentiated goods
question
in perfect competition- the demand curve...
answer
...is close to being horizontal (perfectly elastic)
question
in perfect competition, manager decides quantity by...
answer
marginal benefit (revenue) = marginal cost
question
profit =
answer
price x quantity - total cost
question
in perfect competition, a firm should continue operating...
answer
...so long as price >= min AVC
question
in perfect competition, a firm should shut down...
answer
...when price <= min AVC
question
to maximize short run profits, a perfectly competitive firm should produce the quantity level where...
answer
P = MC
question
a perfectly competitive firm should shut down to minimize its losses when...
answer
P < AVC
question
a barrier to entry is...
answer
...anything that makes entry costly
question
there are no barriers to entry in...
answer
...perfect competition
question
long-run competitive equilibrium - perfect competition
answer
we see that the market price will have to equal not only the firm's marginal cost but also the firm's average costs of production (which occurs at min AC)
question
summary of long-run equilibrium - perfect competition
answer
-short run profit
-entry of more firms
-market supply increases
-market price goes down, market quantity goes up
-demand for individual firm's product goes down
-firm reduces output to max profit
-long-run profits are zero
-entry of more firms
-market supply increases
-market price goes down, market quantity goes up
-demand for individual firm's product goes down
-firm reduces output to max profit
-long-run profits are zero
question
P = MC (perfect competition)
answer
will not be the case for other market structures, such as monopoly
question
P - min AC (perfect competition)
answer
zero profits
-firms are earning (accounting profits) just enough to offset their implicit (opportunity) cost
-firms are earning (accounting profits) just enough to offset their implicit (opportunity) cost
question
review of perfect competition
answer
-identical products
-perfect information
-many buyers and sellers
-no transaction costs
-free entry and exit
-graph is a horizontal line
-perfect information
-many buyers and sellers
-no transaction costs
-free entry and exit
-graph is a horizontal line
question
monopoly
answer
single firm (market power, no close substitute)
-market demand curve is the monopolist's demand curve
-firm has control over price
-market demand curve is the monopolist's demand curve
-firm has control over price
question
sources of monopoly power
answer
-control of an essential facility or scarce resource
-use of superior technology or processes
-protection for imitation: patents, copyrights, trade secrets
-"natural monopolies": when one firm can produce the market output at a lower cost than multiple firms
-use of superior technology or processes
-protection for imitation: patents, copyrights, trade secrets
-"natural monopolies": when one firm can produce the market output at a lower cost than multiple firms
question
government - created monopoly
answer
-requiring licenses to operate
-granting monopoly rights
-auctioning monopoly rights
-granting monopoly rights
-auctioning monopoly rights
question
monopolist decision roadmap
answer
-monopolist gets to decide both price AND quantity
-first decide the optimal quantity by setting marginal revenue equal to marginal cost (MR=MC)
-then set the optimal price by asking what the buyers are willing to pay for this quantity (plug Q* into the demand function)
-first decide the optimal quantity by setting marginal revenue equal to marginal cost (MR=MC)
-then set the optimal price by asking what the buyers are willing to pay for this quantity (plug Q* into the demand function)
question
long-run adjustments in monopoly
answer
none, unless the source of monopoly power is eliminated
question
why does the government dislike monopoly
answer
price is greater than marginal cost
-which means too little output, at too high price
monopolies create deadweight loss
-the consumer and producer surplus that is lost due to the monopolist charging a price greater than marginal cost
-which means too little output, at too high price
monopolies create deadweight loss
-the consumer and producer surplus that is lost due to the monopolist charging a price greater than marginal cost
question
monopolistic competition assumptions and implications
answer
many buyers and sellers
-no one firm has a perfect monopoly
each firm produces a slightly different product
-each firm faces its own demand curve and therefore has the same decision rule as the monopolist
free entry and exit
-long-run zero economic profit: if there are positive profits, other firms will enter and compete them away
-no one firm has a perfect monopoly
each firm produces a slightly different product
-each firm faces its own demand curve and therefore has the same decision rule as the monopolist
free entry and exit
-long-run zero economic profit: if there are positive profits, other firms will enter and compete them away
question
examples of monopolistic competition
answer
-restaurants
-hotels and pubs
-consumer goods such as shampoo, toothpaste
-consumer services, such as hairdressing
-hotels and pubs
-consumer goods such as shampoo, toothpaste
-consumer services, such as hairdressing
question
decision rules for monopolistic competition
answer
-are exactly the same as for monopoly
-first find the optimal quantity by setting marginal revenue equal to marginal cost
-Once you've solved for the optimal quantity, plug that into the (seller specific) demand function and solve for optimal price
-With the optimal price/quantity and the costs, you can calculate the maximum profits
-first find the optimal quantity by setting marginal revenue equal to marginal cost
-Once you've solved for the optimal quantity, plug that into the (seller specific) demand function and solve for optimal price
-With the optimal price/quantity and the costs, you can calculate the maximum profits
question
if firm in monopolistically competitive markets earn short run profits
answer
then additional firms will enter in the long run to capture some of those profits
question
if firm in monopolistically competitive markets earn short run losses
answer
then some firms will exit the industry in the long run
question
In the long run, monopolistically competitive firms produce a level of output such that: price is greater than marginal cost...
answer
...Price will be higher than marginal cost, but won't be as high as the monopolist price
question
In the long run, monopolistically competitive firms produce a level of output such that: price equals the average total cost...
answer
Profits = 0
Firms aren't making any profit
Profit = P x Q - TC
TC = PxQ-ATCxQ
ATC = TC / Q
Firms aren't making any profit
Profit = P x Q - TC
TC = PxQ-ATCxQ
ATC = TC / Q
question
what is oligopoly
answer
Oligopoly market structures are characterized by only a few firms, each of which is large relative to the total industry
-Typical number of firms is between 2 and 10
-Products can be identical or differentiated
-Typical number of firms is between 2 and 10
-Products can be identical or differentiated
question
an oligopoly market composed of two firms is called...
answer
...duopoly
question
oligopoly settings tend to be the most difficult to manage since...
answer
...managers must consider the likely impact of their decisions on the decisions of other firms in the market
question
oligopoly = competition with few firms - costs
answer
One firm may face lower costs than the other. In particular, one may have lower marginal costs due to scale
-airplane manufacturers benefit from scale
-airplane manufacturers benefit from scale
question
oligopoly = competition with few firms - superiority ("vertical")
answer
Does one product perform "better?" if both products are priced equally, would one capture more than 50% of the market
-Number of megapixels on cameras; number of MHz in processors
-Number of megapixels on cameras; number of MHz in processors
question
oligopoly = competition with few firms -sustainability ("horizontal")
answer
"Brand loyalty": how sensitive are my customers to the price i charge?
-Luxury goods
-Luxury goods
question
collusion
answer
an agreement among firms in a market about quantities to produce or prices to charge
question
cartel
answer
a group of firms acting in unison
question
we can assess how powerful one particular firm is by...
answer
...calculating its market share
question
market share of firm =
answer
firm's sales / total sales in the industry
question
market share of less than 1,500
answer
competitive marketplace
question
market share of 1,500-2,000
answer
moderately concentrated marketplace
question
market share of 2,500+
answer
highly concentrated marketplace
question
as a general rule, mergers that increase the HHI by more than 100 points in concentrated markets...
answer
...raise antitrust concerns
question
larger the numbers, the more concentrated, the more monopolistic
answer
fewer competitors
question
an oligopoly is an industry where there is a...
answer
...high level of industry concentration
question
ratios measure the...
answer
...concentration within an industry
question
a firm might choose to produce its own inputs if
answer
long term contracts are costly to write
question
spot exchange can be inefficient in the presence of
answer
opportunism
question
long term contracts are NOT efficient if
answer
specialized investments are not important
question
spot markets are an efficient way for the firm to purchase inputs if
answer
opportunism is not a problem
question
which of the following is the primary disadvantage of producing inputs within a firm
answer
loss of specialization
question
an incentive for managers to maximize profits can be
answer
-threat of takeovers
-company's reputation
-performance bonuses
-company's reputation
-performance bonuses
question
a manager who tries to enhance worker effort by tying workers' compensation to the profitability of the firm is using
answer
profit sharing
question
if the last unit of input increases total product, we know that the marginal product is
answer
positive
question
total product begins to fall when
answer
marginal product is zero
question
if the price of labor increases, in order to minimize the costs of producing a given level of output, the firm manager should use
answer
less of labor and more of capital
question
which of the following statements is incorrect?
fixed costs could be positive when sunk costs are zero
fixed costs do not vary with output
fixed costs are always greater than sunk costs
sunk costs are those costs that are forever lost after they have been paid
fixed costs could be positive when sunk costs are zero
fixed costs do not vary with output
fixed costs are always greater than sunk costs
sunk costs are those costs that are forever lost after they have been paid
answer
fixed costs are always greater than sunk costs
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
