ECON 200 Final Review

Question 0

For a competitive firm to maximize profits…

Answer 0

Price = marginal cost

Or price = cost/marginal product

Question 1

For a monopolist to maximize profits…

Answer 1

marginal revenue = marginal cost

Question 2

For a firm to stay in business in the short run…

Answer 2

The firm’s revenue must be greater than (cover) their variable costs.

Question 3

What is the formula for the discount factor? (delta)

Answer 3

1/(1+r)

Where r is the interest rate

Question 4

What assumptions must be met for the Coase Theorem to be true?

Answer 4

There must be

a) zero or VERY low transaction costs
b) clearly defined property rights

Question 5

Marginal Cost

Answer 5

Change in total cost from producing 1 more unit of output

Question 6

Value of marginal product

Answer 6

The marginal product (in units of output) x the per unit output price
E.g. MP = 4 & item can be sold for $2 each then the VMP is $8

Question 7

What are three reasons for the high degree of specialized/division of labor?

Answer 7

1) Specialization increases the dexterity or skill through repetition.
2) Time is saved by not passing from one task to another
3) Specialization facilitates the invention of machines to take over the routine tasks performed by labor

Question 8

Comparative Advantage

Answer 8

When a producer can produce a good with a lower opportunity cost of production than another.

Question 9

What is a production function?

Answer 9

A mathematic function that measures the maximum amount of output that can be produced by a given combination of inputs.

Question 10

How do you know if a firm is operating efficiently?

Answer 10

The firm must be operating according to it’s cost and production function.

Question 11

Marginal Product

Answer 11

Additional output that is created when an additional (one more) unit of an input is employed.

Question 12

Diminishing marginal productivity

Answer 12

As one input of production is added to a fixed amount of other inputs after some point, the marginal product of the variable input continually diminishes.

Question 13

Diminishing returns at the intensive margin

Answer 13

When more of identical units of a productive input are added to a fixed amount of other factors of production, the amount by which the input increases output becomes smaller and smaller.

Question 14

Diminishing returns at the extensive margin

Answer 14

The phenomenon that when industries expand, eventually the ability to replicate the productive process decreases, as firms must use inputs that are less and less efficient.

Question 15

Economic Efficiency

Answer 15

The exhaustion of mutual benefits. When it is impossible to make anyone better off without making someone worse off.

Question 16

Coase Theorem

Answer 16

The proposition that in the absence of transaction costs, that is, with clearly delineated property rights, the assignment of liability to damages created by one individual will not prevent the exhaustion of mutual benefits, though the incomes of the parties involved will be affected.

Question 17

Pareto Efficient or Pareto Optimal

Answer 17

When all mutual benefits are exhausted; the situation where it is impossible to someone better off without making someone worse off.

Question 18

Total product

Answer 18

The amount of output that factors of production create.

Question 19

Tragedy of the commons

Answer 19

The inefficient allocation that occurs because common ownership does not provide adequate incentive for individuals to bear the full opportunity costs of their decisions

Question 20

Should you shut down in the short run?

Answer 20

The firm should continue to operate in the short run if total revenue at least covers your variable costs. If the incoming revenue does not even cover the variable costs then you should shut down straight away.

Question 21

Should you shut down in the long run?

Answer 21

You should shut down in the long run if... 
total cost (fixed + variable) > total revenue

Question 22

A firm should continue to employ workers (or other units) up to the point where…

Answer 22

Value of marginal product = input price

Question 23

What are solutions to the Bertrand paradox?

Answer 23

1) Product differentiation
2) Binding capacity constraints
3) Repeated game

Question 24

1+ delta + delta^2 + delta^3… =

Answer 24

1/(1-delta)

Question 25

Duopoly firms cooperate (regarding repeated game & the bertrand paradox) if

Answer 25

delta is less than or equal to 1/2 so r <or= 1

1/(1+r)

Question 26

For Hotelling Scarcity rents only…

Answer 26

Maximize dynamic efficiency:
marginal benefit of period 1 = present value of marginal benefit of period 2

(P1 - marginal cost) = (P2 - MEC)/(1+r)

Question 27

Rule for private ownership (how many to employ)

Answer 27

Value of Marginal Product of Labor = wage

Question 28

Common property rule for employment

Answer 28

Value of average product of labor = wage

Question 29

Transaction costs

Answer 29

Costs of establishing and maintaining property rights

Question 30

Monopoly: What is the strategic variable in a cournot model competition?

Answer 30

Quantity

Question 31

Monopoly: What is the strategic variable in a bertrand model competition?

Answer 31

Price