econ final elzanga

Question 1

Depreciation:

Answer 1

a measure of the decline in value of an asset over time; USGAAP accountants always depreciate while economists consider a rise in value as revenue

Question 2

Perfectly Competitive Market:

Answer 2

a market in which economic forces operate in an unimpeded fashion; An individual firm cannot affect the market price in this model

Question 3

Assumption of Perfect Competition

Answer 3

Both buyers and sellers are price takers

The number of firms is large

There are no barriers to entry

Firms’ products are identical

There is complete information

Selling firms are profit-maximizing entrepreneurial firms

Question 4

Barriers to Entry:

Answer 4

social, political, or economic impediments that prevent firms from entering a market

Question 5

Marginal Revenue (MR):

Answer 5

the change in total revenue associated with a change in quantity; market price in this model

Question 6

Marginal Cost (MC):

Answer 6

The change in total cost associated with a changed in quantity; firms supply curve

Question 7

Firms maximize profits

Answer 7

MC = MR = P

Question 8

Increase Production

Answer 8

If MR > MC

Question 9

Decrease Production

Answer 9

If MR < MC

Question 10

Monopolistic Competition:

Answer 10

a market structure in which there are many firms selling differentiated products and few barriers to entry

Question 11

Characteristics of monopolistic competition

Answer 11

o Many sellers
o Differentiated products
o Multiple dimensions of competition
o Easy entry of new firms in the long run
o Ex: soap industry

Question 12

Effect of Advertising

Answer 12

make firm more inelastic

Question 13

Effect of Advertising

Answer 13

positively shift firm’s demand curve

Question 14

Oligopoly:

Answer 14

a market structure in which there are only a few firms and firms explicitly take other firms’ likely response into account

Question 15

Cartel:

Answer 15

a combination of firms that acts as if it were a single firm; shared monopoly

Question 16

Cartel Model of Oligopoly:

Answer 16

model that assumes that oligopolies act as if they were monopolists that have assigned output quotas to individual member firms of the oligopoly so that total output is consistent with joint profit maximization; All firms follow uniform pricing policy that serves the collective interest

Question 17

Implicit collusion:

Answer 17

multiple firms make the same pricing decisions even though they have not explicitly consulted with one another; important reason prices are sticky

Question 18

Kinked Demand Curve:

Answer 18

Marginal revenue is discontinuous; A large change in marginal cost is required for firms to change their prices; Theory of sticky prices

Question 19

Contestable Market Model:

Answer 19

a model of oligopoly in which barriers to entry and barriers to exit, not the structure of the market, determine a firm’s price and output decisions

Question 20

Concentration Ratio:

Answer 20

the value of sales by the top firms of an industry stated as a percentage of total industry sales

Question 21

Herfindahl Index:

Answer 21

an index of market concentration calculated by adding the squared value of the individual market shares of all the firms in the industry; Weights firms with larger market shares more heavily than concentration ratio; Commonly used in gov’t policy