Economics Flashcards
Describe a common value auction.
A common value auction is an auction for a good which has the same value to all bidders, even though this value may not be known with certainty at the time of the auction. The highest bidder may be the one who most overvalues the item (winner’s curse).
Describe a private value auction.
A private value auction is an auction for a good for which the value is different to each bidder. Bidders are not expected to bid amounts greater than their private value of the item.
Describe an English auction.
An ascending price, or English, auction, the highest bidder wins the item and pays the amount bid.
Describe a sealed bid auction.
In a sealed bid auction, each bidder’s bid is unknown to other bidders and the high bidder wins the item and pays the amount bid. The value to each bidder is referred to as the bidder’s “reservation price”. The bid made by the winner may be less than his reservation price.
Describe a Vickrey auction.
In a second price or “vickrey” auction, the winning (highest) bidder pays the amount bid by the second-highest bidder. In this format, there is no incentive for a bidder to bid less than his reservation price.
Describe a Dutch auction.
In a descending price or “Dutch” auction, the auction begins with a high price which is reduced in increments until a buyer accepts the price. When multiple units are available, bidders may accept the price of some units and the price is subsequently reduced incrementally until the last of the available units are accepted.
Describe the auction procedure of U.S. Treasury securities.
The auction of U.S. Treasury securities is done with a modified Dutch auction in which all bidders pay the price at which the last of the units available are purchased. Non-competitive bids may be placed, which are filled in their specified amounts at the final price.
Describe elasticity and name the 3 main demand function elasticity types.
Elasticity is measured as the ratio of the percentage change in one variable to a percentage change in another.
Own Price Elasticity
Cross Price Elasticity
Income Elasticity
Calculate and interpret own price elasticity.
Own Price Elasticity = (% change in quantity demanded) / (% change in own price)
abs(own price elasticity) > 1: demand is elastic
abs(own price elasticity) < 1: demand is inelastic
Calculate and interpret cross price elasticity.
Cross Price Elasticity = (% change in quantity demanded) / (% change in price of related good)
cross price elasticity > 0: related good is a substitute
cross price elasticity < 0: related good is a complement
Calculate and interpret income elasticity.
Income Elasticity = (% change in quantity demanded) / (% change in income)
income elasticity < 0: good is an inferior good
income elasticity > 0: good is a normal good
Define a Giffen good.
A Giffen good is an inferior good for which the negative income effect outweighs the positive substitution effect when price falls. A Giffen good is theoretical and would have an upward sloping demand curve. At loer prices, a smaller quantity would be demanded as a result of the dominance of the income effect over the substitution effect.
Define a Veblen good.
A Veblen good is one for which a higher price makes the good more desirable. The idea is that the consumer gets utility from being seen to consume a good that has high status, and that a higher price fo the good conveys more status and increases its utility. Such a good could conceivably have a positively sloping demand curve for some individuals over some range of prices.
Differentiate between a Giffen good and a Veblen good.
First, Giffen goods are inferior goods (negative income effect), while Veblen goods are not. Second, the existence of Giffen goods is theoretically supported by our rules of consumer choice, while the existence of Veblen goods is not.
