exam 2

Question 1

private cost

Answer 1

a cost that falls directly on an economic decision maker

Question 2

external cost

Answer 2

a cost imposed without compensation on someone other than the person who caused it

Question 3

social cost

Answer 3

the entire cost of a decision, including both private costs and any external costs

Question 4

private benefit

Answer 4

a benefit that accrues directly to the decision maker

Question 5

external benefit

Answer 5

a benefit that accrues without compensation to someone other than the person who caused it

Question 6

network externality

Answer 6

the effect that an additional user of a good or participant in an activity has on the value of that good or activity for others

Question 7

Coase theorem

Answer 7

the idea that even in the presence of an externality, individuals can reach an efficient equilibrium through private trades, assuming zero transaction costs

Question 8

Pigovian Tax

Answer 8

a tax meant to counterbalance a negative externality

Question 9

tradable allowance

Answer 9

a production or consumption quota that can be bought and sold

Question 10

social benefit

Answer 10

the entire benefits of a decision, including both private benefits and external benefits

Question 11

externality

Answer 11

a cost or benefit being imposed without compensation on someone other than the person who caused it

Question 12

excludable

Answer 12

a characteristic of a good or service that allows owners to prevent its use by people who have not paid for it

Question 13

rival in consumption (rival)

Answer 13

the characteristic of a good for which one person’s consumption prevents or decreases others’ ability to consume it

Question 14

private good

Answer 14

a good that is both excludable and rival

Question 15

public good

Answer 15

a good that is neither excludable nor rival

Question 16

common resource

Answer 16

a good that is not excludable but is rival

Question 17

free-rider problem

Answer 17

a problem that occurs when the nonexcludability of a public good leads to undersupply

Question 18

tragedy of the commons

Answer 18

the depletion of a common resource due to individually rational but collectively inefficient overconsumption

Question 19

revealed preference

Answer 19

the idea that people’s preferences can be determined by observing their choices and behavior

Question 20

bundle

Answer 20

a unique combination of goods that a person could choose to consume

Question 21

budget constraint

Answer 21

a line that is composed of all of the possible combinations of goods and services that a consumer can buy with her or his income

Question 22

income effect

Answer 22

the change in consumption that results from increased effective wealth due to lower prices

Question 23

substitution effect

Answer 23

the change in consumption that results from a change in the relative price of goods

Question 24

altruism

Answer 24

a motive for action in which a person’s utility increases simply because someone else’s utility increases

Question 25

reciprocity

Answer 25

responding to another's action with a similar action

Question 26

game

Answer 26

a situation involving at least two people that requires those involved to think strategically

Question 27

game theory

Answer 27

the study of how people behave strategically under different circumstances

Question 28

behaving strategically

Answer 28

acting to achieve a goal by anticipating the interplay between your own and other's decisions

Question 29

prisoners' dilemma

Answer 29

a game of strategy in which two people make rational choices that lead to a less-than-ideal result for both

Question 30

dominant strategy

Answer 30

a strategy that is the best one for a player to follow no matter what strategy other players choose

Question 31

Nash equilibrium

Answer 31

an equilibrium reached when all players choose the best strategy they can, given the choices of all other players

Question 32

commitment strategy

Answer 32

an agreement to submit to a penalty in the future for defecting from a given strategy

Question 33

repeated game

Answer 33

a game that is played more than once

Question 34

tit-for-tat

Answer 34

a strategy in which a player in a repeated game takes the same action that his or her opponent did in the preceding round

Question 35

backward induction

Answer 35

the process of analyzing a problem in reverse, starting with the last choice, then the second-to-last choice, and so on, to determine the optimal strategy

Question 36

first-mover advantage

Answer 36

benefit enjoyed by the player who chooses first and as a result gets a higher payoff than those who follow

Question 37

complete information

Answer 37

state of being fully informed about the choices that relevant economic actors face

Question 38

information asymmetry

Answer 38

a condition in which one person knows more than another

Question 39

adverse selection

Answer 39

a state that occurs when buyers and sellers have different information about the quality of a good or the riskiness of a situation; results in failure to complete transactions that would have been possible if both sides had the same information

Question 40

principal

Answer 40

a person who entrusts someone with a task

Question 41

agent

Answer 41

a person who carries out a task on someone else's behalf

Question 42

moral hazard

Answer 42

the tendency for people to behave in a riskier way or to renege on contracts when they do not face the full consequences of their actions

Question 43

screening

Answer 43

taking action to reveal private information about someone else

Question 44

signaling

Answer 44

taking action to reveal one's own private information

Question 45

statistical discrimination

Answer 45

distinguishing between choices by generalizing based on observable characteristics in order to fill in missing information

Question 46

Constant returns to scale occur when the firm's long-run______

Answer 46

average total costs are constant as output increases

Question 47

A firm that shuts down and produces no output incurs a loss in the short run equal to _____

Answer 47

total fixed costs

Question 48

Joseph used to work as an office manager, earning $25,000 per year. He gave up that job to start a tailoring business. In calculating the economic profit of his tailoring business, the $25,000 income that he gave up is counted as part of the tailoring firm's______

Answer 48

opportunity costs

Question 49

Which of the following is NOT a characteristic of competitive markets? A. there are many buys and many sellers B. Goods offered by the sellers are largely the same. C. Each firm faces a downward sloping demand curve D. Firms can freely exit or enter the market

Answer 49

Each firm faces a downward sloping demand curve

Question 50

If a competitive firm is currently producing a level of output at which price is less than marginal cost, then______

Answer 50

a one-unit decrease in output will increase the firm's profit

Question 51

At the profit-maximizing level of output,______

Answer 51

marginal revenue equals marginal cost

Question 52

For a firm in a competitive market marginal revenue is _____ price.

Answer 52

equal to

Question 53

For a monopolist marginal revenue is _____ price

Answer 53

less than

Question 54

A competitive firm is a price_____

Answer 54

taker

Question 55

a monopolist is a price_____

Answer 55

maker

Question 56

assuming that implicit costs are positive, accounting profit is _____ than economic profit

Answer 56

greater

Question 57

The deadweight loss associated with a monopoly occurs because the monopolist_____

Answer 57

produces an output level less than the socially optimal level

Question 58

For a monopolist, marginal revunue_____

Answer 58

new price + (change in price x old quantity)

Question 59

Laws and government actions designed to prevent monopoly and promote competition are the focus of_____

Answer 59

antitrust policy

Question 60

The term market failure refers to_____

Answer 60

a market that fails to allocate resources efficiently

Question 61

The value of the marginal product of labor is calculated by multiplying the_____

Answer 61

price of output by the marginal product of labor

Question 62

a oligopoly is a market in which____

Answer 62

there are only a few sellers, each offering a product similar or identical to the others

Question 63

a tariff on a product_____

Answer 63

increases the domestic quantity supplied

Question 64

An externality is a _____

Answer 64

cost or benefit imposed without compensation on someone other than the person who caused it."

Question 65

private benefits is the same as

Answer 65

willingness top pay

Question 66

private cost is the same as_____

Answer 66

willingness to cell

Question 67

Positive externalities involve____ benefits

Answer 67

external

Question 68

negative externalities involve ______

Answer 68

external costs

Question 69

future value of a sum eqn.

Answer 69

FV = PV * (1 + r)^n

Question 70

value of a loan with interest

Answer 70

X * (1 + r)

Question 71

Expected value of a sum

Answer 71

Sum of (Pn + Sn)