Exam 2 review Flashcards
Utility is useful in describing what?
A person’s preferences for one good over another
What does altruism describe?
A motive for action in which a person’s utility is increased when another’s utility increases
Procrastination can be seen as irrational behavior on the surface. What is this called?
The time inconsistency of our decision making
The prisoner’s dilemma is a game of strategy in which people make rational choices for what?
A less than ideal result for all
What is a dominant strategy?
A strategy that is the best one to follow, no matter what strategy other players choose
Information asymmetry is a problem when…
A buyer and seller have opposing incentives
The presence of adverse selection in a market causes…
-Failed transactions
-A loss of surplus
-Market failure
When can moral hazard happen?
When adverse selection is a a problem
What is adverse selection?
It results from unobserved characteristics of people or commodities
What is signaling?
Taking action to reveal one’s own private info
What is total revenue?
The quantity sold multiplied by the price paid for each unit (P x Q)
When economic profits are negative, accounting profits could be
-Positive
-Negative
-Zero
Economies of scale refer to returns that occur when?
An increase in output decreases ATC in the long run
For firms that sell one product in a perfectly competitive market, how is average revenue calculated?
total revenue divided by total output
For firms that sell one product in a perfectly competitive market, what is average revenue equal to?
-is equal to marginal revenue
-is equal to the market price
For a firm in a perfectly competitive market with increasing marginal cost, if it produces where marginal
cost exceeds marginal revenue:
it should cut back production to increase profits
when demand increases in a perfectly competitive market, what happens to price in the short run?
price increases
when demand increases in a perfectly competitive market, what happens to supply in the long run?
supply increases
a natural monopoly is a market in which a single firm:
can produce, at a lower cost than multiple firms, the entire quantity of output demanded
A monopoly is constrained by what?
demand
The revenue curves the monopoly sees are different from what a perfectly competitive firms sees because
the marginal revenue curve is downward sloping instead of flat
perfect price discrimination does what?
-eliminates CS
-maximizes PS
-creates DWL
If successive units of a good are consumed, the marginal utility gained typically:
decreases at different rates for different people
What does a budget constraint show?
The goods that all cost the same amount
When the trade-offs you face are determined by the choices someone else will make, behaving rationally involves:
-behaving strategically
-taking into consideration the actions of others
-acting in your own self interest
In the prisoner’s dilemma game:
-the players can not reach to socially optimal point
-a dominant strategy exists for both players
-a noncooperative equilibrium can be predicted
what is it called when a person/company has to make a decision in a previous game
sequential game
what happens to variable costs when a firm produces nothing
the variable costs = zero
how do you calculate economic profits?
total revenue minus all costs (explicit and implicit)
Where does marginal cost cross the average total cost curve
At the min point of the ATC
Marginal cost of output is what?
The additional cost a firm will incur by producing one additional unit of output
What is an essential characteristic of a perfectly competitive market?
Buyers and sellers have no control over the market
For firms that sell one product, what happens to the market price?
-is constant, regardless of quantity sold
-is equal to average revenue for a firm
-is equal to marginal revenue for a firm
Firms in perfectly competitive markets who wish to max profits should produce where?
where MR=MC
If a firm realizes that the market price has fallen below its avg total cost is now earning a loss, what is the best action for the firm to take in the short run?
produce where MC = MR to minimize losses if P > AVC
In the long run, what happens to firms in a perfectly competitive market?
-produce a quantity that maximizes profits
-earn a zero economic profit
-choose the level of output that minimizes average total costs
What happens in a monopoly?
- it has no competition
-has complete market control
-restricts output to maximize profits
What happens to total revenue for a monopolist as output increases?
It increases then decreases
How can a monopolist maximize profits?
By following the same rules as a perfectly competitive firm
In a monopolistic market, consumer surplus is ____ than in a competitive market.
lower
What is moral hazard?
The tendency for people to behave in a riskier way to renege on contracts where they don’t face the full consequences of their actions
when all players choose the best strat they can, given the choices of all other players, what is this an example of?
nash equilibrium
first mover advantage is a typical feature of what game?
sequential move game
what is the difference between one time games and repeated games?
in one-time games, players are more likely to defect
what does variable cost depend on?
the amount of output
what is the additional cost in producing more than one more unit of a good called?
marginal cost
the marginal product of an input always does what as the quantity of that input increases?
it always decreases
When does AFC always decrease
when quantity increases
What can a firm change in a perfectly competitive market?
quantity to produce
What is not a principle of perfect competition?
barriers keeping other firms from entering
what are principles of perfect competition?
-both buyers and sellers are price takers
-standardized goods
-the market price is the individual firm’s demand curve
which market has the market price and demand curve as two different curves?
monopoly
what profits can firms in perfect competition earn in the short run?
positive profits (but not in long run)
why is perfect competition the most efficient market structure?
because it has no deadweight loss
to maximize profits, firms in perfect competition should choose a quantity where MR (blank) MC?
=
if there are economic profits in a perfectly competitive market, what will happen in the long run?
firms will enter the market until economic profits = 0
In the long run in perfect competition, what does the market price equal?
The min of the ATC
Compared to perfect competition, monopolies produce a ___ quantity, and charge a ___ price
lower quantity
in a monopoly, what does the demand curve do?
slopes downward
how can the government influence monopolies?
-large economies of scale
-government intervention
-predatory tactics
what firm can produce the entire market demand more efficiently than many firms can?
natural monopoly
what are ways that monopolistically competitive firms can make profits in the short-run?
product differentiation and advertising
what happens to a monopolistically competitive firm’s demand in the long-run?
demand decreases until price = ATC and profit = 0
in the short run, firms in monopolistic competition act similarly to what other market?
monopolies
what is it called when two firms make an agreement to collude with a punishment if one defects?
commitment strategy
if two duopolists collude to maximize profits, what price would they charge?
the same price as a monopolist would
