Final Econ 103

Question 1

A dominant Strategy

Answer 1

A strategy that is a player’s best action regardless of the action taken by the other player

Question 2

Nash equilibrium

Answer 2

The result when each player in a game chooses the action that maximizes his or her payoff given the actions of other players

Question 3

Externalities (Spillovers)

Answer 3

the impact of a market exchange on a third party who is outside or “external” to the exchange

Question 4

External cost

Answer 4

-Negative externalities
-External cost on third parties: the market produces too much of the good

Question 5

External Benefits

Answer 5

-Positive Externalities
-External Benefits on third parties: the market produces too little of the good

Question 6

marginal private benefits (MPB)

Answer 6

the benefits obtained by consumers from purchasing additional units of some product; shown by the market demand curve

Question 7

marginal social benefits (MSB)

Answer 7

the sum of the private and external benefits when additional units of some product are purchased; aka the social demand curve

Question 8

Marginal social cost (MSC)

Answer 8

is the total cost society pays for the production of another unit

Question 9

Marginal private cost (MPC)

Answer 9

is the change in the producer’s total cost brought about by the production of an additional unit of a good or service aka the marginal cost of production.

Question 10

What sorts of policies can push the market closer to the efficient outcome for negative externalities?

Answer 10

Imposing a tax can help reduce output and push the market towards an efficient outcome
Ex: Carbon taxes, congestion pricing, market permit

Question 11

What sorts of policies can push the market closer to the efficient outcome for positive externalities?

Answer 11

Subsidies can help increase output and push the market toward the efficient outcome
Ex: tax breaks, Government subsidies, direct investment
-Education
-Research and development

Question 12

Public goods

Answer 12

nonrival and nonexcludable
Ex: National Defense
-Street Lighting
-Flood Control

Question 13

Common Sources

Answer 13

Rival and non excludable
Ex: Clean water
-Biodiversity
-Fish

Question 14

Common Sources (Solution)

Answer 14

-Assign property rights to make them excludable
-Regulations, taxes, tradable licenses

Question 15

Public goods (Solution)

Answer 15

-Collective Action
-Public provision: by taxing everyone and producing the public good, government can make people better off

Question 16

Lorenz curve

Answer 16

a graph that compares the cumulative income actually received to a perfectly equal distribution of income; it shows the share of population on the horizontal axis and the cumulative percentage of total income received on the vertical axis

Question 17

The Gini coefficient

Answer 17

is a statistical measure of inequality that describes how equal (or unequal) wealth is distributed among the population of a specified area (usually a country)

Question 18

What thought experiment is central to Rawls’s theory of justice?

Answer 18

“Original Position”
-Imagine people in some initial fair situation. If they were to develop and agree on principles of justice, then these would be fair and valid

Question 19

Competitive model of the labor market

Answer 19

Firms and workers are price takers

Question 20

Monopsony model of the labor market

Answer 20

-There is only one buyer in labor market
-Single buyer has market power: can influence the price at which they purchase the good

Question 21

Minimum wage in the monopsony model

Answer 21

Minimum wage causes firms to increase employment bc the firm refuses to hire another worker (it doesn’t want to raise pay for everybody else)

Question 22

Adverse Selection

Answer 22

-Hidden types
-Adverse Selection occurs when someone knows more about the way things are than other people do

Question 23

Moral Hazard

Answer 23

-Hidden actions, the incentive problem
-Moral hazard occurs when an individual knows more about his or her own actions than other people do
-This leads to a distortion of incentives to take care when someone else bears the $of the lack of effort

Question 24

The market for lemons

Answer 24

The issues that arise regarding the value of an investment or product due to asymmetric information possessed by the buyer and the seller.

-Asymmetric info leads buyers to expect hidden problems in items offered for sale, leading to low prices and the best items being kept off the market

Question 25

Asymmetric Information

Answer 25

(or private info): info that some people have that others do not