Final Terms

Question 1

MR=MC

Answer 1

marginal revenue = marginal cost

Question 2

When do maximize behavior

Answer 2

when MR>MC you max behavior until MR=MC.

Question 3

when do you stop maximizing behavior

Answer 3

when MC<MR when costs exceed revenue

Question 4

why is trade good?

Answer 4

it can help you produce outside of your PPF.

Question 5

comparative advantage

Answer 5

one person/company being able to produce things with less of an opportunity cost than others.

Question 6

inelastic

Answer 6

Quantity demanded only changes a little when there’s a price change (people buy regardless)

Question 7

elastic

Answer 7

Quantity demanded changes a lot when price changes (people may buy less or more depending on price change)

Question 8

how to interpret elasticity

Answer 8

E=4, a 1% increase in price results in a 4% increase in quantity demanded

Question 9

social planner objective

Answer 9

maximize surplus by getting rid of DWL

Question 10

problems with externalities

Answer 10

They have a large cost against society that is bigger than the cost producers bear. (on a graph the optimum quantity is smaller than the equilibrium quantity)

Question 11

solution to negative externalities

Answer 11

internalizing the externality, which means making the person responsible for external costs their negative externality may produce a tax on producers

Question 12

problem with positive externalities

Answer 12

People are causing a good thing to happen with their positive externality but they should be getting compensation but they are over producing because they are not compensated enough.

Question 13

solution to positive externalities

Answer 13

subsidize goods with positive externalities (government gives financial assistance or support to encourage goods that produce a positive externality)

Question 14

complements

Answer 14

pairs of goods that are used together, increase in one = decrease in the other

Question 15

substitutes

Answer 15

pairs of goods that are used in place of each other, increase in one = increase in the other

Question 16

excludability

Answer 16

a characteristic of certain goods that someone can prevent another person from using like a park with an entrance fee

Question 17

rivalry

Answer 17

when there is rivalry for a good like one person’s use takes another away. Like all the swings being used up at a park and having to wait for one.

Question 18

private good

Answer 18

goods that are excludable and have rivalry in consumption (toll and congested roads)

Question 19

public good

Answer 19

good that are neither excludable or rival in consumption (non congested non toll roads)

Question 20

common resource

Answer 20

goods that have rivalry in consumption but are not excludable (congested non toll roads)

Question 21

club good

Answer 21

Club goods: goods that are excludable (like having a fee) but don’t have rivalry in consumption. (uncongested toll roads)

Question 22

public good problem

Answer 22

the free rider problem, when people reap the benefits of a good without paying for it.

Question 23

perfect competition

Answer 23

there’s a lower barrier to entry which means MR=P, MR is always equal to the equilibrium price

Question 24

monopoly

Answer 24

a firm that is the SOLE seller of a product without close substitutes (like a single water provider in town)

Question 25

high barriers to enter

Answer 25

other firms cannot enter the market and compete with it (main sources: monopoly resources, government regulation, the production process)

Question 26

natural monopolies

Answer 26

a monopoly that’s created because it makes the most sense for one company to provide a product because having multiple would be inefficient.

Question 27

game theory

Answer 27

how people behave in strategic situations

Question 28

nash equilibrium

Answer 28

point where people don’t want to deviate because there no benefit, like equilibrium when you are competing with someone else)

Question 29

dominant strategy

Answer 29

strategy that’s the best for you regardless of others players strategies

Question 30

issues with oligopolies

Answer 30

they have trouble maintaining monopoly profits and self interest makes it hard for them to cooperate. They cooperate with low production, high prices, and monopoly profits

Question 31

oligopolies

Answer 31

a market where only a few sellers offer a certain product

Question 32

moral hazard

Answer 32

the tendency of a person who isn’t monitored well to do dishonest or undesirable behavior (like someone working at a store alone eating the products without their bosses permission)

Question 33

risk compensation/peltzman effect

Answer 33

people increase risk behavior when safety measures are created

Question 34

principal agent problem

Answer 34

principal cant perfectly monitor the agent, like a manager wanting the employee to work hard but the employee wants to do the least amount of work possible

Question 35

adverse selection

Answer 35

one person in a transaction knowing more about a product than the other person (if a seller knows more about a product their selling, like it being made poorly, and the buyer doesn’t know but risks a low quality product)