Micro FINAL

Question 1

Demand Elasticities Measure

Answer 1

Ed > 1 - Elastic
Ed = 1 - Unit Elastic
Ed < 1 - Inelastic
Ed = infinity - Perfectly Elastic
Ed = 0 - Perfectly Inelastic

Question 2

If the Price is Elastic increasing price will lead to …

Answer 2

Decreasing Revenue

Question 3

If the Price is Unit Elastic increasing price will lead to …

Answer 3

No change

Question 4

If the Price is Ineastic increasing price will lead to …

Answer 4

Increasing Revenue

Question 5

Determinants of the Price Elasticity of Demand

Answer 5

Closeness of substitutes
Budget share spent on the good
Available time to adjust

Question 6

If Cross-Price Elasticity of Demand is negative then …

Answer 6

The goods are complement

Question 7

If Cross-Price Elasticity of Demand is zero then …

Answer 7

The goods are independent

Question 8

If Cross-Price Elasticity of Demand is positive then …

Answer 8

The goods are substitutes

Question 9

If income elasticity of demand is less than 0, then …

Answer 9

G&S is inferior

Question 10

If income elasticity of demand is less than 1, but greater than 0, then …

Answer 10

G&S is normal and necessity

Question 11

If income elasticity of demand is greater than 1, then …

Answer 11

G&S is normal and luxury

Question 12

Budget constraint

Answer 12

The consumption bundles (i.e., a particular combination of goods) a consumer can afford

Question 13

Marginal rate of substitution

Answer 13

The rate at which the consumer is willing to substitute one good for another

Question 14

Economies of scale

Answer 14

occur when long-run average total cost falls as the quantity of output increases

Question 15

Diseconomies of scale

Answer 15

occur when long-run average total cost rises as the quantity of output increases

Question 16

Shutdown point

Answer 16

A short-run decision not to produce anything because of market conditions.
(If shutdown in the short run, it must still pay fixed costs.)
Shutdown if P < AVC

Question 17

Exit point

Answer 17

A long-run decision to leave the market
(If exit in the long run, there are zero costs.)
Exit if P < ATC

Question 18

The LR market supply curve is horizontal if

Answer 18

all firms have identical costs, and
costs do not change as other firms enter or exit the market.

Question 19

Perfect competition

Answer 19

P = MR

Question 20

Competitive equilibrium

Answer 20

P = MC

Question 21

Three sources of barriers to entry

Answer 21

Monopoly resources: A single firm owns a key resource

Government regulation: The government gives a single firm the exclusive right to produce a good

The production process: A single firm can produce a good at a lower cost than a larger number of producers

Question 22

Monopoly equilibrium

Answer 22

P > MR = MC

Question 23

Public Policy Toward Monopolies

Answer 23

Increasing competition with competition laws
Ban some anticompetitive practices and break up monopolies.

Regulations
Government agencies set the monopolist’s price.

Public ownership
Problem: Public ownership is usually less efficient since there is no profit motive to minimize costs.

Doing nothing
The foregoing policies all have drawbacks, so the best policy may be no policy.

Question 24

Characteristics of Four Market Structures

Answer 24

Perfect competition (Corn, Apples)
Monopolistic competition (Books, Music) /Many competing firms
Products are similar but slightly differentiated
No barriers to entry or exit
Zero economic profits in the long run/
Oligopoly (Oil, Cement) /Market where there are only a few firms competing
Products can be either homogeneous or differentiated
Significant barriers to entry and exit
Each firm’s decisions are dependent upon other firms’ actions
Positive economic profits in the long run
/
Monopoly (Drugs)

Question 25

Differentiated products

Answer 25

Goods that are similar but not identical

Question 26

Homogeneous products

Answer 26

Goods that are identical, making them perfect substitutes

Question 27

Oligopolies’ problem

Answer 27

Like a monopolist, has significant barriers to entry, resulting in long-run economic profits
High degree of interdependence between the few firms that occupy the market

Question 28

Collusion

Answer 28

An agreement among firms in a market about quantities to produce or prices to charge.

Question 29

Cartel

Answer 29

a group of firms acting in unison.
Both firms would be better off if both stick to the cartel agreement.
But each firm has incentive to renege on the agreement.
It is difficult for oligopoly firms to form cartels and honor their agreements.

Question 30

Nash equilibrium

Answer 30

a situation in which economic participants interacting with one another each choose their best strategy given the strategies that all the others have chosen

Question 31

Moral hazard

Answer 31

the risks that someone or something becomes more inclined to take because they have reason to believe that an insurer will cover the costs of any damages

Question 32

Adverse selection

Answer 32

is a term used in economics and insurance to describe a market process in which buyers or sellers of a product or service are able to use their private knowledge of the risk factors involved in the transaction to maximize their outcomes, at the expense of the other parties to the transaction.