primer

Question 1

If the average cost is decreasing (AC > MC), then….

Answer 1

The AC curve lies above the marginal cost curve

Question 2

If the average cost is increasing (AC > MC) then….

Answer 2

The AC curve lies below the marginal cost curve

Question 3

Sunk costs are?

Answer 3

Costs must be incurred no matter what the decision is and thus cannot be avoided.

Question 4

Avoidable costs are?

Answer 4

These costs can be avoided if certain choices are made.

Question 5

Describe accounting profit

Answer 5

Emphasize historical costs
Not necessarily appropriate for decision-making inside a firm
But:
useful to compare one firm in an industry to another,
to evaluate the financial strength of a firm

Accounting Profit = Sales Revenue − Accounting Cost

Question 6

Describe economic costs

Answer 6

Based on the concept of opportunity cost
Appropriate for business decisions and forming strategies
Sales Revenue − Economic Cost

Question 7

What is the law of demand

Answer 7

The lower the price, the greater the quantity demanded; the higher the price, the smaller the quantity demanded.

Question 8

Things a firm can do to make the demand more sensitive to price

Answer 8

1. Unique features
2. Spendings on the product are a large fraction of their total.
3. The product is input for a finished good that is sensitive to price.

Question 9

Things a firm can do to make the demand less sensitive to price

Answer 9

1. Make comparison difficult
2. Tax deductions
3. High switching costs

Question 10

What is the theory of the firm?

Answer 10

The theory of the firm assumes that the firm’s ultimate objective is to make as large a profit as possible.

Question 11

Define perfect Competition

Answer 11

1. an industry with many firms producing identical products
2. firms can enter or exit the industry at will

Implication: opportunities for earning profit based on favorable market conditions will quickly evaporate as new entrants flow into the market, increase the supply of output, and drive price down to the point where economic profits are zero

Question 12

Define game theory

Answer 12

Game theory is the analysis of optimal decision-making when all decision-makers are presumed to be rational, and each is attempting to anticipate the actions and reactions. of its competitors.

Question 13

Define the Nash equilibrium

Answer 13

each player is doing the best he or she can, given the strategies of the other players.

Question 14

What is a dominant strategy

Answer 14

A dominant strategy in game theory is a move that is always the best option for a player, no matter what the other players do