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Econ 2001 > Unit 3 > Flashcards

Unit 3 Flashcards

1
Q

___ occurs in an industry when that industry is made up of many small firms producing homogenous products, when there is no impediment to the entry or exit of firms, and when full information is available.

A

Perfect Competition

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2
Q

___ means inclusion of a number and variety of stocks, bonds, and other such items in an individual’s portfolio. If the individual owns airline stocks, for example, ___ requires the purchase of a stock or bond in a very different industry, such as breakfast cereal production.

A

Portfolio diversification

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3
Q

Name 3 features of the legal status of a corporation.

A
  • Special limits are placed on the losses that may be suffered by those who invest in these firms.
  • These firms are subjected to types of taxation from which other firms are exempt.
  • The corporation is considered to be an entity that is distinct from any of its owners or its management, so that the corporation can outlast the association of any and all of the individuals who are currently connected with the firm.
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4
Q

Name the 4 main differences between monopoly and perfect competition.

A
  1. A monopolist’s profit persists
  2. Monopoly restricts output to raise short-run price
  3. Monopoly restricts output to raise long-run price
  4. Monopoly leads to inefficient resource allocation
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5
Q

When the old management opposes a takeover attempt, it is called a(n) …

A

hostile takeover attempt

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6
Q

Suppose that interest rates suddenly fall from 6 percent to 3 percent in an economy. What will happen to the price of the bond that pays $3 per year?

A

Increases

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7
Q

A(n) ___ is simply an IOU sold by a corporation that promises to pay the holder of the ___ a fixed sum of money at the specified maturity date and some other fixed amount of money (the coupon or interest payment) every year up to the date of maturity.

A

Bond

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8
Q

Under perfect competition, the firm is a(n) ___. It has no choice but to accept the price that has been determined in the market.

A

Price taker

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9
Q

What are the four conditions for perfect competition?

A
  1. Numerous small firms and customers
  2. Homogeneity of the product
  3. Freedom of entry and exit
  4. Perfect information
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10
Q

A(n) ___ is a privilege granted to an inventor, whether an individual or a firm, that for a specified period of time prohibits anyone else from producing or using that invention without the permission of the holder of the ___.

A

Patent

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11
Q

A(n) ___ is a type of security whose returns to investors come from a large pool of mortgages and home-equity loans. Investorst who hold these securities receive a portion of the interest and principal payments made by property owners on their mortgages and home-equity loans.

A

mortgage-backed security

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12
Q

The loss if the firm shuts down =

A

TC - TVC

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13
Q

___ refers to the use of borrowed money to purchase assets. ___ magnifies both returns and losses from investments, the latter contributing significantly to the unusual severity of the financial crisis of 2007-2009.

A

Leverage

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14
Q

Suppose that interest rates are 6 percent in the economy and a safe bond promises to pay $3 per year in interest forever. What do you think the price of the bond will be?

A

$50

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15
Q

Name two misconceptions about bonds.

A
  • Bondholders who try to sell before maturity may find the market price happens to be low and they also may be exposed to losses from inflation.
  • A firm can issue bonds with little backing; The firm may own little valuable property that it can use as a guarantee of repayment to the lender - the bondholder.
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16
Q

A(n) ___ is an industry in which advantages of large-scale production make it possible for a single firm to produce the entire output of the market at lower average cost than a number of firms each producing a smaller quantity.

A

Natural Monopoly

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17
Q

The ___ is the amount that borrowers currently pay to lenders per dollar of the money borrowed - it is the current market price of a loan.

A

Interest rate

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18
Q

A(n) ___ is a firm that has the legal status of a fictional individual. This fictional individual is owned by a number of people, called its stockholders, and is run by a set of elected officers and a board of directors, whose chairperson is often also in a powerful position.

A

Corporation

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19
Q

A firm should continue to operate in the short run if…

A

TR exceeds total short-run VC

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20
Q

___ is where the employee contributes each month (employer may match), and the employee must decide where the funds are invested and they’re given a choice within the plan (401K).

A

Defined Contribution Pensions

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21
Q

The loss if the firm stays in business =

A

TC - TR

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22
Q

Name the 7 main barriers to entry.

A
  1. Legal restrictions
  2. Patents
  3. Control of a scarce resource or input
  4. Deliberately erected entry barriers
  5. Large sunk costs
  6. Technical superiority
  7. Economies of scale
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23
Q

___ is the sale of a given product at different prices to different customers of the firm when there are no differences in the costs of supplying these customers. This also occurs when it costs more to supply one customer than another but they are charged the same price.

A

Price Discrimination

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24
Q

Name a misconception about stocks.

A

Ownership of stocks may be more symbolic than real; stockholders have no real control over firm operations.

25
Q

A(n) ___ (also called a share) of a corporation is a piece of paper that gives the holder of the ___ a share of the ownership of the company.

A

Common stock

26
Q

A firm should keep operating in the short run if…

A

AVC < P

27
Q

If the price of a company’s stock constitutes a random walk, next year its price will equal today’s price plus:

A. An unknown number

B. The percent change in overall stock prices

C. Twice the percent change in overall stock prices

A

A

28
Q

A(n) ___, such as S&P 500, is an average of the prices of a large set of stocks. These stocks are selected to represent the price movements of the entire stock market, or some specified segment of the market, and the chosen set is rarely changed.

A

Stock Price Index

29
Q

When should a firm decide to shut down in either the short run or the long run?

A

When TR < TC

30
Q

___ are attributes of a market that make it more difficult or expensive for a new firm to open for business than it was for the firms already present in that market.

A

Barriers to entry

31
Q

___ equals net earnings, in the accountant’s sense, minus the opportunity costs of capital and of any other inputs supplied by the firm’s owners.

A

Economic profit

32
Q

A ___ is a type of loan used to buy a house or some other physical property.

A

Mortgage

33
Q

The ___ shows the different quantities of output that the industry would supply at different possible prices during some given period of time.

A

supply curve of the perfectly competitive industry

34
Q

___ is where X% of the person’s monthly income would be paid to them each month in retirement.

A

Defined Benefite Pension

35
Q

A(n) ___ is a financial instrument that functions like an insurance policy that protects a lender. The buyer of a ___ pays the seller for insuring against a third-party’s default on a debt that is owed to the former. If the third party defaults on the debt, failing to make the required repayment, the seller of the ___ must pay a lump sum to the buyer of the ___.

A

Credit Default Swap (CDS)

36
Q

___ are any excess of the profits earned persistently by a monopoly firm over and above those that would be earned if the industry were perfectly competitive.

A

Monopoly Profits

37
Q

Bonds are riskier than stocks for ___, while stocks are riskier than bonds for ___.

A

firms; buyers

38
Q

Name the 3 differences between stocks and bonds.

A
  1. Stockholders buy a share of the firm’s ownership vs. bondholders simply lend money.
  2. Stockholders have no idea how much they’ll get for their stock vs. bondholders know how much their bond is worth.
  3. Stockholders receive no money until the firm has paid the bondholders.
39
Q

___ occurs when prices in an economy rise rapidly. The rate of ___ is calculated by averaging the percentage growth rate of the prices of a selected sample of commodities.

A

Inflation

40
Q

A(n) ___ is the acquisition by an outside group (the raiders) of a controlling proportion of a company’s stock.

A

Takeover

41
Q

A certain contract entitles its owner to buy 100 shares of Company X’s stock at a price of $30 in four months, where $30 may be higher or lower than the market price of that stock at the specified date. This is an example of what type of contract?

A

Derivative contract

42
Q

The ___ is where stocks and equities outperform bonds over a period of time.

A

Equity Premium Puzzle

43
Q

Which of the following industries are pure monopolies (Choose all that apply)

A. The only supplier of heating fuel in an isolated town

B. The only supplier of IBM notebook computers in a town

C. The only supplier of digital cameras

D. None of the above

A

D

44
Q

Which of the following statements regarding the role of subprime mortgages and mortgage based securities in the financial crisis of 2007-2009 are true? (Choose all that apply)

A. Mortgage-backed securities reduced lenders’ incentives to properly vet borrowers

B. Many people who obtained subprime mortgage loans couldn’t afford their homes once housing prices stopped rising

C. Investment banks refused to buy securities backed by mortgages that were not subprime

D. Subprime mortgages discouraged borrowers from making risky purchases

A

A, B

45
Q

Economists argue that speculators perform 2 vital economic functions. What are these functions?

A
  1. Speculators sell protection from risk to other people, much like insurance
  2. Speculators help to smooth out price fluctuations by purchasing items when they are abundant and holding them and reselling them when they are scarce; In that way they help to alleviate and even prevent shortages.
46
Q

The equilibrium of a profit-maximizing firm in a perfectly competitive market must occur at an output level at which…

A

MC = MR

47
Q

A(n) ___ is a complex financial instrument whose value depends in some way on the price movements of some specified set of investments, such as a group of stocks, bonds, or commodities.

A

Derivative

48
Q

A(n) ___, in which individual investors can buy shares, is a private investment firm that holds a portfolio of securities. Investors can choose among a large variety of ___, such as stock funds, bond funds, and so forth.

A

Mutual fund

49
Q

The time path of a variable, such as the price of a stock, is said to constitute a(n) ___ if it’s magnitude in one time period is equal to its value in the preceding time period plus a completely random number.

A

Random walk

50
Q

Individuals who engage in ___ deliberately invest in risky assets, hoping to obtain profit from future changes in the price of these assets.

A

Speculation

51
Q

Irresponsible lending involving one particular type of mortgage designed for borrowers who may not be able to repay such a loan, known as a ___, played a central role in the housing bubble that precipitated the financial crisis of 2007-2009.

A

Subprime mortgage

52
Q

A(n) ___ is a mutual fund that chooses a particular stock price index and then buys the stocks (or most of the stocks) that are included in the index. The value of the investment in an ___ depends on what happens to the prices of all stocks in that index.

A

Index fund

53
Q

___ and common stocks are essentially the same thing - pieces of paper issued by a company that give the holder a share of the ownership of that company and offers payments to the holder that are called dividends. The amount of these payments may be high, low, and sometimes even zero, depending on the company’s profit earnings (or losses) during the time period for which the dividends are paid.

A

Equities

54
Q

___ (or retained earnings) is the portion of a corporation’s profits that management decides to keep and reinvest in the firm’s operations rather than paying out as dividends to stockholders.

A

Plowback

55
Q

Stocks and bonds are also called ___.

A

Securities

56
Q

In long-run perfectly competitive equilibrium it is always true that for each firm…

A

P = MC = AC

57
Q

A(n) ___ is an industry in which there is only one supplier of a product for which there are no close substitutes and in which it is very difficult or impossible for another firm to coexist.

A

Pure Monopoly

58
Q

A(n) ___ is where the fund manager is buying and selling stocks in an attempt to increase return.

A

Actively Managed Mutual Fund

59
Q

___ is a legal obligation of a firm’s owners to pay back company debts only with the money they have already invested in the firm.

A

Limited Liability

Econ 2001 (5 decks)

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