Week 4 - Economic Organization

Question 0

Technology

Answer 0

Blueprints and organization of the economy Tech change is defined by increasing output for a fixed set of inputs True growth or intensive growth

Question 1

Firm

Answer 1

Defined by production function (inputs and outputs) Output is function of land, labor, and capital

Question 2

Marginal product

Answer 2

Change in productivity resulting from a change in the variable factor in the production function

Question 3

Law of diminishing marginal product

Answer 3

Marginal product increases until a point of saturation is reached At this point, adding labor decreases output

Question 4

Economies of scale, constant returns to scale, diseconomies of scale (picture)

Answer 4

Question 5

Minimum efficient scale (picture)

Answer 5

Question 6

Perfect competition

Answer 6

Firm is a price taker Large number of buyers and sellers Products are homogenous (perfect substitutes) Buyers and sellers have access to all relevant information Any firm can exit or enter market Perfectly elastic market (change from price = zero)

Question 7

Profit-maximization model (Pic)

Answer 7

AR=TR/Q=PQ/Q=P

Profit maximization occurs where MR=MC

MR>MC - each add unit adds more TR than TC, produced MR

Question 8

Profit (Pic)

Answer 8

Difference bw average total cost and average revenue (perfect - market price)

Question 9

Monopoly

Answer 9

Single seller with barriers to entry Ownership of resources wo close substitutes Economies of scale Legal restrictions

Question 10

Economies of scale

Answer 10

Increases in output reduce per-unit costs Larger firms have advantage

Question 11

Natural monopoly (Pic)

Answer 11

First firm to take advantage of declining average costs of producing a good or service

Question 12

Rent-seeking

Answer 12

Rent as price setter Transfer from consumes to producers Govt extracts rent from being a monopoly Secure benefits from govt

Question 13

Monopoly profit maximization (P)

Answer 13

MR=MC but P>MR

Reduce price to increase output

Question 14

Monopoly profit (P)

Answer 14

Question 15

Broke monopolies (P)

Answer 15

Low demand or high cost

Question 16

Transfer and Deadweight loss as social costs (P)

Answer 16

Question 17

Consumer surplus under perfect competition (P)

Answer 17

Question 18

Deadweight loss under monopoly (P)

Answer 18

Question 19

Oligopoly

Answer 19

Small number of firms and strategic interdependence in one firm’s output decisions affect the prices each firm receives Occurs bc of economies of scale, barriers to entry, or merger

Question 20

Vertical merger

Answer 20

Buying suppliers

Question 21

Horizontal merger

Answer 21

Buying competitors

Question 22

Cooperative game

Answer 22

Players coop to make themselves better off

Question 23

Noncooperative game

Answer 23

Firms make decisions independently

Question 24

Zero-sum game

Answer 24

War of attrition where one player’s gain is equal to another’s loss

Question 25

Positive-sum game

Answer 25

Gains from coop but need coop

Question 26

Prisoners’ dilemma (P)

Answer 26

Question 27

Pricing strategies (P)

Answer 27

Question 28

Cartel

Answer 28

Sets a high price and imposes quotas on suppliers Success depends on small number of firms, undifferentiated products, easily observable prices, little variation

Question 29

Network effects

Answer 29

Consumer’s decision to purchase depends on expectations on how others will purchase Positive or negative feedback

Question 30

Product incompatibility game (P)

Answer 30

Question 31

Product compatibility game and BoS (P)

Answer 31

Question 32

Economic regulation

Answer 32

Regulation of industry Rates of return, prices, entry and exit

Question 33

Social regulation

Answer 33

All firms in economy Improved product quality, safety, Environment

Question 34

Monopoly equilibrium (P)

Answer 34

Question 35

Threat of bankruptcy (P)

Answer 35