ECON QUIZ 2

Nash Equilibrium

"best" choice for both players. solution to the game

Labor demand shifters

-Changes in demand for your product -Changes in the price of capital -Better management and productivity gains -Nonwage benefits and taxes shift demand back

Grim Trigger Strategy

-If the other players have cooperated in all previous rounds, then you'll cooperate -If any player has defected in any previous round, you'll defect forever after

How do firms know what their demand curve looks like?

-Managers might offer different prices to different groups of customers -Managers might offer different prices at different locations -Managers might offer different prices over time

How many cars should one sell? (Optimal price)

-Marginal cost and marginal revenue are plotted -Find Q of MR = MC -Find Price corresponding to that quantity on the demand curve

Rules of Firm Entry and Exit

-New competitors will enter profitable markets -Existing competitors exit unprofitable markets, which helps restore profitability

Why does the market labor supply slope upward?

-New people may be induced to enter the workforce as wages increase -Existing workers may put in more hours as wage rises -Some people may switch occupations to those with higher wages

Four steps to good strategic decisions

1. Consider all possible outcomes 2. Think about "what ifs" separately 3. Play your best response for each "what if" 4. Put yourself in someone else's shoes

Types of barriers to entry

1. Government franchising, licensing or regulation 2. Patents 3. Economies of scale or other cost advantages (high startup costs) 4. Ownership of a scarce factor of production 5. Network effects and switching costs

Solutions to natural monopolies

1. Government provides goods, setting P = MC and tax revenues pay for losses 2. Private sector can supply and P = Average cost

Governments ensure competition in markets by

1. Making laws to ensure competition thrives 2. Making laws that minimize the harm done by businesses exploiting market power

Comparing market power and perfect competition

1. Market power leads to higher prices 2. Market power leads to inefficiently smaller quantity 3. Market power yields larger economic profits 4. Businesses with market power can survive even with inefficiently high costs

How to characterize customers for group pricing

1. Verifiable characteristics (sex, age, student) 2. Difficult-to-change characteristics (can't just get a discount easy peasy)

Conditions for price discrimination

1. Your business must have market power 2. You can prevent resale 3. You can target the right prices to the right customers

Firm

A bundle of contracts. They allow the firm to transform inputs into outputs

Fixed cost

A cost that does not change as quantity produced changes

Focal point

A cue from outside a game that helps you coordinate on a specific equilibrium -ie door problem: signs on doors, norms, laws

Education as a signal

A degree can serve as a signal. You worked hard to get your degree, you must be a good worker.

Coordination game

A game in which all players have a common interest in coordinating their choices

Anti-coordination game

A game in which the best response is to take a different but complementary action to the other player

Prisoners' Dilemma

A game in which the players are prevented from cooperating and in which each has a dominant strategy that leaves them both worse off than if they could cooperate

Strategic plan

A list of instructions that describes how to respond to any possible situation

Quantity discount

A per-unit price that is lower when you buy a larger quantity -Some see buying a bigger quantity to be a hurdle

Prejudice

A preconceived bias against a group that is not based on reason or experience

One-shot game

A strategic interaction that occurs only once

Wage gaps can occur because

Accounting for differences in human capital and job characteristics explains some gaps

Human capital

Accumulated knowledge and skills (education, experience, training, skills)

Collusion

An agreement to limit competition

Signaling

An attempt by the informed side to communicate valuable information that is otherwise hidden

Profit maximizing quantity

At Marginal revenue = Marginal cost

Why does the demand for labor slope downward?

At a high wage, producers want to use less labor and simply produce less to avoid paying higher variable costs. At a low wage, employers are more likely to pay more wages and produce more. -Diminishing marginal product

Why does the supply of labor slope upwards?

At higher wages, people are more willing to work. If wage is too low, employees will prefer to take other jobs. High wages will incentivize more people to join the industry.

Diminishing returns to an input occur when

At least one input is fixed

In the long run, price equals

Average cost

Long-run profitability depends on

Barriers to entry

Institutional discrimination

Bias against disadvantaged groups that is embedded in laws and institutions

Competition is better for consumers because

Businesses will lower their prices and raise quantity to compete with other firms

Thinking like an economist, you should consider a career where

Capital goods are complements

Example of oligopoly

Cellphone providers (AT&T, Verizon, T-mobile, etc)

What shifts individual labor supply

Changing wages in other occupations Changing number of potential workers Changing benefits of not working Nonwage benefits, subsidies, and income taxes

Perfect price discrimination

Charging each customer their reservation price

2 types of mergers

Competitive mergers and anti-competitive mergers

Economy of scale

Costs fall as firm grows

Bundling

Creates a hurdle to getting the second good at a lower price

Competitive merger

Creates a more fearsome competitor. Bad for rivals but could be good for consumers

The income effect is dominating when the supply curve slopes

Downwards

Best responses

Each player's choice is their best response to what they expect the other to choose

Product differentiation

Efforts by sellers to make their products different from those of their competitors

Screening

Employer looks for signals

Efficiency wage

Employers pay workers more to make them more productive. Some jobs will pay more because effort is harder to monitor. It is an incentive.

Free exit

Ensures industries won't remain unprofitable in the long run. Firms will exit until remaining firms once again earn zero economic profit.

Average Revenue

Equals price if everyone is charged the same price.

The opportunity cost of working

Everything you do when you are NOT working

Synonym for input market

Factor market

True or False: Economic profit is important for both long and short run analysis of firm entry and exit

False. Just important for long-run

Average cost

Firm's total costs (fixed and variable) divided by quantity. Total cost / Quantity. Cost per unit.

finitely repeated game

Game in which you face the same strategic interaction a fixed number of times. These often end up the same as one-shot games. Same outcome as one-shot games.

Indefinitely repeated game

Game in which you face the same strategic interaction an unknown number of times

Tit-for-tat strategy

Grim trigger but forgiving. -If the other player has cooperated in the previous round, then you'll cooperate in this round -If the other player has defected in the previous round, you'll defect in the current round

3rd degree price discrimination

Group pricing

Merger Regulation can be evaluated with

Herfindahl-Hirschman Index

Rational Rule for Employers

Hire more workers if the marginal revenue product is greater than or equal to the wage -MRP = Marginal Benefit of Employee -Wage = Marginal cost of employee -Marginal Benefit = Marginal Cost to maximize profits

Employers look for _________ when trying to determine which workers are likely to be more productive

Human capital

2nd degree price discrimination

Hurdle pricing

Marginal revenue will be less than price because

If a firm wants to choose a higher quantity to sell, they must lower prices on ALL UNITS SOLD

Substitution effect

If you can replace labor with capital, your need for workers will fall

Labor demand

In a competitive market, employers pay market wage. They are price takers.

Game theory

In all conflict situations, and thus all games, there are decision makers, rules of the game, and payoffs. Players will choose their strategy without knowledge of how the opposition will play

Maximin strategy

In game theory, a strategy chosen to maximize the minimum gain that can be earned. Players will choose the strategy that has the most attractive "worst case" scenario

Dominant strategy

In game theory, a strategy that is best no matter what the opposition does

Labor supply curve depends on the balance of

Income and substitution effects

Price discrimination _______ efficiency relative to a market without price discrimination

Increases

A woman resigns from her executive position to care for her young children. When her kids are older, she decides to resume her career. She finds her earnings are reduced because of the time she spent outside of the workforce. This is an example of the

Interdependence principle

Natural monopoly

It makes sense sometimes to have a monopoly in certain industries due to economies of scale. The government will allow the monopoly but closely regulate it to minimize harm by market power

Implicit bias

Judgments shaped by the unconscious attribution of particular qualities to specific groups

The price in perfect competition is ______ than the price under imperfect competition. The quantity in perfect competition is ________ than the quantity under imperfect competition

Lower, higher

Tying contracts

Making a customer buy something from someone else in order to be allowed to buy from you

Perfect competition

Markets in which all businesses sell identical goods, with many buyers and sellers. Sellers DO NOT have market power. They are price takers.

Monopolistic competition

Markets in which many small businesses compete, each with differentiated products. Sellers have a LITTLE market power

Monopoly

Markets in which there is only one seller of a product with no close substitutes. Has A LOT of market power

Oligopoly

Markets with only a handful of large sellers. Goods can be homogeneous or differentiated. Sellers have SOME market power

Goal of all firms

Maximizing profits

Income effect (for workers)

Measures how people respond to changes in income and says higher income makes leisure more attractive

Substitution Effect (for workers)

Measures how people respond to changes in relative prices and says that higher wages make work relatively more attractive

Exclusive dealing

Not letting your customers buy from a competitor

Barriers to entry

Obstacles that make it difficult for new firms to enter an industry -Monopolies have the strongest barriers to entry -Oligopolies often have barriers -Perfect and monopolistic competition do not have barriers to entry and thus tend to have zero profit in long run

Strategic Interactions

Occur when your best choices may depend on what others choose and when their best choices may depend on what you choose

Derived demand

Occurs because demand for labor is derived from the demand for the stuff labor makes

Hurdle method

Offering low prices only to buyers who are willing to overcome some hurdle or obstacle -yields self selection -weed out high marginal benefit customers to pay more -hardcover or paperback -haggling for a car. people who dont want to haggle will pay more for a car

Implicit cost

Opportunity cost

Marginal revenue reflects the

Output effect minus discount effect (P - dP*Q)

4 Types of Market Structure

Perfect competition Monopolistic competition Monopoly Oligopoly

Types of discrimination

Prejudice Implicit bias Statistical discrimination Institutional discrimination

Anti-collusion laws

Prevent businesses from agreeing not to compete

Merger laws

Prevent competing businesses from combining to consolidate market power.

Group pricing

Price discrimination by charging different prices to different groups of people -ie: student discount, senior discount, residential versus commercial use

"Just as good as next best option"

Profits = Zero

Examples of natural monopolies

Public utilities Phones used to be

Free entry

Pushes economic profits down to zero in the long run -Occurs when there are no factors making it difficult or costly for a business to enter or exit an industry

Anti-competitive merger

Reduces competition for all sellers. Good for rivals, bad for consumers

Variable cost

Rises as quantity produced rises

Price ceilings limit market power

Set price = marginal cost -Eliminates discount effect and underproduction

Compensating differential

The differences in wages required to offset the desirable and undesirable aspects of a job. Encourage people to take more unpleasant jobs.

Market power

The extent to which a seller can charge a higher price without losing all sales to competing businesses

Marginal product of labor

The extra production that occurs from hiring an extra worker

Short run

The horizon over which the production capacity and the number and type of competitors you face cannot change (fixed factors and costs)

Long run

The horizon over which you or your rivals may expand or contract production capacity and new rivals may enter the market or existing firms may exit -Useful for planning purposes

Marginal revenue product

The marginal revenue from hiring an additional worker -MRP = Marginal Product*Price

Reservation price

The maximum price a customer will pay for a product

Production

The process by which inputs are combined, transformed, and turned into outputs

Output effect

The revenue increase from selling one more unit Price

Discount effect

The revenue loss from cutting the price on all units sold. Change in price*Quantity(old)

Imperfectly competitive market

The situation of facing at least some competitors and/or selling products that differ at least a little from those of competitors

Discrimination

The treating of people differently based on characteristics like their gender, race, ethnicity, sexual orientation, religion, disability, and social class

How do perfectly competitive markets choose the price of their products?

They can't choose the price, so they set the quantity supplied to where price equals marginal cost

Marginal Revenue Calculation

Total revenue / change in quantity

Accounting Profit

Total revenue minus financial costs

Economic Profit

Total revenue minus financial costs minus opportunity costs

The substitution effect is dominating when the supply curve slopes

Upwards

Statistical discrimination

Using observations about the average characteristics of a group to make inferences about an individual

The supply curve looks like this when income and substitution effects offset

Vertical line

Price-fixing

When competitors get together and decide to raise the prices (cartels)

Interlocking directorates

When someone serves on the board for 2 competing firms

Scale effect

When the price of capital declines, you can produce output more cheaply. More workers are needed to produce more things

When does multiple equilibria occur

When there is more than one equilibrium. No dominant strategy.

Repeated game

When you face the same strategic interaction with the same rivals and the same payoffs in successive periods

Rational rule for workers

Work one more hour as long as the wage is at least as large as the marginal benefit of another hour of leisure

Rational Rule for Entry

You should enter a market if you expect to earn a positive economic profit, which occurs when price exceeds average cost

Rational Rule for Exit

You should exit the market if you expect to earn a negative economic profit, which occurs if price is less than average cost

Economic Profit is _________ less than Accounting Profit

always

Market power allows businesses to _______ prices

choose

Indefinitely repeated play helps solve the Prisoners' Dilemma and lead to

collusion

Marginal cost

dTotal cost/dQuantity

If labor becomes more productive,

demand for labor shifts out

True or False: total costs do not include opportunity costs

false. Total costs include opportunity (implicit) costs

Higher education corresponds to

higher earnings

labor choice can be modelled as a tradeoff between

labor and leisure

More competitors = ______ market power

less

WHERE A FIRM MAXIMIZES PROFIT

marginal revenue = marginal cost

Firm's demand curve _______ slope down, depending on market power

might

Market structure with most market power

monopoly

It is often ______ efficient to allow a natural monopoly in certain industries.

more

Successful product differentiation allows you _______ market power

more

Explicit cost

out-of-pocket expenses

Market structure with least market power

perfect competition

For oligopolies, perfectly competitive and monopolistically competitive firms, market demand will always

slope down

Labor Market

the input/factor market in which households supply work for wages to firms that demand labor Price = Wage Quantity = Hours labor supplied

Nonwage benefits and taxes shift demand back because

they add to the cost of labor without affecting wage

Profits Equation

total revenue - total costs (Price*Quantity) - Total Costs

Market power creates ____production

under