Microeconomics Final
monopoly
A firm that is the only seller of a product without close substitutes. Also refers to a market with only one seller. [7.10][1.10]
economic profit
A firm's revenue minus its total costs (including the opportunity cost of capital). [7.4][7.6]
monopoly rents
A form of economic profits, which arise due to restricted competition in selling a firm's product. [7.10]
reciprocity
A preference to be kind or to help others who are kind and helpful, and to withhold help and kindness from people who are not helpful or kind. [4.7][KC4]
technology
A process taking a set of materials and other inputs, including the work of people and machines, to produce an output. [1.4][KC1]
differentiated product
A product produced by a single firm that has some unique characteristics compared to similar products of other firms. [7.4][KC7]
natural monopoly
A production process in which the long-run average cost curve is sufficiently downward-sloping to make it impossible to sustain competition among firms in this market. [7.12]
diminishing marginal product
A property of some production functions according to which each additional unit of input results in a smaller increment in total output than did the previous unit. [3.6][15.1][KC15]
Nash equilibrium
A set of strategies, one for each player in the game, such that each player's strategy is a best response to the strategies chosen by everyone else. [4.13][13.7][KC4]
unemployment
A situation in which a person who is able and willing to work is not employed. [6.4][9.2]
social dilemma
A situation in which actions taken independently by individuals in pursuit of their own private objectives result in an outcome which is inferior to some other feasible outcome that could have occurred if people had acted together, rather than as individuals. [4.0][12.0][KC4]
diminishing returns
A situation in which the use of an additional unit of a factor of production results in a smaller increase in output than the previous increase. [3.1]
diminishing average product of labour
A situation in which, as more labour is used in a given production process, the average product of labour typically falls. [2.7][KC2]
demographic transition
A slowdown in population growth as a fall in death rate is more than balanced by a fall in birth rates. [1.5]
tragedy of the commons
A social dilemma in which self-interested individuals acting independently deplete a common resource lowering the payoffs of all. [4.0][20.9]
strategic interaction
A social interaction in which the participants are aware of the ways that their actions affect others (and the ways that the actions of others affect them). [4.1]
purchasing power parity (PPP)
A statistical correction allowing comparisons of the amount of goods people can buy in different countries that have different currencies. [1.13]
wage labour
A system in which producers are paid for the time they work for their employers. [6.1]
gains from exchange
The benefits that each party gains from a transaction compared to how they would have fared without the exchange. [5.6][7.7][KC16]
cooperative firm
A firm that is mostly or entirely owned by its workers, who hire and fire the managers. [6.9]
When MC<AC
- AC declines with Q - Economies of scale (some incentive to increase output and reduce the average cost)
When MC>AC
- AC increases with Q - Diseconomies of scale
Economies of scale result from....(3 Answers)
- Technological advantages - Cost Advantages - Network economies of scale
When workers are paid the lowest wage they are willing to accept, what happens?
- Workers are indifferent about keeping or losing their job - Employers have no control over workers
When workers are paid more than they are willing to accept, what happens?
- Workers receive employment rents - Workers are less likely to quit - Employers have more power over workers
In economics, institutions refer to 1. established laws. 2. the rules of the game. 3. financial corporations. 4. organizations such as universities
1. the rules of the game.
The figure below is the Lorenz curve of a population. Based on this figure, which of the following statements are correct? - 50% of the population owns 100% of the land. - The wealthiest 1% of the population owns 5% of the land. - The wealthiest 30% of the population owns 70% of the land. 80% of the population owns no land.
50% of the population owns 100% of the land.
π (Price) equals....
= Revenue-Cost = P×Q - C(Q) = Q(P-AC)
game theory
A branch of mathematics that studies strategic interactions, meaning situations in which each actor knows that the benefits they receive depend on the actions taken by all. [4.1]
firm
A business organization which pays wages and salaries to employ people, and purchases inputs, to produce and market goods and services with the intention of making a profit. [1.6][6.0][KC1]
technological progress
A change in technology that reduces the amount of resources (labour, machines, land, energy, time) required to produce a given amount of the output. [1.4][16.1]
Pareto improvement
A change that at least benefits one person without making anyone else worse off. [5.9][KC]
incomplete contract
A contract that does not specify, in an enforceable way, every aspect of the exchange that affects the interests of parties to the exchange (or of others). [6.3][12.4][KC6][KC10]
indifference curve
A curve of the points which indicate the combinations of goods that provide a given level of utility to the individual. [3.2][KC3]
isoprofit curve
A curve on which all points yield the same profit. [6.7]
reservation indifference curve
A curve that indicates allocations (combinations) that are as highly valued as one's reservation option. [5.7][10.5]
preferences
A description of the benefit or cost we associate with each possible outcome. [3.2]
allocation
A description of who does what, the consequences of their actions, and who gets what as a result. [5.2]
causality
A direction from cause to effect, establishing that a change in one variable produces a change in another. While a correlation is simply an assessment that two things have moved together, causation implies a mechanism accounting for the association, and is therefore a more restrictive concept. [1.9][13.0]
inequality aversion
A dislike of outcomes in which some individuals receive more than others. [4.9][19.4][KC4]
concave function
A function of two variables for which the line segment between any two points on the function lies entirely below the curve representing the function (the function is convex when the line segment lies above the function). [3.1][16.1]
sequential game
A game in which all players do not choose their strategies at the same time, and players that choose later can see the strategies already chosen by the other players, for example the ultimatum game. [4.10]
simultaneous game
A game in which players choose strategies simultaneously, for example the prisoners' dilemma. [4.10]
zero sum game
A game in which the payoff gains and losses of the individuals sum to zero, for all combinations of strategies they might pursue. [4.4]
prisoners' dilemma
A game in which the payoffs in the dominant strategy equilibrium are lower for each player, and also lower in total, than if neither player played the dominant strategy. [4.3][KC4]
repeated game
A game in which the same interaction (same payoffs, players, feasible actions) may be occur more than once. [4.6]
coordination game
A game in which there are two Nash equilibria, of which one may be Pareto superior to the other. [13.7][KC12]
public good
A good for which use by one person does not reduce its availability to others. [4.6][12.5][KC4][KC10]
consumption good
A good or service that satisfies the needs of consumers over a short period. [3.2]
scarcity
A good that is valued, and for which there is an opportunity cost of acquiring more. [3.0][KC3]
developmental state
A government that takes a leading role in promoting the process of economic development through its public investments, subsidies of particular industries, education and other public policies. [1.10]
unemployment benefit
A government transfer received by an unemployed person. [6.5]
production function
A graphical or mathematical expression describing the amount of output that can be produced by any given amount or combination of input(s). The function describes differing technologies capable of producing the same thing. [2.7][3.1]
Lorenz curve
A graphical representation of inequality of some quantity such as wealth or income. Individuals are arranged in ascending order by how much of this quantity they have, and the cumulative share of the total is then plotted against the cumulative share of the population. For complete equality of income, for example, it would be a straight line with a slope of one. The extent to which the curve falls below this perfect equality line is a measure of inequality. [5.12][19.2]
cartel
A group of firms that collude in order to increase their joint profits. [7.10][18.6]
contract
A legal document or understanding that specifies a set of actions that parties to the contract must undertake. [6.1][12.0]
isocost line
A line that represents all combinations that cost a given total amount. [2.4][6.7][KC2]
deadweight loss
A loss of total surplus relative to a Pareto-efficient allocation. [7.7][KC7]
market
A market is a way of connecting people who may mutually benefit by exchanging goods or services through a process of buying and selling. [1.6][KC1]
oligopoly
A market with a small number of sellers, giving each seller some market power. [7.10][11.4]
Gini coefficient
A measure of inequality of any quantity such as income or wealth, varying from a value of zero (if there is no inequality) to one (if a single individual receives all of it). [5.12]
index
A measure of the amount of something in one period of time, compared to the amount of the same thing in a different period of time, called the reference period or base period. It is common to set its value at 100 in the reference period. [2.0]
gross domestic product (GDP)
A measure of the market value of the output of the economy in a given period. [1.0][13.1]
game
A model of strategic interaction that describes the players, the feasible strategies, the information that the players have, and their payoffs. [4.1][KC4]
equilibrium
A model outcome that is self-perpetuating. In this case, something of interest does not change unless an outside or external force is introduced that alters the model's description of the situation. [2.2][4.2][KC2]
labour discipline model
A model that explains how employers set wages so that employees receive an economic rent (called employment rent), which provides workers an incentive to work hard in order to avoid job termination. [6.7]
Figure 5.4 shows Angela and Bruno's feasible frontier, and Angela's biological survival constraint. Based on this figure, which of the following is correct?
A new technology that boosted grain production would result in a bigger technically feasible set.
utility
A numerical indicator of the value that one places on an outcome, such that higher valued outcomes will be chosen over lower valued ones when both are feasible. [3.2]
share
A part of the assets of a firm that may be traded. It gives the holder a right to receive a proportion of a firm's profit and to benefit when the firm's assets become more valuable. [6.2][9.7]
performance-related pay
A pay which varies, at least partially, with a worker's performance. [6.2]
economic rent
A payment or other benefit received above and beyond what the individual would have received in his or her next best alternative (or reservation option). [2.3][3.3][KC2][KC5]
comparative advantage
A person or country has comparative advantage in the production of a particular good, if the cost of producing an additional unit of that good relative to the cost of producing another good is lower than another person or country's cost to produce the same two goods. [1.8]
absolute advantage
A person or country has this in the production of a good if the inputs it uses to produce this good are less than in some other person or country. [18.4][1.8][KC18]
entrepreneur
A person who creates or is an early adopter of new technologies, organizational forms, and other opportunities. [2.5]
reservation option
A person's next best alternative among all options in a particular transaction. [2.3][5.7][KC2]
political system
A political system determines how governments will be selected, and how those governments will make and implement decisions that affect all or most members of a population. [1.10]
democracy
A political system, that ideally gives equal political power to all citizens, defined by individual rights such as freedom of speech, assembly, and the press; fair elections in which virtually all adults are eligible to vote; and in which the government leaves office if it loses. [1.10][KC1]
In their study of a firm during 2006-2010 that includes the financial crisis, Lazear and his co-authors found that (i) the firm's productivity increased dramatically as unemployment rose, and (ii) the wage level was kept unchanged. Based on this information, which of the following statements are correct? - The rise in productivity is inconsistent with the predictions of the labour discipline model. - The labor discipline model predicts that a rise in unemployment would have no impact on the wage level. - In the labor discipline model, a rise in the unemployment rate shifts the workers' best response curve to the left. This shifts the point of tangency with the highest feasible isocost to the left. Therefore the model suggests that the firm should cut the wage rate to minimize its cost. - The increase in the productivity primarily reflects that the least productive workers were fired in the downturn. - A possible explanation for why the wage level was not cut may be that the firm judged that the costs of lower employee morale and retention would be greater than what they would have saved in wages.
A possible explanation for why the wage level was not cut may be that the firm judged that the costs of lower employee morale and retention would be greater than what they would have saved in wages.
dominant technology
A technology that produces the same amount at lower cost than alternative technologies irrespective of the prices of inputs. It is capable of producing the same amount of output as the alternative technology with less of at least one input, and not more of any input. [2.3]
piece-rate work
A type of employment in which the worker is paid a fixed amount for each unit of the product made. [6.3]
Joule
A unit of energy or work, originally defined as the amount of energy necessary to lift a small apple vertically 1 metre. [2.6]
Industrial Revolution
A wave of technological advances and organizational changes starting in Britain in the eighteenth century, which transformed an agrarian and craft-based economy into a commercial and industrial economy. [1.4][2.0][KC1]
revealed preference
A way of studying preferences by reverse engineering the motives of an individual (her preferences) from observations about her or his actions. [4.8][20.7]
fairness
A way to evaluate an allocation based on one's conception of justice. [4.7]
Pareto criterion
According to the Pareto criterion, a desirable attribute of an allocation is that it be Pareto-efficient. [5.9]
dominant strategy
Action that yields the highest payoff for a player, no matter what the other players do. [4.2]
Labor contracts are incomplete because... - The firm cannot contract an employee not to leave. - The firm cannot observe exactly how an employee fulfills the contract. - The firm cannot specify every eventuality of a contract. - All of the above
All of the above
feasible set
All of the combinations of the things under consideration that a decision-maker could choose given the economic, physical or other constraints that he faces. [3.4][15.4][KC3]
Pareto dominant
Allocation A Pareto-dominates allocation B if at least one party would be better off with A than B, and nobody would be worse off. [5.9]
strategy
An action (or a course of action) that a person may take when that person is aware of the mutual dependence of the results for herself and for others. The outcomes depend not only on that person's actions, but also on the actions of others. [4.1]
biologically feasible
An allocation that is capable of sustaining the survival of those involved is biologically feasible. [5.5]
Pareto efficient
An allocation with the property that there is no alternative technically feasible allocation in which at least one person would be better off, and nobody worse off. [5.2][7.7][KC5]
technically feasible
An allocation within the limits set by technology and biology. [5.5]
evolutionary economics
An approach that studies the process of economic change, including technological innovation, the diffusion of new social norms, and the development of novel institutions. [2.3]
market power
An attribute of a firm that can sell its product at a range of feasible prices, so that it can benefit by acting as a price-setter (rather than a price-taker). [7.10]
median voter model
An economic model of the location of businesses applied to the positions taken in electoral platforms when two parties compete that provides conditions under which, in order to maximize the number of votes they will receive, the parties will adopt positions that appeal to the median voter. [22.6]
capitalism
An economic system in which private property, markets, and firms play an important role. [1.6][KC1]
natural experiment
An empirical study exploiting naturally occurring statistical controls in which researchers do not have the ability to assign participants to treatment and control groups, as is the case in conventional experiments. Instead, differences in law, policy, weather, or other events can offer the opportunity to analyse populations as if they had been part of an experiment. The validity of such studies depends on the premise that the assignment of subjects to the naturally occurring treatment and control groups can be plausibly argued to be random. [6.4][13.7]
budget constraint
An equation that represents all combinations of goods and services that one could acquire that exactly exhaust one's budgetary resources. [3.7][KC3]
procedural judgements of fairness
An evaluation of an outcome based on how the allocation came about, and not on the characteristics of the outcome itself, (for example, how unequal it is). [5.3][KC5]
willingness to pay (WTP)
An indicator of how much a person values a good, measured by the maximum amount he or she would pay to acquire a unit of the good. [7.4][8.1][KC7]
trade union
An organization consisting predominantly of employees, the principal activities of which include the negotiation of rates of pay and conditions of employment for its members. [9.10][KC6]
dominant strategy equilibrium
An outcome of a game in which every player plays his or her dominant strategy. [4.2][KC4]
social norm
An understanding that is common to most members of a society about what people should do in a given situation when their actions affect others. [4.7][12.0]
Figure 5.8 shows the Pareto efficiency curve CD for the interaction between Angela and Bruno. Which of the following statements is correct?
Angela's marginal rate of substitution is equal to the marginal rate of transformation at all points on the Pareto efficiency curve.
In Figure 5.10, Angela and Bruno are at allocation F, where she receives 3 bushels of grain for 4 hours of work. From the figure, we can conclude that:
Any point in the area between G, H and F would be a Pareto improvement.
asset
Anything of value that is owned. [10.7][11.5][KC11]
net worth
Assets less liabilities. [10.7][KC11]
The figure depicts the efficiency wage equilibrium of a worker and a firm. Which of the following statements is correct? - At A, given that the firm pays the hourly wage of $12, the worker's best response is to exert an effort of 0.5. - At A, given that the worker exerts an effort level of 0.5, the firm's best response is to offer the hourly wage of $12. - This is a sequential game where the firm chooses its action given the worker's best responses to its actions. Therefore the worker receives no rent. - The employer makes profits by coercing the worker to put in some effort.
At A, given that the firm pays the hourly wage of $12, the worker's best response is to exert an effort of 0.5.
Refer to the figure in question 5. Which of the following statements is correct? - A profit-maximising firm would select the quantity at which the average cost is minimized. - At B, the decrease in price that keeps profits constant when one extra car is sold is larger than the decrease in price required to sell one extra car. - At D, the price equals the marginal cost and therefore the firm makes no profit. - The profit margin is the highest at C.
At B, the decrease in price that keeps profits constant when one extra car is sold is larger than the decrease in price required to sell one extra car.
Which of the following statements regarding Pareto efficiency is correct? 1. A Pareto-efficient allocation dominates every Pareto-inefficient allocation. 2. There can be many Pareto-inefficient allocations, but only one Pareto-efficient allocation. 3. At a Pareto-efficient allocation, it is impossible to make one person better off without making another person worse off. 4. A Pareto-efficient allocation is a fair allocation.
At a Pareto-efficient allocation, it is impossible to make one person better off without making another person worse off.
free ride
Benefiting from the contributions of others to some cooperative project without contributing oneself. [4.0][4.5]
In Figure 5.9, D and F are the outcomes before and after the introduction of a new law that limits Angela's work time to four hours a day while requiring a minimum pay of 4.5 bushels. Based on this information, which of the following statements are correct?
Both Angela and Bruno receive economic rents at F. As a result of the new law, Bruno has less bargaining power.
normal profits
Corresponds to zero economic profit and means that the rate of profit is equal to the opportunity cost of capital. [7.4][8.7]
economies of scope
Cost savings that occur when two or more products are produced jointly by a single firm, rather being produced in separate firms. [7.3]
fixed costs
Costs of production that do not vary with the number of units produced. [7.3]
Bruno is a landowner and Angela is a farmer who pays a share of her grain output to Bruno for the use of the land. The figure shows Angela and Bruno's feasible frontier, Angela's biological survival constraint and her reservation indifference curve. If Angela does not work she receives a ration of 2.5 bushels from the government. 1.) a 2.) b 3.) c 4.) d
D
Bruno is a landowner and Angela is a farmer who pays a share of her grain output to Bruno as rent for the use of the land. Consider the following figure, which shows Angela's and Bruno's combined feasible set and the interpretation of the allocation at point E. (picture) 1. Bruno receives more grain at allocation G than at allocation F. 2. Angela prefers G to working 12 hours and consuming 10 bushels. 3. If Bruno is totally selfish, then H would be his preferred allocation. 4. Depending on the shape of her indifference curves, Angela may prefer G to E, she may prefer E to G, or she may be indifferent between the two.
Depending on the shape of her indifference curves, Angela may prefer G to E, she may prefer E to G, or she may be indifferent between the two.
Explain what the rational action in a single instance Prisoner's Dilemma is according to the Restricted Dominance Principle and Restricted MEU.
Dom: rational action is to confess because of the possibility of getting 0 yrs. MEU: rational action is to confess because you would assume that the probability doesn't matter, which gives confessing the higher utility
incentive
Economic reward or punishment, which influences the benefits and costs of alternative courses of action. [2.3][5.1][KC2]
Why are firms like Walmart, Toyota, and Amazon so large?
Economies of scale or increasing returns
ceteris paribus
Economists often simplify analysis by setting aside things that are thought to be of less importance to the question of interest. The literal meaning of the expression is 'other things equal'. In an economic model it means an analysis 'holds other things constant'. [2.3][KC2]
How are institutions and outcomes evaluated
Efficiency & Fairness
Which of the following statements regarding employment contracts is correct? - The firm is required to state exactly what it needs the employee to do in an employment contract. - The firm needs to specify exactly how much effort employees are expected to put into their job. - Employees' effort levels cannot be the basis of an enforceable contract. - Unlike salary contracts, an hourly wage contract is a complete contract, because workers only get paid for the hours they work.
Employees' effort levels cannot be the basis of an enforceable contract.
Which of the following statements regarding employment rents is correct? - They are the costs you have to pay for your employment. - It equals the wage you receive in your employment. - Higher employment rents make workers more likely to quit their job. - Employers can use high employment rents to exert power over employees.
Employers can use high employment rents to exert power over employees.
research and development
Expenditures by a private or public entity to create new methods of production, products, or other economically relevant new knowledge. [7.2]
Bruno is a landowner and Angela is a farmer who pays a share of her grain output to Bruno for the use of the land. The figure shows Angela and Bruno's feasible frontier, two of Angela's indifference curves, and the Pareto efficiency curve CD. Note that Angela's preferences are quasi-linear, so IC2 is simply IC1 shifted upwards. 1.) Moving from F to any point on line CD is Pareto-improving. 2.) F is not Pareto efficient because the marginal rate of substitution does not equal the marginal rate of transformation at this point. 3.) Depending on the slope of the feasible frontier, both Bruno and Angela can be better off at F than at D. 4.) The relative bargaining power of Bruno and Angela determines the number of hours worked along the Pareto efficiency curve.
F is not Pareto efficient because the marginal rate of substitution does not equal the marginal rate of transformation at this point.
For allocations to be economically feasible, what must there be?
For allocations to be economically feasible, they must be Pareto Improvements relatives to the parties reservation options, which may depend on institutions or legislations on working hours
antitrust policy
Government policy and laws to limit monopoly power and prevent cartels. [7.10]
competition policy
Government policy and laws to limit monopoly power and prevent cartels. [7.10]
What did Karl Marx believe?
He observed that the transactions in the labor market were between equals: nobody is in a position to order anyone else to employ or be employed.
Pareto inefficient
However, at Point D (16 goods and 17 services) It is possible to increase either without leading to a decline in the output of the other. Thus to be at point D would be classed as Pareto inefficient, and this is generally considered to be bad for the economy.
Figure 5.3 shows Angela and Bruno's combined feasible set, and four allocations that might result from an interaction between them. From the figure, we can conclude that
If Angela has very flat indifference curves, she may prefer G to the other three allocations. It is possible that Angela is indifferent between G and E.
Which of the following statements about the outcome of an economic interaction is correct?
If the allocation is Pareto efficient, then you cannot make anyone better off without making someone else worse off.
The figure below illustrates Maria's employment rent on her current job, given her wage, her disutility of work, the unemployment benefit, and the expect duration of unemployment. Which of the following statements is correct. - Maria's employment rent per hour is $6. - The cost to Maria of losing her job is $9,240. - If the expected duration of unemployment falls to 22 weeks, Maria's employment rent will be $3,080. - If the unemployment benefit is cut to $5 an hour, Maria's unemployment rent will be $10,780.
If the expected duration of unemployment falls to 22 weeks, Maria's employment rent will be $3,080.
Figure 5.6 shows Angela and Bruno's feasible frontier, Angela's biological survival constraint, and her reservation indifference curve. Based on this figure, which of the following is correct?
If the ration Angela gets from the government increases from 2 to 3 bushels of grain, her reservation indifference curve will be above her biological survival constraint whatever her working hours.
median voter
If voters can be lined up along a single more-versus-less dimension (such as preferring higher or lower taxes, more or less environmental protection), the median voter is the one 'in the middle'—that is (if there is an odd number of voters in total), with an equal number preferring more and preferring less than what he or she does. [22.6]
How can it be possible to avoid trade-offs and achieve fairness?
If we have institutions under which people can deliberate, agree on, and enforce alternative allocations then it may be possible to achieve fairness
Which of the following statements regarding bargaining power is correct? 1. In an ultimatum game, the Proposer has all of the bargaining power. 2. In an ultimatum game, increasing the number of Responders reduces the Proposer's bargaining power. 3. In a dictator game, the Proposer has all the bargaining power. 4. In a dictator game, increasing the number of Responders reduces the Proposer's bargaining power.
In a dictator game, the Proposer has all the bargaining power.
Which of the following statements is true? - A labour contract transfers ownership of the employee from the employee to the employer. - In a labor contract, one side of the contract has the power to issue orders to the other side, but this power is absent from a sale contract. - A firm is a structure that involves decentralization of power to the employees. - The office where the employee works is a relation-specific asset, because the employee cannot use it after leaving the firm.
In a labor contract, one side of the contract has the power to issue orders to the other side, but this power is absent from a sale contract.
Bruno is a landowner and Angela is a farmer who pays a share of her grain output to Bruno for the use of the land. The figure shows Angela and Bruno's feasible frontier, Angela's biological survival constraint and her reservation indifference curve, and how many bushels Angela would get at allocations B and D. 1.) If Bruno can use coercion then he would force Angela to work 21 hours to maximize total production. 2.) In a voluntary exchange where Bruno has all the bargaining power, B is the best choice for Bruno as it maximizes his rent. 3.) In a voluntary exchange where Bruno has all the bargaining power, if Bruno charges 4.5 bushels of rent for the use of his land, then Angela would choose to work 8 hours. 4.) If Angela owned the land herself, then she would choose A, where her rent is maximized.
In a voluntary exchange where Bruno has all the bargaining power, if Bruno charges 4.5 bushels of rent for the use of his land, then Angela would choose to work 8 hours.
best response
In game theory, the strategy that will give a player the highest payoff, given the strategies that the other players select. [4.2][KC4]
minimum acceptable offer
In the ultimatum game, the smallest offer by the Proposer that will not be rejected by the Responder. [4.10][12.2]
labour market
In this market, employers offer wages to individuals who may agree to work under their direction. Economists say that employers are on the demand side of this market, while employees are on the supply side. [1.6]
disposable income
Income available after paying taxes and receiving transfers from the government. [1.2][5.12]
verifiable information
Information that can be used to enforce a contract. [6.10][12.4][KC10]
asymmetric information
Information that is relevant to the parties in an economic interaction, but is known by some but not by others. [6.10][10.4][KC10]
Describe the general structure shared by both the Prisoner's Dilemma and Newcomb's Paradox.
It is highly likely the participants' actions will match even though their actions don't causally affect each other. There is an action X which is such that everyone is better off if they converge on X. It is rational for each participant to perform an action other than X. The best outcome for each person is to Defect when the other Cooperates. The worst outcome for each is to Cooperate when the other Defects. We are highly likely to perform the same action. Mutual Cooperation is better than mutual Defection.
creative destruction
Joseph Schumpeter's name for the process by which old technologies and the firms that do not adapt are swept away by the new, because they cannot compete in the market. In his view, the failure of unprofitable firms is creative because it releases labour and capital goods for use in new combinations. [2.5][16.1][KC16]
substantive judgements of fairness
Judgements based on the characteristics of the allocation itself, not how it was determined. [5.3][KC5]
Explain why people rationally pursuing their interests are likely to achieve the mutually optimal outcome in a multiple Prisoner's Dilemma.
Knowing that the other will remember and learn, if both defect or cooperate, etc, then both can make a decision "together" for a mutually optimal outcome
Downward sloping demand curves mean...
Law of Demand
constant prices
Prices corrected for increases in prices (inflation) or decreases in prices (deflation) so that a unit of currency represents the same buying power in different periods of time. [1.13]
capital-intensive
Making greater use of capital goods (for example machinery and equipment) as compared with labour and other inputs. [2.4]
labour-intensive
Making greater use of labour as an input in production as compared with machines and other inputs. [2.4]
market failure
Market failure is an inefficient allocation of resources in a free market. Market failure implies Pareto inefficiency - because it is possible to improve.
monopolized market
Market in which a single firm produces all the goods that are sold. [7.10][7.9]
The figure shows the Lorenz curve for market income and disposable income in the Netherlands in 2010. Which of the following statements are correct? - The entire Dutch population earns significant market income. - The Gini coefficient is larger for disposable income than for market income. - One-fifth of the Dutch population has virtually no market income. - The poorest one-fifth of the population receives about 20% of all disposable income.
One-fifth of the Dutch population has virtually no market income.
Allocative efficiency
Pareto efficiency is also concerned with allocative efficiency. To be Pareto efficient the distribution of resources needs to be at a point where it is impossible to make someone better off without making someone worse off.
Product efficiency
Pareto efficiency is related to the concept of productive efficiency. Productive efficiency is concerned with the optimal production of goods which occurs at the lowest point on the short run average cost curve and occurs on a PPF.
Define Pareto efficiency
Pareto efficiency is said to occur when it is impossible to make one party better off without making someone worse off. Occurs on a PPF - When an economy is operating on a simple production possibility frontier, (e.g. at point A, B or C) it is not possible to increase output of goods without reducing output of services
cooperation
Participating in a common project that is intended to produce mutual benefits. [4.9]
economically feasible
Policies for which the desired outcomes are a Nash equilibrium, so that once implemented private economic actors will not undo the desired effects. [NO INFO ON THIS ONE.][KC]
social preferences
Preferences that place a value on what happens to other people, and on acting morally, even if it results in lower payoffs for the individual. [4.4]
constrained optimization problem
Problems in which a decision-maker chooses the values of one or more variables to achieve an objective (such as maximizing profit) subject to a constraint that determines the feasible set (such as the demand curve). [7.5]
innovation rents
Profits in excess of the opportunity cost of capital that an innovator gets by introducing a new technology, organizational form, or marketing strategy. [2.3][16.1][KC2]
innovation rents (a.k.a. Schumpeterian rents)
Profits in excess of the opportunity cost of capital that an innovator gets by introducing a new technology, organizational form, or marketing strategy. [2.3][16.1][KC2]
capitalist revolution
Rapid improvements in technology combined with the emergence of a new economic system. [1.1][KC1]
What are two ways of avoiding sub-optimal results in (a single instance) Prisoner's Dilemma?
Rational to take steps to act irrationally if everyone does. (Take a drug that would block me from confessing provided you also take it. Would allow us to achieve the mutually optimal outcome of both staying silent) Punish confessing/defecting (Say you and I are members of a gang that kills anyone who confesses.)
too big to fail
Said to be a characteristic of large banks, whose central importance in the economy ensures they will be saved by the government if they are in financial difficulty. The bank thus does not bear all the costs of its activities and is therefore likely to take bigger risks. [1.10][11.13]
social interactions
Situations in which the actions taken by each person affect other people's outcomes as well as their own. [4.1]
Define Pareto Law
Small group of people always have wealth
firm-specific asset
Something that a person owns or can do that has more value in the individual's current firm than in their next best alternative. [6.1][KC6]
costs of entry
Startup costs that would be incurred when a seller enters a market or an industry. These would usually include the cost of acquiring and equipping new premises, research and development, the necessary patents, and the cost of finding and hiring staff. [8.6]
Why is the Prisoner's Dilemma a case in which rational pursuit of one's interests lead to sub-optimal results?
Staying silent could suit your self-interest, but could also lead to the worst possible outcome (10 yrs)
general-purpose technologies
Technological advances that can be applied to many sectors, and spawn further innovations. Information and communications technology (ICT), and electricity are two common examples. [2.0][21.1][KC21]
What determines the technically feasible set of allocations?
Technology and Biology determine whether or not they are able to mutually benefit, and the technically feasible set of allocations
Figure 5.15 shows the Lorenz curve for market income in the Netherlands in 2010. Which of the following is true?
The Gini coefficient can be calculated as the proportion of area A to area A + B.
Consider the Lorenz curves for pirate ships and navy ships. Given the information in the figure, which of the following statements must be true? - Pirate crewmen earned higher incomes than navy crewmen. - Pirate crewmen earned higher incomes than pirate captains. - The Gini coefficient on pirate ships was much lower than the Gini coefficient on navy ships. - More equal crews are fiercer fighters
The Gini coefficient on pirate ships was much lower than the Gini coefficient on navy ships.
power
The ability to do (and get) the things one wants in opposition to the intentions of others, ordinarily by imposing or threatening sanctions. [5.1][KC5]
marginal product
The additional amount of output that is produced if a particular input was increased by one unit, while holding all other inputs constant. [3.1][KC1][KC3]
What are the allocations that we observe the result of?
The allocations that we observe through history are the result of the institutions, including property rights and bargaining power, that were present in the Economy
opportunity cost of capital
The amount of income an investor could have received by investing the unit of capital elsewhere. [7.3]
income
The amount of profit, interest, rent, labour earnings, and other payments (including transfers from the government) received, net of taxes paid, measured over a period of time such as a year. The maximum amount that you could consume and leave your wealth unchanged. [1.0][10.1][KC11]
separation of ownership and control
The attribute of some firms by which managers are a separate group from the owners. [6.2]
payoff
The benefit to each player associated with the joint actions of all the players. [4.1]
Why, in all situations that share this structure, does rational pursuit of one's interests lead to sub-optimal results?
The best outcome for each person is to Defect when the other Cooperates. The worst outcome for each is to Cooperate when the other Defects. We are highly likely to perform the same action. Mutual Cooperation is better than mutual Defection. For each person the rational action is to Defect even though that leads to a sub-optimal outcome. The mutually optimal outcome is the outcome in which it is impossible for anyone to do better without someone doing worse.
Consider an employee with a reservation wage of $6 an hour. The employee chooses an effort level between zero and one. Which of the following statements regarding her best response curve is correct? - The best response curve describes the effort that the employee would choose for each level of the hourly wage. - The best response curve is upward-sloping and convex. - The curve crosses the horizontal axis at the origin. - The average effort per dollar is increasing in wages.
The best response curve describes the effort that the employee would choose for each level of the hourly wage.
consumer surplus
The consumer's willingness to pay for a good minus the price at which the consumer bought the good, summed across all units sold. [7.7][KC7]
feasible frontier
The curve made of points that defines the maximum feasible quantity of one good for a given quantity of the other. [3.4]
demand curve
The curve that gives the quantity consumers will buy at each possible price. [7.1][KC7]
The figure depicts the demand curve of a firm producing cars, together with its marginal cost, average cost, and isoprofit curves. Based on the figure, which of the following statements is correct? - The consumer surplus in the profit-maximizing outcome is $105,300. - The producer surplus in the Pareto efficient outcome is $118,660. - The deadweight loss in the profit-maximizing outcome is $20,640. - The firm's profit in the Pareto efficient outcome is $100,000.
The deadweight loss in the profit-maximizing outcome is $20,640.
The diagram depicts the demand curve of a product. Assume that there are 100 potential buyers who can choose to purchase one unit each. Based on this graph, which of the following statements is correct? - The diagram demonstrates the Law of Demand. - At an output of 20, the willingness to pay of all 20 consumers who buy the product is £8,000. - Half of the potential buyers are not willing to pay more than £2,000 for the product. - The firm should sell all 100 units in order to maximise its profits.
The diagram demonstrates the Law of Demand
profit margin
The difference between the price and the marginal cost. [7.4][KC7]
Which of the following are factors that contribute to a firm's diseconomies of scale? - The difficulty of monitoring workers' effort as the number of employees increases. - Doubling the capacity of a pipe to transport fuel when the production level is doubled. - Fixed costs such as political lobbying. - Network effects of its output goods.
The difficulty of monitoring workers' effort as the number of employees increases.
employment rent
The economic rent a worker receives when the net value of her job exceeds the net value of her next best alternative (that is, being unemployed). [6.4][KC6]
reservation wage
What an employee would get in alternative employment, or from an unemployment benefit or other support, were he or she not employed in his or her current job. [5.6][6.5][KC6]
Bruno is a landowner and Angela is a farmer who pays a share of her grain output to Bruno for the use of the land. The figure shows Angela and Bruno's feasible frontier, Angela's biological survival constraint, and Angela's reservation indifference curve. If Angela does not work, she receives a ration of 2.5 bushels from the government. 1.) The economically feasible set is the area between Angela's biological survival constraint and the feasible frontier. (picture) 2.) Angela's reservation indifference curve can be below her biological survival constraint. 3.) Angela's reservation indifference curve may not necessarily go through Z. 4.) The economically feasible set is a subset of the technically feasible set.
The economically feasible set is a subset of the technically feasible set.
marginal cost
The effect on total cost of producing one additional unit of output. It corresponds to the slope of the total cost function at each point. [7.3]
substitution effect
The effect that is only due to changes in the price or opportunity cost, given the new level of utility. [3.7][KC3]
income effect
The effect that the additional income would have if there were no change in the price or opportunity cost. [3.7][KC3]
capital goods
The equipment, buildings, raw materials, and other inputs used in producing goods and services, including where applicable any patents or other intellectual property that is used. [1.6][16.1]
bargaining power
The extent of a person's advantage in securing a larger share of the economic rents made possible by an interaction. [5.1][16.3][KC4][KC14]
endowment
The facts about an individual that may affect his or her income, such as the physical wealth a person has, either land, housing, or a portfolio of shares (stocks). Also includes level and quality of schooling, special training, the computer languages in which the individual can work, work experience in internships, citizenship, whether the individual has a visa (or green card) allowing employment in a particular labour market, the nationality and gender of the individual, and even the person's race or social class background. [5.12][19.5]
The figures depict four possible combinations of average cost (AC) and marginal cost (MC) curves. The horizontal axis is the output Q. Which of the following statements correctly matches the corresponding diagram? - The firm in (a) exhibits economies of scale. - The firm in (b) has a positive fixed cost. - The firm in (c) has a constant unit cost of production. - The firm in (d) exhibits constant returns to scale.
The firm in (c) has a constant unit cost of production.
In which of the following cases would a firm be maximizing profits? - The firm pays its employees their reservation wage. - The firm minimizes the cost per unit of effort. - The firm hires no workers. - The firm selects the lowest possible (least steep) isocost line, when the hourly wage is on the horizontal axis and effort per hour is on the vertical axis.
The firm minimizes the cost per unit of effort.
marginal revenue
The increase in revenue obtained by increasing the quantity from Q to Q + 1. [7.6]
economic system
The institutions that organize the production and distribution of goods and services in an entire economy. [1.6][KC1]
factors of production
The labour, machinery and equipment (usually referred to as capital), land, and other inputs to a production process. [2.7]
institution
The laws and social customs governing the way people interact in society. [1.6][5.1][KC1]
subsistence level
The level of living standards (measured by consumption or income) such that the population will not grow or decline. [2.2]
worker's best response function (to wage)
The optimal amount of work that a worker chooses to perform for each wage that the employer may offer. [6.6][KC6]
economic cost
The out-of-pocket cost of an action, plus the opportunity cost. [3.3]
What determines the outcome of an interaction?
The outcome of an interaction depends on people's preferences, as well as the institutions that provide their bargaining power, and how the surplus is divided
efficiency wages
The payment an employer makes that is higher than an employee's reservation wage, so as to motivate the employee to provide more effort on the job than he or she would otherwise choose to make. [6.7]
price elasticity of demand
The percentage change in demand that would occur in response to a 1% increase in price. We express this as a positive number. Demand is elastic if this is greater than 1, and inelastic if less than 1. [7.8][KC7]
residual claimant
The person who receives the income left over from a firm or other project after the payment of all contractual costs (for example the cost of hiring workers and paying taxes). [6.2]
monopoly power
The power that a firm has to control its own price. The fewer close substitutes for the product are available, the greater the firm's price-setting power. [7.10][16.5]
producer surplus
The price at which a firm sells a good minus the minimum price at which it would have been willing to sell the good, summed across all units sold. [7.7][KC7]
price markup
The price minus the marginal cost divided by the price. It is inversely proportional to the elasticity of demand for this good. [7.8][14.2][KC15]
relative price
The price of one good or service compared to another (usually expressed as a ratio). [2.3][15.1][KC2]
conspicuous consumption
The purchase of goods or services to publicly display one's social and economic status. [3.9][10.7]
marginal rate of transformation (MRT)
The quantity of some good that must be sacrificed to acquire one additional unit of another good. At any point, it is the slope of the feasible frontier. [3.4][20.3][KC3]
Which of the following statements regarding the film industry is correct? - The marginal cost of producing additional copies of a film is high. - The price is above marginal cost due to lack of substitutes. - Industry regulators should cap the price of a DVD at its marginal cost. - The quantity sold in the film industry is inefficient.
The quantity sold in the film industry is inefficient.
offshoring
The relocation of part of a firm's activities outside of the national boundaries in which it operates. It can take place within a multinational company or may involve outsourcing production to other firms. [6.0][16.0]
willingness to accept (WTA)
The reservation price of a potential seller, who will be willing to sell a unit only for a price at least this high. [8.1]
private property
The right and expectation that one can enjoy one's possessions in ways of one's own choosing, exclude others from their use, and dispose of them by gift or sale to others who then become their owners. [1.6][5.6][KC1]
ownership
The right to use and exclude others from the use of something, and the right to sell the thing that is owned. [1.7]
Pareto efficiency curve
The set of all allocations that are Pareto efficient. Often referred to as the contract curve, even in social interactions in which there is no contract, which is why we avoid the term. [5.8][KC5]
demand side
The side of a market on which those participating are offering money in return for some other good or service (for example, those purchasing bread). [1.6][17.6]
supply side
The side of a market on which those participating are offering something in return for money (for example, those selling bread). [1.6][17.6]
The following figure depicts an employee's best response to wage when the expected unemployment duration is 44 weeks. Which of the following statements is correct? - In order to induce an extra effort of 0.1 per hour, the employer needs to increase the hourly wage by $3. - The slope of the best response curve is the employer's marginal rate of transformation of higher wages into worker effort. - A fall in the unemployment rate would reduce the reservation wage to below $6. - A wage of $24 per hour will still result in an effort level of 0.8 if there is an increase in the unemployment benefit.
The slope of the best response curve is the employer's marginal rate of transformation of higher wages into worker effort.
division of labour
The specialization of producers to carry out different tasks in the production process. [4.1][6.1][KC6]
economics
The study of how people interact with each other and with their natural surroundings in providing their livelihoods, and how this changes over time. [1.11][KC1]
long run (model)
The term does not refer to a period of time, but instead to what is exogenous. A long-run cost curve, for example, refers to costs when the firm can fully adjust all of the inputs including its capital goods; but technology and the economy's institutions are exogenous. [2.8][14.10][KC14][KC14]
The figure depicts the demand curve of a firm producing cars, together with its marginal cost, average cost, and isoprofit curves. At C, the firm sets the price at $5,440, sells 32 cars, and earns a profit of $63,360. Which of the following statements is correct? - The firm can sell its 33rd car at $5,440. - The total revenue from selling 32 cars is $63,360. - The total cost of producing 32 cars is $110,720. - The marginal cost of producing the 32nd car is $3,460.
The total cost of producing 32 cars is $110,720
average cost
The total cost of the firms's output divided by the total number of units of output. [7.3]
total surplus
The total gains from trade received by all parties involved in the exchange. It is measured as the sum of the consumer and producer surpluses. [7.7]
marginal rate of substitution (MRS)
The trade-off that a person is willing to make between two goods. At any point, this is the slope of the indifference curve. [3.2][20.3][KC3]
altruism
The willingness to bear a cost in order to benefit somebody else. [4.0][13.5][KC4]
Describe the Prisoner's Dilemma.
There are 2 prisoners. If 1 confesses and the other is silent, a gets 0 years b gets 10. If both confess, a and b get 5 each. If both are silent, both get 1yr.
crowding out
There are two quite distinct uses of the term. One is the observed negative effect when economic incentives displace people's ethical or other-regarding motivations. In studies of individual behaviour, incentives may have a crowding out effect on social preferences. A second use of the term is to refer to the effect of an increase in government spending in reducing private spending, as would be expected for example in an economy working at full capacity utilization, or when a fiscal expansion is associated with a rise in the interest rate. [4.8][14.7][KC14]
What is the key characteristic of the Labor Discipline Model?
There is an equilibrium between wage and effort level
The figure shows a demand curve for Cheerios. Based on this figure, which of the following statements is correct? - If the price was $2 then the total demand would be 40,000 pounds. - If the firms want to sell 24,000 pounds then they should charge $2. - The demand curve suggests that halving the price doubles the pounds sold - There is no demand if the price is set above $7.20.
There is no demand if the price is set above $7.20.
network economies of scale
These exist when an increase in the number of users of an output of a firm implies an increase in the value of the output to each of them, because they are connected to each other. [7.2]
constant returns to scale
These occur when doubling all of the inputs to a production process doubles the output. The shape of a firm's long-run average cost curve depends both on returns to scale in production and the effect of scale on the prices it pays for its inputs. [7.2]
decreasing returns to scale
These occur when doubling all of the inputs to a production process less than doubles the output. [7.2]
diseconomies of scale
These occur when doubling all of the inputs to a production process less than doubles the output. [7.2]
increasing returns to scale
These occur when doubling all of the inputs to a production process more than doubles the output. The shape of a firm's long-run average cost curve depends both on returns to scale in production and the effect of scale on the prices it pays for its inputs. [7.2]
economies of scale
These occur when doubling all of the inputs to a production process more than doubles the output. The shape of a firm's long-run average cost curve depends both on returns to scale in production and the effect of scale on the prices it pays for its inputs. [7.2][1.7][KC7]
hidden actions (problem of)
This occurs when some action taken by one party to an exchange is not known or cannot be verified by the other. For example, the employer cannot know (or cannot verify) how hard the worker she has employed is actually working. [12.6][14.6]
hidden attributes (problem of)
This occurs when some attribute of the person engaging in an exchange (or the product or service being provided) is not known to the other parties. An example is that the individual purchasing health insurance knows her own health status, but the insurance company does not. [12.6][14.6]
constrained choice problem
This problem is about how we can do the best for ourselves, given our preferences and constraints, and when the things we value are scarce. [3.5][7.5][KC3]
principal-agent relationship
This relationship exists when one party (the principal) would like another party (the agent) to act in some way, or have some attribute that is in the interest of the principal, and that cannot be enforced or guaranteed in a binding contract. [6.0][10.12][KC11]
average product
Total output divided by a particular input, for example per worker (divided by the number of workers) or per worker per hour (total output divided by the total number of hours of labour put in). [2.7]
substitutes
Two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other. [7.10][21.3][KC21]
dominated
We describe an outcome in this way if more of something that is positively valued can be attained without less of anything else that is positively valued. In short: an outcome is dominated if there is a win-win alternative. [2.4][20.3]
savings
When consumption expenditures is less than net income, saving takes place and wealth rises. [3.1][10.0][KC3]
market failure
When markets allocate resources in a Pareto-inefficient way. [7.10][10.0][KC10]
Tell me about when one person has power to dictate the allocation?
When one person has the power to dictate the allocation, the powerful party will capture the entire surplus. If they have done this, then there cannot be any way to make one person better off without making the other worse off, so must be Pareto Efficient
When is there an opportunity for mutual gains?
When people with differing needs, property and capacities meet there is an opportunity to generate gains for all of them
opportunity cost
When taking an action implies forgoing the next best alternative action, this is the net benefit of the foregone alternative. [3.3][20.3][KC3]
tangency
When two curves share one point in common but do not cross. The tangent to a curve at a given point is a straight line that touches the curve at that point but does not cross it. [3.1]
Figure 5.7a shows Angela and Bruno's feasible frontier, Angela's biological survival constraint and her reservation indifference curve. B is the outcome under coercion, while D is the outcome under voluntary exchange when Bruno makes a take-it-or-leave-it offer. Looking at this graph, we can conclude that:
With a take-it-or-leave-it offer, Bruno's economic rent is equal to the joint surplus.
Industries dominated by small firms generally have.....
constant returns to economies of scale or increasing returns
Market failure- example
for example, the over-consumption of demerit goods (drugs/tobacco) leads to external costs to non-smokers and also early death for smokers. A tax on cigarettes could encourage people to quit smoking, and raise revenue for treating smoking-related diseases.
The 1978 law that protected Bengali sharecroppers from eviction and increased their share of the crop from 50% to 75% did all the following except - increase agricultural output. - generate a Pareto improvement. - incentivize farmers to work hard and invest in their land. - decrease the Gini coefficient in market income.
generate a Pareto improvement.
What is the Free Market view?
less government means more competition
Explain what the rational strategy to follow is in a multiple Prisoner's Dilemma and what is meant by "the mutually optimal outcome."
rational to pick option that leads to best outcome for both
What is a multiple Prisoner's Dilemma?
suppose that there are a series of choices, and that we each know this in particular, we each know that this is not the last time we shall be playing the game with each other - and that we also know that the other will remember, and no doubt be guided by, what has happened on previous occasions.
What is economies of scale?
when people purchase a good because it has many consumers (or users).
