Principles of Economics Review for Exam
Which of the following markets is an example of a perfectly competitive market?
Shares of McDonald's stock
The statutory burden of a tax is the:
government-designated burden of a tax payment.
A quantity regulation is a:
minimum or maximum quantity that can be sold.
When advertising increases brand loyalty for your company's brand, then the company's demand curve becomes:
more inelastic.
A good is characterized as _____ when one person's use of the good does not reduce another person's ability to use the same unit of the good.
nonrival
When a company has market power, it is _____ in its market.
not a price-taker
What is collusion?
Agreements between sellers to increase their market power
What conditions must be met for private bargaining to be effective in resolving an externality?
Bargaining costs must be low, and property rights must be clear.
A subsidy for buyers of a product shifts the:
demand curve to the right.
Buyers bear a smaller incidence of the tax when:
demand is more elastic than supply.
If sellers charge only one price in a market where buyers have private information, then sellers
end up with a mix of customers skewed toward expensive customers.
If sellers charge only one price in a market where buyers have private information, then sellers ...
end up with a mix of customers skewed toward expensive customers.
When quality is not observable by buyers, it is difficult for buyers to purchase
high quality products
According to the Rational Rule for Sellers, a seller should choose the output level where _____ and the price level _____.
marginal cost equals marginal revenue; that is on the seller's demand curve at that output level
A search good is a product that:
can easily be evaluated before purchase.
To reduce their disadvantage due to buyers having private information, auto insurers try to
collect information from customers that relate to how costly the customer will be to the insurer.
To reduce their disadvantage due to buyers having private information, auto insurers try to ...
collect information from customers that relate to how costly the customer will be to the insurer.
What worsens adverse selection in a dental insurance market where buyers have private information?
Allowing buyers to opt-in and opt-out of the market at any time they desire.
Once an original decision has been made, what happens on a game tree with each additional decision made by a player?
A new branch is formed.
Under the Five Forces framework, how can the market power of customers impact a seller's profitability?
Customers with market power can use their leverage to lower the selling price that sellers charge.
Describe the Coase Theorem.
If bargaining is costless, and property rights are clearly established and enforced, then externality problems can be solved through private bargaining.
_____ using specific business practices that increase a seller's market power and excludes other sellers is illegal under U.S. law.
Monopolizing
In which market structure do the actions of a rival have a significant impact on your operations?
Oligopoly
What distinguishes persuasive advertising from informative advertising?
Persuasive advertising focuses on emotions and provides few facts about the product.
What is price competition?
Sellers try to win customers through charging as low a price as possible.
A Nash equilibrium can be identified on a payoff table when:
a check mark is put next to each player's best response, and there is a cell with a check mark for each player.
Walmart has a large aisle that displays many different kinds of toothpastes. This observation indicates that the toothpaste market is
a monopolistically competitive market.
A principal-agent problem can arise when
a principal hires an agent to do something on their behalf, but the principal cannot perfectly observe the agent's actions.
A principal-agent problem can arise when ...
a principal hires an agent to do something on their behalf, but the principal cannot perfectly observe the agent's actions.
An externality is defined as:
a side-effect of an activity that affects bystanders whose interests are not taken into account
When using coordination games to look at the issue of bank runs, the best outcome occurs when:
all people keep their money in the bank.
When a player's best response is to take a different (but complementary) action to the other player, then both participants are playing _____ game.
an anti-coordination
Marjean walks to work every day along a busy road. As she does so, she breathes in the fumes of many cars, often arriving at work coughing. The economic term for the impact of the cars on Marjean is:
an externality
Relationship-specific investments are investments that:
are worth more in the context of a specific business relationship.
What protects a business from the threat of entry by potential competitors?
barriers to entry
In differentiating a product, the supply-side consideration is to _____ as possible.
be as different from competitors
Price ceilings tend to create shortages when used to _____
bring down price in a competitive market.
The economic burden of a tax is the:
burden created by the change in after-tax prices faced by buyers and sellers.
A simultaneous game is one in which:
each player must choose without knowing the other player's choice.
The marginal private benefit is the:
extra benefit enjoyed by the buyer of one extra unit of a good or service
All of the solutions to externality problems involve:
getting buyers and sellers to consider marginal external costs and benefits.
According to the Five Forces framework, the _____ the degree of rivalry in an industry, the _____ the average profits will be in the industry.
greater; lower
If you think you're a low-cost customer who is unlikely to need to file a claim, you'll often get a much better deal if you choose the insurance plan that
has a high deductible.
When quality is not observable by buyers, it is difficult for buyers to purchase
high-quality products
The higher the level of market power among the sellers in a market, the _____ when the Rational Rule for Sellers is applied.
lower the market output
When players in a game collude, they:
make agreements not to compete with each other and, typically, to charge high prices.
A basic logic that applies to all strategic interactions is:
making a good choice requires that you anticipate what others will do.
When people are risk averse, the price they are willing to pay for insurance _____ the actuarially fair price.
may be higher than
When an input seller has market power in the input market, its customers:
may end up paying a higher price for inputs.
By contrast with a market that produces the socially optimal output, a market with negative externalities will:
overproduce
When resources are shared or owned in common, the Nash equilibrium leads to:
overuse of resources.
What type of relationship exists between the level of a company's market power and the price that its owner is able to charge for its product?
positive
As a basic rule of thumb, business owners should differentiate their products as much as possible when:
price competition is intense.
When buyers in a market have market power, then the
product price is lower.
A Grim Trigger strategy is to:
punish rivals who do not cooperate.
A community teaches children that hard work and doing your best at tasks are virtues. This is an example of
reducing moral hazard through social norms.
A community teaches children that hard work and doing your best at tasks are virtues. This is an example of ...
reducing moral hazard through social norms.
A tax on sellers shifts the:
supply curve to the left
When producers signal customers, they are
taking action to convey private information credibly.
When producers signal customers, they are ...
taking action to convey private information credibly.
The tragedy of the commons is the:
tendency to overconsume common resources.
The Rational Rule for Society is that society should produce another unit of a good if:
the marginal social benefit exceeds the marginal social cost
Externalities tend to occur because decision makers consider _____ and do NOT consider _____.
their own costs and benefits; the effects of their actions on others
When you have health insurance, your marginal benefit of a visit to the doctor's office is _____, and your marginal cost is _____.
unchanged; lower
One of the market failures caused by market power is
underproduction
To avoid harm to society, the government often becomes the supplier of a good or service when the respective market
would be a natural monopoly, and the good or service is considered essential.
When a player faces the same strategic interaction a fixed number of times, the player is engaged in _____ game.
a finitely repeated
A subsidy is a:
a government payment designed to encourage particular purchases or productive activities.
A product that has more problems or inferior quality than the average unit available is known as
a lemon
A market with a large number of sellers and a high level of product differentiation is known as
a monopolistically competitive market.
A price ceiling is:
the maximum price that a seller can charge in a market.
Game theory is:
the science of making good decisions in situations involving strategic interactions.
What problem arises in coordination games with multiple equilibria?
It is difficult to achieve the commonly desired outcome.
What is moral hazard?
It refers to the actions people take after they have entered into a transaction that makes the other party to the transaction worse off.
Moral hazard problems are likely to develop under what conditions?
They develop when you must depend on the hidden actions of others.
The outcome that is most efficient for society as a whole — including the interests of buyers, sellers, and bystanders — is the _____ outcome.
socially optimal
A good has a free-rider problem when:
someone can enjoy the benefits of the good without bearing the costs