EC 111 Final Review
When the government requires that a person have a license to work in a particular occupation, then in the labor market for that occupation:
supply decreases
When differentiating its product, a company should strive to:
supply the underserved part of its market
A reservation price is
the highest price that a customer is willing to pay for a product
Which of the following is NOT an example of compensating workers through a pay-for-performance program?
weekly rates
Med-Ready Supplies produces and sells thermometers that are basically identical to those sold by other companies in the market. However, Med-Ready thermometers sell for twice the price of the other thermometers. Why can Med-Ready charge higher prices than other sellers yet still maintain customers?
In the minds of customers, Med-Ready must have successfully differentiated its thermometers from the others
What is the difference between risk spreading and diversification as strategies for reducing risk?
Risk spreading means that a big risk is broken into smaller risks so that a bunch of people can take on a small part of the one big risk. The probability of loss or reward is unchanged but the size of the gain or loss is much smaller. Diversification is when the decision maker takes on a large number of small risks. The total value of the group of small investments may be the same value as the large option, but with diversification, there is less risk of loss becuase it is unlikely all the small investments will turn out badly at the same time. The more dissimilar the investments are the less likely it is that they will swing in the same ways. Diversification does not reduce systemic risk.
Why are people more hesitant to make risky choices when the stakes are large than when the stakes are small?
When stakes are large the potential loss is much greater than when the stakes are small even if the probability is the same. A large loss means greater impact on wealth. Diminishing marginal utility indicates that the extra dollars lost in large losses are associated with greater per dollar losses in utility than in a small loss. Example if there were a $100 loss or a $1,000 loss, the loss of $100 is the same impact on utility in both cases, the extra $900 of loss in the second case decreases utility by more than 9 times the $100 loss.
Explain how income redistribution programs reduce the work incentive of both high-income tax payers and low-income benefit recipients.
Work incentive is tied to net gain from working which is viewed in terms of take-home income. Income redistribution programs-- take income from high-income households through taxes to fund transfers of income (in-kind benefits) to low-income households. when taxes are increased on high-income households their after-tax income falls reducing their reward for work effort. When transfer payments are means tested low-income households recive transfer payments and would receieve reduced benefits if they increased work efforts to earn more income. Increased work efforts would yield little added benefit to household providing low incentive to work
The three sources of discrimination do NOT include
malevolent bias
A seller's demand curve summarizes its _____, and its marginal revenue curve measures its _____.
market power incentive to increase production
Data for the United States show that poverty is not evenly distributed across groups in the population. Which of the following groups has the LOWEST poverty rate?
married couples
When a country is open to international trade, the product markets in the country become
more competitive because there are more suppliers (both domestic and international sellers) selling in the product markets
The relationship between efficiency and equality is _____ when incomes are redistributed.
negative
A person's willingness to accept a given risk-reward combination reflects his or her level of _____, which depends on the person's _____ and _____.
risk aversion temperament life situation
If attention-grabbing events distort your probability assessments, the solution is:
slow thinking and looking up reliable statistics
Government-provided financial funding to households to compensate for bad outcomes such as unemployment, illness, disability, or outliving your savings is known as a:
social insurance programs
The three main approaches that governments use to reduce inequality and poverty are providing a social safety net, proving social insurance programs, and designing tax systems. Briefly explain how each can be used to reduce inequality and poverty.
social safety nets provide income or in-kind transfers when income falls below set poverty line. But they alone do not provide enough support for person to move out of poverty. Means-tested programs that are funded through tax revenues. Social insurance programs are not means tested and available to all. Help to provide insurance for bad outcomes like job loss, disability or old age. Progressive tax systems have rates that rise on additional income so those with higher incomes pay more than those with less. Tax credits can potentially move people out of poverty.
When firms in a market with free entry and exit experience economic losses, then:
some sellers will exit the market, reducing average seller losses
What is a consumer's reservation price? How does a consumer's reservation price relate to price discrimination?
t is the highest price they are willing to pay for a product. It represents the marginal benefit that the consumer would receive from the product. Through price discrimination, a manager wants to charge each customer a price at or close to their reservation price to maximize revenue. But the manager will not reduce price below marginal cost for last customer.
. Lela must decide whether to go on a winter trip to Norway with the hope of seeing the Northern Lights. Seeing the lights would yield a utility level of 2,000, but she has only a 50% chance that they will show during the days of her trip. Making the trip without seeing the lights would yield a utility level of 100, and there is 50% chance of this happening. What is Lela's expected utility if she goes on the trip?
1,050
Your marginal utility would be highest at which of the following wealth levels 10,000 50,000 100,000 500,000
10,000
How does brand proliferation create a barrier to entry in a market?
Brand proliferation occurs when existing company produces multiple versions of a product to appeal to differing consumer preferences. When companies do this, a new company may be discouraged from entering a market since it is more difficult for the new company to differentiate its product from the many versions already available.
Why would a seller use the hurdle method to price discriminate rather than group pricing?
Group pricing is a type of price discrimination that works by charging different prices to different groups of people. Groups are determined by buyers with differing demand, verifiable and difficult-to-change characteristics. If this information about buyers is not available then you can't group price and need to use the hurdle method. Hurdle method requires all buyers to overcome a hurdle or obstacle to qualify for the lower price. Those who are more price sensitive (lowest reservation price) will be more willing to overcome the hurdle to get the lower price.
. Between 1970 and 2014, the share of income earned by the bottom quintile in the United States fell from 5.4% to 3.6%. However, this does not mean that the incomes of those in the bottom quintile fell. Explain how people in the bottom quintile could earn a lower percentage of total income and yet not have lower incomes.
If total income earned rises significantly then smaller percentage of the total income could be a higher dollar amount. Distribution of income becomes more unequal even though incomes are rising overall.
Salaries for physical therapists rise more than salaries for athletic trainers. What will happen in the labor market for athletic trainers?
Labor supply will decrease, resulting in higher wages and fewer hours of employment for the trainers.
How can an employer motivate employees with incentives in ways that help the company operate more productively in achieving its goals?
Offering better pay for better performance through commissions, bonuses, or piece-rate pay. Rewarding good behavior through carrots. Using sticks to keep employees accountable. Appeal to intrinsic motivation rather than just extrinsic motivation (wages).
Increase in the use of e-books has reduced the demand for physical books. How has this impacted the labor market for bookstore managers? Explain the change in the market.
Reduced demand means that there will be reduced use of bookstores and reduced demand for bookstore managers. As the demand for managers decreases, the price (their wage) decreases and the equilibrium quantity (hours of manager's time) will also decrease. This means fewer opportunities to work as bookstore managers
Workers on the night shift at a factory earn more per hour than workers on the day shift, although their human capital and productivity are the same. This is an example of:
a compensating differential
Price competition with identical products across producers leads to _____ because _____.
a low price consumers choose a seller based on price
Walmart has a large aisle that displays many different types of shampoos. This observation indicates that the shampoo market is
a monopolistically competitive market
Otto and Marta live in a nation with a 15% poverty rate. Their household income is sufficient to pay for food, shelter, and basic needs with some funds available for other things their family wants. However, their household income is lower than 75% of the households in their nation. Otto believes that they are prosperous and not poor, but Marta believes that they are poor. Otto is defining poverty in _____ terms, and Marta is defining poverty in _____ terms.
absolute relative
When collusion occurs, sellers in a market
act like a monopolist to increase profits
An insurance policy that, on average, is expected to pay out as much in compensation as it receives in premiums is:
actuarially fair
A regressive tax is
additional income earned is taxed at lower rates as additional income is earned
What level of market power exists for sellers in a perfectly competitive market?
all sellers lack market power
In the long run, a company can remain profitable only if
barriers to entry are present
If more acceptable substitutes are available for a product, the market for the product will:
be less profitable
. Economic theory implies that if a minimum wage is set above the equilibrium wage, there will _____ workers, and _____ will result.
be too many unemployment
Advertising has goals of affecting demand for a company's product in what two ways?
by shifting the company's demand curve to the right and making the curve's slope steeper
When your education level is used to signal an employer, it conveys that you:
can work hard and persistently to complete a large task
Benefits from social safety net programs may come in the forms of
cash assistance, tax breaks, or in-kind transfers
When there is a high level of intergenerational mobility among the poor in a nation:
children of poor parents do not remain in poverty when they are adults
The efficient quantity of output occurs where the
company's marginal cost equals the last customer's marginal benefit
Malia's auto repair shop faces the threat of entry. This intensifies _____ in her market and pushes _____ prices and pushes _____ profits.
competition down down
Arturo makes and sells organic frozen yogurt with fresh fruit toppings. He wants to price discriminate according to a preference for organic food so that those with the most inelastic demand for organic food pay the highest price. To accomplish this, to which group should he give discount coupons for his yogurt?
customers of the local fast-food restaurant
Why does an employer's labor demand curve slope downward?
diminishing marginal product
Treating people differently based on characteristics such as gender, race, ethnicity, sexual orientation, religion, disability, social class, or other factors is:
discrimination
When technology enables the best service provider in a field to supply a huge number of buyers instead of being limited to a small market, the larger market may become:
dominated by one "superstar" provider
Because _____ profit is calculated based on _____ costs, it allows firm owners to make better decisions about _____.
economic total entering and exiting a market
Workers consider a company's _____ and not just the _____.
entire compensation package annual salary
Dinesh owns a restaurant. He is able to negotiate lower prices than other restaurants pay with his supplier because he buys in volume and threatens to buy from another supplier. Dinesh is:
exercising bargaining power
Victor owns a shoe store that is losing money, and several other shoe stores in his market are also losing money. Which of the following guidelines will help him decide whether to remain in business or exit the market?
exit the market if price is expected to be less than average costs
The desire to do something for its external rewards is known as:
extrinsic motivation
When a market is perfectly competitive, advertising typically is done _____ because _____.
for the entire industry it affects market demand more effectively than some individual company demands
Which of the following is NOT true about imperfect competition?
greater product differentiation decreases market power
Arlo owns a barbershop. What condition would make it difficult for him to price discriminate?
he lacks market power
In a perfectly competitive labor market, the manager's hiring decision is about
how many workers to hire
Sellers who are in _____ markets face a less extreme trade-off between higher prices and higher quantity than sellers in perfect competition. As a result of this, they can _____.
imperfectly competitive earn higher profits
Nora, the manager of three hospital rehabilitation clinics, has the clinics adopt software that allows better tracking of supplies. This software adoption also allows therapists to spend less time gathering supplies for therapy sessions. On average, each therapist can meet with one more patient per day. The marginal revenue product of the therapists will _____, and the demand for therapists at the clinics will _____.
increase increase
When the wage for public school teachers rises by 15% in a state, the number of people seeking jobs as teachers
increases
Each of the following is a strategy for reducing risk EXCEPT:
magnification
Which of the following would NOT reduce Leah's risk of being too cold or hot when outside for a picnic?
making sure the food is good so it will distract from the weather
Sun Do sells key chains with leather fobs for $12 and $9. The key chains are very similar and have identical manufacturing costs. The difference is that the stitching on the leather fob is in a less precise pattern on the $9 key chain than it is on the $12 key chains. What approach to price discrimination is Sun Do using?
offering imperfect goods as part of the hurdle method
An intense struggle to gain market share is a distinguishing characteristic of what type of market?
oligopoly
In which of the following cases would a company's profits be threatened?
one of its key input providers gain market power in the input market
When a poverty line is based on relative poverty, a household is poor if its income is less than:
one-half the median household income in the country
Why would it be a bad idea for a retailer to use "wearing nail polish" as the basis for segmenting customers into groups for price discrimination?
people can easily switch from wearing nail polish to not wearing it
Which of the following is NOT an example of the hurdle method of price discrimination?
providing group discounts to price-sensitive consumers based on an identifiable characteristic
Sellers try to avoid the entry of new rivals through the use of demand-side strategies. These demand-side strategies do NOT include
raising the market demand for the product
As outputs increases, fixed costs
remain constant
Marta has an idea for a new product that could earn $1 million if successful. It would cost $600,000 to bring it to market, and that is the potential loss if it fails. Marta estimates that it has a 60% chance of success and 40% chance of failure. Marta is not willing to accept the risk of failure. She enlists 1,000 investors to each put in $600 toward the cost with a promise that they will share proportionately in the profits. What risk reduction strategy is Marta using?
risk spreading
A person who dislikes uncertainty is known as a _____ person.
risk-averse
Sadie is going to buy a guitar for the first time. There are many options, and she wants to choose a guitar that she will enjoy using for many years. Which of the following is an example of gathering information as a strategy to reduce risk?
she can learn all she can about the guitars that are available and try out as many as possible
When the substitution effect dominates, a person's labor supply curve
slopes upward
A characteristic of monopoly that is not present in any other market structure is that
there is only one seller
In the United States, the social insurance programs do NOT meet which of the following criteria?
they are means tested
Hassan is a student who received a coupon to buy pizza from Pizza House at $4 off the regular price. Students at Hassan's school seem to receive the coupons frequently. Which of the following is an assumption that the owners of Pizza House are making about students at Hassan's school?
they are price sensitive
What effect do patents have on competition?
they reduce competition by creating a barrier to new companies entering a market
How can unions improve business productivity?
unions negotiate on behalf of the workers in the union. Gives them a voice in communicating and negotiating with their employer. This greater voice can boost worker morale, create effective comunication which can resolve issues and create a satisfactory work environment. This can lead to greater loyalty and work effort. may feel like more of a part of the company and find solutions to productivity issues
Briefly describe how each of the five forces in the Five Forces framework impacts the profitability of companies in a market.
when there are many competitors (1) it is hard to charge a high price because customers have other companies to choose from. Potential competitors (2) can drive down price.. existing companies feel threatened and charge lower prices to avoid attracting new entrants. Threat of competitors in substitute markets (3) means there are other types of products that can be substituted for your company's product. If the price is high enough its customers will switch from your product to another. Supplier bargaining power (4) impacts cost of production rather than revenue. If the company must purchase inputs in an input market where sellers have bargaining power, the sellers can charge higher prices raising costs of production and reducing profits for that company. Buyer bargaining power (5) means biyers with market or bargaining power can push price down to lower levels reducing the company's profits.