Econ Exam 3

If you charge everyone the same price, your business's average revenue curve is the same as the....

demand curve

Market power determines the shape of a firm's....

demand curve.

Free entry into a market tends to cause what to disappear?

desirable opportunities

Markets will _____ until the demand curve just touches the average cost curve.

either expand or contract

The opportunity cost of working is....

everything you do when you're not working

Average costs _____ with output

fall then rise

The highest profit margin occurs where the average cost curve is...

farthest below the demand curve

In a perfectly competitive labor market, the manager's hiring decision is about

how many workers to hire.

The substitution effect measures

how people respond to a change in relative prices.

Shopping around is a(n) _____ that many _____ customers aren't willing to leap over.

hurdle; less price-sensitive

Bundling creates a(n) _____ to(for) getting the second good at a _____.

hurdle; lower price

intrinsic motivation

the desire to do something for the enjoyment of the activity itself

Compensating differential

the differences in wages required to offset the desirable or undesirable aspects of a job

The difference between the firm demand curve and the marginal revenue curve is due to:

the discount effect.

In the labor market, _____ determine(s) wages and employment.

the forces of supply and demand

short run

the horizon over which the production capacity, and the number and type of competitors you face, cannot change

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

The cost of working one more hour is...

the hour of leisure that is given up.

Labor demand is equal to...

the marginal revenue product of labor

In a perfectly competitive labor market,

the market forces determine the wage.

Implicit Costs

the opportunity cost of resources already owned by the firm and used in business—for example, expanding a factory onto land already owned.

The marginal revenue curve of a firm with market power will always lie below its demand curve because of

the output effect and the discount effect.

Which of the following is an example of a focal point?

Noon serves as lunchtime in the United States.

New competitors mark your market....

less profitable

The exit of competitors from a market means that remaining firms will sell...

more products at higher prices

When segmenting your market demand into groups, base them on....

verifiable and difficult to change characteristics

Price discrimination through group pricing works when the basis for segmenting the consumers is...

verifiable; hard to change; separates consumers based on their reservation price for the product

Generally speaking, workers prefer extra _____ to extra _____.

wages; benefits

Free exit ensures industries...

wont remain unprofitable in the long run

The price elasticity of supply measures...

workers' responsiveness to wages

Coordination games can lead markets to....

yield bad outcomes

3 solutions to coordination problems

-Communication -Focal points, culture and norms -Laws and regulations

Market labor supply depends on...

-How many people decide to work -How many hours existing workers put in -Which occupations people choose

Monopsony power

A business using its bargaining power as a major buyer of labor to pay lower prices, including lower wages

Product differentiation

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

Rational Rule for Exit

Exit the market if you expect to earn a negative economic profit, which occurs if the price is less than your average costs.

Perfect Competition

Markets in which: 1.) All businesses in an industry sell an identical good 2.) There are many sellers and many buyers, each of whom is small relative to the size of the market

Substitution effect

Measures how people respond to a change in relative prices. A higher wage increases the returns to work relative to leisure, leading you to work more

Income effect

Measures how people's choices change when they have more income. A higher wage increases your income, leading you to choose more leisure and hence less work

Marginal Revenue Product

Measures the marginal revenue from hiring an additional worker. The marginal revenue product is equal to the marginal product of labor multiplied by the price of that product

pay-for-performance

Linking the income your workers earn to measures of their performance

Average revenue

Revenue per unit, calculated as total revenue divided by the quantity supplied. Average revenue is equal to the price, if you charge everyone the same price.

In the long run, free entry pushes economic profits...

down to zero

Free entry pushes the price....

down toward average cost

Higher wages lead more people to....

enter the labor force

When market leaders produce on a mass scale, economies of scale mean that new entrants:

have a hard time competing.

According to the income effect....

higher income makes leisure relatively more attractive

Price discrimination leads to...

higher prices for some and lower prices for other

According to the substitution effect....

higher wages make work relatively more attractive

The output in a market with market power is...

inefficient because the marginal benefit to society of extra output exceeds the marginal cost.

Solve finitely repeated games by....

looking forward and reasoning backward

discrimination

treating people differently based on characteristics such as their gender, race, ethnicity, sexual orientation, religion, disability, social class, or other factors

When companies exercise market power, _____ occurs. _____ can partially solve this problem.

underproduction; Price discrimination

Labor demand is downward-sloping because of....

diminishing marginal product

Focal Point

A cue from outside a game that helps you coordinate on a specific equilibrium

Most businesses operate in....

imperfectly competitive markets

Network effects mean....

your product becomes more useful the more people use it

Imperfect Competition examples

Monopolistic Competition and Oligopoly

Price Discrimination

Selling the same good at different prices

Game tree

Shows how a game plays out over time, with the first move forming the trunk, and then each subsequent choice branching out, so the final leaves show all possible outcomes.

Human capital

The accumulated knowledge and skills that make a worker more productive

Best response

The choice that yields the highest payoff for you given the other player's choice.

What happens in a perfectly competitive labor market, when an employer pays its employees less than the market wage?

The employees leave the company to work elsewhere.

Market Power

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

An example that would shift the labor supply curve.

The government increases its provision of childcare services.

What will be a major factor influencing which occupation you choose?

The market wage

second mover advantage

The strategic advantage that can follow from taking an action that adapts to your rival's choice

First mover advantage

The strategic gain from an anticipatory action that can force a rival to respond less aggressively

In choosing a career path, you are likely to succeed when you choose

an occupation you have a lower opportunity cost in relative to other people.

What is the dominant factor determining market price in the long run (assuming the industry has unrestricted entry)?

average costs

Your long-run profitability depends on....

barriers to entry

Higher wages create an incentive to...

invest in capital

profit margin

profits per unit sold = average revenue - average cost

In the long run, economic profits....

tend toward zero

Price discrimination increases....

the quantity you sell

Free exit pushes the price....

up toward average cost

statistical discrimination

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

short run equation

variable costs + fixed costs = total costs

long run equation

variable costs = total costs

The Rational Rule for Sellers is that sellers should choose the quantity _____ and choose the price _____.

where marginal revenue equals marginal cost; that is on the seller's demand curve for that quantity

Reason backward

Start by analyzing the last period of the game. Use this to figure what will happen in the second-to-last period, and keep reasoning backward until you can see all the consequences that follow from today's decision.

Prune the tree method

Start by looking forward to the final period and highlighting out your rival's best responses, then prune the options the rival would never choose "the dead leaves" off your game tree.

Tell people to drive on the left-hand side of the road

Tell people to drive on the left-hand side of the road

Marginal Product of Labor

The extra production that occurs from hiring an extra worker

Reservation Price

The maximum price a customer will pay for a product. It is equal to their marginal benefit.

Why is pursuing a job in a "winner-take-all" market is risky?

The very best performers capture a large share of the rewards, leaving little for those who are just slightly less skilled.

What happens in the labor market for biologists when wages in other, similar occupations fall?

There is a rightward shift of the supply curve.

How can you overcome the complexity of all possible outcomes from strategic interactions?

Think about the "what ifs?" separately

Employers use educational background and degrees obtained to indicate an applicant's:

productivity and certain traits.

The grim trigger strategy....

punishes your rival for not cooperating

Car sellers look closely at the clothes you're wearing, the phone you carry, and other cues that might signal your _____.

reservation price

The degree of a seller's market power has an impact on the...

seller's demand curve.

Bundling is defined as

selling different goods together as a package

If the scale effect dominates the substitution effect, a decrease in the price of capital would

shift the labor demand curve to the right.

job-specific skills

skills that are only useful in a job with one particular employer

General skills

skills useful to many employers

Repeated play helps....

solve the Prisoner's Dilemna

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.

Labor supply curve depends on....

the balance of income and substitution effects

The first mover advantage is about....

the benefits of commitment

The second mover advantage is about....

the benefits of flexibility

marginal cost

the change in the firms cost as it produces for output

derived demand

the demand for an input derives from the demand for the stuff that input produces

extrinsic motivation

the desire to do something for its external rewards such as higher pay

Strategies to outcompete and deter new entrants:

- Demand-side: Create customer lock in - Supply-side: Develop unique cost advantages - Regulatory: Mobilize government to prevent entry - Deterrence: Convince potential entrants you'll crush them

Nash Equilibrium statements

- Each player's expectation of the other player's strategy is correct. - All players choose their best response to the strategy they expect the other player will choose - No player can do better by unilaterally changing his or her choice.

Examples of Side-Supply Barriers

- Mass Production - Relationships with suppliers resulting in less costly production factors - Learning by doing

A government may want to create barriers to sellers entering a given market for all of the following reasons:

- encouraging research and development by offering patents on new inventions and technologies. - ensuring that sellers provide products and services that are safe for consumers. - keeping average cost low when there is a natural monopoly.

All the following are forms of showing the seller that you are a savvy buyer with a low reservation price:

- never indicating how much you love the product you may buy. - making it clear that you are willing to shop around. - spending a long time negotiating.

All of the following are examples of hurdles:

- selling an inferior good cheaper than the more expensive version without imperfections. - releasing a cheaper version at a later date. - giving worse service to normal customers.

The negative outcomes of market power include all of the following:

- smaller quantity. - higher costs. - larger profits.

What careers are part of a "winner-take-all" market?

-Athlete -Actor -Author

What are the three key ideas helping you shape your segmentation strategy?

-Base group discounts on difficult-to-change characteristics. -Segment your market into groups whose demand differs. -Target your group discounts based on verifiable characteristics.

Labor Demand Shifters

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

Factors that shift labor supply:

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

A successful price discrimination strategy:

-Charges higher prices to those who'll pay them -Offers selective discounts to induce new customers to buy

Wages vary due to differences in:

-Labor demand and human capital -Labor supply and compensating differentials -Institutional factors -Discrimination

Key Insights into Imperfect Competition

-Market power allows you to pursue independent pricing strategies -More competitors leads to less market power -Successful product differentiation gives you more market power -Imperfect competition among buyers gives them bargaining power -Your best choice depends on the actions that other businesses make

Sources of discrimination:

-Prejudice -Implicit bias -Statistical discrimination

Price discrimination is only feasible if:

-Your business has market power -You can prevent resale -You can target the right prices to the right customers

All of the following are forms of group pricing discrimination:

-an internet company charging lower prices for residential than for business service. -a hairdresser charging more for women's haircuts than for men's. -books being cheaper in India than in the United States.

Mass production can lower the... This favors.....

...average cost of production ...big producers

Check mark method

If you put a check mark next to each players' best response, then an outcome with a check mark from each player is a Nash equilibrium

4 steps for making good decisions

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

3-Step Recipe

1. Is the labor supply or labor demand curve shifting? (Or both?) 2. Is that shift an increase or a decrease? 3. How will wages and the number of jobs change in the new equilibrium?

Strategic Plan

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

Monopolistic Competition

A market with many small businesses competing, each selling differentiated products

Oligopoly

A market with only a handful of large sellers Ex: Wireless data market

One-shot game

A strategic interaction that occurs only once

Payoff table

A table that lists your choices in each row, the other player's choices in each column, and so shows all the possible outcomes, listing the payoffs in each cell

Signal

An action taken to credibility convey information that is hard for someone else to verify

Collusion

An agreement by rivals to not compete with each other, but to all charge high prices instead

Nash Equilibrium

An equilibrium in which the choice that each player makes is a best response to the choices the other players are making

Switching costs

An impediment that makes it costly for customers to switch to buying from another business

How does marginal revenue compare to price for a seller with market power?

Beyond the first unit sold, marginal revenue is below price.

Look forward

In games that play out over time, you should look forward to anticipate the likely consequences of your choices

What's a possible drawback with using high-powered incentives?

Incentives can distort effort.

Perfect Price Discrimination

Charging each customer their exact willingness to pay (reservation price).

The discount effect facing companies in perfectly and imperfectly competitive markets?

Companies in perfect competition DO NOT face it. Companies in imperfect competition DO face it.

Average cost

Cost per unit, calculated as your firm's total costs (including fixed and variable costs) divided by the quantity produced

Rational Rule for Employers

Hire more workers if the marginal revenue product is greater than (or equal to) the wage

When a retailer varies price on items in ways that require buyers to spend extra time or effort to get a lower price, the retailer is using what to price discriminate?

Hurdle method

grim trigger strategy

If the other players have cooperated in all previous rounds, you will cooperate. But if any player has defected in the past, you will defect.

How does a useful signal help employers?

It helps to figure out which workers are likely to be more productive.

Barriers to entry

Obstacles that make it difficult for new firms to enter a market

When young people choose to spend more leisure time playing videogames, what would happen to the labor market for young people?

Wage will increase, and fewer jobs will be available.

What is determined by the intersection of the downward-sloping labor demand curve and the upward-sloping labor supply curve?

Wages and employment

Coordination game

When all players have a common interest in coordinating their choices

Free entry

When there are no factors making it particularly difficult or costly for a business to enter or exit an industry

Monopoly

When there is only one seller in the market

Imperfect Competition

When you face at least some competitors and/or you sell products that differ at least a little from your competitors.

finitely repeated game

When you face the same strategic interaction a fixed number of times

Repeated game

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

Strategic Interaction

When your best choice may depend on what others choose, and their best choice may depend on what you choose.

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 the price exceeds your average cost

If you cannot prevent resale of your good, which of the following occurs when attempting price discrimination?

You'll end up selling large quantities at a low price.

The adoption of new technologies involves _____ because your best response is to use a system that is _____ whatever system your suppliers and customers use.

a coordination game; compatible with

Quantity discounts are:

a form of hurdle pricing, where the hurdle that gets you a discount on additional units of a good is buying one (or more) initial units of the good.

Efficiency wage

a higher wage paid to encourage greater work productivity

If both players know that they won't interact after the last period, their last round will be equivalent to _____, and both players will likely _____.

a one-shot game; defect

Prisoner's Dilemma

a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial

prejudice

a preconceived bias against a group that's not based on reason or experience

You will go to a party if your friend decides to go with you. This is an example of:

a strategic interaction.

When a game has multiple Nash equilibria, the game will be considered...

an anti-coordination game

When you don't price discriminate, all of the following apply

any discount you give to get an extra sale also applies to all of your existing customers. the discount effect applies to the situation. this lost revenue reduces your marginal revenue substantially.

Perfect Competition and Monopoly are....

both rare

An airline company wants to charge high prices to business travelers while charging lower prices to leisure travelers because _____ travelers typically have higher reservation prices, while _____ travelers are price sensitive.

business; leisure

pay-for-performance examples

commissions, piece rates, bonuses, promotions

Despite advances in price discrimination through tools like big data, perfect price discrimination remains difficult because of:

concerns over fairness and ethical issues.

When rivals collude to raise prices, they....

increase their profits

A(n) _____ in demand for the product you sell will increase the labor demand of your business and shift the labor demand curve to the _____.

increase; right

New education funding designed to make college more affordable will shift the labor supply curve to the left because it...

increases the benefit of not working.

Price discrimination _____ the quantity you sell by _____.

increases; offering selective discounts

In order for education to work as a signal for a company:

it must be less costly for highly productive workers to earn a college degree than it is for less productive workers.

implicit bias

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

Average cost is the dominant factor in determining prices in the...

long run

A seller's demand curve summarizes its _____, and its marginal revenue curve measures its _____.

market power; incentive to increase production

monopsony power affects whether....

minimum wages hurt employment

Explicit Costs

out-of-pocket costs for a firm—for example, payments for wages and salaries, rent, or materials

In a competitive labor market, the employers...

pay the market wage

An employer who discriminates in hiring based on prejudice may end up....

paying a higher wage for a less productive employee

Collusion is a...

prisoner's dilemna

Labor supply

the time your spend working in the market

Accounting profit

the total revenue a business receives, less than its explicit financial costs = Total revenue - explicit financial costs

Economic profit

the total revenue a firm receives, less both explicit financial costs and the entrepreneur's implicit opportunity costs =Total revenue - Explicit financial costs - Entrepreneur's implicit opportunity costs

Selective discounts help solve...

the underproduction problem

Multiple equilibria

when there is more than one equilibrium

Indefinitely Repeated Game

when you face the same strategic interaction an unknown number of times

Anti-coordination game

when your best response is to take a different (but complementary) action to the other player