Managerial Economics
According to dominant price leader model, if the smaller firms do not follow the leader, the price leader will retaliate by dropping its prices below the _____ levels of its competitors, forcing them to make _________.
AC losses
when three workers are used in the production process, the total output of cakes is 12. APL=
APL=TP/QL=12/3=4
If the price it charges is above _____, then the profit maximizing firm will be able to make _________________ profits. It will earn more than _____ profits.
ATC abnormal (supernormal) normal
in 2nd degree price discrimination, as long as the price is above _____, sellers are able to __________the quantity they sell and earn more revenues and _________
ATC increase profits
Why is the monopolistically competitive firm not productively efficient in the long run?
ATC is not at its minimum point
__________________________ can also affect tastes and preferences.
Advertising and negative publicity
Which of the following statements is true assuming ceteris paribus? Bad weather causes the supply curve to shift to the right and the prices of agricultural products to rise. Supply is more price inelastic when firms are able to carry large stocks of inventory. If the PES coefficient is 1.5, a rise in price of 15% would lead to an increase in quantity supplied of 10%, meaning that supply is elastic. An increase in indirect taxes causes supply to decrease and price to rise.
An increase in indirect taxes causes supply to decrease and price to rise.
These average costs can be calculated using the following formulas.
AverageFixedCost(AFC)=TFC/Q AverageVariableCost(AVC)=TVC/Q AverageTotalCost(ATC)=AFC+AVC
challenge is to not rely too much on one's _______________________ and ignore the potential information that appropriate _______________________ can reveal.
"gut" feeling analytical methods
duopoly originates from the Greek language and means
"two sell."
Price elasticity of supply (PES) formula
% change in quantity supplied / % change in price %ChangeinQs/%ChangeinP
percentage change in price can be calculated as follows:
%ChangeinP=(∆inP/InitialP)*100 Where initial P=initial (original) price Note: P1 is often used to denote the original price and P2 the new price.
percentage change in quantity supplied formula
%ChangeinQs=(∆inQs/InitialQs)*100 where: ∆=change initial Qs=quantity supplied at the initial (original) price Note: Q1 is often used to denote the original quantity and Q2 the new quantity.
percentage change in price can be calculated as follows:
%∆inP=(∆inP/InitialP)·100 where: initial P=initial (original) price Note: P1 is often used to denote the original price and P2 the new price.
Price elasticity of demand (PED) formula
%∆inQd=(∆inQd/InitialQd)·100 where: ∆=change initial Qd=quantity demanded at the initial (original) price Note: Q1 is often used to denote the original quantity and Q2 the new quantity.
Although regression analysis can be a very useful tool, it has certain limitations and potential problems that you should be aware of:
(1) misspecification of the equation, (2) multicollinearity, (3) the identification problem, and (4) problems with random errors.
four different market structures:
(1) perfect (pure) competition (2) monopolistic competition (3) oligopoly (4) pure monopoly
three important elasticities
(1) price elasticity of demand, (2) income elasticity of demand, and (3) cross price elasticity of demand.
four main determinants of price elasticity of demand
(1) the availability of close substitutes, (2) the proportion of income spent on the product/service, (3) whether the product/service is a luxury or necessity, and (4) time
no positive externalities can be represented by the equation
(MSB =MPB)
Short Run Output Analysis shows
(a) the total output (total product), a given level of labor input (TP), (b) the marginal product of labor (MPL), (c) the average product of labor (APL).
The principal (e.g., shareholders of a company) employs
(through the board of directors) a CEO.
market structure characteristics
--# and size of firms that compete in the industry --extent to which firms have market power (i.e., control over price) --whether the product/service is homogeneous or differentiated --whether firms engage in price and/or non-price competition --extent there are barriers to entry/exit the market --availability of info to firms and buyers.
different types of investment decisions that firms may face include:
--purchase of new capital to produce a new product --construction of additional factories, warehouses, and offices to meet increasing demand, or company's expansion into other geographic markets --deciding whether to buy or lease equipment, machines, and vehicles --deciding whether to produce a product or to outsource its production --replacing obsolete plants and equipment
For estimating demand, a significance level of_______ is considered to be acceptable
.05
Revenue maximization occurs when MR =
0.
Given that essential products may last for a couple of weeks or even months, even a_____ rise in their prices is not likely to make buyers _________ the amount that they buy by much, so demand is likely to be relatively
10 % decrease price inelastic.
"buy two get the third at a 50 % discount" is an example of what type of price discrimination?
2nd degree
Dominance is often interpreted to mean that the firm has at least _____ percent of the market share although in some countries a firm that has over ____% of the market share may also be considered to have monopoly power.
40 25
in oligopolistic markets across countries, the four-firm or five-firm concentration ratios tend to be very high, often above _____. This means the largest four or five firms in the industry produce or sell a combined____ or more of the total market ________.
80 % or even 90 %. 80 % output
Fill in the blank spaces in the following table. Output TFC TVC TC MC 0 ____ ____ ____ n/a 1 ____ 40 _____ ___ 2 80 ____ 140 ____ 3 ____ ____ ______ 30
80, 80, 80, 0, 60, 90, 80, 120, 170, 40, 20
A .05 significance level means that you can be ____ percent confident that the results obtained from a sample are representative of the ________________ that you are studying
95 statistical population
most popular theories regarding goals of firms:
: (1) profit maximization, (2) revenue maximization, (3) sales (output) maximization, and (4) profit satisficing
Which of the following statements is incorrect? Banks use restrictive clauses in their loan contracts to reduce moral hazard. Not setting a home alarm after purchasing house insurance is an example of moral hazard. Insurance companies try to reduce moral hazard by requiring deductions and co-payments. A bank lending money to someone with a temporary job is an example of moral hazard.
A bank lending money to someone with a temporary job is an example of moral hazard.
Which of the following statements is correct? --A firm maximizes its profits when its MR = AC. --When total revenue is zero, MR is maximized. --If MR > MC, the firm should decrease its output to increase profits. --A firm maximizes its TR when MR = 0.
A firm maximizes its TR when MR = 0.
Which of the following statements is correct? --A negative externality exists if MSB > MPB. --A negative externality exists if MPB > MPC. --A negative externality exists if MSC > MPC. --A negative externality means that an activity creates positive spillover effects to third parties.
A negative externality exists if MSC > MPC.
Which of the following statements is correct? --A positive externality means that an activity creates external costs. --A positive externality exists if MPB > MPC. --A positive externality exists if MSB > MPB. --A positive externality exists if MSC > MPC.
A positive externality exists if MSB > MPB.
Which of the following statements is correct regarding the prisoners' dilemma? The two players can collude but the outcome does not lead to an equilibrium. Only one of the players has a dominant strategy. Both players have a dominant strategy that leads to a Nash equilibrium. None of the players has a dominant strategy.
Both players have a dominant strategy that leads to a Nash equilibrium.
___________ is an agreement between firms to reduce competition between each other.
Collusion
Which of the following statements is correct? --In the long run, a pure monopoly is allocative efficient. --A monopoly can never make a loss. --Collusion is more likely to occur in an oligopoly market. --In an oligopoly market, four-firm concentration ratios tend to be low.
Collusion is more likely to occur in an oligopoly market.
Which of the following is incorrect regarding the long run? A firm may experience commercial economies of scale if it receives a discount for bulk purchases. Diminishing marginal returns lead to diseconomies of scale. If a firm increases its output and its LRAC fall, it is experiencing internal economies of scale. Managerial diseconomies of scale can occur when communication and coordination between different departments, divisions, and organizational layers becomes slower and less efficient.
Diminishing marginal returns lead to diseconomies of scale.
___________ costs are not paid for by the parties that create them and therefore these costs are not taken into consideration by a firm's managers when deciding
External how much to produce and what price to charge.
Mainstream economists do not use mathematics in their economic models. True False
False
Third-degree price discrimination common example is
Fares/tickets for travel priced differently for adults and children
in using a quadratic function, , there is no stage____ . Both MPL and APL begin to __________as the number of workers is __________.
I decrease increased
Which of the following statements is correct? Investment projects with a positive NPV can have a profitability index less than one. Higher net present values always lead to a higher IRR. If NPV is positive, then the discount rate is lower than the IRR. If the profitability index is less than one, then the return on investment is high enough to cover the cost of capital.
If NPV is positive, then the discount rate is lower than the IRR.
Heterodox economists, in particular, _____________, disagree with mainstream view, arguing that expansionary fiscal policy will result in
Keynesians higher tax revenues and lower government spending on unemployment benefits.
Internal diseconomies of scale occur in the long run when the firm's
LRAC rises as output increases.
organizational slack can exist in______ private companies that make _______ profits.
Large Large
Which of the following statements are true? Firms maximize profits or minimize losses if MR = AC. In the long run, monopolistically competitive firms are likely to earn abnormal profits. Perfectly competitive firms produce differentiated products. Large sunk costs may act as a barrier to exit from an industry. Monopolies do not make losses.
Large sunk costs may act as a barrier to exit from an industry.
in transfer pricing, to overcome divisional profit target conflict of interests problem is to set divisional targets regarding the ___ of the intermediate products.
MC
in transfer pricing, final price of production should represent the _____ ____ ____ ________ ________ and the firm can then charge a price that will result in MR =MC.
MC of the final product
Allocative efficiency exists when P =
MC.
marginal cost equation
MC=∆TC/∆Q=∆TVC/∆Q
firms will be willing to increase their output as long as the _____is greater than the ______ because for each additional unit produced, the firm will realize a____ ________ ________
MPB MPC net private benefit
In the absence of any negative externality, MSC will equal
MPC
under perfect competition, price is always equal to ___ for a firm
MR
As long as _____is greater than zero, a firm can increase its ___by selling more.
MR TR
any monopolistically competitive firm that wishes to maximize profits, will have to charge a price and produce a level of output at which
MR = MC
If a firm wishes to maximize its profits, it must charge a price and produce a level of output which will result in
MR = MC.
Under perfect competition, since price is always equal to MR for a firm, then the profit maximizing rule can be restated as
MR = P = MC.
To maximize total revenue, firm must produce an output level at which
MR =0.
If a firm wants to maximize profits, it must charge a price and produce an output level which will result in
MR =MC.
To maximize profits, firms must produce at an output level which results in
MR =MC.
If there are no positive externalities, the MPB will be equal to the .
MSB
In providing subsidies to firms or buyers, the challenge for the government is determining the level of output at which________________, with the primary difficulty being the measurement of the actual sizes of the
MSB =MSC external benefit
The socially optimal level output occurs when
MSB =MSC.
resources are efficiently allocated when
MSB =MSC.
Reducing market failure due to externalities requires that the output in the market changes so that
MSB becomes equal to MSC
existence of a negative externality means that
MSC is greater than MPC
Which of the following statements is correct? --There are strong barriers to entry to a monopolistically competitive market. --Perfectly competitive firms sell differentiated products and thus are price makers. --Monopolistically competitive firms sell differentiated products and have some control over price. --Perfectly competitive and monopolistically competitive firms are productively efficient.
Monopolistically competitive firms sell differentiated products and have some control over price.
sensitivity analysis can reflect what happens to the expected _____if the ________ were to be lower or higher.
NPV discount rate
In a game where the participants cannot collude, the equilibrium outcome will be a
Nash equilibrium
main tool used by central banks today is =
OMO.
The most well-known example of overt collusion is the ___________ cartel.
OPEC
Which of the following statements is incorrect? --A firm may engage in penetration pricing to enter a market. --A firm may engage in predatory pricing to drive competitors out of the market. --Evidence suggests that many firms use a cost-plus pricing approach to set their prices. --Oligopoly firms in an industry are less likely to engage in limit pricing if the market is highly contestable.
Oligopoly firms in an industry are less likely to engage in limit pricing if the market is highly contestable.
How could moral hazard be a problem for a bank?
Once the bank has given the loan, the borrower may engage in behavior that reduces the likelihood of the loan being repaid.
In pure monopoly industries, there is ____ firm that has strong market power and can earn ______ _________ profits.
One large abnormal
___________ are what the game theory predicts will happen for a given situation.
Outcomes
kinked demand curve model makes sense but does not explain why _____ is the current _____ _______ in the first place.
P market price
PED is equal to:
PED=%∆inQd/%∆inP=(∆inQd/InitialQd)/(∆inP/InitialP)=(∆Qd/Q1)*(P1/∆P)
total PES is equal to:
PES=%∆inQs/%∆inP=(∆inQs/InitialQs)/(∆inP/InitialP)= (∆Qs/Q1)*( P1/∆P)
Profitability Index (PI) formula
PI =PV of the Stream of Future Cash Inflows/Initial Investment Outlay
to calculate the present value (PV) of a future cash flow (CF), you can use the following equation:
PV = CF / [ (1 + i)^n ] where: i=annual interest rate n=number of years
Predatory pricing will be less effective and costly if the new firm has the financial strength to engage in ___________ ____________ for an extended period of time.
Penetration pricing
Which of the following statements is correct? --Third-degree price discrimination involves charging one price for the first range of quantities purchased and lower prices for additional ranges of quantities purchased. --Price discrimination necessitates that buyers have different price elasticities of demand and the seller is able to prevent buyers in the high-priced market from purchasing goods in the low-priced market. --If a firm practices second-degree price discrimination, there will be no consumer surplus. --First-degree price discrimination occurs when firms charge
Price discrimination necessitates that buyers have different price elasticities of demand and the seller is able to prevent buyers in the high-priced market from purchasing goods in the low-priced market.
Which of the following statements are correct? Revenue maximization occurs when P = ATC. Profits are maximized when MR = MC. Sales (output) maximization occurs when MR = 0. If a firm sells 100 units of a good at €8, its profits will be €800. If TC = €100,000 and TR = €80,000, then profit = €20,000. If P = ATC, the firm earns only normal profit.
Profits are maximized when MR = MC. If P = ATC, the firm earns only normal profit.
cubic function can be represented as follows:
Q=a+b+bL+cL2−dL3 where: a=constant value b, c, d=coefficients L=labor`
A simple production function could be expressed as
Q=f(L, K) where: L=labor K=capital
A production function can be expressed mathematically as follows:
Q=f(X1, X2, X3, ..., Xn) where: Q=output X1 to Xn=inputs that are used in the production process
if a monopoly firm earns abnormal profits, it may spend more on _________, which may lead to ____________ products and production processes, resulting in greater __________ _________.
R&D innovative dynamic efficiency
To conduct a regression analysis, you can use a range of software packages such as
SPSS and SAS. Microsoft Excel
_________________ is the underlying assumption upon which economics is based.
Scarcity
Today, organizational slack can still occur in ______-owned firms but various EU governments have tried to reduce it as they have had to meet the ________ ____ _________ criteria regarding national debt and budget deficits.
State Stability and Growth Pact (SGP)
examples of government subsidies to buyers
Students getting grant for education tax deductions for expenditures on education and training
________costs are irrelevant to a decision.
Sunk
the cost function in the short run will reflect both fixed costs and variable costs and can be expressed as follows:
TC=TFC+TVC where: TC=total cost TFC=total fixed cost (i.e., sum of all the different fixed costs) TVC=total variable cost (i.e., sum of all the different variable costs)
Average revenue (AR) is
TR divided by quantity and is essentially the price per unit.
The initial cost for investment project A is €10,000 and the PV of the future cash flows is €11,000. The initial cost for project B is €9,000 and the PV of the future returns is €10,000. Based on this information, what can we conclude? The firm should invest in project B because it has a higher profitability index (PI). The firm should not invest in either project because both have a PI less than one. The firm should invest in project A because it has a higher profitability index (PI). The firm should not invest in either project because both have a PI greater than one.
The firm should invest in project B because it has a higher profitability index (PI).
Identify two goods that are substitutes for each other.
Toyota and Honda cars; Pepsi cola and Coca-Cola; Samsung and iPhone smart phones
Economists may arrive at different empirical conclusions even when they are researching the same topic. False True
True
recession.
When aggregate expenditure falls and unemployment throughout the whole economy rises
Which of the following statements is correct? --Monopolies are inefficient because they produce more than is socially optimal. --Public goods have two characteristics: excludability and rivalry in consumption. --Without a public sector, the amount of merit goods consumed would be less than socially optimal. --Without a public sector, merit goods would not be produced in society.
Without a public sector, the amount of merit goods consumed would be less than socially optimal.
Cross price elasticity of demand (XED) equation
XEDAB=%ChangeinDemandforGoodA/%ChangeinPriceofGoodB
Income elasticity of demand (YED) formula
YED=%ChangeinDemand/%ChangeinIncome
In an oligopolistic market, there are either only _______ firms (i.e., a pure or classic oligopoly case) or there are more than_______ firms but only a small number of large firms ________ the market.
a few a few dominate
full-range pricing
a firm sets the price of all complementary and substitute products jointly to maximize profits
First mover advantage is the
ability of a firm/business to choose the best location for a business/firm first
the phrase "willing and able" refers to the firm's
ability to cover its costs and its willingness to offer the product for sale, believing that it is worth the time, money, and effort relative to the price paid by the consumer.
Monopolistically competitive firms can charge slightly higher prices than their competitors and still earn __________profits.
abnormal
As long as existing monopolistic competitive firms in the industry continue to make _________ profits, new firms will have an ___________ to continue to enter the market to compete and as this happens, the demand for the products and services of existing firms will _______ and they will continue to _________ prices.
abnormal incentive fall lower
In the short run, a perfectly competitive firm can earn _______________ profits. This means that TR > ____and P > ______.
abnormal (super normal) TC ATC
if a project's PI >1, then the project should be
accepted.
Strategies are the possible _________of each ________ in the game
actions participant
Explicit costs are the ___________________________________ such as wages, rental payments for office space, advertising expenses, interest on loans, and payments for raw materials.
actual costs incurred in producing goods or services
The MPL is the
additional (extra) output that is created from using one more unit of labor.
Marginal cost (MC) is the
additional cost of producing one more unit of output.
At MSB =MSC level of output, the value that society places on the last unit produced is equal to the
additional cost to society (in terms of resources, etc.) of producing that last unit.
Marginal revenue is the
additional revenue generated from selling one more unit of output.
Asymmetric information leads to two problems:
adverse selection and moral hazard.
examples of non price determinants of demand
advertising tastes and preferences in favor of goods income change (effect on normal goods) price change of substitute goods change in the number of potential buyes change in consumer attitude of the state of the economy or price changes
monopolistically competitive firms may spend large amounts of money on _______________ and product _____________.
advertising differentiation
if the price of a good falls, an individual can
afford to buy more because his/her purchasing power has increased.
The principal-agent problem occurs because the___________ does not always act in the interests of the ________________
agent (e.g., manager) principal (e.g., owner or shareholders).
Macroeconomics looks at ___________________________ in the economy and how it is affected by ________________________________ by all households and total ________________________ by all firms in the whole economy
aggregate (total) expenditure total (aggregate) consumption investment spending
Collusion occurs when firms _________________________________. and may also agree to divide up the market ___________ and not __________ in each other's market.
agree to behave in a certain way that will benefit them geographically compete
Collusion requires that firms reach an _________ and _____to it.
agreement stick
the kinked-demand curve help us understand why cuts in _________ by one oligopoly ________ firm on a particular route are often followed by decreases in___ ______ by other firms serving the same route.
airfares airline air fares
perfectly competitive firms are price takers, meaning that they
all charge the same going price in the market
In the short run, a firm's total cost (TC) is comprised of
all fixed costs and all variable costs.
perfect information means firms/buyers are able to obtain
all relevant information at no cost regarding prices of goods and inputs, product quality, production processes, etc.
If MSB is lower than the MSC-- there is
allocating too many resources to the production of this good net value loss for society
In perfectly competitive markets in absence of externalities, there is _______________ efficiency because P = ____
allocative MC
Perfect competition represents the theoretical conditions under which both _________ ____ ____________ efficiency exists.
allocative and productive
Perfect competition represents the theoretical conditions under which both_____________ ____ _________ efficiency exists.
allocative and productive
Supply may be relatively price elastic if a firm is not
already operating at full capacity.
in dominant price leadership, if the leader lowers its prices, the other smaller oligopoly firms
also lower their prices.
In determining the prices, the managers should take into account the ________ of resources used to produce product and how the _____of those resources affects the amount of resources available for the production of the
amount use other types of products.
· Demand is the
amount (quantity) of a good or service that buyers are willing and able to buy at different prices over a given period of time in a given market.
Supply is the
amount (quantity) of a good or service that firms/producers/sellers are willing and able to offer for sale at different prices over a given period of time in a given market.
individual demand schedule shows the
amount of a good or service that an individual is willing and able to buy at different prices over a given period of time in a given market.
demand curve shows the
amount of a good or service that buyers are willing and able to purchase at different price levels.
Revenue is the
amount of money earned from selling goods or services.
It is important to understand that the supply curve shifts because the
amount offered for sale at different prices changes, as reflected in a new supply schedule.
private benefit to firms is
amount paid by the consumers becoming revenue
Law of supply states that, ceteris paribus,
an increase in price results in an increase in quantity supplied.
Moral hazard occurs when
an individual increases their exposure to risk when another party bears the risk.
If the price of a good increases, then
an individual with a given income can afford to buy less.
supply of a good is likely to be more price elastic if it is e
asy and not costly to store products.
Moral hazard is an ____________ information problem that arises ________ a transaction has occurred
asymmetric after
Adverse selection is a problem created by __________ information ________ an agreement or transaction is made.
asymmetric before
short run is the period of time during which
at least one factor of production cannot be changed.
Economists and managers are more concerned with ________costs than __________cost figures.
average total
Firms that adopt mark-up or cost-plus pricing determine their
average cost of production and then add a certain percentage (mark-up) for profit
In the short run, a firm faces both
average fixed costs (AFC) and average variable costs (AVC).
The expected value is the
average of all possible outcomes for a project
The APL is the _______________________. It represents ______________________-
average product of labor labor productivity.
Labor productivity is the
average product produced per unit of labor in a given period of time.
sales maximization occurs at an output level where price is equal to _________________________ When this occurs, total economic profits are _________.
average total cost, i.e., P = ATC. zero
The screening to reduce the problem of adverse selection involves the bank doing a _____________ _______to verify the information provided by the applicant regarding their __________ __________ _________ _________
background check income, employment and credit history, and asset ownership
adverse selection example
bank gives a loan—borrower could lie about money usage
if an oligopoly market does not have a clear dominant leader, what may occur?
barometric price leadership.
in monopoly markets, governments can help to reduce______________to allow more firms to __________the market and compete
barriers to entry enter
Economics is a field of study that tries to find answers to the
basic economic problem that arises from scarcity.
which analytical tools to use to make informed decisions third step
be aware that if you choose to rely only on quantitative research findings, you may end up having an incomplete picture of a given situation and make a decision that is not completely informed.
If the NPV of an investment is positive, it means that the cost of financing the investment project has
been covered and some money has been left over
requiring collateral helps to reduce moral hazard since borrowers will have a greater incentive not to engage in ____________ that will
behavior reduce their ability to repay the loan
Microeconomics is the branch of economics that studies the ____________________________________________, and specific markets such as the market for _______________________
behavior of individual economic units such as an individual consumer or firm shoes or cars
Positive spillover effects occur when the consumption of a good or service results in a
benefit to a third party not involved in the production and purchase of that good or service
marginal refers to the additional
benefit to society that arises from the consumption of one more unit of a good.
Opportunity cost is the cost in terms of the
benefits foregone of the next best alternative use of a resource which has been given up due to a particular choice.
opportunity cost.
benefits to society of what is sacrificed or given up when a choice is made
Each time a firm solicits bids, the colluding companies can each take turns submitting the _______ offer but at a _______ price.
best high
in game theory, strategy is a dominant strategy if it is
best for the player and they have no incentive to change it
dominant firm price leadership model-if there is one firm that is much __________than the other oligopoly firms, the big firm may emerge as the _________ in the market.
bigger leader
market demand for a product is
bigger than one person's individual demand for a product.
managers aim to achieve a certain profit level that will be satisfactory to the
board of directors and the shareholders.
Non-zero-sum game occurs when
both players (e.g., firms) may lose or gain depending on each player's actions.
in a pure oligopoly, strong ________ ________and ____________of existing firms may act as a barrier for new firms to enter and successfully __________ themselves.
brand names reputation establish
ceteris paribus assumption or "other things being equal" assumption
build models that often concentrate on the relationship between a few variables and assume that other variables that may influence the studied relationship do not change.
IRR can be calculated using a
business calculator
A market is any set of arrangements that allows
buyers and sellers to interact to exchange goods or services for some sort of payment such as cash.
Second-degree price discrimination occurs when a firm charges
buyers different prices according to how much they purchase.
a determinant of demand is the number of _________ EX During the summer time, the number of potential buyers in countries such as Greece, Spain, Italy, Malta, and Cyprus_________________ In November when there are fewer tourists, the demand for buying things is much ___________.
buyers in the market. increases due to tourists. lower
first conditions to be met for a firm to be able to implement price discrimination
buyers must have different price elasticities of demand firm must be able to determine the price elasticity of demand differences amongst the buyers.
If the price falls or rises of an essential good, people are not likely to react by buying a lot more or a lot less because they are already
buying as much as they need
when undertaking capital budgeting, there is a need to account for the risks of the investment projects by
calculating the expected values of the future cash inflows
sunk costs are expenses that have been incurred and
cannot be recovered.
Budgets are reminders that managers ______________________________ and that they must make choices to use available ______________________ (labor hours, machines, equipment, raw materials, production lines, etc.) in the most ______________________ way.
cannot spend money infinitely resources efficient
Business managers need to engage in careful _____________ to avoid operating in stages_______in the short run.
capacity planning I or III
Other barriers to entry in natural monopoly that make it difficult for new firms to set up/compete in a market: --existence of high ________ costs --strong ________ names of existing firms (that may also be due to high ______) --patents and _____________ --ownership of a _______resource --restrictive _____practices such as limit pricing
capital brand quality copyrights scarce trade
if there are other investment projects that have a higher NPV and the firm has limited funds that necessitates ________ __________, it may have to prioritize which projects it undertakes and some projects with a positive NPV may
capital rationing not be pursued or may be pursued in the future
managers need to determine what the future _______ _______ are worth today.
cash inflows
To achieve a decrease in inflationary pressures by decreasing money supply growth and increasing interest rates., the _______________ can sell securities to
central bank commercial banks or the general public.
Responsibility for formulating and implementing monetary policy often lies in the hands of a country's
central bank.
When there is a change in a product's price,______________, there is a movement along the product's ____________ resulting in an ____________ in demand (if the price falls) or a ________________ of demand (if the price rises).
ceteris paribus demand curve extension contraction
If you competitor lowers its prices, __________________, you will know that the demand for your product will noticeably ________.
ceteris paribus fall
As new firms enter to compete, _________ _________, the industry supply _________and the industry supply curve shifts to the ________.
ceteris paribus increases right
managers don't know exactly how their competitors will react to a ___________in their strategy. Therefore, ___________________ ____________ a common characteristic in game theory.
change incomplete information
demand for a good is inversely related to a_________________ of a complementary good.
change in the price
Advances in technology are only one factor that can
change supply and shift the supply curve.
Whenever there is a surplus or a shortage, sellers have an incentive to
change the price that they charge.
income effect is the effect on demand due to
changes in the purchasing power of income that arise from a change in price.
to analyze potential risks associated with changing conditions, it is useful to conduct a scenario analysis by
changing more than one variable at the same time
In reality, more than one factor that can affect demand may be _________________________ making the overall effect less .
changing simultaneously predictable
Limit pricing
charge a price that is lower than the one that will maximize its profits in order to discourage potential new rivals from entering the market.
Penetration pricing occurs when a firm
charges a low price in order to establish itself in an industry and obtain a desired market share.
Predatory pricing occurs when a firm
charges a price low enough to drive a competitor out of business.
price skimming
charging high prices and earning abnormal profits until new competitors arise
If the price of a good/service rises, some buyers may wish to switch to relatively_________________. However, if there aren't many close ________________, it may be difficult for buyers to switch and they may continue to buy the more__________________. For instance, when the price of petrol rises, the quantity demanded may not fall that much because there aren't many
cheaper substitutes substitutes expensive product close substitutes
Resources are allocated efficiently if an economy produces those goods that its
citizens value the most.
Which schools of economic thoughts are classified as mainstream?
classical, new classical, neo classical, and Austrian economics
main economic schools of thought include
classical, new classical, neo-classical, Austrian, Keynesian, new Keynesian, post Keynesian, institutional, evolutionary, radical, Marxist, feminist, and behavioral.
Under the mainstream view, one could classify the following economic schools
classical, new classical, neo-classical, and Austrian economics.
At Pe, the market is said to ________ as all units supplied are bought and there are no incentives for sellers to either_________________. This is why there is an equilibrium.
clear raise or lower their price
Governments and other regulatory bodies can pass laws that require parties to a transaction to provide
clear and accurate information so that firms and buyers can make informed decisions
The demand for essential products may be price inelastic also because there are no ____________and a small proportion of ___________ is spent on them.
close substitutes income
If the expected values are different, then the _______________________ is used to indicate the relative risk
coefficient of variation
banks can require ____________ from borrowers helps to reduce the losses arising from adverse selection.
collateral
firms in an oligopoly market may ________to increase their prices and profits.
collude
One potential disadvantage of auctions is that the bidding firms in an oligopoly industry may ________ to all submit ______ prices.
collude high
if the opportunities for competitive secret bidding repeats over a short period of time, then the bidding companies may ______ agreeing to submit ______ priced bids.
collude high
Oligopoly markets may ________ and _____ high prices to earn higher profits
collude fix
market demand for a product or service is the
combination of all individual buyer's demand in a given market.
The market supply of a product or service is the
combination of all individual seller's supply in a given market.
As a firm increases all its inputs and its output rises in the long run, it may experience
commercial, financial, managerial, marketing, R&D, and technical economies of scale.
managerial diseconomies of scale happen when effective and timely ____________________ between different departments, divisions, and organizational layers becomes________________________-
communication and coordination slower and more difficult.
Cartel members agree to fix or set high prices and not ________ on price. By doing so they ___________their profits
compete increase
interdependence that characterizes firms in oligopoly industries affects the way firms
compete in their respective markets.
oligopoly firms tried to increase their profits by reducing ____________and _________high prices. This strategy is unethical and risky because
competition fixing the fines and consequences for the colluding firms and their managers are quite high.
By soliciting ___________ bids, firms increase their chances of making a better decision and reduce (but not eliminate) the likelihood of an
competitive adverse selection.
Auctions are commonly used by private and public organizations for conducting
competitive procurements
game theory is used to understand better how potential ____________________ may respond to a firm's______________ ___________________
competitors price change.
even in a monopoly market, managers cannot become ________________. They need to continue to ________ and __________the quality of their product or service in order to retain their ________ ______.
complacent innovate improve market power
If the cross price elasticity coefficient is negative, then the two goods are ______________________.
complementary
Goods that are consumed together are known as
complementary goods.
__________ ratios depend on how the market is defined
concentration
simplifying assumptions are made about the ____________________ under which the economic agent operates in order to utilize
conditions structural equilibrium models
Perfect information refers to the
conditions under perfect competition where all producers and consumers have equal access to all available market information and prices accurately reflect all available information.
in transfer pricing, divisional profit target creates a
conflict of interests
Due to differences, it is possible that NPV and IRR may provide
conflicting answers
advertising by all monopolistic competitive firms in the industry may result in consumer
confusion and a waste of resources.
in regression equation, the coefficient a is a ___________ term. It represents the value of the __________ variable when all the independent variables are __________.
constant dependent zero
governments can regulate natural monopolies to reduce the possibility of
consumer exploitation in the form of high prices or poor quality service
what type of consumers benefit from first degree price discrimination?
consumers (with the more elastic demand) who would have had to pay a higher price if only one price was charged to all buyers
products sold in the monopolistic market are close substitutes, so the prices charged cannot be much higher than the competitors because
consumers can easily switch to another seller
Social benefits include the private benefits (e.g., satisfaction) that the consumer experiences from __________ __ __________ plus the private benefits obtained by the firm that _________ _____ _______ ______ ________
consuming a good produces and sells the good
If the price of furniture falls from €200 to €150, the quantity supplied falls from 120 to 90 pieces per month. This is called a ____________________ and is shown by a movement _________________along the supply curve.
contraction of supply down (and to the left)
market power is
control over price
market power=
control over price
perfectly competitive firms have no
control over price.
Repeated duopoly games can lead to a
cooperative equilibrium
Proponents of government intervention in markets argue that without government intervention, firms in free markets will not
correct the market failures and will not regulate themselves.
heavy polluting firms will try to reduce their emissions to lessen the ________ ___ ________ associated with buying additional permits from other firms or investing in more
cost of compliance environmentally-friendly production plants, equipment, and methods.
In the real world, buyers and firms do not have perfect knowledge and obtaining information often involves _________.
costs
indirect taxes (such as VAT) levied on the sale of goods and services are treated as _______ by firms.
costs
Each monopolistic manager makes decisions based on the average ______ that they face and_______ _________ that they want to pursue regardless of what most of the other firms in the market are doing.
costs profit margins
existence of asymmetric information creates potential problems that influence the decisions taken by firms in a way that creates additional __________ and reduces ____________in the economy.
costs efficiency
Providing subsidies to the firms lowers their ________ ___ ____________ and creates ___________for them to produce more.
costs of production incentives
If the NPV is zero, the cost of capital is ____________, and firms may choose to undertake the investment because it will help them to
covered produce more and increase their sales and market revenue.
Most collusive behavior is ________ since collusion is illegal.
covert
Most cartels are ________ and engage in ________ price fixing agreements.
covert secret
managers may themselves face the problem of asymmetric information when deciding which customers to offer the options of making purchases on ___________ and other related issues such as the _________ and ___________ of the credit.
credit duration and amount
central bank can increase _____________________and the_______________________ by buying securities from __________________________________________________. It can also adopt non-traditional methods such as ___________________________________ to stimulate bank lending and spending in the economy.
credit creation money supply commercial banks or the general public quantitative easing (QE)
if there is capital rationing, managers of the firm will have to use an additional _________ to decide which projects to invest in such as the
criterion profitability index (PI)
As a manager, it is important to know the ______________________ for the products/services you sell with respect to changes in the prices of
cross price elasticity of demand substitutes and complements.
answer derived from Cross price elasticity of demand (XED) equation is called the ____________________________. If you are given the percentage changes, it is easy to calculate the elasticity coefficient
cross price elasticity of demand coefficient elasticity coefficient
Data can be classified as
cross-sectional and times series
The incremental costs are the total_________________ associated with a decision.
current and future costs
Since the level of output is determined by________________ managers must try to effectively estimate future ____________in order to have the right amount of fixed and variable inputs so that their firms can operate in
customer demand, demand stage II.
a monopolistically competitive firm can charge slightly higher prices and still have ____________, earn _________, and be ___________
customers revenues profitable
managers do not rely only on ____________ but also on their _______________ that have been shaped from experience.
data instincts
sunk costs do not change because of a particular _________and thus should not be taken into account when
decision weighing potential options.
Game theory helps to analyze how individuals make _______________ when they know that their _____________________ affect others while at the same time the decisions of others affect them and everyone affected is aware of this mutual ________________________
decisions decisions decisions interdependence
trough of a business cycle.
decline in economic activity stops and reaches its lowest point
increasing marginal returns to labor causes the MC of production to ____________, which in turn causes the AVC to ________.
decrease fall
· A ____________________ in income tax rates will ____________________ disposable income leading to a rise in consumer spending in the economy. In contrast, an increase in corporate tax rates will decrease retained earnings leading to a ______________________ in investment spending.
decrease increase decrease
if existing firms exit the market (e.g., due to bankruptcy), the market supply will _________, shifting the supply curve to the _________.
decrease left
If the price of Toyota cars falls, ceteris paribus, the demand for Honda cars may ____________, shifting the demand curve for Honda cars to the ________. This will ___________the amount of Honda cars bought in the market.
decrease left decrease
bad weather or even crop diseases will ________ the amount that farmers will be able to offer for sale at any given _______, shifting the supply curve to the ______.
decrease price left
If in dominant price leadership, demand is relatively price elastic, the higher prices will
decrease firms' total revenues.
Tight or contractionary monetary policy aims to
decrease inflationary pressures by decreasing money supply growth and increasing interest rates.
If the proportion of income spent on a good is small, then buyers are less likely to significantly
decrease the amount they buy when the price rises.
When an oligopoly firm increases its price but demand is price elastic, its total revenue ___________.
decreases
When OPEC decides to decrease the quota, the supply from its members _________ and causes the price of oil to ________.
decreases rise
Insurance companies include _________ and co-payment policies in their contracts which create incentives for the insured to behave in ways that are not risky since the ____________ _____________ _________ _____will be partly borne by the insured.
deduction cost of any damage
· Economists use both__________________________________ methods
deductive and inductive
The F-value is compared to a critical value of F to determine whether the entire regression equation is statistically significant based on the ________________________________. In essence, the F-value measures the _____________________ of the coefficient of determination R2.
degrees of freedom and the desired significance level statistical significance
managers of the firm (principal) do not have as much information about the contractor's (agent's) ability to ________ the project at the estimated _________ and ___________ which is an example of
deliver cost and deadline asymmetric information
percentage change in income leads to a greater percentage change in __________, then we can conclude that demand for this product is _______________
demand income elastic.
in natural monopoly, one firm can satisfy the whole ________ in the market and yet this one firm does not produce at the lowest possible average ________.
demand cost
change in income is only one factor that can change ________ and shift the __________________.
demand demand curve
firm cannot know with certainty what the _____________for its products will be and how much ___________it will earn.
demand revenue
in setting their prices, firms take into account the ______________ and _________ _________ of demand for their products/services as well as the prices charged by ______________________.
demand and price elasticity competitors
The equilibrium is the point where the
demand curve and supply curve intersect
Companies conduct consumer surveys to obtain the data they need to create
demand equations.
important to conduct surveys and collect data in a way that will reduce the potential problems so that the results of _________________ are not misleading.
demand estimations
·there is a positive relationship between income and the
demand for normal goods.
Remember the shifts in the demand curve merely reflect the new ____________ in which at any given price, more or less is demanded.
demand schedule
shift of the demand curve occurs when the
demand schedule changes.
how monetary policy and fiscal policy may be able to influence aggregate spending in the economy are
demand side policies
If other non-price determinants of demand change, they can also cause _________________________, shifting the demand curve to the ___________ respectively.
demand to increase or decrease right or left
In a regression analysis, the ______________ variable is the variable that is being estimated. The ________________ variables are the ones that predict or explain the effect on the __________________ variable.
dependent independent dependent
regression coefficients will show by how much the _________ variable will change given a ________ unit change in the ____________ variable.
dependent one independent
Capital budgeting involves
determining which capital projects firm should invest in how much this investment will cost the company how the investment expenditure will be financed
negative externalities create external cost because the firm and consumers directly involved in the production and consumption of the good
did not pay for the cost that the third parties incurred.
A firm maximizes profits when it charges that price and produces that output level at which the
difference between TR and TC is greatest.
Consumer surplus is the
difference between the maximum price that a buyer is willing to pay for a good and the actual price charged.
Price discrimination involves charging ____________ prices for the same good or service when the ________ in price are not due to differences in ________.
different differences costs
intertemporal pricing is where company charges
different prices in two different time periods that may span weeks, months, or even a few years.
Multiproduct pricing occurs when firms consider how their
different products may be related to each other either on the demand side or the production (cost) side.
scenario analysis analyzes how
different values of multiple variables will affect a project's NPV.
sensitivity analysis analyzes how
different values of variables will affect a project's NPV.
The extent to which monopolistic competitive firms can charge higher prices depends on how successful they have been in ___________ their product/service and making the demand for their product/service ___ ______
differentiating less elastic
The shape of the long run average cost curve is not determined by ________________________ but by internal________________________________that lead to increasing and decreasing returns to scale respectively.
diminishing marginal returns economies and diseconomies of scale
in stage 2 of production in the short run, despite_________________, TP continues to ________since MPL is _________
diminishing marginal returns rise positive
declining marginal product that results from adding more and more of a variable input (e.g., labor) to a fixed quantity of another input (e.g., capital in the form of kitchen space and ovens) is known as
diminishing marginal returns.
Since there are no fixed costs in the long run, the law of______________ does not apply in the long run.
diminishing returns
as firms add more and more workers to a fixed amount of capital or land, __________________ begin to set in and the MC of production begins to __________.
diminishing returns rise
when an activity creates an external cost that is not paid for by the __________parties involved, the true overall cost to society of producing and consuming a good is _________ than the paid private cost, making MSC __________ than MPC
direct greater greater
to prevent imperfect information, government can provide information regarding such negative effects
directly to consumers.
value of the NPV is based on the expected _________ _______ over the duration of the expected future cash flow
discount rate
If the NPV is zero, the IRR is equal to the________ ________and theoretically the firm can earn as much ___________in the project as it can ___________ _________ in the next best alternative way (e.g., saving the money in the bank).
discount rate investing using the funds
The NPV method assumes that the cash inflows are automatically reinvested at the
discount rate (i.e., the cost of capital)
internal rate of return (IRR) is the
discount rate that makes the NPV of a project equal to zero
Long run-Commercial economies may arise from
discounted prices on bulk purchases of supplies.
For capital budgeting purposes, to determine what future cash inflows are worth today is done by __________ the future cash flows to a present value (today's value) using an appropriate______ ________ that reflects the ________ of the funds used.
discounting interest rate cost
for heterodox economists, main determinant of household spending is______________________ and the main determinant of firms' investment spending is the
disposable income animal spirits of business managers.
When there is only one worker, the addition of a second worker allows the two workers to ________________________________________. This is an example of _________________________. The two workers can also _________________and _______ each other. For both of these reasons, labor productivity _________and the APL and MPL _________.
divide the required tasks between them and to specialize. division of labor cooperate help rises rise
Third-degree price discrimination occurs when the seller
divides or segments buyers into distinct markets (e.g., according to income, age, or geographic location) and charges a different price in each market.
in regression equation, t-value is calculated by
dividing the estimated coefficient by the standard error of the coefficient.
coefficient of variation is obtained by
dividing the standard deviation by the expected value and multiplying the ratio by 100.
Labor productivity is calculated by
dividing total product by the quantity of labor (QL).
Transfer Pricing occurs in many large organizations comprised of ___________ that may operate as a distinct _________center. The manager of each center must meet a
divisions profit profit target
Choosing between different capital projects is not always an obvious decision because the revenues from and expenditures for the different projects
do not all occur at once but continue over a period of time
Fixed costs are costs that
do not vary with output.
it is possible that an oligopoly market does not have a clear
dominant leader.
In oligopoly markets, firms may follow the pricing behavior of
dominant or barometric price leaders.
question is not whether these _________________ will occur but rather ________ they will occur and how _____________ they will be
downturns when severe
The screening to reduce the problem of adverse selection involves insurance companies to carry out background checks, regarding
driving records and number of accidents, and existing long-term illnesses.
Oligopoly markets with only two firms are known as a
duopoly
The IRR will be higher if most of the future cash inflows are earned _________instead of ________in the life of the project.
earlier later
Heterodox economists critical of the effectiveness of using ________________________________ to pull an economy out of a recession
easy monetary policy (without expansionary fiscal policy)
______________________ such as consumers or households are assumed to act ____________________ and to have the necessary relevant _______________________ that will allow them to make optimal ____________________.
economic agents rationally information decisions
periods of economic prosperity tend to be followed by
economic downturns.
Only under perfect competition is there
economic efficiency.
· Managerial economics is a branch of economics that involves using
economic information and analysis to make informed business decisions.
Heterodox economics embraces a broader range of
economic perspectives.
· Using both inductive and deductive methods, economists find support for their
economic theories, build upon theories, and even create new theories.
by understanding perfect competition, we can then understand why the other market structures are not
economically efficient
As a branch of economics, managerial economics adopts the method used in the field of study known as ______________. Economics is a _______________science.
economics social
in dominant price leadership, dominant firm would be able to lower price below AC of rivals if it is so large that it experiences much larger __________ __ _________ and its average costs are ________ than its competitors.
economies of scale lower
inaccuracies in economic models as a potential limitation is not perceived to be a problem by all ____________________; whether this is a limitation depends on the _____________________________ to which the economist adheres to
economists school of economic thought
challenges involved in classifying economic thinking is that
economists of a particular school of thought understand and describe the views and theories of other schools differently than the way that economists in the other schools of thought describe and explain their own theories and positions
Macroeconomics involves the study of the
economy as a whole
government can also choose to provide public __________ and operate ___________itself and cover the costs using
education hospitals tax revenues
ceteris paribus assumption
effect of a change in one of the factors on demand, it is assumed that the other factors remained constant
What is imperative to develop for reducing principal-agent problems?
effective selection procedures and incentive programs
in transfer pricing, divisional goal should be to aim for ________ in order to keep MC low and the price charged by each division at each stage of the production process should represent the
efficiency intermediate product's MC.
Due to increased competition in a monopolistic competitive market, demand for the firm's product or service may become more _______ . The decreased demand will result in the firm selling less ________. As demand ____________and becomes more _________, firms will charge lower prices.
elastic output decreases elastic
demand for a monopolistically competitive firm's products is likely to be relatively _______ as there are ______ close substitutes that buyers can switch to if a particular firm _______ its prices.
elastic many increases
If XEDAB is 1.5, this means that demand is cross price ___________ and the two goods are _____________ . Moreover, a decrease of 10 percent in the price of good B will lead to a(n) ______________ in the demand for good A of ______percent. Demand for a good is likely to be more price elastic if the proportion of income spent on the good is_____________. On the other hand, demand is likely to be more price inelastic in the ________-term.
elastic substitutes decrease 15 large/high short
PES formula answer is called the PES
elasticity coefficient.
peak load pricing strategy acknowledges the importance of price _______ ___ _________ but it is also implemented because at times of peak demand, the firm experiences_________ ______ _____
elasticity of demand higher marginal costs.
Auctions help to reduce (but not ________) some of the uncertainty about price as they are able to provide to the buying firm additional information regarding
eliminate expected prices
predatory pricing could be adopted by an existing large firm that wants to __________ a competitor which can be done by the large firm charging a price
eliminate lower than the competitor's AC.
agent (e.g., ___________ ______________) is someone who acts on behalf of the principal (e.g.,_____________ __________).
employee or manager employing organization
Pure monopolies are rare because it implies that no other firm can_____ ___ _____ to compete. This means that the barriers to entry are very _____ or _________ and that other firms are __________ from entering.
enter the market high or strong blocked
perfectly competitive firm can maximize profits by charging a price that is ___________ to MC (with the condition that___ ___ __________).
equal MC is rising
If a firm wants to maximize sales of output, subject to not making a loss, it will charge a price that is ________
equal to ATC.
IRR means that the investment project is earning just enough to cover the cost of capital since the PV of the future stream of net returns will be
equal to the initial outflow of funds spent on the investment
in prisoners dilemma, every game has an _________ outcome
equilibrium
perfectly competitive firms take the __________ price established in the market (from the market ________ and market ________) as given.
equilibrium demand supply
the increase in demand has led to a new higher
equilibrium price and equilibrium quantity.
_____________________________y in a market are simultaneously determined by demand and supply.
equilibrium price and quantit
The amount demanded and supplied at this price is known as the
equilibrium quantity (Qe).
in regression equation, dependent variable (Y) is the variable that is being
estimated
in regression equation to determine whether a result is statistically significant, you must compare the ____________t-value to a _________t-value in a t-table.
estimated critical
in dominant price leadership, if the leader raises its prices, the other firms
eventually increase their prices as well.
When quantity demanded is greater than quantity supplied, there is _________ demand in the market, resulting in a _________. Sellers see that there is an opportunity to _________________. This ________________ also creates an incentive for them to _________________
excess shortage charge a higher price. higher price increase the quantity supplied.
When quantity supplied is greater than quantity demanded, there is __________ supply in the market resulting in a ______________.
excess surplus
standard deviation reflects the variation of possible outcomes from the _________ ___________and is thus used as an indicator of
expected value absolute risk.
firm usually incurs _____________________ on capital projects in the early periods and the ____________________ tend to be received later and for differing amounts of time periods in the future
expenditures (outflows of funds) revenues (inflow of funds)
managers need to be able to properly assess the true value of the _________________________________ in order to make appropriate decisions regarding which investments to undertake. To be able to do this, managers need to understand the
expenditures and revenues over time time value of money
when the price of a product or service changes, it becomes relatively more _________________________ compared to other products and services and some consumers will
expensive or cheaper substitute the more expensive one with a cheaper one.
Governments can pass anti-trust laws in monopoly markets that prohibit firms from
exploiting consumers by charging very large prices or colluding to reduce competition.
When the price of furniture rises from €200 to €250, the quantity supplied rises from 120 to 150 pieces per month. This is called an ______________________ and is shown by a movement___________________ along the supply curve.
extension of supply up (and to the right)
with negative externalities, if the ________cost to______ _____ can be reduced without necessarily reducing the ________ of the good, then the inefficiency will decrease
external third parties output
inefficiency arises from both people not taking into account __________ benefits but also from a lack of _____________ about the actual private _________ that is obtained from these ________ goods.
external information value merit
Whenever the consumption of a good creates a positive externality, the social benefits includes not only the value of private benefits but also the
external benefits to third parties.
negative externality occurs when the production and/or consumption of a good creates an _________ ______ that spills over to ___ _________ who were not ___________ involved in the production and consumption of that good.
external cost third parties directly
Governments intervene in markets to correct market failures created by
externalities, monopoly power, and missing information
During short run, if a firm wants to increase its output, one of its
factor inputs is fixed in quantity or size and cannot be varied.
Positive economics is about
facts or statements that can be tested.
Induction occurs when economists create theories (general statements about economic behavior) based on
facts which have been determined after the analysis of data.
as new firms enter to compete in perfect, it makes the equilibrium market price ______, shifting each firm's individual demand curve ________ and _____________ the price that each firm can charge.
fall down lowering
quantity demanded for the oligopoly firm that increased prices will , making demand relatively price __________.
fall elastic
in stage 3 of production in the short run, TP begins to _______as MPL becomes _________
fall negative
If supply increases, ceteris paribus, the equilibrium price will ________ and the equilibrium quantity will __________.
fall rise
manager may decide to counter price of competitors with own price cuts, special offers, or increased advertising to avoid the
fall in the demand for your own products.
even though the prices of alcohol and cigarettes have risen considerably over time mainly due to taxes, the quantity demanded for these products has
fallen proportionately less than the increases in price.
as time passes, people can find substitutes and the quantity demanded ________ more in the long-term, making demand_________________-
falls less price inelastic or more price elastic.
in habit or addiction, even when the price rises, the quantity demanded
falls only a little
A .10 significance level means that you can be 10 percent confident that the results obtained from a sample are representative of the statistical population that is being studied. t/f
false
A PED coefficient of -2 indicates that demand is inelastic. t/f
false
A cross elasticity of demand coefficient of 0.8 suggests that the two goods are complements. t/f
false
A rise in the price of a good will lead to an increase in the demand for a complementary good. t/f
false
ATC must be rising if MC is rising. t/f
false
Advances in technology lower costs of production and shift a firm's supply curve to the left. t/f
false
An income elasticity of demand coefficient of 0.8 suggests that: a rise in income of 20% will lead to an increase in demand of 25% t/f
false
An income elasticity of demand coefficient of 0.8 suggests that: demand is income elastic since demand increases by 16% when income rises by 20% t/f
false
An income elasticity of demand coefficient of 0.8 suggests that: the good is an inferior good t/f
false
An increase in the wages of workers will lead to an increase in supply. t/f
false
Cross-sectional data represents information about a variable over a period of time. t/f
false
Crowding out occurs when governments reduce their spending. t/f
false
Demand for a good is likely to be more price inelastic the more substitutes are available. t/f
false
Demand for a good is likely to be more price inelastic when there are many close substitutes. t/f
false
Demand for goods tends to be more elastic in the short run than in the long run. t/f
false
Demand for normal goods is always income elastic. t/f
false
Diseconomies of scale arise from diminishing marginal returns. t/f
false
Economists agree on the effects of minimum wages on unemployment. t/f
false
Fiscal policy is about changing taxes and interest rates. t/f
false
If XED is negative, the goods are inferior goods. t/f
false
If a firm increases all of its inputs by 10 percent and as a result its output increases by 15 percent, this firm would have experienced decreasing returns to scale. t/f
false
If five workers can produce 15 units of output, then the marginal product of labor is three. t/f
false
If the marginal product (MP) of labor is falling, total output (TP) must also be falling. t/f
false
If the market price is above the equilibrium price, there will be excess demand.t/f
false
If the market price is below the equilibrium price, there will be a surplus.t/f
false
If the price of a good rises by 10% and quantity demanded falls by 20%... ... the PED coefficient is -0.5 and demand is relatively price elastic. t/f
false
If the price of a good rises by 10% and quantity demanded falls by 20%... ... the PED coefficient is -0.5 and demand is relatively price inelastic.t/f
false
If the price of a good rises by 10% and quantity demanded falls by 20%... ... the total expenditure of buyers on the good will rise due to the price increase. t/f
false
In a regression equation, the coefficient a represents the value of the independent variable when the dependent variable is zero. t/f
false
In the long run, all factors of production are fixed. y/f
false
In the short run, all costs are fixed. t/f
false
In the short run, all factors of production are variable. t/f
false
MC falls due to diminishing marginal productivity t/f
false
Policy makers mainly look at GDP indicators when making decisions. t/f
false
Sample bias occurs in surveys when survey participants answer questions according to what they think the surveying organization wants to hear.t/f
false
Successful advertising will cause the demand curve for a product to shift to the left. t/f
false
Supply is likely to be more elastic in the short-term than in the long-term. t/f
false
The coefficient of determination (R2) indicates the proportion of variation in the independent variable that is explained by the dependent variable in a regression equation. t/f
false
The market demand is always less than an individual demand. t/f
false
The regression coefficients of the independent variables show the effect of the dependent variable on the independent variables. t/f
false
There is an inverse relationship between price and quantity supplied. t/f
false
There is only one measure of inflation: the CPI. t/f
false
Third-degree price discrimination is an uncommon phenomenon in many countries. t/f
false
This statements is correct based on ceteris paribus assumptions: A decrease in income will cause the demand for inferior goods to fall. t/f
false
This statements is correct based on ceteris paribus assumptions: Coca-Cola and Pepsi cola soft drinks are complementary goods. t/f
false
This statements is correct based on ceteris paribus assumptions: Successful advertising will shift the demand curve for the advertised good to the left.t/f
false
a monopolistically competitive firm is more efficient than a perfectly competitive one t/f
false
all firms charge the same price in an oligopoly market t/f
false
first-degree price discrimination is easy to implement.t/f
false
managers look at only NPV to decide whether they should invest t/f
false
monopolies always make large profits t/f
false
important characteristic of oligopoly markets is that the firms are independent. t/f
false interdependent
_________ and ________ _________ markets are markets that are considered close to being perfectly competitive
farming and foreign exchange
Collusion is easier in markets where there are _____ firms, when the firms in the market face similar _________ ____, and the market is not ___________.
few average costs contestable
in creating economic theories, economists build models that often concentrate on the relationship between a ________________ and assume that other ______________ that may influence the studied relationship do not ________________.
few variables variables change
third conditions to be met for a firm to be able to implement price discrimination
firm must have control over price; that is, it must have market power.
The easier it is for new firms to enter a market, the greater the number of ______ in it and the more ______________ there is between the firms in the industry.
firms competition
important to keep in mind that economists disagree because if___________________________ make decisions that are based on recommendations of a particular economic school of thought or doctrine that is in fact _____________________, then these ___________________________ are less likely utilize their __________ resources properly and efficiently.
firms or governments incorrect firms or governments scarce
degrees of price discrimination:
first degree, second degree, third degree
Aggregate spending in the economy can also be influenced by=
fiscal policy.
In the short run, at least one factor of production is ________ and cannot be ________________________. This means that in the short run, there is at least one
fixed varied in size or quantity. fixed cost.
Two-part tariff is where a firm charges a
fixed access fee plus a usage fee determined by the amount of goods or services consumed.
During stage I, managers would be underutilizing their ____________ and during stage III, they would be operating inefficiently in the sense of not being able to utilize further their________________ while employing additional
fixed inputs fixed capacity variable inputs.
in dominant price leadership, other firms
follow the pricing behavior of the leader.
problem of using regression is incorrectly specifying the _______ of the regression equation. For example, a linear equation may be used when in fact the dependent and independent variables are not _______________ related.
form linearly
In a game with two players and two strategies, there are ____ possible outcomes.
four
issuing authority can either provide tradeable pollution permits to the polluting firms for ________or it can _____them a certain
free charge amount of money for each permit
difficult for private firms to provide public goods profitably due to the
free rider problem
government supplying public goods helps to avoid the market failure that would result from missing markets due to the
free rider problem.
firms such as McDonald's should practice what type of pricing?
full-range pricing
challenge for the managers is to set the prices of all its products in a way that will allow the firm to make large profits in total. Such _________ _________may justify _________ _________ products.
full-range pricing loss leader
A cost function expresses cost as a
function of output.
to calculate Net Present Value, discount all ____ _____ flows to the present and then subtract the
future cash present value of all outflows from the present value of all inflows
To evaluate and compare the relative worth of investment projects, it is preferable to use methods that account for
future cash flows and the time value of money
risk is a risk is a
future event with a measurable probability
uncertainty is a
future event with an indefinable or incalculable probability.
In the long run, perfectly competitive firm's abnormal profits will attract other firms into the industry as their owners and managers will hope to also
gain large profits.
· important to clearly define the
geographic dimension of the market.
individual supply schedule shows the amount of a ________________ that a seller is willing and able to offer for sale at different prices over a __________ in a _______
good or service given period of time given market.
Allocative efficiency exists means that resources in the economy are allocated to the production of ________ buyers want since the value buyers place on the last unit of the _______________ bought (as represented by the _______) is equal to the additional cost to society of producing that last unit (as represented by _________).
goods good/service price MC
Normative economics involves opinions about what the
government "ought to" or "should do" or how the economy "should be."
mainstream economists also argue increased___________________________________________ will result in higher__________________________________ and the government's ensuing ______________________ will drive up ________________________ and crowd out (reduce) ________________________________________, thus reducing the effectiveness of the
government spending and/or lower taxes budget deficits borrowing interest rates private sector household and business spending expansionary fiscal policy.
· Fiscal policy is the
government's policy with respect to government spending and taxation.
demand curve is a
graphical representation of the relationship between price and quantity demanded.
As long as the MR of an additional unit of output is _________ than the MC associated with producing and selling that unit, a firm can increase its profits by producing more.
greater
In imperfectly competitive markets, profit maximizing firms charge a price that is _________ than MC and thus there is ___________ inefficiency.
greater allocative
If a certain percentage change in price leads to a greater percentage change in quantity supplied, the PES coefficient will be __________________ and supply is said to be
greater than one price elastic.
government could pass regulations or set maximum levels and c
harge fines to those firms that exceed the maximum levels
Which of the following statements is incorrect? The standard deviation from the expected NPV of two projects with different expected net present values is a measure of relative risk. Calculating the expected NPV of an investment project is one way to account for risk in capital budgeting. The coefficient of variation can be used to compare the relative risk of two investment projects with different expected net present values. The difference between risk and uncertainty is that the probability of a risky event occurring is known
he standard deviation from the expected NPV of two projects with different expected net present values is a measure of relative risk.
Economic indicators reflect the
health of the economy.
All but classical, new classical, neo-classical, and Austrian economic schools of thoughts are classified as
heterodox
for many mainstream economists, a common conclusion is that
heterodox thinking lacks credibility because it is often based on a non-scientific methodological approach that does not use mathematical equilibrium optimization models.
Critics argue that instead of acting rationally, managers make decisions based on
heuristics and gut feelings.
some firms may be so large that they dominate the market and are able to charge _____ prices and earn _______ profits. In such markets, these large firms are said to have __________ power. That is, they are price __________ not price _______.
high abnormal monopoly makers takers
strategy of setting high prices can be effective in raising firms' profits only if barriers to entry are ________ and new firms _______enter and ____________the existing firms.
high cannot underprice
Examples of barriers to entry include
high capital costs, legal barriers, patents, strong brand reputation of existing firms, and ownership of scarce resources.
managers may decrease the quantity of stock for products that have a
high income elasticity of demand.
After some time, competing firms will not find it acceptable to continue to charge low prices and they may agree to cooperate to both charge ________________________________. This would result in _______________
high prices in order to make higher profits cooperative equilibrium
Heterodox economists argue countries that have low inflation and sound fiscal finances continue to have relatively
high unemployment rates.
it is possible that the NPV may be higher for one product, but the IRR may be _________for the other product.
higher
A shift to the right in the demand curve indicates that at any given price demand will be __________. A shift to the left indicates that at any given price demand will be __________
higher lower
If the NPV is positive (i.e., greater than zero), the IRR will be __________than the opportunity cost of the capital and the recommendation is that the investment project should
higher be undertaken
Organizational slack means that costs are _____________ than what they should be due to various reasons such as the ____________ of more workers than actually needed, salaries being ________ than what employees are willing to work for, and inadequate control or oversight of___________ ___________. Other causes include extravagant ___________ by top managers. Such inefficiencies were present in the past in state monopolies as all costs and any losses were covered by_______ ________.
higher employment higher production processes spending tax revenues
According to the IRR method, a firm should prefer to invest its funds in projects that have a _________IRR if the IRR is _________than the firm's
higher greater opportunity cost of capital (i.e., the discount rate).
Although total cost is __________due to the employment of specialist managers and the salaries that have to be paid, managerial decision-making is ___________and the increased productivity and added value created by these specialized managers outweighs the
higher improved added cost and average costs fall.
In contrast to perfect competition, a monopoly charges a ______________ price and produces _________ output resulting in economic ________________.
higher less inefficiency
Predatory pricing will be more effective if firm is able to charge a price that is _________ than its own AC but __________than the rival firm's AC
higher lower
Second-degree price discrimination occurs when a firm charges a ________ price for a given level of the first units purchased, then a _________ price for a given amount of additional units, and so on.
higher lower
prestige pricing idea is that buyers will be willing to pay a ________ price for a product or service if they believe that it bestows upon them some level of __________
higher prestige
it is useful to carry out a sensitivity analysis by creating two more forecasts: an optimistic one to reflect_________________________and a pessimistic one to reflect
higher future cash inflows lower than expected cash inflows
peak-load pricing is where customers are charged
higher price during peak demand (e.g., during rush hours or business hours) and a lower price at off-peak times (e.g., in the evenings).
Prestige pricing occurs when a firm charges a
higher price for a product or service as buyers believe that the product or service conveys some level of prestige.
increase in income and resulting increase in demand that has led to the
higher price.
the demand curve facing monopolistically competitive firms is _____________ elastic but not __________elastic as is the case with perfectly competitive firms.
highly perfectly
managers also face asymmetric information problems when deciding who to ________ and how to ____________ their employees
hire compensate
probabilities may be based on _______ ________/_______of future events based on various _______________ and _____________indicators.
historical data and/or expectations macroeconomic and industrial
in perfectly competitive market, products/services produced and sold by each firm are __________________ and perfect _______________ for the products/services sold by the other firms.
homogeneous substitutes
income elasticity of demand (YED) is
how much demand changes when income changes
Price elasticity of supply (PES) measures.
how much the quantity supplied of a good changes when its price changes
key to understanding basic economic problem is the idea that
humans always want to have more than what they currently have.
Economists also use the deductive approach whereby
hypotheses are made, tested, and then rejected or accepted based on quantitative analyses of data.
Heteroscedasticity is the problem that arises
if the variance of the random error is not constant and changes over time, leading to prediction errors due to repeated overestimations or underestimations.
Asymmetric information refers to the situation under
imperfect competition where at least one party in an economic transaction has more information than the other party.
economic costs of production include not only the explicit costs but also the ____________________ costs of the resources.
implicit (opportunity)
Which of the following is not a problem that the government faces when trying to correct market failure? --lack of adequate information regarding the size of external benefits --cost of monitoring firms' compliance with regulations --lack of adequate information regarding the size of external costs --inability to prevent people from benefitting from the public goods it provides
inability to prevent people from benefitting from the public goods it provides
One of the reasons a loss can happen was the state firms did not have an __________ to produce efficiently due to a lack of _____________, leading to
incentive competition organizational slack (X - inefficiency).
principal-agent problem occurs when the employee or manager (agent) has an _____ ____ ___ _____ in the best interests of the ______. (principal)
incentive not to behave employer
equilibrium is a stable equilibrium when players adopt the strategy that is best for them, and therefore they do not have an _______________________
incentive to change it.
If a firm is able to produce different types of products using its facilities and inputs, it will have an
incentive to produce more of the products that are in high demand and can be sold at a higher price.
Pollution taxes create ___________ for firms to find ways to reduce the amount of pollution they emit
incentives
governmental regulations creates ___________for firms to try to avoid the fine
incentives
important for managers to be aware of the__________________ of demand for the ________________ that they sell
income elasticities products
answer derived from Income elasticity of demand (YED) equation is called the
income elasticity of demand coefficient.
managers may decide to diversify by selling products/services for which demand is__________________-
income inelastic.
two other factors that influence demand are
income levels and expectations.
if any of the other determinants of demand change (e.g., income, tastes and preferences, expectations, number of buyers) then there will be a __________of the demand curve either to the ________ or to the _____
income, tastes and preferences, expectations, number of buyers shift right left
If the prices of raw materials and other inputs (e.g., wages of workers, electricity) rise, this will __________ the firm's cost of production.
increase
Increased awareness of global warming and environmental problems may cause the demand for hybrid cars to ________, shifting the _________curve to the _________. This will cause the equilibrium price and equilibrium quantity for hybrid cars to ___________.
increase demand right increase
If more firms enter the industry to produce and compete, the market supply is likely to _________, shifting the supply curve to the ______.
increase right
Changes in Non-Price Determinants of Supply Favorable weather (agriculture) Decrease in input costs (raw materials, electricity, rent, and wages) Advances in technology Decrease in indirect taxes Increase in gov subsidies Increase in number of sellers Business managers expect prices to fall in the future and want to sell more now Decrease in price of other products the firm sells effect on supply:______________ direction of supply curve:____________ Effect on Pe and Qe:______________
increase right rise
The Changes in Non-Price Determinants of Demand are as follows: Successful advertising Change in tastes and preferences in favor of good Increase in income (effect on normal goods) Increase in the price of substitute goods Increase in the number of potential buyes Consumers become more optimistic regarding the future state of the economy or they expect prices to rise in the future Effect on demand:______________ Direction of the demand curve shift:_________ Effect on Pe and Qe:________ If any of the above non-price determinants changes in the opposite way, then demand will ___________ and the demand curve will shift to the ________. This will cause Pe and Qe to _________.
increase right rise decrease left decrease
central bank selling securities to commercial banks or the general public can also ___________ the discount rate making it more ______________ for commercial banks to borrow from the _________________ which in turn reduces
increase expensive central bank commercial bank lending
technology caused increases in productivity will allow firms to _______their supply and the supply curve will shift to the ______. Similarly, subsidies given by the government to firms also help to
increase right reduce costs and increase supply.
Supply-side policies aim to
increase aggregate supply by increasing efficiency in the product and resource markets.
alternative approach to promoting economic growth is to
increase aggregate supply.
If price rises, a firm can________________ by drawing from its existing stock inventory
increase its quantity supplied
Loose (easy) or expansionary monetary policy aims to
increase or accommodate aggregate spending in the economy by increasing the money supply and keeping interest rates low or decreasing them.
amount of the subsidy or tax deduction provided to buyers must be large enough to
increase the MPB (demand) curve of the buyers up to the point where MSB =MSC
managers of the dominant and competing firms may engage in collusive behavior to
increase their profits.
If the level of income rises, demand for most goods ________________ and if income falls, demand .· Such goods and services are known as __________________ goods.
increases decreases normal
Expansionary fiscal policy occurs when the government
increases its spending and/or decreases taxes.
fixed costs remain the same whether output
increases or decreases.
If the demand for a good is price inelastic, a seller can increase its revenue by ________________ the price of this good. If PED is -0.4, an increase in price of 10 percent will lead to a _____________in quantity demanded of ________percent. If YED is 0.8, this means that the good is ____________ and that an increase in income of _______percent will lead to a(n) _________ in demand of 16 percent.
increasing decrease four normal 20 increase
In contrast to a cubic function which represents a situation where ___________ marginal returns are followed by _________marginal returns, a quadratic function can be used to represent a situation where there are
increasing diminishing no increasing returns but rather diminishing returns occur immediately as variable inputs are increased.
cubic production function exhibits both
increasing and diminishing marginal returns
In the short run, as firms try to increase output by using more labor, they initially experience
increasing marginal returns to labor.
To make optimal decisions, managers must compare the potential __________________________ of a specific course of action with the ________________
incremental benefits incremental costs.
Relevant costs are the ___________________of a decision.
incremental costs (both explicit and implicit)
When this happens, it is difficult to know which of the related ______________ variables is actually affecting the _________________ variable.
independent dependent
Monopolistically competitive firms act _______________of each other's behavior, meaning the firm will not respond to the behavior of_________ _________ ____________ firm in the market.
independently every single competing
One potential buyer's demand for a particular product is an example of
individual demand.
One firm's supply of a particular product is an example of
individual supply.
demand curve facing the pure monopoly is the ____________ demand curve and it is ________.
industry steeper
Negative externalities are a form of
inefficiency.
common economic view is that markets are ___________________________ and they do not ____________________ themselves and thus governments need to intervene to correct ________________________ arising from imperfect __________________________________________
inefficient correct market failures competition and information.
markets for example defense and street lighting would be missing and this would be an example of an
inefficient allocation of resources and a market failure.
in cost plus pricing, mark-ups tend to be higher when the demand for the products is relatively price _______ and lower when the demand is price ________.
inelastic elastic
Since demand for oil tends to be price _________, total revenue for the oil exporting countries rises when price _______ceteris paribus.
inelastic rises
if the products cannot be stored for a long time, e.g., fruits and vegetables, then the supply is likely to be relatively price _________, at least in the _____-term.
inelastic short
short-term supply tends to be ___________but in the long-term, supply becomes more price ____________.
inelastic elastic
Demand for a pure monopoly's product or service is likely to be relatively _________ as there are ____ close substitutes for consumers to switch to if the monopoly charges ________ prices.
inelastic no high
If a certain good has a negative income elasticity of demand, then you can infer that it is an _____________ good since the demand for ______________ goods is inversely related to the level of ____________.
inferior inferior income
what may be an _________________ good for some people may be a normal ____________ good for others.
inferior preferred
economic indicators include
inflation indicators, labor market indicators, government finances, and surveys.
Under conditions of perfect competition, it is assumed that buyers and firms have perfect ________________.
information
Managers must create procedures that will allow them to obtain and analyze ____________in a ________-effective way.
information cost
Time series data represents
information about a variable over a period of time.
Cross-sectional data is
information obtained about variables for a specific time period
main purposes of learning about managerial economics is to improve your understanding of important economic concepts so that as a manager you can make
informed decisions that will be beneficial for the company that you own or work for.
in transfer pricing, product produced by one division may become the ______ for another division and if each divisional manager sets prices that will increase the profits of his or her division, the costs will be _________and the final product price will be .
input high high
Managers of firms may be worried about what is the best price that they should pay to acquire ________ or for the __________ of a project.
inputs completion
Production is a process during which _________ such as raw materials are transformed into ________ using other ________ such as labor, land, and _________ such as machines, tools, factories, and offices.
inputs output inputs capital goods
The production function shows the relationship between ______________. it shows the _________________that can be produced within a given time period, using a given combination of ________ and level of ________________.
inputs and output. maximum level of output inputs technology
according to the kinked-demand curve model, firms in an oligopoly market due to their __________________ will be reluctant to change prices and prices will tend to be _______, meaning that they do not __________often.
interdependence sticky change
for heterodox economists, increases in ______________ rates will not have a noticeable _________________ effect.
interest crowding out
managers may choose not to undertake an investment if it has a small NPV because they may fear the possibility of a rise in ________ ______ which will _______the NPV and possibly make it
interest rates lower negative
IRR method assumes reinvestment at the
internal rate of return.
To reduce negative externality inefficiency, the external cost needs to be _______________so that the parties directly involved bear the whole _____. This would _________the price of the good and demand and output would _____________to the point where MSB =MSC.
internalized MSC increase decrease
The tax raises the firm's cost of production, thus
internalizing the external cost
important to keep in mind that economists disagree because differences reflect the varying _______________________ of how an economy works as well as the nature and causes of its ___________________ and in turn point to differing __________________________________ that are or should be recommended
interpretations problems strategies and policies
the company Apple uses what type of pricing strategy?
intertemporal pricing
For certain goods, as income increases, some people may buy less, i.e., there is an
inverse relationship between income and demand.
If managers are optimistic regarding the future, they will be willing to
invest to expand and produce more.
If managers are pessimistic regarding the future, they may choose to cut back on ___________________ and begin to produce less to avoid large unwanted
investment spending stock levels.
To reduce the problem of moral hazard, banks may also approve a loan but only make the funds available upon the borrower presenting an _________ related to the
invoice purpose of the loan.
How can governments correct the market failure associated with negative externalities? --deregulating markets --issuing tradeable pollution permits --providing subsidies to sellers to produce more --providing subsidies to buyers
issuing tradeable pollution permits
According to the____________ curve model, ___________ firms will be less likely to engage in _________competition.
kinked-demand oligopoly price
The dominant price leadership model suggests that the behavior of the firms in the market will be exactly opposite of that of the
kinked-demand curve.
Since all firms will have increased prices in dominant price leadership, customers will
l still buy from the firms if they are not able to find close substitutes.
The government can also provide information such as the availability of jobs in different geographic regions in order to reduce
labor market failure due to unemployment
Due to _________ barriers to entry, monopoly firms may be able to continue to earn ___________ profits even in the _______ run.
large abnormal long
organizational slack can also exist in ________ private companies that make ______profits.
large large
natural monopoly is one in which the internal economies of scale are very __________ and extend over a ______ range of _______, so _______ that not even one firm satisfying the whole market demand produces and sells enough to be able to experience all ___________ _________ ______ ________
large large range of output large internal economies of scale.
in perfectly competitive market, there is a very ________ number of small firms, each producing a very ________amount of the total market output.
large small
long run-Research and development economies may arise as
large firms spread the cost of R&D over a greater level of output.
Firms will want to include clauses regarding penalties for________ ________ of the project, but contractors may also want to have a ___________ contract to cover __________ costs
late completion cost-plus unexpected
Both the income and substitution effects help to support the
law of demand.
Usually, for a pure monopoly to exist, there must be a _________ barrier that prevents other firms from registering and competing in the market. This is the case in some countries with the _____________ industry, where only one firm is allowed to provide _______________to a specific region.
legal electricity electricity
To maximize profits at lower price in perfect competition, the firms have to produce or sell _________ at an output level where the new lower price is equal to ____.
less MC
Oligopoly markets tend to be _______ contestable due to barriers to entry, and they also have _____ firms. For these reasons, ________ is more likely to occur in an oligopoly market than in _________ _______ markets where there are many firms each acting independently.
less fewer collusion monopolistically competitive
To the extent that the firm has limited resources, ______resources will be left to produce other products and this will __________the MC for these other products and their prices. This will affect the sales and ______ of product and the ___________of the whole organization.
less increase revenue profitability
In time value of money, a given amount of money in the future is worth ________ than the _________amount today
less same
demand for certain products is also influenced by potential buyers'
levels of income.
Governments can_______ ________ on environmentally damaging activities that create external costs.
levy taxes
Mainstream economics is in favor of
limited government intervention in the economy.
regression equation may be a
linear equation, a quadratic one, or even an exponential one.
English auction is also used in __________ sales of houses and other ___ ______
liquidation real estate
long run-Financial economies may arise if a large firm is able to obtain a
loan at a lower interest rate because it is considered a less risky borrower compared to smaller firms.
Internal economies of scale occur when a firm's
long run average cost (LRAC) falls as output increases
Marketing economies may arise due to
long run-lower average advertising costs.
As new firms enter the monopolistic competitive market, existing firms begin to _______ some of their customers and the demand for their product or service begins to ___________. This will cause the demand curve to shift to the ________.
lose decrease left
If the managers of small oligopoly firms know that all firms in the market will follow the leader's pricing strategies, they will not worry about ________ _______ ________if, for instance, the leader increases prices.
losing many customers
monopolistic competitive firms will continue to exit in the long run if they are making _________. As this happens, demand for remaining firms' products will __________, allowing these firms to ___________their prices. The new ____________prices will allow the surviving firms to make a ___________ profit
losses increase increase higher normal
Although monopoly firms often do make large profits, they can also make ____________. monopoly may also make a _______if it is not producing as __________as possible or it other countries made __________.
losses loss efficiently losses
if firms in a monopolistically competitive market are making ________ in the short run because the price they can charge is __________than the ATC, in the long run, some firms will begin to _________the market.
losses lower exit
predatory pricing may cause the firm engaging in this pricing strategy to make _________ even if only in the ______ run.
losses short
Although producer surplus for the firm increased, part of producer surplus that existed has been ______. part of the consumer surplus that existed has not been t________________________ but rather has also been lost. These losses represent a __________________ _____________ loss to society resulting from the existence of the monopoly.
lost ransferred to the monopoly deadweight welfare
Heterodox economists argue that even if the central bank adopts an accommodative monetary policy stance during a recession,
low interest rates will not suffice to adequately stimulate spending to create jobs.
negative externalities results in MPC being __________ than MSC, which in turn results in ____________prices and output levels that are more than socially optimal
lower lower
If the NPV is negative, the IRR will be ____________than the cost of capital and the investment project should be rejected
lower be rejected
limit pricing price is likely to be __________than new firm's AC but ____________than the existing firm's AC, allowing the latter to make __________profits
lower higher abnormal
in cost plus pricing, if demand decreases, firms _______ the mark-up and when demand rises and is high, firms ___________ the mark-up.
lower increase
As a result negative externalities, the MPC is ________than the MSC and the price charged for the good is _______than that which would reflect the ______cost to society of producing and consuming the good. This _________price in turn encourages greater
lower lower true lower demand and output.
According to kinked demand curve model, if an oligopoly firm were to lower its price to attract more customers, competing firms in the market will __________ their prices to retain their ______ _________ Hence, the increase in quantity demanded arising from the lower prices will be _________, essentially making demand relatively price ____________.
lower market share. small inelastic
in transfer pricing, if costs and product price are high, this may result in ________profits for the organization as a whole, preventing the organization from __________its profits
lower maximizing
To avoid such surpluses (and the associated costs of storage), firms will _____________their prices.This will result in a _______in quantity demanded. The lower price also reduces firms' _________to produce and quantity supplied .
lower rise incentive falls
managers understanding the perspective of the banks and insurance companies helps them undertake practices that will help them have better working relationships with these institutions and be charged________ __________and ____________ by reducing concerns regarding _______ _________and __________ _________
lower fees premiums adverse selection and moral hazard
In most cases, for a firm to sell more, it must
lower its price.
why does third-degree price discrimination work in Fares/tickets for travel priced differently for adults and children?
lower prices for children's tickets to make it more affordable for parents. By engaging in this type of pricing, the seller is able to earn more sales revenue and profits
The lower costs subsidies provide allow the firms to
lower their prices
even when oligopoly firms agree to collude, there is always the incentive to cheat by _______ ________ which would increase the cheating firm's _________ ____ _______ at the expense of its rivals.
lowering prices sales and profits
if monopolistic competitive firm has truly distinguished itself, it will have created _________________________ In such cases, the firm will be able to charge a price that is above its _______and still remain profitable
loyal customers who are willing to pay a slightly higher price. ATC
Superior goods are
luxury items that have an income elasticity of demand greater than one
____________________________ objectives that are most commonly pursued today by governments in the Western world
macroeconomic
many economists disagree on what ______________________________ objectives governments should concentrate on pursuing, which __________________ are most effective in attaining their chosen ________________, and what are the __________________________________ of their chosen policies.
macroeconomic policies objectives consequences
future cash inflows may not be known with certainty since future streams of income depend on a number of factors that the firm may not be able to predict or forecast with certainty such as ________________ __________ ______________, all which could affect the future demand and sales revenue.
macroeconomic conditions domestically and abroad, changes in consumer preferences, and changes in input prices
· fluctuations represent a form of
macroeconomic instability
Large fluctuations in the economic indicators contribute to, and reflect,
macroeconomic instability which ultimately hurt businesses, households, and the economy.
The inflation rate in Germany is lower than in the US. This statement pertains mainly to microeconomics or macroeconomics?
macroeconomics
Most economic departments in universities in the Western world and particularly in the US teach and promote the virtues of ____________________ thinking
mainstream
One approach to distinguish between the various schools is to categorize them as representing either the ___________________ or ______________________ (non-conforming or unorthodox) economic views.
mainstream heterodox
managers need to make decisions that will _______________________ of the firms that they work for.
maintain, increase, or even maximize the profitability
Managers want to be able to estimate the demand for their products/services in order to______________________Economists often use _______________________ to estimate the demand for a product.
make appropriate decisions. regression analysis
managers must have a good understanding of the macroeconomic environment if they wish to
make informed decisions that will benefit their organizations.
Firms with market power are price ____________. The greater the market power, the more ____________the demand curve facing a firm.
makers inelastic
managerial economics involves normative issues such as
managers deciding which goals a firm should pursue
Why would the smaller oligopoly firms be willing to follow the pricing behavior of the leader?
managers don't worry about losing customers due to all firms raising/lowering prices
profit maximizing level of output of Q where MR = MC, the firm charges a price that is greater than _________ cost, resulting in allocative _____________ (since P > MC).
marginal inefficiency
making optimal decisions involves a comparison of the_____________________ benefits and ___________________ of a decision with the optimum being obtained at the level where the
marginal (additional) marginal costs two are equal.
Perfectly competitive firms demand curve values MC=
marginal cost
amount of subsidy provided to the private firm must be large enough to lower the price to the level which will result in the
marginal private costs to the firm being equal to the MSB.
Perfectly competitive firms demand curve values MR=
marginal revenue
if seller could practice 1st degree price discrimination, price would become equal to _________ ________ and the firm would produce up to the output level where price equaled __________ ____because then ____=______ and the firm would maximize profit results in _____ consumer surplus
marginal revenue marginal cost MR = MC zero
At the profit maximizing level of output, the____________ ________ of the last unit sold is equal to the ____________ ___________ of selling that last unit.
marginal revenue (MR) marginal cost (MC)
resources are allocated efficiently when the _________ _______ ______ of producing and consuming a good or service equal the ________ _______ ______ of producing and consuming the good or service.
marginal social benefits (MSB) marginal social costs (MSC)
In a free market, without government intervention, prices are determined by the
market (price) mechanism, i.e., the market forces of demand and supply.
The quantity of a good or service that is demanded differs according to how the
market is geographically defined
Market structure concerns the characteristics that a
market or industry has.
perfectly competitive firms have no
market power.
Survey data should be collected from a representative sample of the appropriate______________________ to avoid sample _______.
market segment bias
Mainstream economics promotes the idea that
markets by themselves can correct any imbalances and that government intervention creates inefficiencies.
Neoclassical economics assumes that firms aim to
maximize profits
Critics argue that most business managers do not aim to
maximize profits.
Auctions help sellers obtain the ________ price for their products which is advantageous for the selling firms but does reduce buyers'
maximum consumer surplus.
to implement 1st degree price discrimination, seller would have to know the __________ price that a buyer is willing to pay for each additional unit demanded and all other potential sellers must not be willing to charge the potential buyer a price lower than the __________ price the buyer is willing to pay
maximum lower maximum
The total amount of pollution allowed by the total amount of pollution permits is set equal to the
maximum amount of pollution that is socially optimal.
in tradeable pollution permits, government still the challenge of having to correctly determine the
maximum amount of pollution that will result in MSB =MSC.
Education and health care are considered to be ________ goods
merit
consumption of _________ __________ creates positive externalities, and positive ___________effects that extend to third parties
merit goods spillover
Managerial economics makes considerable use of ____________________________ analysis as it helps managers develop a better understanding of their
microeconomic pricing and output strategies and the potential resulting impact on costs, demand, revenues, and profits.
McDonald's has increased the wages of its workers. Starbucks closed 1,000 stores in the last five years These are examples of
microeconomic statements
for heterodox economists, expansionary fiscal policy effects will help to
minimize the increases in the budget deficit.
If ATC is not at a _____________ at the profit maximizing level of output there is productive inefficiency.
minimum
in the long run, a firm produces a level of output at which P =________________ This means that the firm is ________________ ______________________t
minimum ATC. productively efficient
Normal profit is the
minimum amount of profit that a person is willing to earn to remain in business.
Producer surplus is the difference between the
minimum price that a firm is willing to sell each additional unit of output (represented by the MC curve) and the price that it actually receives
If a firm were to pursue sales maximization, it would likely be subject to a
minimum profit constraint.
main policies that are used to attain the macroeconomic objectives today are
monetary policy, fiscal policy, and supply-side policies.
collusion is more likely to occur when the competing firms are able to
monitor the behavior of each other at low costs.
Imperfectly competitive markets, such as markets characterized by __________ competition and _________, do not have perfect information and obtaining information is not without a ________
monopolistic oligopoly cost
markets may vary between countries and what may be an oligopoly in one market may be _____________ in another.
monopolistically competitive
Barriers to entry are weak in ____________________ markets but high in ____________ and _____________markets. ____________competitive firms are both __________ and productively efficient.
monopolistically competitive oligopolistic monopoly Perfectly allocatively
In the real world, most markets are either
monopolistically competitive or oligopolistic
due to the level of competition in the market, a monopolistically competitive firm theoretically will charge a lower price compared to a _________________firm.
monopoly
When an oligopoly firm lowers its price but demand is price inelastic, although it will sell ________, its total revenue from sales will _________.
more decrease
In time value of money, a certain amount of money today is worth _________than the ________amount of money in the future
more same
At any given price, sellers will be willing and able to offer___________ or they will be willing and able to supply the ____________ as before but at a ___________ price.
more for sale same quantity lower
Which schools of economic thoughts are classified as heterodox?
most all other schools of thought not mainstream (Keynesian, new Keynesian, post Keynesian, institutional, evolutionary, radical, Marxist, feminist, and behavioral.)
Cross price elasticity of demand (XED) measures how
much the demand for one product/service changes when the price of another product/service changes.
Price elasticity of demand (PED) measures how
much the quantity demanded for a good changes when its price changes
Total revenue (TR) is calculated by
multiplying the number of units sold by the price of each unit. TR=Q·P
managers need to be aware that the NPV and IRR methods may not provide the same conclusion for __________ __________ or alternative _________________ projects as the _________ cost of the investment differs and/or the size of the future_________ ________ differ
mutually exclusive investment initial cash inflows
Economists argue that all resources (_______________________________________) are _____________ in comparison to society's infinite __________.
natural resources, human resources, and capital goods made by humans limited wants
mainstream economists argue that expansionary fiscal policy can i__________________________ only in the short-term because such a policy will lead to _____________________________ in the long-term that will cause _________________________ in the economy to return to its pre-____________________________ level.
ncrease aggregate expenditure higher inflation rates aggregate output expansionary
if PI <1, then the NPV is .
negative
if the future cash flow turns out to be smaller than expected, a small positive NPV could become
negative
If total cost is greater than total revenue, a firm earns
negative profits or, in other words, it makes a loss.
problem of negative externalities is not the amount of the good that is being produced and consumed but rather the amount of if the external cost to third parties can be reduced without necessarily reducing the output of the good, then the inefficiency will decrease
negative spillover effects that the production and/or consumption of the good creates
When quantity demanded is equal to quantity supplied, there is
neither excess supply nor excess demand.
to calculate the net present value (NPV) of a project, you must calculate the future__ ____ flows (_______ _____ _____) and _______ them to the present
net cash revenues minus costs discount
To account for risk in capital budgeting, we need to calculate the expected ________________ using the expected values of
net present value future cash flows
Two methods that discount future cash flows to present values are the
net present value (NPV) internal rate of return (IRR)
If MSB greater than the MSC --there will be a
net value gain for society of producing additional units
In perfectly competitive markets, there are ____barriers to entry, there are _______ small firms that produce __________ goods that are ________ substitutes, and, as a result, the firms are price _____
no many homogeneous perfect takers
in perfect competition, new firms can enter the industry since there are ___ __________ to entry.
no barriers
In a perfectly competitive market, there are___ ___________ that make it __________ for new firms to enter into the industry
no barriers difficult
Productive and allocative efficiency exist only under conditions of perfect (pure) competition where there are________ to entry and there are many ________ firms selling a ________________product or service, none of which have any_______ _______r or control over ______.
no barriers small homogeneous market power price
heterodox
non-conforming or unorthodox
prisoners' dilemma is a__________________, _______________ game
non-cooperative, non-zero-sum
The prisoners' dilemma is an example of which of the following? non-cooperative, non-zero-sum game unstable equilibrium non-cooperative, zero-sum game cooperative, zero-sum game
non-cooperative, non-zero-sum game
Public goods have two characteristics:
non-excludability and non-rivalry in consumption.
Although monopolistically competitive firms do compete on price, they also engage in ________________ __________ to differentiate their products or services from those of their competitors.
non-price competition
other factors that influence supply, beyond the price of the good/service itself, are known as
non-price determinants of supply.
in regression equation, random term is assumed to have a
normal distribution, a zero mean, and a constant variance, and independent of everything else
The government should spend more on education. example of....
normative statement
If the NPV is negative, the cost of capital will
not be covered and the firm should not undertake the investment.
If an oligopoly firm were to increase its prices, the kinked-demand curve model says competing firms will _____ ___________their prices in hope of luring customers with their __________ prices away from the competitor that ___________ prices.
not increase lower increased
Heterodox economists argue that concentrating primarily on keeping inflation and fiscal deficits low will
not necessarily lead to high growth rates and falling unemployment.
If a firm lowers its price to sell more and as a result the MR becomes negative, then the firm should
not produce and sell that additional unit.
If the production and sale of an additional unit of output creates additional costs (MC) that are greater than the additional revenues (MR), the firm should
not produce the additional unit because it will decrease its profits.
· List five supply-side policies
o a decrease in income tax rates to create incentives to work more o abolition or decrease in minimum wages o reduction in size and duration of unemployment benefits o increased spending on training and education o incentives (such as tax breaks or subsidies) to encourage investment in R&D
Identify five different types of economic indicators.
o labor market conditions such as the unemployment rate o inflation rate o economic growth rate (% change in real GDP) o key expenditure such as construction spending o •manufacturing/industrial production
Examples of supply-side policies include:
o lowering size and duration of unemployment benefits to create greater incentives for unemployed to search for jobs o reducing or abolishing minimum wages to create greater incentives for employers to hire workers, particularly young, unskilled workers o reducing marginal income tax rates to create incentives for workers to work more hours o reducing trade union power o making info about jobs more accessible for unemployed o increasing competition in product markets
macroeconomic objectives that are most commonly pursued today by governments in the Western world aim to achieve the following macroeconomic goals:
o sustainable economic growth o price stability (low inflation) o full employment (low unemployment) o balance of payments equilibrium o sustainable national debt (including low budget deficits) o more equitable distribution of income
What can a manager do to minimize negative impact and perhaps even make decisions that will allow their company to benefit from a recession?
o understand terminology used to describe macroeconomic conditions o . look for signs that suggest economy is or will be changing
firms may find it difficult to provide certain goods profitably if they cannot________ ________ from those who benefit from these goods.
obtain payments
criticisms of the scientific methodological approach used by many economists is that it is
often difficult to realistically model the economy and the behavior of its economic agents using structural equations and optimization theory
the US brewery industry has over 350 companies producing beer but the four largest breweries produce close to 90 % of the output. This is what kind of market?
oligopoly
the grocery store market. is what type of market?
oligopoly
game theory is often used to understand the potential behavior of firms operating in an _________________due to mutual _____________ between firms
oligopoly interdependence
Non-excludability means that
once a good or service has been provided, it is difficult or too costly to exclude non-payers from benefiting from the good or service
When the absolute value of the PED coefficient is greater than ____, it must be true that the percentage change in quantity demanded is ______________ than the percentage change in price.
one greater
pure monopoly exists when there is _____ firm in the industry due to _____ barriers to entry
one high
In pure monopoly industries, there is _____ firm that has strong_________ ______ and can earn______ _________ profits.
one market power large abnormal
banking industry may show barometric price leadership by
one firm cutting interest rates and others follow another firm change interest rate and others follow
The kinked-demand curve does not explain why (2 things)
one firm may be charging a smaller or larger price than other firms oligopoly firm may not choose to lower its price when one of its competitors does so.
zero-sum game occurs when
one player's loss is the other player's gain and vice versa.
In regression equation, each beta coefficient indicates how much the demand will change due to a
one unit change in each of the explanatory variables.
pure monopoly exists when there is ____ ____ _____-in the industry. This means there are__ _____ firms that sell the product or service.
only one firm no other
Traditional monetary policy tools include
open market operations (OMO) that involve the buying and selling of securities, changing the discount rate (i.e., the rate at which commercial banks can borrow o from the central bank), changing the reserve ratio (i.e., the percentage of deposits that must be held as reserves by the commercial banks).
normal profit represents the _____________ costs of the resources employed in the business including the ___________amount that the person could earn using his human capital elsewhere.
opportunity minimum
The incremental costs include the_____________ and thus all _________costs of a decision.
opportunity cost implicit
Discount rate represents the
opportunity cost of using the funds for the investment
In the real world, various non-price determinants of demand and supply may be changing at the same time, creating
opposing effects on the market price and/or equilibrium quantity
idea of __________________ is characteristic of many economic models whereby the economic agent (_______________________________) aims to maximize ________________________________ respectively, subject to certain constraints.
optimization household, firm, or government utility, profits, or social welfare
managers can______________________________________ to minimize the potential negative effects of the business cycle, specifically, _________________.
organize their firms' business activities recessions
in barometric price leadership there is no guarantee that
other firms will follow what one firm has done
variable costs are incurred only when the business produces
output
If the regulations are too strict, __________ will fall to a level where MSB is greater than MSC and firms and their customers will have been _____________ affected more than is _________ ________
output negatively socially efficient
Minimum profit constraint means firm would increase its ____________ as much as possible and up to the point where it would still be able to earn a certain level of _________ that had been previously determined as the
output profit minimum acceptable level.
To correct the market failure of positive externalities, _________ ________ ______________ needs to increase.
output and consumption
Sales maximization involves selling as much
output as possible without making a loss.
in long run, firm will experience increasing returns to scale if its
output increases proportionately more than its inputs.
Since fixed costs do not change, only variable costs change as
output increases.
if the external cost to third parties can't be reduced without necessarily reducing the output of the good, then an alternative way to reduce the inefficiency is to reduce the amount of
output of the good that is creating the external cost.
In the case of negative externalities, there is an ___________________ of resources and an ______________of goods
over allocation overconsumption
Collusion can be ________ (formal and known), taking the form of a _______, or ___________(tacit).
overt cartel covert
not all economists describe and explain their
own school's theories in the same way.
Firms in the private sector exist to make profits for their
owners
Implicit costs are not actually __________but represent the _____________ of resources used.
paid opportunity cost
in prisoners dilemma, _____ ______ shows the various _______ for each player (e.g., ___________) based on the strategy chosen by both players
payoff matrix payoffs prisoner
in game theory, ________ are what the participants may potentially receive from each decision or strategy given the decision or strategy of the other player (e.g.,___).
payoffs firm
private benefit to that consumer is the
perceived satisfaction
If you are given the ___________________ in PES, it is easy to calculate the elasticity coefficient.
percentage changes
in long run constant returns to scale occur in a firm if the
percentage increase in output is the same as the percentage increase in all of the inputs
in perfectly competitive market, firms also have access to _________ information and are able to copy any new ____________ ___________ that their competitors may be using.
perfect production techniques
in perfectly competitive market, there is ______________ knowledge and information and no _____________ ________in this type of market and buyers are fully aware that the products sold by each firm are_______________________
perfect transaction costs exactly the same.
in perfectly competitive markets firms and buyers have
perfect information
lack of________________ __________may lead managers and buyers to make incorrect decisions.
perfect information
In a monopolistically competitive market, , the products/services are close but not________ ___________
perfect substitutes.
perfectly competitive firms are price takers and thus face a demand curve that is
perfectly elastic.
although today's bonus plans tend to be more directly linked to the firm's long-term_____________ _____ _____________, it is still possible the compensation package offered to CEOs may have incentives that are more aligned with
performance and profitability revenue and/or sales (output) maximization.
The agent is the
person (or institution) acting on behalf of the principal
Individual demand can be a
person's demand or a firm's demand
Identify two goods that are complementary.
petrol and cars; tennis rackets and tennis balls; contact lenses and lens cleaning solution
If managers know the demand for their products is highly income elastic, then they can be better prepared to
plan for and deal with a recession during which the demand for these products will fall considerably
cooperative equilibrium is where
players elect to cooperate in order to jointly maximize their payoff.
effect of the tradeable pollution permits will be to reduce
pollution levels and the negative externalities.
A firm can increase its profits by undertaking an investment with a __________NPV.
positive
Much of the economic analysis involved in managerial economics is ______________ in nature.
positive
______________ slope reflects the law of supply.
positive
firms may have a certain amount of funds budgeted for investment projects and are willing to undertake more than one project at one time as long as these projects have a ___________ NPV and an IRR above the
positive cost of capital.
if the PI >1, it must be true that the NPV is ___________ since the PV of the cash inflows will be ____________ than the initial investment expenditure.
positive greater
if there is capital rationing, this would limit the firm's ability to undertake all investment projects with a
positive NPV and an IRR that is greater than the discount rate.
The unemployment rate in Spain is over 10%. Microsoft's profits have been falling during the last four years. These are examples of
positive economic statements
To the extent that the government incorrectly estimates the __________ _____________, the amount of buyer subsidies provided may be either too little or too much.
positive externalities
income elasticity of demand coefficient for normal goods will always be a
positive number, i.e., above zero.
If total revenue is greater than total cost, a firm earns
positive profits.
_________ _________ ________ are known as positive externalities or external benefits since third parties who do not pay also benefit
positive spillover effects
if income and demand are _______________related, this means that these goods are _____________ goods.
positively normal
demand for a product is _______________ related to the price of substitute products. That is, if the price of a substitute product ___________, the demand for the_____________________ rises.
positively rises other substitute good
When deciding whether to invest in a project, firms must take into account the project's risk to account for the
possibilities of future events occurring or not occurring.
to stop imperfect information, laws can require firms to make known information regarding the ______________ __________ ________________ of consuming certain food and cigarettes available to consumers.
potential negative effects
in regression equation, independent (explanatory) variables (X1, ..., X5) are the ones that
predict or explain the effect on the dependent variable
regression equation may also be inadequate in that it does not include important __________________. The omission of variables reduces the __________________ of the equation and also affects the ______________ of the variables that have been included in the equation.
predictors predictive ability coefficients
quantity demanded for a good changes when its ________ changes
price
managers of two rival firms may try to reach an agreement to not compete on ____. They may ____________ to keep prices high. Each firm has an incentive to __________ its price because if it does and its competitor does not, it will _______its profit. If the firms collude, each firm still has an incentive to _____.
price collude lower increase cheat
To continue to offer the same quantity for sale in the face of input prices rising, the firm will want a higher ______. Or it may choose to offer less for sale in order to __________________. Either response will result in less being offered for sale at each price, shifting the supply curve to the
price reduce its costs, e.g., by laying off workers. left
various determinants of demand (other than the __________ of the good or service itself) can affect demand and these factors are known as
price non-price determinants
According to the law of supply, if the ________of a product rises, the ________________ of that product rises
price quantity supplied
a monopolistically competitive market gives firms some control over ________ and means that firms do not have to charge the ________ price as other firms (as is the case under perfect competition).
price same
there is an inverse (negative/indirect) relationship between______________________ demanded. This relationship is known as the
price and quantity law of demand.
there is a positive (direct) relationship between _________________. This relationship is known as the__________
price and quantity supplied law of supply.
firm's pricing strategy may simply be to follow that of the barometric firm if it is not itself the firm initiating the
price change.
barometric price leadership is
price changes initiated by any oligopoly firm in the industry may act as a barometer that other firms follow
Why is a monopolistically competitive firm less efficient than a perfectly competitive one?
price charged is higher than that charged by a perfectly competitive firm firm produces less output
Low inflation helps to maintain a country's _________________________________ which in turn contributes to economic growth and smaller levels of __________________. Hence, it is important for central banks to engage in appropriate______________________ and for governments to avoid an excessively _______________________________________
price competitiveness unemployment monetary policy expansive fiscal policy.
second conditions to be met for a firm to be able to implement price discrimination
price discriminating firm must be able to keep the segmented markets separate from each other at a relatively low cost. must be able to prevent transfer of demand where those being charged a higher price in one market are able to buy the product or service in the lower priced market.
non-price competition helps to make the demand for a firm's product or service less ______ ________, allowing it to charge a slightly ________ price and remain __________.
price elastic higher competitive
demand for luxuries such as vacations abroad is likely to be relatively ____________ because if the price rises, people may choose to not go on vacation as they can
price elastic live without them.
the percentage change in quantity demanded is greater than the percentage change in price, we say that demand is ___________. If, on the other hand, a certain percentage change in price leads to a _________ percentage change in quantity demanded, the absolute value of the PED coefficient will be ____________ and demand is said to be _____________
price elastic smaller less than one price inelastic
o buyers would be willing and able to buy more if
price falls.
soap powder detergent fined cartel case is interesting in that the dominant firms in the US and EU industry, Proctor & Gamble and Unilever, were found guilty of_______ ________through the cartel they had formed with Henkel which was the_________ ________ soap producer in Europe.
price fixing third largest
demand for necessities such as water, milk, bread, and other basic food types is likely to be relatively
price inelastic.
Why is the monopolistically competitive firm not allocatively efficient ?
price is greater than MC
Even if demand is price inelastic, what ensures that all the firms will actually follow the leader's prices?
price leader may send msg to rivals may drop price lower than AC of rivals which makes them have losses managers of small firms know threat and thus follow price leader
demand (Qd) is a function of the
price of the good and the non-price determinants
firms that introduce a new product for which there are no close substitutes and demand is relatively price inelastic may engage in
price skimming
Implicit in the views of mainstream macroeconomic policy thinkers is that long-term growth cannot be obtained without
price stability and fiscal discipline
according to mainstream economic view, first condition that must be met for macroeconomic stability is
price stability.
in perfectly competitive markets, firms are ______ _______ and simply charge the current market price. If they charge a slightly higher price, demand for their product will be
price takers zero.
importance of price elasticity of demand cannot be overemphasized in determining the
price that should be charged for a product or service
long run equilibrium situation
prices charged will be equal to ATC and the firms will be making only normal profit and other firms will not want to enter the market to compete
In the short-term, if __________, firms may not be able to increase by much the amount that they supply. This is particularly true in the _________industry
prices rise farming
The key in dominant price leadership is that buyers must be willing to continue to buy the product or service even if________ ________This may or may not be the case.
prices rise.
employer-employee relationships have the potential to create _____________ problems.
principal agent
in many large firms, the managers are not the owners and in such cases, there may exist a ______________ problem.
principal-agent
greater amount of pertinent information that managers have, the better they will be able to deal with___________ relationships and reduce the potential for
principal-agent adverse selection and moral hazard.
consumers of the good are not required to pay for external cost since the price that they pay only represents the ____________ cost of production and not the ________ cost to _________ which is represented by MSC.
private overall society
Whereas _________goods can be profitably produced and sold since non-payers can be excluded, _________ goods are not likely to be provided by private firm
private public
When deciding how much to buy, consumers weigh the_________ _______that they perceive they will obtain from the good against the___________ __________that they will incur in buying and consuming the good
private benefits private costs
may be possible to assign _______________to certain events which reflect the likelihood of these events happening in the future.
probabilities
expected value is weighted according to the
probabilities of each outcome occurring.
As price rises, a firm has a greater incentive and ability to
produce and offer more for sale.
firm can be viewed as efficient if it uses its resources to
produce as much as it can at the lowest possible average cost without reducing the quality of its output.
cost function shows the total cost of
producing any given level of output.
in stage 1 of production in the short run, the average ______________ rises. This occurs because of the ______________________________ between the workers that allows for greater use of underutilized ______________ resulting in MPL being _____________than APL. The MPL curve cuts the APL curve when APL is at its
product of labor specialization and cooperation fixed capital greater maximum level.
Non-price competition may be in the form of________, _________,________, and other non-price characteristics. Non-price competition helps to increase a firm's _________.
product packaging, after-sales service, quality demand
Cost functions are determined by _____________functions.
production
Being efficient is a prerequisite for attaining the optimal level of _____________________ , that is, the level of production at which the
production average cost is at its minimum level
Critics argue that due to incomplete knowledge of a firm's _____________ function, and potential __________ _______ ________, managers do not have the ability to make profit-maximizing
production revenues and costs
If price rises, it will be easier to increase quantity supplied by utilizing more fully existing
production capacity
_____________ or _____________of certain goods creates negative externalities, ___________costs that spill over to third parties.
production or consumption external
OPEC influences the world price of oil by setting __________ _____________ for its members.
production quotas
In perfectly competitive markets in absence of externalities, there is ___________ efficiency since output is produced at the lowest possible average cost.
productive
In imperfectly competitive markets the profit maximizing level of output, average total cost is not at its minimum level and thus there is
productive inefficiency
Advances in technology can increase _______________, thus lowering
productivity average costs of production.
Diseconomies can also result from decreased____________________who become alienated working in a ____________organization where they feel that they are
productivity of workers large not being heard or cared for.
Sellers also use auctions to obtain the highest price for their
products
loss leaders
products at prices even lower than the costs of each product
A __________ _________ firm will charge a price and produce a level of output that will result in MR = MC.
profit-maximizing
Each time managers face a decision, they must determine how their choice will influence the organization's ___________. To this end, they must consider all ________________ associated with their decisions.
profitability relevant costs
oligopoly interdependence means that decisions and actions of one firm affect the ___________ and ensuing ________ and actions of other competing oligopoly firms.
profitability decisions
PI can be used to compare the relative ______________of projects that are different in .
profitability size
Firms want to invest in capital projects that are _________and that align with and contribute to the organization's
profitable long-term strategic goals.
helpful to calculate the profitability index (PI) of each ________ and _____ ________ them according to this index.
project rank order
collateral is
property that the lender can take ownership over if the borrower defaults.
coefficient of determination (R2) indicates the
proportion of variation in the dependent variable that is explained by the explanatory (independent) variables.
The government can attempt to correct positive externalities in one of three ways:
provide subsidies to firm, provide subsidies to buyers, provide the good itself
English auction is a
public auction where the auctioned item is sold for the final highest bid
In addition to providing merit goods, governments can also provide __________ ____________such as national defense and street lighting
public goods
In contrast to a ________ monopoly where there is only one firm in the industry, a firm may be considered to have monopoly power if it is _________ in its industry.
pure dominant
In a ________oligopoly, where there are only a few firms in the industry, barriers to entry tend to be ________. This makes it _______for new firms to enter the market.
pure large difficult
In the real world, there are few ____ monopolies. That is, there are few industries that have ______ ____ firm.
pure only one
According to mainstream view, _____________________ alone cannot be useful because it cannot __________________________________ explain the behavior of__________________________________ and thus cannot form the basis for valid ________________ recommendations.
qualitative research scientifically (mathematically) consumers, firms, and government policy
Firms use competitive bidding to obtain the best price or the best offer which is likely not to depend only on price but also on ________ _____________, and other terms of the offer.
quality, service performance
many (mainstream) economists feel that the best (if not only way) for their discipline to be accepted as a science is to use .
quantitative methods in building their models and conducting their research
production formula states that the level of output depends on the
quantities of labor and capital.
as price (P) falls, ______________________ rises and as price rises, the quantity demanded ______.
quantity demanded (Qd) falls
The long run is the period of time during which the
quantity or size of all factor inputs including capital and land can be increased.
if a firm is already operating at maximum capacity, it will be difficult to increase _______________ by much at least in the ________-term.
quantity supplied short
to correct negative externality market failure, the tax must __________________________At this point, ___=____, resulting in a___________ ___________ output level.
raise the MPC to the point where it becomes equal to MSC. MSB =MSC socially efficient
profitability index (PI) is the
ratio of payoff to investment for a specific project
rational expectations school of thought takes the idea of _________________________ and assumes that economic agents are able to understand the ___________________________________________ to the point that such policies may actually become ____________________
rationality future effects of government policy decisions ineffective
Neoclassical economics argues that economic decision makers such as managers act ____________using all relevant information when making decisions.
rationally
many economic models are based on unrealistic assumptions that do not accurately represent the ________________ and therefore the _________________________ derived from these models and research are inaccurate and potentially __________________ for the economic well-being of the __________________________________ adopting them.
real world conclusions and policy prescriptions hazardous governments and firms
Managers cannot know with certainty when the economy will go into a _____________ ________, whether new competitors will _________the market, or if an existing competitor will introduce a new _______________.
recession and for how long enter substitute
in natural monopoly, existence of another firm would simply _________ the amount of output for the initial firm, leading to higher _____ ______ average costs and ultimately _________ prices for buyers and society.
reduce long run higher
market conditions and consumer preferences may change in ways that __________ barriers to entry or _______ consumer demand for a monopoly's product or service.
reduce reduce
oligopoly firms tend to avoid competing on price as this would lead to _________. However, in certain oligopoly markets, firms may also occasionally compete on price, if not in a direct manner, through indirect methods such as ____________
reduced profits. special offers.
Collusion is illegal in the EU, the US, and most other countries because it
reduces competition at the expense of buyers.
e data must be collected in a way that
reduces the potential problems and limitations associated with survey data.
Once the relevant variables that are likely to have an effect on the have been identified, a
regression equation needs to be created
business cycle or trade cycle refers to the
regular fluctuations in economic activity in an economy.
differences in NPV and IRR are due to the ___________________ assumptions made for each method.
reinvestment
If the project's PI <1, then the project should be .
rejected
regression equation expresses the
relationship between the dependent variable (e.g., hotel accommodation) and the independent variables
according to the kinked-demand curve model, oligopoly firms will be _______ to change prices because of the___________ ___________of their competitors.
reluctant anticipated response
under allocation of ___________ to the production of a service that creates a ____________externality is a form of market failure that results in ____________-
resources positive inefficiency
In the case of positive externalities, there is an under-allocation of ___________ and under consumption of the _________ ________ by the private sector.
resources merit goods
market failure exists when
resources are not allocated efficiently
Elasticity of demand measures the
responsiveness of demand to a change in another variable
making a potential borrowing present an invoice related to the loan example of a ________ ________ aimed at reducing the possibility that the borrower will engage in
restrictive clause risky behavior
Many markets exhibit characteristics of monopolistic competition such as _________ product markets as well as other types of markets such as
retail hair salons, restaurants, florists, dry cleaners, and pharmacy stores.
if a firm wants to maximize sales __________, it will charge a price that will result in MR =0.
revenue
firm's private benefits include the revenue it obtains from selling the good.
revenue it obtains from selling the good.
owner-manager may pursue increased ___________ as much as possible, incorrectly thinking that this will also help him to maximize profits.
revenues
CEOs may put a lot of effort into taking over other companies as this form of external growth will increase __________. It may also increase the firm's _____ ________ in anticipation of the projected _______ and higher ________that the merged firm will earn.
revenues (and output). stock price benefits profits
If the price of a product rises, the quantity supplied of that product will ________. This is known as an __________of supply and is shown by a movement up along the supply curve. If the price of a product falls, the quantity supplied of that product will ________. This is known as a ____________of supply and is shown by a movement _________ along the supply curve. A change in a non-price determinant of supply will cause the supply curve to ________. If supply increases the supply curve will _______to the ____. If supply decreases, the supply curve will ________to the _______.
rise extension fall contraction down shift shift right shift left
If the price of a product falls, the quantity demanded for that product will _______. This is known as an _________ of demand and is shown by a movement down along the demand curve. If the price of a product rises, the quantity demanded for that product will ________. This is known as a ___________ of demand and is shown by a movement _________ along the demand curve. A change in a non-price determinant of demand will cause the demand curve to ________. If demand increases the demand curve will shift to the _______. If demand decreases, the demand curve will shift to the ________.
rise extension fall contraction up shift right left
If demand increases, ceteris paribus, the equilibrium price and equilibrium quantity will both _________. If demand decreases, ceteris paribus, the equilibrium price and equilibrium quantity will both ______.
rise fall
in dominant price leadership, the extent that demand for the product or service sold is relatively price inelastic, then total revenues of the firms will _____if the firms ________their prices.`
rise increase
If the price of oil rises, transportation and shipping costs are likely to _________. This will cause costs of production to ______and the supply curves of many firms to shift to the ________, causing prices in general to ______and equilibrium output of many businesses to ____________.
rise rise left rise decrease
If supply decreases, ceteris paribus, the equilibrium price will _______ and the equilibrium quantity __________.
rise fall
if there is good weather, agricultural output will ______ and be _________ than normally expected.
rise higher
Once MC rises above AVC, AVC begins to _________causing in turn ATC to _________.
rise rise
quantity supplied is assumed to _________ as price ________.
rise rises
if the cost of going on a vacation abroad falls, ceteris paribus, the quantity demanded may__________________ more as people want to experience something more novel.
rise proportionately
As sellers lower the price, quantity demanded _________. Sellers will have an incentive to continue to ________ their price until they do not have any _______.
rises lower surplus
expected future cash flows may not be _______free, and thus there is no guarantee that the _____of these future inflows will be as __________.
risk size estimated
When probabilities can be assigned to future events, we can then refer to the
risk of such events occurring or not.
game theory helps managers consider the effects of their ___________ ____________on their own firm's _____________.
rivals' responses profits
How do managers face asymmetric information problems when deciding who to hire and how to compensate their employees?
salespeople are paid a fixed salary= some may not work hard commission=create an incentive for salespeople to work harder and those who apply for the jobs are more likely to be willing to work
NPV and IRR methods provide the
same conclusions.
Price discrimination involves selling the
same good at different prices even though costs are the same.
standard deviation can be used to compare the risk of two projects only if they have the
same or very similar expected values (i.e., average distribution of returns).
estimated regression coefficient for each independent variable is based on a_____________, not on the ______________
sample of data whole statistical population.
· Economics is a social science that studies how to use society's
scarce resources in the most efficient way in order to satisfy as many of society's wants as possible.
to reduce the problem of adverse selection, banks carry out ________ tests to increase the likelihood of identifying potentially _______ _________
screening bad borrowers.
perfect information means that the firms know or are able to find out, without any ________ _________, the prices of their competitors, the prices charged for _______ by different suppliers, and competitors' ___________ method
search costs inputs production
tastes and preferences are influenced by
seasonal changes as well as changing trends in fashion and technology.
the problem with prestige pricing is that most people are __________ to price and are willing and able to buy more of a product at __________ prices
sensitive lower
identification problem makes it difficult to identify the ___________________effects of demand and supply. We may identify the effects of demand but not _______________________ but not demand. We may not be able to identify whether demand had a bigger effect on supply or supply had a _______________________ Not identifying and resolving this problem (by using advanced estimation techniques) will lead to biased estimates of the _____________________-
separate and simultaneous supply or the effects of supply bigger effect on demand. regression coefficients.
Essentially, a country may have a law which clearly prohibits other firms from__________________________. This may happen to avoid the waste associated with the _______________ of resources
setting up operations to compete. duplication
If the firm is making large enough profits to keep the shareholders satisfied, it is not likely the shareholders will complain or notice the annual profits could have been
several percentage points higher.
This behavior of profit "satisficing" reflects the need to satisfy _______________________. managers (agents) will not always be making decisions that are in the best interests of the ________.
shareholder (principal) demands. owners
The CEO is hired to serve the interests of the _________________. However, the CEO may wish to pursue other objectives based on his/her interests and
shareholders incentive package
demand for a product/service is likely to be more inelastic in the ___________-term than in the ________-term.
short long
It is possible in the _____ run that a monopolistically competitive firm earns _______ profits since price is _______ than ATC.
short abnormal greater
in a perfectly competitive market, there is allocative efficiency both in the________ ______ and _____ ______
short run long run
as long as at least one factor input is fixed, the business is said to be operating in the
short run.
NPV and IRR methods will either both suggest that the project _______________________________________ which true as long as there is no _________ _________and the funds budgeted for capital projects are not ____________.
should be undertaken or that the project should be rejected capital rationing limited
heterodox economists argue that creating economic models that are based on ___________________ and thus ____________________ assumptions of how the economy works can be of ___________________ usefulness at best and at worst are _____________________ if governments and firms adopt them and they lead to__________________________
simplistic unrealistic limited dangerous detrimental outcomes.
sealed-bid auction is where bidders
simultaneously submit sealed bids which are unknown to other bidders
In the long run, a firm can vary the______________ of all factor inputs in an effort to _______________When all factor inputs are changed by the same proportion, there is a change in the_____________________Such a change may result in increasing, constant, or decreasing _____________-
size and quantity increase output. scale of production. returns to scale.
Once you have entered the relevant data and specified the form of the regression equation, the software will generate various statistics such as the
size of the constant term a, the beta coefficients, the standard error (SE) of each beta coefficient, t-values (or t-statistic) for each independent variable, the coefficient of determination (R2), and the F value.
In a monopolistically competitive market, there are many _______ firms that produce ___________ products or services that are very ____________ but not exactly the ______ (in contrast to a _________ __________________).
small differentiated similar same perfect competition
if interest rates in the economy rise during the duration of the future cash inflows, then the NPV will be
smaller
When the PES coefficient is less than one, it must be true that the percentage change in quantity supplied is ____________ than the percentage change in price. When this happens, we say that supply is
smaller price inelastic.
if elasticity coefficient is less than one, this means that the percentage change in demand was___________________________________ and we can conclude that demand for this good is
smaller than the percentage change in income income inelastic
These private benefits are also part of _________benefits to society since the consumers and producers are part of society.
social
economics is a _______________ science that is comprised of various schools of thought with differing
social assumptions, theoretical bases, and methodological approaches.
Whenever the consumption of a good creates a positive externality, the marginal _________ benefit is greater than the marginal ________ benefit formula is MSB = ______+___________
social private MPB + positiveexternality
Economics is a
social science that studies how to allocate resources efficiently
The government or some other authority determines the maximum amount of pollution that is _________optimal then issues ____________ to pollute.
socially permits (licenses)
the basic economic problem is that the key assumption made by economists is that
society's resources are limited but human wants are unlimited.
Making the permits tradeable creates incentives for firms to reduce their emission levels because
some firms will be able to sell their permits to earn revenues
long run-Managerial economies may arise due to a large firm using ____________ managers in different functional areas such as
specialist finance, marketing, production, and human resources.
long run-Technical economies may arise from increased ____________and division of ________, or due to the ________principle.
specialization labor container
Negative externalities arise because certain costs
spill over to third parties and these costs are not paid for by the parties directly involved in the production and/or consumption of the good.
To measure the risk regarding the dispersion of the returns, we can use the
standard deviation
Today, organizational slack can still occur in ______-owned firms but various EU governments have tried to reduce it as they have had to meet the__________ _______ _______ _______ criteria regarding national debt and budget deficits.
state Stability and Growth Pact (SGP)
equilibrium price and quantity are not _____. They change whenever the _____________________________________ change
static non-price determinants of demand and/or supply
compare the estimated t-value to the critical t-value in the t-table based on the degrees of freedom and desired significance level and if the estimated t-value is greater than the critical t-value, the result is said to be
statistically significant at the chosen significance level.
If the regulations are too lax, the market failure will not be totally corrected as MSC will
still be greater than MSB.
For each game theory situation, the potential ___________ __________ and __________________ must be determined.
strategies, payoffs, and outcomes
Based on the assumptions made of how competitors will behave, managers can then adopt an appropriate _______.
strategy
game theory is a useful tool for managers in determining
strategy and prices
Oligopoly markets usually have ______ barriers to entry that lead to the existence of a small number of large, __________firms that monitor the behavior of their ______________.
strong interdependent competitors
Non-price competition in the form of ___________, ________, ________, _________ is a characteristic of oligopolistic industries.
strong brand images, technological advances, quality, and design
If the cross price elasticity coefficient is a positive number, then the two goods are __________________.
substitutes
a change in price also creates a
substitution effect.
degrees of freedom are found by
subtracting the number of independent variables (k) plus one from the number of observations (n) in the sample.
One way the external cost can be internalized is to give to the third parties who suffer from the negative externality the right to
sue for damages
Large_______ _______ act as a deterrent from exiting an industry but may also discourage potential __ _________ from entering the pure oligopoly market in the first place.
sunk costs new competitors
when making a decision, managers must only take into account the relevant costs and not any
sunk costs.
Firms face potential principal-agent problems when they are trying to choose _________ or ____________ ______________
suppliers construction contractors
indirect taxes reduce ___________, shifting the supply curve to the ______.
supply left
An increase in indirect taxes, ceteris paribus, will cause the _______ curve to shift to the _______. This will ________ the equilibrium price and _________ the equilibrium quantity.
supply left increase decrease
If other non-price determinants of supply change, they can also cause ___________ to increase or decrease, shifting the ___________ to the right or left respectively.
supply supply curve
Monetary policy is concerned with the
supply of money, interest rates, and the availability of credit.
shifts in the supply curve merely reflect the new _____________ in which at any given price, more or less is ____________.
supply schedule supplied
An example of the container principle is the use of large oil tankers. An oil tanker's cost mainly depends on its _______________ but its output depends mainly on its __________. Large containers have a bigger _________relative to their _____________ than do ________containers. Shipping companies that increase their output by using large containers find that their output______________ as much as their input cost and so average cost _________.
surface area volume volume surface area small increases four times falls
Price discrimination reduces consumer __________but can be ________for some consumers
surplus beneficial
. Data to determine demand is often obtained through
surveys
five factors (beyond price) that can influence the demand for a product or service:
tastes and preferences, income levels, and expectations, the prices of related goods, the number of buyers in the market
Demand for a good or service is influenced by changes in
tastes and preferences.
the government can cover the costs of providing public goods from the
tax revenues that it can legally collect from citizens and businesses.
advances in _________ have made it easier and less costly for firms to obtain more and more information that in turn can improve
technology decision-making.
some industries tend to be oligopolistic in nature across countries such as
telecommunications and internet providers, beer manufacturing, white appliances such as laundry machines and refrigerators, tobacco, and photocopying machines.
limit pricing
the existing firm charges prices lower than those that maximize profits in order to discourage new firms from entering.
economy is said to be in a recession when
the growth rate (i.e., the percentage change in real GDP) falls for two consecutive quarters.
Perfectly competitive firms demand curve values Pe=
the market equilibrium price
Perfectly competitive firms demand curve values Qe=
the market equilibrium quantity
. First-degree price discrimination is the practice of charging
the maximum price that each buyer is willing to pay for each unit of a good or service.
Perfectly competitive firms demand curve values P=
the price charged by the perfectly competitive firm, which is the price that all firms in the market charge
When managers pursue their own goals at the expense of their employers' goals, this is an example of which of the following? a positive externality the principal-agent problem moral hazard market signaling
the principal-agent problem
the economy is said to be in its recovery stage or phase after
the trough, economic activity (or the growth rate) begins to rise
Assume that the managers of two competing firms are trying to decide between a high or low price strategy for their firms and that they are willing to change their prices repeatedly. In such a repeated duopoly game... ... the managers of the two firms will not take into account the decisions of the other firm. ... the two firms will have an incentive to collude and reach a cooperative equilibrium. ... the two firms will have an incentive to engage in predatory pricing. ... there will be a zero-sum game outcome.
the two firms will have an incentive to collude and reach a cooperative equilibrium.
Opportunity cost
the value of next best alternative good given up because of a particular choice.
a pure or classic oligopoly case
there are either only a few firms in the market
Why is the grocery store market an oligopoly?
there are many relatively small firms in this market but also a few large grocery stores that have large market shares.
Why do firms use loss leader products?
these products (loss leaders) attract customers to stores expect customers will not only buy loss leaders but will also buy other products which have a high mark-up.
The free-rider problem occurs when
those who consume or benefit from a good or service do not pay for it.
There are ________ degrees of price discrimination
three
TP, MPL, and APL data plotted in graphs showing the =
three stages of production in the short run.
most important determinant of price elasticity of supply is
time.
if the XED for a product is cross price elastic with respect to changes in the price of one of your competitor's products, manager will want
to pay close attention to your competitor's pricing.
long run- Internal diseconomies arise when a firm becomes
too big and it experiences managerial diseconomies of scale.
When the production and consumption of a good creates an external cost, ___________________________. the amount of resources allocated to the production of the good is _________ ______________________________________
too much of the good is being produced and consumed. more than what is socially optimal
challenge for the government is determining the right level of tax so that it is not
too small or too large.
market supply refers to the
total quantity of a good or service that all sellers are willing and able to offer for sale in the defined market.
In terms of demand, the market demand refers to the
total quantity of a product or service that all potential buyers are willing and able to purchase in the defined market.
Profits are the difference between
total revenue (TR) and total cost (TC).
Profits are the difference between a firm's
total revenues and total costs.
favored method amongst economists for reducing negative externalities is the use of
tradeable pollution permits.
Economists promote the idea that the pollution permits should be
tradeable.
in price discrimination, seller must be able to prevent __________ ___ ______ whereby buyers in the low-priced market (where demand is relatively more _________) are able to resell the product in the other higher-priced market at a price that ___________ the price discriminating firm
transfer of supply elastic undercuts
since there are no transaction costs in a perfectly competitive market, there are no_________________ ___ _________ costs involved in switching to other sellers.
transportation or search
A 0.10 significance level means that you can be 90 percent confident that the results obtained from a sample are representative of the statistical population that you are studying. t/f
true
A PES coefficient of 0.5 indicates that supply is inelastic. t/f
true
A cross elasticity of demand coefficient of -1.2 suggests that the two goods are complements. t/f
true
A decrease in income will lead to an increase in the demand for inferior goods. t/f
true
A decrease in indirect taxes will lead to an increase in the supply of goods. t/f
true
A firm will experience increasing returns to scale if it increases all of its inputs by 10 percent and as a result its output increases by 15 percent. t/f
true
According to the business cycle, the trough stage is followed by a recovery. t/f
true
An income elasticity of demand coefficient of 0.8 suggests that: demand is income inelastic since a rise in income of 10% will increase demand by 8% t/f
true
As output increases, AFC decreases. t/f
true
Bad weather that destroys crops is likely to lead to an increase in the price of agricultural products. t/f
true
During a recession, unemployment rises. t/f
true
During stage II of the short run production, the average product of labor is falling. t/f
true
During the summer, the price for renting cars is higher than in February. t/f
true
For a firm to maximize its revenues, it must charge a price and produce that output level which will result in MR = 0. t/f
true
If XED is positive, the goods are substitutes. t/f
true
If demand is price elastic, a decrease in price will lead to higher total revenues for the seller. t/f
true
If the average product (AP) is rising, it must be true that MP is greater than AP. t/f
true
If the price of a good rises by 10% and quantity demanded falls by 20%... ... the PED coefficient is -2 and demand is relatively price elastic. t/f
true
In the long run, all costs are variable. t/f
true
Increasing returns to scale result from internal economies of scale. t/f
true
Loose (expansionary) monetary policy aims to stimulate spending. t/f
true
Mainstream economists support austerity measures as a way of reducing national debts even though these measures reduce economic growth and increase unemployment in the short term. t/f
true
Managerial economics help managers develop a better understanding of their pricing strategies. t/f
true
Managerial economics involves both positive economic analyses and normative issues. t/f
true
Non-price competition is also a characteristic of oligopolistic markets. t/f
true
Rent expenses are an example of fixed costs. t/f
true
R² is the coefficient of determination. t/f
true
Second-degree price discrimination is more common than first-degree price discrimination. t/f
true
Supply is likely to be more inelastic if it is difficult or costly to store a product. t/f
true
The coefficient a in a regression equation is a constant term. t/f
true
The greater the entry barriers, the less contestable the market is. t/f
true
The main tool used by central banks is open market operations. t/f
true
There is an inverse relationship between price and quantity demanded. t/f
true
This statements is correct based on ceteris paribus assumptions: An increase in the price of a good will lead to an increase in the demand for a substitute good. t/f
true
in a perfectly competitive market, if one firm were to charge a slightly higher price than its competitors, all its customers would switch to other firms t/f
true
managers should not rely only on a few indicators when planning for the future. t/f
true
monopolistically competitive firm can be more efficient or less inefficient than a monopoly. t/f
true
profit maximization does not occur by simply charging the highest price or producing the most output possible. t/f
true
Multicollinearity exists when
two or more of the independent variables are related to each other in a systematic way
Competitive bidding is a method of procurement where
two or more suppliers submit separate bids to win the available contract.
Those who oppose government interference argue the government is _________to correct the market failures and that in trying to reduce one type of market failure, it may create other ______________
unable inefficiencies
Auctions help buyers deal with the ___________ involved regarding purchasing decisions
uncertainty
If probabilities cannot be assigned, then we are dealing with an
uncertainty
a merit good is one that would be _______________ if provided only by the ________sector, that is, only by ________ businesses
under-consumed private private
In trying to win a contract, construction firms may place bids that _____________ the true costs of construction which creates the potential for an ___________ _________-
underestimate adverse selection
which analytical tools to use to make informed decisions second step
understand the limitations of the data that you have at your disposal.
which analytical tools to use to make informed decisions first step
understand the underlying economic framework upon which an analytical tool is based. Are the assumptions realistic? Are they relevant to the country, the macroeconomic conditions, and the market characteristics in which your firm operates?
existence of a positive externality implies that society is
undervaluing the good that is creating the external benefit
average fixed costs (AFC) and average variable costs (AVC) together make up
up average total cost (ATC).
existence of strong multicollinearity biases the standard errors of the regression coefficients ______________, thus reducing the ______________ and making it more difficult to identify statistically significant ______________ variables and reject the null hypothesis.
upwards upwards independent
Non-rivalry in consumption means that the
use and consumption of the good or service by one person does not result in less of the good or service being available for other people
relevant and reliable data may not be easily obtainable and those conducting a regression analysis may have to
use whatever data they can find at an acceptable cost.
In perfectly competitive markets in absence of externalities, ________ placed on the goods as reflected in the price (and thus the benefit derived from the good) is equal to the
value additional cost of producing the last unit of the good
The law of diminishing marginal returns states that as more and more units of a _______________input are added to a ___________quantity of another input, eventually the ___________product of the _____________input will begin to fall.
variable fixed marginal variable
If business does not produce anything, it does not have to pay for
variable costs.
law of diminishing marginal returns states that as more and more units of a __________________ are added to a _____________amount of another input, eventually the_______________ will start to decrease and thus output will begin to __________at a diminishing rate.
variable input fixed marginal product rise
greater the standard deviation, the greater the absolute risk because the
variations from the expected value are greater.
In the long run, all factors of production can be _____________and therefore there are no
varied fixed costs.
monopolistically competitive firms spending money on advertising and product differentiation may be good for consumers as they have a greater
variety of products to choose from.
Variable costs are costs that_______________This means that as a firm increases its output, its
vary with output. variable costs rise.
Insurance companies also create restrictive clauses in their contracts that make the insurance policies ________ if it is discovered that the insured person previously ________ about his
void lied lifestyle
since barriers to entry into monopolistic competitive markets are _________, new firms may be enticed to enter the market in the _____run as they too hope to earn part of the market's ________ profits.
weak long large
Monopolistically competitive markets have ____ barriers to entry and _______ small firms producing a ____________ product or service
weak many differentiated
A market is contestable when there are _______ ______ _ ______ and it is possible for _____ ____ to enter the market to compete.
weak barriers to entry new firms
Non-price determinants of supply
weather (agriculture) input costs (raw materials, electricity, rent, and wages) technology indirect taxes gov subsidies number of sellers Business managers expectations of prices price of other products the firm sells
Examples of non price determinants of supply include the
weather (mainly for agricultural products), costs of production (influenced by the prices of raw materials and other inputs, the wages of workers, advances in technology, and indirect taxes and subsidies), expectations of the future, prices of other products or services that can be supplied by the seller, number of sellers in the market.
Serial correlation is the problem that arises
when the distribution of the random error in one period is affected by its value in the previous period, leading to prediction errors due to repeated overestimations or underestimations.
How could moral hazard be a problem for an insurance company?
when they insure their customers' cars and houses and the insurance has changed the insured person's behavior (taking more risks), making the person feel they can take more risks
· As managers, you need to understand
why a particular policy is being enacted and what macroeconomic objective is being sought.
Nash equilibrium outcome results from the players making their best decision based on what they believe
will be the other players' decisions
ceteris paribus
with other conditions remaining the same. "shorter hours of labor will, ceteris paribus, reduce the volume of output"
demand curve that is perfectly elastic implies that if the price charged by an individual firm is higher than the price charged by the other firms in the market, its demand will be ________. The firm can sell each additional unit at the __________market price. Hence, the MR of each additional unit sold is ________to the equilibrium price in the market.
zero same equal
fixed costs must be paid even if the firm produces
zero output.
in a single, non-repeated, competitive bidding situation, it is unlikely that the bidding companies will collude since the outcome is a ________ game where the company that _______ the contract wins and the companies that do not get the contract lose
zero-sum obtains
way of classifying games is whether they are
zero-sum or non-zero-sum
Economic Indicators: National income and trade
§ GDP, personal income, balance of payments (BOP) § exchange rates
Economic Indicators: Inflation
§ HICP, CPI, PPI
· Economic Indicators: Surveys
§ Survey of Consumer Expectations (SCE) § ECB Survey of Professional Forecasters § Business Leaders Survey
Economic Indicators: Government finances
§ budget deficit/surplus and government debt
Economic Indicators: Key expenditures
§ construction spending and motor vehicle sales
Economic Indicators: Manufacturing and inventories
§ industrial production and capacity utilization § manufacturers' shipments, inventories, and orders § wholesale and retail inventories
Economic Indicators: Labor market conditions
§ initial claims for unemployment benefits/insurance § employment rate and unemployment rate § labor force participation rate § long-term unemployed
peak of the cycle.
· The point at which business cycle reaches its highest point right before it begins to fall again
If €100 is deposited in a bank and earns interest of 3%, after two years what will the amount of compounded interest earned be? €6.09 €3 €106 €6
€6.09
Assuming that the rate of interest is constant at 4%, what is the present value (PV) of €112.49 obtained at the end of the fourth year? €102.04 €96,16 €108.16 €104
€96,16