Microeconomics Exam 2 Review
perfect competition
- a lot of small buyers & sellers - all sellers are selling an identical good - have no market power
examples of positive externalities
- education - vaccines - good hygiene - roommates bringing things
monopolistic competition
- many sellers selling differentiated products - sellers have small amounts of market power
Monopoly
- only 1 seller - seller has a LOT of market power
more examples of negative externalities
- pollution - tall people at a concert - party noise - traffic patterns - sick classmates
possible solutions to solve externality problems
- private bargaining - fixing the price - fix the quantity - laws & regulations - government provision
oligopoly
- small number of sellers - sellers have some amount of market power - U.S. has antitrust laws to try & keep oligopolies from obtaining too much market power - ex: cell phones, airlines, streaming services, social media
How to solve coordination problems
1. direct communication 2. focal points 3. laws & regulations
What does it mean to be price sensitive?
As the price increases sales decrease because fewer customers feel the product is good value
diminishing marginal utility
Each additional dollar yields a smaller boost to your utility—that is, less marginal utility—than the previous dollar.
free rider problem
For a group, the problem of people not joining because they can benefit from the group's activities without joining. (ex. if you clean your dorm, your roommates will benefit if they don't help)
social insurance
Government-provided insurance against bad outcomes such as unemployment, illness, disability, or outliving your savings.
implicit bias
Judgments shaped by the unconscious attribution of particular qualities to specific groups.
Why are labor unions positive for workers & negative for employers?
Labor unions are positive for workers as they advocate for better wages, improved working conditions, and increased job security through collective bargaining. However, they may be viewed negatively by employers due to potential increased costs, limited flexibility, and disruptions to business operations during disputes.
Malia and Asi have a household income that is insufficient to pay for both food and shelter, with no funds available for other types of expenses. However, their household income is higher than 75% of the households in their developing nation. Malia feels that they are poor, and Asi feels that they are prosperous. Their feelings are consistent with which views of poverty?
Malia focuses on absolute poverty, Asia focuses on relative poverty
cap & trade
Mechanism to reduce the emission of pollutants by establishing a market for emission permits.
the hurdle method
Offer lower prices only to buyers who are willing to overcome some hurdle - the idea is that buyers will sort themselves into groups based on their reservation price
In the past year, the Starbucks corporation has been accused of activity to prevent the unionization of Starbucks employees, especially barista employees at traditional consumer-facing Starbucks locations. Draw a graph describing what would likely happen to the labor market for Starbucks baristas after a union goes into effect. Why might employers desire to prevent a union?
Starbucks may try to prevent the organization of unions at their locations in order to prevent thewage of baristas from increasing, and protecting their profits. This is all the more important sincelabor is a large portion of Starbucks' input costs
Steve and Jeff are identical twins and thus alike in many ways. Notably, both have chosen the same career: firefighting. Steve, however, lives and works in Chicago, a metropolis of 5 million people, whereas Jeff lives and works in Clarksville, Tennessee, a city of 100,000 people. Which twin is likely to receive the higher wage? What is a likely source of this wage differential?
Steve is likely to have a higher wage since he lives in Chicago. There is way more action in Chicago since more people reside there and more dangerous incidents could typically happen
social safety net
The cash assistance, goods, and services provided by the government to better the lives of those at the bottom of the income distribution; means tested
We have seen that minimum wage laws can make a labor market more efficient, but what is the primary challenge with a geographic minimum wage law (especially federal)?
The primary challenge with a geographic minimum wage law, particularly at the federal level, is the variation in the cost of living across different regions or states within a country. A uniform federal minimum wage might not accurately reflect the diverse economic realities across various areas. Setting a single minimum wage for a geographically diverse nation could lead to situations where the wage is insufficient in high-cost areas and disproportionately high in low-cost regions, potentially causing unintended consequences like unemployment or increased business costs in certain areas.
second mover advantage
The strategic advantage that can follow from taking an action that adapts to your rival's choice
You're shopping to replace two front tires, and you've discovered a pattern: most tire shops offer promotions that apply to buying 4 tires. for example, one place that you visited offered free installation and lifetime balance for purchasing four tires. Another offered $15 off per tire for purchasing 4 tires. A third place's offer: buy three tires and get the fourth free. What kind of price discrimination strategy are the tire shops using? Explain why the tire shops might want to price discriminate in this way.
The tire shops are using quantity discounts as a form of price discrimination. They mayfind it helpful to do so because people generally have a lower willingness to pay for the fourthtire (almost no one needs to replace all four at once). These discounts allow them to capture moresales of the fourth tire without discounting tires 1-3.
What is an example of a negative externality?
When Fazio parks his big truck at a grocery store, people in the cars on either side of his parking space have a hard time opening their car doors
Can a country have zero absolute poverty and still have residents living in relative poverty?
Yes a country can have zero absolute poverty and still have people living in relative poverty. Relative poverty is when you have less resources than some other residents of the same country. Absolute poverty depends on some strict standard of a resource (usually income) to determine the number of people in poverty. So, if all incomes are higher than an absolute poverty measure, but the distribution of income is unequal, there can be relative poverty without absolute poverty in a country. For example, in the United States there are very few residents below the "global poverty" threshold set by the World Bank. But, there are still many ofresidents in relative poverty - they are worse off than other residents of the US
What do externalities arise from?
a conflict between private & social benefits/costs
intrinsic motivation
a desire to perform a behavior for its own sake and to be effective
coordination game
a game where all players have a common interest in making the same decision (ex. bringing the same dish to a picnic)
anti-coordination game
a game where the best response for each player is to take a different, but complimentary action (ex. bringing different dishes to a dinner party)
non-rival goods
a good where one person's use doesn't subtract from another's (ex. cable & internet)
How would you explain the difference between Medicaid & Medicare to a friend? Medicaid is ______, whereas Medicare is ________
a means-tested program; available to anyone over 65 years old
What is an example of a seller that has the LEAST market power?
a retiree adjusting his portfolio by selling a share of Ford stock
regressive tax
a tax where those with less income tend to pay a higher share of their income on the tax
progressive tax
a tax where those with more income tend to pay a higher share of their income in taxes
first-mover advantage
about benefits of commitment; arises when you preemptively commit to an aggressive position & the rival's best response is to be less aggressive
human capital
accumulated knowledge and skills
collusion
an agreement between companies to limit competition
poverty line
an income level below which a family is defined to be in poverty
You and your friend are invited to a picnic and asked to bring either potato salad or fruit salad. You realize that if you both bring the same side, people will be disappointed by not having the other available. You and your friend are in a(n)...
anti-coordination game
quantity hurdle
bulk buying discounts
Stella sells vegetables at the farmers market. She sells cucumbers, tomatoes, and carrots, but usually has trouble selling all of her carrots. So, she offers a special low price for a mixed basket of vegetables. In this scenario, which form of price discrimination is Stella practicing?
bundling
What is NOT an externality?
changes in price from market activity
group pricing
charging different prices to different groups of people (ex. college students vs. non college students
When there is a high level of intergenerational mobility among the poor in a nation:
children of poor parents do not remain in poverty when they are adults
pharmaceuticals
companies maintain lots of marker power because of patents and oligopoly structure
A police officer on the evening shift may earn more than one who works in the day shift because of:
compensating differentials
What can the government do to restrain market power?
create laws that promote competition & create laws that minimize the opportunity
For effective segmentation of market demand, the criteria one uses to categorize customers into a group must be _______ & _______
easy to check; hard to change
Concerned with high turnover and low worker morale, in 1914 Henry Ford introduced the $5 daily wage, a doubling of pay for most Ford workers. Subsequently, Ford saw significant increases in productivity and profits. Ford's actions illustrate:
efficiency wages
The key to Amazon's competitive edge in online retail is low labor costs, which allows it to charge low consumer prices. Amazon famously monitors its warehouse workers closely, using security cameras equipped with artificial intelligence to track and analyze a worker's movements. This close monitoring of employees aids Amazon's low labor cost strategy by both increasing efficiency and reducing the need for:
efficiency wages
efficiency wages
employers increase wages to make workers more productive
When a company owner practices perfect price discrimination, the marginal revenue of an extra unit sold:
equals its price
The difference between a club good and a public good is that a club good is ______ and a public good is _________.
excludable & nonrival; nonexcludable & nonrival
What is the goal of price discrimination?
goal is to charge everyone the maximum that they are willing to pay
club good
goods that are excludable but not rival in consumption (cable & internet)
public goods
goods that are non-excludable & non-rival (ex. national defense & knowledge)
common resource
goods that are rival but not excludable (ex. public parks, town commons, roads)
A seller's demand curve will have a steep negative slope when the seller;
has a high level of market power
When the Federal Trade Commission allowed the two largest oil companies, Exxon and Mobil, to merge, it created the world's largest company. in order to complete the merger, Exxon and Mobil agreed to sell 2431 gas stations. of them, 1740 were located in the mid-Atlantic states, 360 in California, 319 in Texas, and 12 in Guam. Why would the government regulators require Exxon-Mobil to sell so many gas stations in specific parts of the country before allowing the merger to occur?
he government wanted to make sure that the merger would not be severelyanticompetitive. They likely identified areas where the only gas stations present were Exxon orMobil. In these areas, a merger would result in essentially a local monopoly of gas provision. So,to complete the merger, they needed to sell these locations to other companies
insurance for large medical bills
health insurance
If an employer infers than an individual is more or less "suited" to a particular job based on that individual's gender, the employer is exhibiting what type of discrimination?
implicit bias
relative poverty
judges poverty relative to the material living standards of your contemporary society - measures say that more people are in poverty
absolute poverty
judges the adequacy of resources relative to an absolute standard of living
Antitrust laws
laws that encourage competition in the marketplace & prevent existing companies from obtaining too much market power
Scarlett Johansson was the world's highest paid actress in 2018, earning $40.5 million. The average actor/actress salary in that year was $50,175 plus bonuses, profit sharing, and commissions. What allows Scarlett Johansson to earn over 380 times the average earnings of other in her profession?
likely the "superstar effect" where film employers will pay more for an actress with namerecognition - someone who is viewed as an A list celebrity may be worth many times more thana B list celebrity, even if the difference in acting talent is somewhat small.
With price discrimination, a company ends up selling:
more but at an efficient output level
Does monopoly power always lead to market inefficiency? describe why or why not.
no, monopoly power does not always create a less efficient market. A key example is ina natural monopoly. Sometimes, a monopoly forms *because* it is the lowest-cost option. In thecase of most local utilities, natural monopolies keep prices lower and generate more economicsurplus (more efficient)
Most neighborhood streets have traffic lights to help control the flow of traffic. The traffic lights are _____ and _____. Therefore, they are likely to be _____ by the competitive market.
nonrival; nonexcluable; under provided
About 90% of new car sales are dominated by roughly 10 auto manufacturers. This means that the auto industry market structure is likely:
oligopoly
The options for ride share in your city are Uber and Lyft. The market structure is:
oligopoly
Monopsony power in the labor market
only one employer which have to hire fewer people at a lower wage
What is the tendency of a negative externality in terms of quantity?
overproduce
prejudice
overt bias against a group that is not based on reason
An employer who discriminates in hiring based on prejudice may end up _____.
paying a higher wage for a less productive employee
non-excludable good
people cannot easily be excluded from using a good (ex. public roads)
An appliance story holds a week-long sale on refrigerators every summer and on stoves every fall. This is an example of a seller using _______ to achieve price discrimination through ________.
price fluctuations; the hurdle method
What is an example of something that is rival and non excludable?
public parks
The current sales tax in Texas us 6.25% & everyone, regardless of their income, pays the sakes tax. Is the sales tax progressive, regressive, or neither?
regressive
Major League Baseball teams typically announce their starting pitchers well in advance. This doesn't give away secrets because, barring injury, pitchers will typically start every five games. Knowing who the pitcher will be gives the opposing team the opportunity to select offensive players with the best chances of performing well in the game. So, the opposing team has a _______.
second-mover advantage
bundling hurdle
sell items at a discount when combined with other items
price discrimination
selling the same products to people at different prices
When you install solar panels for your home, you reduce dependency of nonrenewable energy and decrease reliance on hydropower. Fewer people than the socially optimal number, however, choose solar power. In the market for solar panels, the marginal:
social benefit is greater than the marginal private benefit
What are the differences between social insurance programs and social safety net programs?
social safety net programs are meant for poverty alleviation, and they are means-testedin order to be directed toward those at the lower end of the income distribution. Social insuranceprograms are not strictly directed at low-income populations. They are often available toeveryone in the country experiencing a temporary setback such as unemployment
In a recent economics research paper titled "The Unintended Consequences of 'Ban the Box'", Jennifer Dole and Benjamin Hansen study the effects of a policy which prevents employers from asking about a criminal record on a job application. These "ban the box" policies were often passed in order to decrease barriers in the job search process for people with a criminal conviction. what the authors found was that these policies have the unintended consequence of creating new barriers for black men during their job search. Because employers could not observe the criminal history of their applicants directly, they were more likely to dismiss Black male applicants early on in the process because this demographic group has a higher number of criminal convictions on average. Is this a type of labor discrimination we discussed in class? If so, which category does iy most fall under?
statistical discrimination
price fluctuation hurdle
stores have huge seasonal sales
intergenerational mobility
the extent to which the economic status of children is independent of the economic status of their parents
Nash Equilibrium
the outcome where both players are making their best response choice
poverty rate
the percentage of people whose family income is below the poverty line
Locals of Las Vegas habitually present their driver's licenses when buying goods and services from Las Vegas businesses, as they receive discounts on many items, including show tickets, attractions, shopping, dining, and hotel stays. Why would Las Vegas sellers charge lower prices to locals than to tourists?
the reservation prices of tourists are higher than those of locals
What happens in the labor market for public school teachers when a state government raises the minimum educational standards for certification as a public school teacher?
the supply of teachers decreases, resulting in a higher wage and lower quantity of labor
What illustrates a positive externality?
the value of Maria's house rises when the city builds a park nearby, enhancing her view
A familiar example of a negative externality is loud music in a busy park on a weekend. In principle, it should be possible to solve this externality by permitting park visitors to negotiate rights to play music in particular locations or at specific times. This does not happen often. Why not?
there are way too many people to be supervising, making it incredibly difficult to keep track of what everyone is doing
a note about mergers
they are not always anticompetitive
Hassan is a student who received a coupon to buy pizza from Pizza House at $4 off the regular price. Students at Hassan's school seem to receive the coupons frequently. Which of the following is an assumption that the owners of Pizza House are making about students at Hassan's school?
they are price sensitive
How do licensing requirements affect supply?
they decrease supply
discrimination
treating people differently based on characteristics such as: gender, race, ethnicity, religion, sexual orientation, & disability status
What is the tendency of a positive externality in terms of quantity?
underproduce
insurance for job loss
unemployment insurance
How might the formation of a union impact the productivity of a company?
unions increase productivity by improving communication between workers and employers
statistical discrimination
using observations about the average characteristics of a group to judge an individual in that group
haggling hurdle
willing to negotiate prices for each sale
In what situation would Maria's Donut Shop have the least amount of market power?
within 3 miles, five other donut shops and three bakeries sell breakfast pastries
insurance for an injury at work
worker's compensation
perfect price discrimination
you charge each person exactly their reservation price
compensating differentials
you have to pay people extra to do undesirable jobs
What is an example of a negative externality?
your neighbors band practices early in the morning, waking you up
